Document ID: SEC-2020-0152-0001
Agency: sec
Document Type: Rule
Title: Cross-Border Application of Certain Security-Based Swap Requirements
Posted Date: 2020-02-04T05:00Z

[Federal Register Volume 85, Number 23 (Tuesday, February 4, 2020)]
[Rules and Regulations]
[Pages 6270-6354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27760]

[[Page 6269]]

Vol. 85

Tuesday,

No. 23

February 4, 2020

Part II

 Securities and Exchange Commission

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17 CFR Parts 201 and 240

 Cross-Border Application of Certain Security-Based Swap Requirements 
and Risk Mitigation Techniques for Uncleared Security-Based Swaps; 
Final Rules; Order Designating Certain Jurisdictions as ``Listed 
Jurisdictions'' for Purposes of Applying the Security-Based Swap Dealer 
De Minimis Exception of Rule 3a71-3(d) Under the Exchange Act to 
Certain Cross-Border Security-Based Swap Transactions; Rule

  Federal Register / Vol. 85 , No. 23 / Tuesday, February 4, 2020 / 
Rules and Regulations  

[[Page 6270]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 201 and 240

[Release No. 34-87780; File No. S7-07-19]
RIN 3235-AM13

Cross-Border Application of Certain Security-Based Swap 
Requirements

AGENCY: Securities and Exchange Commission.

ACTION: Final rules; guidance.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting rule amendments and providing guidance to 
address the cross-border application of certain security-based swap 
requirements under the Securities Exchange Act of 1934 (``Exchange 
Act'') that were added by Title VII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the ``Dodd-Frank Act''). The 
Commission also is issuing a statement regarding compliance with rules 
for security-based swap data repositories and Regulation SBSR.

DATES: 
    Effective date: These rules are effective April 6, 2020.
    Compliance date: The compliance dates are discussed in Part X.B of 
this final release.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director, 
Laura Compton, Senior Special Counsel, or Kateryna Imus, Special 
Counsel, regarding the guidance related to security-based swap 
transactions that have been ``arranged'' or ``negotiated'' by personnel 
located in the United States, the amendment to Exchange Act Rule 3a71-
3, applications for substituted compliance, the amendments to Rule 0-13 
related to designation as a listed jurisdiction, and the compliance 
dates and statement regarding compliance with rules for security-based 
swap data repositories and Regulation SBSR referenced in Part X, at 
202-551-5870; Devin Ryan, Senior Special Counsel, and Edward 
Schellhorn, Special Counsel, regarding the amendment to Commission Rule 
of Practice 194; Joanne Rutkowski, Assistant Chief Counsel, and Bonnie 
Gauch, Senior Special Counsel, regarding the amendments to Exchange Act 
Rule 15Fb2-1 and guidance related to Exchange Act Rule 15Fb2-4; and 
Joseph Levinson, Senior Special Counsel, regarding the modifications to 
Exchange Act Rule 18a-5, at 202-551-5777; Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is providing guidance 
regarding the application of certain uses of the terms ``arranged'' and 
``negotiated'' in connection with the cross-border application of 
security-based swap regulation under the Exchange Act; providing 
guidance regarding the certification and opinion of counsel 
requirements in Exchange Act Rule 15Fb2-4 and Rule 3a71-6 and adequate 
assurance requirement in Exchange Act Rule 3a71-6; adopting amendments 
to Exchange Act Rules 0-13, 3a71-3, 15Fb2-1, and 18a-5 and Commission 
Rule of Practice 194; and issuing a statement regarding compliance with 
rules for security-based swap data repositories and Regulation SBSR.

I. Overview

    The Commission is enhancing the effectiveness and the efficiency, 
in the cross-border context, of rules that implement requirements under 
Title VII of the Dodd-Frank Act \1\ to provide for the regulation of 
security-based swap activity. The amendments finalize proposals that 
the Commission made to address issues regarding the cross-border 
application of Title VII.\2\ Previously, market participants and other 
commenters had raised concerns regarding possible disruptive effects 
associated with several requirements that implicate cross-border 
activity in the security-based swap market, suggesting that those 
requirements would create significant operational burdens and impose 
unwarranted costs. The Commission also noted that those concerns may be 
exacerbated by differences between the Commission's rules in those 
areas and corresponding rules of the Commodity Futures Trading 
Commission (``CFTC'') in connection with the regulation of the swaps 
market.\3\
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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 of the Dodd-Frank Act.
    \2\ Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements, 
Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 24, 
2019) (``Proposing Release'').
    \3\ See Proposing Release, 84 FR at 24207.
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    Commenters addressed a range of issues regarding the proposed rules 
and guidance, and those comments are addressed below.\4\ The Commission 
has carefully considered commenters' views. For the reasons discussed 
below, the Commission is taking the following actions:
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    \4\ The comment letters are available at https://www.sec.gov/comments/s7-07-19/s70719.htm. The Commission also received comments 
on topics outside the scope of the proposal that are not addressed 
in this release. See letter from Scott O'Malia, CEO, International 
Swaps and Derivatives Association, dated July 23, 2019 (``ISDA 
letter'') at 3-4 (arguing that the CFTC's rules for swaps and the 
Commission's rules regarding security-based swaps, including those 
not proposed to be amended, should not materially differ); Yolanda 
Lewis, dated July 23, 2019 (generally discussing certain issues 
related to certificate-less bonds and employees' securities 
companies).
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     The Commission is providing guidance regarding the terms 
``arrange'' and ``negotiate,'' as those terms are used within certain 
rules connected to the cross-border application of Title VII.\5\
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    \5\ As discussed in more detail below, these rules include 
provisions of Exchange Act Rule 3a71-3 regarding the cross-border 
application of the ``security-based swap dealer'' definition, the 
cross-border application of security-based swap dealer business 
conduct requirements, and provisions related to activities of 
foreign branches of U.S. banks. These also include provisions of 
Regulation SBSR regarding the cross-border application of regulatory 
reporting and public dissemination requirements, and provisions of 
Rule 3a67-10 regarding the cross-border application of definitions 
and requirements applicable to major security-based swap 
participants. See generally Part II.B, infra.
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     The Commission is adopting a conditional exception to 
provisions of Exchange Act Rule 3a71-3 that otherwise would require 
non-U.S. persons to count--against the thresholds associated with the 
de minimis exception to the ``security-based swap dealer'' definition--
security-based swap dealing transactions with non-U.S. counterparties 
when U.S. personnel arrange, negotiate, or execute those 
transactions.\6\
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    \6\ In connection with that exception, the Commission also is 
adopting a technical amendment to Exchange Act Rule 0-13.
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     The Commission is adopting an amendment to Exchange Act 
Rule 15Fb2-1 to allow a nonresident security-based swap dealer or major 
security-based swap participant (each, an ``SBS Entity'') that is 
unable to provide the certification and opinion of counsel required by 
Rule 15Fb2-4, to be conditionally registered if the nonresident SBS 
Entity instead submits a certification and an opinion of counsel that 
identify, and are conditioned upon, the occurrence of a future action 
that would provide the Commission with adequate assurances of prompt 
access to the books and records of the nonresident SBS Entity, and the 
ability of the nonresident SBS Entity to submit to onsite inspection 
and examination by the Commission. A nonresident SBS Entity that 
submits a conditional certification and opinion of counsel in 
connection with an application that otherwise is complete in all 
respects shall be conditionally registered and

[[Page 6271]]

will remain conditionally registered until the Commission acts to grant 
or deny ongoing registration. If none of the future actions that are 
included in an applicant's conditional certification and opinion of 
counsel occurs within 24 months of the compliance date for Rule 15Fb2-
1, and there is not otherwise a basis that would provide the Commission 
with the required assurances, the Commission may institute proceedings 
thereafter to determine whether ongoing registration should be denied.
     The Commission is providing guidance regarding the 
requirements, in Exchange Act Rules 15Fb2-4(c) and 3a71-6, to provide 
the Commission with a certification and opinion of counsel, including 
with respect to the foreign laws to be covered in the certification and 
opinion of counsel of a nonresident SBS Entity; the scope of the books 
and records covered by the certification and opinion of counsel; 
whether the certification and opinion of counsel can be predicated on 
consents (if consents are allowed in the relevant jurisdiction); and 
whether the certification and opinion of counsel can rely on a 
memorandum of understanding (``MOU''), agreement, protocol, or other 
regulatory arrangement with the Commission facilitating access to the 
books and records of SBS Entities located in that jurisdiction, an 
applicant's understanding of the general experience with the 
application of the relevant local law or rule, or a Commission order 
granting substituted compliance based on a finding of ``adequate 
assurances'' in accordance with Exchange Act Rule 3a71-6(c).
     The Commission is adopting, as proposed, an amendment to 
Rule of Practice 194, by including proposed paragraph (c)(2), to 
exclude an SBS Entity, subject to certain limitations, from the 
prohibition in Exchange Act Section 15F(b)(6) with respect to an 
associated person who is a natural person who (i) is not a U.S. person 
and (ii) does not effect and is not involved in effecting security-
based swap transactions with or for counterparties that are U.S. 
persons, other than a security-based swap transaction conducted through 
a foreign branch of a counterparty that is a U.S. person.
     The Commission is adopting, as proposed, amendments to 
Rule 18a-5 to provide that a bank \7\ or stand-alone \8\ SBS Entity is 
not required to make and keep current a questionnaire or application 
for employment executed by an associated person if the SBS Entity is 
excluded from the prohibition in Section 15F(b)(6) of the Exchange Act 
with respect to such associated person. The Commission also is adopting 
amendments to Rule 18a-5 to provide that a questionnaire or application 
for employment executed by an associated person who is not a U.S. 
person need not include all of the information described in paragraphs 
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5 
unless the SBS Entity (1) is required to obtain such information under 
applicable law in the jurisdiction in which the associated person is 
employed or located or (2) obtains such information in conducting a 
background check that is customary for such firms in that jurisdiction, 
and the creation or maintenance of records reflecting that information 
would not result in a violation of applicable law in the jurisdiction 
in which the associated person is employed or located.\9\
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    \7\ The Exchange Act distinguishes between SBS Entities for 
which there is a prudential regulator as defined in Section 1a(39) 
of the Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(39), 
incorporated by reference in Section 3(a)(74) of the Exchange Act, 
15 U.S.C. 78c(a)(74), and those that are not subject to supervision 
by a prudential regulator (see, e.g., 15 U.S.C. 78o-10(f)(1)(B)). 
SBS Entities for which there is a prudential regulator are referred 
to herein as ``bank SBS Entities.''
    \8\ An SBS Entity for which there is no prudential regulator 
could be dually registered with the Commission as a broker-dealer 
(``broker-dealer SBS Entity'') or registered with the Commission 
only as an SBS Entity (``stand-alone SBS Entity'').
    \9\ 17 CFR 240.17a-3(a)(12) requires broker-dealers, including 
broker-dealer SBS Entities, to make and keep current a questionnaire 
or application for employment for each associated person that 
contains information about the associated person (the 
``questionnaire requirement'') as well other information about 
associated persons. The Commission adopted parallel requirements in 
Rule 18a-5 for stand-alone and bank SBS Entities. See Requirements 
for Security-Based Swap Dealers, Major Security-Based Swap 
Participants, and Broker-Dealers; Capital Rule for Certain Security-
Based Swap Dealers, Exchange Act Release No. 87005 (Sep. 19, 2019), 
84 FR 68550 (Dec. 16, 2019) (``Recordkeeping and Reporting Adopting 
Release'').
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     The Commission is issuing a statement regarding compliance 
with rules for security-based swap data repositories and Regulation 
SBSR.
    A number of these final actions have been modified from the 
proposals to address issues raised by commenters, and more generally to 
enhance the actions' effectiveness and efficiency. The Commission has 
consulted and coordinated with staff of the CFTC and the prudential 
regulators,\10\ in accordance with the consultation mandate of the 
Dodd-Frank Act.\11\ The Commission also has 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.\12\
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    \10\ The term ``prudential regulator'' is defined in Section 
1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is 
incorporated by reference 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.
    \11\ 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.''
    In addition, Section 752(a) of the Dodd-Frank Act provides in 
part that ``[i]n order to promote effective and consistent global 
regulation of swaps and security-based swaps, the Commodity Futures 
Trading Commission, the Securities and Exchange Commission, and the 
prudential regulators . . . as appropriate, shall consult and 
coordinate with foreign regulatory authorities on the establishment 
of consistent international standards with respect to the regulation 
(including fees) of swaps.''
    \12\ Staff participates in a number of international standard-
setting bodies and workstreams working on OTC derivatives reforms. 
For example, Commission staff participates in the Financial 
Stability Board's Working Group on OTC Derivatives Regulation. 
Commission staff also participates in the International Organization 
of Securities Commissions (``IOSCO'') Committee on Derivatives, the 
joint Basel Committee on Banking Supervision (``BCBS'') and IOSCO 
Working Group on Margin Requirements' Monitoring Group and 
participates in international working groups that impact OTC 
derivatives financial market infrastructures, such as Committee on 
Payment Market Infrastructures (``CPMI'')--IOSCO joint working 
groups assessing legal and regulatory frameworks for central 
counterparties and trade repositories and examining central 
counterparty resilience and recovery.
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II. Security-Based Swap Transactions Arranged, Negotiated, or Executed 
by U.S. Personnel

A. Use of ``Arranged, Negotiated, or Executed'' Criteria

1. Background
    A number of the rules implementing Title VII in the cross-border 
context account for whether security-based swap transactions have been 
arranged, negotiated, or executed by personnel located in the United 
States. In 2016, the Commission adopted Exchange Act Rule 3a71-
3(b)(1)(C)(iii). The rule provides that for purposes of determining 
whether non-U.S. persons will be deemed to be security-based swap 
dealers--and hence subject to the Title VII requirements applicable to

[[Page 6272]]

security-based swap dealers--non-U.S. persons (other than conduit 
affiliates as defined in the rule) must count, against the applicable 
de minimis threshold, their security-based swap dealing transactions 
with non-U.S. counterparties that were ``arranged, negotiated, or 
executed'' by personnel within the United States.\13\ The Commission 
also incorporated the ``arranged, negotiated, or executed'' criteria 
into the cross-border application of other parts of the security-based 
swap dealer de minimis counting rules,\14\ of the cross-border 
application of business conduct provisions for SBS Entities,\15\ of 
Regulation SBSR's regulatory reporting and public dissemination 
provisions,\16\ and of Title VII rules regarding major security-based 
swap participants.\17\
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    \13\ See Proposing Release, 84 FR at 24208 nn.12-13.
     Rule 3a71-3 further requires that such non-U.S. persons count 
their dealing transactions with certain U.S. counterparties, their 
dealing transactions in which their performance under the security-
based swap is guaranteed by a U.S. affiliate, and, in some 
circumstances, certain transactions of affiliates. See Exchange Act 
Rules 3a71-3(b)(1)(iii)(A)-(B), (b)(2) and 3a71-4, 17 CFR 240.3a71-
3(b)(1)(iii)(A)-(B), (b)(2) and 3a71-4.
    Persons whose dealing activities exceed the de minimis 
thresholds will be required to register as security-based swap 
dealers. See Exchange Act Section 3(a)(71)(D), 15 U.S.C. 
78(c)(a)(71)(D); Exchange Act Rule 3a71-2, 17 CFR 240.3a71-2. For a 
discussion of the compliance date for registration of security-based 
swap dealers, see Part X.B.
    \14\ See Proposing Release, 84 FR at 24208 n.81.
    \15\ See Exchange Act Rule 3a71-3(c), 17 CFR 240.3a71-3(c). See 
Proposing Release, 84 FR at 24208 n.79 for further discussion.
    \16\ See Regulation SBSR Rules 908(a)(1)(v) and 908(b)(5), 17 
CFR 242.908(a)(1)(v) and 908(b)(5) (incorporating an ``arranged, 
negotiated, or executed'' standard). See Proposing Release, 84 FR at 
24208 n.80 for further discussion.
    \17\ See Exchange Act Rule 3a67-10(b)(3)(i), 17 CFR 240.3a67-
10(b)(3)(i) (setting out that the ``major security-based swap 
participant'' excludes positions that arise from transactions 
conducted through a foreign branch of a counterparty that is a 
registered security-based swap dealer and thus incorporating the 
definition of ``transaction conducted through a foreign branch,'' 
which makes use of ``arranged, negotiated, and executed'' criteria); 
Exchange Act Rule 3a67-10(d), 17 CFR 240.3a67-10(d) (stating that 
U.S. and non-U.S. major security-based swap participants are 
excluded from having to comply with certain business conduct 
requirements in connection with transactions conducted through a 
foreign branch, based on that same definition). See Proposing 
Release, 84 FR at 24208 n.82 for further discussion.
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    In the Proposing Release, the Commission solicited comment 
regarding how U.S. personnel are used in connection with cross-border 
security-based swap transactions, and regarding the impacts of tests 
that account for the activity of U.S. personnel.\18\ The Commission 
also solicited comment on guidance regarding the use of the terms 
``arranged'' and ``negotiated'' in the cross-border application of 
Title VII rules, as well as on two alternative approaches to a 
conditional exception to Rule 3a71-3(b)(1)(C)(iii).\19\ The proposals 
sought to address concerns that had been raised regarding the 
consequences associated with the incorporation of ``arranged, 
negotiated, or executed'' criteria in the cross-border application of 
Title VII, in a manner that balanced two competing considerations.\20\ 
On one hand, the proposals reflected the Commission's continued belief 
that the use of ``arranged, negotiated, or executed'' criteria 
appropriately should constitute part of the security-based swap dealer 
de minimis counting requirement in connection with transactions 
involving two non-U.S. counterparties, in part due to the risk that 
non-U.S. persons engaged in security-based swap dealing activity in the 
United States otherwise could avoid regulation under Title VII.\21\ On 
the other hand, the proposals also reflected the Commission's 
recognition that the use of ``arranged, negotiated, or executed'' 
criteria as part of the de minimis counting requirement might produce 
negative consequences such as causing financial groups ``to relocate 
U.S. personnel or relocate the activities performed by U.S. personnel, 
to avoid security-based swap dealer registration,'' and that those 
results ``have the potential to increase fragmentation and harm U.S. 
market participants and the U.S. economy.'' \22\
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    \18\ See Proposing Release, 84 FR at 24217, 24227-28.
    \19\ See Proposing Release, 84 FR at 24217-18, 24237-43.
    \20\ See Proposing Release, 84 FR at 24207-08.
    \21\ See Proposing Release, 84 FR at 24208-09, 24218.
    \22\ See id. at 24216, 24218.
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2. Commission Action
    After considering comments submitted in response to the Proposing 
Release, the Commission continues to believe the ``arranged, 
negotiated, or executed'' criteria form an appropriate basis for 
applying Title VII requirements in the cross-border context.\23\ At the 
same time, after considering commenters' views, the Commission 
continues to recognize that the use of ``arranged, negotiated, or 
executed'' criteria has the potential to lead to a variety of negative 
consequences. Accordingly, the Commission is issuing guidance regarding 
the application of the terms ``arranged'' and ``negotiated'' in the 
cross-border application of Title VII rules to the provision of 
``market color,'' as well as adopting a conditional exception from the 
incorporation of ``arranged, negotiated, or executed'' criteria as part 
of the de minimis counting test.\24\
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    \23\ Some commenters supported these criteria, with one noting 
that failure to regulate these transactions under Title VII would 
create competitive disparities between U.S. and non-U.S. market 
participants, while regulating these transactions ``will enable the 
Commission to better monitor for disruptive trading practices and 
will also provide the necessary data regarding overall market 
trading activity to allow the Commission to evaluate market trends 
and accurately assess the impact of other reforms implemented in the 
security-based swap market.'' See letter from Stephen Berger, 
Managing Director, Citadel, dated July 23, 2019 (``Citadel letter'') 
at 2-5; see also letter from Dennis Kelleher, President and CEO, 
Better Markets, dated July 23, 2019 (``Better Markets letter'') at 
11 (``Better Markets would like to commend the SEC for affirming 
fundamental legal bases for continuing to apply Dodd-Frank Act 
requirements to ANE Transactions based on a territorial analysis of 
the SEC's cross-border jurisdiction''); letter from Americans for 
Financial Reform Education Fund, dated July 23, 2019 (``AFR 
letter'') at 2 (``we also pointed out that given the narrow 
definition of U.S. person under the rule, the inclusion of ANE 
transactions in the de minimis count was an absolutely crucial 
protection to include in the rule'').
    In contrast, some commenters reiterated opposition to any use of 
``arranged, negotiated, or executed'' criteria in connection with 
Title VII implementation, including cross-border tests related not 
only to the de minimis exception to the ``security-based swap 
dealer'' definition, but also to other requirements related to 
security-based swap dealer registration, to business conduct 
requirements and to reporting and public dissemination requirements. 
See letter from Briget Polichene, CEO, Institute of International 
Bankers, and Kenneth E. Bentsen, President and CEO, Securities 
Industry and Financial Markets Association, dated July 23, 2019 
(``IIB/SIFMA letter'') at 7-8, 16-18; ISDA letter at 4-7; letter 
from Wim Mijs, CEO, European Banking Federation, dated July 23, 2019 
(``EBF letter'') at 7; letter from Mark Hutchinson, Managing 
Director & General Counsel, HSBC Bank USA, N.A., dated July 23, 2019 
(``HSBC letter'') at 2-3. Some of these commenters also expressed 
the view, however, that the proposed exception would partially--but 
not completely--address the problems they identified in connection 
with the use of those criteria. See IIB/SIFMA letter at 2 (stating 
that if the Commission does not adopt the commenter's recommended 
approach of not incorporating ``arranged, negotiated, or executed'' 
criteria as part of Title VII implementation, it should ``adopt a 
modified version of the Proposal's conditional exception from the de 
minimis calculation''); ISDA letter at 7-9; HSBC letter at 1, 5. One 
commenter also argued that the Commission should exempt all non-U.S. 
registered security-based swap dealers from business conduct 
requirements other than those that also apply to transactions 
subject to the proposed exception to the de minimis counting 
requirement. See IIB/SIFMA letter at 16.
    \24\ As noted in the Proposing Release, the antifraud provisions 
of the federal securities laws and certain relevant Title VII 
requirements would continue to apply to the transactions subject to 
the exception. See Proposing Release, 84 FR at 24219.
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    As the Commission previously recognized, the ``arranged, 
negotiated, or executed'' criteria serve important regulatory 
interests, including helping protect against the potential that market 
participants would use booking practices to engage in an unregistered 
security-based swap dealing business in the United States. Those 
criteria further

[[Page 6273]]

reflect the activity-based focus of the ``security-based swap dealer'' 
definition,\25\ as well as considerations regarding competitive 
disparities, market fragmentation, and public transparency. Similarly, 
the Title VII SBS Entity requirements more generally serve a number of 
regulatory purposes apart from mitigating counterparty and operational 
risks, ``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.'' 
\26\
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    \25\ As the Commission has previously noted, ``Exchange Act 
Section 3(a)(71)(A) identifies specific activities that bring a 
person within the definition of a `security-based swap dealer': (1) 
[h]olding 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.'' 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, Exchange Act Release No. 77104 
(Feb. 10, 2016), 81 FR 8598, 8614 (Feb. 19, 2016) (``ANE Adopting 
Release'') (citing Exchange Act Section 3(a)(71)(A), 15 U.S.C. 
78c(a)(71)(A)).
     The Commission has interpreted this definition to apply to 
persons engaged in indicia of dealing activity. See ANE Adopting 
Release, 81 FR at 8614 (citing Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' Exchange Act Release No. 66868 
(Apr. 27, 2012), 77 FR 30596, 30617-18 (May 23, 2012) 
(``Intermediary Definitions Adopting Release'')).
    Consistent with the statutory definition, the Commission has 
stated that the de minimis threshold relates to the volume of 
dealing activity and not to specific risk-related factors. Moreover, 
the fact that risk from a transaction between two non-U.S. persons 
exists largely outside the United States does not determine whether 
a sufficient nexus exists to require a non-U.S. person to count the 
transaction toward its de minimis threshold. Rather, ``the 
appropriate analysis . . . 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 the 
Commission's further definition] of `security-based swap dealer.''' 
ANE Adopting Release, 81 FR at 8614.
    \26\ See Proposing Release, 84 FR at 24201 n.20. The 
Commission's actions to mitigate the negative consequences 
potentially associated with the various uses of this type of test 
accordingly are designed to do so while preserving the important 
Title VII interests that the Commission advanced when it 
incorporated the test into the various cross-border rules. See 
Proposing Release, 84 FR at 24208.
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    For similar reasons, the Commission is unpersuaded by one 
commenter's suggestion \27\ to replace the ``arranged, negotiated, or 
executed'' criteria for applying Title VII in the cross-border context 
with a ``primary trading relationship'' test. Moreover, the Commission 
recognizes that a test, such as a primary trading relationship test, 
that purports to distinguish between ``direct'' and ``meaningful'' 
involvement in a transaction on the one hand, and ``occasional'' and 
``incidental'' involvement on the other hand, in practice would be 
subject to subjective and inconsistent application.
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    \27\ See HSBC letter (highlighting operational issues associated 
with the use of an ``arranged, negotiated, or executed test'' and 
stating that it would be more practical to make use of a ``primary 
trading relationship'' test that looks at ``the nature of the 
trading relationship between the non-U.S. parties and the U.S. 
personnel involved in the trade''; adding that that test would apply 
``if U.S. personnel are directly and meaningfully involved in the 
trading relationship with the non-U.S. parties at the relationship 
level (e.g., the client's primary point of contact for the SBS is 
located in the United States), but not when ``U.S. personnel are 
only occasionally and incidentally involved in the trading 
relationship with the non-U.S. parties'').
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    At the same time, commenters argued that the use of ``arranged, 
negotiated, or executed'' criteria has the potential to lead to a 
variety of negative consequences. In particular, commenters expressed 
concern that these criteria may cause the relocation of operations and 
personnel out of the United States, inhibit the use of centralized risk 
management, reduce liquidity in the U.S. market, increase fragmentation 
in global markets, impose significant compliance costs and logistical 
challenges, and produce competitive disparities.\28\ As discussed 
below, the conditional exception should help mitigate the negative 
consequences that otherwise may arise from the use of those criteria to 
their security-based swap business, while also helping to avoid 
allowing persons to engage in an unregulated security-based swap 
dealing business in the United States.
---------------------------------------------------------------------------

    \28\ See IIB/SIFMA letter at 7-8, 16-18; ISDA letter at 4-7; EBF 
letter at 7; HSBC letter at 2-3.
---------------------------------------------------------------------------

    Commenters expressed concerns about both the proposed ``market 
color'' guidance and the proposed conditional exception. Some 
commenters asserted that the proposed guidance would encourage market 
participants to restructure their security-based swaps business to 
avoid the requirements of the Dodd-Frank Act.\29\ Commenters argued 
that this evasion would impede the Commission's ability to monitor 
compliance,\30\ as well as to exercise its anti-fraud authority.\31\ 
Commenters also worried that the Commission would lose the ability to 
oversee the vast majority of ``arranging'' and ``negotiating'' 
activity.\32\ Similarly, some commenters objected to the proposed 
exception to the de minimis counting rule, asserting that the proposal 
reflected industry preference contrary to the Commission's public 
interest mandate,\33\ was unsupported by new information,\34\ and would 
permit certain market participants to use booking practices to avoid 
having to register as security-based swap dealers.\35\ The Commission 
recognizes that the guidance addresses certain activity that will not 
be cross-border ``arranging'' and ``negotiating'' subject to the 
application of certain Title VII rules. Further, the Commission is 
mindful that the exception modifies the approach taken in 2016, when 
the Commission incorporated the ``arranged, negotiated, or executed'' 
criteria into the de minimis counting rule. Though the exception does 
permit market participants to avoid counting certain ``arranging, 
negotiating, or executing'' activity towards the security-based swap 
dealer registration thresholds, in the Commission's view, its approach 
appropriately balances the recent concerns presented by commenters \36\ 
and helps avoid the potential negative consequences that some have 
suggested may be associated with the current ``arranging, negotiating, 
or executing'' standard. In the Commission's view, this approach is in 
the public interest because it should help facilitate implementation of 
the Title VII security-based swap dealer requirements in a manner that 
is both effective and efficient.\37\
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    \29\ See Citadel letter at 5; see also Better Markets letter at 
17.
    \30\ See Citadel letter at 5.
    \31\ See Better Markets letter at 21.
    \32\ See Citadel letter at 5.
    \33\ See Better Markets letter at 1-2.
    \34\ See Better Markets letter at 25; AFR letter at 3-4.
    \35\ See AFR letter at 4; see also Citadel letter at 5 
(expressing concerns regarding permitting counterparties to ``engage 
in dealing activity using U.S.-based personnel without being 
appropriately registered with the Commission'' in connection with 
expressing opposition to Alternative 2); letter from Karl Muth, 
dated July 19, 2019 (``Muth letter'') (expressing view that ``the 
risk that non-U.S. persons engaged in security-based swap dealing 
activity in the United States could avoid regulation under Title VII 
. . . is a more serious risk than the risk that the ambit of Title 
VII may be expanded nominally in some unanticipated way'').
    \36\ See note 23, supra, and Parts II.B and II.C, infra.
    \37\ Three commenters expressed concerns regarding 
documentation-related compliance burdens in connection with the use 
of the ``arranging, negotiating, or executing'' standard in Title 
VII rules. See IIB/SIFMA letter at 16 (asserting that many business 
conduct requirements ``would impose documentation burdens on non-
U.S. counterparties that would deter them from having the 
interactions with U.S. personnel that would trigger these 
requirements''; suggesting an exemption from all business conduct 
requirements as applied to non-U.S. security-based swap dealers' 
``arranging, negotiating, or executing'' activity,'' except for 
those requirements that are conditions to the new exception from the 
de minimis counting rule); ISDA letter at 7 (asserting that 
``certain business conduct requirements would impose documentation 
burdens on non-U.S. counterparties that may incentivize them not to 
transact with nonresident [security-based swap dealers] that utilize 
U.S. personnel''; suggesting either an exemption from, or 
substituted compliance for, all business conduct requirements as 
applied to non-U.S. security-based swap dealers' ``arranging, 
negotiating, or executing'' activity''); HSBC letter at 3-4 (noting 
that it would be ``immensely cumbersome to modify [OTC derivatives 
regulation compliance systems] to systematically monitor and track 
the location of any front office personnel acting for HSBC''). 
Another commenter did not cite documentation burdens but called for 
an exemption from all business conduct requirements for transactions 
between two non-U.S. persons that are ``arranged, negotiated, or 
executed'' by U.S. personnel. See EBF letter at 7. For the reasons 
discussed above, the Commission continues to believe the ``arranged, 
negotiated, or executed'' criteria form an appropriate basis for 
applying Title VII requirements, including business conduct 
requirements, in the cross-border context. The Commission encourages 
potential foreign SBS Entity registrants, however, to contact the 
staff to discuss concerns regarding any disruption that may be 
associated with any documentation requirements arising from 
transactions that are arranged, negotiated, or executed by U.S. 
personnel. In this regard, the Commission notes that certain of 
these business conduct requirements are required by statute.
     Similarly, three commenters expressed concerns regarding the 
application of Regulation SBSR to transactions between non-U.S. 
persons that are ``arranged, negotiated, or executed'' by U.S. 
personnel. See IIB/SIFMA letter at 16-18 (suggesting an exemption 
from Regulation SBSR for such transactions when they are reported in 
another jurisdiction but not publicly disseminated due to 
insufficient liquidity in that jurisdiction); ISDA letter at 5-7 
(suggesting an exemption from Regulation SBSR for such transactions 
until the Commission issues substituted compliance determinations 
for all G-20 jurisdictions); EBF letter at 7 (suggesting an 
exemption from Regulation SBSR for such transactions). One commenter 
urged the Commission to continue applying Regulation SBSR to 
transactions between non-U.S. persons that are ``arranged, 
negotiated, or executed'' by U.S. personnel, to promote the 
Commission's supervisory interest in monitoring U.S. trading 
activity and to increase transparency and enhance price discovery 
for U.S. market participants. See Citadel letter at 1, 2-5. For the 
reasons discussed above, the Commission continues to believe the 
``arranged, negotiated, or executed'' criteria form an appropriate 
basis for applying Title VII requirements, including Regulation 
SBSR, in the cross-border context. Another commenter asked the 
Commission to allow transaction reports made pursuant to Regulation 
SBSR to mask counterparty information when a foreign legal barrier 
requires counterparty consent and/or regulatory authorization to 
report unmasked data. See IIB/SIFMA letter at 28-29. As discussed in 
Part X.C, the Commission is issuing a statement regarding compliance 
with Regulation SBSR. This statement takes account of these 
comments.

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[[Page 6274]]

B. Guidance Regarding the Meaning of ``Arranged'' and ``Negotiated'' in 
Connection With the Cross-Border Application of Title VII

1. Proposed Approach
    For purposes of the ``arranged, negotiated, or executed'' test, the 
Commission intended for the terms ``arrange'' and ``negotiate'' to 
``indicate market-facing activity of sales or trading personnel in 
connection with a particular transaction, including interactions with 
counterparties or their agents.'' \38\ Recognizing that market-facing 
activity may vary significantly in connection with security-based swap 
transactions, the Commission proposed guidance regarding activity that 
is not ``arranging'' or ``negotiating'' for purposes of Title VII 
requirements.\39\ The proposed guidance would have applied to the 
``arranged, negotiated, or executed'' test that is used in connection 
with the de minimis counting rules \40\ and in the cross-border 
application of business conduct rules,\41\ regulatory reporting and 
public dissemination requirements,\42\ and major security-based swap 
participant rules.\43\
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    \38\ See ANE Adopting Release, 81 FR at 8622; see also Proposing 
Release, 84 FR at 24215.
    \39\ See Proposing Release, 84 FR at 24216.
    \40\ In connection with de minimis counting, this guidance would 
apply to: (1) Exchange Act Rule 3a71-3(b)(1)(iii)(C), which requires 
the counting of security-based swap dealing transactions between 
non-U.S. counterparties that have been ``arranged, negotiated, or 
executed'' in the United States, 17 CFR 240.3a71-3(b)(1)(iii)(C); 
(2) Exchange Act Rule 3a71-3(b)(2), which addresses the counting of 
affiliate transactions described by paragraph (b)(1) (which includes 
the (b)(1)(iii)(C) requirement), 17 CFR 240.3a71-3(b)(2); (3) 
Exchange Act Rule 3a71-5, which excepts certain cleared anonymous 
transactions from the individual counting requirement of paragraph 
(b)(1) of Rule 3a71-3 and from the affiliate counting requirement of 
paragraph (b)(2), but is unavailable to transactions ``arranged, 
negotiated, or executed'' by U.S. personnel, 17 CFR 240.3a71-5; and 
(4) the de minimis counting requirement of Exchange Act Rule 3a71-
3(b)(1)(iii)(A), requiring the counting of dealing transactions 
involving a foreign branch of a registered security-based swap 
dealer and a non-U.S. counterparty (or another foreign branch), 17 
CFR 240.3a71-3(b)(1)(iii)(A). The regulatory interests underlying 
the Rule 3a71-3(b)(1)(iii)(C) and Rule 3a71-3(b)(1)(iii)(A) uses of 
arranged, negotiated, and/or executed criteria to implement the de 
minimis counting requirement are similar (as are, derivatively, the 
Rule 3a71-3(b)(2) and Rule 3a71-5 uses).
    The guidance also would apply to the definition of ``transaction 
conducted through a foreign branch'' in Rule 3a71-3(a)(3), which 
incorporates the functionally equivalent ``arranged, negotiated, and 
executed'' terminology.
    \41\ See note 14, supra.
    \42\ See note 16, supra.
    \43\ See note 17, supra.
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    In the Proposing Release, the Commission explained that in certain 
circumstances the market-facing activity of U.S. personnel is so 
limited that it would not implicate the regulatory interests underlying 
the relevant Title VII requirements.\44\ The Commission proposed that 
such circumstances arise when U.S. personnel provide ``market color'' 
in connection with security-based swap transactions, but otherwise have 
no client responsibility and receive no transaction-linked 
compensation.\45\ The Commission further proposed that, for those 
purposes, the term ``market color'' would mean background information 
regarding pricing or market conditions associated with particular 
instruments or with markets more generally, including information 
regarding current or historic pricing, volatility, or market depth, and 
trends or predictions regarding pricing, volatility, or market depth, 
as well as other types of information reflecting market conditions and 
trends.\46\ The Commission proposed that U.S. personnel who have no 
client responsibility and receive no transaction-linked compensation 
could provide market color in connection with security-based swap 
transactions in support of non-U.S. persons who actually arrange, 
negotiate, and execute those transactions on behalf of their clients, 
without triggering the requirements under Title VII that incorporate 
the ``arranged, negotiated, or executed'' test.\47\ The Commission 
explained that, for purposes of the proposed guidance, having no client 
responsibility would mean that the U.S. personnel providing market 
color must not have been assigned, and must not otherwise exercise, 
client responsibility in connection with the transaction.\48\ The 
Commission noted that the involvement of U.S. personnel who are 
designated as sales persons or traders would not necessarily trigger 
the ``arranged, negotiated, or executed'' test as long as such 
personnel's activity is limited to the provision of market color, 
rather than arranging or negotiating.\49\ The Commission also explained 
that U.S. personnel not receiving transaction-linked compensation means 
that the U.S. personnel do not receive compensation based on or 
otherwise linked to the completion of transactions on which the U.S. 
personnel provide market color.\50\ The Commission clarified, however, 
that this does not include profit-sharing arrangements or other 
compensation practices that account for aggregated profits, as such 
arrangements would not be expected to incentivize U.S. personnel in a 
similar manner or to a similar degree as compensation that is directly 
linked to the success of individual transactions.\51\
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    \44\ See Proposing Release, 84 FR at 24216.
    \45\ See id. at 24216-17.
    \46\ See id. at 24216.
    \47\ See id. at 24217.
    \48\ See id. at 24217.
    \49\ See id. at 24216 n.95.
    \50\ See id. at 24217.
    \51\ See id. at 24217 n.96.
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    In proposing the guidance, the Commission reasoned that the 
provision of market color by U.S. personnel who have no client 
responsibility and receive

[[Page 6275]]

no transaction-linked compensation is a type of limited market-facing 
activity by U.S. personnel that, standing alone, would not trigger the 
concerns and regulatory interests that underpin the various uses of the 
``arranged, negotiated, or executed'' test, as such activity would not 
appear comprehensive enough to pose a significant risk of allowing an 
entity to exit the Title VII regulatory regime without exiting the U.S. 
market.\52\ Moreover, non-U.S. counterparties reasonably would not 
expect Title VII business conduct requirements to apply merely as the 
result of receiving technical information from U.S. personnel.\53\ As 
noted in the Proposing Release, in circumstances where limited market-
facing activity by U.S. personnel does not trigger the ``arranged, 
negotiated, or executed'' test, the federal securities laws, including 
applicable anti-fraud provisions, still may apply to that activity 
depending on the particular facts and circumstances.\54\
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    \52\ See id. at 24216 n.94.
    \53\ See id.
    \54\ See id. at 24217 n.97.
---------------------------------------------------------------------------

2. Commission Action
    The Commission is providing the guidance largely as proposed, 
modified to further explain the term ``market color.'' \55\ The 
Commission believes that, as revised, the guidance will help entities 
evaluate what is, and what is not, ``market color.''
---------------------------------------------------------------------------

    \55\ Three commenters expressed general support for the guidance 
as proposed. See IIB/SIFMA letter at 3, 9-10; HSBC letter at 1, 5 
(expressing general support for the comments in the IIB/SIFMA 
letter); ISDA letter at 2.
---------------------------------------------------------------------------

    The Commission is providing guidance \56\ regarding the ``arranged, 
negotiated, or executed'' test that is used in connection with de 
minimis counting,\57\ the cross-border application of business conduct 
rules,\58\ regulatory reporting and public dissemination 
requirements,\59\ and major security-based swap participant rules.\60\
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    \56\ The Commission continues to believe there is no reason to 
revisit its prior guidance regarding the scope of the term 
``execute''; the Commission therefore did not in the Proposing 
Release and does not now provide any additional guidance regarding 
the interpretation of that term. Moreover, although the Commission 
is providing guidance with respect to certain market-facing 
activities that in its view do not constitute arranging or 
negotiating for purposes of the relevant Title VII requirements, the 
Commission's view otherwise remains unchanged with respect to 
guidance provided in the ANE Adopting Release regarding what 
constitutes arranging, negotiating, or executing security-based 
swaps.
    \57\ In connection with de minimis counting, this guidance 
applies to: (1) Exchange Act Rule 3a71-3(b)(1)(iii)(C), which 
requires the counting of security-based swap dealing transactions 
between non-U.S. counterparties that have been ``arranged, 
negotiated, or executed'' in the United States, 17 CFR 240.3a71-
3(b)(1)(iii)(C); (2) Exchange Act Rule 3a71-3(b)(2), which addresses 
the counting of affiliate transactions described by paragraph (b)(1) 
(which includes the (b)(1)(iii)(C) requirement), 17 CFR 240.3a71-
3(b)(2); (3) Exchange Act Rule 3a71-5, which excepts certain cleared 
anonymous transactions from the individual counting requirement of 
paragraph (b)(1) of Rule 3a71-3 and from the affiliate counting 
requirement of paragraph (b)(2), but is unavailable to transactions 
``arranged, negotiated, or executed'' by U.S. personnel, 17 CFR 
240.3a71-5; and (4) the de minimis counting requirement of Exchange 
Act Rule 3a71-3(b)(1)(iii)(A), requiring the counting of dealing 
transactions involving a foreign branch of a registered security-
based swap dealer and a non-U.S. counterparty (or another foreign 
branch), 17 CFR 240.3a71-3(b)(1)(iii)(A). The regulatory interests 
underlying the Rule 3a71-3(b)(1)(iii)(C) and Rule 3a71-
3(b)(1)(iii)(A) uses of arranged, negotiated, and/or executed 
criteria to implement the de minimis counting requirement are 
similar (as are, derivatively, the Rule 3a71-3(b)(2) and Rule 3a71-5 
uses).
    The guidance also applies to the definition of ``transaction 
conducted through a foreign branch'' in Rule 3a71-3(a)(3), which 
incorporates the functionally equivalent ``arranged, negotiated, and 
executed'' terminology.
    \58\ See note 15, supra (addressing Exchange Act Rule 3a71-3(c), 
17 CFR 240.3a71-3(c), business conduct exclusion).
    \59\ See note 16, supra (addressing Regulation SBSR Rules 
908(a)(1)(v) and 908(b)(5), 17 CFR 242.908(a)(1)(v) and 908(b)(5), 
regarding the cross-border application of regulatory reporting and 
public dissemination requirements).
    \60\ See note 18, supra (addressing cross-border major security-
based swap participant provisions of Exchange Act Rules 3a67-
10(b)(3)(i) and 3a67-10(d), 17 CFR 240.3a67-10(b)(3)(i) and 3a67-
10(d)).
---------------------------------------------------------------------------

    In the Commission's view, ``market color'' is limited to background 
information regarding pricing or market conditions associated with 
particular instruments or with markets more generally in support of 
persons who arrange, negotiate, or execute security-based swap 
transactions on behalf of their clients. Background information 
includes information regarding (1) current or historic pricing, 
volatility, or market depth, and (2) trends or predictions regarding 
pricing, volatility, or market depth, as well as information related to 
risk management.
    The Commission is clarifying that U.S personnel who provide market 
color in connection with security-based swap transactions--in the form 
of information or data as described above--do not trigger the Title VII 
requirements that use an ``arranged, negotiated, or executed'' test 
when both the following circumstances exist:
     No client responsibility--The U.S. personnel have not been 
assigned, and do not otherwise exercise, client responsibility in 
connection with the transaction.
     No transaction-linked compensation--The U.S. personnel do 
not receive compensation based on, or otherwise linked to, the 
completion of individual transactions on which the U.S. personnel 
provide market color. \61\
---------------------------------------------------------------------------

    \61\ As stated in the Proposing Release, the Commission 
understands that it is commonplace for firms to account for the 
overall profit or loss of the firm, or of a particular division or 
office, in calculating compensation for personnel. Solely for the 
purposes of this guidance, the Commission does not view profit-
sharing arrangements or other compensation practices that account 
for aggregated profits as transaction-linked compensation, as such 
arrangements would not be expected to incentivize U.S. personnel in 
a similar manner or to a similar degree as compensation that is 
directly linked to the success of individual transactions.
---------------------------------------------------------------------------

    In contrast, in the Commission's view, any solicitation activity by 
personnel located in the United States or activity to respond to 
requests by counterparties to enter into transactions when such 
requests are made directly to personnel located in the United States 
would not be ``market color.'' \62\ Moreover, market-facing activity by 
personnel located in the United States also would not be ``market 
color'' if such activity involves:
---------------------------------------------------------------------------

    \62\ See Intermediary Definitions Adopting Release, 77 FR at 
30618 (identifying actively soliciting clients in security-based 
swaps as a factor in indicating that a person meets the statutory 
definition of security-based swap dealer); see also Application of 
``Security-Based Swap Dealer'' and ``Major Security-Based Swap 
Participant'' Definitions to Cross-Border Security-Based Swap 
Activities, Exchange Act Release 34-72472 (Jun. 25, 2014), 79 FR 
47278, 47322 n.364 (Aug. 12, 2014) (``Cross-Border Adopting 
Release'') (stating that the term ``arranging'' was used in lieu of 
``solicit'' to reflect the fact that a person may engage in dealing 
activity not only through transactions that the person actively 
solicits, but also through transactions that result from 
counterparties reaching out to the person); ANE Adopting Release, 81 
FR 8622 n.221.
---------------------------------------------------------------------------

     Providing recommendations, such as recommending particular 
instruments;
     providing predictions regarding potential merits or risks 
of, or providing trading ideas or strategies relating to, a proposed 
security-based swap transaction;
     structuring a particular security-based swap transaction; 
or
     finalizing or reaching agreement with respect to any 
pricing or non-pricing element, such as underlier, notional amount or 
tenor, that must be resolved to complete a security-based swap 
transaction.
    The language above is different from the language in the proposal 
in response to a number of commenters who expressed concern that it 
would be difficult to distinguish ``market color'' activity from 
``arranging'' and ``negotiating'' activity.\63\
---------------------------------------------------------------------------

    \63\ See Citadel letter at 5; Better Markets letter at 13-14.
---------------------------------------------------------------------------

    Commenters expressed concern that the guidance would encourage 
entities (including U.S. entities) to restructure to avoid or evade 
requirements applicable

[[Page 6276]]

under the Dodd-Frank Act.\64\ One commenter warned that ``market 
color'' was ``highly facts and circumstances-specific, complicating 
monitoring and surveillance by the Commission regarding whether dealer 
firms are appropriately classifying ANE transactions,'' \65\ as well as 
the exercise of the Commission's anti-fraud authority \66\ and would 
result in the Commission losing oversight over the vast majority of 
transactions that are currently classified as ``arranging'' or 
``negotiating.'' \67\ Finally, a commenter stated that the guidance 
would lead to ``bifurcation of U.S. and non-U.S. markets'' that would 
be ``almost certain to impair liquidity and increase costs on U.S. 
counterparties'' and lead to increased fragmentation.\68\
---------------------------------------------------------------------------

    \64\ See Citadel letter at 5; see also Better Markets letter at 
17.
    \65\ See Citadel letter at 5.
    \66\ See Better Markets letter at 21.
    \67\ See Citadel letter at 5.
    \68\ See Better Markets letter at 23-24.
---------------------------------------------------------------------------

    The Commission is not making additional changes in response to 
these comments. The Commission believes the guidance describes 
activities that are sufficiently limited and should not encourage 
entities (including U.S. entities) to restructure to avoid requirements 
applicable under the Dodd-Frank Act or to lead to market fragmentation. 
Moreover, contrary to one commenter's suggestion, the Commission is not 
taking the position that market color activities are not within its 
jurisdiction.\69\ Indeed, to the extent federal securities laws, 
including anti-fraud, apply to U.S. personnel's provision of market 
color, nothing in this guidance affects requirements for U.S. personnel 
to comply with those laws. Moreover, any U.S. personnel who would have 
the requisite expertise to provide market color, likely would be 
associated persons of an entity registered with the Commission in an 
appropriate capacity, such as a security-based swap dealer or broker-
dealer.
---------------------------------------------------------------------------

    \69\ Nothing in the amendments or guidance should be interpreted 
as a limitation or further clarification of the ``outer bounds of 
the agency's cross-border jurisdiction.'' See ISDA letter at 2.
---------------------------------------------------------------------------

C. Conditional Exception to Required De Minimis Counting of Certain 
Dealing Transactions Arranged, Negotiated, or Executed by U.S. 
Personnel

    For the reasons discussed above in part A.2, and after carefully 
considering comments received, the Commission is adopting a conditional 
exception to the de minimis counting requirement of Rule 3a71-
3(b)(1)(iii)(C), subject to certain modifications from the proposal 
that are addressed below.\70\
---------------------------------------------------------------------------

    \70\ As discussed below, the Commission is adopting a modified 
version of Alternative 2 of the proposed exception, which requires 
that the U.S. personnel at issue be associated either with a 
registered broker or with a registered security-based swap dealer. 
See Part II.C.1, infra.
     This conditional exception to Rule 3a71-3(b)(1)(iii)(C) also 
would have ramifications to affiliate counting provisions of 
paragraph (b)(2) of Rule 3a71-3. Paragraph (b)(2) requires persons 
engaged in security-based swap transactions described in paragraph 
(b)(1) of the rule -which includes the transactions at issue--also 
to count certain dealing transactions of affiliates under common 
control, including transactions described in paragraph (b)(1)(iii) 
(unless, pursuant to Rule 3a71-4, the affiliate itself is a 
registered security-based swap dealer or a person in the process of 
registering as a security-based swap dealer). As a result, 
transactions subject to the proposed Rule 3a71-3(b)(1)(iii)(C) 
exception further would not be subject to the paragraph (b)(2) 
affiliate transaction counting requirement.
    Also, Exchange Act Rule 3a71-5 excepts certain cleared anonymous 
transactions from the individual counting requirement of paragraph 
(b)(1) of Rule 3a71-3 (which includes the (b)(1)(iii)(C) 
requirement) and from the affiliate counting requirement of 
paragraph (b)(2), but the Rule 3a71-5 exception is unavailable to 
transactions arranged, negotiated, or executed by U.S. personnel. 
Because the exception to (b)(1)(iii)(C) will prevent the 
transactions at issue from triggering either the (b)(1) or (b)(2) 
counting requirements, the Rule 3a71-5 exception would not be 
relevant to those transactions.
---------------------------------------------------------------------------

1. Registration and Ownership Status of the Entity With Which U.S. 
Personnel Is Associated
(a) Proposed Approach
    The proposal set forth two alternatives that differed with regard 
to the registration status of the entity with which personnel engaged 
in arranging, negotiating, or executing activity within the United 
States is associated. Under Alternative 1, all such arranging, 
negotiating, or executing activity within the United States would have 
to be performed by personnel associated with an entity that is 
registered with the Commission as a security-based swap dealer.\71\ 
Alternative 1 was predicated on the reasoning that requiring this U.S. 
activity to be conducted by personnel in their capacity as associated 
persons of a registered security-based swap dealer would help ensure 
that the U.S. activity would be subject to key security-based swap 
dealer requirements under Title VII, including requirements regarding 
supervision, books and records, trade acknowledgments and 
verifications, and business conduct standards. Alternative 2 as 
proposed was broader, allowing for the U.S. activity to be performed by 
personnel associated with an entity that is registered with the 
Commission as a broker (or, as with the first alternative, an entity 
that is registered as a security-based swap dealer).\72\ The other 
proposed conditions to the two alternatives were intended to be 
functionally identical.\73\
---------------------------------------------------------------------------

    \71\ See Alternative 1--proposed Rule 3a71-3(d)(1)(i)(A).
    \72\ See Alternative 2--proposed Rule 3a71-3(d)(1)(i)(A).
    \73\ There were certain technical differences between the two 
alternatives, to reflect the potential that, under Alternative 2, 
the U.S. activity could be conducted by a registered broker that is 
not also registered as a security-based swap dealer. See note 154, 
infra.
---------------------------------------------------------------------------

    Both proposed alternatives required that the registered entity 
(whether it is a registered security-based swap dealer or a registered 
broker) be a majority-owned affiliate of the non-U.S. person relying on 
the exception.\74\ The affiliation condition in part reflected the 
expectation that financial groups that use the exception to avoid 
having to relocate their U.S.-based personnel (so as to avoid 
triggering security-based swap dealer registration) would use 
affiliated entities to satisfy the exception.\75\ The affiliation 
condition also was intended to help guard against the risk that a 
financial group may seek to attenuate its responsibility for any 
shortcomings in the registered entity's compliance with the conditions 
to the exception.\76\ The proposal made use of a majority-ownership 
standard \77\ to achieve that goal--rather than other measures of 
affiliation such as a common control standard or alternative ownership 
thresholds--to help ensure that the financial group has a significant 
interest in the registered entity, including the registered entity's 
compliance with applicable requirements.\78\
---------------------------------------------------------------------------

    \74\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(i)(B).
    \75\ See Proposing Release, 84 FR at 24220, 24227.
    \76\ See id.
    \77\ Paragraph (a)(10) of Rule 3a71-3 defines the term 
``majority-owned affiliate'' to encompass relationships whereby one 
entity directly or indirectly owns a majority interest in another, 
or whereby a third party directly or indirectly owns a majority 
interest in both, where ``majority interest'' is the right to vote 
or direct the vote of a majority of a class of voting securities of 
an entity, the power to sell or direct the sale of a majority of a 
class of voting securities of an entity, or the right to receive 
upon dissolution, or the contribution of, a majority of the capital 
of a partnership.
    \78\ See id.
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(b) Commission Action
    As discussed above in part II.A.2, ``arranging,'' ``negotiating,'' 
and ``executing'' are core components of security-based swap dealing 
activity.\79\

[[Page 6277]]

Moreover, a non-U.S. person that, as part of its security-based swap 
dealing, ```engages in market-facing activity using personnel located 
in the United States' would perform activities that fall within the 
security-based swap dealer definition `at least in part in the United 
States.' '' \80\ The Commission is adopting Alternative 2--which 
requires that the ``arranging, negotiating, or executing'' activity in 
the United States be performed by personnel associated with either a 
registered security-based swap dealer or a registered broker \81\--but 
is modifying elements of Alternative 2 from the proposal in response to 
concerns raised by commenters.\82\ In addition, the Commission is 
adopting, as proposed, the condition requiring that the registered 
entity be a majority-owned affiliate of the non-U.S. person relying on 
the exception.\83\
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    \79\ The ``arranged, negotiated, or executed'' criteria do not 
encompass non market-facing activity, such as:
     Processing trades and other back-office activities; designing 
security-based swaps without engaging in market-facing activity in 
connection with specific transactions; preparing underlying 
documentation including negotiating master agreements (``as opposed 
to negotiating with the counterparty the specific economic terms of 
a particular security-based swap transaction''); and clerical and 
ministerial tasks such as entering executed transactions on a non-
U.S. person's books.
     Proposing Release, 84 FR at 24215 (citing ANE Adopting Release, 
81 FR at 8622). Further, the ``arranged'' and ``negotiated'' 
criteria do not include certain types of market-facing activity 
consistent with the ``market color'' guidance discussed in Part 
II.B, supra.
    \80\ See Proposing Release, 84 FR at 24208.
    As noted in the Proposing Release, the exception applies only to 
the Rule 3a71-3(b)(1)(iii)(C) requirement for non-U.S. persons to 
count transactions that involve dealing activity in the United 
States. Rule 3a71-3 continues to require non-U.S. persons to count 
all of their security-based swap dealing transactions with U.S. 
person counterparties, all of their security-based swap dealing 
transactions that are guaranteed by their U.S. person affiliates, 
and certain dealing transactions of their affiliates. See Proposing 
Release, 84 FR at 24219 nn.102, 105.
    \81\ As noted in the Proposing Release, the exception would not 
be satisfied if the ``arranging, negotiating, or executing'' 
activity is conducted by a bank that has not registered as a broker 
due to exceptions for bank brokerage activity in the Exchange Act's 
definition of ``broker,'' unless the bank is registered as a 
security-based swap dealer. See Proposing Release, 84 FR at 24226 
n.166.
    \82\ See Exchange Act Rule 3a71-3(d)(1)(i)(A).
    \83\ The Commission received no comments specific to that 
proposed condition. As discussed in the Proposing Release, that 
condition is intended to help ensure that the financial group of the 
non-U.S. person has a significant interest in the registered 
security-based swap dealer or registered broker-dealer, to help 
promote appropriate compliance and oversight practices. See 
Proposing Release, 84 FR at 24220.
    Paragraph (a)(10) to Rule 3a71-3 defines ``majority-owned 
affiliate'' to encompass a relationship whereby one entity directly 
or indirectly owns a majority interest in another, or where a third 
party directly or indirectly owns a majority interest in both, where 
``majority interest'' reflects voting power, the right to sell, or 
the right to receive capital upon dissolution or the contribution of 
capital.
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    The Commission believes that its modified approach to Alternative 2 
is preferable both to Alternative 1--which would have required the U.S. 
activity to be performed by persons associated with a registered 
security-based swap dealer--and to Alternative 2 as proposed in 
supporting the use of ``arranged, negotiated, or executed'' criteria as 
part of de minimis counting, while avoiding negative consequences that 
otherwise may be associated with those criteria. The Commission also 
believes that the modified approach to Alternative 2 will provide 
important relief to non-U.S. persons from the potential need to 
register multiple entities. This conclusion in part reflects the 
reasons outlined below and in part reflects the fact that, although the 
registration status of the entity engaged in U.S. activity is 
different, the two alternatives are subject to other conditions that 
are nearly identical (as one commenter also noted).\84\ Though the 
registered entity is not the counterparty to the transaction, the 
registered entity must comply with certain requirements for security-
based swap dealers who act as counterparties to a security-based swap. 
The registered entity must comply with these requirements as if it were 
the counterparty to the transaction. Moreover, even when the U.S. 
activity at issue is conducted through a registered broker that is not 
also registered as a security-based swap dealer, the entity nonetheless 
must comply with these requirements as if it were a registered 
security-based swap dealer. These additional conditions protect both 
counterparties and the Commission's ability to access information, as 
well as avoid the potential that the exception could be relied upon by 
non-U.S. persons that are not subject to certain minimum financial 
responsibility requirements.\85\ These conditions also materially 
distinguish the modified version of Alternative 2 from alternatives 
that the Commission previously rejected when it incorporated 
``arranged, negotiated, or executed'' criteria into the de minimis 
counting test.\86\ Further, the Commission agrees with the commenters 
who supported Alternative 2 because it provides more flexibility to 
market participants to utilize U.S. personnel associated with either a 
registered broker or a registered security-based swap dealer.\87\
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    \84\ See IIB/SIFMA letter at 10-11 (stating that under 
Alternative 2 the relevant transactions would be ``no less 
protected'' than under Alternative 1 because Alternative 2 would 
require compliance with the same conditions as Alternative 1).
    \85\ See id.
    \86\ In particular, when the Commission adopted rule amendments 
incorporating ``arranged, negotiated, or executed'' criteria as part 
of the de minimis counting test, and rejected an alternative 
approach based on the use of registered broker-dealers or U.S. 
banks:
    The Commission noted that 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, and 
stated that such an approach would effectively supplant Title VII 
security-based swap dealer regulation for a majority of dealing 
activity carried out in the United States with a ``cobbled 
together'' grouping of other requirements.
    Proposing Release, 84 FR at 24220.
    Alternative 2, in contrast, does not permit any carve-out for 
banks, and would require compliance with security-based swap dealer 
requirements in connection with key protections, including security-
based swap dealer requirements regarding disclosure of risks, 
characteristics, material incentives, and conflicts of interest; 
suitability; fair and balanced communications; and trade 
acknowledgment and verification.
    \87\ See ISDA letter at 7-8 (``We believe that this flexible 
approach is important given that certain non-U.S. entities that 
enter into SBSs with other non-U.S. persons do not intend to 
register as an SBSD in the United States.''); HSBC letter at 2-3 
(noting that U.S. personnel associated with two registered security-
based swap dealers and one registered broker-dealer engage in 
arranging, negotiating, or executing activity for non-U.S. entities 
in the HSBC group).
     For the same reasons, and for the avoidance of doubt, the 
Commission is adopting as proposed the provision of Alternative 2 
that permits the registered entity not to count against the de 
minimis thresholds for security-based swap dealer registration the 
transactions that its associated persons arrange, negotiate, or 
execute pursuant to the exception. See Exchange Act Rule 3a71-
3(d)(3).
---------------------------------------------------------------------------

    In adopting its modified approach to Alternative 2, the Commission 
also is mindful both of the comments in opposition to any exception as 
discussed above in Part II.A.2 and of one commenter's view that the 
exception should not permit a non-U.S. firm to engage in security-based 
swap dealing activity in the United States without it or an affiliate 
being registered as a security-based swap dealer.\88\ On

[[Page 6278]]

balance, however, the Commission is persuaded that the modified version 
of Alternative 2 will help to address the potential negative 
consequences that otherwise would be associated with the use of 
``arranged, negotiated, or executed'' criteria as part of the de 
minimis counting test, while providing flexibility to market 
participants and promoting effective, efficient cross-border 
implementation of security-based swap dealer registration requirements 
in a manner consistent with the public interest.\89\ Importantly, the 
exception does not apply to dealing activities involving U.S. 
counterparties or U.S. guarantees and thus does not permit market 
participants to avoid counting those transactions against the de 
minimis thresholds.\90\
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    \88\ See Citadel letter at 5-6 (``While we have concerns about 
permitting a dealer counterparty to engage in dealing activity using 
U.S.-based personnel without being appropriately registered with the 
Commission, in no event should the Commission adopt Alternative 2. 
This would allow a non-U.S. firm to engage in dealing activity in 
the U.S. in security-based swaps without either it, or an affiliate, 
being registered in the appropriate capacity with the Commission. As 
a result, key entity-level requirements designed specifically for 
firms engaged in security-based swap dealing activities would not 
apply. The Exchange Act is clear that `[i]t shall be unlawful for 
any person to act as a security-based swap dealer unless the person 
is registered as a security-based swap dealer with the Commission.' 
ANE Transactions constitute dealing activity in the U.S. and 
therefore should be taken into account for security-based swap 
dealer registration.'' (footnote omitted)). The same commenter also 
stated that a failure to regulate the transactions at issue would 
create competitive disparities between U.S. and non-U.S. dealers 
with respect to the requirements applicable to the trading 
activities conducted by their U.S. personnel. See Citadel letter at 
2. Finally, the commenter viewed Alternative 2 as allowing non-U.S. 
persons to ``exit the Title VII regulatory regime without exiting 
the U.S. market'' and to conduct ``an unregistered security-based 
swap dealing business in the United States.'' See Citadel letter at 
2 (quoting the Proposing Release, 84 FR at 24215 nn.80-81).
    \89\ As discussed in Part II.A.2, supra, the Commission 
reiterates its conclusion that the ``arranged, negotiated, or 
executed'' criteria appropriately belong in the de minimis counting 
requirement.
    \90\ To be clear, the exception to the de minimis counting 
requirement does not reflect a determination by the Commission that 
these transactions are without the jurisdiction of the United States 
under Exchange Act Section 30(c). Consistent with the Commission's 
view expressed in the ANE Adopting Release, transactions that are 
arranged, negotiated, or executed by personnel located in the United 
States in connection with a foreign person's dealing activity 
constitute dealing activity within the United States. Accordingly, 
and as noted above, although the Commission is providing a limited 
exception from the requirement to count certain of these trades 
toward the de minimis threshold, the antifraud provisions of the 
federal securities laws and certain relevant Title VII requirements 
would continue to apply to the transactions subject to the 
exception.
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(1) Minimum Capital Requirement
    The Commission is modifying Alternative 2 from the proposal to 
require any broker that serves as the registered entity for purposes of 
the exception, and that is not approved to use models to compute 
deductions for market or credit risk, to maintain minimum net capital 
and establish and maintain risk management control systems as if the 
broker were also registered as a security-based swap dealer.\91\ The 
Commission is mindful that, as proposed, Alternative 2 would have 
permitted a registered broker holding significantly less capital than a 
registered security-based swap dealer to serve as the registered entity 
for purposes of the exception. Indeed, one commenter favored 
Alternative 2 precisely because it would not require a broker to dually 
register as a security-based swap dealer, nor require it to hold the 
potentially higher minimum net capital required of registered security-
based swap dealer, if it wished to serve as the registered entity for 
purposes of the exception.\92\ The lowest fixed-dollar minimum net 
capital requirement for registered broker-dealers is $5,000, so long as 
the broker-dealer does not receive, owe, or hold customer funds or 
securities, does not carry customer accounts, and does not engage in 
certain other activities.\93\ However, broker-dealers may be subject to 
significantly higher capital requirements depending on their 
businesses. For example, broker-dealers that carry customer funds or 
securities must maintain at least $250,000 in net capital.\94\ These 
minimum net capital requirements nonetheless are significantly lower 
than the minimum net capital required of brokers who are also 
registered security-based swap dealers. A broker dually registered as a 
security-based swap dealer must maintain at least $20 million in net 
capital if it does not use models to compute deductions for market or 
credit risk (or the sum of an indebtedness-based ratio and up to eight 
percent of the risk margin amount, if that sum is greater than $20 
million).\95\
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    \91\ See Exchange Act Rule 3a71-3(d)(1)(i)(A)(1)-(2).
    \92\ See IIB/SIFMA letter at 10-11 & n.18 (arguing that the 
higher security-based swap dealer capital requirements would be 
disproportionate to the associated risk to the registered entity).
    \93\ See Exchange Act Rule 15c3-1(a)(2)(vi), 17 CFR 240.15c3-
1(a)(2)(vi).
    \94\ See Exchange Act Rule 15c3-1(a)(2)(i), 17 CFR 240.15c3-
1(a)(2)(i).
    \95\ See Exchange Act Rule 15c3-1(a)(10), 17 CFR 204.15c3-
1(a)(10).
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    The Commission believes it is appropriate to require a broker 
serving as the registered entity for purposes of the exception to 
maintain minimum net capital at least equal to the minimum net capital 
requirements for brokers that are also security-based swap dealers. A 
minimum capital requirement for brokers serving as the registered 
entity for purposes of the exception ensures that every financial group 
that has foreign dealers engaged in U.S. security-based swap dealing 
activity pursuant to the exception--whether through a registered 
security-based swap dealer or a registered broker--must maintain the 
same amount of net capital. The Commission believes that this 
requirement reduces the potential for competitive disparities between 
firms that make use of a registered broker for purposes of the 
exception and those that make use of a registered security-based swap 
dealer. Reducing the potential for such disparities should help to 
mitigate one commenter's concern that Alternative 2 could allow non-
U.S. persons to ``exit the Title VII regulatory regime without exiting 
the U.S. market'' and to conduct ``an unregistered security-based swap 
dealing business in the United States.'' \96\ On balance, the 
Commission believes that these concerns regarding the potential for 
evasion of Title VII weigh more heavily than another commenter's 
preference for the flexibility to use a minimally capitalized broker 
for purposes of the exception.\97\ Accordingly, a broker not approved 
to use models may not serve as the registered entity for purposes of 
the exception unless it maintains at least as much net capital as that 
required for a broker that is also registered as a security-based swap 
dealer (i.e., currently a minimum of $20 million).\98\ Because the use 
of a broker subject to higher capital requirements mitigates concerns 
regarding the potential for avoidance of Title VII, a broker that is 
approved to use models also could serve as the registered entity for 
purposes of the exception. In addition to complying with the other 
conditions to the exception, such brokers must comply with the higher 
minimum net capital and tentative net capital requirements that apply 
to them (i.e., currently minimums of $1 billion and $5 billion, 
respectively).\99\
---------------------------------------------------------------------------

    \96\ See Citadel letter at 2 (quoting the Proposing Release, 84 
FR at 24215 nn.80-81).
    \97\ See IIB/SIFMA letter at 10-11 & n.18.
    \98\ See Exchange Act Rule 15c3-1(a)(10), 17 CFR 240.15c3-
1(a)(10). The minimum net capital requirement for a broker that 
serves as the registered entity for purposes of the exception does 
not lower the minimum net capital or tentative net capital that a 
broker must maintain if required pursuant to other applicable 
requirements.
    \99\ See Exchange Act Rule 15c3-1(a)(7), 17 CFR 240.15c3-
1(a)(7).
---------------------------------------------------------------------------

    For analogous reasons, the Commission is modifying the proposal to 
require any broker that is not approved to use models and that serves 
as the registered entity for purposes of the exception to establish and 
maintain risk management control systems as if the entity also were a 
security-based swap dealer.\100\ This condition imposes a new 
requirement to comply with portions of Rule 15c3-4 only for brokers who 
engage in ``arranging, negotiating, or executing'' activity pursuant to 
the exception and who are not approved to use models and are not dually 
registered as a security-based swap dealer or an OTC derivatives 
dealer. Other registered entities who may engage in ``arranging, 
negotiating, or executing'' activity pursuant to the exception--brokers 
who are approved to use models, non-model brokers who are dually 
registered as

[[Page 6279]]

either a security-based swap dealer or an OTC derivatives dealer, and 
stand-alone security-based swap dealers--are already required to comply 
with Rule 15c3-4.\101\ As the Commission noted when adopting rules 
regarding risk management control systems for non-model-approved 
broker-dealers also registered as security-based swap dealers, ``[t]he 
Commission believes that establishing and maintaining a strong risk 
management control system is necessary for entities engaged in 
security-based swap business.'' \102\ Appropriate risk management 
controls help a firm to reduce its risk of significant loss, which also 
reduces the risk of spreading the losses to other market participants 
or throughout the financial markets as a whole.\103\ The Commission 
recognizes that service as the registered entity for purposes of the 
exception would not by itself be expected to create the same level of 
market or credit risk for a registered broker as it would for dealing 
entities that hold positions in security-based swaps. The Commission 
would expect the registered broker to establish such controls 
appropriate to the risk it undertakes. If the registered broker does 
not undertake any other activities other than arranging, negotiating, 
or executing transactions for its affiliates, the system of internal 
risk management controls regarding market and credit risk could, for 
example, entail guidelines, policies, and procedures that the broker 
does not undertake activities that create market or credit risk. 
Accordingly, the Commission is requiring that a broker that is not 
approved to use models and that serves as the registered entity for the 
purposes of the exception, must comply with Rule 15c3-1(a)(10)(ii) as 
if that entity were registered with the Commission as a security-based 
swap dealer.
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    \100\ See Exchange Act Rule 3a71-3(d)(1)(i)(B)(2) (requiring 
compliance with Exchange Act Rule 15c3-1(a)(10)), which in turn 
requires compliance with portions of Exchange Act Rule 15c3-4, when 
the registered entity is a broker not approved to use models to 
compute deductions for market or credit risk).
    \101\ See Exchange Act Rule 15c3-1(a)(7) (requiring brokers 
approved to use models to comply with portions of Exchange Act Rule 
15c3-4); Exchange Act Rule 15c3-1(a)(10) (requiring brokers not 
approved to use models who are dually registered as security-based 
swap dealers to comply with portions of Exchange Act Rule 15c3-4); 
Exchange Act Rule 15c3-4 (requiring compliance by OTC derivatives 
dealers); Exchange Act Rule 18a-1(f) (requiring security-based swap 
dealers to comply with portions of Exchange Act Rule 15c3-4).
    \102\ Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR 
43872, 43907 (Aug. 22, 2019) (``Capital, Margin, and Segregation 
Adopting Release'').
    \103\ See id.
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(2) Limited Exemption From Broker Registration
    The Commission is modifying Alternative 2 from the proposal to 
include, as an ancillary to the conditional exception, a limited 
exemption from the broker registration requirement in Section 15(a) of 
the Exchange Act for ``arranging, negotiating, or executing'' activity 
that is conducted in compliance with the exception and that is with or 
for a counterparty that is an eligible contract participant. Consistent 
with the Proposing Release, the Commission also recognizes that the 
``arranging, negotiating, or executing'' activity subject to the 
exception generally would constitute ``broker'' activity under the 
Exchange Act.\104\ As a result, a security-based swap dealer not 
already registered as a broker that serves as the registered entity for 
purposes of the exception, and its associated persons, could be 
required to register as brokers pursuant to Section 15(a) of the 
Exchange Act unless they can avail themselves of an exception from 
broker status or an exemption from broker registration.\105\ One 
commenter suggested that the Commission exempt from broker registration 
any registered security-based swap dealer whose only securities 
brokerage activity is the ``arranging, negotiating, or executing'' 
activity that its U.S. personnel conducts in connection with the 
exception.\106\ That commenter noted that a security-based swap dealer 
not dually registered as a broker-dealer and approved to use models to 
compute deductions for market or credit risk is subject to a minimum 
net capital requirement of $20 million and a minimum tentative net 
capital requirement of $100 million, versus minimum requirements of $1 
billion and $5 billion, respectively, for a broker-dealer approved to 
use models.\107\ The Commission believes that applying the heightened 
broker-dealer capital requirements to all security-based swap dealers 
approved to use models who serve as the registered entity for purposes 
of the exception could limit the usefulness of the exception, and is 
adopting the limited exemption from broker registration to avoid that 
potential outcome.\108\
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    \104\ See Proposing Release, 84 FR at 24220. Although the Dodd-
Frank Act excludes from the Exchange Act definition of ``dealer'' 
persons who engage in security-based swaps with or for persons who 
are eligible contract participants, see Section 3(a)(5) of the 
Exchange Act, 15 U.S.C. 78c(a)(5), as amended by Section 761(a)(1) 
of the Dodd-Frank Act, it does not include comparable provisions for 
persons who act as brokers in security-based swaps. Because 
security-based swaps, as defined in Section 3(a)(68) of the Exchange 
Act, are included in the Exchange Act Section 3(a)(10) definition of 
``security,'' persons who act as brokers in connection with 
security-based swaps must, absent an exception or exemption, 
register with the Commission as a broker pursuant to Exchange Act 
Section 15(a), and comply with the Exchange Act's requirements 
applicable to brokers. See Intermediary Definitions Adopting 
Release, 77 FR at 30597 n.9
    \105\ See Proposing Release, 84 FR at 24220. Exchange Act 
Section 15(a) requires persons who engage in brokerage activities 
involving securities (including security-based swaps) to register 
with the Commission unless they can avail themselves of an exception 
or exemption from the registration requirement. The definition of 
``broker'' in Exchange Act Section 3(a)(4) generally encompasses 
persons engaged in the business of effecting transactions in 
securities for the account of others, but does not encompass banks 
that are engaged in certain activities, which may include a 
significant portion of banks' security-based swap dealing activity. 
See Proposing Release, 84 FR at 24209 n.21 (citing ANE Adopting 
Release, 81 FR at 9619).
    \106\ See IIB/SIFMA letter at 11.
    \107\ See IIB/SIFMA letter at 11 n.18; Exchange Act Rules 18a-
1(a) and 15c3-1(a)(7), (10), 17 CFR 240.18a-1(a) and 15c3-1(a)(7), 
(10).
    \108\ The Commission also acknowledges that the exemption 
creates the potential for competitive disparities between market 
participants who engage in ``arranging, negotiating, or executing'' 
activity with non-U.S. eligible contract participants pursuant to 
the exception, for whom an exemption from broker registration 
potentially would be available, and market participants who engage 
in similar activity with U.S. persons, for whom the Rule 3a71-3 
exception is not available and thus the related exemption from 
broker registration also would not apply. For example, an exemption 
from broker registration available only with respect to ``arranging, 
negotiating, or executing'' activity with non-U.S. persons could 
create an incentive for market participants to provide greater 
liquidity and/or liquidity at a lower cost to non-U.S. eligible 
contract participants than to U.S. eligible contract participants. 
The limitations on the availability of the exemption should minimize 
the potential for these competitive disparities while also making 
the exception from the de minimis counting standard a practicable 
alternative.
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    At the same time, the Commission is mindful that the exception 
applies to ``arranging, negotiating, or executing'' activity with both 
eligible contract participants and non-eligible contract participants. 
As noted above, the exemption from broker registration applies only to 
``arranging, negotiating, or executing'' activity that is conducted in 
compliance with the exception and that is with or for a counterparty 
that is an eligible contract participant. The Commission believes that 
requiring broker registration with respect to ``arranging, negotiating, 
and executing'' activity with or for a counterparty that is not an 
eligible contract participant is consistent with the heightened 
protections that Congress applied to security-based swap transactions 
with or for non-eligible contract participants.\109\
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    \109\ In its Title VII statutory framework, Congress applied 
heightened protections for security-based swap counterparties who 
are not eligible contract participants, requiring, for example, 
security-based swap transactions with or for a person who is not an 
eligible contract participant to be effected only on a registered 
national securities exchange. See Exchange Act Section 6(l), 15 
U.S.C. 78f(l), as added by Section 763(e) of the Dodd-Frank Act. 
Congress' Title VII statutory framework also includes an exception 
from the definition of dealer for persons engaged in the business of 
buying and selling security-based swaps with or for eligible 
contract participants, but provides no exception from the dealer 
definition for persons engaged in the business of buying and selling 
security-based swaps with or for non-eligible contract participants. 
See Exchange Act Section 3(a)(5), 15 U.S.C. 78c(a)(5), as amended by 
Section 761(a)(1) of the Dodd-Frank Act.

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[[Page 6280]]

    Finally, Exchange Act Rule 10b-10 requires brokers to provide 
certain disclosures in connection with ``transactions'' that involve 
``customers'' of the broker.\110\ Although many of the disclosures 
required by Rule 10b-10 would be included in a trade acknowledgment and 
verification \111\ delivered pursuant to the condition discussed in 
Part II.C.2 below, some of the Rule 10b-10-required disclosures may not 
duplicate the information provided in a trade acknowledgment and 
verification. These additional disclosures required under Rule 10b-10 
provide the customer with important information regarding the brokerage 
activity.\112\ The Commission thus believes that the limited exemption 
from broker registration should be conditioned upon the security-based 
swap dealer providing these non-duplicative disclosures to the customer 
if Rule 10b-10 otherwise would apply to the activity subject to the 
exception.\113\ Accordingly, pursuant to Section 15(a)(2) of the 
Exchange Act, the Commission deems consistent with the public interest 
and the protection of investors to adopt a limited exemption from the 
broker registration requirements of Section 15(a)(1) of the Exchange 
Act for ``arranging, negotiating, or executing'' activity conducted 
pursuant to the exception with or for eligible contract participants. 
New paragraph (d)(4) of Rule 3a71-3 provides that a registered 
security-based swap dealer that serves as the registered entity for 
purposes of the exception and its associated persons shall not be 
subject to registration as a broker pursuant to Section 15(a)(1) solely 
because that registered entity or the associated person engages in 
``arranging, negotiating, or executing'' activity pursuant to the 
exception with or for an eligible contract participant, provided that 
(i) the conditions to the availability of the exception are satisfied 
in connection with such activities and (ii) if Rule 10b-10 would apply 
to an activity subject to the exception, the registered security-based 
swap dealer provides to the customer \114\ the disclosures required by 
Rule 10b-10(a)(2) (excluding Rule 10b-10(a)(2)(i)-(ii)) and Rule 10b-
10(a)(8) in accordance with the time and form requirements set forth in 
Rule 15Fi-2(b)-(c), or, alternatively, promptly after discovery of any 
defect in the registered security-based swap dealer's good faith effort 
to comply with such requirements.
---------------------------------------------------------------------------

    \110\ See Exchange Act Rule 10b-10(a), 17 CFR 240.10b-10(a) 
(prohibiting a broker or dealer to effect for or with an account of 
a customer any transaction in, or to induce the purchase or sale by 
such customer of, a security unless the broker or dealer delivers a 
written confirmation at or before completion of the transaction).
    \111\ While Rule 15Fi-2 requires a trade acknowledgment to 
disclose all terms of the security-based swap transaction, see 
Exchange Act Rule 15Fi-2(c), 17 CFR 240.15Fi-2(c), Rule 10b-10 
includes provisions requiring disclosures that may not form part of 
the terms of the security-based swap transaction between the relying 
entity and its counterparty, including the capacity in which the 
broker (who would not be party to the transaction) is acting, see 
Exchange Act Rule 10b-10(a)(2), CFR 240.10b-10(a)(2), and the fact 
that the broker is not a member of the Securities Investor 
Protection Corporation, if such is the case, see Exchange Act Rule 
10b-10(a)(8), 17 CFR 240.10b-10(a)(8).
    \112\ For example, customers may use disclosures regarding the 
capacity in which the broker is acting and membership in the 
Securities Investor Protection Corporation to determine whether the 
broker is able to meet the customer's needs.
    \113\ For the reasons discussed in Part II.C.2, infra, these 
disclosures may be delivered to the customer in accordance with the 
time and form requirements set forth in Rule 15Fi-2(b)-(c), rather 
than in accordance with the slightly different timing standards set 
forth in Rule 10b-10. If the registered security-based swap dealer 
relying on this exemption from registration as a broker makes a good 
faith effort to comply with the requirement to deliver these 
disclosures to the customer as and when required, the failure to do 
so will not make the exemption from broker registration unavailable 
so long as the registered security-based swap dealer delivers the 
disclosures to the customer promptly after discovery of the defect 
in compliance. See Exchange Act Rule 3a71-3(d)(4).
    \114\ For example, the Rule 10b-10 disclosures could be provided 
as part of the disclosures required pursuant to the disclosure 
condition in Rule 3a71-3(d)(1)(ii)(B)(1) discussed below.
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(3) Limit on Use of the Exception for Covered Inter-Dealer Security-
Based Swaps and Related Notice and Recordkeeping Provisions
    The final rule limits the availability of the exception in 
connection with certain inter-dealer security-based swaps, and provides 
for related notices and recordkeeping requirements to facilitate 
implementation of this limit. In particular, the final rule provides 
that the availability of the exception is conditioned on the aggregate 
gross notional amount of certain inter-dealer security-based swap 
positions connected with dealing activity subject to the exception over 
the course of the immediately preceding 12 months remaining below $50 
billion.\115\ If that threshold is exceeded, the exception will not be 
available and all of the relevant transactions (including transactions 
below the $50 billion threshold) must be counted against the de minimis 
thresholds to the ``security-based swap dealer'' definition.\116\ The 
rules further condition the availability of the exception on the 
registered entity whose associated persons conduct the ``arranging, 
negotiating, or executing'' activity in the United States filing a 
notice with the Commission prior to commencing such activity.\117\ 
Finally, the registered entity must comply with certain recordkeeping 
requirements designed to facilitate compliance with this $50 billion 
threshold.\118\
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    \115\ See Exchange Act Rule 3a71-3(d)(1)(vii).
    \116\ See Exchange Act Rule 3a71-3(d)(6)(ii).
    \117\ See Exchange Act Rule 3a71-3(d)(1)(vi).
    \118\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
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(a) Purpose of the Limit
    In its releases adopting rules applying Title VII requirements to 
cross-border transactions in 2014 and 2016, the Commission recognized 
and sought to reduce the risk that market participants might 
restructure their business or develop novel business structures to 
permit them to characterize their security-based swap dealing activity 
as occurring outside the United States.\119\ Section 30(c) of the 
Exchange Act provides the Commission with authority to adopt rules that 
apply to a ``person that transacts a business in security-based swaps 
without the jurisdiction of the United States'' if it determines that 
such rules are ``necessary or appropriate to prevent the evasion'' of 
any Title VII requirements.\120\ The Commission invoked this authority 
in connection with several of its cross-border requirements.\121\ In 
particular, the Commission identified this provision as the basis for 
adopting a rule requiring conduit affiliates to count certain of their 
dealing transactions against the de minimis threshold.\122\ The 
Commission

[[Page 6281]]

also explained that several other of its cross-border requirements that 
apply to activity occurring in the United States are ``necessary or 
appropriate as a prophylactic measure to help prevent the evasion of 
the provisions of the Exchange Act that were added by the Dodd-Frank 
Act, and thus help ensure that the relevant purposes of the Dodd-Frank 
Act are not undermined.'' \123\
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    \119\ See Cross-Border Adopting Release, 79 FR at 47363-64; ANE 
Adopting Release, 81 FR at 8609.
    \120\ Exchange Act Section 30(c), 15 U.S.C. 78dd(c).
    \121\ See, e.g., Cross-Border Adopting Release, 79 FR at 47291-
92 (interpreting the Commission's anti-evasion authority under 
section 30(c) of the Exchange Act and including anti-evasion among 
the principles informing the Commission's approach to cross-border 
regulation of these markets).
    \122\ See Cross-Border Adopting Release, 79 FR at 47314. A 
conduit affiliate is ``a non-U.S. affiliate of a U.S. person that 
enters into security-based swaps with non-U.S. persons, or with 
certain foreign branches of U.S. banks, on behalf of one or more of 
its U.S. affiliates (other than U.S. affiliates that are registered 
as security-based swap dealers or major security-based swap 
participants), and enters into offsetting transactions with its U.S. 
affiliates to transfer the risks and benefits of those security-
based swaps.'' Id. The Commission noted in that release that ``[t]he 
conduit affiliate concept serves as a prophylactic anti-evasion 
measure'' and that it did ``not believe that any entities currently 
act as conduit affiliates in the security-based swap market.'' Id. 
at 47315.
    \123\ The Commission stated in these releases that, apart from 
the de minimis counting requirements applicable to conduit 
affiliates, the rules it adopted apply to conduct occurring within 
the United States and thus are within the Commission's authority 
apart from this anti-evasion provision. However, it went on to state 
that it also viewed these rules as necessary or appropriate as an 
anti-evasion measure under Section 30(c) of the Exchange Act. See, 
e.g., Cross-Border Adopting Release, 79 FR at 47302 n.186 
(definitions of ``foreign branch'' and ``transaction conducted 
through a foreign branch''); id. at 47309 n.262 (definition of 
``principal place of business''); id. at 47320 n.365 (requirement 
that non-U.S. persons count dealing transactions with U.S. persons 
toward their de minimis thresholds); ANE Adopting Release, 81 FR at 
8615 n.158 (requirement that non-U.S. persons count transactions in 
connection with their dealing activity that are arranged, 
negotiated, or executed by personnel located in the United States).
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    Similarly, when the Commission adopted the ``arranged, negotiated, 
or executed'' test, it recognized the possibility that financial groups 
might seek to avoid this requirement by having personnel outside the 
United States perform market-facing activities under the direction of 
personnel located in the United States.\124\ It addressed this concern 
by explaining that ``arranging, negotiating, and executing'' as used in 
Exchange Act Rule 3a71-3 ``also include directing other personnel to 
arrange, negotiate, or execute a particular security-based swap.'' 
\125\ The Commission explained that it ``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.'' \126\ Consequently, ``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.'' \127\
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    \124\ ANE Adopting Release, 81 FR at 8623.
    \125\ Id.
    \126\ Id.
    \127\ Id.
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    The Commission recognizes that the exception it is adopting may 
also create incentives for financial groups to restructure their 
business to avoid the application of certain Title VII requirements in 
some circumstances. Available data suggests that the majority of inter-
dealer transaction activity in North American corporate single-name 
credit default swaps involved at least one non-U.S.-domiciled dealer in 
2017.\128\ Although the data also suggests that these non-U.S.-
domiciled dealers would be likely to register as security-based swap 
dealers even absent a requirement to count their transactions arranged, 
negotiated, or executed by U.S. personnel,\129\ a financial group could 
restructure its dealing business in response to this exception in such 
a way that it could carry out this inter-dealer business in significant 
part in one or more unregistered non-U.S. dealers, while continuing to 
arrange, negotiate, or execute transactions using personnel located in 
the United States. Further, as the Commission recognized in proposing 
the exception, U.S. dealing entities also may use this type of 
exception from the counting requirement to reduce the application of 
Title VII requirements to their transactions.\130\ Two commenters 
expressed similar concerns that the exception as proposed could allow 
firms to structure large portions of their business to avoid Title VII 
while continuing to pose risks to the U.S. financial system.\131\ 
Allowing this type of restructuring of the inter-dealer business could 
have potentially undesirable effects on the underlying credit and 
equity markets in the United States.
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    \128\ Using data obtained from the DTCC Derivatives Repository 
Limited Trade Information Warehouse (see Part IV.A.1, infra), the 
Commission estimates that approximately 82% of the notional amount 
of bilateral (i.e., uncleared) inter-dealer transactions referencing 
North American single-name corporate underliers involve at least one 
non-U.S.-domicile dealer.
    \129\ Each of these dealers currently transacts significant 
volumes security-based swaps with U.S. persons, including with 
counterparties that are themselves not dealers, which they would be 
required to count against their de minimis thresholds. These dealers 
would exceed the $8 billion de minimis threshold that applies to 
credit default swap transactions based solely on transactions with 
U.S. persons.
    \130\ See Proposing Release, 84 FR at 24219 (``In making this 
proposal, the Commission is mindful that U.S.-based dealing entities 
may use this type of exception to structure their booking practices 
to manage the application of Title VII to their security-based swap 
dealing business--e.g., by booking dealing transactions with non-
U.S. counterparties into their non-U.S. affiliates, to reduce the 
application of Title VII security-based swap dealer requirements to 
those transactions.'').
    \131\ See Better Markets letter at 1, 25 (noting that the 
proposed exception could ``facilitate[e] evasion or avoidance of 
critical pillars of the [security-based swap] framework'' and 
expressing concern that this framework must ``reach far enough'' to 
prevent restructuring that would ``expos[e] [the] U.S. financial 
system and U.S. taxpayers to the risks arising from [security-based 
swap] activities''); AFR letter at 1-3 (noting that the proposed 
exception could prompt U.S.-based financial groups to ``easily avoid 
swap dealer designation for large shares of their U.S.-related 
business'').
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    To help to mitigate these concerns, the Commission is imposing a 
limit on covered inter-dealer security-based swap transactions that a 
non-U.S. dealer or its affiliates may conduct in reliance on the 
exception. In adopting this limit, the Commission is balancing the 
concerns discussed above regarding the potential negative consequences 
associated with both the ``arranging, negotiating, or executing'' 
counting standard and the exception as proposed. The Commission is 
choosing not to apply the limit to non-inter-dealer security-based 
swaps at this time because it is not clear that a broader limitation is 
necessary to avoid the potential negative consequences associated with 
the exception. Rather, the Commission believes that a limit on inter-
dealer security-based swaps will mitigate concerns regarding the 
proposed exception without unduly restricting the non-inter-dealer 
security-based swap market. Taken as a whole, the limit and related 
notice and recordkeeping provisions are designed to focus the 
availability of the exception in a manner that will promote the 
exception's benefits for market efficiency as addressed above, but that 
also will help reduce incentives for financial groups to restructure 
their business to avoid the application of certain Title VII 
requirements.
    The limit on use of the exception applies to any non-U.S. person, 
regardless of whether it is affiliated with a U.S or non-U.S. financial 
group, as the Commission has concerns about potential evasive activity 
on the part of non-U.S. affiliates of U.S. financial groups as well as 
of non-U.S. financial groups. The Commission is concerned that failing 
to apply the same limit to non-U.S. dealers relying on the exception, 
whether they belong to U.S. or non-U.S. financial groups, could distort 
competition in this market. Moreover, the regulatory status of the 
relying entity's counterparty does not impact these potentially 
undesirable effects, and thus is not relevant to application of the $50 
billion limit.\132\

[[Page 6282]]

This limit thus applies without regard to whether either counterparty 
is affiliated with a U.S or non-U.S. financial group and regardless of 
the regulatory status of the relying entity's counterparty. The $50 
billion limit should help ensure that a relying entity, together with 
its non-U.S. person affiliates, cannot use the exception to enter into 
unlimited transactions with other firms that themselves could engage in 
dealing activity subject to the exception. Under this approach, the 
Commission believes these financial groups will have less incentive to 
structure their businesses to avoid regulation of their inter-dealer 
business under the relevant Title VII requirements. For example, with 
this limitation, a financial group will not be able to use the 
exception to move its inter-dealer business with non-U.S. persons 
involving ``arranging, negotiating, or executing'' activity above the 
$50 billion threshold to an unregistered non-U.S. affiliate.\133\ 
Moreover, the requirement to aggregate transactions of covered 
affiliates, as discussed below, ensures that the $50 billion threshold 
applies to all unregistered non-U.S. persons in a financial group and 
thus prevents the financial group from allocating its inter-dealer 
transactions to multiple unregistered non-U.S. affiliates to avoid 
registration of any affiliate.
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    \132\ In many cases, the non-U.S. person counterparty may be 
recognized, registered, or regulated under U.S. or foreign law as a 
security-based swap dealer, swap dealer, bank, broker-dealer, or 
futures commission merchant, but the regulatory status of the 
counterparty is not relevant to the $50 billion limit, as a 
transaction will need to be counted toward that limit even if the 
counterparty is an unregulated entity.
    Similarly, the regulatory status of the relying entity and its 
affiliates also is irrelevant for purposes of the $50 billion limit. 
The relying entity is required to count toward its de minimis 
thresholds all covered inter-dealer security-based swap positions 
connected with its own or an affiliate's ``arranging, negotiating, 
or executing'' dealing activity subject to the exception, regardless 
of the application of non-U.S. regulatory regimes to those 
transactions.
    \133\ For the avoidance of doubt, the $50 billion limit does not 
apply transactions that are not eligible for the exception (or for 
which reliance on the exception is not sought). For example, if a 
non-U.S. person (``counterparty 1'') enters into a security-based 
swap with a U.S. person (``counterparty 2''), even if that U.S. 
person is an affiliate of a registered entity that acts pursuant to 
the exception, counterparty 1 would not be required to count that 
transaction towards its $50 billion limit, as transactions with U.S. 
persons are not eligible for the exception. Counterparty 1 would, of 
course, count such a transaction toward the de minimis thresholds 
for registration as a security-based swap dealer.
    Similarly, if a non-U.S. person (``counterparty 1'') enters into 
a security-based swap that is ``arranged, negotiated, or executed'' 
by U.S. personnel with a non-U.S. person (``counterparty 2''), for 
which counterparty 1 does not seek reliance on the exception, 
counterparty 1 would not be required to count that transaction 
towards its $50 billion limit, even if counterparty 1 relies on the 
exception for other transactions and even if counterparty 2 is 
relying on the exception for that transaction. Counterparty 1 would, 
of course, count such a transaction toward the de minimis thresholds 
for registration as a security-based swap dealer.
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    The Commission intends to monitor changes in the market in response 
to this exception and initially will use the report that Commission 
staff is required to produce under Exchange Act Rule 3a71-2A to analyze 
the changes. Commission staff will repeat this analysis at least once 
every five years. If this initial analysis or subsequent monitoring 
suggests that firms are using the exception to avoid the de minimis 
counting requirement in a manner that is inconsistent with the 
statutory and regulatory objectives of Title VII or that non-U.S. 
persons are entering into disproportionately large volumes of security-
based swaps pursuant to the exception, the Commission may determine 
that it is necessary to consider amendments to the exception or to the 
underlying counting requirements, including possible amendments 
pursuant to its anti-evasion authority in Exchange Act Section 30(c).
(b) Scope of the Limit and Related Recordkeeping Requirement
    Under the final rule, the exception would be available to a relying 
entity only if the aggregate gross notional amount of covered inter-
dealer security-based swap positions connected with dealing activity 
subject to the exception over the course of the immediately preceding 
12 months does not exceed $50 billion.\134\ Covered inter-dealer 
security-based swaps are those that are between, on the one hand, the 
non-U.S. person relying on the exception, and, on the other hand, a 
non-U.S. person that is either (1) a registered entity that has filed 
with the Commission a notice that its associated persons may conduct 
``arranging, negotiating, or executing'' activity pursuant to the 
exception \135\ or (2) an affiliate of such a registered entity.\136\ A 
relying entity would count towards this $50 billion threshold two types 
of covered int er-dealer security-based swaps: (1) The covered inter-
dealer security-based swap positions connected with the relying 
entity's dealing activity subject to the exception and (2) the covered 
inter-dealer security-based swap positions connected with dealing 
activity subject to the exception engaged in by non-U.S. person 
affiliates of the relying entity.\137\ The Commission is applying the 
$50 billion limit to security-based swaps involving the relying 
entity's non-U.S. person affiliates because failure to count such 
affiliates could allow a financial group to structure its inter-dealer 
security-based swap business to avoid the limit. For example, absent a 
requirement to count the transactions of a relying entity's own 
affiliates, a financial group could organize a new legal entity to 
conduct inter-dealer security-based swap business each time a relying 
entity approached the $50 billion limit. Similarly, the requirement to 
count transactions with affiliates of another financial group's 
registered entity includes the non-U.S. majority-owned affiliates 
relying on the exception as well as other non-U.S. affiliates who do 
not rely on the exception. Absent such a requirement, a relying entity 
could conduct unlimited security-based swap business with the other 
financial group, so long as the counterparty is an entity not relying 
on the exception. The $50 billion limit applies to transactions of 
affiliates as described above to avoid such outcomes.
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    \134\ See Exchange Act Rule 3a71-3(d)(1)(vii) (limitation on 
application of the exception to covered inter-dealer security-based 
swaps); Exchange Act Rule 3a71-3(a)(13) (definition of covered 
inter-dealer security-based swap); Exchange Act Rule 3a71-3(d)(6)(i) 
(description of the persons whose covered inter-dealer security-
based swaps count towards the limitation).
    \135\ If the counterparty to the security-based swap is a 
registered entity that is a U.S. person, then the exception would 
not be available for the security-based swap and the limitation on 
covered inter-dealer security-based swaps conducted pursuant to the 
exception thus would not apply.
    \136\ Exchange Act Rule 3a71-3(a)(13) defines covered inter-
dealer security-based swaps to include transactions with a 
registered entity that has filed a notice pursuant to Rule 3a71-
3(d)(1)(vi) and with an affiliate of such a registered entity. As 
discussed more fully below, Rule 3a71-3(d)(1)(vi) requires the 
registered entity to file a notice with the Commission that its 
associated persons may conduct ``arranging, negotiating, or 
executing'' activity pursuant to the exception.
    \137\ See Exchange Act Rule 3a71-3(d)(1)(vii), (d)(6). This 
threshold extends to dealing transactions by affiliates of the 
relying entity to guard against a firm's evasion of the threshold by 
dividing transactions among multiple affiliates.
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    To identify the covered inter-dealer security-based swap positions 
connected with the relying entity's dealing activity subject to the 
exception, a relying entity first must determine whether a security-
based swap is connected with its own dealing activity subject to the 
exception and, if it is, then it must determine whether the 
counterparty is a non-U.S. person that is either (i) a registered 
entity whose associated persons conduct ``arranging, negotiating, or 
executing'' activity pursuant to the exception or (ii) an affiliate of 
such a registered entity. The Commission believes that a relying entity 
will be able to structure its operations to answer this first question, 
as it and its registered affiliate must comply with certain 
recordkeeping conditions discussed below in connection with the 
specific ``arranging, negotiating, or executing'' activity that is 
subject to the exception. To assist the relying entity in determining 
whether its counterparty is a registered entity whose associated 
persons act pursuant

[[Page 6283]]

to the exception or an affiliate of such a registered entity, the final 
rules condition the availability of the exception on a registered 
entity first filing with the Commission a notice that its associated 
persons may conduct activity pursuant to the exception.\138\ Further, 
the final rules provide a safe harbor from the limitation for any 
security-based swap if the relying entity reasonably determines at the 
time of execution of the security-based swap that its counterparty is 
neither another firm's registered entity nor an affiliate of such a 
registered entity.\139\ For example, the Commission believes that it 
would be reasonable for a relying entity (or its affiliate) to 
determine a security-based swap is not a covered inter-dealer security-
based swap if the relying entity or an affiliate requests at least 
quarterly, and diligently pursues, a list of affiliates from each 
registered entity whose name appears on the Commission's website and 
the relying entity determines at the time of execution of the security-
based swap that the name of the counterparty to the security-based swap 
does not appear on any such list in the relying entity's possession at 
that time.\140\ Further, the Commission believes that it would be 
reasonable for financial groups to produce and share a single list of 
their affiliates for use in connection with the $50 billion limit and 
in connection with determining eligibility for exceptions to the 
Commission's requirements for security-based swap dealers to collect 
initial margin from counterparties.\141\
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    \138\ See Exchange Act Rule 3a71-3(d)(1)(vi). This notice must 
be filed before an associated person of the registered entity 
commences any ``arranging, negotiating, or executing'' activity 
pursuant to the exception. The notice must be submitted to the 
electronic mailbox described on the Commission's website at 
www.sec.gov at the ``ANE Exception Notices'' section. The Commission 
will post the notice on its website. A registered entity whose 
associated persons will no longer conduct ``arranging, negotiating, 
or executing'' activity pursuant to the exception may request that 
the Commission remove such notice from its website by sending a 
message to the same electronic mailbox.
    \139\ See Exchange Act Rule 3a71-3(a)(13).
    \140\ If a relying entity executes a security-based swap with a 
counterparty that, at the time of execution, the relying entity 
reasonably believes is not an affiliate of another firm's registered 
entity, the relying entity need not later re-characterize the 
security-based swap as a covered inter-dealer security-based swap, 
even if it later discovers that its counterparty is an affiliate of 
another firm's registered entity.
    \141\ The Commission's margin rules for non-bank security-based 
swap dealers include an exception from the requirement to collect 
initial margin for non-cleared security-based swaps when certain 
exposures of the security-based swap dealer and its affiliates to 
the counterparty and its affiliates do not exceed $50 million. See 
Exchange Act Rule 18a-3(c)(1)(iii)(H)(1), 17 CFR 240.18a-
3(c)(1)(iii)(H)(1); see also Capital, Margin, and Segregation 
Adopting Release, 84 FR at 43925-26 & nn.522-523 (citing Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 636, 697 (Jan. 6, 2016); Margin and Capital 
Requirements for Covered Swap Entities, 80 FR 74840, 74901 (Nov. 30, 
2015)).
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    The relying entity also must include in its calculation of covered 
inter-dealer security-based swap positions subject to the $50 billion 
limit all positions connected with dealing activity subject to the 
exception that its non-U.S. person affiliates engage in with another 
non-U.S. person that is either (i) a registered entity whose associated 
persons conduct ``arranging, negotiating, or executing'' activity 
pursuant to the exception or (ii) an affiliate of such a registered 
entity. The relying entity need not, however, include in this 
calculation the positions of its own non-U.S. person affiliate that is 
in the process of registering with the Commission as a security-based 
swap dealer.\142\ This exclusion from the $50 billion limit ensures 
that a financial group does not lose the ability to make use of the 
exception as a result of the dealing activity of an entity that will 
register with the Commission. To assist the relying entity in obtaining 
information needed to determine the volume of its affiliates' 
transactions subject to the limit, and to assist the Commission in 
reviewing compliance with the limit, each registered entity whose 
associated persons may conduct ``arranging, negotiating, or executing'' 
activity pursuant to the exception must obtain from the relying entity 
documentation regarding the relying entity's compliance with the 
limit.\143\ The registered entity must maintain this documentation for 
not less than three years following the ``arranging, negotiating, or 
executing'' activity subject to the exception, the first two years in 
an easily accessible place.\144\
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    \142\ See Exchange Act Rule 3a71-3(d)(6)(i)(B).
    \143\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2). The 
Commission recognizes that a single group of affiliates may include 
more than one registered entity whose associated persons act 
pursuant to the exception. In such a case, the relying entity would 
need to consult with each such registered entity with which it is 
affiliated.
    \144\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
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(c) Impact of Breaching the Limit
    Under the Commission's rules, a person not registered as a 
security-based swap dealer is deemed not to be a security-based swap 
dealer if the security-based swap dealing activity in which the person, 
or any other entity controlling, controlled by or under common control 
with that person, engages over the course of the immediately preceding 
twelve months falls below certain de minimis thresholds.\145\ The 
exception serves to exclude certain transactions ``arranged, 
negotiated, or executed'' by U.S. personnel \146\ from the list of 
transactions that an entity otherwise must count against these de 
minimis thresholds.\147\ If a relying entity exceeds the $50 billion 
limit, two key consequences will result. First, as of the date the $50 
billion limit is breached, new Rule 3a71-3(d)(6)(ii)(A) prohibits the 
relying entity from relying on the exception for future security-based 
swap transactions.\148\ The exception will be unavailable for future 
security-based swap transactions without regard to whether the 
transaction is or is not a covered inter-dealer security-based swap. 
Second, as of the date that the $50 billion limit is breached, the 
relying entity would have to begin to count certain transactions 
subject to the exception against the de minimis thresholds. New Rule 
3a71-3(d)(6)(ii)(B) requires the relying entity to count against the de 
minimis thresholds all covered inter-dealer security-based swap 
positions connected with dealing activity subject to the exception in 
which the entity or certain affiliates engaged over the course of the 
immediately preceding twelve months. This requirement applies to all of 
these covered inter-dealer security-based swap positions, including the 
portion that falls below the $50 billion limit.\149\ Because each of 
the de minimis thresholds is significantly lower than $50 billion, as a 
practical matter a relying entity that exceeds $50 billion in relevant 
covered inter-dealer security-based swap positions over the immediately 
preceding twelve months also generally should breach one or more of the 
de minimis thresholds and be required to register with the Commission 
as a security-based swap dealer. As of the date that the $50 billion 
limit is breached, the relying entity would begin to include in its 
calculation of security-based swap positions subject to the de minimis 
thresholds all of the relevant covered inter-dealer security-based 
swaps subject to the exception engaged in over the course of the 
immediately preceding twelve months.\150\
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    \145\ See Exchange Act Rule 3a71-2(a)(1).
    \146\ See Exchange Act Rule 3a71-3(b)(1)(iii)(C).
    \147\ See Exchange Act Rule 3a71-3(d).
    \148\ See Exchange Act Rule 3a71-3(d)(6)(ii)(A).
    \149\ See Exchange Act Rule 3a71-3(d)(6)(ii)(B).
    \150\ See Exchange Act Rule 3a71-3(d)(6)(ii)(B). The relying 
entity would begin to count such positions against the de minimis 
thresholds on the date that the $50 billion limit is breached. The 
final rule does not require the relying entity to re-calculate its 
de minimis thresholds as of the dates the dealing activity connected 
with such newly included positions occurred. Requiring such a re-
calculation could cause a relying entity that breaches the $50 
billion limit to determine that it breached a de minimis threshold 
on an earlier date and, as a result, to find itself out of 
compliance with the registration deadline in Rule 3a71-2(b). The 
Commission believes that imposing such a result could make the 
exception unworkable for market participants and, accordingly, is 
adopting a requirement for the relying entity to count such 
positions against the de minimis thresholds beginning on the date 
that the $50 billion limit is breached. However, counting such 
positions as of the date that the $50 billion limit is breached does 
not require the relying entity to attribute that date to the dealing 
activity connected to such positions. Rather, the relying entity 
would count such positions using the respective dates of the dealing 
activity connected to such positions and, accordingly, would count 
against the de minimis thresholds any such positions connected with 
dealing activity engaged in over the course of the immediately 
preceding twelve months.

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[[Page 6284]]

    Finally, under the Commission's existing rules governing the de 
minimis threshold, a person who can no longer take advantage of the de 
minimis exception is not subject to regulation as a security-based swap 
dealer for a transitional period of either two months after the end of 
the month in which the person becomes unable to rely on the de minimis 
exception or until the person submits a complete application for 
registration as a security-based swap dealer, if earlier.\151\ These 
rules also have two important consequences for entities who rely on the 
exception. First, a relying entity that breaches the $50 billion limit 
and as a result also breaches a de minimis threshold need not seek to 
rely on the exception for transactions connected with dealing activity 
that occurs during this transitional period.\152\ Second, Rule 3a71-
3(d)(6)(i)(B) does not require a relying entity to count against the 
$50 billion limit the transactions of any affiliate that is deemed not 
to be a security-based swap dealer pursuant to Rule 3a71-2(b).\153\ As 
a result, a relying entity need not count against the $50 billion limit 
the transactions of an affiliate that is in the process of registering 
as a security-based swap dealer.
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    \151\ See Exchange Act Rule 3a71-2(b), 17 CFR 240.3a71-2(b).
    \152\ Further, a relying entity that breaches the $50 billion 
limit is not eligible to rely on the exception for additional 
transactions. See Exchange Act Rule 3a71-3(d)(1)(vii), (6)(ii)(A).
    \153\ See Exchange Act Rule 3a71-3(d)(6)(i)(B).
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(d) Impact of the Limitation on Reporting and Public Dissemination
    As discussed in the statement regarding compliance with rules for 
security-based swap data repositories and Regulation SBSR in Part X.C 
below, all transactions connected with a relying entity's dealing 
activity that are arranged, negotiated, or executed by U.S. personnel 
in reliance on the exception will be required to be reported to a 
security-based swap data repository, and covered inter-dealer security-
based swap transactions that at least one side of the transactions 
arranges, negotiates, or executes in reliance on the exception must 
also be publicly disseminated.
2. Compliance With Specific Security-Based Swap Dealer Requirements
(a) Proposed Approach
    Both alternatives to the proposed exception were conditioned in 
part on the registered entity complying with certain security-based 
swap dealer requirements as if the counterparties to the non-U.S. 
person relying on the exception also were counterparties to the 
registered entity. Those ``as if'' requirements addressed: (1) 
Disclosure of risks, characteristics, material incentives and conflicts 
of interest (regarding the registered entity, as well as material 
incentives and conflicts of interest associated with the non-U.S. 
person relying on the exception) (the ``disclosure condition''); (2) 
suitability of recommendations (the ``suitability condition''); (3) 
fair and balanced communications (the ``communications condition''); 
(4) trade acknowledgment and verification (the ``trade acknowledgment 
and verification condition''); and (5) certain portfolio reconciliation 
requirements (the ``portfolio reconciliation condition'').\154\
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    \154\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(A), (B). For Alternative 2, proposed paragraph 
(d)(1)(ii)(A) further would provide that the registered entity must 
comply with those requirements as if it also is registered as a 
security-based swap dealer, if it is not registered as a security-
based swap dealer.
    Those ``as if'' compliance conditions address the following 
security-based swap dealer requirements: (1) Exchange Act Section 
15F(h)(3)(B)(i), (ii) and Exchange Act Rule 15Fh-3(b) provisions 
related to the disclosure of risks, characteristics, incentives and 
conflicts, and further specified that it would include material 
incentives and conflicts of interest associated with the non-U.S. 
person relying on the exception; (2) Rule 15Fh-3(f) suitability 
provisions; (3) Section 15F(h)(3)(C) and Rule 15Fh-3(g) fair and 
balanced communications provisions; (4) Rule 15Fi-1 and 15Fi-2 trade 
acknowledgment and verification provisions; and (5) proposed Rule 
15Fi-3 portfolio reconciliation provisions, but only with respect to 
the initial reconciliation of the security-based swap resulting from 
the transaction.
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    Those proposed conditions reflected the fact that the registered 
entity that would engage in arranging, negotiating, or executing 
activity in the United States in connection with the transactions at 
issue would not be a contractual party to the security-based swaps 
resulting from that activity. Absent those conditions, the registered 
entity accordingly would not necessarily trigger certain requirements 
that are predicated on being a ``counterparty'' to the 
transaction.\155\ The Commission preliminarily concluded that the 
compliance burdens associated with those conditions would be justified 
by associated counterparty protections, or by risk-related benefits or 
other benefits.\156\
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    \155\ See Proposing Release, 84 FR at 24221.
    \156\ See id. at 24221-22.
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    Conversely, the proposal specified that the registered entity would 
not have to comply with ``counterparty''-related requirements that 
address: (1) Eligible counterparty (``ECP'') verification; (2) daily 
mark disclosure; (3) clearing rights disclosure; (4) ``know your 
counterparty'' checks; (5) portfolio compression; and (6) trading 
relationship documentation.\157\ For certain of those requirements the 
Commission reasoned that it would be difficult for the registered 
entity to obtain requisite information, while for others the Commission 
concluded that the requirements would be inapposite given the nature of 
the registered entity's activities in connection with the 
transaction.\158\
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    \157\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C).
    \158\ See Proposing Release, 84 FR at 24221.
---------------------------------------------------------------------------

    The proposal also recognized that the registered entity would be 
subject to certain additional requirements by virtue of its registered 
status. For Alternative 1, the Commission noted that the entity would 
have to comply with additional requirements applicable to registered 
security-based swap dealers, including requirements related to 
supervision, chief compliance officers, books and records, and 
financial responsibility.\159\ For Alternative 2, the Commission noted 
that a registered broker would have to comply with applicable broker-
dealer requirements under the federal security laws and self-regulatory 
organization (``SRO'') rules.\160\
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    \159\ See id. at 24223.
    \160\ See id. at 24227.
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(b) Commission Action
    The Commission continues to believe that the investor protection 
benefits of these conditions justify any burdens related to compliance 
with the conditions and is adopting the disclosure condition and trade 
acknowledgment and verification condition with additional guidance and 
the communications condition as proposed. The Commission is adopting 
the suitability condition with one modification and is not adopting the 
portfolio reconciliation condition. Accordingly, the exception is 
available only if the registered entity engaging in

[[Page 6285]]

the arranging, negotiating, or executing activity in the United States 
complies with certain disclosure, communications, trade acknowledgment 
and verification, and suitability requirements as if the counterparties 
to the non-U.S. person relying on the exception also were 
counterparties to the registered entity and, if the registered entity 
is a broker not registered as a security-based swap dealer, also as if 
it were a registered security-based swap dealer.\161\ The discussion 
below considers each of these conditions in turn, as well as the 
interaction of the exception with substituted compliance and other 
requirements not applicable to the exception.
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    \161\ See Exchange Act Rule 3a71-3(d)(1)(ii)(A). Following the 
adoption of the compliance date for SBS Entity registration 
described in Part XI.B, infra, staff understands that FINRA may 
review the application of its rules to security-based swap 
transactions and to SBS Entities who also are members of FINRA.
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(1) Disclosure Condition
    Disclosure of material information concerning the security-based 
swap in a manner reasonably designed to allow the counterparty to 
assess the material risks and characteristics of the security-based 
swap, as well as any material incentives or conflicts of interest the 
registered entity or the non-U.S. entity relying on the exception may 
have in connection with the security-based swap, will permit a 
counterparty to assess more effectively whether and under which terms 
to enter into a security-based swap transaction. The Commission does 
not agree with the commenter's suggestion that disclosures of material 
incentives and conflicts of interest should be limited to those of the 
registered entity but not of the non-U.S. entity relying on the 
exception.\162\ A disclosure of material incentives and conflicts of 
interest would be meaningfully incomplete if it omitted those of the 
non-U.S. entity relying on the exception, because the relying entity is 
the counterparty to the transaction. As the Commission noted in the 
Proposing Release, though the compliance burdens associated with the 
disclosure condition ``may be significant, those burdens should be 
mitigated by the underlying provision stating that the [disclosure] 
requirement . . . will apply only when the registered security-based 
swap dealer knows the identity of the counterparty at a reasonably 
sufficient time prior to execution of the transaction.'' \163\ The 
disclosure condition also requires disclosure of only material risks, 
characteristics, incentives, and conflicts of interest, and not 
disclosure of all risks, characteristics, incentives, and conflicts of 
interest.\164\ Another commenter expressed the general view that the 
``as if'' conditions ``are duplicative and may lead to the imposition 
of undue costs without commensurate regulatory benefits.'' \165\ To 
avoid the potential for duplicative disclosures, registered entities 
may choose to delegate to the relying entity the tasks of delivering 
the required disclosures and creating (but not maintaining) books and 
records relating to those disclosures as required by Rule 3a71-
3(d)(1)(iii)(B)(1). A registered entity that delegates these tasks to 
the relying entity would remain responsible for ensuring that all of 
the disclosures required by Rule 3a71-3(d)(ii)(B)(1) are delivered in 
the manner described in Rule 15Fh-3(b), for ensuring that books and 
records relating to these disclosures are created as required by Rule 
3a71-3(d)(1)(iii)(B)(1), and for itself maintaining books and records 
relating to these disclosures as required by Rule 3a71-
3(d)(1)(iii)(B)(1).\166\
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    \162\ See IIB/SIFMA letter at 8. The HSBC letter supported the 
recommendations of the IIB/SIFMA letter related to the proposed 
exception.
    \163\ See Proposing Release, 84 FR at 24221 (citing Exchange Act 
Rule 15Fh-3(b)). As also noted in the Proposing Release, 
circumstances in which the registered entity engaged in activity 
pursuant to the exception may not know the identity of the 
counterparty could include circumstances in which the registered 
entity provides only execution services, and does not arrange or 
negotiate the transaction, as well as circumstances where U.S. 
personnel specify a trading strategy or techniques carried out 
through algorithmic trading or automated electronic execution of 
security-based swaps. See Proposing Release, 84 FR at 24224 n.149.
    \164\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(1) (referencing 
Exchange Act Section 15F(h)(3)(B)(i)-(ii) and Rule 15Fh-3(b)).
    \165\ See ISDA letter at 9-10.
    \166\ For the avoidance of doubt, whether or not the registered 
entity delegates this task to the relying entity, the disclosures of 
material incentives and conflicts of interest generally should make 
clear which material incentives and conflicts of interest apply to 
the registered entity and which apply to the relying entity.
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(2) Communications Condition
    Similarly, the Commission concludes that the requirement for the 
registered entity to communicate with counterparties in a fair and 
balanced manner also will promote investor protection by prohibiting 
registered entities from overstating the benefits or understating the 
risks of potential transactions to inappropriately influence 
counterparties' investment decisions. One commenter expressly supported 
the proposed communications condition.\167\ In adopting the 
communications condition, the Commission is applying the same 
requirement \168\ to the arranging, negotiating, or executing activity 
that the registered entity's U.S. personnel undertakes in connection 
with transactions not subject to the exception, thus minimizing any 
compliance burdens.
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    \167\ See IIB/SIFMA letter at 13-14. That comment also expressed 
support for two features of the proposed framework that are not ``as 
if'' conditions--the application of anti-fraud provisions to the 
transactions at issue, and restrictions on transactions with non-
ECPs. See id. at 12.
    \168\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(3) (referencing 
Exchange Act Section 15F(h)(3)(C) and Rule 15Fh-3(g)); FINRA Rule 
2210.
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(3) Trade Acknowledgment and Verification Condition
    The Commission believes that the trade acknowledgment and 
verification condition will help to ensure that there are definitive 
written records of the terms of the transactions that result from the 
registered entity's arranging, negotiating, or executing activity in 
the United States, as well as help to control legal and operational 
risks for the counterparties.\169\ One commenter expressed the general 
view that the ``as if'' conditions ``are duplicative and may lead to 
the imposition of undue costs without commensurate regulatory 
benefits.'' \170\ To avoid the potential for duplicative trade 
acknowledgments and verifications, registered entities may choose to 
delegate to the relying entity the tasks of delivering the required 
trade acknowledgment or verification and creating (but not maintaining) 
books and records relating to that trade acknowledgment or verification 
as required by Rule 3a71-3(d)(1)(iii)(B)(1). A registered entity that 
delegates these tasks to the relying entity would remain responsible 
for ensuring compliance with the requirements of Rules 15Fi-1 and 15Fi-
2 as required by Rule 3a71-3(d)(ii)(B)(4), for ensuring that books and 
records relating to the trade acknowledgment or verification are 
created as required by Rule 3a71-3(d)(1)(iii)(B)(1), and for itself 
maintaining books and records relating to the trade acknowledgment or 
verification as required by Rule 3a71-3(d)(1)(iii)(B)(1).
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    \169\ See Proposing Release, 84 FR at 24222 (citing Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39808 (June 17, 
2016) (``Trade Acknowledgment and Verification Adopting Release'')).
    \170\ See ISDA letter at 9-10.
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    One commenter requested an exemption from Exchange Act Rule 10b-10 
for brokers that may serve as the registered entity for purposes of the

[[Page 6286]]

exception.\171\ As an initial matter, the Commission notes that Rule 
10b-10 may not apply to every instance in which a broker serves as the 
registered entity for purposes of the exception, as Rule 10b-10 applies 
to ``transactions'' that involve ``customers.'' \172\ For activity to 
which both the Rule 3a71-3(d)(1)(ii)(B)(4) trade acknowledgment and 
verification condition and Rule 10b-10 may apply, however, the 
Commission believes that duplicative requirements should be avoided. In 
adopting Rules 15Fi-1 and 15Fi-2, the SBS Entity trade acknowledgment 
and verification rules upon which the trade acknowledgment and 
verification condition is based, the Commission noted that an SBS 
Entity that is also a broker or dealer could be required to comply with 
both Rule 10b-10 and Rule 15Fi-2.\173\ The Commission believed that 
these duplicative requirements could be overly burdensome and concluded 
that an exemption from Rule 10b-10 was appropriate to avoid such a 
result, and therefore included such an exemption in the rule.\174\ 
However, the Commission also limited the exemption from Rule 10b-10 to 
principal transactions; Rule 10b-10 continues to apply to security-
based swap brokerage transactions.\175\
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    \171\ See IIB/SIFMA letter at 13-14.
    \172\ See Exchange Act Rule 10b-10(a), 17 CFR 240.10b-10(a) 
(prohibiting a broker or dealer to effect for or with an account of 
a customer any transaction in, or to induce the purchase or sale by 
such customer of, a security unless the broker or dealer delivers a 
written confirmation at or before completion of the transaction).
    \173\ See Trade Acknowledgment and Verification Adopting 
Release, 81 FR at 39824.
    \174\ See id.
    \175\ See id. at 39824-25.
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    The Commission believes that the potential application of both Rule 
10b-10 and the trade acknowledgment and verification condition could 
result in partially duplicative disclosures, but also notes that some 
of the disclosures required by Rule 10b-10 may not be duplicated in the 
trade acknowledgment and verification condition.\176\ If the 
``arranging, negotiating, or executing'' activity triggers Rule 10b-10, 
these additional disclosures required by Rule 10b-10 provide the 
customer with important information regarding the brokerage 
activity.\177\ The Commission thus is adopting an exemption \178\ from 
Rule 10b-10 with respect to any ``arranging, negotiating, or 
executing'' activity conducted in accordance with the exception. To 
qualify for the exemption, the broker must comply with the trade 
acknowledgment and verification condition in connection with activity 
that is subject to the exception, and include any applicable 
disclosures required by Rule 10b-10(a)(2) (excluding Rule 10b-
10(a)(2)(i)-(ii)) and Rule 10b-10(a)(8) either in the trade 
acknowledgment or verification or in another disclosure \179\ delivered 
to the counterparty. To avoid the potential for duplicative 
disclosures, registered entities may choose to delegate to the relying 
entity the tasks of delivering these Rule 10b-10 disclosures and 
creating (but not maintaining) books and records relating to those 
disclosures as required by Rule 3a71-3(d)(1)(iii)(B)(1).
---------------------------------------------------------------------------

    \176\ While Rule 15Fi-2 requires a trade acknowledgment to 
disclose all terms of the security-based swap transaction, see 
Exchange Act Rule 15Fi-2(c), 17 CFR 240.15Fi-2(c), Rule 10b-10 
includes provisions requiring disclosures that may not form part of 
the terms of the security-based swap transaction between the relying 
entity and its counterparty, including the capacity in which the 
broker (who would not be party to the transaction) is acting, see 
Exchange Act Rule 10b-10(a)(2), 17 CFR 240.10b-10(a)(2), and the 
fact that the broker is not a member of the Securities Investor 
Protection Corporation, if such is the case, see Exchange Act Rule 
10b-10(a)(8), 17 CFR 240.10b-10(a)(8).
    \177\ For example, customers may use disclosures regarding the 
capacity in which the broker is acting and membership in the 
Securities Investor Protection Corporation to determine whether the 
broker is able to meet the customer's needs.
    \178\ See Exchange Act Rule 3a71-3(d)(5).
    \179\ For example, the Rule 10b-10 disclosures could be provided 
as part of the disclosures required pursuant to the disclosure 
condition in Rule 3a71-3(d)(1)(ii)(B)(1) discussed above.
---------------------------------------------------------------------------

    Similarly, the trade acknowledgment and verification condition 
would require a trade acknowledgment to be delivered to the 
counterparty promptly, but in any event by the end of the first 
business day following the day of execution of the security-based swap 
transaction,\180\ while Rule 10b-10 requires a confirmation to be 
delivered at or before completion of the transaction.\181\ The 
Commission recognizes that imposing two competing timing standards for 
similar types of disclosures could unnecessarily increase compliance 
burdens, and believes that the time and form standards required by the 
trade acknowledgment and verification condition adequately protect 
counterparties to security-based swap transactions subject to the 
exception because they are the same standards that apply to registered 
security-based swap dealers.\182\
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    \180\ See Exchange Act Rule 15Fi-2(b), 17 CFR 240.15Fi-2(b).
    \181\ See Exchange Act Rule 10b-10(a), 17 CFR 240.10b-10(a).
    \182\ If the broker or dealer relying on this exemption from 
Rule 10b-10 makes a good faith effort to comply with the requirement 
to deliver these disclosures to the customer as and when required, 
the failure to do so will not make the exemption from Rule 10b-10 
unavailable so long as the broker or dealer delivers the disclosures 
to the customer promptly after discovery of the defect in 
compliance. See Exchange Act Rule 3a71-3(d)(5).
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(4) Suitability Condition
    As proposed, the suitability condition would have required that if, 
as part of the registered entity's arranging, negotiating, or executing 
activity in the United States, the registered entity recommends a 
security-based swap or trading strategy involving a security-based swap 
to a counterparty of the non-U.S. entity relying on the exception, the 
registered entity must comply with the suitability requirements of Rule 
15Fh-3(f)(1) as if the counterparty to the relying entity was its own 
counterparty. Accordingly, the registered entity would have to (1) 
undertake reasonable diligence to understand the potential risks and 
rewards associated with the recommended security-based swap or trading 
strategy involving a security-based swap (the ``objective prong'') and 
(2) have a reasonable basis to believe that a recommended security-
based swap or trading strategy involving a security-based swap is 
suitable for the counterparty (the ``counterparty-specific 
prong'').\183\ To satisfy the counterparty-specific prong as proposed, 
a security-based swap dealer would have to obtain relevant information 
regarding the counterparty, including the counterparty's investment 
profile, trading objectives, and its ability to absorb potential losses 
associated with the recommended security-based swap or trading strategy 
involving a security-based swap.\184\
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    \183\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(2); see also 
Exchange Act Rule 15Fh-3(f)(1), 17 CFR 240.15Fh-3(f)(1).
    \184\ See Exchange Act Rule 15Fh-3(f)(1), 17 CFR 240.15Fh-
3(f)(1).
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    The Commission is adopting the suitability condition with a 
modification that provides an alternative means of satisfying the 
counterparty-specific prong. Consistent with the condition as proposed, 
the suitability condition will apply to the exception only when the 
registered entity makes a recommendation to the counterparty.\185\ Also 
consistent with the condition as proposed, the registered entity could 
choose to satisfy the counterparty-specific prong of the suitability 
condition by ensuring that it has a reasonable basis to believe that 
the recommended security-based swap or strategy involving a security-
based swap is suitable for the counterparty, as required by Rule 15Fh-
3(f)(1)(ii).\186\
---------------------------------------------------------------------------

    \185\ See id.
    \186\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(2) (referencing 
Exchange Act Rule 15Fh-3(f)).
---------------------------------------------------------------------------

    The proposed rule provided an alternative means of satisfying the 
counterparty-specific prong for

[[Page 6287]]

institutional counterparties. This alternative means contained four 
main elements. First, as proposed, the alternative means would have 
required the registered entity to reasonably determine that the 
institutional counterparty, or an agent to which the counterparty has 
delegated decision-making authority, is capable of independently 
evaluating investment risks with regard to the relevant security-based 
swap or trading strategy involving a security-based swap.\187\ The 
proposed rule would have allowed the registered entity to satisfy this 
requirement by obtaining certain written representations.\188\ Second, 
as proposed, the alternative means would have required the registered 
entity to obtain from the institutional counterparty or its agent 
affirmative written representations that it is exercising independent 
judgment in evaluating the recommendations with regard to the security-
based swap or trading strategy involving a security-based swap.\189\ 
Third, as proposed, the alternative means would have required the 
registered entity to disclose that it is acting in its capacity as a 
counterparty, and is not undertaking to assess the suitability of the 
security-based swap or trading strategy involving a security-based 
swap.\190\ Fourth, as proposed, the alternative means would have been 
available only when the counterparty in fact is an institutional 
counterparty.
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    \187\ See proposed Exchange Act Rule 3a71-3(d)(1)(ii)(B)(2) 
(referencing Exchange Act Rule 15Fh-3(f)).
    \188\ See id.
    \189\ See id.
    \190\ See id.
---------------------------------------------------------------------------

    The Commission believes that the counterparty-specific prong's 
investor protection benefit for institutional counterparties is 
unlikely to justify the burden on both the registered entity and the 
institutional counterparty to obtain from the counterparty the 
information and representations as described above, solely to make a 
recommendation in connection with ``arranging, negotiating, or 
executing'' activity eligible for the exception. The Commission further 
believes it appropriate to eliminate from the alternative means of 
satisfying the counterparty-specific prong the proposed disclosure to 
the institutional counterparty that the registered entity is acting in 
its capacity as a counterparty, as the registered entity would not be 
acting as counterparty in connection with the ``arranging, negotiating, 
or executing'' activity subject to the exception. For these reasons, in 
adopting Rule 3a71-3(d)(1)(ii)(B)(2), the Commission has tailored the 
suitability condition to allow the registered entity to comply with the 
counterparty-specific prong by reasonably determining that the 
counterparty to whom it makes a recommendation is an ``institutional 
counterparty'' as defined in Rule 15Fh-3(f)(4) and by disclosing to the 
counterparty that it is not undertaking to assess the suitability of 
the security-based swap or trading strategy involving a security-based 
swap for the counterparty.\191\
---------------------------------------------------------------------------

    \191\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(2).
---------------------------------------------------------------------------

    By allowing the counterparty-specific prong of the suitability 
condition to be satisfied by this disclosure when the registered entity 
makes a recommendation to a counterparty it reasonably determines is an 
institutional counterparty, the Commission also is partially addressing 
one commenter's suggestion to reduce both prongs of the suitability 
condition to a disclaimer when the registered entity does not have 
primary client responsibility for the counterparty.\192\ This commenter 
expressed the view that the proposed suitability condition should be 
limited when the registered entity ``is not assigned primary client 
responsibility for a non-U.S. counterparty,'' so that the registered 
entity merely would have to disclose that it is acting in its capacity 
as agent of the non-U.S. person relying on the exception, and that 
neither entity ``is undertaking to assess the suitability of the SBS 
transaction or trading strategy.'' \193\ The suitability condition 
would allow a disclaimer of the counterparty-specific prong, but not of 
the objective prong, when the registered entity reasonably determines 
that the counterparty is an institutional counterparty. The Commission 
does not agree with the commenter, however, that this alternative 
method of compliance should be available whenever the registered entity 
does not have primary client responsibility for the counterparty, or 
that the registered entity should be able to disclaim responsibility 
for understanding the potential risks and rewards of a particular 
product or strategy. Registered entities become involved in arranging, 
negotiating, or executing activity on behalf of a non-U.S. entity 
precisely because they are expected to have specialized knowledge and 
expertise regarding a particular security-based swap product or 
strategy, so the registered entity likely already possesses the 
information needed to comply with the objective prong of the 
suitability condition. Moreover, when these registered entities make a 
recommendation regarding such a product or strategy, counterparties are 
likely to expect that the recommendation is based on reasonable 
diligence to understand its potential risks and rewards, as, again, the 
registered entity's specialized knowledge and expertise are likely the 
reason it becomes involved in arranging, negotiating, or executing 
activity on behalf of its non-U.S. affiliate. Further, the limitations 
suggested by the commenter would allow the registered entity to make 
recommendations to a counterparty that the registered entity does not 
reasonably believe to be an institutional counterparty without ensuring 
that the recommendation is suitable for the counterparty. The 
Commission recognizes that the counterparty-specific prong of the 
suitability condition may entail significant compliance burdens in some 
instances in which the registered entity must obtain the counterparty 
information and make a suitability assessment using that 
information.\194\ However, the Commission continues to believe those 
burdens, now tailored to apply in full only when the registered entity 
does not reasonably determine that the counterparty is an institutional 
counterparty, are justified by the importance of the counterparty 
protections provided by this requirement.
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    \192\ See IIB/SIFMA letter at 13.
    \193\ See IIB/SIFMA letter at 17 (also suggesting that the 
Commission work with FINRA ``to adopt a parallel exemption'' from a 
FINRA suitability rule).
    \194\ As noted in the Proposing Release, however, the Commission 
understands that in some cases U.S. personnel currently manage 
trading or sales relationships with counterparties and thus already 
may possess the information needed to comply with the counterparty-
specific prong of the suitability condition. See Proposing Release, 
84 FR at 24222.
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(5) Proposed Portfolio Reconciliation Condition
    The Commission is not adopting the proposed portfolio 
reconciliation condition. Two commenters called for the removal of the 
proposed portfolio reconciliation condition.\195\ The

[[Page 6288]]

Commission is persuaded by comments that the burdens of compliance with 
the proposed condition would not justify its benefits. In particular, 
one commenter stated that the costs of developing new systems to 
conduct portfolio reconciliation between the non-U.S. counterparty and 
the registered entity, together with the condition's requirement 
regarding agreement in writing on the terms of portfolio 
reconciliation, ``would likely discourage non-U.S. counterparties from 
having the interactions with U.S. personnel that could trigger the 
condition.'' \196\ The Commission agrees that, in the context of 
transactions eligible for the exception, the costs of these 
requirements likely would have this effect on some non-U.S. 
counterparties, particularly given that the proposed condition would 
have prompted these costs in service of only one portfolio 
reconciliation between the counterparty and the registered entity. For 
these reasons, the Commission is not including the limited portfolio 
reconciliation requirement as a condition to the exception.
---------------------------------------------------------------------------

    \195\ See ISDA letter at 8 (stating that the portfolio 
reconciliation condition is ``particularly problematic'' in that it 
would add a two-way documentation burden ``that would require 
extensive client-outreach and client responses within a short period 
of time''); IIB/SIFMA letter at 14 (stating that the condition 
likely would discourage non-U.S. counterparties from having 
interactions with U.S. personnel that could trigger the condition, 
and because the reconciliation process would be burdensome by 
encompassing non-economic terms of security-based swap transactions; 
arguing in the alternative that the Commission should permit the 
registered entity to comply with the condition if the non-U.S. 
person relying on the exception ``is subject to portfolio 
reconciliation requirements in its home jurisdiction'').
    \196\ See IIB/SIFMA letter at 14.
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(6) Interaction of the Exception With Substituted Compliance
    The Commission is not modifying the four adopted as-if conditions 
(disclosure condition, communications condition, trade acknowledgment 
and verification condition, and suitability condition) to allow them to 
be satisfied by substituted compliance or otherwise by compliance with 
the home-country requirements of the entity relying on the exception. 
One commenter argued that the Commission should generally allow for the 
use of substituted compliance in connection with those (and other) 
conditions.\197\ Another commenter argued that the proposed trade 
acknowledgment and verification condition should be satisfied if the 
non-U.S. person relying on the exception ``provides written 
documentation of the SBS's terms to the counterparty in compliance with 
[the non-U.S. person's] home country confirmation requirements.'' \198\
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    \197\ See ISDA letter at 9-10.
    \198\ See IIB/SIFMA letter at 13-14 (also suggesting that if the 
registered entity is a broker-dealer, the Commission and FINRA 
should exempt the entity from compliance with Rule 10b-10 and the 
FINRA fixed income confirmation rule if the non-U.S. person provides 
that documentation to the counterparty and discloses that the 
registered entity is acting as agent).
---------------------------------------------------------------------------

    Any entity relying on the exception would be, by definition, a non-
U.S. person not registered with the Commission. The relying entity thus 
would not be eligible for substituted compliance, which is available 
only to registered SBS Entities, nor would it be covered by the ``MOU 
or other arrangement addressing supervision and enforcement''\199\ that 
is a key condition precedent of a substituted compliance determination. 
The registered entity also would not necessarily be able to ascertain 
whether or not the relying entity had complied with its home-country 
regulations to which the registered entity is not subject. Allowing the 
relying entity to satisfy the ``as-if'' conditions by way of compliance 
with its home-country requirements could compromise the Commission's 
ability to both supervise the registered entity and ascertain the 
relying entity's compliance with the ``as-if'' conditions. Instead, in 
applying the ``as-if'' conditions to the registered entity, the 
Commission is striking a balance that will allow flexibility for market 
participants engaging in cross-border security-based swap activity, but 
also further Title VII's goals of counterparty protection.\200\
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    \199\ See Exchange Act Rule 3a71-6(a)(2)(ii), 17 CFR 3a71-
6(a)(2)(ii).
    \200\ The Commission is mindful that the foreign blocking laws, 
privacy laws, secrecy laws, and other foreign legal barriers may 
limit or prohibit firms from providing books and records directly to 
the Commission. Similarly, such laws may impede the transfer of 
relevant records among affiliates for the purposes of complying with 
the exception. The exception is not available in situations in which 
such impediments to transferring information preclude compliance 
with conditions that require the relying entity to transfer 
information to the registered entity: The disclosure condition, the 
trade acknowledgment and verification condition, and conditions 
requiring the registered entity to obtain from the relying entity 
certain books and records. See also Proposing Release, 84 FR at 
24222 n.126 & 24223-24 n.143.
---------------------------------------------------------------------------

(7) Requirements Not Applicable to the Exception
    As proposed, the exception included a list of certain other 
``counterparty''-related requirements compliance with which would not 
be a condition to the availability of the exception. This proposed list 
included ECP verification requirements,\201\ ``know your counterparty'' 
requirements,\202\ clearing rights disclosure requirements,\203\ daily 
mark disclosure requirements,\204\ proposed portfolio compression 
requirements,\205\ and proposed security-based swap trading 
relationship documentation requirements.\206\ One commenter argued that 
the exception should not be subject to compliance with these 
requirements,\207\ and the Commission agrees. In the case of the ECP 
verification requirements and ``know your counterparty'' requirements, 
the Commission continues to believe that in some circumstances the 
registered entity would have limited interaction with the counterparty 
to the transactions subject to the exception, making it difficult to 
obtain the information needed to satisfy those requirements. 
Nevertheless, existing limitations on entering into security-based 
swaps with non-ECPs will remain in effect.\208\ Similarly, the 
Commission agrees that the exception should not be conditioned on 
compliance with clearing rights disclosure requirements because the 
transactions subject to the exception would not be expected to be 
subject to the underlying clearing rights as such rights apply only to 
transactions ``entered into'' by security-based swap dealers.\209\ The 
Commission also continues to believe that the exception should not be 
conditioned on compliance with daily mark disclosure requirements 
because those requirements are predicated on there being an ongoing 
relationship between the registered entity and the counterparty that 
may not be present in connection with the transactions subject to the 
exception, and further would be linked to risk management functions 
that are likely to be associated with the entity in which the resulting 
security-based swap position is booked. Finally, the Commission is 
considering in a separate release final rules regarding portfolio 
compression and trading relationship documentation, and continues to 
believe that the exception should not be conditioned on compliance with 
those rules.
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    \201\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(1).
    \202\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(4).
    \203\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(3).
    \204\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(2).
    \205\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(5).
    \206\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C)(6).
    \207\ See IIB/SIFMA letter at 12.
    \208\ See Exchange Act Section 6(l), 15 U.S.C. 78f(l) (requiring 
security-based swaps with non-ECPs to be effected on a national 
securities exchange); Securities Act of 1933 Section 5(e), 15 U.S.C. 
77e(e) (requiring registration of the offer and sale of security-
based swaps to non-ECPs). The registered entity might use 
information obtained from its non-U.S. affiliate to verify that a 
counterparty to the security-based swap is in fact an ECP.
    \209\ See Exchange Act Section 3C(g)(5), 15 U.S.C. 78c-3(g)(5).
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    Although the Commission agrees that a party complying with the 
exception should not be required to comply with these requirements, the 
Commission believes that including a list of these requirements in Rule 
3a71-3 could potentially cause confusion among

[[Page 6289]]

market participants. As proposed, this list of requirements was 
described as a list of Exchange Act provisions and rules and 
regulations thereunder to which the ``compliance obligation described 
in paragraph (d)(1)(ii)(A) [of Rule 3a71-3] does not apply.'' \210\ 
However, paragraph (d)(1)(ii)(A) of Rule 3a71-3 states only that, in 
connection with transactions subject to the exception, the registered 
entity must ``compl[y] with the requirements described in paragraph 
(d)(1)(ii)(B) [of Rule 3a71-3] as if the counterparties to the non-U.S. 
person relying on this exception also were counterparties to the 
registered entity.'' \211\ Paragraph (d)(1)(ii)(B) of Rule 3a71-3, in 
turn, lists the requirements that together comprise the ``as-if'' 
conditions discussed above. The Commission therefore does not believe 
it is necessary to include in Rule 3a71-3 the proposed list of 
requirements with which the registered entity need not comply.
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    \210\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii)(C).
    \211\ See Exchange Act Rule 3a71-3(d)(1)(ii)(A).
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3. Commission Access to Relevant Books, Records and Testimony, and 
Related Obligations
(a) Proposed Approach
    The proposal would require the non-U.S. person relying on the 
conditional exception, upon request, to promptly provide the Commission 
or its representatives with any information or documents within the 
non-U.S. person's possession, custody or control related to 
transactions under the exception, to make its foreign associated 
persons \212\ available for testimony, and to provide assistance in 
taking the evidence of other persons, wherever located, related to 
those transactions.\213\
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    \212\ Proposed paragraph (a)(11) of Rule 3a71-3 defined the term 
``foreign associated person'' as a natural person domiciled outside 
the United States that is a partner, officer, director, or branch 
manager of the non-U.S. person relying on the exception (or any 
person occupying a similar status or performing similar functions); 
any employee of that non-U.S. person; or any person that directly or 
indirectly controls, is controlled by, or is under common control 
with that non-U.S. person.
    \213\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(iii)(A). That proposed condition further would provide that 
if, despite the non-U.S. person's best efforts, the non-U.S. person 
is prohibited by applicable foreign law or regulations from 
providing such access to the Commission, the non-U.S. person may 
continue to rely on the exception until the Commission issues an 
order modifying or withdrawing an associated ``listed jurisdiction'' 
determination. The proposed provisions relating to the ``listed 
jurisdiction'' condition to the exception in part would permit the 
Commission to withdraw a listed jurisdiction determination if the 
jurisdiction's laws or regulations have had the effect of preventing 
the Commission or its representatives from accessing such 
information, documents and testimony. See Part II.C.5, infra.
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    The proposal further would require that the registered entity 
engaged in the arranging, negotiating or executing activity in the 
United States create and maintain all required books and records 
relating to the transactions at issue.\214\ That registered entity 
further would be required to obtain, from the non-U.S. person relying 
on the exception, and maintain documentation encompassing all terms 
governing the trading relationship between the non-U.S. person and its 
counterparty relating to the transactions subject to the 
exception.\215\ The registered entity also would have to obtain, from 
the non-U.S. person relying on the exception, written consent to 
service of process for any civil action brought by or proceeding before 
the Commission.\216\
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    \214\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(iii)(B)(1).
    \215\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(iii)(B)(2). These would include terms addressing payment 
obligations, netting of payments, events of default or other 
termination events, calculation and netting of obligations upon 
termination, transfer of rights and obligations, allocation of any 
applicable regulatory reporting obligations, governing law, 
valuation, and dispute resolution.
    \216\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(iii)(B)(3).
---------------------------------------------------------------------------

    Those proposed requirements were intended to ``help provide the 
Commission with a comprehensive view of the dealing activities 
connected with transactions relying on the proposed exception, and 
facilitate the Commission's ability to identify fraud and abuse in 
connection with transactions that have been arranged, negotiated, or 
executed in the United States.'' \217\
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    \217\ Proposing Release, 84 FR at 24224.
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(b) Commission Action
    The Commission is adopting these books and records-related 
conditions, including the definition of ``foreign associated person'' 
with modifications.\218\ As discussed in Part II.C.1 above, the 
Commission also is adopting a requirement for each registered entity 
whose associated persons may conduct ``arranging, negotiating, or 
executing'' activity pursuant to the exception to obtain from the 
relying entity, and maintain, documentation regarding the relying 
entity's compliance with the $50 billion limit on the availability of 
the exception.\219\ Further, to ensure that registered entity is able 
to make relevant records available to the Commission as needed, and to 
provide greater certainty to market participants who conduct activity 
pursuant to the exception, the Commission also is adopting record 
retention requirements in new Rule 3a71-3(d)(1)(iii)(B)(2)-(4). One 
commenter expressed the view that the Commission's access should be 
limited to the books and records of the registered entity, and should 
not extend to books and records of the non-U.S. person relying on the 
exception, because ``the Commission's regulatory nexus or interest in 
the transaction does not go beyond the `arranging' or `negotiating' 
activities conducted in the United States.'' \220\ The Commission's 
ability to access books and records, and obtain relevant testimony, of 
the relying entity is key to the Commission's ability to evaluate 
compliance with the exception. These conditions will help to provide 
the Commission with information about the dealing activities connected 
with transactions relying on the exception and will help to demonstrate 
whether the relying entity properly classified transactions as eligible 
for the exception. The conditions also will facilitate the Commission's 
ability to enforce against fraud and abuse in connection with 
transactions subject to the exception that have been arranged, 
negotiated, or executed in the United States.\221\
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    \218\ See Exchange Act Rule 3a71-3(a)(13), (d)(1)(iii).
    \219\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
    \220\ See ISDA letter at 9.
    \221\ As explained in the Proposing Release, and consistent with 
Exchange Act Rules 17a-3, 17a-4, 18a-5, and 18a-6, the registered 
entity would create, obtain and/or maintain the following types of 
records related to the ``arranging, negotiating, or executing'' 
activity subject to the exception: Records of communications; 
written agreements; copies of trade acknowledgments and 
verifications; records related to transactions not verified in a 
timely manner; and documents related to compliance with security-
based swap dealer business conduct standards. Other types of records 
addressed in Rules 17a-3, 17a-4, 18a-5, and 18a-6--e.g., inclusion 
of trades in financial ledgers--would not appear to be required for 
the registered entity in connection with ``arranging, negotiating, 
or executing'' activity subject to the exception. See Proposing 
Release, 84 FR at 24223 n.141.
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4. Notices to Counterparties
(a) Proposed Approach
    The proposed exception was conditioned on the registered entity 
notifying the counterparty of the non-U.S person relying on the 
exception that the non-U.S. person is not registered as a security-
based swap dealer, and that certain Exchange Act provisions or rules 
addressing the regulation of security-based swaps would not be 
applicable in connection with the transaction, including provisions 
affording clearing rights to counterparties (the ``notification 
condition'').\222\ The

[[Page 6290]]

proposal required the registered entity to provide this information 
contemporaneously with and in the same manner as the arranging, 
negotiating, or executing activity that is the subject of the 
exception, and did not require the notice to be made if the registered 
entity does not know the identity of the counterparty at a reasonably 
sufficient time prior to the execution of the transaction.\223\ The 
Commission intended this condition ``to help guard against 
counterparties assuming that the involvement of U.S. personnel in an 
arranging, negotiating, or executing capacity as part of the 
transaction would be accompanied by all of the safeguards associated 
with Title VII security-based swap dealer regulation.'' \224\
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    \222\ See Proposing Release, 84 FR at 24224.
    \223\ See id.
    \224\ See id.
---------------------------------------------------------------------------

(b) Commission Action
    The Commission is adopting the notification condition with a 
modification that provides an alternative means of satisfying the 
condition. Consistent with the proposal, the final rules require the 
registered entity to notify the counterparty that the entity relying on 
the exception is not registered as a security-based swap dealer and 
that certain Exchange Act provisions or rules do not apply to the 
transaction.\225\ Like the proposal, this notification is not required 
when the registered entity does not know the counterparty's identity at 
a reasonably sufficient time prior to the execution of the transaction 
to permit the notification.\226\ Two commenters argued that, if the 
Commission adopts this condition, the registered entity should be able 
to make the required notice one time to cover the entire relationship 
with the counterparty; these commenters cited the difficulty of making 
and documenting the notice contemporaneously with every counterparty 
contact.\227\ The Commission believes that a single notice given at the 
first arranging, negotiating, or executing activity that is subject to 
the exception is sufficient to cover all subsequent arranging, 
negotiating, or executing activity of a registered entity that has no 
other customer or counterparty relationship with the counterparty. When 
the registered entity does have a separate customer or counterparty 
relationship with the counterparty, the need to identify transactions 
to which the full protection of the U.S. securities laws does not apply 
becomes more acute. In these situations, the Commission believes that a 
contemporaneous notice made in the same manner as the arranging, 
negotiating, or executing activity subject to the exception best 
fulfills the condition's investor protection goals. Accordingly, the 
final rules provide that, during a period in which the counterparty is 
not a customer \228\ of the registered entity or a counterparty to a 
security-based swap with the registered entity, the notice need only be 
provided contemporaneously with, and in the same manner as, the first 
arranging, negotiating, or executing activity with that counterparty, 
rather than with each such activity during the period in which the 
counterparty is not such a customer or counterparty. Because this 
single notice is permitted only during a period in which the 
counterparty is not a customer of the registered entity or a 
counterparty to a security-based swap with the registered entity, the 
final rules would require the registered entity to resume providing the 
notice contemporaneously with, and in the same manner as, each 
arranging, negotiating, or executing activity at issue if the 
counterparty later becomes a customer of the registered entity or a 
counterparty to a security-based swap with the registered entity. In 
adopting this change, the Commission is balancing commenters' concerns 
regarding the practical challenges of repeating the notice 
contemporaneously with each arranging, negotiating, or executing 
activity subject to the exception with the need to avoid confusion 
among counterparties regarding the applicability of U.S. securities 
laws to transactions arranged, negotiated, or executed by personnel 
located in the United States.
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    \225\ See Exchange Act Rule 3a71-3(d)(1)(iv).
    \226\ See id. As noted in the Proposing Release, circumstances 
in which the registered entity engaged in activity pursuant to the 
exception may not know the identity of the counterparty could 
include circumstances in which the registered entity provides only 
execution services, and does not arrange or negotiate the 
transaction, as well as circumstances where U.S. personnel specify a 
trading strategy or techniques carried out through algorithmic 
trading or automated electronic execution of security-based swaps. 
See Proposing Release, 84 FR at 24224 n.149.
    \227\ See ISDA letter at 9; IIB/SIFMA letter at 14-15.
    \228\ The term ``customer'' is defined consistent with the 
definition of the term in Rule 15c3-3, the customer protection rule 
that applies to brokers and dealers. See Exchange Act Rule 15c3-
3(a)(1), 17 CFR 240.15c3-3(a)(1).
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5. Applicability of Financial Responsibility Requirements of a Listed 
Jurisdiction
(a) Proposed Approach
    Finally, the proposed exception would be conditioned on the 
requirement that the non-U.S. person relying on the exception be 
subject to the margin and capital requirements of a ``listed 
jurisdiction'' when engaging in the transactions at issue (the ``listed 
jurisdiction condition'').\229\ This condition was intended ``to help 
avoid creating an incentive for dealers to book their transactions into 
entities that solely are subject to the regulation of jurisdictions 
that do not effectively require security-based swap dealers or 
comparable entities to meet certain financial responsibility 
standards.'' \230\ The Commission proposed corresponding amendments to 
Rule 0-13 to provide a mechanism for applications for designation as a 
listed jurisdiction.\231\
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    \229\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(v). Under the proposal, the term ``listed jurisdiction'' was 
defined to mean any jurisdiction which the Commission by order has 
designated as a listed jurisdiction for purposes of the exception. 
See proposed Exchange Act Rule 3a71-3(a)(12).
    \230\ See Proposing Release, 84 FR at 24225. The Commission 
further explained: Absent this type of condition, the exception from 
the de minimis counting requirement could provide a competitive 
advantage to non-U.S. persons that conduct security-based swap 
dealing activity in the United States without being subject to 
sufficient financial responsibility standards. More generally, the 
proposed condition is consistent with the belief the Commission 
expressed when it adopted the ``arranged, negotiated, or executed'' 
de minimis counting rule, that applying capital and margin 
requirements to such transactions between two non-U.S. persons can 
help mitigate the potential for financial contagion to spread to 
U.S. market participants and to the U.S. financial system more 
generally.Id.
    \231\ See Proposing Release, 84 FR at 24290-91.
---------------------------------------------------------------------------

    The proposal specified that the Commission conditionally or 
unconditionally may determine ``listed jurisdictions'' by order, in 
response to applications or upon the Commission's own initiative.\232\ 
In considering a jurisdiction's potential status as a ``listed 
jurisdiction,'' the Commission would consider whether an order would be 
in the public interest, based on factors such as the jurisdiction's 
applicable margin and capital requirements, and the effectiveness of 
the foreign regime's supervisory compliance program and enforcement 
authority in connection with those

[[Page 6291]]

requirements, including in the cross-border context.\233\
---------------------------------------------------------------------------

    \232\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(2).
    The proposal further provided that applications for a listed 
jurisdiction order may be made by a party or group of parties that 
potentially would seek to rely on the exception from the de minimis 
counting requirement, or by a foreign financial regulatory authority 
supervising such a party or its security-based swap activities. See 
Alternatives 1 and 2--proposed Exchange Act Rule 3a71-3(d)(2)(i). 
The rule also specified that applications must be filed pursuant to 
the procedures set forth in Exchange Act Rule 0-13 (which as adopted 
addresses substituted compliance applications), and the Commission 
proposed to amend Rule 0-13 to also address listed jurisdiction 
applications.
    \233\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(ii).
---------------------------------------------------------------------------

    The proposal further specified that the Commission might modify 
\234\ or withdraw a listed jurisdiction determination, after notice and 
opportunity for comment, if the Commission determines that continued 
listed jurisdiction status would not be in the public interest. That 
could be based on the above factors regarding the jurisdiction's margin 
and capital requirements and associated supervisory and enforcement 
practices, or it could be based on consideration of whether the 
jurisdiction's laws or regulations have had the effect of preventing 
the Commission or its representatives from promptly being able to 
obtain information regarding the non-U.S. persons relying on the 
exception.\235\
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    \234\ The proposal explained that the Commission may modify a 
listed jurisdiction determination when: (1) Certain market 
participants or classes of market participants in the jurisdiction 
are not required to comply with the relevant financial 
responsibility requirements; (2) the jurisdiction's supervisory or 
enforcement practices oversee certain market participants or classes 
of market participants differently than others; or (3) the 
jurisdiction's barriers to data access apply to certain market 
participants or classes of market participants but not others. The 
Commission further noted that, in practice, the use of this 
authority may cause the exception to be unavailable to certain 
groups of market participants in a jurisdiction, or to individual 
market participants. See Proposing Release, 84 FR at 24225-26.
    \235\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(iii). As the Commission explained, those latter criteria 
reflected the importance of the proposed exception's information 
access condition, as well as the conclusion that it would be 
appropriate to modify or withdraw listed jurisdiction status if, in 
practice, the Commission or its representatives have been prevented 
from accessing information required under the exception due to the 
jurisdiction's laws or regulations. See Proposing Release, 84 FR at 
24225.
---------------------------------------------------------------------------

    The Commission also addressed the distinction between ``listed 
jurisdiction'' determinations and determinations for substituted 
compliance, and clarified that listed jurisdiction status would not be 
predicated on the foreign jurisdiction's financial responsibility 
regime being comparable to Title VII requirements.\236\
---------------------------------------------------------------------------

    \236\ As the Commission explained, listed jurisdiction 
applications and substituted compliance applications would arise in 
distinct contexts, and ``the different purposes of these proposed 
exclusions and a substituted compliance determination mean that the 
Commission may reach different conclusions regarding these issues 
when considering a substituted compliance determination than it does 
when considering listed status.'' See Proposing Release, 84 FR at 
24226.
---------------------------------------------------------------------------

    In proposing the ``listed jurisdiction'' condition, the Commission 
recognized that commenters to the Commission's earlier proposal for the 
``arranged, negotiated, or executed'' counting requirement suggested 
that potential concerns regarding the outcome that the condition was 
intended to avoid could be addressed by conditioning a broker-dealer 
based alternative to the counting rule on the non-U.S. entity being 
regulated in a ``local jurisdiction recognized by the Commission as 
comparable,'' or in a G-20 jurisdiction or in a jurisdiction where the 
entity would be subject to Basel capital requirements. The Commission 
stated, however, that it did not believe that those concerns would be 
addressed adequately by a ``one size fits all'' approach that was 
linked simply to a jurisdiction's membership in the G-20 or compliance 
with Basel standards, with no further opportunity to consider relevant 
regulatory practices and requirements.\237\
---------------------------------------------------------------------------

    \237\ See Proposing Release, 84 FR at 24225. The proposal 
further explained:
    The Commission is mindful that a jurisdiction's membership in 
the G-20 or its compliance with Basel standards can be a positive 
indicator regarding the effectiveness of the jurisdiction's margin 
and capital regimes. At the same time, the Commission also 
recognizes that implementation and oversight practices may vary even 
among those jurisdictions. Accordingly, the Commission preliminarily 
believes that the proposed individualized ``listed jurisdiction'' 
assessment would provide us an appropriate degree of discretion to 
consider whether the jurisdiction has implemented appropriate 
financial responsibility standards and exercises appropriate 
supervision in connection with those standards, and whether the 
Commission as necessary could access relevant information.
     Id.
---------------------------------------------------------------------------

    The proposal also preliminarily stated, based on the Commission's 
understanding of relevant margin and capital requirements, an initial 
set of listed jurisdictions and that the Commission might issue a set 
of listed jurisdiction orders in conjunction with its final action on 
the proposed exception.\238\
---------------------------------------------------------------------------

    \238\ See Proposing Release, 84 FR at 24226.
---------------------------------------------------------------------------

(b) Commission Action
    The Commission is adopting the listed jurisdiction condition, 
together with the related amendments to Rule 0-13, as proposed.\239\ 
The listed jurisdiction condition is intended to deter dealers from 
attempting to avoid Title VII by simply booking their transactions to 
entities in jurisdictions that do not effectively require security-
based swap dealers or comparable entities to meet certain financial 
responsibility standards.\240\ Without the requirement, the exception 
could ``provide a competitive advantage to non-U.S. persons that 
conduct security-based swap dealing activity in the United States 
without being subject to sufficient financial responsibility 
standards.'' \241\ More generally, the condition is consistent with the 
view that applying capital and margin requirements to transactions 
between two non-U.S. persons that have been arranged, negotiated, or 
executed in the United States can help mitigate the potential for 
financial contagion to spread to U.S. market participants and to the 
U.S. financial system more generally.\242\
---------------------------------------------------------------------------

    \239\ See Exchange Act Rule 3a71-3(d)(1)(v); Rule 0-13.
    \240\ See Proposing Release, 84 FR at 24225.
    \241\ Id.
    \242\ Id.
---------------------------------------------------------------------------

    In making its determination as to whether a foreign jurisdiction 
warrants a ``listed jurisdiction'' designation, in addition to the 
other requirements of the exception, the Commission may consider 
``factors relevant for purposes of assessing whether such a designation 
would be in the public interest.'' \243\ Two such factors included in 
the rule are the jurisdiction's applicable margin and capital 
requirements \244\ and the effectiveness of the relevant foreign 
financial regulatory authority's supervisory compliance program and 
enforcement authority in connection with those requirements, including 
in the cross-border context.\245\ As part of assessing whether a 
designation would be in the public interest, the Commission also 
expects to consider whether a foreign jurisdiction has a security-based 
swaps market that demonstrates both a potential need for designation as 
a listed jurisdiction and an incentive for the relevant foreign 
financial regulatory authorities to oversee that market. With these 
factors in mind, the Commission may not designate all G-20 
jurisdictions as listed jurisdictions as one commenter

[[Page 6292]]

suggested.\246\ The implementation of margin and capital requirements, 
as well as supervision and enforcement of them, varies significantly 
across G-20 jurisdictions.\247\ Moreover, many G-20 jurisdictions do 
not have substantial security-based swap markets and as such may not 
necessarily have comparable incentives or resources to oversee those 
markets. By separate order, taking into account the factors described 
above and the other requirements of new paragraph (d)(2) to Rule 3a71-
3, the Commission has designated Australia, Canada, France, Germany, 
Japan, Singapore, Switzerland, and the United Kingdom as listed 
jurisdictions.
---------------------------------------------------------------------------

    \243\ Exchange Act Rule 3a71-3(d)(2)(ii).
    \244\ In assessing a jurisdiction's applicable margin and 
capital requirements, the Commission would expect to consider 
whether the margin and capital requirements at issue would apply to 
entities who transact in security-based swaps. For example, in a 
jurisdiction where heightened margin and capital requirements for 
OTC derivatives are only applicable to certain types of entities, 
such as banks, the Commission may limit a listed jurisdiction order 
to entities covered by such requirements.
    \245\ Id. The Commission does not consider impediments to 
information access as part of its initial listed jurisdiction 
determination. However, the Commission may modify or withdraw listed 
jurisdiction status in the event that, in practice, among other 
things, the Commission or its representatives have been prevented 
from accessing information due to the jurisdiction's laws and 
regulations. Exchange Act Rule 3a71-3(d)(2)(iii)(B). The Commission 
also may modify or withdraw listed jurisdiction status, if the 
Commission otherwise finds that continued listing jurisdiction 
status is no longer in the public interest based on any factor the 
Commission determines to be relevant. See Exchange Act Rule 3a71-
3(d)(2)(iii).
    \246\ See IIB/SIFMA letter at 15 (citing the G-20 jurisdictions' 
``progress toward adopting capital and margin requirements 
consistent with international standards''; further stating that 
``the concentration of the SBS markets in the G20 jurisdictions 
limits the negative consequences'' of the listed jurisdiction 
condition, and that ``the swaps markets in emerging markets are 
significantly larger''). The same commenter also generally supported 
the listed jurisdiction condition. See id.
    \247\ See, e.g., Financial Stability Board, OTC Derivatives 
Market Reforms: Thirteenth Progress Report on Implementation (Oct. 
15, 2019), available at https://www.fsb.org/wp-content/uploads/P151019.pdf.
---------------------------------------------------------------------------

    Finally, designation as a listed jurisdiction serves a purpose 
distinct from, and is subject to substantially different requirements 
than, those of a substituted compliance order. As noted above, 
designation as a listed jurisdiction helps to avoid a competitive 
advantage for non-U.S. persons that might otherwise conduct security-
based swap dealing activity in the United States ``without being 
subject to sufficient financial responsibility standards.'' \248\ Also 
as noted above, the Commission may consider whether designation as a 
listed jurisdiction is in the public interest in light of the relevant 
jurisdiction's applicable margin and capital requirements, but these 
requirements need not be comparable to U.S. requirements.\249\ 
Similarly, the Commission may consider, as a factor in determining 
listed jurisdiction status, the effectiveness of the relevant foreign 
financial regulatory authority's supervisory compliance program and 
enforcement authority in connection with those requirements, including 
in the cross-border context, but this effectiveness need not require an 
MOU or other arrangement with the foreign financial regulatory 
authorities addressing supervisory and enforcement cooperation.\250\ By 
contrast, a substituted compliance determination in part requires \251\ 
the Commission to assess the comparability of a foreign financial 
regulatory system to Exchange Act requirements \252\ and to enter into 
a supervisory and enforcement memorandum of understanding and/or other 
arrangement with the relevant foreign financial regulatory authorities 
addressing supervisory and enforcement cooperation arising under the 
substituted compliance determination.\253\ As a result, while a listed 
jurisdiction application may raise issues that are similar to those 
that would accompany applications for substituted compliance, the 
Commission expects to evaluate applications for designation as a listed 
jurisdiction independently of those regarding substituted compliance, 
and may reach different conclusions regarding a substituted compliance 
application than it does regarding a listed jurisdiction application.
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    \248\ See Proposing Release, 84 FR at 24225.
    \249\ See Exchange Act Rule 3a71-3(d)(2)(ii).
    \250\ See id.
    \251\ See Exchange Act Rule 3a71-6(a)(2), 17 CFR 240.3a71-
6(a)(2) (``The Commission shall not make a substituted compliance 
determination . . . unless the Commission [satisfies certain 
conditions].'')
    \252\ See Exchange Act Rule 3a71-6(a)(2)(i), 17 CFR 240.3a71-
6(a)(2)(i).
    \253\ See Exchange Act Rule 3a71-6(a)(2)(ii), 17 CFR 240.3a71-
6(a)(2)(ii).
---------------------------------------------------------------------------

    One commenter criticized the proposed listed jurisdiction condition 
on the grounds that the proposal would not require the foreign regime 
to be comparable to U.S. regulation, and that the Commission's 
consideration of financial responsibility criteria would be 
optional.\254\ However, the Commission believes that, unlike in the 
context of substituted compliance, designation as a listed jurisdiction 
need not require comparability of capital and margin requirements to 
serve its intended purpose to deter non-U.S. entities relying on the 
exception from conducting dealing activity in the United States without 
being subject to sufficient financial responsibility standards. 
Further, the final rule does not require the Commission to consider 
applicable margin and capital requirements but, rather, lists these 
requirements as a factor that the Commission may consider relevant for 
purposes of assessing whether a listed jurisdiction order would be in 
the public interest. In the Commission's view, this flexibility in the 
rules is warranted because different regulatory systems may be able to 
further the goal of the listed jurisdiction condition through other 
financial responsibility measures. In assessing listed jurisdiction 
status, the Commission may need to take into account the manner in 
which the jurisdiction's regulatory system is informed by local 
business and market practices. While recognizing the commenter's desire 
to require an assessment of the jurisdiction's applicable capital and 
margin requirements, in this circumstance the Commission believes that 
the listed jurisdiction assessments will turn upon relevant facts and 
circumstances in a manner such that it would not be practicable to 
impose such a requirement.
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    \254\ See AFR letter at 4 (``However, the Proposal is explicit 
that the Commission would not be required to find that the 
regulatory regime in a listed jurisdiction is comparable to U.S. 
regulation. Instead, designation as a listed jurisdiction is 
completely at the discretion of the Commission, which ``may 
conditionally or unconditionally determine'' which jurisdictions 
qualify based on a vague public interest standard. While a few 
criteria are set forward, such as the existence (but not the 
stringency) of capital and margin standards in the jurisdiction, and 
the effectiveness of the supervisory compliance program in the 
jurisdiction, Commission consideration of these factors is 
completely optional. Thus, by no means would regulation in a listed 
jurisdiction guarantee regulatory protections comparable to U.S. 
oversight under Title VII of Dodd-Frank.'' (footnote omitted)).
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III. Amendment to Rule 15Fb2-1 and Guidance on the Certification and 
Opinion of Counsel Requirements

A. General

    Exchange Act Rule 15Fb2-4 requires that nonresident SBS Entities 
seeking to register with the Commission certify that they can, as a 
matter of law, and will provide the Commission with access to their 
books and records and submit to onsite examination. The rule also 
requires that nonresident SBS Entities submit with their Forms SBSE, 
SBSE-A, or SBSE-BD, as appropriate, an opinion of counsel determining 
that they can, as a matter of law, provide the Commission with access 
to their books and records and submit to onsite examination.
    As discussed in the Proposing Release,\255\ after the adoption of 
the registration rules for SBS Entities, the Commission staff received 
a number of questions regarding the scope of the certification and 
opinion of counsel requirement in Exchange Act Rule 15Fb2-4.\256\ Some 
of the questions related to issues raised by foreign blocking laws, 
privacy laws, secrecy laws and other foreign legal barriers that may 
limit or prohibit firms from: (i) Providing books and records directly 
to

[[Page 6293]]

the Commission; or (ii) submitting to an onsite inspection or 
examination by SEC staff.\257\ In general, the firms requested guidance 
as to whether the certification and opinion of counsel could take into 
account different approaches available under foreign blocking laws, 
privacy laws, secrecy laws or other legal barriers that may facilitate 
firms' ability to provide books and records to the Commission and 
submit to an examination or inspection by Commission staff in a manner 
consistent with a particular foreign legal requirement.
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    \255\ See Proposing Release, 84 FR at 24233-38.
    \256\ See, e.g., letter from Briget Polichene, Chief Executive 
Officer, Institute of International Bankers, and Kenneth E. Bentsen, 
President and CEO, SIFMA, dated August 26, 2016 (available at 
https://www.sec.gov/comments/s7-05-14/s70514-18.pdf), and email from 
Sarah A. Miller, Chief Executive Officer, Institute of International 
Bankers, dated November 16, 2016 (available at https://www.sec.gov/comments/s7-05-14/s70514-19.pdf).
    \257\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, Exchange Act Release No. 
75611 (Aug. 5, 2015), 80 FR 48964, 48981 (Aug. 14, 2015) 
(``Registration Adopting Release'').
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1. Proposed Approach
    As indicated in the Proposing Release, the Commission recognizes 
that foreign blocking laws, privacy laws, secrecy laws or other legal 
barriers may vary in purpose and scope, among other aspects. In 
recognition of the differences among foreign laws, the Commission 
proposed guidance to firms seeking clarification as to the requirement, 
in Rule 15Fb2-4, that a non-resident SBS Entity applicant provide the 
Commission with a certification and opinion of counsel. In particular, 
and as discussed in more detail below, the Commission proposed guidance 
to Exchange Act Rule 15Fb2-4 regarding: (1) The foreign laws that must 
be covered by the certification and opinion of counsel; (2) the scope 
of the books and records that are the subject of the certification and 
opinion of counsel, namely that the certification and opinion of 
counsel need only address: (i) Records that relate to the ``U.S. 
business'' (as defined in Exchange Act Rule 3a71-3(a)(8)) of the 
nonresident SBS Entity; and (ii) financial records necessary for the 
Commission to assess the compliance of the nonresident SBS Entity with 
capital and margin requirements under the Exchange Act and rules 
promulgated by the Commission thereunder, if these capital and margin 
requirements apply to the nonresident SBS Entity; (3) predication of a 
firm's certification and opinion of counsel, as necessary, on the 
nonresident SBS Entity obtaining prior consent of the persons whose 
information is or will be included in the books and records to allow 
the firm to promptly provide the Commission with direct access to its 
books and records and to submit to on-site inspection and examination; 
(4) applicability of the certification and opinion of counsel to 
contracts entered into prior to the date on which the SBS Entity 
submits an application for registration pursuant to Section 15F(b); and 
(5) whether the certification and opinion of counsel submitted by a 
nonresident SBS Entity can take into account approvals, authorizations, 
waivers or consents provided by local regulators. The Commission also 
proposed to amend Rule 15Fb2-1 to provide additional time for an SBS 
Entity to submit the certification and opinion of counsel required 
under Rule 15Fb2-4(c)(1).
2. Commission Action
    In response to the Commission's proposals, the commenters that 
addressed this issue recommended that the Commission eliminate the 
certification and opinion of counsel requirement, or eliminate the 
opinion of counsel requirement and modify the certification 
requirement, or revise or clarify the proposed guidance regarding the 
scope of the certification and opinion of counsel requirement.\258\ The 
commenters stated that doing so would: harmonize with CFTC 
requirements; \259\ level the playing field for U.S. and non-U.S. firms 
(which both operate internationally and are likely subject to the same 
foreign privacy, blocking and other laws); \260\ reduce compliance 
costs;\261\ reduce the market impacts of the possible withdrawal of 
participants unable to provide the certification and opinion \262\ and 
address concerns that the requirement, which would apply only with 
respect to nonresident SBS Entities, would violate national treatment 
principles.\263\ Commenters also described foreign laws that would make 
it impossible for nonresident SBS Entities to comply with the 
rule.\264\
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    \258\ See EBF letter at 2; letter from Manuel Rybach, Managing 
Director, Credit Suisse, and Jeffrey Samuel, Managing Director, UBS, 
dated July 23, 2019 (``Credit Suisse/UBS letter''); at 2; ISDA 
letter at 10; IIB/SIFMA letter at 18-20.
    \259\ See EBF letter at 2; Credit Suisse/UBS letter at 2.
    \260\ See ISDA letter at 10; Credit Suisse/UBS letter at 2.
    \261\ See IIB/SIFMA letter at 19; Credit Suisse/UBS letter at 2.
    \262\ See IIB/SIFMA letter at 19; Credit Suisse/UBS letter at 2.
    \263\ See IIB/SIFMA letter at 20.
    \264\ See, e.g., Credit Suisse/UBS letter at 2:
    In principle, Swiss administrative law requires foreign 
authorities to seek administrative assistance when requesting data 
provision from Switzerland or on-site inspections in Switzerland. 
Additionally, Switzerland has a number of laws that are intended to 
protect the privacy of its customers and employees. These Swiss 
domestic laws may conflict with the Commission's Proposal. Most 
notably, Article 47 of the Swiss Federal Banking Act, to the extent 
customers have not waived such right, protects customer-related data 
from disclosure to any third-parties and applies to all banking 
institutions in Switzerland.
    Article 271 of the Swiss Criminal Code also prevents ``official 
acts'' from being performed on behalf of a foreign authority on 
Swiss soil and poses an obstacle to the cross-border transmission of 
data located in Switzerland, in cases where the transmission of data 
has not been approved by Swiss authorities or the requirements of 
Article 42c and Article 42 Paragraph 2 of the Swiss Financial Market 
Supervision Act (``FINMASA'') or the other administrative assistance 
requirements are not met. Finally, any on-site inspections performed 
in Switzerland on FINMA supervised entities by non-Swiss authorities 
are subject to the requirements of Article 43 FINMASA, and will 
always require varying degrees of FINMA involvement.
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    Some commenters urged the Commission to eliminate the certification 
and opinion of counsel requirement altogether.\265\ One commenter 
recommended that the Commission eliminate the opinion of counsel 
requirement and adopt exclusions from the certification for competing 
blocking, privacy, or secrecy laws--similar to what the CFTC has 
done.\266\ This approach was also suggested by another commenter as an 
alternative to elimination of the requirements.\267\ Similarly, another 
commenter suggested that the Commission consider limiting the 
requirement to a certification of a senior officer, based on reasonable 
due diligence, that the SBS Entity will provide access to its U.S. 
business-related books and records to the Commission upon request.\268\
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    \265\ See EBF letter at 2; Credit Suisse/UBS letter at 2; ISDA 
letter at 10.
    \266\ See IIB/SIFMA letter at 20.
    \267\ See Credit Suisse/UBS letter at 2.
    \268\ See ISDA letter at 10.
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    Upon consideration of the comments, the Commission is retaining the 
certification and opinion of counsel requirement of Exchange Act Rule 
15Fb2-4 because, as we explained when we adopted the requirement, we 
believe that significant elements of an effective regulatory regime are 
the Commission's ability to access registered SBS Entities' books and 
records and to inspect and examine the operations of registered SBS 
Entities.\269\ At the same time, the Commission is mindful of the 
concerns raised by commenters and therefore, as described below, is 
amending Rule 15Fb2-1 to: (1) Permit an SBS Entity to provide a 
conditional certification and opinion of counsel; and (2) upon the 
provision of such a conditional certification and opinion of counsel in 
connection with an otherwise complete application, conditionally 
register the SBS Entity. Furthermore, the Commission is also providing 
guidance regarding the application of the certification and opinion of 
counsel requirement (including the conditional

[[Page 6294]]

certification and opinion of counsel under Rule 15Fb2-1, as amended).
---------------------------------------------------------------------------

    \269\ Registration Adopting Release, 80 FR at 48981.
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B. Amendment to Rule 15Fb2-1 Providing for a Conditional Certification 
and Opinion of Counsel

1. Proposed Approach
    In the Proposing Release the Commission acknowledged that a 
nonresident SBS Entity may be unable to provide the certification or 
opinion of counsel required under Rule 15Fb2-4(c)(1) \270\ by the time 
the entity would be required to register because efforts to address 
legal barriers to the Commission's access to books and records are 
still ongoing.\271\ The Commission recognized, in the Proposing 
Release, that absent relief such nonresident SBS Entities could bear 
the cost of lowering or restructuring their market activities below the 
annual thresholds that would trigger registration requirements, an 
outcome that could create significant market disruptions.\272\
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    \270\ As described in the Registration Adopting Release, an SBS 
Entity is conditionally registered with the Commission when it 
submits a complete application on Form SBSE, SBSE-A, or SBSE-BD, as 
appropriate, and the Form SBSE-C senior officer certifications (see 
17 CFR 240.15Fb2-1(d)). To be complete, a Form SBSE, SBSE-A, or 
SBSE-BD submitted by a nonresident SBS Entity would generally need 
to include the Schedule F certification and opinion of counsel.
    \271\ See Proposing Release, 84 FR at 24237. For example, the 
relevant regulatory authority in the foreign jurisdiction where the 
nonresident SBS Entity maintains its covered books and records may 
be in the process of (i) issuing an approval, authorization, waiver 
or consent or (ii) negotiating an MOU or other arrangement with the 
Commission.
    \272\ See Registration Adopting Release, 80 FR at 49008.
---------------------------------------------------------------------------

    Given that, the Commission proposed to amend Exchange Act Rule 
15Fb2-1 to provide additional time for a nonresident SBS Entity to 
submit the certification and opinion of counsel required under Rule 
15Fb2-4(c)(1). Specifically, the Commission proposed new paragraphs 
(d)(2) and (e)(2) of Exchange Act Rule 15Fb2-1. Proposed paragraph 
(d)(2) would have provided that a nonresident applicant that is unable 
to provide the certification and opinion of counsel required under Rule 
15Fb2-4(c)(1) shall be conditionally registered for up to 24 months 
after the compliance date for Rule 15Fb2-1 if the applicant submits a 
Form SBSE-C and a Form SBSE, SBSE-A or SBSE-BD, as applicable, that is 
complete in all respects but for the failure to provide the 
certification and the opinion of counsel required by Rule 15Fb2-
4(c)(1). Proposed paragraph (e)(2) would have provided that if a 
nonresident SBS Entity became conditionally registered in reliance on 
paragraph (d)(2) and provides the certification and opinion of counsel 
required by Rule 15Fb2-4(c)(1) within 24 months of the compliance date 
for Rule 15Fb2-1, the firm would remain conditionally registered until 
the Commission acts to grant or deny ongoing registration, and that if 
the nonresident SBS Entity fails to provide the certification and 
opinion of counsel within 24 months of the compliance date for Rule 
15Fb2-1, the Commission may institute proceedings to determine whether 
ongoing registration should be denied. The Registration Adopting 
Release noted that once an SBS Entity was conditionally registered, all 
of the Commission's rules applicable to registered SBS Entities would 
apply to the entity and it must comply with them.\273\
---------------------------------------------------------------------------

    \273\ See id. at 48970 n.52.
---------------------------------------------------------------------------

2. Commission Action
    Only one commenter specifically addressed the proposed amendment, 
and that commenter did so in support of the proposal.\274\ However, 
that commenter also requested that where a provisionally-registered SBS 
Entity has demonstrated best efforts but is nonetheless unable to 
furnish the certification and opinion of counsel within the 24-month 
grace period, the Commission should provide SBS Entities additional 
time in which to provide the certification and opinion of counsel.\275\ 
More generally, as noted above, commenters have identified concerns 
with the certification and opinion of counsel requirement, and 
recommended that the Commission eliminate the requirement altogether, 
or else eliminate the opinion of counsel requirement and modify the 
certification requirement, or revise or clarify the proposed guidance 
regarding the scope of the certification and opinion of counsel 
requirement.\276\ The commenters stated that doing so would, among 
other things, harmonize with CFTC requirements.\277\ Commenters have 
expressed that the problem is not one of willingness to provide the 
certification and opinion of counsel at the time of registration, but 
rather the effect of privacy, blocking and secrecy laws, the EU General 
Data Protection Regulation (``GDPR'') and other legal impediments on 
the ability of a nonresident SBS Entity to provide the certification 
and opinion of counsel required by Rule 15Fb2-4(c). The CFTC addressed 
this issue by creating an exception for ``applicable blocking, privacy 
or secrecy laws'' from its requirement that an applicant produce books 
and records in a timely fashion.
---------------------------------------------------------------------------

    \274\ See ISDA letter at 10.
    \275\ See id. at n.24.
    \276\ See EBF letter at 2; Credit Suisse/UBS letter at 2; ISDA 
letter at 10; IIB/SIFMA letter at 18-20.
    \277\ See EBF letter at 2; Credit Suisse/UBS letter at 2.
---------------------------------------------------------------------------

    Accordingly, the Commission is adopting a modified approach, which 
is intended to achieve the same goal as the proposed amendment--
providing relief to SBS Entities that are unable to provide the 
certification or opinion of counsel required under Rule 15Fb2-4(c)(1) 
by the time the entity would be required to register--but in a manner 
that more broadly addresses the concerns regarding the application of 
the certification and opinion of counsel requirement raised by 
commenters.\278\
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    \278\ See Proposing Release at 24236 (noting that an SBS Entity 
may be unable to provide the certification and opinion of counsel 
required by Exchange Act Rule 15Fb2-4(c))(1) by the time the entity 
is required to register because efforts to address legal barriers to 
Commission access are still ongoing).
---------------------------------------------------------------------------

    Under Rule 15Fb2-1(d)(2) as adopted, a nonresident SBS Entity that 
is unable to provide the certification and opinion of counsel required 
by Rule 15Fb2-4(c) by the time the entity is required to register shall 
instead provide a conditional certification and opinion of counsel that 
identifies and is conditioned upon the occurrence of a future action 
that would provide the Commission with adequate assurances of prompt 
access to the books and records of the nonresident SBS Entity, and the 
ability of the nonresident SBS Entity to submit to onsite inspection 
and examination by the Commission. As set forth in Rule 15Fb2-1(d)(3), 
such future action could include: (1) Entry by the Commission and the 
foreign financial regulatory authority of the jurisdiction(s) in which 
the nonresident SBS Entity maintains the books and records that are 
addressed by the certification and opinion of counsel required by Rule 
15Fb2-4 into a memorandum of understanding, agreement, protocol, or 
other regulatory arrangement providing the Commission with adequate 
assurances of (i) prompt access to the books and records of the 
nonresident SBS Entity, and (ii) the ability of the nonresident SBS 
Entity to submit to onsite inspection and examination by the 
Commission; (2) issuance by the Commission of an order granting 
substituted compliance in accordance with Rule 3a71-6 based on adequate 
assurances by the foreign financial authority in the jurisdiction(s) in 
which the nonresident SBS Entity maintains the books and records that 
are addressed by the certification and opinion of counsel required by 
Rule

[[Page 6295]]

15Fb2-4(c)(1); \279\ or (3) any other action that would provide the 
Commission with assurances regarding prompt access to books and records 
and the ability to conduct onsite inspection and examination of the 
nonresident SBS Entity. Such ``any other action'' could be premised on, 
and take into account, the guidance the Commission is providing below 
and could include, for example, the subsequent receipt by the 
nonresident SBS Entity of consents on which it could premise a 
certification and opinion of counsel under Rule 15Fb2-4(c). The 
Commission is providing guidance below regarding the foreign laws to be 
addressed, and the scope of the books and records to be covered by the 
certification and opinion of counsel required by Rule 15Fb2-4(c)(1).
---------------------------------------------------------------------------

    \279\ Under Exchange Act Rule 3a71-6(c)(3), a foreign financial 
regulatory authority seeking a substituted compliance determination 
must provide ``adequate assurances that no law or policy of any 
relevant foreign jurisdiction would impede the ability of any entity 
that is directly supervised by the foreign financial regulatory 
authority and that may register with the Commission as [an SBS 
Entity] to provide prompt access to such entity's books and records 
or to submit to onsite inspection or examination by the 
Commission.''
---------------------------------------------------------------------------

    A nonresident SBS Entity that submits a conditional certification 
and opinion of counsel, in connection with an application that is 
complete in all respects but for the failure to provide the 
certification and the opinion of counsel required by Rule 15Fb2-
4(c)(1), shall be conditionally registered. A nonresident SBS Entity 
that has become conditionally registered in reliance on this section 
will remain conditionally registered until the Commission acts to grant 
or deny ongoing registration. If none of the future actions that are 
included in an applicant's conditional certification and opinion of 
counsel occurs within 24 months of the compliance date for Rule 15Fb2-
1, and there is not otherwise a basis for concluding that the 
Commission will have the necessary access and ability to conduct onsite 
inspection and examination,\280\ the Commission may institute 
proceedings thereafter to determine whether ongoing registration should 
be denied, in accordance with paragraph (e)(1) of the rule as 
amended.\281\
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    \280\ While not required, an applicant that is conditionally 
registered may amend its application if it subsequently becomes able 
to provide the certification and opinion of counsel contemplated by 
Exchange Act Rule 15Fb2-4(c).
    \281\ See Exchange Act Rule 15Fb2-1(e)(2). If there are 
extenuating circumstances such as, for example, where the foreign 
regulator has taken steps to issue an approval, authorization, 
waiver or consent or to enter into an MOU or other arrangement with 
the Commission, but has not yet completed that process, or the 
Commission has not yet completed its review of a substituted 
compliance application, the Commission would expect to take such 
circumstances into account when considering whether to institute 
such proceedings.
---------------------------------------------------------------------------

C. Foreign Laws to Be Addressed by the Certification and Opinion of 
Counsel

1. Proposed Guidance
    The Commission proposed to provide guidance that it would be 
appropriate for the certification and opinion of counsel to address 
only the laws of the jurisdiction or jurisdictions in which a 
nonresident SBS Entity maintains its covered books and records as 
described in Part III.D. below (``covered books and records'').\282\ 
The certification and opinion of counsel would not need to cover every 
jurisdiction where customers or counterparties of the nonresident SBS 
Entity may be located or where the nonresident SBS Entity may have 
additional offices or conduct business. Instead, they would only need 
to cover the jurisdiction(s) where the nonresident SBS Entity maintains 
its covered books and records, provided that the laws of the 
jurisdiction where the firm is incorporated or jurisdictions in which 
it is doing business would not prevent the Commission from having 
direct access to the covered books and records, nor prevent the 
nonresident SBS Entity from promptly furnishing them to the Commission 
or opening them up to the Commission for an onsite inspection or 
examination.
---------------------------------------------------------------------------

    \282\ Proposing Release, 84 FR at 24234.
---------------------------------------------------------------------------

2. Commission Action
    Commenters expressed concerns that it could be difficult or costly 
for an SBS Entity to provide a certification and an opinion of counsel 
regarding the absence of any jurisdiction's requirements that could 
prevent the SBS Entity from providing the Commission with prompt access 
to its records or to submit to onsite inspection and examination.\283\ 
The Commission also recognizes that U.S. SBS Entities with operations 
in other countries may face similar issues but are not required to 
provide negative assurances regarding the ability of these other 
jurisdictions to affect Commission access to books and records. Given 
this, an SBS Entity's certification and opinion of counsel need address 
only the jurisdiction(s) where the nonresident SBS Entity maintains its 
covered books and records (as discussed below). In this regard, the 
certification and opinion of counsel would need to address the laws of 
the jurisdiction(s) where the nonresident SBS Entity maintains its 
covered books and records. If a nonresident SBS Entity maintains copies 
of the required records in multiple jurisdictions, the SBS Entity can 
elect to provide a certification and opinion of counsel with respect to 
laws of a single jurisdiction where the necessary access can be 
supported.\284\
---------------------------------------------------------------------------

    \283\ See EBF letter at 3-4; ISDA Letter at 11; IIB/SIFMA letter 
at 20-21.
    \284\ See EBF letter at 3; ISDA letter at 11-12.
---------------------------------------------------------------------------

    The Commission notes that Exchange Act Section 15F(f)(1)(C) 
requires that an SBS Entity ``shall keep books and records. . . . open 
to inspection and examination by any representative of the 
Commission.'' Similarly, Exchange Act Rule 18a-6(g) provides that a 
nonresident SBS Entity ``must furnish promptly to a representative of 
the Commission legible, true, complete, and current copies'' of its 
books and records.\285\ These obligations are independent of, and in 
addition to, the certification and opinion of counsel requirement.
---------------------------------------------------------------------------

    \285\ See Exchange Act Rule 18a-6(g) and discussion in 
Recordkeeping and Reporting Adopting Release.
---------------------------------------------------------------------------

D. Covered Books and Records

1. Proposed Guidance
    In the Proposing Release, the Commission proposed to provide 
guidance that the certification and opinion of counsel need only 
address: (1) Books and records that relate to the ``U.S. business'' of 
the nonresident SBS Entity (as defined in 17 CFR 240.3a71-3(a)(8)); and 
(2) financial records necessary for the Commission to assess the 
compliance of the nonresident SBS Entity with capital and margin 
requirements under the Exchange Act and rules promulgated by the 
Commission thereunder, if these capital and margin requirements apply 
to the nonresident SBS Entity. The Commission stated that this guidance 
could help firms understand the scope of what is covered by the 
certification and opinion of counsel.
    The Commission stated that it would be appropriate to tie the scope 
of the books and records covered by the certification and opinion of 
counsel to a firm's ``U.S. business'' and relevant financial records to 
encompass those transactions that appear particularly likely to affect 
the integrity of the security-based swap market in the United States 
and the U.S. financial markets more generally or that raise concerns 
about the protection of participants in those markets.\286\ The 
Commission indicated that following this approach would tailor the

[[Page 6296]]

certification and opinion of counsel to the types of records the 
Commission would need to review, inspect or examine to determine 
compliance with applicable substantive requirements.
---------------------------------------------------------------------------

    \286\ See Proposing Release, 84 FR at 24235 n.211 (citing 
Business Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 77617 
(Apr. 14, 2016), 81 FR 29960, 30065 (May 13, 2016) (``Business 
Conduct Adopting Release'').
---------------------------------------------------------------------------

2. Commission Action
    The Commission is providing guidance largely as proposed, with 
additional clarifications to respond to commenters. Thus, an SBS 
Entity's certification and opinion of counsel need only address the 
following records: (1) Books and records that relate to the ``U.S. 
business'' of the nonresident SBS Entity (as defined in 17 CFR 
240.3a71-3(a)(8)); and (2) financial records necessary for the 
Commission to assess the compliance of the nonresident SBS Entity with 
applicable capital and margin requirements under the Exchange Act and 
rules promulgated by the Commission thereunder. The commenters that 
addressed this aspect of the proposed guidance asked that the 
certification and opinion of counsel not be required to cover any 
records maintained by a nonresident SBS Entity's U.S. registered 
broker-dealer or U.S. security-based swap dealer affiliate.\287\ Upon 
consideration of the comments, we believe it would be appropriate to 
further clarify that the certification and opinion of counsel need not 
cover any books and records that are held in the United States, either 
directly, for example, in an office of the nonresident SBS Entity, or 
by an associated person of the nonresident SBS Entity or third party in 
accordance with Rule 18a-6(f).\288\ To the extent books and records are 
maintained in the United States in accordance with Commission rules, 
the Commission should able to promptly access those records from the 
U.S. entity, and so there would be no need for the staff to seek to 
obtain them from the nonresident SBS Entity. The SBS Entity's 
certification and opinion of counsel would not need to address access 
to such books and records, except to represent that they are kept in 
the United States in accordance with Commission rules, but would still 
need to address the ability of the SBS Entity to submit to onsite 
inspections and examinations with respect to those books and records.
---------------------------------------------------------------------------

    \287\ See EBF letter at 3; ISDA letter at 12; IIB/SIFMA letter 
at 22.
    \288\ Exchange Act Rule 18a-6(f) provides:
    (f) If the records required to be maintained and preserved 
pursuant to the provisions of Sec. Sec.  240.18a-5 and 240.18a-6 are 
prepared or maintained by a third party on behalf of the security-
based swap dealer or major security-based swap participant, the 
third party must file with the Commission a written undertaking in a 
form acceptable to the Commission, signed by a duly authorized 
person, to the effect that such records are the property of the 
security-based swap dealer or major security-based swap participant 
and will be surrendered promptly on request of the security-based 
swap dealer or major security-based swap participant and including 
the following provision:
    With respect to any books and records maintained or preserved on 
behalf of [SBSD or MSBSP], the undersigned hereby undertakes to 
permit examination of such books and records at any time or from 
time to time during business hours by representatives or designees 
of the Securities and Exchange Commission, and to promptly furnish 
to said Commission or its designee true, correct, complete, and 
current hard copies of any or all or any part of such books and 
records.
    Agreement with an outside entity will not relieve such security-
based swap dealer or major security-based swap participant from the 
responsibility to prepare and maintain records as specified in this 
section or in Sec.  240.18a-5.
---------------------------------------------------------------------------

    The Commission is not, however, accepting a suggestion to ``exclude 
from the definition of covered books and records the financial records 
of a non-U.S. [security-based swap dealer] that is subject to the 
Commission's margin and capital requirements but relying on a 
substituted compliance determination with respect to [its] home country 
margin and capital requirements.'' \289\ Substituted compliance is an 
alternative means of satisfying the Commission's capital and margin 
requirements. The Commission retains full authority over registered SBS 
Entities vis-[agrave]-vis the nonresident SBS Entity's compliance with 
those alternative margin and capital requirements, and Commission staff 
may need access to the relevant books and records to examine and assess 
the SBS Entity's compliance with applicable requirements. Accordingly, 
if a nonresident SBS Entity is subject to the Commission's margin and 
capital requirements, it is important that the certification and 
opinion of counsel address access to the covered books and records of 
that SBS Entity, even if the SBS Entity is relying on a substituted 
compliance determination with respect to its home country margin and 
capital requirements.
---------------------------------------------------------------------------

    \289\ See IIB/SIFMA letter at 22.
---------------------------------------------------------------------------

E. Consents

1. Proposed Guidance
    As explained in the Proposing Release, firms had noted that certain 
jurisdictions' laws may permit a firm to promptly provide access to 
books and records and to submit to an onsite inspection and 
examination, if the SBS Entity were to obtain consent from the natural 
person whose information is documented in the SBS Entity's books and 
records.\290\ In response, the Commission stated its ``preliminary 
belief'' that it would be appropriate for an SBS Entity's certification 
and opinion of counsel to be predicated, as necessary, on the SBS 
Entity obtaining the prior consent of the persons whose information is 
or will be included in the SBS Entity's books and records. The 
Proposing Release identified a number of concerns if an SBS Entity were 
to seek to rely on consents, and proposed guidance that a nonresident 
SBS Entity seeking to rely on consents, should obtain such consents 
prior to registering as an SBS Entity, and continue to obtain consents, 
as necessary, on an ongoing basis so that it would be able to continue 
to provide the Commission with access to books and records. The 
Commission noted that it is the SBS Entity's decision whether to rely 
on consents, and that a nonresident SBS Entity may also want to explore 
whether an alternative basis exists under the foreign privacy laws that 
would permit the nonresident SBS Entity to collect and maintain the 
necessary data and to provide the information directly to Commission 
staff.\291\
---------------------------------------------------------------------------

    \290\ See Proposing Release, 84 FR at 24235.
    \291\ Id.
---------------------------------------------------------------------------

    Finally, the Commission stated that a nonresident SBS Entity 
should, before registering with the Commission, assess whether it would 
be able to meet the obligation to provide the Commission with access to 
its books and records, and take appropriate steps to ensure that, if 
registered, it would be able to comply with them. For example, if a 
nonresident SBS Entity is unable to obtain consent from a customer or 
counterparty or if a customer or counterparty provides a consent then 
later withdraws that consent, the firm may need to cease conducting a 
security-based swap business with that person in order to comply with 
the Exchange Act and the Commission's rules thereunder or to seek an 
alternative basis under the foreign law(s) that allows the nonresident 
SBS Entity to satisfy its obligations under the federal securities 
laws.\292\
---------------------------------------------------------------------------

    \292\ See id.
---------------------------------------------------------------------------

2. Commission Action
    Commenters expressed concern with various aspects of the proposed 
guidance, in particular that: (1) Requiring SBS Entities to obtain 
consents prior to registration would be problematic, and the Commission 
should allow SBS Entities more time (one commenter suggested 24 months 
after registration) to obtain the required consents; \293\ (2) the 
reliance on consents may not be a viable path forward due to the rules 
and guidance established under the GDPR and similar member

[[Page 6297]]

state rules, because those consents must be given freely with the 
ability to withdraw the consent at any time; \294\ (3) the Commission 
should not impose requirements regarding the method and frequency in 
which consent must be obtained, and SBS Entities should be able to 
obtain consent on a one-time basis through a protocol or disclosure-
based regime and not be required to obtain consents on a transaction-
by-transaction basis; \295\ and (4) a withdrawal of consent by a 
counterparty should not affect transactions a security-based swap 
dealer had entered into with such counterparty when the counterparty's 
initial consent was in force.\296\
---------------------------------------------------------------------------

    \293\ See EBF letter at 2, 5; ISDA letter at 13; IIB/SIFMA 
letter at 28.
    \294\ See EBF letter at 3; IIB/SIFMA letter at 23. One commenter 
asked the Commission to exempt EU-based registrants from obtaining 
employee consents because GDPR may prevent nonresident SBSDs from 
obtaining such consents. See ISDA letter at 13.
    \295\ See ISDA letter at 13-14.
    \296\ See IIB/SIFMA letter at 27-28.
---------------------------------------------------------------------------

    Nothing in the Exchange Act or the rules thereunder, or the 
guidance, requires an SBS Entity to obtain consents of the persons 
whose information is or will be included in its books and records. To 
the extent, however, such consents would allow the nonresident SBS 
Entity to promptly provide the Commission with access to its books and 
records and submit to on-site inspection and examination in the 
relevant jurisdiction, the Commission is providing guidance that the 
certification and opinion of counsel of a nonresident SBS Entity may be 
predicated upon the receipt of such consents.
    The Commission is mindful of the concerns raised by commenters, but 
believes that, in addition to the requirements of Rule 15Fb2-4, the 
reliance on consents in providing the required certification and 
opinion of counsel regarding its covered books and records may 
implicate the underlying requirements of both Exchange Act Section 
15F(f)(1)(C), which requires that an SBS Entity ``shall keep books and 
records . . . open to inspection and examination by any representative 
of the Commission,'' and Exchange Act Rules 17a-4(j) and 18a-6(g), as 
relevant, under which a nonresident SBS Entity must ``furnish promptly 
to a representative of the Commission legible, true, complete, and 
current copies'' of its books and records. Accordingly, the Commission 
is clarifying that, when an SBS Entity is relying on consents in 
providing the required certification and opinion of counsel regarding 
its covered books and records, the SBS Entity should obtain consents in 
a time and manner consistent with the representations made in the 
certification and opinion of counsel (such as, prior to entering into a 
transaction with counterparties for which the SBS Entity is relying on 
consents in providing the required certification and opinion of counsel 
regarding its covered books and records), in order to ensure Commission 
prompt access to books and records, regardless of whether the entity is 
conditionally or permanently registered.\297\
---------------------------------------------------------------------------

    \297\ The Commission is not addressing the method and frequency 
in which consent must be obtained.
---------------------------------------------------------------------------

    Similarly, to the extent an SBS Entity is relying on consents in 
providing the required certification and opinion of counsel regarding 
its covered books and records, it is not the Commission's intent that 
the withdrawal of consent by a counterparty should affect the validity 
of transactions entered into when the counterparty's consent was in 
force.\298\ Nor does the Commission believe that a counterparty's 
withdrawal of consent would necessarily require amendment of an SBS 
Entity's certification and opinion of counsel under Rule 15Fb2-
4(c)(2).\299\ That said, the SBS Entity would still need to comply with 
the underlying requirements of Exchange Act Section 15F(f)(1)(C) and of 
Exchange Act Rule 18a-6(g), as discussed.\300\ For that reason, as 
noted in the Proposing Release, a nonresident SBS Entity may also want 
to explore whether an alternative basis exists under the foreign 
privacy laws that would permit the nonresident SBS Entity to collect 
and maintain the necessary data and to provide the information to 
Commission staff.\301\
---------------------------------------------------------------------------

    \298\ See IIB/SIFMA letter at 27-28.
    \299\ Exchange Act Rule 15Fb2-4(c)(2) requires a nonresident SBS 
Entity to re-certify and submit a revised opinion of counsel within 
90 days after any changes in the legal or regulatory framework that 
would impact the SBS Entity's ability to provide, or the manner in 
which it provides the Commission prompt access to its books and 
records, or would impact the Commission's ability to inspect and 
examine the SBS Entity. If the SBS Entity is able to continue to 
meet its obligations notwithstanding the withdrawal of consent, such 
as for example if there is an MOU between the Commission and the 
relevant foreign financial regulator, a withdrawal of consent may 
not implicate Rule 15Fb2-4(c)(2).
    \300\ Because the final rules do not require an SBS Entity to 
obtain consents, the Commission is not adopting the commenter's 
suggestion that it exempt EU-based registrants from obtaining 
employee consents. See ISDA letter at 13.
    \301\ See Proposing Release, 84 FR at 24235.
---------------------------------------------------------------------------

F. Open Contracts

1. Proposed Guidance
    In the Proposing Release, the Commission stated that it 
preliminarily believed that the certification and opinion of counsel 
would not need to address the books and records of security-based swap 
transactions that were entered into prior to the date on which a 
nonresident SBS Entity submits an application for registration pursuant 
to Section 15F(b) of the Exchange Act and the rules thereunder.\302\ 
The Commission indicated that it recognizes there may be practical 
impediments to obtaining consents with respect to open contracts,\303\ 
and that any potential application of these rules to open contracts 
could undermine the expectations that the parties had when entering 
into the security-based swap.
---------------------------------------------------------------------------

    \302\ See id. See also Business Conduct Adopting Release, 81 FR 
at 29969, in which the Commission stated that the business conduct 
rules generally would not apply to any security-based swap entered 
into prior to the compliance date of the rules, and generally would 
apply to any security-based swap entered into after the compliance 
date of these rules, including a new security-based swap that 
results from an amendment or modification to a pre-existing 
security-based swap.
    \303\ For purposes of the proposed guidance, the term ``open 
contracts'' would have included any contract entered into by the SBS 
Entity prior to the date on which an SBS Entity submits an 
application for registration which the SBS Entity continues to hold 
on its books and records and under which it may have continuing 
obligations.
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2. Commission Action
    The Commission is providing the guidance as proposed.\304\ Thus, a 
nonresident SBS Entity's certification and opinion of counsel need not 
address records relating to security-based swap transactions entered 
into prior to the date on which a nonresident SBS Entity submits an 
application for registration pursuant to Section 15F(b) of the Exchange 
Act and the rules thereunder which the nonresident SBS Entity continues 
to hold on its books and records and under which it may have continuing 
obligations.
---------------------------------------------------------------------------

    \304\ The one commenter that addressed this issue indicated that 
it supported this proposed guidance. See IIB/SIFMA letter at 24.
---------------------------------------------------------------------------

G. Memoranda of Understanding, Agreements, Protocols, or Other 
Regulatory Arrangements With Foreign Financial Regulatory Authorities

1. Proposed Approach
    The Commission stated in the Proposing Release that firms have 
indicated that while local laws or rules in some foreign jurisdictions 
may prevent a nonresident SBS Entity from providing the Commission with 
direct access to its books and records or submitting to onsite 
inspections or examinations, in some cases the relevant foreign 
financial regulatory authority may have entered into an MOU or other 
arrangement with the Commission to facilitate Commission access to 
records of nonresident SBS

[[Page 6298]]

Entities located in the jurisdiction.\305\ Those firms requested 
guidance regarding whether the certification and opinion of counsel 
submitted by a nonresident SBS Entity could rely on MOUs or other 
arrangements foreign financial regulatory authorities may have entered 
into with the Commission to facilitate Commission access to records at 
the request of the SBS Entity.
---------------------------------------------------------------------------

    \305\ See Proposing Release, 84 FR at 24235-36 n. 201, citing 
memoranda of meetings between Commission staff and market 
intermediaries.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that it 
preliminarily believes that it would be appropriate for the 
certification and opinion of counsel to take into account whether the 
relevant regulatory authority in the foreign jurisdiction has: (i) 
Issued an approval, authorization, waiver or consent; or (ii) entered 
into an MOU or other arrangement with the Commission facilitating 
direct access to the books and records of SBS Entities located in that 
jurisdiction, including the Commission's inspections and examinations 
at the offices of SBS Entities located in that jurisdiction, provided 
that such an approval, authorization, waiver, consent or MOU or 
arrangement is necessary to address legal barriers to the Commission's 
direct access to books and records of the SBS Entities in that 
jurisdiction.\306\ However, the Commission noted that consideration of 
such an approval or MOU would need to be consistent with the 
Commission's registration program.
---------------------------------------------------------------------------

    \306\ Proposing Release, 84 FR at 24236.
---------------------------------------------------------------------------

    The Commission further stated in the Proposing Release that it 
would be appropriate to take into consideration an MOU or other 
arrangement that provided for consultation or cooperation with a 
foreign regulatory authority in conducting onsite inspections and 
examinations at the foreign offices of nonresident SBS Entities.\307\ 
The Commission further noted that it also believed it would be 
consistent with its registration program if the Commission is required 
to notify the relevant foreign regulatory authority of its intent to 
conduct an onsite inspection or examination and staff from the foreign 
regulatory authority can accompany the Commission when it visits the 
foreign office of the nonresident SBS Entity.\308\ However, the 
Commission indicated that it would not be consistent with its 
interpretation of the requirement to rely on an MOU or other 
arrangement if, whether by the terms of any relevant agreement, under 
provisions of local law, or in light of prior practice, consultation or 
cooperation with the foreign regulatory authority restricts the 
Commission's ability to conduct timely inspections and examinations of 
the books and records in the foreign office of the nonresident SBS 
Entity.\309\
---------------------------------------------------------------------------

    \307\ Id.
    \308\ Id.
    \309\ Id.
---------------------------------------------------------------------------

2. Commission Action
    The commenters that addressed the issue supported the proposition 
that the certification and opinion of counsel could take into account 
MOUs with and others actions of the relevant foreign regulatory 
authorities.\310\ In particular, commenters suggested that MOUs could 
help to facilitate the needed access to books and records. One 
commenter noted that ``some conflicts with blocking and secrecy laws 
can be successfully addressed [with arrangements with home country 
regulators], resulting in direct access to records,'' \311\ while 
another recommended that the Commission allow the certification and 
opinion to rely on MOUs and similar tools because ``the SEC may still 
obtain personal data through MOUs and other similar tools, which are 
permitted under GDPR.'' \312\ A third commenter stated that the 
``Commission should address [. . .] conflicts with personal data 
protection laws through MOUs with the appropriate foreign regulatory 
agencies'' because the MOUs would provide the Commission with ``access 
to protected personal data.'' \313\
---------------------------------------------------------------------------

    \310\ See EBF letter at 2-3; ISDA letter at 12; IIB/SIFMA letter 
at 23-24.
    \311\ See EBF Letter at 2-3.
    \312\ See ISDA Letter at 12.
    \313\ See IIB/SIFMA Letter at 24.
---------------------------------------------------------------------------

    After consideration of these comments, the Commission is providing 
guidance, consistent with the standard we are adopting in Rule 15Fb2-1, 
as discussed above, that a nonresident SBS Entity's certification and 
opinion of counsel may take into account whether the relevant 
regulatory authority in a foreign jurisdiction has entered into a 
memorandum of understanding, agreement, protocol, or other regulatory 
arrangement providing the Commission with adequate assurances of (1) 
prompt access to the books and records of the nonresident SBS Entity, 
and (2) the ability of the nonresident SBS Entity to submit to onsite 
inspection or examination by the Commission. The certification and 
opinion of counsel may also take into account an applicant's 
understanding of the general experience with the foreign jurisdiction's 
application of the relevant local law or rule. Accordingly, if an 
applicant reasonably believes that there is nothing in local law that 
would interfere with the Commission's ability to examine the applicant, 
the applicant may take into account that experience as well in making 
the certification or obtaining the opinion of counsel. An applicant 
could form a reasonable belief, for example, if it had been able to 
provide access to Commission staff or other U.S. regulators without 
difficulty in the past, and there have been no changes in local law 
that would materially alter the circumstances surrounding the 
applicant's past experience.
    Again consistent with the standard we are adopting in Rule 15Fb2-1, 
the Commission believes that it is appropriate as well for a 
nonresident SBS Entity's certification and opinion of counsel to take 
into account a Commission determination granting substituted 
compliance, in accordance with Rule 3a71-6(c)(3), to a jurisdiction in 
which the SBS Entity maintains its covered books and records.

H. Requests for Substituted Compliance

1. Proposed Approach
    As noted in the Proposing Release, the guidance regarding the 
certification and opinion of counsel requirements in Rule 15Fb2-4 also 
would be relevant to Exchange Act Rule 3a71-6, which allows SBS 
Entities to comply with certain requirements under Section 15F of the 
Exchange Act through substituted compliance.\314\ Paragraph (c)(2)(ii) 
of Rule 3a71-6 provides that substituted compliance requests by parties 
or groups of parties--other than foreign financial regulatory 
authorities--must include the certification and opinion of counsel 
required in connection with SBS Entity registration as if such party 
were subject to that requirement at the time of the request.\315\ By 
contrast, substituted compliance requests submitted by foreign 
regulatory authorities are not required to be accompanied by a 
certification or opinion of counsel.\316\ Rather, foreign financial 
regulatory authorities may make substituted compliance requests only if 
they provide adequate assurances that no law or policy of any relevant 
foreign jurisdiction would impede the ability of any entity that is 
directly supervised by the foreign financial regulatory authority and 
that may register with the Commission as an SBS Entity to provide the 
Commission with prompt access to the entity's books or records, or to 
submit to on-site inspection and examination by the

[[Page 6299]]

Commission.\317\ The Commission further explained in the Proposing 
Release that the guidance outlined in Parts III.C.1, III.D.1, III.E.1, 
III.F.1, and III.G.1 above regarding the application of the 
certification and opinion of counsel requirements would inform the 
Commission's assessment of any certification and opinion of counsel, or 
assurances from a foreign financial regulatory authority, submitted in 
connection with a substituted compliance request.\318\
---------------------------------------------------------------------------

    \314\ Exchange Act Rule 3a71-6; see also Proposing Release, 84 
FR at 24233-34.
    \315\ Exchange Act Rule.3a71-6(c)(2)(ii).
    \316\ Exchange Act Rule 3a71-6(c)(3).
    \317\ Id.
    \318\ See Proposing Release, 84 FR at 24233 & n.206.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted the time needed to 
consider substituted compliance requests and welcomed submission of 
substituted compliance requests with respect to any of its final rules 
for which substituted compliance is potentially available.\319\ The 
Commission noted that it would consider all such requests, including 
those submitted without a certification or opinion of counsel, though a 
request by parties or groups of parties who are not foreign regulatory 
authorities would not be considered complete until a certification and 
opinion are filed.\320\ Accordingly, the Commission encouraged 
potential applicants to begin the process of requesting substituted 
compliance as soon as practicable.\321\ The Commission cautioned, 
however, that this did not mean that the Commission would grant any 
application for substituted compliance until any required certification 
and opinion of counsel are filed.\322\
---------------------------------------------------------------------------

    \319\ See Proposing Release, 84 FR at 24233-34.
    \320\ See id. at 24234. For the avoidance of doubt, Rule 15Fb2-
1(d)(2) is not relevant to substituted compliance requests.
    \321\ See id.
    \322\ See id.
---------------------------------------------------------------------------

2. Commission Action
    The Commission continues to believe that the guidance outlined in 
Parts III.C to III.G above regarding the scope and content of the 
certification and opinion of counsel requirement in Rule 15Fb2-4 also 
should be relevant to any certification and opinion of counsel from a 
registrant or potential registrant pursuant to Exchange Act Rule 3a71-
6(c)(2)(ii) in connection with a substituted compliance request. The 
certification and opinion of counsel required in connection with a 
substituted compliance request submitted by a party or group of parties 
other than a foreign financial regulatory authority are identical to 
the certification and opinion of counsel required in connection with 
SBS Entity registration.\323\
---------------------------------------------------------------------------

    \323\ See Exchange Act Rule 3a71-6(c)(2)(ii). Similarly, the 
Commission continues to believe that relevant aspects of the 
guidance outlined in Parts III.D to III.F above should inform the 
Commission's assessment of whether a foreign financial regulatory 
authority has provided the assurances required pursuant to Exchange 
Act Rule 3a71-6(c)(3) in connection with a substituted compliance 
request submitted by a foreign financial regulatory authority.
---------------------------------------------------------------------------

    Some commenters urged the Commission to revise Rule 3a71-6 so as to 
eliminate the requirement for a certification and opinion (in the case 
of substituted compliance requests made by parties or groups of parties 
who are not foreign financial regulatory authorities) and for adequate 
assurances (in the case of substituted compliance requests made by 
foreign financial regulatory authorities).\324\ These commenters argued 
that the Commission no longer needs this certification and opinion or 
assurances, given the Commission's proposed 24-month grace period for 
delivery of the certification and opinion required in connection with 
registration of a non-resident SBS Entity, as discussed above in Part 
III.B.\325\ Nevertheless, the certification, opinion of counsel, and 
assurances required in connection with substituted compliance 
applications remain relevant despite the Commission's adoption of 
changes to Exchange Act Rule 15Fb2-1. These requirements serve to 
assure the Commission regarding its ability to evaluate a registrant's 
compliance with the federal securities laws. For any requirements for 
which the Commission permits the use of substituted compliance, 
compliance with the federal securities laws would be measured by 
reference to the registrant's compliance with a foreign financial 
regulatory system. Any impediments to the Commission's ability to 
access a registrant's books and records thus could impede its ability 
to evaluate the registrant's compliance with the foreign requirements. 
Further, unlike in the context of SBS Entity registration, Exchange Act 
Rule 3a71-6(a)(2)(ii) requires the Commission to enter into supervisory 
and enforcement cooperation arrangements as a necessary component of 
substituted compliance. In the substituted compliance context, 
impediments to the Commission's ability to access a registrant's books 
and records have the potential to impede effective cooperation with the 
relevant foreign financial regulatory authority. As the Commission 
noted when it proposed the substituted compliance framework, these 
cooperation arrangements were intended to express the commitment of the 
Commission and the foreign financial regulatory authority or 
authorities to cooperate with each other to fulfill their respective 
regulatory mandates.\326\ This commitment, as expressed through the 
substituted compliance cooperation arrangement, is critical for the 
Commission to be able to interpret, evaluate, and enforce requirements 
for which substituted compliance is available. The Commission thus is 
retaining the certification, opinion, and adequate assurances 
requirements of Rule 3a71-6.
---------------------------------------------------------------------------

    \324\ See EBF letter at 5-6 (arguing that the Commission no 
longer requires assurances regarding access to substituted 
compliance users' books and records given the Commission's proposal 
to permit a delay in the delivery of the certification and opinion 
of counsel required in connection with SBS Entity registration); 
IIB/SIFMA letter at 25 (arguing that the certification, opinion of 
counsel and assurances requirements served only to prevent the 
Commission from having to consider substituted compliance requests 
from a jurisdiction with legal barriers that prevent access to 
registrants' books and records); ISDA letter at 14-15 (arguing that 
the issues that would warrant delaying delivery of the certification 
and opinion of counsel required in connection with SBS Entity 
registration also would impede delivery of a certification and 
opinion of counsel in connection with substituted compliance 
requests).
    \325\ See EBF letter at 5-6; IIB/SIFMA letter at 25; ISDA letter 
at 14-15.
    \326\ 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 30968, 31088 (May 23, 2013) (``Cross-Border Proposing 
Release'').
---------------------------------------------------------------------------

    Commenters also argued that, if the Commission is unable to issue 
final substituted compliance determinations ahead of the compliance 
date for registration of SBS Entities, the Commission should issue 
temporary substituted compliance determinations for the same foreign 
requirements for which the CFTC has issued comparability determinations 
and related no-action relief regarding certain swap dealer 
requirements.\327\ One commenter further suggested that all requests 
for substituted compliance submitted at least six months before the 
compliance date for SBS Entity registration and not adjudicated before 
that date should be deemed granted until 18 months after the Commission 
completes its review.\328\ As discussed below in Part X.B, the 
Commission has considered commenters' concerns regarding the time 
needed to plan for SBS Entity registration, and is providing potential 
registrants more than 18 additional months to prepare for the 
compliance date for SBS Entity

[[Page 6300]]

registration. The Commission believes that this time period also is 
sufficient for it to complete consideration of substituted compliance 
applications, and thus aims to complete consideration of timely 
substituted compliance applications in advance of the compliance date 
for SBS Entity registration. To achieve that goal, the Commission 
welcomes requests for substituted compliance ahead of the compliance 
date for SBS Entity registration, including those submitted without a 
certification or opinion of counsel, and encourages potential 
applicants to begin the process of requesting substituted compliance as 
soon as practicable.\329\ The Commission expects to work closely with 
applicants for substituted compliance, including both potential 
registrants and relevant foreign financial regulatory authorities. 
Because the Commission does not expect its consideration of timely 
substituted compliance applications to be delayed beyond the compliance 
date for SBS Entity registration, the Commission believes it 
unnecessary to adopt a framework for provisional substituted 
compliance. Should the Commission determine that, despite diligent 
efforts of the staff, potential registrants, and authorities, it 
requires additional time to complete consideration of a substituted 
compliance application, appropriate relief tailored to specific 
circumstances may be considered.
---------------------------------------------------------------------------

    \327\ See EBF letter at 6; IIB/SIFMA letter at 32; ISDA letter 
at 15; Credit Suisse/UBS letter at 2-3.
    \328\ See IIB/SIFMA letter at 32.
    \329\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43957.
---------------------------------------------------------------------------

I. Other

    Rule 15Fb2-4(c)(2) requires a nonresident SBS Entity to re-certify 
within 90 days after any changes in the legal or regulatory framework 
that would impact the ability of the SBS Entity to provide, or the 
manner in which it would provide prompt access to its books and 
records, or would impact the ability of the Commission to inspect and 
examine the SBS Entity. The SBS Entity would be required as well to 
submit a revised opinion of counsel describing how, as a matter of law, 
the SBS Entity will continue to meet its obligations. Commenters have 
identified concerns with the rule as drafted, and provided thoughtful 
suggestions regarding steps the Commission could take to address the 
underlying concern of ensuring the Commission's continued prompt access 
to books and records and the ability of the SBS Entity to submit to 
onsite inspection and examination by the Commission.\330\ In this 
regard, the Commission will continue to remain available to provide 
assistance regarding issues that may arise in connection with the SBS 
Entity's obligation to update its certification and opinion of counsel 
upon changes in the relevant foreign laws.
---------------------------------------------------------------------------

    \330\ See IIB/SIFMA at 26-27. Among other things, IIB/SIFMA 
suggests that the Commission should clarify what would constitute a 
reasonable approach for a nonresident security-based swap dealer to 
identify changes in the laws covered by its certification and 
opinion of counsel, and that the nonresident security-based swap 
dealer conduct its review of applicable law in connection with the 
compliance review that would take place in connection with annual 
reports of the Chief Compliance Office under Exchange Act Rule 15Fk-
1(c). Under this approach, a nonresident security-based swap dealer 
would be required to notify the Commission of any issue within 90 
days of the annual review and in connection with such notice, to 
propose a plan for addressing the issue.
---------------------------------------------------------------------------

IV. Amendment to Commission Rule of Practice 194

A. Proposed Approach

    Commission Rule of Practice 194 \331\ governs the process by which 
SBS Entities may apply to the Commission for relief from the statutory 
disqualification prohibition set forth in Section 15F(b)(6) of the 
Exchange Act.\332\ As outlined in the proposal, the Commission proposed 
new paragraph (c)(2) of Rule of Practice 194 to both (1) address 
concerns raised by commenters before and after the Commission adopted 
its SBS Entity registration rules relating to the application of the 
prohibition in Exchange Act Section 15F(b)(6) to associated persons of 
SBS Entities who are not U.S. persons and who do not interact with U.S. 
persons,\333\ and (2) to harmonize the Commission's rules more closely 
with the CFTC's approach to statutory disqualification as it applies to 
the activities of non-U.S. associated persons.\334\ As proposed, 
paragraph (c)(2) of Rule of Practice 194 would provide an exclusion, 
subject to certain limitations, from the statutory disqualification 
prohibition in Section 15F(b)(6) of the Exchange Act for an SBS Entity 
with respect to an associated person who is a natural person who (1) is 
not a U.S. person and (2) does not effect and is not involved in 
effecting security-based swap transactions with or for counterparties 
that are U.S. persons, other than a security-based swap transaction 
conducted through a foreign branch of a counterparty that is a U.S. 
person.\335\
---------------------------------------------------------------------------

    \331\ See Applications by Security-Based Swap Dealers or Major 
Security-Based Swap Participants for Statutorily Disqualified 
Associated Persons To Effect or Be Involved in Effecting Security-
Based Swaps,'' Exchange Act Release No. 84858 (Dec. 19, 2018), 84 FR 
4906-47. (Feb. 19, 2019) (``Rule of Practice 194 Adopting 
Release'').
    \332\ See 15 U.S.C. 78o-10(b)(6)), which provides that, 
``[e]xcept to the extent otherwise specifically provided by rule, 
regulation, or order of the Commission, it shall be unlawful for a 
security-based swap dealer or a major security-based swap 
participant to permit any person associated with a security-based 
swap dealer or a major security-based swap participant who is 
subject to a statutory disqualification to effect or be involved in 
effecting security-based swaps on behalf of the security-based swap 
dealer or major security-based swap participant, if the security-
based swap dealer or major security-based swap participant knew, or 
in the exercise of reasonable care should have known, of the 
statutory disqualification.''
    \333\ See Proposing Release, 84 FR at 24238 n.235.
    \334\ See id. at 24238-39.
    \335\ See id. at 24238-42, 24290.
---------------------------------------------------------------------------

    The Commission also proposed that an SBS Entity would not be able 
to avail itself of the exclusion from the prohibition in Exchange Act 
Section 15F(b)(6) set forth in proposed paragraph (c)(2) with respect 
to an associated person if that associated person is currently subject 
to an order described in subparagraphs (A) and (B) of Section 3(a)(39) 
of the Exchange Act,\336\ with the limitation that an order by a 
foreign financial regulatory authority described in subparagraphs 
(B)(i) and (B)(iii) of Section 3(a)(39) shall only apply to orders by a 
foreign financial regulatory authority in the jurisdiction where the 
associated person is employed or located.\337\
---------------------------------------------------------------------------

    \336\ Generally, Exchange Act Section 3(a)(39) defines the 
circumstances that would subject a person to a statutory 
disqualification with respect to membership or participation in, or 
association with a member of, an SRO. See 15 U.S.C. 78c(a)(39).
    \337\ See Proposing Release, 84 FR at 24238-42, 24290.
---------------------------------------------------------------------------

B. Commission Action

    In soliciting comments on proposed new paragraph (c)(2), the 
Commission noted that in the Registration Adopting Release, the 
Commission included an interpretation of the scope of the phrase 
``involved in effecting security-based swaps,'' as that phrase is used 
in Exchange Act Section 15F(b)(6).\338\ The Commission stated in the 
Registration Adopting Release that the term ``involved in effecting 
security-based swaps'' generally means engaged in functions necessary 
to facilitate the SBS Entity's security-based swap business, including, 
but not limited to the following activities: (1) Drafting and 
negotiating master agreements and confirmations; (2) recommending 
security-based swap transactions to counterparties; (3) being involved 
in executing security-based swap transactions on a trading desk; (4) 
pricing security-based swap positions; (5) managing collateral for the 
SBS Entity; and (6) directly supervising

[[Page 6301]]

persons engaged in the above-described activities.\339\ The Commission 
requested comment on whether, based on the above-mentioned 
interpretation: (1) There are additional categories of non-U.S. 
associated persons of an SBS Entity that should be excluded from the 
statutory disqualification prohibition in Section 15F(b)(6); and, (2) 
if so, to describe the functions carried out by such non-U.S. 
associated persons of an SBS Entity and why commenters believe those 
functions do not present the types of concerns addressed by the 
prohibition on associating with a statutorily disqualified person.\340\
---------------------------------------------------------------------------

    \338\ See id. at 24242 (Question 7).
    \339\ See id. at 24242, n. 268 (citing Registration Adopting 
Release, 80 FR at 48974, 48976); see also id. at 24213, n. 61.
    \340\ See id. at 24242.
---------------------------------------------------------------------------

    Certain commenters addressed proposed Rule of Practice 194(c)(2) 
specifically.\341\ Although all such commenters supported proposed Rule 
of Practice 194(c)(2), these commenters also expressed that the scope 
of non-U.S. associated persons subject to the Commission's statutory 
disqualification prohibition and questionnaire recordkeeping 
requirement is still overly broad.\342\ These commenters requested that 
the Commission further narrow the scope of non-U.S. persons subject to 
these requirements to include only non-U.S. front-office associated 
persons who solicit or accept security-based swaps with U.S. persons or 
who supervise such persons and, in turn, to exclude non-U.S. middle- or 
back-office associated persons.\343\ In general, the commenters state 
that including middle- and back-office functions within the scope of 
the statutory disqualification provision would sweep in numerous 
additional associated persons as compared to the CFTC's approach to the 
parallel statutory disqualification provision under the CEA.\344\ These 
commenters suggest that, by modifying proposed Rule of Practice 
194(c)(2) to more closely track the CEA definition of ``associated 
person of a swap dealer or major swap participant,'' \345\ the 
Commission could exclude non-U.S. middle- or back-office associated 
persons from the statutory disqualification prohibition and thus the 
questionnaire recordkeeping requirement.\346\ They state that this 
approach would more closely harmonize the Commission's statutory 
disqualification prohibition with the CFTC's approach to its analogous 
statutory disqualification prohibition.\347\
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    \341\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA 
letter at 3, 16; see also email from Tilman Lueder, Head of 
Securities Markets Unit, European Commission, dated Sept. 10, 2019 
(``European Commission email'') (providing estimates from six 
unspecified EBF member firms on the number of associated persons 
potentially impacted under four possible scenarios, including 
adopting Rule of Practice 194(c)(2) as proposed or with further 
modifications to exclude certain middle- or back-office functions).
    \342\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA 
letter at 3, 16.
    \343\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA 
letter at 3, 16.
    \344\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA 
letter at 3, 16. CEA Section 4s(b)(6) parallels the statutory 
disqualification prohibition under Exchange Act Section 15F(b)(6). 
See 7 U.S.C. 6s(b)(6); see also CFTC Regulation 23.22 (promulgating 
the statutory disqualification prohibition in CEA Section 4s(b)(6) 
under the CFTC's regulations).
    \345\ 7 U.S.C Sec.  1a(4) (with respect to the CEA, ``[t]he term 
`associated person of a swap dealer or major swap participant' means 
a person who is associated with a swap dealer or major swap 
participant as a partner, officer, employee, or agent (or any person 
occupying a similar status or performing similar functions), in any 
capacity that involves (i) the solicitation or acceptance of swaps; 
or (ii) the supervision of any person or persons so engaged''); see 
also 17 CFR 1.3 (CEA Regulation defining associated person of a swap 
dealer or major swap participant).
    \346\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter 
at 16.
    \347\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter 
at 16.
---------------------------------------------------------------------------

    For example, one commenter argues that including middle- and back-
office functions within the scope of the statutory disqualification 
provision would sweep in ``a great number of additional persons . . . 
because financial institutions tend not to organize those functions to 
be focused on a single jurisdiction such as the United States (e.g., 
when negotiating global master agreements), but rather serve the entire 
swap business holistically, and which tend to be harder to canvas under 
home country laws, given that they have no trading authority.'' \348\ 
Similarly, another commenter argues that, with respect to these middle- 
or back-office associated persons, ``[t]heir discretion is frequently 
constrained in respects that make the potential for bad acts that could 
harm counterparties very limited, not only through detailed procedures 
but also multiple layers of controls.'' \349\ According to that 
commenter, while the benefits of subjecting these middle- or back-
office associated persons to the statutory disqualification requirement 
in Section 15F(b)(6) would be relatively low, the costs of extending 
this requirement to these associated persons, on the other hand, would 
be quite high.\350\ This same commenter also states that the number of 
associated persons implicated by the Commission's current 
interpretation would be ``significant,'' that many of them would be 
located outside the United States, and that these associated persons 
frequently perform functions for a broad range of products not limited 
to security-based swaps.\351\
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    \348\ EBF Letter at 6.
    \349\ IIB/SIFMA Letter at 30; see also id. (also suggesting that 
if the Commission does not adopt the commenter's recommendation, the 
Commission should instead adopt an exclusion for associated persons 
``who neither engage in these front office functions nor exercise 
managerial or other discretionary, supervisory authority over the'' 
security-based swap business of an SBS Dealer in order to be 
consistent with FINRA's approach to operations professionals as 
provided in FINRA Rule 1220(b)(3)).
    \350\ See id. This commenter did not provide supporting data 
regarding the magnitude of these purported benefits or costs.
    \351\ Id. This commenter did not provide supporting data 
regarding the number of associated persons impacted by its 
recommendation.
---------------------------------------------------------------------------

    In response to the proposal, European Commission staff asked 
certain EBF members to provide estimates of the number of associated 
persons that may be potentially impacted under four different 
scenarios: (Scenario 1) if proposed Rule of Practice 194(c)(2) is not 
adopted (i.e., the status quo without proposed paragraph (c)(2)); 
(Scenario 2) if proposed Rule of Practice 194(c)(2) is adopted, as 
proposed, without modification; (Scenario 3) if proposed Rule of 
Practice 194(c)(2) is adopted, as proposed, but modified to also 
exclude associated persons involved in drafting and negotiating master 
agreements and confirmations and managing collateral for the SBS 
Entity; and (Scenario 4) if proposed Rule of Practice 194(c)(2) is 
adopted, as proposed, but modified to exclude all associated persons 
identified in Scenario 3, as well as associated persons involved in 
structuring or supervisory functions (i.e., only sales and trading 
associated persons would be considered ``involved in effecting'' 
security-based swap transactions).\352\ European Commission staff 
provided estimates from six unspecified EBF member firms, which show 
that adopting the amendment as proposed may reduce the number of 
associated persons impacted by the statutory prohibition by 
approximately 54%, with a range of estimates between 20% and 85%, as 
well as further reductions in the number of associated persons impacted 
by the prohibition for Scenarios 3 and 4, which are discussed 
below.\353\
---------------------------------------------------------------------------

    \352\ See European Commission email.
    \353\ See id.
---------------------------------------------------------------------------

    After considering the commenters' views, the Commission is adopting 
Rule of Practice 194(c)(2) as proposed. As a threshold matter, in 
response to the commenters' general suggestion that the Commission 
modify proposed Rule of Practice 194(c)(2) to more closely track the 
CEA definition of ``associated person of a swap dealer or major swap

[[Page 6302]]

participant,'' \354\ it is important to note that Exchange Act Section 
3(a)(70) generally defines the term ``persons associated with'' an SBS 
Entity more broadly than the CEA defines associated person of a swap 
dealer or major swap participant.\355\ The Exchange Act definition 
includes, among other persons, any employee of an SBS Entity,\356\ 
while the CEA definition is limited to persons acting in any capacity 
that involves the solicitation or acceptance of swaps or the 
supervision of any person or persons so engaged.\357\ However, the 
Exchange Act definition generally excludes persons performing functions 
that are solely clerical or ministerial, which would include middle- or 
back-office associated persons of SBS Entities solely performing such 
functions.\358\
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    \354\ See note 345, supra.
    \355\ Compare 15 U.S.C. 78c(a)(70) with 7 U.S.C Sec.  1a(4).
    \356\ See 15 U.S.C. 78c(a)(70).
    \357\ See 7 U.S.C Sec.  1a(4).
    \358\ See 15 U.S.C. 78c(a)(70)(B).
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    Additionally, while the Commission adopted an exclusion for 
associated person entities in Rule of Practice 194(c)(1),\359\ the 
Commission continues to believe that replacing an associated person 
that is a natural person that is effecting or involved in effecting 
security-based swap transactions because of a statutory 
disqualification would not create the same practical issues and 
possible market disruption as moving the services, such as cash and 
collateral management services, provided by an associated person entity 
to another entity.\360\ Further, the Commission is not revising its 
prior interpretation of the scope of the phrase ``involved in effecting 
security-based swaps,'' as it is used in Exchange Act Section 
15F(b)(6), by adopting the modifications to the proposal recommended by 
commenters.\361\ Revising the Commission's prior interpretation to 
either carve out all \362\ or some \363\ middle- or back-office 
functions would be inconsistent with the Commission's analogous 
interpretation of the term ``effecting transactions'' in the context of 
securities transactions.\364\ As the Commission explained, effecting 
transactions in securities includes more than just executing trades or 
forwarding orders for execution.\365\ Generally, effecting securities 
transactions also can include, for example, participating in the 
transactions through a number of activities such as screening potential 
participants in a transaction for creditworthiness, facilitating the 
execution of a transaction, and handling customer funds and 
securities.\366\
---------------------------------------------------------------------------

    \359\ See 17 CFR 201.194(c).
    \360\ See Rule of Practice 194 Adopting Release, at 4911; see 
also Applications by Security-Based Swap Dealers or Major Security-
Based Swap Participants for Statutorily Disqualified Associated 
Persons To Effect or Be Involved in Effecting Security-Based Swaps, 
Exchange Act Release No. 75612 (Aug. 5, 2015), 80 FR 51684, 51695 
(Aug. 25, 2015) (proposing release).
    \361\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA 
letter at 3, 16.
    \362\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA 
letter at 3, 16.
    \363\ See European Commission email (suggesting in Scenario 3, 
outlined above, excluding associated persons involved in drafting 
and negotiating master agreements and confirmations and managing 
collateral for the SBS Entity).
    \364\ See Registration Adopting Release, 80 FR at 48976, n. 99 
(citing, for example, Definition of Terms in and Specific Exemptions 
for Banks, Savings Associations, and Savings Banks Under Sections 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange 
Act Release No. 44291 (May 11, 2001), 66 FR 27760, 27772-73 (May 18, 
2001)).
    \365\ See id.
    \366\ See id. The Commission notes that we are not addressing 
broker-dealer registration here. As a general matter, broker-dealer 
registration will depend on the specific facts and circumstances of 
each particular situation.
---------------------------------------------------------------------------

    Moreover, revising the Commission's interpretation as these 
commenters suggest would narrow the scope of the term ``involved in 
effecting'' such that it would have the same meaning as the term 
``effect.'' However, as the Commission observed in the Registration 
Adopting Release, the statutory provision on disqualification in 
Section 15F(b)(6) of the Exchange Act includes the phrase ``involved in 
effecting,'' separately and in addition to ``effecting.'' \367\ The 
Commission stated previously that it understands that the inclusion of 
two separate terms in Section 15F(b)(6) to mean that the terms have 
different meanings, and that the term ``involved in effecting'' 
includes a broader range of activities than simply ``effecting'' 
security-based swap transactions.\368\ Accordingly, the Commission 
explained that ``it would be inappropriate to focus solely on the 
persons that effect transactions and not also on those that are 
involved more broadly in these key aspects of the process necessary to 
facilitate transactions, because persons involved in these key aspects 
of the process have the ability, through their conduct (intentional or 
unintentional), to increase risks to investors, counterparties and the 
markets.'' \369\
---------------------------------------------------------------------------

    \367\ See Registration Adopting Release, 80 FR at 48976.
    \368\ See id.
    \369\ See id.
---------------------------------------------------------------------------

    In addition, if any of the modifications recommended by these 
commenters are adopted, it would create an inconsistent application of 
the statutory prohibition for associated persons involved in effecting 
security-based swap transactions with or for counterparties that are 
U.S. persons. That inconsistency would result in certain associated 
persons being excluded from the statutory prohibition--even though they 
are involved in the security-based swap market in the United States--
simply because those persons are located outside the United States and 
their firms have organized their back-offices to service the entire 
swap and security-based swap business irrespective of jurisdiction.
    As discussed in Part VI.C below, this inconsistency may result in 
competitive disparities between U.S. and non-U.S. statutorily 
disqualified persons in middle- and back-office functions. Indeed, 
based on the estimates provided to the European Commission by EBF 
member firms, the potential for competitive disadvantage is not 
trivial. For example, and as outlined in Part VI.C, two of the 
alternative scenarios provided by EBF member firms may reduce the scope 
of application of the statutory prohibition with respect to non-U.S. 
associated persons--even though they may be involved in the security-
based swap market in the United States--by an average of 38%, for 
Scenario 3 relative to the proposal (with estimates ranging between 20% 
and 80% for Scenario 3), and by an average of 66% for Scenario 4 
relative to the proposal (with estimates ranging of between 45% and 87% 
for Scenario 4).\370\
---------------------------------------------------------------------------

    \370\ See Part VI.C.3.f (Table 4, Panel B, of the Economic 
Analysis).
---------------------------------------------------------------------------

    We also note that, even without the modification recommended by 
these commenters, the amendments to Rule 18a-5 as adopted, which are 
discussed below,\371\ will reduce the burden on firms with respect to 
the questionnaire requirements for non-U.S. associated persons. For 
example, subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-
5, as adopted, provide that a questionnaire or application for 
employment executed by an associated person who is not a U.S. person 
need not include all of the information described in paragraphs 
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5, 
unless the SBS Entity (1) is required to obtain such information under 
applicable law in the jurisdiction in which the associated person is 
employed or located or (2) obtains such information in conducting a 
background check that is customary for such firms in that jurisdiction, 
and the creation or

[[Page 6303]]

maintenance of records reflecting that information would not result in 
a violation of applicable law in the jurisdiction in which the 
associated person is employed or located.\372\
---------------------------------------------------------------------------

    \371\ See generally Part V.
    \372\ See id. As discussed below, these subparagraphs would 
apply to an associated person who is not a U.S. person (as defined 
in Exchange Act Rule 3a71-3(a)(4)(i)(A)) that effects or is involved 
in effecting security-based swaps transactions on behalf of an SBS 
Entity with certain U.S persons.
---------------------------------------------------------------------------

    Finally, and most importantly, the Commission believes that the 
modification recommended by these commenters would undermine important 
investor protections provided by the statutory disqualification 
provision in Section 15F(b)(6) of the Exchange Act. As the Commission 
noted in the Rule of Practice 194 Adopting Release, Exchange Act 
Section 15F(b)(6) is designed to limit the potential that associated 
persons who have engaged in certain types of ``bad acts'' will be able 
to negatively affect the security-based swap market and the 
participants in that market.\373\ The Commission has also stated that 
it is concerned principally with those transactions that appear likely 
to affect the integrity of the security-based swap market in the United 
States and the U.S. financial markets more generally or that raise 
concerns about the protection of participants in those markets.\374\ 
The Commission has also noted that the risk of fraud and other 
misconduct may be increased and the counterparty protection benefits of 
the disqualification provision may be reduced if, for instance, persons 
involved in structuring security-based swaps, facilitating execution, 
or handling customer funds and securities are excepted from the 
statutory disqualification provision.\375\ For example, and as also 
discussed in Part VII.D below, allowing statutorily disqualified 
associated persons to manage the collateral for an SBS Entity in 
connection with security-based swap transactions with or for 
counterparties that are U.S. persons may give rise to higher compliance 
and counterparty risks to U.S. counterparties and, thus, the U.S. 
security-based swap market.\376\
---------------------------------------------------------------------------

    \373\ See Rule of Practice 194 Adopting Release, 84 FR at 4909.
    \374\ See Proposing Release, 84 FR at 24215 n. 79 (citing 
Business Conduct Adopting Release, 81 FR at 30065); see also id. at 
24235, 24240 (discussing the same).
    \375\ See Registration Adopting Release, 80 FR at 49011.
    \376\ See, e.g., id. at 48976.
---------------------------------------------------------------------------

    The data outlined by the Commission in the Rule of Practice 194 
Adopting Release suggests that, based on analogous disqualification 
review processes in swap and broker-dealer settings, individuals 
engaged in misconduct are more likely to engage in repeated 
misconduct.\377\ Similarly, the Commission noted that, although there 
is a dearth of evidence of misconduct in swap and security-based swap 
markets, the Commission recognizes research in other settings 
reflecting that: (1) Past misconduct may predict future misconduct 
risk; (2) markets may penalize some disclosed misconduct, and (3) 
market participants engaging in misconduct generally suffer 
reputational costs.\378\ As a result, the Commission believes that the 
statutory disqualification and the inability to continue associating 
with SBS Entities may create disincentives for engaging in misconduct.
---------------------------------------------------------------------------

    \377\ See Rule of Practice 194 Adopting Release, 84 FR at 4928-
33.
    \378\ See id. at 4923.
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is 
adopting Rule of Practice 194(c)(2) as proposed.

V. Modifications to Rule 18a-5

A. Proposed Approach

    In the Proposing Release the Commission proposed to modify proposed 
Rule 18a-5.\379\ Exchange Act 18a-5 was originally proposed in the 
Recordkeeping and Reporting Proposing Release, which proposed 
recordkeeping, reporting, and notification requirements applicable to 
SBS Entities, securities count requirements applicable to certain SBS 
Entities, and additional recordkeeping requirements applicable to 
broker-dealers to account for their security-based swap and swap 
activities.\380\ Rule 18a-5 has since been adopted.\381\ As described 
in the Recordkeeping and Reporting Proposing Release, the Commission 
originally proposed Exchange Act Rule 18a-5 (patterned after Exchange 
Act Rule 17a-3, the recordkeeping rule for registered broker-dealers), 
to establish recordkeeping standards for stand-alone and bank SBS 
Entities.\382\ As adopted, paragraphs (a)(10) and (b)(8) of Rule 18a-5 
require that a stand-alone or bank SBS Entity, respectively, make and 
keep current a questionnaire or application for employment for each 
associated person who effects or is involved in effecting security-
based swaps on the SBS Entity's behalf.\383\ Rule 18a-5 requires that 
the questionnaire or application for employment include the associated 
person's identifying information, business affiliations for the past 
ten years, relevant disciplinary history, relevant criminal record, and 
place of business, among other things.\384\
---------------------------------------------------------------------------

    \379\ See Proposing Release, 84 FR at 24242.
    \380\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers; Capital Rule for Certain Security-Based Swap 
Dealers, Exchange Act Release No. 91958 (Ap. 13, 2014), 79 FR at 
25205 (May 2, 2014) ``Recordkeeping and Reporting Proposing 
Release'').
    \381\ See Recordkeeping and Reporting Adopting Release.
    \382\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25205
    \383\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68558 (``these associated person recordkeeping requirements apply to 
natural persons and not to legal entities that may be associated 
persons.'').
    \384\ See Exchange Act Rule 18a-5(a)(10) and (b)(8), 
Recordkeeping and Reporting Adopting Release, 84 FR at 68558.
---------------------------------------------------------------------------

    Based on comments received in response to the Recordkeeping and 
Reporting Proposing Release and the Cross-Border Proposing Release, the 
Commission proposed, in the Proposing Release, to modify proposed Rule 
18a-5 to provide flexibility with respect to the questionnaire 
requirement as applied to certain associated persons of both stand-
alone and bank SBS Entities.\385\ Thus, the Commission proposed to 
modify proposed Rule 18a-5 by adding two subparagraphs to provide 
separate exemptions under both paragraph (a)(10) and paragraph (b)(8).
---------------------------------------------------------------------------

    \385\ See Proposing Release, 84 FR at 24242.
---------------------------------------------------------------------------

1. Exemption Based on the Exclusion From the Prohibition Under Section 
15F(b)(6)
    As described in the Proposing Release, the questionnaire 
requirement is intended to serve as a basis for a background check of 
the associated person to verify that the person is not subject to 
statutory disqualification under Section 15(b)(6) of the Exchange Act, 
and so to support the certification required under Rule 15Fb6-2(b). The 
addition of subparagraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) would 
provide that a stand-alone or bank SBS Entity is not required to make 
and keep current a questionnaire or application for employment with 
respect to an associated person if the stand-alone or bank SBS Entity 
is excluded from the prohibition in Section 15F(b)(6) of the Exchange 
Act with respect to that associated person. These proposed 
modifications were designed to complement the Commission's proposed 
amendments to Rule of Practice 194, which would have provided an 
exclusion from the prohibition in Section 15F(b)(6) of the Exchange Act 
with respect to an associated person who is not a U.S. person and does 
not effect and is not involved in effecting security-based

[[Page 6304]]

swap transactions with or for counterparties that are U.S. persons, 
other than a security-based swap transaction conducted through a 
foreign branch of a counterparty that is a U.S. person, subject to 
certain conditions.
    As a result, under proposed subparagraphs (a)(10)(iii)(A) and 
(b)(8)(iii)(A), a stand-alone or bank SBS Entity generally would not be 
required to obtain the questionnaire or application for employment, 
otherwise required by Rule 18a-5, with respect to any associated person 
who is not a U.S. person and who does not effect and is not involved in 
effecting security-based swap transactions with or for counterparties 
that are U.S. persons (other than a security-based swap transaction 
conducted through a foreign branch of a counterparty that is a U.S. 
person), subject to certain conditions. More specifically, proposed 
subparagraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) would have provided 
that a stand-alone or bank SBS Entity would not be required to make and 
keep current a questionnaire or application for employment with respect 
to any associated person if the SBS Entity is excluded from the 
prohibition in Exchange Act 15F(b)(6) with respect to that associated 
person.
2. Exemption Based on Local Law
    The Commission also proposed to modify Rule 18a-5 by adding 
subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to address situations 
where the law of a non-U.S. jurisdiction in which an associated person 
is employed or located may prohibit a stand-alone or bank SBS Entity 
from receiving, creating or maintaining a record of any of the 
information mandated by the questionnaire requirement. These 
subparagraphs would apply to an associated person who is not a U.S. 
person (as defined in Exchange Act Rule 3a71-3(a)(4)(i)(A)),\386\ and 
who effects or is involved in effecting security-based swaps 
transactions on behalf of an SBS Entity. As proposed, the addition of 
subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5 would 
have permitted the exclusion of certain information mandated by the 
questionnaire requirement with respect to those associated persons if 
the receipt of that information, or the creation or maintenance of 
records reflecting such information, would result in a violation of 
applicable law in the jurisdiction in which the associated person is 
employed or located.\387\ As explained in the Proposing Release, rather 
than fully excluding these associated persons from the questionnaire 
requirement, the exclusion would provide that the stand-alone or bank 
SBS Entity need not record information mandated by the questionnaire 
requirement with respect to such associated persons if the receipt of 
that information, or the creation or maintenance of records reflecting 
such information, would result in a violation of applicable law in the 
jurisdiction in which the associated person is employed or 
located.\388\
---------------------------------------------------------------------------

    \386\ Exchange Act Rule 3a71-3(a)(4)(i)(A) defines the term U.S. 
person to mean, with respect to natural persons, ``a natural person 
resident in the United States.''
    \387\ The SBS Entity would still need to record, on the 
questionnaire or application, information that would not violate 
local law (an associated person's name, address, etc.).
    \388\ To the extent an nonresident SBS Entity is able to rely on 
either paragraph (a)(10)(iii)(A) or (b)(8)(iii)(A) with respect to a 
particular associated person, the Commission explained that firm 
would not need to also rely on the relief provided under 
(a)(10)(iii)(B) or (b)(8)(iii)(B) because the firm would be exempt 
from the questionnaire requirement with respect to that associated 
person. See Proposing Release, 84 FR at 24243, n.281.
---------------------------------------------------------------------------

    The Commission explained that this proposed change was designed to 
address commenters' concerns, and would provide stand-alone and bank 
SBS Entities with flexibility to not record information that might 
result in a violation of the law in the jurisdiction in which the 
associated person is employed or located, while continuing to require 
that they record information not restricted by the law in that 
jurisdiction. In addition, the Commission stated that stand-alone and 
bank SBS Entities should still make and keep current information 
included in the questionnaire requirement that would not result in a 
violation of local law.

B. Commission Action

    The Commission solicited comment on all aspects of these proposed 
modifications to Rule 18a-5. Two commenters wrote in support of this 
proposed rule change.\389\ One commenter requested that the Commission 
further clarify that, in performing reasonable due diligence, SBS 
Entities are not expected to take actions that would violate applicable 
privacy laws in the jurisdiction where the associated person is located 
or employed.\390\
---------------------------------------------------------------------------

    \389\ See EBF letter at 6-7; IIB/SIFMA letter at 30.
    \390\ See EBF letter at 7.
---------------------------------------------------------------------------

    For the reasons discussed in the proposal,\391\ and after 
consideration of the comments, the Commission is adopting these new 
subparagraphs to Rule 18a-5, but is modifying subparagraphs 
(a)(10)(iii)(B) and (b)(8)(iii)(B) to provide that a questionnaire or 
application for employment executed by an associated person who is not 
a U.S. person need not include the information described in paragraphs 
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5, 
unless the SBS Entity (1) is required to obtain such information under 
applicable law in the jurisdiction in which the associated person is 
employed or located or (2) obtains such information in conducting a 
background check that is customary for such firms in that jurisdiction, 
and the creation or maintenance of records reflecting that information 
would not result in a violation of applicable law in the jurisdiction 
in which the associated person is employed or located. We modified 
these paragraphs to provide greater clarity as to what information, 
generally required by 18a-5(a)(10)(i) and (b)(8)(i), an SBS Entity 
could exclude from an employee's questionnaire or application.
---------------------------------------------------------------------------

    \391\ See Proposing Release, 84 FR at 24243-4.
---------------------------------------------------------------------------

    Every SBS Entity must still comply with Section 15F(b)(6) of the 
Exchange Act and Rule 15Fb6-2 with respect to every associated person 
who effects or is involved in effecting security-based swaps on behalf 
of the SBS Entity absent an exclusion from the statutory 
disqualification prohibition in Section 15F(b)(6) of the Exchange Act, 
in which case, as set forth in subparagraphs (a)(10)(iii)(A) and 
(b)(8)(iii)(A), the SBS Entity is not required to make and keep current 
a questionnaire or application for employment executed by an associated 
person. The questionnaire requirement is, in part, designed to serve as 
a basis for a background check of the associated person who is a 
natural person and who effects or is involved in effecting security-
based swap transactions on the SBS Entity's behalf to verify that the 
person is not subject to statutory disqualification. As we explained in 
the Registration Adopting Release, the rules do not specify what steps 
an SBS Entity should take to perform a background check.\392\ While the 
required employment questionnaire or application includes a significant 
amount of information that can be helpful to determine whether an 
associated person may be subject to a statutory disqualification, we 
believe financial institutions already take steps to verify the 
background of their employees.\393\ Firms have flexibility in the 
manner in which they perform background checks, as long as those checks 
provide them with sufficient comfort to certify that none of the SBS

[[Page 6305]]

Entity's employees who effect or are involved in effecting security-
based swaps on the SBS Entity's behalf is subject to a statutory 
disqualification, except as specifically permitted by rule, regulation 
or order of the Commission.\394\
---------------------------------------------------------------------------

    \392\ Registration Adopting Release, 80 FR at 48977.
    \393\ Id.
    \394\ Id.
---------------------------------------------------------------------------

    We further believe that such background checks conducted using 
procedures that are either legally required or customary in the 
relevant non-U.S. jurisdictions, as outlined above in new subparagraphs 
(a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5,\395\ would constitute 
reasonable due diligence on which a Chief Compliance Officer (or his or 
her designee) \396\ could rely, in the absence of red flags that are in 
the firm's possession, when signing the associated person certification 
required by Rule 15Fb6-2.\397\
---------------------------------------------------------------------------

    \395\ Exchange Act Rule 18a-5 requires that SBS Entities 
maintain records that provide a basis for assessing compliance with 
the statutory disqualification prohibition set forth in Section 
15F(b)(6) of the Exchange Act and related Exchange Act Rule 15Fb6-2. 
See Recordkeeping and Reporting Adopting Release, 84 FR at 68558. 
Accordingly, and as provided in new subparagraphs (a)(10)(iii)(B) 
and (b)(8)(iii)(B) of Rule 18a-5, if an SBS Entity is (1) required 
to obtain the information described in paragraphs (a)(10)(i)(A) 
through (H) and (b)(8)(i)(A) through (H) under applicable law in the 
jurisdiction in which the associated person is employed or located 
or (2) obtains such information in conducting a background check 
that is customary for such firms in that jurisdiction, Rule 18a-5 
requires such SBS Entity to create and maintain a record reflecting 
that information, unless the creation or maintenance of records 
reflecting that information would result in a violation of 
applicable law in the jurisdiction in which the associated person is 
employed or located.
    \396\ Exchange Act Rule 15Fb6-2(b) requires that a registrant's 
Chief Compliance Officer ``or his or her designee'' must review and 
sign the questionnaire or application for employment. While the 
designee could be a person who reports directly to the Chief 
Compliance Officer, the Chief Compliance Officer also could 
designate a person such as a person in the registrant's Human 
Resources or other, similar department.
    \397\ Exchange Act Rule 15Fb6-2(b) provides: ``(b) To support 
the certification required by paragraph (a) of this section, the 
security-based swap dealer's or major security-based swap 
participant's Chief Compliance Officer, or his or her designee, 
shall review and sign the questionnaire or application for 
employment, which the security-based swap dealer or major security-
based swap participant is required to obtain pursuant to the 
relevant recordkeeping rule applicable to such security-based swap 
dealer or major security-based swap participant, executed by each 
associated person who is a natural person and who effects or is 
involved in effecting security based swaps on the security-based 
swap dealer's or major security-based swap participant's behalf. The 
questionnaire or application shall serve as a basis for a background 
check of the associated person to verify that the person is not 
subject to statutory disqualification.''
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VI. Economic Analysis

    The Commission is mindful of the economic effects, including the 
costs and benefits, of the adopted amendments and guidance. Section 
3(f) of the Exchange Act provides that whenever the Commission is 
engaged in rulemaking pursuant to the Exchange Act and is required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, the Commission shall also consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation.\398\ In addition, 
Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the impact such rules 
would have on competition.\399\ Exchange Act Section 23(a)(2) also 
provides that the Commission shall not adopt any rule which would 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
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    \398\ See 15 U.S.C. 78c(f).
    \399\ See 15 U.S.C. 78w(a)(2).
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    The analysis below addresses the likely economic effects of the 
adopted amendments, including the anticipated and estimated benefits 
and costs of the amendments and their likely effects on efficiency, 
competition, and capital formation. The Commission also discusses the 
potential economic effects of certain alternatives to the approaches 
taken in this release. The Commission is providing guidance and 
interpretive positions in this release. Any comments on the substance 
of the guidance and interpretations are discussed above.\400\ To the 
extent that a regulated person would have acted differently than what 
is provided in the interpretations, there may be economic consequences 
attached to the rules as interpreted.
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    \400\ See Parts II and III, supra.
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    Many of the benefits and costs discussed below are difficult to 
quantify. For example, the Commission cannot quantify the costs that 
potentially could result from competitive disparities associated with 
the exception to Rule 3a71-3 because these costs will depend, in part, 
on foreign regulatory requirements applicable to non-U.S. entities. 
This is because the extent to which a non-U.S. entity would need to 
develop or modify systems to allow it and its majority-owned affiliate 
to meet the conditions of the exception likely depends on the extent to 
which the non-U.S. entity's local regulatory obligations differ from 
analogous conditions of the exception. These potential costs could also 
depend on the business decisions of non-U.S. persons that may avail 
themselves of the exception. Furthermore, the likelihood of a non-U.S. 
entity availing itself of the exception depends on whether the non-U.S. 
entity is regulated in a listed jurisdiction, a determination that, in 
turn, depends on the foreign regulatory regime. Also, in connection 
with the amendments to Commission Rule of Practice 194, the Commission 
has no data or information allowing us to quantify the number of 
disqualified non-U.S. employees transacting with foreign counterparties 
or foreign branches of U.S. counterparties on behalf of U.S. and non-
U.S. SBS Entities; the direct costs of relocating disqualified U.S. 
personnel outside of the United States for U.S. and non-U.S. SBS 
Entities; or reputational and compliance costs of U.S. and non-U.S. SBS 
Entities from continuing to transact through disqualified non-U.S. 
associated persons with foreign counterparties and foreign branches of 
U.S. counterparties. Therefore, while the Commission has attempted to 
quantify economic effects where possible, much of the discussion of 
economic effects is qualitative in nature.

A. Baseline

    To assess the economic effects of the amendments, the Commission is 
using as the baseline the security-based swap market as it exists at 
the time of this release, including applicable rules the Commission has 
already adopted, but excluding rules the Commission has proposed but 
not yet finalized. 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,\401\ the Cross-Border Adopting Release, the SDR Rules and Core 
Principles Adopting Release,\402\ and the Rule of Practice 194 Adopting 
Release.\403\ Additionally, the baseline includes rules that have been 
adopted but for which compliance is not yet required, including the ANE 
Adopting Release, Registration Adopting Release,\404\ Regulation SBSR 
Amendments Adopting Release,\405\

[[Page 6306]]

Business Conduct Adopting Release,\406\ Capital, Margin, and 
Segregation Adopting Release,\407\ and the Recordkeeping and Reporting 
Adopting Release \408\ 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 discuss available data from the security-based swap 
market, security-based swap market participants and dealing structures, 
market-facing and non-market-facing activities of dealing entities, 
security-based swap market activity, global regulatory efforts, other 
markets and existing regulatory frameworks, estimates of persons that 
may use the exception to Rule 3a71-3, estimates of persons for which 
the Market Color Guidance may be relevant, statutory disqualification, 
certification, opinion of counsel, and employee questionnaires.
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    \401\ See Intermediary Definitions Adopting Release, 77 FR at 
30596.
    \402\ See Security-Based Swap Data Repository Registration, 
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb. 
11, 2015), 80 FR 14438 (Mar. 19, 2015) (``SDR Rules and Core 
Principles Adopting Release'').
    \403\ See Rule of Practice 194 Adopting Release, 84 FR at 4906.
    \404\ See Registration Adopting Release, 80 FR 48964.
    \405\ See Reporting and Dissemination of Security-Based Swap 
Information, Exchange Act Release No. 78321 (Jul. 14, 2016), 81 FR 
53546, 53590-91 (Aug. 12, 2016) (``Regulation SBSR Amendments 
Adopting Release'').
    \406\ See Business Conduct Adopting Release.
    \407\ See Capital, Margin, and Segregation Adopting Release, 84 
FR 43872.
    \408\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68550.
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1. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part, 
by available data on security-based swap transactions, though the 
Commission acknowledges that limitations in the data limit the extent 
to which it is possible to quantitatively characterize the market.\409\ 
The Commission's analysis of the current state of the 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 2017. The details of this 
data set, including its limitations, have been discussed in a prior 
release.\410\
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    \409\ The Commission also relies on qualitative information 
regarding market structure and evolving market practices provided by 
commenters and knowledge and expertise of Commission staff.
    \410\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68623-24.
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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 the TIW sample, 
and include, but are not limited to, investment companies, pension 
funds, private (hedge) funds, sovereign entities, and industrial 
companies. A discussion of security-based swap market participants can 
be found in a prior release.\411\
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    \411\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.
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(b) Security-Based Swap Market Participant Domiciles
    The security-based swap market is global in nature with 
participants from different countries transacting with one another. A 
discussion of the domicile of security-based swap market participants 
can be found in a prior release.\412\
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    \412\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43972.
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(c) Market Centers
    A market participant's domicile, however, does not necessarily 
correspond to where it engages in security-based swap activity. In 
particular, non-U.S. persons engaged in security-based swap dealing 
activity operate in multiple market centers and carry out such activity 
with counterparties around the world.\413\ 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 underlying 
security is traded. Thus, although a significant amount of the dealing 
activity in security-based swaps on U.S. reference entities involves 
non-U.S. dealers, the Commission understands that these dealers tend to 
carry out much of the security-based swap trading and related risk-
management activities in these security-based swaps within the United 
States.\414\ 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.
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    \413\ See ANE Adopting Release, 81 FR at 8604 n.56.
    \414\ See id. n.58.
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    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 supplemented with legal entity location data 
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, Paris, Zurich, Tokyo, Hong Kong, Chicago, 
Sydney, Toronto, Frankfurt, Singapore, and the Cayman Islands.\415\
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    \415\ 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. The legal entity 
location data are from Avox.
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    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. Market activity may also 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
    A non-U.S. person 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 non-U.S. person may weigh differently.
    A non-U.S. person 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.\416\ Alternatively, a non-U.S. person 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. Some non-
U.S. persons may book transactions originating in a particular region 
to an affiliate established in a

[[Page 6307]]

jurisdiction located in that region.\417\ A non-U.S. person may choose 
to book its security-based swap transactions in one jurisdiction in 
part to avoid triggering regulatory requirements associated with 
another jurisdiction.
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    \416\ See ANE Adopting Release, 81 FR at 8604.
    \417\ There is some indication that this booking structure is 
becoming increasingly common in the market. See, e.g., Catherine 
Contiguglia, ``Regional Swaps Booking Replacing Global Hubs,'' 
Risk.net, Sept. 4, 2015, 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.
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    Regardless of where a non-U.S. person 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 non-U.S. person 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,\418\ for example, when 
counterparty's home financial markets are closed. A non-U.S. person 
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 utilize 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. Some non-U.S. persons 
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.
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    \418\ 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.
---------------------------------------------------------------------------

    The non-U.S.-person 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 non-U.S. person may determine that another of its 
affiliates 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 market-facing 
activity on its behalf in that jurisdiction. In these cases, the 
affiliate that books these transactions and its affiliated agent may 
operate as an integrated dealing business, each performing distinct 
core functions in carrying out that business.
    Alternatively, the non-U.S.-person affiliate that books these 
transactions may in some circumstances determine to engage the services 
of an unaffiliated agent through which it can engage in market-facing 
activity. For example, a non-U.S. person 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.\419\ A non-
U.S. person may also use unaffiliated agents that operate at its 
direction. Such an arrangement may be particularly valuable in enabling 
a non-U.S. person to service clients or access liquidity in 
jurisdictions in which it has no security-based swap operations of its 
own.
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    \419\ The Commission understands 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.
---------------------------------------------------------------------------

    The Commission understands that non-U.S.-person affiliates (whether 
affiliated with U.S.-based non-U.S. persons or not) that are 
established in foreign jurisdictions may use any of these structures to 
engage in dealing activity in the United States, and that they may seek 
to engage in dealing activity in the United States to transact with 
both U.S.-person and non-U.S.-person counterparties. In transactions 
with non-U.S.-person counterparties, these foreign affiliates may 
affirmatively seek to engage in dealing activity in the United States 
because the sales personnel of the non-U.S.-person dealer (or of its 
agent) in the United States have existing relationships with 
counterparties in other locations (such as Canada or Latin America) or 
because the trading personnel of the non-U.S.-person dealer (or of its 
agent) in the United States have the expertise to manage the trading 
books for security-based swaps on U.S. reference securities or 
entities. The Commission understands that some of these foreign 
affiliates engage in dealing activity in the United States through 
their personnel (or personnel of their affiliates) in part to ensure 
that they are able to provide their own counterparties, or those of 
non-U.S.-person affiliates in other jurisdictions, with access to 
liquidity (often in non-U.S. reference entities) during U.S. business 
hours, permitting them to meet client demand even when the home markets 
are closed. In some cases, such as when seeking to transact with other 
dealers through an interdealer broker, these foreign affiliates may 
act, in a dealing capacity, in the United States through an 
unaffiliated, third-party agent.
3. Market-Facing and Non-Market-Facing Activities
    As discussed in the Proposing Release, the activities of a 
security-based swap dealer involve both market-facing activities and 
non-market-facing activities.\420\ Market-facing activities would 
include arranging, negotiating, or executing a security-based swap 
transaction. The terms ``arrange'' and ``negotiate'' indicate market-
facing activity of sales or trading personnel in connection with a 
particular transaction, including interactions with counterparties or 
their agents. The term ``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. Non-market-facing activities include processing trades and other 
back-office activities; designing security-based swaps without engaging 
in market-facing activity in connection with specific transactions; 
preparing underlying documentation including negotiating master 
agreements (as opposed to negotiating with the counterparty the 
specific economic terms of a particular security-based swap 
transaction); and clerical and ministerial tasks such as entering 
executed transactions on a non-U.S. person's books.
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    \420\ See Proposing Release, 84 FR at 24215.
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4. Security-Based Swap Market Activity
    As already noted, firms that act as dealers play a central role in 
the security-based swap market. These dealers transact with hundreds or 
a thousand or more counterparties. A discussion of activity in the 
security-based swap market is available in a prior release.\421\
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    \421\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68625-27.
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5. Global Regulatory Efforts
    The amendments and guidance relate to non-U.S.-person dealers that 
may be subject to foreign regulations of their security-based swap 
activities that are similar to regulations that may apply to them 
pursuant to Title VII. A discussion

[[Page 6308]]

of foreign regulatory efforts, including margin and capital 
requirements, is available in a prior release.\422\
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    \422\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43979-80.
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6. Other Markets and Existing Regulatory Frameworks
    The numerous financial markets are integrated, often attracting the 
same market participants that trade across corporate bond, swap, and 
security-based swap markets, among others. A discussion of other 
markets and existing regulatory frameworks can be found in a prior 
release.\423\
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    \423\ See Rule of Practice 194 Adopting Release, 84 FR at 4927.
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7. Estimates of Persons That May Use the Exception to Rule 3a71-3
    To analyze the economic effects of the exception to Rule 3a71-3, 
the Commission has analyzed 2017 TIW data to identify persons that may 
use the exception. The Commission believes that these persons fall into 
several categories, which are discussed below.
(a) Non-U.S. Persons Seeking to Reduce Assessment Costs
    One category of persons that may use the exception are those non-
U.S. persons that may need to assess the amount of their market-facing 
activity against the de minimis thresholds solely because of the 
inclusion of security-based swap transactions between two non-U.S. 
persons that are arranged, negotiated, or executed by personnel located 
in the U.S. for the purposes of the de minimis threshold analysis. 
These non-U.S. persons may have an incentive to rely on the exception 
as a means of avoiding assessment \424\ and business restructuring if 
the cost of compliance associated with the exception is less than 
assessment costs and the costs of business restructuring. In the ANE 
Adopting Release, the Commission provided an estimate of this category 
of persons.\425\ However, in light of the reduction in security-based 
swap market activity since the publication of the ANE Adopting 
Release,\426\ the Commission believes that it would be appropriate to 
update that estimate to more accurately identify the set of persons 
that potentially may use the exception. Analyses of the 2017 TIW data 
indicate that approximately five non-U.S. persons,\427\ beyond those 
non-U.S. persons likely to incur assessment costs in connection with 
the other cross-border counting rules that the Commission previously 
had adopted in the Cross-Border Adopting Release,\428\ are likely to 
exceed the $2 billion threshold \429\ the Commission has previously 
employed to estimate the number of persons likely to incur assessment 
costs under Exchange Act Rule 3a71-3(b). These non-U.S. persons may 
have an incentive to rely on the exception as a means of avoiding 
assessment if the cost of compliance associated with the exception is 
less than the assessment costs.
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    \424\ These non-U.S. persons may incur assessment costs to 
determine whether their covered inter-dealer security-based swap 
positions exceed the $50 billion cap (see Part II.C.1, supra). 
However, these non-U.S. persons may not find it necessary to count 
toward the $50 billion threshold if their total covered inter-dealer 
security-based swap positions is less than $50 billion or they 
restructure their security-based swap business to avoid engaging in 
such covered positions. To the extent that this is true, it may 
still benefit these non-U.S. persons to rely on the exception to 
avoid assessing the amount of security-based swap transactions 
between two non-U.S. persons that are arranged, negotiated, or 
executed by personnel located in the U.S. for the purposes of the de 
minimis threshold analysis.
    \425\ See ANE Adopting Release, 81 FR at 8627.
    \426\ See Part VI.A.4, supra.
    \427\ Adjustments to these statistics from the ANE Adopting 
Release reflect further analysis of the TIW data. Cf. ANE Adopting 
Release, 81 FR at 8627 (providing an estimate of 10 additional non-
U.S. persons based on 2014 TIW data).
    \428\ See Proposing Release, 84 FR at 24208 n.13.
    \429\ See ANE Adopting Release, 81 FR at 8626.
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(b) Non-U.S. Persons Seeking To Avoid Security-Based Swap Dealer 
Regulation
    Another category of persons that potentially may use the exception 
are those non-U.S. persons whose dealing transaction volume would have 
fallen below the $3 billion de minimis threshold if their transactions 
with non-U.S. counterparties were not counted toward the de minimis 
threshold under the current ``arranged, negotiated, or executed'' 
counting requirement, but absent the exception, would have dealing 
transactions in excess of that threshold.\430\ Such non-U.S. persons 
may choose to use the exception if they expect the compliance cost 
associated with the exception to be lower than the compliance cost 
associated with being subject to the full set of security-based swap 
dealer regulation and the cost of business restructuring. The 
Commission's analysis of 2017 TIW data indicates that there is one non-
U.S. person whose transaction volume would have fallen below the $3 
billion de minimis threshold if that person's transactions with non-
U.S. counterparties were not counted toward the de minimis threshold 
under the current ``arranged, negotiated, or executed'' counting 
requirement.\431\
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    \430\ The $3 billion threshold is being used to help identify 
potential impacts of the exception. A phase-in threshold of $8 
billion currently is in effect. See Exchange Act Rule 3a71-2(a)(1).
    \431\ The analysis begins by considering the single-name CDS 
transactions of each of the non-U.S. persons against both U.S.-
person and non-U.S.-person counterparties. The Commission then 
excluded transactions involving these non-U.S. persons and their 
non-U.S. person counterparties. For this analysis, we assume that 
all transactions between non-U.S. person dealers and non-U.S. 
counterparties are arranged, negotiated, or executed using U.S. 
personnel.
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(c) U.S. Dealing Entities Considering Changes to Booking Practices
    A third category of persons that potentially may use the exception 
are those U.S. dealers that use U.S. personnel to arrange, negotiate, 
or execute transactions with non-U.S. counterparties. Such dealers may 
consider booking future transactions with non-U.S. counterparties to 
their non-U.S. affiliates, while still using U.S. personnel to arrange, 
negotiate, or execute such transactions. These U.S. dealers may have an 
incentive to engage in such booking practices in order to utilize the 
exception to the extent that they wish to continue using U.S. personnel 
to arrange, negotiate, or execute transactions with non-U.S. 
counterparties and the compliance cost associated with the exception is 
less than the cost of compliance with Title VII requirements (if they 
choose not to book transactions to avail themselves of the exception) 
and the cost of business restructuring (if they choose to both book 
transactions to their non-U.S. affiliates and also refrain from using 
U.S. personnel to arrange, negotiate, or execute such 
transactions).\432\ The Commission's analysis of 2017 TIW data 
indicates that there are six U.S. dealers who transact with non-U.S. 
counterparties, who are likely to register as security-based swap 
dealers,\433\ and have non-U.S. affiliates that also transact in the 
CDS market. To the extent that these U.S. dealers anticipate booking 
future transactions with non-U.S. counterparties that are arranged, 
negotiated, or executed by U.S. personnel to their non-U.S. affiliates, 
the Commission believes that these U.S. dealers may potentially make 
use of the exception.
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    \432\ The Commission recognizes that this potential use of the 
exception by U.S. dealing entities is distinct from the rationale 
underlying the exception, which is to help avoid market 
fragmentation and operational risks resulting from the relocation of 
U.S. personnel by non-U.S. dealers. See Proposing Release, 84 FR at 
24231. Nonetheless, such changes in booking practices by U.S. 
dealing entities might be a consequence of the exception.
    \433\ To the extent that U.S. persons with transaction volumes 
that are insufficient to trigger dealer registration potentially 
might also make use of the exception, this estimate would be a lower 
bound estimate of the number of U.S. persons that potentially may 
make use of the exception.

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[[Page 6309]]

(d) Additional Considerations and Summary
    The economic analysis of the exception depends, in part, on whether 
non-U.S. persons that might make use of the exception have U.S. 
affiliates that are likely to register as security-based swap dealers 
or are registered broker-dealer affiliates.\434\ Of the six non-U.S. 
persons discussed above,\435\ four have majority-owned affiliates that 
are registered broker-dealers. Of the same six non-U.S. persons, one 
has a majority-owned affiliate that is likely to register as a 
security-based swap dealer. Of the six U.S. persons discussed above, 
all have majority-owned affiliates that are registered broker-dealers, 
and all have majority-owned affiliates that are likely to register as 
security-based swap dealers. Of these 12 persons, eight are banks, and 
three are affiliated with banks. These estimates are summarized in 
Table 1 below. The Commission's analysis of the security-based swap 
market \436\ indicates that these 12 persons transacted with 807 non-
U.S. counterparties, of which 558 participate in the swap markets and 
249 do not.
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    \434\ As discussed in Part VI.B.1, infra, non-U.S. persons that 
already have an affiliated registered security-based swap dealer or 
affiliated registered broker-dealer likely would use their existing 
registered affiliates to rely on the exception rather than register 
new entities. For these non-U.S. persons, the costs of complying 
with the conditions associated with the exception likely would be 
lower than the per-entity costs reported in Table 3, which are based 
on the de novo formation of a security-based swap dealer or broker-
dealer.
    \435\ Calculated as the 5 non-U.S. persons seeking to reduce 
assessment costs (see Part VI.A.7.a, supra) + 1 non-U.S. person 
seeking to avoid security-based swap dealer regulation (see Part 
VI.A.7.b, supra) = 6 non-U.S. persons.
    \436\ The analysis uses 2017 TIW data.

        Table 1--Affiliates of Persons That May Use the Exception
------------------------------------------------------------------------
  Persons identified in TIW data that may use
                 the exception                    Non-U.S.       U.S.
------------------------------------------------------------------------
Estimate......................................            6            6
Breakdown:
    Has majority-owned registered broker-                 4            6
     dealer affiliate.........................
    Has majority-owned affiliate likely to                1            6
     become registered security-based swap
     dealer...................................
    Is a bank.................................            4            4
    Is a bank affiliate.......................            1            2
------------------------------------------------------------------------

    In summary, the Commission's analysis of 2017 TIW data indicates 
that 12 persons \437\ may make use of the exception. In light of the 
uncertainty associated with this estimate \438\ and to account for 
potential growth of the security-based swap market, and consistent with 
the approach in the ANE Adopting Release, the Commission believes that 
it is reasonable to increase this estimate by a factor of two.\439\ As 
a result, the Commission estimates that up to 24 persons potentially 
may make use of the exception. The Commission also doubles the number 
of non-U.S. counterparties discussed above and estimates that persons 
that may make use of the exception may transact with up to 1,614 non-
U.S. counterparties, of which 1,116 participate in the swap markets and 
498 do not.\440\ In response to a commenter who noted the absence of an 
estimate of the security-based swap transaction activity potentially 
implicated by the exception,\441\ the Commission is providing an 
estimate of the security-based swap transactions that the 24 persons 
may engage in with non-U.S. counterparties. The Commission estimates 
that these 24 persons may transact up to 97,894 security-based swap 
transactions with an aggregate notional amount of $554 billion \442\ 
with the 1,614 non-U.S. counterparties. The Commission estimates that 
these transactions make up between 4.7% and 13.1% \443\ of the U.S. 
security-based swap market.
---------------------------------------------------------------------------

    \437\ Calculated as 5 non-U.S. persons seeking to reduce 
assessment costs (see Part VI.A.7.a, supra) + 1 non-U.S. person 
seeking to avoid security-based swap dealer regulation (see Part 
VI.A.7.b, supra) + 6 U.S. persons considering changes to booking 
practices (see Part VI.A.7.c, supra) = 12 persons.
    \438\ The estimate may be overinclusive, as it is unlikely that 
all transactions between two non-U.S. persons 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. See 
ANE Adopting Release, 81 FR at 8627.
    \439\ See id. The Commission does not believe increasing the 
estimate by a factor of two is arbitrary, as suggested by a 
commenter (see AFR letter at 4). The security-based swap market 
could grow in the future such that the number of persons that may 
use the exception could exceed the 12 persons that the Commission 
estimated from the 2017 TIW data. Further, as discussed in note 438, 
supra, there is uncertainty associated with the estimate of 12 
persons due to limitations of the TIW data, which suggests that the 
number of persons that may use the exception could exceed 12. In 
light of these considerations and consistent with the approach in 
the ANE Adopting Release, the Commission believes that it is 
reasonable to increase the estimate by a factor of two.
    \440\ See Part VI.B.3.a, infra, where we use these estimates to 
calculate certain costs associated with an additional alternative.
    \441\ See AFR letter at 4.
    \442\ The Commission estimates that the 12 persons identified in 
the 2017 TIW data engaged in 48,947 single-name CDS transactions 
with an aggregate notional amount of $277 billion with their non-
U.S. counterparties. To address potential growth in the market and 
data related uncertainty, and consistent with the approach in the 
ANE Adopting Release, the Commission has doubled the number of 
transactions and aggregate notional amount to, respectively, 97,894 
transactions and $554 billion. See Part VI.A.4, supra.
    \443\ In the 2017 TIW data, the Commission estimates that there 
are 372,445 single-name CDS transactions with an aggregate notional 
amount of $5,962 billion. To address potential growth in the market 
and data related uncertainty, and consistent with the approach in 
the ANE Adopting Release, the Commission estimates that there are 
372,445 x 2 = 744,890 security-based swap transactions with an 
aggregate notional amount of $5,962 billion x 2 = $11,924 billion in 
the U.S. security-based swap market. In terms of transaction count, 
the set of security-based swap transactions that may be subject to 
the conditional exception makes up 97,894/744,890 x 100 = 13.1% of 
the U.S. security-based swap market. In terms of aggregate notional 
amount, this set of transactions makes up 554/11,924 x 100 = 4.7% of 
the U.S. security-based swap market.
---------------------------------------------------------------------------

8. Statutory Disqualification
    In the Rule of Practice 194 Adopting Release, the Commission 
analyzed, among others, data on the number of natural persons 
associated with SBS Entities, applications for review under parallel 
review processes, and relevant research on statutory disqualification. 
In that release, the Commission estimated that SBS Entities may file up 
to five applications per year with respect to their associated natural 
persons. A more detailed discussion of these data and estimates can be 
found in that release.\444\ If associated natural persons who become 
statutorily disqualified are located outside of the U.S. and effect or 
are involved in effecting transactions solely with foreign 
counterparties and foreign branches of U.S. counterparties, the 
amendment may decrease the number of these applications for relief and 
corresponding direct costs.
---------------------------------------------------------------------------

    \444\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.

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

[[Page 6310]]

    The Commission has received comments \445\ concerning the potential 
impact of the proposed approach on the number of associated persons 
subject to the statutory prohibition relative to the baseline, as 
summarized in Table 2 below.
---------------------------------------------------------------------------

    \445\ See European Commission email, summarized in Table 4 below 
and showing that 6 market participants estimated that the proposal 
may reduce the scope of associated persons within the statutory 
prohibition by an average of approximately 54%, with a range of 
estimates between 20% and 85%.

                      Table 2--Estimates of Associated Persons Affected by the Proposal 446
      [Panel A. Market Participant Estimates of the Number of Associated Persons Affected by the Proposal]
----------------------------------------------------------------------------------------------------------------
             Estimate                  Bank 1       Bank 2       Bank 3       Bank 4       Bank 5       Bank 6
----------------------------------------------------------------------------------------------------------------
Baseline \447\....................        3,750  2,150-2,250        2,100        2,100        1,340       >6,800
Proposal \448\....................        1,125  1,350-1,400      700-800  \449\ 1,680      650-750       >1,000
----------------------------------------------------------------------------------------------------------------

 
    [Panel B. Percentage Reduction in Associated Persons Based on Data Provided by 6 Market Participants] 450
-----------------------------------------------------------------------------------------------------------------
          Estimate               Average       Minimum       Maximum
----------------------------------------------------------------------------------------------------------------
Proposal....................          54%           20%           85%
----------------------------------------------------------------------------------------------------------------

    In the proposing release, the Commission estimated that the 
exclusion may reduce the number of applications under Rule of Practice 
194 by between zero and two applications. As summarized in Panel B of 
Table 2, the Commission has received estimates that the proposal may 
reduce the scope of associated persons subject to the statutory 
prohibition by an average of 54%, with a range of between 20% and 85%. 
In the Rule 194 Adopting Release that forms part of this economic 
baseline, the Commission estimated that there may be as many as 5 
applications per year under Rule of Practice 194.\451\ Using the 
estimate of 5 applications per year under the baseline and the above 
range of between 20% and 85% reduction in the scope of natural persons 
subject to the statutory prohibition relative to baseline, the 
Commission now estimates that adopting the proposed approach may reduce 
the number of applications under Rule of Practice 194 by between one 
and four applications.\452\
---------------------------------------------------------------------------

    \446\ See European Commission email.
    \447\ Range of associated persons if global SBS associated 
persons are taken into account, with broad definition and accounting 
for back office.
    \448\ Remaining range of associated persons after accounting for 
potential reduction of this number when removing personnel with no 
U.S. person contacts.
    \449\ This figure represents an estimate of ``only those 
associated persons authorized to communicate directly with U.S. 
persons.''
    \450\ See European Commission email. Where a market participant 
provided a range, the percentage reduction was calculated using a 
midpoint of that range. When a market participant provided an 
estimate using ``over,'' the percentage reduction assumed the figure 
was exactly as reported, which may under-estimate the magnitude of 
the reduction relative to baseline.
    \451\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.
    \452\ This estimate is calculated as follows: 5 x 0.2 = 1 
application; 5 x 0.85 = 4.25 or, approximately, 4 applications.
---------------------------------------------------------------------------

9. Certification, Opinion of Counsel, and Employee Questionnaires
    As a baseline matter, SBS Entity Registration rules, including Rule 
15Fb2-1 and the certification and opinion of counsel requirements in 
Rule 15Fb2-4, have been adopted but compliance with registration rules 
is not yet required.
    In addition, Rule 17a-3(a)(12) requires all broker-dealers, 
including broker-dealers that may seek to register with the Commission 
as SBS Entities, to make and keep current a questionnaire or 
application for employment for each associated person. In the 
Recordkeeping and Reporting Adopting Release, the Commission adopted a 
parallel requirement, in Rule 18a-5, for stand-alone and bank SBS 
Entities. The Commission is adopting modifications to Rule 18a-5(a)(10) 
and Rule 18a-5(b)(8). Based on 2017 TIW data, of 22 non-U.S. persons 
that may register with the Commission as security-based swap dealers, 
the Commission estimates that approximately 12 security-based swap 
dealers will be foreign banks and another 3 will be foreign stand-alone 
security-based swap dealers that may be affected by these 
modifications.

B. Amendment to Rule 3a71-3

    This section discusses the potential costs and benefits associated 
with the amendment to Rule 3a71-3 and the effects of the amendment on 
efficiency, competition, and capital formation.
    Under the adopted alternative, each person that engages in 
arranging, negotiating, and executing activity with non-U.S. 
counterparties using affiliated U.S.-based personnel would have two 
possible options for complying with the Commission's Title VII 
regulations regarding the cross-border application of the ``security-
based swap dealer'' definition. The first option would be for the 
persons to follow current security-based swap dealer counting 
requirements without regard for the exception afforded by the 
amendment. Specifically, a person could opt to incur the assessment 
costs to determine (i) whether any portion of their security-based swap 
transaction activities must be counted against the dealer de minimis 
thresholds, and (ii) whether the total notional amount of relevant 
transaction activities exceeds the de minimis threshold.\453\ If the 
amount of its activities crosses the de minimis thresholds, then the 
person would have to register as a security-based swap dealer and 
become subject to Title VII security-based swap dealer requirements. A 
person that chooses to comply in this manner would experience no 
incremental economic effects under the exception as compared to the 
baseline.
---------------------------------------------------------------------------

    \453\ See Part II.A, supra.
---------------------------------------------------------------------------

    The second option would be to rely on the exception afforded by the 
amendment. Under the amendment, a person could register one entity as a 
security-based swap dealer or broker-dealer \454\ to arrange, 
negotiate, or execute transactions with non-U.S. counterparties on its 
behalf using personnel located in a U.S. branch or office. Doing so 
could allow it to avoid the direct regulation of itself (or multiple 
affiliated entities) as a security-based swap dealer. A person that 
chooses to use this exception and incur the associated costs to meet 
the conditions of this exception, detailed below, likely would not 
incur assessment costs with respect to

[[Page 6311]]

security-based swap transactions with non-U.S. counterparties that are 
arranged, negotiated, or executed by personnel located in the United 
States.
---------------------------------------------------------------------------

    \454\ Registration may not be required if, as discussed in Part 
VI.A.7, supra, persons who may take advantage of this exception 
already have affiliates that are registered and choose to use these 
registered entities to take advantage of the exception. See also 
Part VI.B.1.a, infra.
---------------------------------------------------------------------------

    As discussed above, the Commission believes that up to 24 \455\ 
persons potentially may use the exception to the extent that the 
compliance costs associated with the exception are lower than the 
compliance costs in the absence of the exception.
---------------------------------------------------------------------------

    \455\ See Part VI.A.7, supra.
---------------------------------------------------------------------------

1. Costs and Benefits of the Amendment
    The Commission believes that the amendment would provide increased 
flexibility to security-based swap market participants to comply with 
the Title VII framework while preserving their existing business 
practices. This could reduce their compliance burdens, while supporting 
the Title VII regime's benefit of mitigating risks in foreign security-
based swap markets that may flow into U.S. financial markets through 
liquidity spillovers. The Commission also believes that the amendments 
could reduce market fragmentation and associated distortions. At the 
same time, and as detailed later in this section, the Commission 
acknowledges that the amendment potentially limits certain other 
programmatic benefits of the Title VII regime by excusing security-
based swap market participants that elect to use the exception from 
some of the Title VII requirements that would otherwise apply to their 
activity. The Commission believes that the amendment will result in 
compliance costs for persons that elect to use the exception, as 
described below. However, the Commission expects that persons will 
elect to incur those costs only where it would be less costly than 
either complying with the Title VII framework or restructuring to avoid 
using U.S. personnel to arrange, negotiate, or execute transactions 
with non-U.S. counterparties.
(a) Costs and Benefits for Persons That May Use the Amendment
    The primary benefit of the amendment is that it would permit a 
person further flexibility to opt into a Title VII compliance framework 
that is compatible with its existing business practices. While the 
registered U.S. person would be the entity adhering to most of the 
conditions set forth in the amendment and the non-U.S. person would be 
responsible for complying with some of the other conditions,\456\ for 
the purposes of this analysis, the Commission assumes that the costs of 
complying with these conditions will be passed on to the non-U.S.-
person affiliate. In the absence of the amendment, a non-U.S. person 
could incur the cost of registering as a security-based swap dealer, 
and a financial group may incur the cost of registering at least one 
security-based swap dealer \457\ due to the ``arranged, negotiated, or 
executed'' counting test. The non-U.S. person or group accordingly 
would incur the cost necessary for compliance with the full set of 
security-based swap dealer requirements by one or more registered 
security-based swap dealers. These burdens, contingent on exceeding the 
de minimis threshold, are in addition to the assessment costs that the 
non-U.S. person would incur to identify and count relevant market-
facing activity toward the de minimis threshold.
---------------------------------------------------------------------------

    \456\ See, e.g., Exchange Act Rule 3a71-3(d)(1)(iii)(A).
    \457\ The available data limit the Commission's ability to 
discern the multiple different legal entities each of which engages 
in security-based swap market-facing activity at levels above the de 
minimis thresholds because the way in which non-U.S. persons 
organize their dealing business may not align with the way their 
transaction volumes are accounted for in TIW. In particular, it is 
possible that some of the 10 non-U.S. persons identified in the TIW 
data as potential registrants aggregate transaction volumes of 
multiple non-U.S.-person dealers. In such cases, the exclusion of 
transactions between these non-U.S.-person dealers and non-U.S. 
counterparties from the de minimis calculations may result in 
multiple non-U.S.-person dealers no longer meeting the de minimis 
threshold.
---------------------------------------------------------------------------

    As discussed in the ANE Adopting Release, such a non-U.S. person 
could respond to these costs by restructuring its security-based swap 
business to avoid using U.S. personnel to arrange, negotiate, or 
execute transactions with non-U.S. counterparties. Such a strategy 
would allow the non-U.S. person to avoid counting transactions between 
the non-U.S. person and its non-U.S. counterparties toward the non-U.S. 
person's de minimis threshold. In addition to reducing the likelihood 
of incurring the programmatic costs associated with the full set of 
security-based swap dealer requirements under Title VII, this response 
to current requirements could reduce the assessment costs associated 
with counting transactions toward the de minimis threshold and fully 
abrogate the need to identify transactions with non-U.S. counterparties 
that involve U.S. personnel.\458\
---------------------------------------------------------------------------

    \458\ In 2016, the Commission estimated a cost of $410,000 per 
entity to establish systems to identify market-facing activity 
arranged, negotiated, or executed using U.S. personnel and $6,500 
per entity per year for training, compliance and verification costs. 
See ANE Adopting Release, 81 FR at 8627. Adjusted for inflation, 
these amounts are respectively approximately $443,292 and $7,028 in 
2019 dollars. Unless otherwise stated, cost estimates in Part VI of 
this release are adjusted for CPI inflation using data from the 
Bureau of Labor Statistics through June 2019, where applicable.
---------------------------------------------------------------------------

    However, the Commission also noted in the ANE Adopting Release that 
restructuring is itself costly. To reduce the costs of assessment and 
potential dealer registration, a non-U.S. person may need to incur 
costs to ensure that U.S. personnel are not involved in arranging, 
negotiating, or executing transactions with non-U.S. counterparties. 
The Commission was able to quantify some, but not all of the costs of 
restructuring in the ANE Adopting Release.\459\ As discussed above in 
Part VI.A.2.d, non-U.S. persons may make their location decisions based 
on business considerations such as maintaining 24-hour operations or 
the value of local market expertise. Thus, restructuring business lines 
or relocating personnel (or the activities performed by U.S. personnel) 
to avoid the United States could result in less efficient operations 
for non-U.S. persons active in the security-based swap market.
---------------------------------------------------------------------------

    \459\ In 2016, the Commission estimated it would cost 
approximately $28,300 per entity to establish 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 market-facing activity. See ANE Adopting 
Release, 81 FR at 8628. Adjusted for inflation, this is 
approximately $30,598. The foregoing is one of the ways in which a 
non-U.S. person might choose to restructure its business activities. 
Other restructuring methods, such as the relocation of U.S. 
personnel to locations outside the United States, potentially would 
be more costly.
---------------------------------------------------------------------------

    The exception would benefit non-U.S. persons by offering them an 
alternative to costly relocation or restructuring that would still 
permit them to avoid some of the costs associated with assessing their 
market-facing activity while also reducing the likelihood that their 
market-facing activity crosses the de minimis threshold. As discussed 
in detail below, the availability of the exception would be conditioned 
on the use of a registered entity and compliance with certain Title VII 
requirements designed to protect counterparties but not all Title VII 
requirements. To the extent that the costs of compliance with these 
conditions are lower than the compliance costs in the absence of the 
amendment and the costs of business restructuring, the exception could 
reduce the regulatory cost burden for the non-U.S. person or group.
    The Commission recognizes that U.S.-based dealing entities may use 
the exception by booking transactions with non-U.S. counterparties into 
non-U.S. affiliates, thereby avoiding the application of the full set 
of security-based swap dealer requirements to those transactions and 
the associated security-

[[Page 6312]]

based swaps.\460\ As discussed further in Part VI.B.1.b below, U.S.-
based dealing entities that use the conditional exception in this 
manner may benefit by incurring lower compliance costs when providing 
liquidity to non-U.S. counterparties.
---------------------------------------------------------------------------

    \460\ See Parts II.C and VI.A.7, supra.
    \461\ Certain cost estimates presented in this section differ 
from those presented in the Proposing Release (see Proposing 
Release, 84 FR at 24255-61). There are a number of reasons for such 
differences. First, the Commission now adjusts for inflation through 
June 2019, whereas in the Proposing Release, the Commission adjusted 
for inflation through the end of 2018 (see note 458, supra). Second, 
the Commission now uses data through the end of 2018 to estimate the 
capital requirement for the registered entity, whereas in the 
Proposing Release, the Commission used data through the first 
quarter of 2018. Third, the Commission has revised the cost 
estimates associated with the suitability condition to reflect (a) 
the number of non-U.S. counterparties presented in Part VII.A.4 note 
663, infra, and (b) modifications to the suitability condition as 
discussed in Part II.C.2, supra, and Part VII.A.4, infra. Fourth, 
the Commission has removed the costs associated with the proposed 
portfolio reconciliation requirement, which the Commission is not 
adopting. Fifth, the Commission has revised the cost associated with 
the capital requirement for the registered entity if it is a 
registered broker, in light of modifications discussed in Part 
II.C.1, supra.
---------------------------------------------------------------------------

    The Commission's designation of a listed jurisdiction by order 
could signal to non-U.S. counterparties that a non-U.S. person was 
subject to a regulatory regime that, at a minimum, is consistent with 
the public interest in terms of financial responsibility requirements, 
the jurisdiction's supervisory compliance program, the enforcement 
authority in connection with those requirements, and other factors the 
Commission may consider. This process potentially provides a 
certification benefit to non-U.S. persons availing themselves of the 
exception by demonstrating to non-U.S. counterparties the applicability 
of regulatory requirements that would be in the public interest.
    Table 3 summarizes the quantifiable costs the Commission estimates 
non-U.S. persons could incur as a result of the conditions associated 
with the exception. The per-entity cost estimates assume the de novo 
formation of a security-based swap dealer or broker-dealer. The 
Commission expects that these are likely upper bounds for per-entity 
costs for two reasons. First, non-U.S. persons may already be regulated 
by jurisdictions with similar requirements and, as a consequence of 
foreign regulatory requirements, may already have established 
infrastructure, policies, and procedures that would facilitate meeting 
the conditions of the exception. For example, a non-U.S. person 
regulated by a jurisdiction with similar trade acknowledgment and 
verification requirements would likely already have an order management 
system in place capable of complying with Rule 15Fi-2, making 
development of a novel system for the purpose of taking advantage of 
the exception unnecessary. Second, non-U.S. persons that already have 
an affiliated registered security-based swap dealer or registered 
broker-dealer likely would use their existing registered affiliates to 
rely on the exception rather than register new entities.

                                 Table 3--Estimates of Quantifiable Costs Associated With Amendment to Rule 3a71-3 \461\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Initial costs                                             Ongoing costs
                                     -------------------------------------------------------------------------------------------------------------------
                                                     Per entity                                 Aggregate                   Per entity       Aggregate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Registered entity:
    Security-based swap dealer        $530,991................................  $12,743,784.............................          $2,797         $67,128
     registration.
    Security-based swap dealer        ........................................  ........................................       3,000,000      72,000,000
     capital requirement.
    Broker-dealer registration......  $301,400................................  $7,233,600..............................          54,800       1,315,200
    Broker-dealer capital             ........................................  ........................................       3,000,000      72,000,000
     requirement.
    Risk management control systems.  $525,333................................  $12,607,992.............................          71,000       1,704,000
    Applicable SBSD requirements....  $2,107,341..............................  $50,576,184.............................         520,735      12,497,640
   Recordkeeping:
         If registered        $530,935................................  $12,742,440.............................         101,353       2,432,472
         entity is a registered
         security-based swap dealer
         and registered broker-
         dealer or registered entity
         is a stand-alone registered
         broker-dealer.
         If registered        $243,376................................  $5,841,024..............................          61,140       1,467,360
         entity is a stand-alone
         registered SBSD.
         If registered        $187,388................................  $4,497,312..............................          44,405       1,065,720
         entity is a bank registered
         SBSD.
    Trading relationship              $3,150..................................  $75,600.................................           3,692          88,608
     documentation.
    Consent to service of process...  $423....................................  $10,152.................................  ..............  ..............
    Development of policies and       $4,230..................................  $101,520................................  ..............  ..............
     procedures for threshold
     compliance documentation.
    Receipt and maintenance of        ........................................  ........................................          21,996         527,904
     compliance documentation.
    Notice by registered entity.....  $212....................................  $5,088..................................  ..............  ..............
    Analysis of inter-dealer          $16,320.................................  $391,680................................          18,190         436,560
     activity.
Non-U.S. entity:
    Trading relationship              $3,150..................................  $75,600.................................           7,384         177,216
     documentation.
    Consent to service of process...  $423....................................  $10,152.................................  ..............  ..............
    Disclosure of limited Title VII   $30,598 and 100 hours...................  $734,352 and 2,400 hours................  ..............  ..............
     applicability.
    ``Listed jurisdiction''           $119,364................................  $358,092................................  ..............  ..............
     applications.
    Development of policies and       $4,230..................................  $101,520................................  ..............  ..............
     procedures for threshold
     compliance documentation.
    Creation and conveyance of        ........................................  ........................................          43,992       1,055,808
     compliance documentation.
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 6313]]

    If a non-U.S. person or its affiliated group seeks to rely on the 
exception using a registered security-based swap dealer, that person or 
its affiliated group would incur the cost of registering one U.S.-based 
entity as a security-based swap dealer (if there otherwise is not an 
affiliated security-based swap dealer present).\462\ The Commission 
estimates per entity initial costs of registering a security-based swap 
dealer of approximately $530,991.\463\ In addition, the non-U.S. person 
or its affiliated group would incur ongoing costs associated with its 
registered security-based swap dealer of approximately $2,797.\464\ 
Based on the Commission's estimate that up to 24 \465\ persons might 
avail themselves of the exception, the aggregate initial costs 
associated with registering security-based swap dealers under the 
exception would be approximately $12,743,784 and the aggregate ongoing 
costs would be approximately $67,128.\466\ The U.S. person affiliate of 
such a non-U.S. person or affiliated group would also be required to 
meet minimum capital requirements as a registered security-based swap 
dealer.\467\ At a minimum, the Commission estimates the ongoing cost of 
this capital to be approximately $3 million \468\ per entity and $72 
million in aggregate.\469\ To the extent that this capital is held in 
liquid assets \470\ that generate a positive return to the registered 
security-based swap dealer, that positive return could be used to 
offset, at least in part, the ongoing cost of capital.
---------------------------------------------------------------------------

    \461\ Certain cost estimates presented in this section differ 
from those presented in the Proposing Release (see Proposing 
Release, 84 FR at 24255-61). There are a number of reasons for such 
differences. First, the Commission now adjusts for inflation through 
June 2019, whereas in the Proposing Release, the Commission adjusted 
for inflation through the end of 2018 (see note 458, supra). Second, 
the Commission now uses data through the end of 2018 to estimate the 
capital requirement for the registered entity, whereas in the 
Proposing Release, the Commission used data through the first 
quarter of 2018. Third, the Commission has revised the cost 
estimates associated with the suitability condition to reflect (a) 
the number of non-U.S. counterparties presented in Part VII.A.4 note 
663, infra, and (b) modifications to the suitability condition as 
discussed in Part II.C.2, supra, and Part VII.A.4, infra. Fourth, 
the Commission has removed the costs associated with the proposed 
portfolio reconciliation requirement, which the Commission is not 
adopting. Fifth, the Commission has revised the cost associated with 
the capital requirement for the registered entity if it is a 
registered broker, in light of modifications discussed in Part 
II.C.1, supra.
    \462\ This is a Title VII programmatic cost and is in addition 
to other Title VII programmatic costs discussed in Part VI.B.1.b, 
infra.
    \463\ This estimate incorporates quantifiable initial costs 
presented in the Registration Adopting Release, 80 FR at 48990-95 & 
49005-06, adjusted for inflation. Specifically, per entity initial 
costs in 2019 dollars are estimated as $13,027 (filing Form SBSE) + 
$13,289 (senior officer certification) + $449,700 (associated 
natural person certifications) + $27,110 (associated entity person 
certifications) + $27,865 (initial filing of Schedule F) = $530,991.
    \464\ This estimate incorporates quantifiable annual costs 
presented in the Registration Adopting Release, 80 FR at 48990-95 & 
49005-06, adjusted for inflation. Specifically, per entity ongoing 
costs in 2019 dollars are estimated as $931 (amending Form SBSE) + 
$1,505 (amending Schedule F) + $51 (retaining signature pages) + 
$310 (filing withdrawal form) = $2,797.
    \465\ See Part VI.A.7, supra.
    \466\ Aggregate initial costs calculated as 24 x $530,991 = 
$12,743,784. Aggregate ongoing costs calculated as 24 x $2,797 = 
$67,128.
    \467\ A registered non-bank security-based swap dealer may be 
subject to minimum fixed-dollar capital requirements of $20 million 
or $1 billion in net capital and $100 million or $5 billion in 
tentative net capital, depending in part on whether it is a stand-
alone security-based swap dealer or a security-based swap dealer 
that is dually registered as a broker-dealer, and on whether it uses 
models to compute deductions for market and credit risk. See 
Capital, Margin, and Segregation Adopting Release, 84 FR at 43874-
76. Registered security-based swap dealers that have a prudential 
regulator must comply with capital requirements that the prudential 
regulators have prescribed. See Margin and Capital Requirements for 
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (adopting capital 
requirements for bank security-based swap dealers).
    \468\ This estimation assumes that the registered entity relies 
on the limited exemption from broker registration, does not use 
models to compute deductions for market or credit risk, and thus 
must maintain a minimum net capital of $20 million. See Part II.C, 
supra, and Capital, Margin, and Segregation Adopting Release, 84 FR 
at 43875. The Commission estimated the cost of capital in two ways. 
First, the time series of average return on equity for all U.S. 
banks between the fourth quarter 1983 and the fourth quarter 2018 
(see Federal Financial Institutions Examination Council (US), Return 
on Average Equity for all U.S. Banks [USROE], retrieved from FRED, 
Federal Reserve Bank of St. Louis on July 26, 2019, available at 
https://fred.stlouisfed.org/series/USROE), are averaged to arrive at 
an estimate of 11.28%. The cost of capital is calculated as 11.28% x 
$20 million = $2.256 million or approximately $2.3 million. The 
Commission believes that use of the historical return on equity for 
U.S. banks adequately captures the cost of capital because of the 12 
persons that were identified in the 2017 TIW data as persons that 
potentially may use the exception, eight are banks and three have 
bank affiliates. See Part VI.A.7, supra. To the extent that this 
approach does not adequately capture the cost of capital of persons 
that are not banks or have no bank affiliates, the Commission 
supplements the estimation by also using the annual stock returns on 
financial stocks to calculate the cost of capital. With this second 
approach, the annual stock returns on a value-weighted portfolio of 
financial stocks from 1983 to 2018 (see Professor Ken French's 
website, available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and accessed on July 26, 2019) are 
averaged to arrive at an estimate of 16.05%. The cost of capital is 
calculated as 16.05% x $20 million = $3.21 million or approximately 
$3.2 million. The final estimate of the cost of capital is the 
average of $2.3 million and $3.2 million = (2.3 + 3.2)/2 = $2.75 
million or approximately $3 million.
    \469\ Aggregate costs calculated as $3 million x 24 entities = 
$72 million.
    \470\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43879.
---------------------------------------------------------------------------

    If a non-U.S. person or its affiliated group seeks to rely on the 
exception using a registered broker-dealer, that person or its 
affiliated group would incur the cost of registering one entity as a 
broker-dealer (if there otherwise is not an affiliated broker-dealer 
present). The Commission estimates the per entity initial costs of 
registering a broker-dealer to be approximately $301,400,\471\ and 
estimates the per entity ongoing costs of meeting registration 
requirements as a broker-dealer to be approximately $54,800 \472\ per 
year. Based on the Commission's estimate that up to 24 \473\ persons 
might avail themselves of the exception and assuming that these persons 
choose to do so by using registered broker-dealers, the Commission 
estimates the aggregate initial costs of broker-dealer registration to 
be $7,233,600 \474\ and the aggregate
ongoing costs of meeting broker-dealer registration requirements to be 
$1,315,200 \475\ per year. Non-U.S. persons meeting the conditions of 
the exception by using a registered broker-dealer would additionally 
incur the cost of complying with applicable requirements associated 
with the registered broker-dealer status, including maintaining a 
minimum level of net capital. The Commission estimates the ongoing cost 
of this capital to be approximately $3 million \476\ per

[[Page 6314]]

entity. If the up to 24 persons that might use the exception choose to 
do so by using registered broker-dealers, the estimated aggregate 
ongoing cost of capital is approximately $72 million.\477\ To the 
extent that this capital is held in liquid assets \478\ that generate a 
positive return to the registered broker-dealer, that positive return 
would offset, at least in part, the ongoing cost of capital.
---------------------------------------------------------------------------

    \471\ The Commission previously estimated that an entity would 
incur costs of $275,000 to register as a broker-dealer and become a 
member of a national securities association. See Crowdfunding, 
Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71388, 71509 
(Nov. 16, 2015) (``Regulation Crowdfunding Adopting Release''). 
Adjusted for inflation, these costs are $301,400 in 2019 dollars.
    \472\ The Commission previously estimated that an entity would 
incur ongoing annual costs of $50,000 to maintain broker-dealer 
registration and membership of a national securities association. 
See Regulation Crowdfunding Adopting Release, 80 FR at 71509. 
Adjusted for inflation, these costs are $54,800 in 2019 dollars. The 
estimation of ongoing annual costs is based on the assumption that 
the entity would use existing staff to perform the functions of the 
registered broker-dealer and would not incur incremental costs to 
hire new staff. To the extent that the entity chooses to hire new 
staff, the ongoing annual costs may be higher.
    \473\ See Part VI.A.7, supra.
    \474\ Aggregate broker-dealer registration costs calculated as 
$301,400 x 24 entities = $7,233,600.
    \475\ Aggregate ongoing costs of meeting broker-dealer 
registration requirements calculated as = $54,800 x 24 entities = 
$1,315,200.
    \476\ This estimation assumes that the registered entity does 
not use models to compute deductions for market or credit risk and 
thus must maintain a minimum net capital of $20 million (see Part 
II.C, supra). The Commission believes that the methodology for 
estimating the cost of capital of a registered security-based swap 
dealer is also appropriate for estimating the cost of capital of a 
registered broker-dealer (see note 468, supra). Using the historical 
return on equity for all U.S. banks, the Commission calculated the 
cost of capital as 11.28% x $20 million = $2.256 million or 
approximately $2.3 million. The Commission believes that use of the 
historical return on equity for U.S. banks adequately captures the 
cost of capital because of the 12 persons that were identified in 
the 2017 TIW data as persons that potentially may use the exception, 
eight are banks and three have bank affiliates. See Part VI.A.7, 
supra. To the extent that this approach does not adequately capture 
the cost of capital of persons that are not banks or have no bank 
affiliates, the Commission supplements the estimation by also using 
the annual stock returns on financial stocks to calculate the cost 
of capital. With this second approach, the Commission calculated the 
cost of capital as 16.05% x $20 million = $3.21 million or 
approximately $3.2 million. The final estimate of the cost of 
capital is the average of $2.3 million and $3.2 million = (2.3 + 
3.2)/2 = $2.75 million or approximately $3 million.
    \477\ Aggregate costs calculated as $3 million x 24 entities = 
$72 million.
    \478\ See Exchange Act Rule 15c3-1.
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    To the extent that a non-U.S. person or its affiliated group seeks 
to rely on the exception by using a registered broker-dealer that is 
not approved to use models and is not dually registered as a security-
based swap dealer or an OTC derivatives dealer, such a non-U.S. person 
or its affiliated group would incur costs to establish and maintain 
risk management control systems as if the registered entity also were a 
security-based swap dealer.\479\ The Commission estimates the per 
entity initial costs of such risk management control systems to be 
approximately $525,333,\480\ and estimates the per entity ongoing costs 
of such risk management control systems to be approximately 
$71,000.\481\ If the up to 24 persons that might use the exception 
choose to do so by using registered broker-dealers that are not 
approved to use models and are not dually registered as security-based 
swap dealers or OTC derivatives dealers, the estimated aggregate 
initial costs and ongoing costs would be approximately 
$12,607,992,\482\ and $1,704,000,\483\ respectively.
---------------------------------------------------------------------------

    \479\ See Section II.C.1.b, supra.
    \480\ Per entity initial costs = 2,000/3 hours x $423/hour 
national hourly rate an attorney + 2,000/3 hours x $202/hour 
national hourly rate for a risk management specialist + 2,000/3 
hours x $139/hour national hourly rate for an operations specialist 
+ per entity hardware and software expenses of $16,000 = $525,333.33 
or approximately $525,333. See Capital, Margin, and Segregation 
Adopting Release, 84 FR at 43962 and Section VII.A.4.g, infra. The 
per hour figures for an attorney, a risk management specialist, and 
an operations specialist are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, as modified 
by Commission staff to adjust for inflation and to account for an 
1,800-hour work-year, and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead.
    \481\ Per entity ongoing costs = 250 hours x $202/hour national 
hourly rate for a risk management specialist + per entity ongoing 
cost of $20,500 = $71,000.
    \482\ Aggregate initial costs calculated as $525,333 x 24 
entities = $12,607,992.
    \483\ Aggregate ongoing costs calculated as $71,000 x 24 
entities = $1,704,000.
---------------------------------------------------------------------------

    To the extent that a non-U.S. person has an existing, registered 
broker-dealer affiliate,\484\ and uses that affiliate to rely on the 
conditional exception, the non-U.S. person would not incur costs 
associated with registering a broker-dealer and the incremental 
compliance cost would be limited to costs associated with complying 
with the other conditions of the exception as discussed below.
---------------------------------------------------------------------------

    \484\ Analyses of 2017 TIW data indicate that of the six non-
U.S. persons that potentially may use the exception, four have 
majority-owned registered broker-dealer affiliates. See Part VI.A.7, 
supra.
---------------------------------------------------------------------------

    In addition to registering either as security-based swap dealers or 
as broker-dealers, U.S. person affiliates of non-U.S. persons seeking 
to rely on the exception would be required to comply with applicable 
security-based swap dealer requirements, including those related to 
disclosures of risks, characteristics, incentives, and conflicts of 
interest, suitability,\485\ communications, and trade acknowledgment 
and verification.\486\ The Commission, estimates initial costs 
associated with these requirements of up to approximately $2,107,341 
per entity,\487\ or up to $50,576,184 in aggregate,\488\ and ongoing 
costs associated with these requirements of approximately $520,735 per 
entity,\489\ or up to $12,497,640 in aggregate.\490\
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    \485\ See note 461, supra, discussing, among other things, that 
the cost estimate associated with the suitability condition has been 
revised to reflect modifications to the suitability condition as 
discussed in Part II.C.2, supra, and Part VII.A.4, infra.
    \486\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B). The costs of 
complying with applicable security-based swap dealer requirements 
are Title VII programmatic costs and are in addition to other Title 
VII programmatic costs discussed in Part VI.B.1.b, infra.
    \487\ This estimate incorporates quantifiable initial costs 
presented in the Business Conduct Adopting Release, 81 FR at 30092-
93, 30111, 30117, 30126, and the Trade Acknowledgment and 
Verification Adopting Release, 81 FR at 39839, adjusted for 
inflation where applicable. Specifically, initial costs associated 
with disclosures, suitability, communications, and trade 
acknowledgment and verification in 2019 dollars are estimated as 
$980,288 (disclosures) + $970,031 (suitability) + $18,034 
(communications) + $138,988 (trade acknowledgment and verification) 
= $2,107,341. The cost associated with disclosures has been adjusted 
to account for the fact that the disclosures of clearing rights and 
daily mark are not part of paragraph (d)(1)(ii)(B)(1) of Exchange 
Act Rule 3a71-3.
    As discussed above, the Commission assumes that the compliance 
costs incurred by the U.S. registered entity in connection with the 
amendment would be passed on to the non-U.S.-person affiliate. To 
the extent that the registered entity complies with the disclosure 
condition by delegating to the non-U.S.-person affiliate the tasks 
of delivering the required disclosures and creating (but not 
maintaining) books and records relating to those disclosures as 
required by Rule 3a71-3(d)(1) (iii)(B)(1) (see Part II.C.2, supra), 
the cost associated with the disclosure condition and the cost 
associated with Rule 3a71-3(d)(1) (iii)(B)(1) could be incurred 
directly, at least in part, by the non-U.S.-person affiliate. The 
Commission does not believe such delegation affects the estimation 
of the costs associated with the disclosure condition and Rule 3a71-
3(d)(1) (iii)(B)(1). Further, to the extent that the registered 
entity complies with the trade acknowledgment and verification 
condition by delegating to the non-U.S. person-affiliate the tasks 
of delivering the required trade acknowledgment or verification and 
creating (but not maintaining) books and records relating to that 
trade acknowledgment or verification as required by Rule 3a71-
3(d)(1) (iii)(B)(1) (see Part II.C.2, supra), the cost associated 
with the trade acknowledgment and verification condition and the 
cost associated with Rule 3a71-3(d)(1) (iii)(B)(1) could be incurred 
directly, at least in part, by the non-U.S.-person affiliate. The 
Commission does not believe such delegation affects the estimation 
of the costs associated with the trade acknowledgment and 
verification condition and Rule 3a71-3(d)(1)(iii)(B)(1).
    In estimating the cost associated with the trade acknowledgment 
and verification condition, the Commission assumes that the 
registered entity relies on the exemption from Rule 10b-10 (see 
Exchange Act Rule 3a71-3(d)(5)) to the extent that the registered 
entity is a registered broker and Rule 10b-10 applies to the 
transaction that is subject to the exception. If such an entity does 
not rely on the exemption from Rule 10b-10, the cost associated with 
the trade acknowledgment and verification condition could be higher.
    \488\ Aggregate initial costs = Per entity initial costs of 
$2,107,341 x 24 entities = $50,576,184.
    \489\ This estimate incorporates quantifiable ongoing costs 
presented in the Business Conduct Adopting Release, 81 FR at 30092-
93, 30111, 30126, and the Trade Acknowledgment and Verification 
Adopting Release, 81 FR at 39839, adjusted for inflation where 
applicable. Specifically, ongoing costs associated with disclosures, 
and trade acknowledgment and verification are estimated in 2019 
dollars as $424,407 (disclosures) + $96,328 (trade acknowledgment 
and verification) = $520,735. The cost associated with disclosures 
has been adjusted to account for the fact that the disclosures of 
clearing rights and daily mark are not part of paragraph 
(d)(1)(ii)(B)(1) of Rule 3a71-3.
    \490\ Aggregate ongoing costs = Per entity ongoing costs of 
$520,735 x 24 entities = $12,497,640.
---------------------------------------------------------------------------

    If the registered entity is a registered stand-alone security-based 
swap dealer, it also would be responsible for creating and maintaining 
books and records related to the transactions subject to the exception 
that are required, as applicable, by Exchange Act Rules 18a-5 and 18a-
6, including any books and records requirements relating to the 
provisions specified in paragraph (d)(1)(iii)(B) of Rule 3a71-3. The 
Commission estimates the initial costs associated with Exchange Act 
Rules 18a-5 and 18a-6 to be approximately $243,376 per entity,\491\ or 
up to

[[Page 6315]]

$5,841,024 in aggregate,\492\ and ongoing costs associated with these 
rules of approximately $61,140 per entity,\493\ or up to $1,467,360 in 
aggregate.\494\ The discussion in Part VI.A.7 above suggests that a 
number of the persons that may make use of the exception likely would 
be banks.\495\ In light of this finding, the Commission also presents 
cost estimates associated with Exchange Act Rules 18a-5 and 18a-6 under 
the assumption that the registered security-based swap dealer is a bank 
registered security-based swap dealer. The Commission estimates the 
initial costs associated with these rules to be approximately $187,388 
per entity,\496\ or up to $4,497,312 in aggregate,\497\ and ongoing 
costs associated with these rules of approximately $44,405 per 
entity,\498\ or up to $1,065,720 in aggregate.\499\
---------------------------------------------------------------------------

    \491\ The per entity initial costs associated with Exchange Act 
Rule 18a-5 (assuming that the stand-alone registered security-based 
swap dealer does not have a prudential regulator and is not an ANC 
stand-alone registered security-based swap dealer) = 320 hours x 
$315/hour national hourly rate for a compliance manager + per entity 
external costs of $1,000 = $101,8000. See Recordkeeping and 
Reporting Adopting Release, 84 FR at 68609-11 for burden hours and 
external costs. The $315 per hour figure for a compliance manager is 
from SIFMA's Management and Professional Earnings in the Securities 
Industry--2013, as modified by Commission staff to adjust for 
inflation and to account for an 1,800-hour work-year, and multiplied 
by 5.35 to account for bonuses, firm size, employee benefits, and 
overhead.
    The per entity initial costs associated with Exchange Act Rule 
18a-6 (assuming that the stand-alone registered security-based swap 
dealer does not have a prudential regulator and is not an ANC stand-
alone registered security-based swap dealer) = 408 hours x $347/hour 
national hourly rate for a senior database administrator = $141,576. 
See Recordkeeping and Reporting Adopting Release, 84 FR at 68611-14 
for burden hours. The $347 per hour figure for a senior database 
administrator is from SIFMA's Management and Professional Earnings 
in the Securities Industry--2013, as modified by Commission staff to 
adjust for inflation and to account for an 1,800-hour work-year, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    The per entity initial costs associated with Exchange Act Rules 
18a-5 and 18a-6 = $101,800 + 141,576 = $243,376.
    \492\ Aggregate initial costs = Per entity initial costs of 
$243,376 x 24 entities = $5,841,024.
    \493\ The per entity ongoing costs associated with Exchange Act 
Rule 18a-5 (assuming that the stand-alone registered security-based 
swap dealer does not have a prudential regulator and is not an ANC 
stand-alone registered security-based swap dealer) = 400 hours x 
$71/hour national hourly rate for a compliance clerk + per entity 
external costs of $4,650 = $33,050. See Recordkeeping and Reporting 
Adopting Release, 84 FR at 68609-11 for burden hours and external 
costs. The $71 per hour figure for a compliance clerk is from 
SIFMA's Office Salaries in the Securities Industry (Oct. 2013), as 
modified by Commission staff to adjust for inflation and to account 
for an 1,800-hour work-year, and multiplied by 2.93 to account for 
bonuses, firm size, employee benefits, and overhead.
    The per entity ongoing costs associated with Exchange Act Rule 
18a-6 (assuming that the stand-alone registered security-based swap 
dealer does not have a prudential regulator and is not an ANC stand-
alone registered security-based swap dealer) = 310 hours x $71/hour 
national hourly rate for a compliance clerk + per entity external 
costs of $6,080 = $28,090. See Recordkeeping and Reporting Adopting 
Release, 84 FR at 68611-14 for burden hours and external costs.
    The per entity ongoing costs associated with Exchange Act Rules 
18a-5 and 18a-6 = $33,050 + 28,090 = $61,140.
    \494\ Aggregate ongoing costs = Per entity ongoing costs of 
$61,140 x 24 entities = $1,467,360.
    \495\ See Part VI.A.7, supra, stating that of the 12 persons 
identified in 2017 TIW data as potential users of the exception, 
eight are banks.
    \496\ The per entity initial costs associated with Exchange Act 
Rule 18a-5 (assuming that the registered security-based swap dealer 
has a prudential regulator) = 260 hours x $315/hour national hourly 
rate for a compliance manager = $81,900. See Recordkeeping and 
Reporting Adopting Release, 84 FR at 68609-11 for burden hours. See 
note 491, supra, for a derivation of the national hourly rate for a 
compliance manager.
    The per entity initial costs associated with Exchange Act Rule 
18a-6 (assuming that the registered security-based swap dealer has a 
prudential regulator) = 304 hours x $347/hour national hourly rate 
for a senior database administrator = $105,488. See Recordkeeping 
and Reporting Adopting Release, 84 FR at 68611-14 for burden hours. 
See note 491, supra, for a derivation of the national hourly rate 
for a senior database administrator.
    The per entity initial costs associated with Exchange Act Rules 
18a-5 and 18a-6 = $81,900 + $105,488 = $187,388.
    \497\ Aggregate initial costs = Per entity initial costs of 
$187,388 x 24 entities = $4,497,312.
    \498\ The per entity ongoing costs associated with Exchange Act 
Rule 18a-5 (assuming that the registered security-based swap dealer 
has a prudential regulator) = 325 hours x $71/hour national hourly 
rate for a compliance clerk = $23,075. See Recordkeeping and 
Reporting Adopting Release, 84 FR at 68609-11. See note 493, supra, 
for a derivation of the national hourly rate for a compliance clerk.
    The per entity ongoing costs associated with Exchange Act Rule 
18a-6 (assuming that the registered security-based swap dealer has a 
prudential regulator) = 230 hours x $71/hour national hourly rate 
for a compliance clerk + per entity external costs of $5,000 = 
$21,330. See Recordkeeping and Reporting Adopting Release, 84 FR at 
68611-14 for burden hours and external costs.
    The per entity ongoing costs associated with Exchange Act Rules 
18a-5 and 18a-6 = $23,075 + 21,330 = $44,405.
    \499\ Aggregate ongoing costs = Per entity ongoing costs of 
$44,405 x 24 entities = $1,065,720.
---------------------------------------------------------------------------

    If the registered entity is a registered security-based swap dealer 
and a registered broker-dealer, or if the registered entity is a stand-
alone registered broker-dealer, then it would need to comply with 
Exchange Act Rules 17a-3 and 17a-4, including any books and records 
requirements relating to the provisions specified in paragraph 
(d)(1)(iii)(B) of Rule 3a71-3. The Commission estimates the initial 
costs associated with Exchange Act Rules

[[Page 6316]]

17a-3 and 17a-4 to be approximately $530,935 per entity,\500\ or up to 
$12,742,440 in aggregate,\501\ and ongoing costs associated with these 
rules of approximately $101,353 per entity,\502\ or up to $2,432,472 in 
aggregate.\503\
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    \500\ The Commission estimates these costs in two parts: (1) 
Costs associated with the SBS requirements of Exchange Act Rules 
17a-3 and 17a-4, i.e., recordkeeping requirements mandated under the 
Dodd-Frank Act with respect to broker-dealer SBSDs that were adopted 
in the Recordkeeping and Reporting Adopting Release and (2) costs 
associated with the non-SBS requirements of Exchange Act Rules 17a-3 
and 17a-4.
    The per entity initial costs associated with the SBS 
requirements of Exchange Act Rule 17a-3 (assuming the entity is not 
an ANC broker-dealer) = 150 hours x $315/hour national hourly rate 
for a compliance manager = $47,250. See Recordkeeping and Reporting 
Adopting Release, 84 FR at 68609-11. See note 491, supra, for a 
derivation of the national hourly rate for a compliance manager.
    To estimate the per entity initial costs associated with the 
non-SBS requirements of Exchange Act Rule 17a-3, the Commission 
assumes these costs are proportional to the per entity ongoing costs 
associated with the non-SBS requirements of Exchange Act Rule 17a-3. 
Further, the Commission assumes that this proportion is equal to the 
proportion of per entity initial costs to per entity ongoing costs 
associated with the SBS requirements of Exchange Act Rule 17a-3. As 
discussed in note 502, infra, the Commission estimates the per 
entity ongoing costs associated with the SBS requirements of 
Exchange Act Rule 17a-3 as $10,082. The proportion of per entity 
initial costs to per entity ongoing costs associated with the SBS 
requirements of Exchange Act Rule 17a-3 is $47,250/$10,082 or 
approximately 4.7. The per entity initial costs associated with the 
non-SBS requirements of Exchange Act Rule 17a-3 is estimated as 4.7 
x $59,186 (per entity ongoing costs associated with non-SBS 
requirements of Exchange Act Rule 17a-3, see note 502, infra) = 
$278,174.20 or approximately $278,174.
    The per entity initial costs associated with the SBS 
requirements of Exchange Act Rule 17a-4 (assuming the entity is not 
an ANC broker-dealer) = 156 hours x $347/hour national hourly rate 
for a senior database administrator = $54,132. See Recordkeeping and 
Reporting Adopting Release, 84 FR at 68611-14. See note 491, supra, 
for a derivation of the national hourly rate for a senior database 
administrator.
    To estimate the per entity initial costs associated with the 
non-SBS requirements of Exchange Act Rule 17a-4, the Commission 
assumes these costs are proportional to the per entity ongoing costs 
associated with non-SBS requirements of Exchange Act Rule 17a-4. 
Further, the Commission assumes that this proportion is equal to the 
proportion of per entity initial costs to per entity ongoing costs 
associated with SBS requirements of Exchange Act Rule 17a-4. As 
discussed in note 502, infra, the Commission estimates the per 
entity ongoing costs associated with the SBS requirements of 
Exchange Act Rule 17a-4 as $8,432. The proportion of per entity 
initial costs to per entity ongoing costs associated with SBS 
requirements of Exchange Act Rule 17a-4 is $54,132/$8,432 or 
approximately 6.4. The per entity initial costs associated with non-
SBS requirements of Exchange Act Rule 17a-4 is estimated as 6.4 x 
$23,653 (per entity ongoing costs associated with non-SBS 
requirements of Exchange Act Rule 17a-4, see note 502, infra) = 
$151,379.20.
    The per entity initial costs associated with Exchange Act Rules 
17a-3 and 17a-4 = $47,250 + $278,174.20 + $54,132 + $151,379.20 = 
$530,935.40 or approximately $530,935.
    \501\ Aggregate initial costs = Per entity initial costs of 
$530,935 x 24 entities = $12,742,440.
    \502\ The Commission estimates these costs in two parts: (1) 
Costs associated with the SBS requirements of Exchange Act Rules 
17a-3 and 17a-4, i.e., recordkeeping requirements mandated under the 
Dodd-Frank Act with respect to broker-dealer SBSDs that were adopted 
in the Recordkeeping and Reporting Adopting Release and (2) costs 
associated with the non-SBS requirements of Exchange Act Rules 17a-3 
and 17a-4.
    The per entity ongoing costs associated with the non-SBS 
requirements of Exchange Act Rule 17a-3 = 673.40 hours x $71/hour 
national hourly rate for a compliance clerk + per entity external 
costs of $11,374.15 in 2019 dollars = $59,185.55, or approximately 
$59,186. Per entity ongoing burden hours = total burden hours of 
2,763,612/4,104 broker-dealer respondents = 673.40 hours. See U.S. 
Securities and Exchange Commission, ``Supporting Statement for the 
Paperwork Reduction Act Information Collection Submission for Rule 
17a-3'' (Mar. 9, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=72125401. See note 493, supra, for a 
derivation of the national hourly rate for a compliance clerk.
    The per entity ongoing costs associated with the SBS 
requirements of Exchange Act Rule 17a-3 (assuming the entity is not 
an ANC broker-dealer) = 142 hours x $71/hour national hourly rate 
for a compliance clerk = $10,082 (See Recordkeeping and Reporting 
Adopting Release, 84 FR at 68609-11).
    The per entity ongoing costs associated with the non-SBS 
requirements of Exchange Act Rule 17a-4 = 257 hours x $71/hour 
national hourly rate for a compliance clerk + per entity external 
costs of $5,406 in 2019 dollars = $23,653. See U.S. Securities and 
Exchange Commission, ``Supporting Statement for the Paperwork 
Reduction Act Information Collection Submission for Rule 17a-4'' 
(Oct. 19, 2016), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68823501.
    The per entity ongoing costs associated with the SBS 
requirements of Exchange Act Rule17a-4 (assuming the entity is not 
an ANC broker-dealer) = 72 hours x $71/hour national hourly rate for 
a compliance clerk + per entity external costs of $3,320 = $8,432 
(See Recordkeeping and Reporting Adopting Release, 84 FR at 68611-
14).
    The total per entity ongoing costs = $59,186 + $10,082 + $23,653 
+ $8,432 = $101,353.
    \503\ Aggregate ongoing costs = Per entity ongoing costs of 
$101,353 x 24 entities = $2,432,472.
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    The registered entity also must obtain from the non-U.S. person 
relying on the exception, and maintain for not less than three years 
following the ``arranging, negotiating, or executing'' activity 
pursuant to the exception, the first two years in an easily accessible 
place, documentation encompassing all terms governing the trading 
relationship between the non-U.S. person and its counterparty relating 
to the transactions subject to this exception, including, without 
limitation, terms addressing payment obligations, netting of payments, 
events of default or other termination events, calculation and netting 
of obligations upon termination, transfer of rights and obligations, 
allocation of any applicable regulatory reporting obligations, 
governing law, valuation, and dispute resolution.\504\ The Commission 
believes that both the registered entity and its non-U.S. affiliate 
will incur costs to comply with this condition.\505\ However as 
discussed above, the Commission believes that the costs incurred by the 
registered entity would be passed on to the non-U.S. affiliate. For 
registered entities, the Commission estimates the initial costs 
associated with this condition to be approximately $3,150 per 
registered entity,\506\ or up to $75,600 in aggregate,\507\ and ongoing 
costs associated with this condition of approximately $3,692 per 
registered entity,\508\ or up to $88,608 in aggregate.\509\ For non-
U.S. entities, the Commission estimates the initial costs associated 
with this condition to be approximately $3,150 per non-U.S. 
entity,\510\ or up to $75,600 in aggregate,\511\ and ongoing costs 
associated with this condition of approximately $7,384 per non-U.S. 
entity,\512\ or up to $177,216 in aggregate.\513\
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    \504\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
    \505\ See Part VII.A.4.d, infra.
    \506\ As discussed in Part VII.A.4.d, infra, the condition 
imposes an initial burden of 20 hours. The Commission assumes that 
the burden will be allocated equally between the registered entity 
and the non-U.S. entity. Therefore, a registered entity will incur 
initial costs associated with a burden of 10 hours = 10 hours x 
$315/hour national hourly rate for a compliance manager = $3,150. 
See note 491, supra, for a derivation of the national hourly rate 
for a compliance manager.
    \507\ Aggregate initial costs = Per entity initial costs of 
$3,150 x 24 entities = $75,600.
    \508\ Per entity ongoing costs = 1 hour x 52 weeks x $71/hour 
national hourly rate for a compliance clerk= $3,692. See note 493, 
supra, for a derivation of the national hourly rate for a compliance 
clerk.
    \509\ Aggregate ongoing costs = Per entity ongoing costs of 
$3,692 x 24 entities = $88,608.
    \510\ As discussed in note 506, supra, a non-U.S. entity will 
incur initial costs associated with a burden of 10 hours = 10 hours 
x $315/hour national hourly rate for a compliance manager = $3,150. 
See note 491, supra, for a derivation of the national hourly rate 
for a compliance manager.
    \511\ Aggregate initial costs = Per entity initial costs of 
$3,150 x 24 entities = $75,600.
    \512\ Per entity ongoing costs = 2 hours x 52 weeks x $71/hour 
national hourly rate for a compliance clerk = $7,384. See note 493, 
supra, for a derivation of the national hourly rate for a compliance 
clerk.
    \513\ Aggregate ongoing costs = Per entity ongoing costs of 
$7,384 x 24 entities = $177,216.
---------------------------------------------------------------------------

    The registered entity also would be responsible for obtaining from 
the non-U.S. person relying on this exception, and maintaining for not 
less than three years following the ``arranging, negotiating, or 
executing'' activity pursuant to the exception, the first two years in 
an easily accessible place, written consent to service of process for 
any civil action brought by or proceeding before the Commission, 
providing that process may be served on the non-U.S. person by service 
on the registered entity in the manner set forth in the registered 
entity's current Form

[[Page 6317]]

BD, SBSE, SBSE-A, or SBSE-BD, as applicable.\514\ The Commission 
believes that both the registered entity and its non-U.S. affiliate 
will incur one-time costs to comply with this condition.\515\ For 
registered entities, the Commission estimates the one-time costs 
associated with this condition to be approximately $423 per registered 
entity,\516\ or up to $10,152 in aggregate.\517\ For non-U.S. entities, 
the Commission estimates the one-time costs associated with this 
condition to be approximately $423 per non-U.S. entity,\518\ or up to 
$10,152 in aggregate.\519\ To the extent both parties agree to use an 
industry-standard consent provision,\520\ these costs may be limited.
---------------------------------------------------------------------------

    \514\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(3).
    \515\ See Part VII.A.4.e, infra. The Commission assumes that the 
burden will be allocated equally between the registered entity and 
the non-U.S. entity. The burden associated with the registered 
entity's maintenance of records related to the consent to service 
condition are included in the Commission's estimate of the burden 
associated with the registered entity's maintenance of records 
related to the recordkeeping provisions.
    \516\ Per entity initial costs = 1 hour x $423/hour for national 
hourly rate for an attorney = $423. The hourly cost figure is based 
upon data from SIFMA's Management and Professional Earnings in the 
Securities Industry--2013 (modified by the Commission staff to 
adjust for inflation and to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead).
    \517\ Aggregate initial costs = Per entity initial costs of $423 
x 24 entities = $10,152.
    \518\ See note 516, supra.
    \519\ See note 517, supra.
    \520\ See Part VII.A.4.e, infra.
---------------------------------------------------------------------------

    Although costly, the Commission believes that the conditions 
associated with the exception afford appropriate counterparty 
protections under Title VII and the Commission has considered the 
benefits of these specific Rule provisions in prior Commission 
releases.\521\ In the context of the exception, these conditions would 
benefit non-U.S. counterparties. Moreover, the registered entity would 
be required to notify non-U.S. counterparties, in connection with each 
transaction covered by the exception, that the non-U.S. person is not 
registered as a security-based swap dealer and that certain Exchange 
Act provisions or rules do not apply to the transaction.\522\ The final 
rules require the registered entity to provide the notice 
contemporaneously with, and in the same manner as, the arranging, 
negotiating, or executing activity at issue. The final rules also 
provide that, during a period in which the counterparty is not a 
customer \523\ of the registered entity or a counterparty to a 
security-based swap with the registered entity, the notice need only be 
provided contemporaneously with, and in the same manner as, the first 
arranging, negotiating, or executing activity with that counterparty, 
rather than with each such activity during the period in which the 
counterparty is not such a customer or counterparty. Because this 
single notice is permitted only during a period in which the 
counterparty is not a customer of the registered entity or a 
counterparty to a security-based swap with the registered entity, the 
final rules would require the registered entity to resume providing the 
notice contemporaneously with, and in the same manner as, each 
arranging, negotiating, or executing activity at issue if the 
counterparty later becomes a customer of the registered entity or a 
counterparty to a security-based swap with the registered entity. The 
Commission believes that non-U.S. persons would incur an upfront cost 
of $734,352 and 2,400 hours \524\ to develop appropriate disclosures, 
but that non-U.S. persons using the exception would integrate these 
disclosures into existing trading systems so that the ongoing costs of 
delivering these disclosures would be insubstantial. Furthermore, 
disclosures are only required when the identity of the counterparty is 
known to the registered entity, so anonymous transactions would not be 
subject to this requirement.\525\
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    \521\ See Business Conduct Adopting Release; Trade 
Acknowledgment and Verification Adopting Release; and Recordkeeping 
and Reporting Adopting Release.
    \522\ See Exchange Act Rule 3a71-3(d)(1)(iv).
    \523\ The term ``customer'' is defined consistent with the 
definition of the term in Rule 15c3-3, the customer protection rule 
that applies to brokers and dealers. See Exchange Act Rule 15c3-
3(a)(1).
    \524\ See Part VII.A.4.a and note 653, infra, stating that each 
non-U.S. person would spend 100 hours and incur approximate costs of 
$30,598 in 2019 dollars to develop policies and procedures to help 
ensure that appropriate disclosures are provided. The aggregate 
upfront costs are = $30,598 x 24 entities = $734,352. The aggregate 
burden hours are = 100 x 24 entities = 2,400 hours. These cost 
estimates are based on the assumption that none of the non-U.S. 
persons would use the alternative means of satisfying the condition 
(i.e., single disclosure) (see Part VII.A.4.a, infra). To the extent 
that non-U.S. persons rely on single disclosure as a means of 
satisfying the condition, the costs associated with the condition 
could be reduced.
    \525\ See Proposing Release, 84 FR at 24224 n.149, for 
circumstances in which the registered entity engaged would not know 
the identity of the counterparty.
---------------------------------------------------------------------------

    These required notices would benefit non-U.S. counterparties by 
informing them of the regulatory treatment of transactions under the 
exception. To the extent that non-U.S. counterparties value elements of 
the Title VII regulatory framework that do not apply to transactions 
under the exception, they may attempt to negotiate more favorable 
prices to compensate themselves for the additional risks they may 
perceive. Alternatively, non-U.S. counterparties that prefer 
transactions fully covered by the Commission's security-based swap 
regulatory framework could search for a registered security-based swap 
dealer willing to transact with all Title VII protections in place.
    The final rules include a cap of $50 billion on the aggregate gross 
notional value of covered inter-dealer security-based swap positions 
that a registered entity may support on behalf of its non-U.S. person 
affiliates that choose to rely on the conditional exception. To comply 
with this provision, registered entities will develop policies and 
procedures for threshold compliance documentation at a one-time cost of 
$4,230 per registered entity,\526\ or $101,520 in aggregate.\527\ 
Registered entities will further incur ongoing costs associated with 
receipt and maintenance of compliance documentation received from non-
U.S. persons.\528\ The Commission estimates annual costs associated 
with receipt and maintenance of compliance documentation of $21,996 per 
registered entity,\529\ or $527,904 in aggregate.\530\ Use of the 
exception further requires the registered entity to file a notice with 
the Commission that the registered entity's associated persons will be 
used in connection with the exception. The Commission estimates that 
preparation and filing of such notice would entail initial costs of 
approximately $212 per registered entity,\531\ or $5,088 in

[[Page 6318]]

aggregate.\532\ Finally, registered entities that support ANE activity 
on behalf of non-U.S. person affiliates may choose to develop systems 
to determine whether their covered inter-dealer positions exceed the 
$50 billion cap. The Commission estimates such systems or modifications 
to existing systems could cost a registered entity approximately 
$16,320 in upfront costs,\533\ or $391,680 in aggregate.\534\ Periodic 
assessment of positions against the $50 billion cap could cost an 
additional $18,190 per registered entity on an annual basis,\535\ or 
$436,560 in aggregate.\536\
---------------------------------------------------------------------------

    \526\ Per entity initial costs = 10 hour x $423/hour for 
national hourly rate for an attorney = $4,230. The hourly cost 
figure is based upon data from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013 (modified by the 
Commission staff to adjust for inflation and to account for an 
1,800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead).
    \527\ Aggregate initial costs = Per entity initial costs of 
$4,230 x 24 entities = $101,520.
    \528\ The registered entities are required to maintain such 
documentation for not less than three years following the 
``arranging, negotiating, or executing'' activity pursuant to the 
exception, the first two years in an easily accessible place. See 
Rule 3a71-3(d)(1)(iii)(B)(2).
    \529\ Per entity annual cost = 52 hour x $423/hour for national 
hourly rate for an attorney = $21,996. The hourly cost figure is 
based upon data from SIFMA's Management and Professional Earnings in 
the Securities Industry--2013 (modified by the Commission staff to 
adjust for inflation and to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead).
    \530\ Aggregate annual costs = Per entity annual costs of 
$21,996 x 24 entities = $527,904.
    \531\ Per entity initial costs = 0.5 hour x $423/hour for 
national hourly rate for an attorney = $211.50 or approximately 
$212. The hourly cost figure is based upon data from SIFMA's 
Management and Professional Earnings in the Securities Industry--
2013 (modified by the Commission staff to adjust for inflation and 
to account for an 1,800-hour work-year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead). 
See Section VII.A.4.h, infra.
    \532\ Aggregate initial costs = Per entity initial costs of $212 
x 24 entities = $5,088.
    \533\ Estimate based on prior Commission estimates of the costs 
of systems non-U.S. persons might implement to determine whether 
their dealing transactions exceed the de minimis thresholds, and 
adjusted for inflation to 2019 dollars. See Cross-Border Adopting 
Release, 79 FR at 47332. These initial systems costs would be lower 
for registered entities with systems already in place to assess 
whether their security-based swap transaction activity exceeds the 
de minimis threshold.
    \534\ Aggregate initial costs = Per entity initial costs of 
$16,320 x 24 entities = $391,680.
    \535\ Estimate based on prior Commission estimates of the costs 
of systems non-U.S. persons might implement to determine whether 
their dealing transactions exceed the de minimis thresholds, and 
adjusted for inflation to 2019 dollars. See Cross-Border Adopting 
Release, 79 FR at 47332. These ongoing systems costs would be lower 
for registered entities with systems already in place to assess 
whether their security-based swap transaction activity exceeds the 
de minimis threshold.
    \536\ Aggregate annual costs = Per entity annual costs of 
$18,190 x 24 entities = $436,560.
---------------------------------------------------------------------------

    As discussed in Part II above, non-U.S. persons operating in listed 
jurisdictions could rely on the conditional exception. By doing so, 
these non-U.S. persons may gain a competitive advantage over non-U.S. 
persons operating in unlisted jurisdictions. In particular, non-U.S. 
persons operating in listed jurisdictions and that rely on the 
exception may incur lower regulatory burdens \537\ than non-U.S. 
persons operating in unlisted jurisdictions. This cost advantage may be 
limited if the Commission subsequently orders additional unlisted 
jurisdictions to be designated as listed jurisdictions, and non-U.S. 
persons operating in these jurisdictions rely on the conditional 
exception following the designation. This cost advantage also may be 
limited if non-U.S. persons operating in unlisted jurisdictions could 
set up operations in a listed jurisdiction to rely on the exception.
---------------------------------------------------------------------------

    \537\ These non-U.S. persons may incur lower regulatory burdens 
to the extent that they avoid the costs of assessing market-facing 
activity and the costs of compliance with conditions set forth under 
the exception are lower than the compliance costs in the absence of 
the exception and the costs of business restructuring. In contrast, 
non-U.S. persons in unlisted jurisdictions may have to incur the 
costs of assessing market-facing activity. Further, for these non-
U.S. persons, the costs of complying with the full set of security-
based swap dealer requirements and business restructuring may be 
higher than compliance costs associated with the exception.
---------------------------------------------------------------------------

    For non-U.S. persons in jurisdictions that are not yet designated 
as listed jurisdictions by the Commission, an application for listed 
jurisdiction designation would be filed pursuant to Rule 0-13 and, like 
the exception, is purely voluntary. Thus, the Commission expects that, 
to the extent that market participants submit applications for 
designation of one or more listed jurisdictions, non-U.S. persons would 
do so only to the extent that they believe that compliance with each 
relevant jurisdiction's regulatory regime, in combination with the 
other conditions of the exception, was less burdensome than the 
alternatives of (i) incurring assessment costs related to de minimis 
calculations and potential compliance with the Title VII regulatory 
framework for dealers, and (ii) restructuring their security-based swap 
businesses to avoid arranging, negotiating, or executing transactions 
with non-U.S. counterparties using personnel located in the United 
States. The Commission estimates that three non-U.S. persons that seek 
to rely on the exception would file listed jurisdiction 
applications.\538\ The Commission estimates the costs associated with 
each application to be approximately $119,364, or up to $358,092 in 
aggregate.\539\ Any costs incurred by a non-U.S. person in filing an 
application for a listed jurisdiction may be obviated in part by the 
provision that permits a foreign financial regulatory authority or 
authorities supervising such a non-U.S. person or its security-based 
swap activities to file such an application. Further, the non-U.S. 
persons (or their financial regulatory authorities) in those 
jurisdictions that are designated as listed jurisdictions by the 
Commission may avoid the costs of filing an application.
---------------------------------------------------------------------------

    \538\ See Part VII.A.4.f, infra.
    \539\ The Commission assumes that the costs associated with 
filing an application for a qualified jurisdiction designation are 
the same as the costs associated with filing a substituted 
compliance request with respect to business conduct requirements. 
See Business Conduct Adopting Release, 81 FR at 30097, 30137, and 
Part VII.A.4.f, infra. The Commission estimates the per entity costs 
of filing an application in 2016 dollars as: $30,400 (internal 
counsel) + $80,000 (external counsel) = $110,400. Adjusted for CPI 
inflation, the per entity costs of filing an application in 2019 
dollars are = $119,364. The aggregate costs of filing applications = 
Per entity costs of $119,364 x 3 entities = $358,092.
---------------------------------------------------------------------------

    Finally, a non-U.S. person that chooses to use the conditional 
exception would be required to develop policies and procedures, jointly 
with the registered entity that supports its ANE activity, for 
documentation to support compliance with the $50 billion covered inter-
dealer position threshold. The Commission estimates that a non-U.S. 
person, similar to a registered entity, would incur initial costs of 
$4,230,\540\ or $101,520 in aggregate,\541\ to develop these policies 
and procedures. Moreover, to maintain compliance with the cap on 
covered inter-dealer positions a non-U.S. person would incur ongoing 
costs to create compliance documentation and convey this documentation 
to the registered entity that supports its ANE activity. The Commission 
estimates annual costs of $43,992 per non-U.S. person,\542\ or 
$1,055,808 in aggregate,\543\ associated with creation and conveyance 
of compliance documentation.
---------------------------------------------------------------------------

    \540\ Per entity initial costs = 10 hour x $423/hour for 
national hourly rate for an attorney = $4,230. The hourly cost 
figure is based upon data from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013 (modified by the 
Commission staff to adjust for inflation and to account for an 
1,800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead).
    \541\ Aggregate initial costs = Per entity initial costs of 
$4,230 x 24 entities = $101,520.
    \542\ Per entity annual costs = 104 hour x $423/hour for 
national hourly rate for an attorney = $43,992. The hourly cost 
figure is based upon data from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013 (modified by the 
Commission staff to adjust for inflation and to account for an 
1,800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead).
    \543\ Aggregate annual costs = Per entity annual costs of 
$43,992 x 24 entities = $1,055,808.
---------------------------------------------------------------------------

(b) Title VII Programmatic Costs and Benefits
    The exclusion of transactions that must be counted against the de 
minimis threshold will affect the set of registered security-based swap 
dealers subject to security-based swap dealer regulation and in turn 
determine the allocation and flow of programmatic costs and benefits 
arising from such regulation.
    The Commission believes that Rule 3a71-3(d)(1)(v) would support the 
Title VII regime's programmatic benefit of mitigating risks in foreign 
security-based swap markets that may flow into U.S. financial markets 
through liquidity spillovers.\544\ Specifically, Rule 3a71-

[[Page 6319]]

3(d)(1)(v) would require a non-U.S. person relying on the exception to 
be subject to the margin and capital requirements of a listed 
jurisdiction when engaging in transactions subject to the exception. As 
discussed earlier,\545\ the listed jurisdiction condition is intended 
to help avoid creating an incentive for dealers to book their 
transactions into entities that solely are subject to the regulation of 
jurisdictions that do not effectively require security-based swap 
dealers or comparable entities to meet certain financial responsibility 
standards. Absent this type of condition, non-U.S. persons that rely on 
the exception could gain a competitive advantage because they would be 
able to conduct security-based swap dealing activity in the United 
States without being subject to even minimal financial responsibility 
standards and incurring the associated compliance costs. Such non-U.S. 
persons potentially could provide liquidity to market participants at 
more favorable prices, but potentially also at greater risk, compared 
to registered security-based swap dealers. Generally, this condition 
would benefit non-U.S. counterparties. It provides them with assurances 
that the non-U.S. person has sufficient financial resources to engage 
in security-based swap activity and that the non-U.S. person's risk 
exposures to other counterparties are appropriately managed. This 
supports the Title VII regime's programmatic benefit of preventing 
risks in foreign security-based swap markets from flowing into U.S. 
financial markets through liquidity spillovers.
---------------------------------------------------------------------------

    \544\ As the Commission noted elsewhere, in a highly 
concentrated global security-based swap market, the failure of a key 
liquidity provider poses a particularly high risk of propagating 
liquidity shocks 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. See ANE Adopting Release, 81 FR at 8611-12, 
8630.
    \545\ See Part II.C.5, supra.
---------------------------------------------------------------------------

    The Commission believes that another potential programmatic benefit 
of the amendment is to reduce market fragmentation and associated 
distortions. In the ANE Adopting Release, the Commission noted that the 
``arranged, negotiated, or executed'' counting requirement may cause 
non-U.S. dealers to restructure their operations to avoid using U.S. 
personnel in order to avoid triggering security-based swap dealer 
obligations. Such restructuring may result in market fragmentation. 
Nevertheless, to the extent that the restructuring costs incurred by 
non-U.S. dealers offset the benefits from avoiding dealer registration, 
the likelihood or extent of market fragmentation and associated 
distortions may be attenuated, but not eliminated.\546\ The Commission 
believes that the amendment, by permitting a non-U.S. person further 
flexibility to opt into a Title VII compliance framework that is 
compatible with its existing business practices, could further reduce 
the incentives of non-U.S. persons to restructure and further reduce 
the likelihood or extent of market fragmentation and associated 
distortions.\547\
---------------------------------------------------------------------------

    \546\ See ANE Adopting Release, 81 FR at 8630.
    \547\ One commenter perceived a tension between, on the one 
hand, the reduction in market fragmentation as a result of the 
amendment and, on the other hand, the exacerbation of market 
fragmentation if non-U.S. dealers limit themselves to trading with 
non-U.S. persons to avoid triggering security-based swap dealer 
obligations absent the rules adopted in the ANE Adopting Release 
(see ANE Adopting Release, 81 FR at 8610-11). See AFR letter at 4. 
The market fragmentation in both instances have different causes. 
The market fragmentation in the first instance stems from 
restructuring by non-U.S. dealers to avoid using U.S. personnel; the 
market fragmentation discussed in the ANE Adopting Release stems 
from the way non-U.S. dealers select their trading counterparties. 
The amendment addresses, among other things, market fragmentation 
that stems from restructuring by non-U.S. dealers.
---------------------------------------------------------------------------

    The above discussion notwithstanding, the Commission is mindful 
that the likelihood of market fragmentation and associated distortions 
might increase if U.S.-based dealing entities rely on the conditional 
exception by booking transactions with non-U.S. counterparties into 
non-U.S. affiliates, thereby avoiding the application of the full set 
of security-based swap dealer requirements to those transactions and 
the associated security-based swaps.\548\ As discussed further below, 
U.S.-based dealing entities that use the conditional exception in this 
manner may incur lower compliance costs when providing liquidity to 
non-U.S. counterparties and may decide to limit their liquidity 
provision only to non-U.S. counterparties. To the extent that these 
U.S.-based dealing entities choose to provide liquidity only to non-
U.S. counterparties, security-based swap liquidity may fragment into 
two pools: One pool that caters to U.S. counterparties and another pool 
that caters to non-U.S. counterparties.
---------------------------------------------------------------------------

    \548\ See Proposing Release, 84 FR at 24219, and Part VI.A.7, 
supra.
---------------------------------------------------------------------------

    The amendment could promote competition in the security-based swap 
market to the extent that competitive effects arise from differences 
between the full set of requirements for registered security-based swap 
dealers (that otherwise would apply to the non-U.S. entity) and the 
conditions applicable to the registered U.S. entity under the 
amendment. As discussed more fully below,\549\ a non-U.S.-person dealer 
that uses the exception may become more competitive in the market for 
liquidity provision because (a) the non-U.S.-person dealer may incur 
lower compliance costs when providing liquidity to non-U.S. 
counterparties and (b) non-U.S. counterparties may incur lower costs 
when transacting with the non-U.S.-person dealer. The set of dealing 
entities that benefit from such competitive effects might expand to the 
extent that U.S.-based dealing entities that are primarily or wholly 
responsible for managing interactions with non-U.S. counterparties may 
rely on the conditional exception by booking transactions into non-U.S. 
affiliates.\550\ Nevertheless, this competitive effect may be 
attenuated by the condition that makes the exception available only to 
non-U.S. persons that are subject to the margin and capital 
requirements of a listed jurisdiction.
---------------------------------------------------------------------------

    \549\ See Part VI.B.2, infra.
    \550\ See Proposing Release, 84 FR at 24219.
---------------------------------------------------------------------------

    The amendment potentially could limit the programmatic benefits of 
Title VII regulation because the non-U.S. person taking advantage of 
the conditional exception would not be subject to the full suite of 
Title VII business conduct and financial responsibility requirements. 
This limitation of programmatic benefits might increase to the extent 
that U.S.-based dealing entities that primarily or wholly are 
responsible for managing interactions with non-U.S. counterparties may 
rely on the conditional exception by booking transactions into non-U.S. 
affiliates.\551\ Because the non-U.S. person would not be subject to 
Title VII business conduct requirements, the associated Title VII 
counterparty protections would not apply to the non-U.S. person's 
communications with non-U.S. counterparties. The non-U.S. 
counterparties thus would not benefit from those protections in their 
dealings with the non-U.S. person relying on the exception, 
notwithstanding the U.S. arranging, negotiating, and executing activity 
that led to the transactions at issue.\552\
---------------------------------------------------------------------------

    \551\ See id.
    \552\ The antifraud provisions of the federal securities laws 
and certain relevant Title VII requirements would continue to apply 
to the transactions. See note 24, supra.
---------------------------------------------------------------------------

    Similarly, Title VII financial responsibility requirements 
applicable to security-based swap dealers would not apply to the non-
U.S. person, notwithstanding that the transactions would result from 
arranging, negotiating, and executing activity in the United States. 
The financial

[[Page 6320]]

responsibility requirements serve to prevent the spread to U.S. 
financial markets of financial contagion that originates from the 
failure of one or more non-U.S. persons engaged in arranging, 
negotiating, and executing activity in the United States.\553\ However, 
the fact that these requirements would not apply to non-U.S. persons 
taking advantage of the conditional exception could limit the Title VII 
regulatory regime's ability to protect U.S. financial markets from 
financial contagion. This concern would be mitigated by the condition 
that makes the exception available only to non-U.S. persons that are 
subject to the margin and capital requirements of a listed 
jurisdiction, which would afford the Commission flexibility to 
designate jurisdictions with appropriately robust financial 
responsibility requirements as listed jurisdictions.
---------------------------------------------------------------------------

    \553\ See ANE Adopting Release, 81 FR at 8612.
---------------------------------------------------------------------------

    Non-U.S. persons would face important limits on their ability to 
rely on the conditional exception. First, such non-U.S. persons could 
not rely on the exception if the gross notional value of covered inter-
dealer security-based swap positions made in reliance on the 
conditional exception, aggregated across their non-U.S. affiliates, 
exceeded $50 billion over the course of the immediately preceding 12 
months. If this threshold were to be breached, the non-U.S. person 
relying on the exception must count against the de minimis thresholds 
all of its (and its non-U.S. person affiliates') covered inter-dealer 
security-based swap positions connected with dealing activity subject 
to the exception over the course of the immediately preceding 12 
months, including any transactions below the $50 billion limit.\554\ 
This condition mitigates incentives for financial groups, including 
U.S. financial groups, to restructure their business to avoid the 
application of certain Title VII requirements by carrying out 
substantial amounts of transactions against other dealers using one or 
more unregistered foreign dealers. As a result, this condition will 
help preserve the programmatic effects of Title VII regulation of 
covered inter-dealer security-based swap activities while also reducing 
the potential that reliance on the exception by foreign dealers would 
distort markets by conferring competitive advantages on foreign dealers 
relative to U.S. dealers. Second, competitive disparities and limits to 
the programmatic effects of Title VII may be more generally offset to 
the extent that non-U.S. counterparties value the protections afforded 
them by Title VII regulation and prefer to transact with dealing 
entities that are subject to the full scope of Title VII regulation, 
rather than with non-U.S. persons that rely on the conditional 
exception.
---------------------------------------------------------------------------

    \554\ See Exchange Act Rule 3a71-3(d)(6)(ii)(B). The de minimis 
thresholds to the ``security-based swap dealer'' definition appear 
in Rule 3a71-2(a)(1).
---------------------------------------------------------------------------

2. Effects on Efficiency, Competition, and Capital Formation
    As discussed earlier, the amendment could reduce the regulatory 
burden for non-U.S. persons that engage in security-based swap 
arranging, negotiating, and executing activity with non-U.S. 
counterparties using affiliated U.S.-based personnel because these non-
U.S. persons could avail themselves of an additional, potentially 
lower-cost, means of engaging in arranging, negotiating, and executing 
activity with non-U.S. counterparties.\555\ To the extent that the 
regulatory burden for such non-U.S. persons is reduced as a result of 
the amendment, resources could be freed up for investing in profitable 
projects, which would promote investment efficiency and capital 
formation. In addition, a reduction in regulatory burden for such non-
U.S. persons could allow these persons to operate their security-based 
swap dealing business more efficiently. To the extent that these non-
U.S. persons carry out security-based swap dealing activity with 
counterparties around the world \556\ and choose to pass on cost 
savings flowing from their improved efficiency in the form of lower 
prices for liquidity provision, counterparties around the world could 
benefit by being able to transact at lower costs. A reduction in 
regulatory burden associated with the amendment could lower entry 
barriers into the security-based swap market and increase the number of 
non-U.S.-person dealers that are willing to provide liquidity to non-
U.S. counterparties using affiliated U.S.-based personnel. An increase 
in the number of such non-U.S.-person dealers may increase competition 
for liquidity provision to non-U.S. counterparties, which could lower 
transaction costs for these counterparties and improve their ability to 
hedge economic exposures. To the extent that non-U.S.-person dealers 
focus their market-making activities on non-U.S. counterparties and 
avoid U.S. counterparties, the competition for liquidity provision to 
U.S. counterparties may decline, which could increase transaction costs 
for U.S. counterparties and impair their ability to hedge their 
economic exposures or to incur economic exposures. In addition, to the 
extent that increased transaction costs reduce the expected profits 
from trading on new information, market participants may be less 
willing to transact in the security-based swap market in response to 
new information. Such reduced participation in the security-based swap 
market might impede the incorporation of new information into security-
based swap prices, reducing the informational efficiency of these 
markets.
---------------------------------------------------------------------------

    \555\ See Part VI.B.1, supra.
    \556\ See Part VI.A.2.c, supra.
---------------------------------------------------------------------------

    The amendment might generate certain competitive effects due to 
gaps between the full set of requirements for registered security-based 
swap dealers and the conditions applicable to the registered entity of 
the non-U.S. person under the amendment,\557\ though these effects will 
be tempered to the extent that the non-U.S.-person dealer passes on 
compliance costs incurred by its U.S. registered entity to the non-U.S. 
counterparty. First, under Rule 3a71-3(d)(1)(C), the exception would 
not be conditioned on the registered entity of the non-U.S. person 
dealer having to comply with requirements pertaining to ECP 
verification, daily mark disclosure, and ``know your counterparty.'' 
\558\ Thus, to the extent that the non-U.S. person adheres only to the 
provisions specifically required by the conditions set forth under the 
amendment, the non-U.S. person dealer could incur lower compliance 
costs in providing liquidity to non-U.S. counterparties than under 
current rules, relative to the baseline. In that case, the non-U.S. 
person-dealer might be able to lower the price at which it offers 
liquidity to a non-U.S. counterparty. However, under the exception the 
non-U.S. person must have a U.S. affiliate that is registered with the 
Commission. The extent to which the non-U.S. person dealer may offer a 
more competitive price would depend in part on whether the non-U.S. 
person dealer will pass on compliance costs incurred by its U.S. 
registered entity to the non-U.S. counterparty in the form of a higher 
price for providing liquidity to the non-U.S. counterparty. To the 
extent that the non-U.S. person-dealer offers liquidity to the non-U.S. 
counterparty at a price that fully

[[Page 6321]]

recovers the compliance costs incurred by its U.S. registered entity, 
any price reduction that could be offered by the non-U.S.-person dealer 
might be limited.
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    \557\ As context, the use of the ``arranged, negotiated, or 
executed'' counting standard was intended in part to avoid allowing 
competitive disparities between registered security-based swap 
dealers and entities that otherwise could engage in security-based 
swap market-facing activity in the United States without having to 
register as security-based swap dealers. See Proposing Release, 84 
FR at 24208-09.
    \558\ See Business Conduct Adopting Release, 81 FR at 29978.
---------------------------------------------------------------------------

    Second, a non-U.S. counterparty may prefer to enter into a 
security-based swap transaction with a non-U.S.-person dealer that 
takes advantage of the conditional exception, rather than a U.S. 
registered security-based swap 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 avoid certain costs by transacting 
with a non-U.S. person dealer. For example, Title VII financial 
responsibility requirements applicable to security-based swap dealers 
would not apply to the non-U.S. person dealer under the amendment, 
although the non-U.S. person dealer would be subject to the margin and 
capital requirements of a listed jurisdiction. To the extent that a 
non-U.S. counterparty has already established with the non-U.S. person 
dealer the necessary margin agreement that is compliant with the margin 
requirements of the listed jurisdiction, the non-U.S. counterparty 
could avoid the additional costs of negotiating and adhering to a new 
margin agreement that is compliant with the Commission's Title VII 
margin requirements, if the non-U.S. counterparty transacts with the 
non-U.S. person dealer.
    These competitive effects may create an incentive for entities that 
carry out their security-based swap dealing business in a U.S. person 
dealer with non-U.S. person counterparties to restructure a proportion 
of this business to be carried out in a non-U.S. person dealer 
affiliate. The extent to which such entities are willing or able to 
restructure would be limited. Market forces could limit incentives to 
restructure to the extent that non-U.S. counterparties value the 
protections afforded them by Title VII regulation and prefer to 
transact with dealing entities that are subject to the full scope of 
Title VII regulation, rather than with non-U.S. persons that rely on 
the conditional exception. Further, the $50 billion aggregate notional 
value cap on covered inter-dealer security-based swap positions applied 
to registered entities that support non-U.S. person affiliates' 
reliance on the conditional exemption, limits non-U.S. persons' ability 
to restructure their security-based swap businesses.
3. Additional Alternatives Considered
    In developing these amendments, the Commission considered a number 
of alternatives. This section outlines these alternatives and discusses 
the potential economic effects of each.
(a) Proposed Alternative 1
    The Commission is adopting Alternative 2 to the exception, which 
requires that the arranging, negotiating, and executing activity in the 
United States be performed by personnel associated either with a 
registered security-based swap dealer or with a registered broker--but 
is modifying elements of Alternative 2 from the proposal in response to 
concerns raised by commenters.\559\
---------------------------------------------------------------------------

    \559\ See Exchange Act Rule 3a71-3(d)(1)(i)(A).
---------------------------------------------------------------------------

    As an alternative, the Commission could have adopted Alternative 1, 
which would have required the arranging, negotiating, and executing 
activity in the United States to be performed by personnel associated 
with registered security-based swap dealers.\560\ Some commenters 
rejected Alternative 1 in favor of Alternative 2 because it provides 
more flexibility to market participants to utilize U.S. personnel 
associated with either a registered broker or a registered security-
based swap dealer.\561\ To the extent that market participants would 
choose not to rely on the exception if Alternative 1 were adopted, 
because of the absence of a registered broker option, Alternative 1 may 
have been less effective in supporting the use of ``arranged, 
negotiated, or executed'' criteria as part of de minimis counting, 
while avoiding negative consequences that otherwise may be associated 
with those criteria could be attenuated. In light of this concern, the 
Commission believes that the adopted approach is preferable to the 
alternative.
---------------------------------------------------------------------------

    \560\ See Proposing Release, 84 FR at 24291.
    \561\ See note 87, supra.
---------------------------------------------------------------------------

(b) Requiring the Registered Entity To Comply With ECP Verification and 
``Know Your Counterparty''
    When identifying the security-based swap dealer requirements that 
are applicable to a registered entity for purposes of this rulemaking, 
the Commission considered requiring the registered entity to comply 
with ECP verification and ``know your counterparty'' requirements, 
along with other security-based swap dealer requirements, even if the 
registered entity is not a party to the resulting security-based swap. 
Although this alternative would lead to greater conformity with the 
full set of security-based swap dealer requirements, the provisions in 
question may require knowledge that may not be readily available to the 
registered entity when it engages in limited arranging, negotiating, 
and executing activity in connection with the security-based swaps 
addressed by the exception. These operational difficulties may prevent 
the registered entity from complying with the provisions or may require 
the registered entity to incur costs to ensure compliance. The 
Commission estimates that, if included as part of the conditions of the 
exception, the ECP verification and know your counterparty requirements 
would impose initial costs of approximately $3,006 per registered 
entity,\562\ or $72,144 in aggregate,\563\ and ongoing costs of 
approximately $94,497 per registered entity,\564\ or $2,267,928 in 
aggregate.\565\ Further, the non-U.S. counterparties transacting with 
the non-U.S. persons making use of the exception that are not also 
participating in swap markets and relying on industry established 
verification of status protocol may incur initial costs associated with 
the verification of status requirement and related adherence 
letters.\566\ The Commission estimates these aggregate initial costs at 
approximately $473,598.\567\ All non-U.S. counterparties (or their 
agents) transacting with the non-U.S. persons making use of the 
exception would also be required to collect and provide essential facts 
to the registered entities to comply with the ``know your 
counterparty'' obligations for an aggregate initial cost of 
approximately

[[Page 6322]]

$6,631,926.\568\ To the extent that the knowledge needed to comply with 
these requirements may not be readily available to the registered 
entity and the registered entity has to expend additional resources to 
obtain that knowledge, the actual costs incurred by the registered 
entity to comply with these requirements may be higher. The Commission 
acknowledges that a non-U.S. person making use of the exception 
potentially could mitigate the compliance costs of the registered 
entity by transacting only with non-U.S. counterparties that are known 
ECPs to the registered entity. By doing so, the registered entity could 
avoid expending additional resources to learn about the non-U.S. 
counterparties' ECP status. However, as a result of this approach, the 
non-U.S. person may have to forgo transacting with new non-U.S. 
counterparties whose ECP status is not known to the registered entity. 
The non-U.S. person would thus have to balance the cost savings 
associated with transacting only with a set of known non-U.S. 
counterparties against the revenues that may be forgone by not 
transacting with new non-U.S. counterparties whose ECP status is 
unknown to the registered entity.
---------------------------------------------------------------------------

    \562\ This estimate incorporates quantifiable initial costs 
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation.
    \563\ Aggregate initial costs = Per entity initial costs of 
$3,006 x 24 entities = $72,144.
    \564\ This estimate incorporates quantifiable initial costs 
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation.
    \565\ Aggregate initial costs = Per entity initial costs of 
$94,497 x 24 entities = $2,267,928.
    \566\ In the Business Conduct Adopting Release, the Commission 
assumed that counterparties that are swap market participants likely 
already adhere to the relevant protocol and would not have any 
start-up or ongoing burdens with respect to verification. See 
Business Conduct Adopting Release, 81 FR at 30091. The Commission 
continues to believe that this assumption is valid and thus, for 
purposes of this alternative, the Commission believes that only non-
U.S. counterparties that are not swap market participants will incur 
verification-related costs. As discussed in Part VI.A.7, supra, the 
Commission estimates that up to 24 persons likely may use the 
exception, and that their registered entity affiliates may arrange, 
negotiate, or execute transactions with up to 1,614 non-U.S. 
counterparties, of which 498 do not participate in swap markets.
    \567\ This estimate incorporates quantifiable initial costs 
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation. Per counterparty initial costs in 
2019 dollars = $951. Aggregate initial costs = Per entity initial 
costs of $951 x 498 counterparties = $473,598.
    \568\ This estimate incorporates quantifiable initial costs 
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation. Per counterparty initial costs in 
2019 dollars = $4,109. Aggregate initial costs = Per entity initial 
costs of $4,109 x 1,614 counterparties = $6,631,926.
---------------------------------------------------------------------------

    As another alternative, the Commission considered requiring 
compliance with the ECP verification and ``know your counterparty'' 
requirements with a one-time carve out when the non-U.S. counterparty 
is unknown to the registered entity and there is no basis to believe 
that the registered entity would have further interactions with that 
non-U.S. counterparty. Although such a carve out may reduce compliance 
costs arising from transactions that likely would pose the greatest 
operational difficulties in terms of obtaining knowledge needed for 
complying with the ECP verification and know your counterparty 
requirements, the Commission is also cognizant that the carve out may 
create new costs associated with assessing when the carve out would 
apply. The Commission is concerned that these new assessment costs may 
impose an additional burden on the registered entity and may offset any 
reduction in compliance costs associated with a one-time carve out. As 
with the previous alternative, a non-U.S. person making use of the 
exception potentially could mitigate the compliance costs of the 
registered entity by transacting only with non-U.S. counterparties that 
are ECPs known to the registered entity. As discussed above, the non-
U.S. person would thus have to balance the cost savings associated with 
this approach against the revenues that may be forgone by not 
transacting with new non-U.S. counterparties whose ECP status is 
unknown to the registered entity.
    In light of these compliance challenges and the fact that the 
amendment does include conditions designed to impose a minimum standard 
of conduct upon security-based swap dealers in connection with their 
transaction-related activities, the Commission believes that the 
adopted approach is preferable to these alternatives.
(c) Requiring the Registered Entity To Comply With Daily Mark 
Disclosure
    The Commission also considered requiring the registered entity to 
comply with daily mark disclosure, along with other security-based swap 
dealer requirements, even if the registered entity is not a party to 
the resulting security-based swap. Similar to the discussion of ECP 
verification and know your counterparty requirements above, this 
alternative would lead to greater conformity with the full set of 
security-based swap dealer requirements. However, it may require 
knowledge that may not be readily available to the registered entity 
when it engages in limited arranging, negotiating, and executing 
activity in connection with the security-based swaps addressed by the 
exception. Further, the daily mark disclosure is predicated on the 
existence of an ongoing relationship between the security-based swap 
dealer and the counterparty that may not be present in connection with 
the transactions at issue, and would be linked to risk management 
functions that are likely to be associated with the entity in which the 
resulting security-based swap position is located.\569\ These 
operational difficulties may prevent the registered entity from 
complying with the daily mark disclosure requirement or may require the 
registered entity to incur an unreasonably high cost to ensure 
compliance. In light of these compliance challenges and the fact that 
the amendment does include conditions designed to impose a minimum 
standard of conduct upon security-based swap dealers in connection with 
their transaction-related activities, the Commission believes that the 
adopted approach is preferable to this alternative.
---------------------------------------------------------------------------

    \569\ See Proposing Release, 84 FR at 24223.
---------------------------------------------------------------------------

(d) Requiring a Limited Disclosure of Incentives and Conflicts
    As an alternative to the disclosure requirements set forth under 
Rule 3a71-3(d)(1)(ii)(B)(1), the Commission considered requiring the 
registered entity to disclose its own material incentives and conflicts 
of interest, but not requiring the registered entity to disclose the 
incentives and conflicts of interest of its non-U.S. affiliate. While 
this alternative might help to mitigate the costs associated with 
disclosing the incentives and conflicts of interest of the non-U.S. 
affiliate,\570\ the benefits associated with such disclosures \571\ may 
also decrease because non-U.S. counterparties would not know about the 
incentives and conflicts of interest of the non-U.S. affiliate prior to 
entering into security-based swaps with the non-U.S. affiliate. In 
light of this concern, the Commission believes that the adopted 
approach is preferable to this alternative.
---------------------------------------------------------------------------

    \570\ See Business Conduct Adopting Release, 81 FR at 30112.
    \571\ See id. at 30111-12.
---------------------------------------------------------------------------

(e) Requiring the Non-U.S. Person To Be Domiciled in a G-20 
Jurisdiction or in a Jurisdiction Where the Non-U.S. Person Would Be 
Subject to Basel Capital Requirements
    As alternatives to paragraph (d)(1)(v), the Commission considered a 
requirement that the non-U.S. person be domiciled in a G-20 
jurisdiction or in a jurisdiction where the non-U.S. person would be 
subject to Basel capital requirements as commenters have suggested. 
While the Commission acknowledges that these alternatives are clearly 
defined and would provide certainty to market participants, the 
Commission believes these alternatives potentially could create 
opportunities for regulatory arbitrage whereby a non-U.S. person may 
relocate its operations to a jurisdiction that imposes lower financial 
responsibility standards. The non-U.S. person may thus enjoy a cost 
advantage relative to other dealers that operate under higher 
regulatory burdens, while not being subject to equally rigorous 
financial responsibility standards. Further, as discussed earlier,\572\ 
the fact that a jurisdiction is a member of the G-20 or subscribes to 
Basel standards does not by itself provide assurance that the 
jurisdiction has implemented appropriate financial responsibility 
standards.
---------------------------------------------------------------------------

    \572\ See Part II.C.5, supra.

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[[Page 6323]]

(f) Not Requiring Notification to Counterparties of the Non-U.S. Person
    In identifying the conditions that would apply to the non-U.S. 
person, the Commission considered omitting the notification 
condition.\573\ The omission of this notification condition may reduce 
cost and thus regulatory burden for the non-U.S. persons that rely on 
the exception.
---------------------------------------------------------------------------

    \573\ See Part II.C.4, supra.
---------------------------------------------------------------------------

    However, the absence of this notification condition potentially 
could reinforce the competitive disparity between the non-U.S. persons 
that make use of the exception and registered security-based swap 
dealers that comply with the full set of Title VII security-based swap 
dealer requirements. As discussed above,\574\ non-U.S. persons that 
avail themselves of the exception could bear lower costs compared to 
registered security-based swap dealers that have to comply with the 
full set of security-based swap dealer requirements.
---------------------------------------------------------------------------

    \574\ See Part VI.B.2, supra.
---------------------------------------------------------------------------

    To the extent that non-U.S. counterparties prefer to trade with 
dealers that are subject to the full set of Title VII security-based 
swap dealer requirements and the associated safeguards, in the absence 
of the notification condition, non-U.S. persons that rely on the 
exception could bear lower regulatory costs than registered security-
based swap dealers but may nevertheless be regarded by non-U.S. 
counterparties as subject to similar Title VII safeguards as registered 
security-based swap dealers. As a result, these non-U.S. persons 
potentially could capture the business of non-U.S. counterparties from 
registered security-based swap dealers that they otherwise might not 
have captured if the notification condition had been part of the 
exception. In light of this concern, the Commission believes that 
requiring such notification to non-U.S. counterparties is preferable to 
this alternative.
(g) ``No Management of Relationship'' Condition
    When identifying the conditions of the exception, the Commission 
considered making the exception unavailable where U.S. personnel manage 
the relationship with the non-U.S. counterparty to the security-based 
swap. Such a condition might help address concerns that U.S.-based 
dealers could use the exception to rebook transactions, which are 
managed by U.S. personnel, to a non-U.S. affiliate to avoid triggering 
security-based swap dealer registration. However, the Commission 
recognizes that there may be challenges in articulating objective 
criteria to identify when the exception would or would not be available 
under this type of approach. Even if objective criteria could be 
articulated, non-U.S. persons seeking to use the exception may have to 
incur costs to satisfy these criteria on an ongoing basis. In light of 
these concerns, the Commission believes that the adopted approach is 
preferable to this alternative.

C. Amendment to Commission Rule of Practice 194

    Several key economic effects and tradeoffs inform the Commission's 
analysis of adopting new paragraph (c)(2) of Rule of Practice 194.\575\
---------------------------------------------------------------------------

    \575\ See Rule of Practice 194 Adopting Release, 84 FR at 4922-
43.
---------------------------------------------------------------------------

    First, as the Commission discussed in the Rule of Practice 194 
Adopting Release,\576\ increasing the ability of statutorily 
disqualified persons to effect or be involved in effecting security-
based swap transactions on behalf of SBS Entities may give rise to 
higher compliance and counterparty risks, increase costs of adverse 
selection, decrease market participation, and reduce competition among 
higher quality associated persons and SBS Entities.
---------------------------------------------------------------------------

    \576\ See id.
---------------------------------------------------------------------------

    Second, at the same time, the scope of conduct that gives rise to 
disqualification is broad and includes conduct that may not pose 
ongoing risks to counterparties.\577\ In addition, as discussed in the 
Rule of Practice 194 Adopting Release and in greater detail below, 
strong disqualification standards can also reduce competition and the 
volume of service provision.
---------------------------------------------------------------------------

    \577\ As discussed in Part V.A. of the Rule of Practice 194 
Adopting Release, the definition of disqualified persons, as applied 
in the statutory prohibition in Exchange Act Section 15F(b)(6), is 
broad. That definition disqualifies associated persons due to 
violations of the securities laws, but also for felonies and 
misdemeanors not related to the securities laws and/or financial 
markets, and certain foreign sanctions. See id. at 4922, 4929.
---------------------------------------------------------------------------

    Third, public information about misconduct can give rise to capital 
market participants voting with their feet (reputational costs), and 
labor markets frequently penalize misconduct through firing or other 
career outcomes in other settings, as discussed in the Rule of Practice 
194 Adopting Release. If counterparties perceive the risks related to 
disqualified associated persons to be high, counterparties may choose 
to perform more in-depth due diligence related to their SBS Entity 
counterparties or to transact with SBS Entities without disqualified 
associated persons.
    Fourth, an overwhelming majority of dealers and most counterparties 
transact across both swap and security-based swap markets, including in 
financial products that are similar or identical in their payoff 
profiles and risks. As discussed in the Rule of Practice 194 Adopting 
Release, differential regulatory treatment of disqualification in swap 
and security-based swap markets may disrupt existing counterparty 
relationships and may increase costs of intermediating transactions for 
some SBS Entities, which may be passed along to certain counterparties 
in the form of higher transaction costs.
    Fifth, as also discussed in the Rule of Practice 194 Adopting 
Release, market participants may value bilateral relationships with SBS 
Entities, including with SBS Entities dually-registered as Swap 
Entities, and searching for and initiating bilateral relationships with 
new SBS Entities may involve costs for counterparties. For example, 
security-based swaps are long-term contracts that are often 
renegotiated, and disruptions to existing counterparty relationships 
can reduce the potential future ability to modify a contract, which may 
be priced in widening spreads.\578\
---------------------------------------------------------------------------

    \578\ See id. at 4922.
---------------------------------------------------------------------------

1. Costs and Benefits of the Amendment
    Once compliance with SBS Entity registration rules is required, 
registered SBS Entities will be unable to utilize any statutorily 
disqualified associated natural person, including natural persons with 
potentially valuable capabilities, skills, or expertise, to effect or 
be involved in effecting security-based swap transactions, absent 
relief, including an order under Rule of Practice 194. Absent the 
exclusion in Rule of Practice 194(c)(2), the statutory disqualification 
prohibition set forth in Section 15F(b)(6) of the Exchange Act would 
apply to all associated natural persons effecting or involved in 
effecting security-based swap transactions on behalf of all registered 
SBS Entities regardless of the nature of the conduct giving rise to the 
disqualification.\579\ SBS Entities are, under the baseline regulatory 
regime, unable to rely on statutorily disqualified associated persons 
even if such persons are non-U.S. persons transacting exclusively with 
non-U.S. counterparties. However, absent the exclusion provided in Rule 
of Practice

[[Page 6324]]

194(c)(2), SBS Entities would still be able to apply to the Commission 
for relief, and the Commission would still be able to grant relief, 
including under Rule of Practice 194.
---------------------------------------------------------------------------

    \579\ As noted above, Section 3(a)(39) of the Exchange Act 
generally defines the circumstances that would subject a person to a 
statutory disqualification with respect to membership or 
participation in, or association with a member of, an SRO. See 15 
U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    Under the exclusion provided in Rule of Practice 194(c)(2), unless 
a limitation applies,\580\ SBS Entities will be able to allow 
statutorily disqualified associated natural persons that are not U.S. 
persons to effect or be involved in effecting security-based swap 
transactions with non-U.S. counterparties and foreign branches of U.S. 
counterparties. The Commission received comment generally in support of 
the proposed amendment \581\ and continues to believe that amendment to 
Rule of Practice 194, to include subparagraph (c)(2), involves three 
possible benefits.
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    \580\ An SBS Entity would not be able to avail itself of the 
exclusion in paragraph (c)(2) if an associated person is currently 
subject to certain orders.
    \581\ See, e.g., EBF letter at 6; IIB/SIFMA letter at 5, 29-30; 
ISDA letter at 3, 16; see also European Commission email.
---------------------------------------------------------------------------

    First, SBS Entities may benefit from greater flexibility in hiring 
and managing non-U.S. employees transacting with foreign counterparties 
and foreign branches of U.S. counterparties. To the degree that such 
employees may have valuable skills, expertise, or counterparty 
relationships that are difficult to replace and outweigh the 
reputational and compliance costs of continued association, SBS 
Entities would be able to continue employing them without being 
required to apply for relief with the Commission. In addition, cross-
registered SBS Entities would experience economies of scope in 
employing non-U.S. natural persons in their swap and security-based 
swap businesses. Specifically, SBS Entities will be able to rely on the 
same non-U.S. natural persons in transactions with the same 
counterparties across integrated swap and security-based swap markets. 
In addition, SBS Entities will no longer be required to apply for 
relief under Rule of Practice 194 with respect to non-U.S. persons 
transacting with foreign counterparties and foreign branches of U.S. 
counterparties.\582\
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    \582\ As discussed in the economic baseline, the exclusion may 
reduce the number of applications by between one and four 
applications, resulting in potential cost savings of between $12,690 
(=1 x 30 hours x Attorney at $423 per hour) and $50,760 (=4 x 30 
hours x Attorney at $423 per hour).
---------------------------------------------------------------------------

    Second, to the degree that SBS Entities currently pass along costs 
to counterparties in the form of, for example, higher transaction 
costs, the amendment may benefit non-U.S. counterparties and foreign 
branches of U.S. counterparties through lower prices of available 
security-based swaps. In addition, such counterparties of SBS Entities 
would be able to continue transacting with the same non-U.S. associated 
persons of the same SBS Entities across interconnected markets without 
delays related to Commission review under Rule of Practice 194. Both 
the returns and the risks from security-based swap transactions by 
foreign branches of U.S. persons may flow to the U.S. business of U.S. 
persons, contributing to profits and losses of U.S. persons.
    Third, the amendment may benefit disqualified non-U.S. natural 
persons seeking to engage in security-based swap activity. Under the 
amendment, an SBS Entity would no longer be required to incur costs 
related to applying for relief under Rule of Practice 194 in order to 
allow a disqualified non-U.S. natural person to transact with foreign 
counterparties and foreign branches of U.S. counterparties. The 
amendment to Rule of Practice 194, to include subparagraph (c)(2), may 
reduce direct costs to SBS Entities of hiring and retaining 
disqualified non-U.S. employees. This may improve employment 
opportunities for disqualified non-U.S. natural persons in the 
security-based swap industry. However, research in other contexts 
points to large reputational costs from misconduct, and some papers 
show that employers may often fire and replace employees engaging in 
misconduct to manage these reputational costs, as discussed in the Rule 
of Practice 194 Adopting Release.\583\
---------------------------------------------------------------------------

    \583\ See Rule of Practice 194 Adopting Release, 84 FR at 4932.
---------------------------------------------------------------------------

    Rule of Practice 194(c)(2) would result in SBS Entities being less 
constrained by the general statutory prohibition in their security-
based swap activity with foreign counterparties and foreign branches of 
U.S. counterparties. The Commission continues to recognize that 
associating with statutorily disqualified natural persons effecting or 
involved in effecting security-based swaps on behalf of SBS Entities 
may give rise to counterparty and compliance risks. For example, as the 
Commission discussed elsewhere, in other settings, individuals engaged 
in misconduct are significantly more likely to engage in repeated 
misconduct.\584\ Data in the Rule of Practice 194 Adopting Release 
suggests that, in analogous disqualification review processes in swap 
and broker-dealer settings, the application rate is low, but there are 
incidences of repeated misconduct.\585\ The Commission also continues 
to recognize that statutory disqualification and an inability to 
continue associating with SBS Entities creates disincentives against 
underlying misconduct for associated persons and that there may be 
spillover effects on other associated persons within the same SBS 
Entity.\586\ Further, the Commission recognizes that, under the 
amendment, the Commission would be unable to make an individualized 
determination about whether permitting a given non-U.S. associated 
natural person to effect or be involved in effecting security-based 
swaps on behalf of an SBS Entity is consistent with the public 
interest.
---------------------------------------------------------------------------

    \584\ For a more detailed discussion, see id.
    \585\ See id. at 4928.
    \586\ For example, as discussed in the Rule of Practice Adopting 
Release, Dimmock, Gerken, and Graham (2018) examine customer 
complaints against FINRA-registered representatives in 1999 through 
2011, and argue that misconduct of individuals influences the 
misconduct of their coworkers. Using mergers of firms as a quasi-
exogenous shock, the paper examines changes in an adviser's 
misconduct around changes to an employee's coworkers due to a 
merger. The paper estimates that an employee is 37% more likely to 
commit misconduct if her new coworkers encountered in the merger 
have a history of misconduct. The paper contributes to broader 
evidence on peer effects, connectedness, and commonality of 
misconduct, and can help explain the distributional properties in 
the prevalence of misconduct across firms documented in Egan, 
Matvos, and Seru (2017). See Stephen G. Dimmock, William C. Gerken, 
& Nathaniel P. Graham, Is Fraud Contagious? Coworker Influence on 
Misconduct by Financial Advisors, 73 J. Fin. 1417 (2018); see also 
Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial 
Adviser Misconduct, 127 J. POL. ECON. 233 (2019).
---------------------------------------------------------------------------

    The Commission also notes that the amendment would allow SBS 
Entities to rely on disqualified non-U.S. personnel in their 
transactions with both foreign counterparties and foreign branches of 
U.S. counterparties. To the degree that statutory disqualification may 
increase risks to counterparties, to the degree that SBS Entities may 
choose to rely on disqualified foreign personnel despite reputational 
and compliance costs of association, and to the extent that such 
counterparties do not move their business to other personnel or SBS 
Entity, this may increase risks to foreign branches of U.S. 
counterparties. Depending on the consolidation and ownership structure 
of counterparties, some of the returns as well as losses in foreign 
branches may flow through to some U.S. parent firms. However, the 
adopted approach provides for identical treatment of foreign 
counterparties and foreign branches of U.S. counterparties, reducing 
potential competitive disparities between them in security-based swap 
markets.
    Importantly, the exclusion would more closely harmonize the 
Commission's approach with the approach already being followed with 
respect to foreign personnel of Swap

[[Page 6325]]

Entities. As such, the Commission's assessment of the benefits and 
potential counterparty risks of the relief discussed above is informed 
by experience and data with respect to CFTC/National Futures 
Association statutory disqualification review in swap markets, 
including, among others: (i) The low incidence of statutory 
disqualification of associated persons; (ii) the majority of 
applications arising out of non-investment related conduct by 
associated persons; and (iii) the absence of additional statutory 
disqualification forms filed by swap dealers to request NFA 
determination with respect to a new statutory disqualification for any 
of the individuals.\587\ The Commission also notes that parallel swap 
markets remain large, with multi-name credit default swaps representing 
an increasing share of credit-default swap notional outstanding, and 
highly liquid.\588\
---------------------------------------------------------------------------

    \587\ See Rule of Practice Adopting Release, 84 FR at 4931.
    \588\ See, e.g., Inaki Aldasoro & Torsten Ehlers, The Credit 
Default Swap Market: What a Difference a Decade Makes, BIS Q. Rev., 
June 2018, at 3 (Graph 1), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf, last accessed March 26, 2019; see also Richard 
Haynes & Lihong McPhail, The Liquidity of Credit Default Index Swap 
Networks (Working Paper, 2017).
---------------------------------------------------------------------------

    Three factors may reduce the magnitude of the above economic costs 
and benefits. First, the Commission will continue to be able, in 
appropriate cases, to institute proceedings under Exchange Act Section 
15F(l)(3) to determine whether the Commission should censure, place 
limitations on the activities or functions of such person, suspend for 
a period not exceeding 12 months, or bar such person from being 
associated with an SBS Entity.\589\
---------------------------------------------------------------------------

    \589\ See 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

    Second, the security-based swap market is an institutional one, 
with investment advisers, banks, pension funds, insurance companies, 
and ISDA-recognized dealers accounting for 99.8% of transaction 
activity.\590\ While security-based swaps may be more opaque than 
equities and bonds and may give rise to greater information asymmetries 
between dealers and non-dealer counterparties, institutional 
counterparties may be more informed and sophisticated compared to 
retail clients. However, given limited data availability on the 
domiciles of non-dealer counterparties, the Commission is unable to 
quantify how many non-institutional foreign counterparties may be 
affected by the Rule.
---------------------------------------------------------------------------

    \590\ See Rule of Practice 194 Adopting Release, 84 FR at 4925-
26, Table 1.
---------------------------------------------------------------------------

    Importantly, the concentrated nature of security-based swap market-
facing activity may reduce the ability of counterparties to choose to 
transact with SBS Entities that do not rely on disqualified personnel. 
As the Commission estimated elsewhere, the top five dealer accounts 
intermediated approximately 55% of all SBS Entity transactions by gross 
notional, and the median counterparty transacted with 2 dealers in 
2017.\591\ While reputational incentives may flow from a customer's 
willingness to deal with an SBS Entity, the fact that the customer may 
not have many dealers to choose from weakens those incentives. However, 
the Commission also notes that market concentration is itself 
endogenous to market participants' counterparty selection. That is, 
counterparties trade off the potentially higher counterparty risk of 
transacting with SBS Entities that rely on disqualified associated 
persons against the attractiveness of security-based swaps (price and 
non-price terms) that they may offer. If a large number of 
counterparties choose to move their business to SBS Entities that do 
not rely on disqualified associated persons (including those SBS 
Entities that may currently have lower market share), market 
concentration itself can decrease.
---------------------------------------------------------------------------

    \591\ See id. at 4925.
---------------------------------------------------------------------------

    Third, as discussed above, the exclusion will not be available with 
respect to an associated person if that associated person is currently 
subject to an order described in subparagraphs (A) and (B) of Section 
3(a)(39) of the Exchange Act, with the limitation that an order by a 
foreign financial regulatory authority described in subparagraphs 
(B)(i) and (B)(iii) of Section 3(a)(39) shall only apply to orders by a 
foreign financial regulatory authority in the jurisdiction where the 
associated person is employed or located. In such circumstances, 
affected SBS Entities will be required to apply for relief under Rule 
of Practice 194 and will be unable to allow their disqualified 
associated person entities to effect or be involved in effecting 
security-based swaps on their behalf, pending review by the Commission.
2. Effects on Efficiency, Competition, and Capital Formation
    The Commission has assessed the effects of the amendment on 
efficiency, competition, and capital formation. As noted above, 
limiting the ability of statutorily disqualified persons to effect or 
be involved in effecting security-based swaps on behalf of SBS Entities 
may reduce compliance and counterparty risks and may facilitate 
competition among higher quality associated persons and SBS Entities, 
thereby enhancing integrity of security-based swap markets. At the same 
time, limits on the participation of disqualified employees in 
security-based swap markets may result in costs related to replacing or 
reassigning an employee to SBS Entities or applying to the Commission 
for relief. This may disrupt existing counterparty relationships across 
closely linked swap and security-based swap markets and increase 
transaction costs borne by counterparties, adversely effecting 
efficiency and capital formation in swap and security-based swap 
markets.
    In addition, if more SBS Entities seek to avail themselves of the 
exclusion and retain, hire, or increase their reliance on disqualified 
foreign personnel in their transactions with foreign counterparties, a 
greater number of disqualified persons may seek employment and business 
opportunities in security-based swap markets. As discussed in the Rule 
of Practice 194 Adopting Release,\592\ there is a dearth of economic 
research on these issues in derivatives markets, and the research in 
other settings cuts both ways. On the one hand, a greater number of 
disqualified persons active in security-based swaps could increase the 
``lemons'' problem and related costs of adverse selection,\593\ since 
market participants may demand a discount from counterparties if they 
expect a greater chance that counterparties have employed disqualified 
persons that are involved in arranging transactions. This effect could 
lead to a reduction in informational efficiency and capital formation. 
On the other hand, more flexibility in employing disqualified persons 
may also increase competition and consumer surplus.\594\
---------------------------------------------------------------------------

    \592\ See Rule of Practice 194 Adopting Release, 84 FR at 4923.
    \593\ See, e.g., George A. Akerlof, The Market for ``Lemons'': 
Quality Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488 
(1970). Informational asymmetry about quality can negatively affect 
market participation and decrease the amount of trading--a problem 
commonly known as adverse selection. When information about 
counterparty quality is scarce, market participants may be less 
willing to enter into transactions, and the overall level of trading 
may fall.
    \594\ See Jonathan Berk & Jules H. van Binsbergen, Regulation of 
Charlatans in High-Skill Professions (Stanford University Graduate 
School of Business, Research Paper No. 17-43, 2017), available at 
https://ssrn.com/abstract=2979134. The paper models the costs and 
benefits of both disclosure and standards regulation of 
``charlatans'' (professionals who sell a service they do not 
deliver) in high skill professions. When there is a mismatch between 
high demand for a skill and short supply of the skill, the presence 
of charlatans in a profession is an equilibrium outcome. 
Importantly, reducing the number of charlatans by regulation 
decreases consumer surplus in their model. Both standards and 
disclosure regulations drive charlatans out of the market, but the 
resulting reduction in competition amongst producers actually 
reduces consumer surplus. In turn, producers strictly benefit from 
such regulation.

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[[Page 6326]]

    The amendment would preserve an equal competitive standing of U.S. 
and non-U.S. SBS Entities with disqualified foreign personnel as they 
compete for business with foreign counterparties and foreign branches 
of U.S. counterparties. Importantly, under the baseline, both U.S. and 
non-U.S. Swap Entities are able to transact with foreign counterparties 
relying on their foreign disqualified personnel without applying to the 
CFTC for relief from the statutory prohibition. As discussed in the 
economic baseline, the Commission expects extensive cross-registration 
of dealers across the two markets. As a result of the exclusion being 
adopted, dually registered U.S. SBS Entities would be more likely to be 
able to rely on at least some of the same disqualified foreign 
personnel in transacting with the same counterparties in both swap 
(e.g., index CDS) and security-based swap (e.g., single-name CDS) 
markets.
    The amendment may create incentives for SBS Entities to relocate 
their personnel (or the activities performed by U.S. personnel) outside 
the U.S. to be able to avail themselves of the exclusion and avoid 
being bound by the statutory prohibition. 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 will, in turn, 
depend on the relative volumes of market-facing activity that a firm 
carries out on different underliers and with counterparties in 
different jurisdictions. As a result of these dependencies, the 
Commission cannot reliably quantify the costs of these alternative 
approaches to compliance. However, the Commission believes that firms 
would seek to relocate their personnel (or the activities performed by 
U.S. personnel) only if they expect the relocations to be profitable.
    Further, the amendment may improve the employment and career 
outcomes of disqualified foreign personnel relative to disqualified 
U.S. personnel. As a result, disqualified personnel may seek to 
relocate outside the U.S. and seek employment by SBS Entities in their 
foreign business. To the degree that such relocation occurs, it may 
reduce the effective scope of application of the statutory prohibition. 
This may also lead to a separating equilibrium: It may decrease 
counterparty risks and adverse selection costs of security-based swaps 
in SBS Entities and in transactions with U.S. counterparties and 
increase counterparty risks and adverse selection costs in transactions 
with foreign counterparties and foreign branches of U.S. 
counterparties.
3. Alternatives Considered
    The Commission has considered several alternatives to the amendment 
to Rule of Practice 194(c)(2).
(a) Relief for All SBS Entities With Respect to Non-U.S. Personnel 
Transacting With Non-U.S. Counterparties But Not With Foreign Branches 
of U.S. Counterparties
    The Commission could have adopted an exclusion for all SBS Entities 
with respect to foreign personnel transacting with foreign 
counterparties, without making the exclusion available to foreign 
personnel transacting with foreign branches of U.S. counterparties. As 
discussed above, a history of statutorily disqualifying conduct may 
signal higher ongoing risks to counterparties. SBS Entities may choose 
to replace disqualified foreign personnel due to reputational and 
compliance costs. In addition, the security-based swap market is 
institutional in nature, and better informed institutional 
counterparties may choose to move their business to another employee or 
another SBS Entity without disqualified personnel. To the degree that 
SBS Entities do not replace disqualified personnel and counterparties 
do not move their business, the alternative may decrease risks to 
foreign branches of U.S. counterparties relative to the adopted 
approach. Since both potential returns and potential risks of foreign 
branches may flow through to some U.S. parents (depending on the 
counterparty's ownership and organizational structure), the alternative 
could reduce the returns and risks of such U.S. counterparties' 
parents.
    At the same time, the alternative approach would involve unequal 
effects on foreign counterparties and foreign branches of U.S. 
counterparties. Specifically, under the alternative, foreign 
counterparties would be able to choose between transacting with those 
SBS Entities that employ statutorily disqualified personnel and those 
that do not, whereas foreign branches of U.S. counterparties would only 
be able to transact with SBS Entities that do not employ statutorily 
disqualified personnel. If SBS Entities with disqualified personnel 
compensate for potentially higher counterparty risks with, for example, 
more attractive terms of security-based swaps, the alternative may 
introduce disparities in access and cost of security-based swaps 
available to foreign counterparties as compared to those available to 
foreign branches of U.S. counterparties.
(b) Relief for Non-U.S.-Person SBS Entities With Respect to Non-U.S. 
Personnel Transacting With Non-U.S. Counterparties and Foreign Branches 
of U.S. Counterparties
    The Commission has considered a narrower alternative exclusion 
limited to non-U.S.-person SBS Entities relying on non-U.S. personnel 
in their transactions with foreign counterparties and foreign branches 
of U.S. counterparties. The alternative exclusion would be subject to 
the same limitation as the amendment, discussed above: An SBS Entity 
would not be able to rely on the exclusion with respect to an 
associated person currently subject to an order that prohibits such 
person from participating in the U.S. financial markets, including the 
securities or swap market, or foreign financial markets.
    Relative to the amendment, this alternative would broaden the 
effective scope of application of the statutory prohibition and might 
reduce ongoing compliance and counterparty risks for foreign 
counterparties and foreign branches of U.S. counterparties. Under the 
alternative, disqualified foreign personnel of U.S. SBS Entities would 
be unable to transact without the costs and delays related to 
applications for relief. This might decrease the number of disqualified 
foreign personnel transacting in security-based swap markets and 
seeking to associate with U.S. SBS Entities. Lower market participation 
of disqualified personnel on behalf of U.S. SBS Entities in their 
foreign transactions may reduce the costs of adverse selection and 
increase foreign counterparty willingness to transact with U.S. SBS 
Entities in security-based swaps.
    At the same time, it would result in a disparate competitive 
standing between U.S. SBS Entities and non-U.S.-person SBS Entities as 
they are competing for business with foreign counterparties and foreign 
branches of U.S. counterparties. This alternative would allow 
nonresident SBS Entities to enjoy flexibility in hiring, retaining, and 
replacing non-U.S. personnel and in staffing foreign offices with 
personnel engaged in transactions with foreign counterparties. However, 
U.S. SBS Entities would be unable to rely on the exclusion and would 
have to either replace an employee or apply under Rule of Practice 194, 
incurring related costs and delays. To the degree that SBS Entities 
pass along costs to their

[[Page 6327]]

counterparties, relative to the exclusion, this narrower alternative 
may result in somewhat lower availability or worse terms of security-
based swaps and may somewhat reduce the choice of dealers for foreign 
counterparties and foreign branches of U.S. counterparties.
    Further, under the alternative, foreign personnel of U.S. SBS 
Entities would not have the same competitive standing as foreign 
personnel of non-U.S. SBS Entities when engaging in business with the 
same foreign counterparties. The Commission also notes that the 
definition of a U.S. person is based on a natural person's residency in 
the United States. As discussed above, excluding foreign personnel of 
foreign SBS Entities creates incentives for all disqualified U.S. 
personnel employed by foreign SBS Entities to be transferred to a 
foreign office in order to legally become non-U.S. personnel eligible 
for the alternative exclusion. Of course, the choice made by a non-U.S. 
SBS Entity to transfer disqualified U.S. personnel abroad will reflect 
the value of an employee's skills and expertise, costs to reputation 
with counterparties, the number of positions being moved, and internal 
organizational structures of a non-U.S. SBS Entity. However, SBS 
Entities are commonly part of large financial groups with many domestic 
and foreign regional offices. Therefore, many non-U.S. SBS Entities may 
be able to relocate statutorily disqualified U.S. personnel to foreign 
offices and rely on the exclusion.
    Under this alternative, however, disqualified personnel of U.S. SBS 
Entities would be unable to relocate to a foreign office and rely on 
the exclusion, adding to the competitive disparities between 
disqualified personnel of U.S. and foreign SBS Entities transacting 
with the same foreign counterparties. As a result, under the 
alternative, statutorily disqualified personnel of U.S. SBS Entities 
may seek employment with foreign SBS Entities and continue to transact 
with the same foreign counterparties on behalf of non-U.S. SBS 
Entities.
    The Commission continues to recognize that, due to adverse 
selection costs and compliance risks related to hiring and retaining 
disqualified persons, many SBS Entities may choose not to hire or may 
fire and replace statutorily disqualified employees. However, this 
incentive may be weaker with respect to personnel whose conduct giving 
rise to disqualification occurred in jurisdictions where statutory 
disqualification is not public information.
(c) Relief for Non-U.S. SBS Entities With Respect to Both U.S. and Non-
U.S. Personnel Transacting With Foreign Counterparties and Foreign 
Branches of U.S. Counterparties
    The Commission has considered excluding from the statutory 
prohibition both U.S. and foreign disqualified personnel, but limiting 
the relief to non-U.S.-person SBS Entities transacting exclusively with 
foreign counterparties or foreign branches of U.S. counterparties. The 
alternative exclusion would be subject to the same limitation as the 
amendment, discussed above: An SBS Entity would not be able to rely on 
the exclusion with respect to an associated person currently subject to 
an order that prohibits such person from participating in the U.S. 
financial markets, including the securities or swap market, or foreign 
financial markets.
    Under the alternative, non-U.S. SBS Entities would enjoy full 
flexibility in hiring, retaining, and replacing personnel and in 
staffing both U.S. and non-U.S. offices with personnel engaged in 
transactions with foreign counterparties. To the degree that non-U.S. 
SBS Entities pass along costs to their counterparties, this may result 
in somewhat higher availability or improved terms of security-based 
swaps for foreign counterparties. Further, under the alternative, 
disqualified U.S. personnel would have the same competitive standing as 
disqualified foreign personnel with similar skills and expertise 
transacting on behalf of non-U.S. SBS Entities with the same foreign 
counterparties. For example, disqualified U.S. personnel transacting 
with foreign counterparties and foreign branches of U.S. counterparties 
would not need to relocate to a foreign office of a foreign SBS Entity 
to avail themselves of the exclusion.
    Relative to the Rule, this alternative would increase the 
competitive gap between U.S. and non-U.S. SBS Entities in their ability 
to hire, retain, and locate disqualified personnel as they compete for 
business with foreign counterparties. To the degree that U.S. SBS 
Entities may wish to begin or continue to associate with disqualified 
personnel despite potential reputation costs, U.S. SBS Entities would 
be required to apply with the Commission and disallow disqualified 
personnel from effecting security-based swaps pending Commission 
action. At the same time, foreign SBS Entities would be able to freely 
hire and retain disqualified personnel in the U.S. and allow them to 
engage in security-based swap transactions with foreign counterparties 
and foreign branches of U.S. counterparties.
    As noted in the economic baseline, this alternative approach is 
inconsistent with the relief from the CFTC's requirements that is 
available to both U.S. and non-U.S. SBS Entities with respect to only 
foreign personnel. Given expected extensive cross-registration and 
active cross-market participation by counterparties, differential 
treatment of disqualification may disrupt counterparty relationships 
between the same dually registered SBS Entities transacting with the 
same foreign counterparties in related markets.
    Under the alternative and relative to the amendment, disqualified 
U.S. personnel of non-U.S. SBS Entities may enjoy better employment and 
career outcomes, which may increase the number of disqualified 
personnel transacting in security-based swap markets and seeking to 
associate with SBS Entities. Greater market participation of 
disqualified personnel on behalf of non-U.S. SBS Entities, particularly 
in jurisdictions where conduct giving rise to disqualification is not 
public or easily accessible information, may increase the costs of 
adverse selection and decrease counterparty willingness to transact 
with non-U.S. SBS Entities in security-based swaps. As a result, some 
foreign counterparties may choose to move their transaction activity 
from non-U.S. to U.S. SBS Entities.
    The magnitude of the above economic effects of the alternative 
approach may be limited by three factors. First, many non-U.S. SBS 
Entities may choose to locate personnel transacting with foreign 
counterparties in foreign offices if most of their business is in 
foreign underliers trading in foreign jurisdictions.\595\ As a result, 
some non-U.S. SBS Entities may already locate personnel, including 
statutorily disqualified personnel, dedicated to transacting with 
foreign counterparties outside the United States.
---------------------------------------------------------------------------

    \595\ As discussed in Part VII.A.2.c, infra, we understand that 
many market participants engaged in market-facing activity prefer to 
use traders and manage risk for security-based swaps in the 
jurisdiction where the underlying security is traded.
---------------------------------------------------------------------------

    Second, due to reputational and adverse selection costs and 
compliance risks related to hiring and retaining disqualified persons, 
many SBS Entities may choose not to hire, or may fire and replace 
disqualified employees. The incentive to disassociate is strongest in 
jurisdictions in which conduct giving rise to statutory 
disqualification is public information (as in the U.S). As a result, it 
is not clear how often non-U.S. SBS Entities would choose to hire or

[[Page 6328]]

continue to employ disqualified U.S. personnel even if they were able 
to rely on an exclusion and avoid applying for relief under Rule of 
Practice 194.
    Third, the primary difference between the adopted approach and the 
alternative is in the treatment of U.S. SBS Entity personnel. 
Specifically, under the amendment, U.S. SBS Entities may permit non-
U.S. personnel to transact with foreign counterparties and foreign 
branches of U.S. counterparties, whereas under the alternative they may 
not. With respect to non-U.S. SBS Entities, the amendment provides 
relief for foreign personnel only; the alternative provides relief with 
respect to both U.S. and foreign personnel. As discussed above, the 
definition of a U.S. person in Rule 3a71-3(a)(4)(i)(A) under the 
Exchange Act with respect to a natural person is based on residency in 
the United States. Under the amendment, non-U.S. SBS Entities may be 
able to simply transfer statutorily disqualified U.S. personnel 
transacting with foreign counterparties to a foreign office in order to 
become eligible for the exclusion. Of course, each non-U.S. SBS 
Entity's choice to continue to employ disqualified U.S. personnel and 
relocate them abroad would likely reflect the value of an employee's 
skills and expertise, reputational costs of continued association, the 
number of positions being moved, and internal organizational structures 
of each entity, among others. However, non-U.S. SBS Entities are 
commonly members of large financial groups with many domestic and 
foreign regional offices, and such relocation is likely to be feasible 
for some non-U.S. SBS Entities. As a result, depending on the ease and 
costs of such relocation and the value of disqualified personnel to the 
non-U.S. SBS Entity, the scope of this alternative with respect to non-
U.S. SBS Entities may be similar to the effective scope of the 
exclusion with respect to non-U.S. SBS Entities.
(d) Relief for All SBS Entities With Respect to All Personnel 
Transacting With Non-U.S. Counterparties and Foreign Branches of U.S. 
Counterparties
    The Commission has considered an exclusion for both U.S. and 
foreign SBS Entities with respect to all personnel transacting with 
foreign counterparties and foreign branches of U.S. counterparties. The 
alternative exclusion would be subject to the same limitation as the 
amendment, discussed above: An SBS Entity would not be able to rely on 
the exclusion with respect to an associated person currently subject to 
an order that prohibits such person from participating in the U.S. 
financial markets, including the securities or swap market, or foreign 
financial markets.
    This alternative would allow both non-U.S. and U.S. SBS Entities to 
enjoy full flexibility in hiring, retaining, and replacing personnel, 
and in staffing both U.S. and non-U.S. offices with personnel engaged 
in transacting with foreign counterparties and foreign branches of U.S. 
counterparties. To the degree that SBS Entities currently pass along 
costs to their counterparties or to the degree disqualified personnel 
may have superior skills or expertise, this may benefit the terms of 
security-based swaps and choice of dealers available to foreign 
counterparties. Further, disqualified U.S. personnel would have the 
same competitive standing as disqualified foreign personnel with 
similar skills and expertise transacting on behalf of SBS Entities with 
the same foreign counterparties.
    Relative to the exclusion, this alternative provides more relief 
from the statutory prohibition and may, thus, increase ongoing 
compliance and counterparty risks for foreign counterparties and 
foreign branches of U.S counterparties. Since all disqualified 
personnel of all SBS Entities transacting with foreign counterparties 
and foreign branches of U.S. counterparties would be excluded from the 
statutory prohibition, more disqualified personnel may seek to 
associate with both U.S. and foreign SBS Entities and to transact with 
foreign counterparties and foreign branches of U.S. counterparties. 
However, as discussed elsewhere in this release and in the Rule of 
Practice 194 Adopting Release, one of the key disincentives against 
continued association with disqualified personnel may be reputational. 
To the degree that information about the disqualifying conduct by U.S. 
personnel may be public and institutional customers perceive 
disqualification as increasing counterparty risk, counterparties may 
move their business, and SBS Entities may simply replace disqualified 
U.S. personnel. As a result, it is not clear that SBS Entities would 
significantly increase their reliance on disqualified personnel in 
transactions with foreign counterparties and foreign branches of U.S. 
counterparties relative to the baseline or the adopted approach. 
Nevertheless, to the degree that they may do so, greater market 
participation of disqualified personnel may increase adverse selection 
costs and decrease such counterparties' willingness to participate in 
security-based swap markets.
    As noted above, a natural person's residency in the United States 
is endogenous. As a result, any exclusion for foreign personnel, but 
not U.S. personnel, transacting with foreign counterparties may result 
in SBS Entities simply transferring disqualified U.S. personnel to a 
foreign office. As the Commission recognized above, this decision by an 
SBS Entity will reflect the uniqueness and value of an employee's 
skills, expertise, and client relationships relative to the 
reputational costs and compliance risks of continuing to employ 
disqualified personnel and directs costs of personnel transfers. 
However, SBS Entities that belong to large global financial groups are 
less likely to be constrained by the location of disqualified personnel 
whom they prefer to retain. As a result, the economic effects of this 
alternative may be similar to those of the adopted approach.
(e) Relief for All SBS Entities With Respect to Non-U.S. Personnel 
Effecting and Involved in Effecting Security-Based Swaps With U.S. and 
Non-U.S. Counterparties
    The Commission has also considered alternatives excluding from the 
statutory prohibition non-U.S. associated persons involved in effecting 
security-based swaps with both U.S. and non-U.S. counterparties in 
general, or under certain circumstances. For example, the Commission 
has considered excluding from the statutory prohibition non-U.S. 
associated persons involved in effecting security-based swaps with U.S. 
counterparties, if such activity is limited in level or scope (e.g., 
collateral management).
    As discussed in the economic baseline above, security-based swap 
markets are global and many SBS Entities actively participate across 
U.S. and non-U.S. markets. Due to economies of scale and scope, some 
SBS Entities may choose not to separate customer facing and/or 
operational activities, such as collateral management and clearing, 
related to security-based swaps with U.S. and non-U.S. counterparties. 
To the degree that some SBS Entities rely on the same personnel across 
their U.S. and non-U.S. business, they are currently unable to hire and 
retain statutorily disqualified personnel absent relief by the 
Commission. As discussed above, SBS Entities may face reputational 
costs from retaining disqualified employees. To the degree that SBS 
Entities would prefer to hire and retain certain disqualified employees 
due to their superior expertise, skills, and abilities, and despite 
such reputational costs, the alternative would provide beneficial 
flexibility in personnel decisions

[[Page 6329]]

without necessitating an SBS Entity to completely separate the 
operational side of their U.S and non-U.S. businesses (and more 
flexibility relative to the amendment). Some of these benefits may flow 
through to counterparties in the form of more efficient execution of 
security-based swaps and related services, or better price and non-
price terms.
    To the degree that statutory disqualification of associated persons 
may increase compliance and counterparty risks, the alternative may 
involve greater risks to U.S. counterparties of SBS Entities relative 
to the amendment. The Commission continues to note that the scope of 
conduct that gives rise to statutory disqualification is broad and 
includes conduct that is not related to investments or financial 
markets. Moreover, the security-based swap market is an institutional 
one, and conduct that gives rise to statutory disqualification in the 
U.S. is generally public. U.S. counterparties that believe statutory 
disqualification is a meaningful signal of quality may vote with their 
feet and choose to transact with non-disqualified personnel or SBS 
Entities that do not rely on disqualified personnel.
    The alternative would provide broader relief compared to CFTC's 
requirements in swap markets and would not result in a harmonized 
regulatory regime with respect to statutory disqualification. 
Importantly, the full costs and benefits of an alternative that 
provides broader relief from the statutory prohibition in security-
based swaps compared to the relief available in swap markets may not be 
realized. Specifically, to the degree that market participants transact 
across swap and security-based swap markets with the same SBS Entity 
counterparties, SBS Entities may continue to rely on the same personnel 
who are allowed to effect or be involved in both swaps and security-
based swap transactions.
(f) Relief With Respect to Certain Non-U.S. Middle- and Back-Office 
Associated Persons
    As discussed above, the Commission has considered two alternatives 
that would exclude certain non-U.S. middle- or back-office associated 
persons from the scope of the statutory disqualification prohibition in 
Section 15F(b)(6).\596\ The first alternative would exclude non-U.S. 
associated persons involved in drafting and negotiating master 
agreements and confirmations and managing collateral for the SBS Entity 
from the statutory prohibition. The second alternative would be broader 
and also exclude from the statutory prohibition associated persons 
involved in structuring or supervisory functions, leaving only sales 
and trading persons considered ``involved in effecting'' security-based 
swaps and subject to the statutory prohibition.
---------------------------------------------------------------------------

    \596\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA 
letter at 3, 16.
    \597\ See European Commission email.
    \598\ Range of associated persons if global SBS associated 
persons are taken into account, with broad definition and accounting 
for back office.
    \599\ Remaining range of associated persons after accounting for 
potential reduction of this number when removing personnel with no 
U.S. person contacts.
    \600\ This figure represents an estimate of ``only those 
associated persons authorized to communicate directly with U.S. 
persons.''
    \601\ Remaining range of associated persons after accounting for 
potential further reduction of the number by excluding back office 
functions.
    \602\ Remaining range of associated persons after accounting for 
potential further reduction by focusing exclusively on personnel 
with sales or trader mandates for derivatives.
    \603\ This figure represents the response ``approx. 100 if 
limited to US-focused associated persons.''
    \604\ This figure represents the response ``estimated 700 SBS 
associated persons for front-office personnel only, and when 
removing all back-office functions (comparable to the CFTC 
associated person approach).''

                                Table 4--Estimates of Associated Persons Affected by the Proposal and Alternatives \597\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Estimate                              Bank 1          Bank 2          Bank 3          Bank 4          Bank 5          Bank 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline \598\..........................................           3,750     2,150-2,250           2,100           2,100           1,340          >6,800
Proposal \599\..........................................           1,125     1,350-1,400         700-800     \600\ 1,680         650-750          >1,000
Alternative 1 \601\.....................................             875             850         100-200             n.a             560             700
Alternative 2 \602\.....................................             288             750       \603\ 100       \604\ 700             n.a             n.a
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 5--Percentage Reduction in Associated Persons Based on Data Provided by 6 Market Participants \605\
----------------------------------------------------------------------------------------------------------------
                 Panel A. Reduction Relative to the Market Participant Estimates of the Baseline
-----------------------------------------------------------------------------------------------------------------
                            Estimate                                Average (%)     Minimum (%)     Maximum (%)
----------------------------------------------------------------------------------------------------------------
Proposal........................................................              54              20              85
Alternative 1...................................................              76              58              93
Alternative 2...................................................              80              66              95
----------------------------------------------------------------------------------------------------------------
Panel B. Reduction Relative to the Market Participant Estimates of the Proposal
----------------------------------------------------------------------------------------------------------------
Alternative 1...................................................              38              20              80
Alternative 2...................................................              66              45              87
----------------------------------------------------------------------------------------------------------------

    Based on estimates summarized in Tables 4 and 5 above, the first 
alternative may reduce the scope of application of the statutory 
prohibition with respect to associated persons by an average of 76% 
relative to baseline estimates in the survey, with a range of estimates 
between 58% and 93%. The second alternative may reduce the scope of 
application of the statutory prohibition with respect to associated 
persons by an average of 80% relative to

[[Page 6330]]

baseline estimates in the survey, with a range of estimates between 66% 
and 95%. In contrast, by adopting the proposed approach, as discussed 
above, the Commission estimates that the final amendments may reduce 
the scope of application of the statutory prohibition by approximately 
54%, with a range of estimates between 20% and 85%.
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    \605\ See European Commission email. Where a market participant 
provided a range, the percentage reduction was calculated using a 
midpoint of that range. When a market participant provided an 
estimate using ``over,'' the percentage reduction assumed the figure 
was exactly as reported, which may under-estimate the magnitude of 
the reduction relative to baseline.
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    Relative to the final approach, both alternatives excluding certain 
non-U.S. middle- and back-office employees may provide SBS Entities 
with further flexibility with respect to hiring and retaining 
disqualified personnel who may have valuable expertise and skills in 
their security-based swap business with U.S. and non-U.S. 
counterparties. These alternatives may also involve greater benefits 
for disqualified persons who may enjoy improved labor market outcomes 
and a greater likelihood of being hired and retained by SBS Entities in 
their middle and back-office functions. Such an alternative may also 
more closely harmonize the treatment of statutory disqualification 
across tightly linked swap and security-based swap markets.\606\
---------------------------------------------------------------------------

    \606\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter 
at 16; see also Part V, supra.
---------------------------------------------------------------------------

    However, the Commission continues to recognize that, relative to 
the final approach, and to the degree that statutory disqualification 
may act as a signal of quality of an associated person, these 
alternatives may further increase compliance and counterparty risks, 
including to U.S. counterparties. As discussed in Part IV.B above, the 
conduct of a variety of middle- and back-office activities beyond 
solicitations or sales of security-based swaps--activities such as 
collateral management in connection with security-based swaps--may 
directly impact the risks and returns of counterparties on security-
based swaps. These alternatives may also increase the incentives of 
U.S. and non-U.S. SBS Entities to move their non-U.S. disqualified 
personnel into middle- and back-office functions and may result in 
competitive disadvantages between U.S. and non-U.S. disqualified 
persons in front- and middle- and back-office functions.
    The costs and benefits of these alternatives relative to the final 
approach are likely to be attenuated by two important considerations. 
First, as discussed above, the security-based swap market is an 
institutional one. To the degree that institutional counterparties may 
view statutory disqualification as a meaningful signal of quality, SBS 
Entities may still choose to disassociate from disqualified personnel 
in middle- and back-office functions to reduce reputational costs. 
While dealer concentration may reduce the effectiveness of this market 
discipline, market concentration is itself endogenous. As a result, the 
benefits of this alternative to SBS Entities and disqualified personnel 
as well as the potential risks to counterparties may be dampened. 
Second, under the alternatives, as under the final approach, the 
Commission would continue to be able, in appropriate cases, to 
institute proceedings under Exchange Act Section 15F(l)(3) to determine 
whether the Commission should censure, place limitations on the 
activities or functions of such person, suspend for a period not 
exceeding 12 months, or bar such person from being associated with an 
SBS Entity.\607\ However, the Commission reiterates that the conduct of 
middle- and back-office activities may impact the risks and returns of 
counterparties and that, as estimated in Table 4, these alternatives 
may result in a further narrowing of the scope of the statutory 
prohibition relative to the final approach.
---------------------------------------------------------------------------

    \607\ See 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

D. Certification, Opinion of Counsel, and Employee Questionnaires

    In addition, the Commission is adopting certain amendments to 
registration Rule 15Fb2-1, and modifications to the requirement to 
obtain employee questionnaires under Rules 18a-5(a)(10) and (b)(8).
1. Amendments to Rule 15Fb2-1
    As the Commission stated in the Registration Adopting Release, the 
Commission's access to books and records and the ability to inspect and 
examine registered SBS Entities facilitates Commission oversight of 
security-based swap markets.\608\ To the degree that the certification 
and opinion of counsel requirements of Rule 15Fb2-4 provide assurances 
regarding the Commission's ability to oversee and inspect and examine 
nonresident SBS Entities, the baseline certification and opinion of 
counsel requirements may reduce counterparty and compliance risks and 
adverse selection.
---------------------------------------------------------------------------

    \608\ See Registration Adopting Release, 80 FR at 48972.
---------------------------------------------------------------------------

    However, certain nonresident entities may lack clarity concerning 
the scope of the certification and opinion of counsel requirements and 
their ability to comply. Specifically, the recent passage of the GDPR, 
as well as the potential exit of the United Kingdom from the European 
Union may create significant uncertainty for market participants 
currently intermediating large volumes of security-based swaps 
regarding their ability to comply with the certification and opinion of 
counsel requirements, as well as the background check recordkeeping 
requirements discussed below.
    The Commission estimates that nonresident SBS Entities currently 
intermediating approximately 59.8% of all security-based swap notional 
are subject to foreign privacy and secrecy laws, blocking statutes, and 
other legal barriers that make it difficult or create uncertainty about 
their ability to provide certification and opinion of counsel and/or to 
be subject to inspections and examinations by the Commission.\609\ Such 
nonresident SBS entities may be less likely to apply or may become 
unable to register as SBS Entities when compliance with SBS Entity 
registration rules is required.\610\ As a result, some nonresident SBS 
Entities currently intermediating large volumes of security-based swap 
transactions may cease transaction activity or be forced to relocate 
certain operations, books, and records. This may result in disruptions 
to valuable counterparty relationships or increased costs to 
counterparties (to the degree that nonresident SBS Entities may pass 
along the costs of such restructuring in

[[Page 6331]]

the form of higher transaction costs or less attractive security-based 
swaps). In addition, depending on whether and which SBS Entities step 
in to intermediate the newly available market share, there may be 
significant competitive effects.
---------------------------------------------------------------------------

    \609\ Since we expect a large number of U.S. SBS Entities will 
have dually registered as Swap Entities, to inform our analysis we 
considered foreign jurisdictions where CFTC staff previously 
provided no-action relief for trade repository reporting 
requirements as they apply to swap dealers (available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/15-01.pdf). This estimate was also informed by a legal analysis of the 
EU General Data Protection Regulation, foreign blocking statutes, 
bank secrecy and employment laws, jurisdiction specific privacy 
laws, and other legal barriers that may inhibit compliance with 
regulatory requirements. These jurisdictions were matched to the 
domicile classifications of TIW accounts likely to trigger 
requirements to register with the Commission as SBS Entities when 
compliance with registration requirements becomes effective, using 
2017 DTCC-TIW data. If foreign jurisdictions amend their data 
privacy and blocking laws, provide guidance, or enter into 
international agreements that would facilitate compliance with 
Commission SBS Entity registration requirements before compliance 
with SBS Entity registration rules becomes effective, or if SBS 
Entities choose to restructure their operations and/or relocate 
their books and records to other jurisdictions (for example, in 
response to the potential exit of the U.K. from the E.U. or GDPR 
restrictions), this figure may over- or under-estimate the security-
based swap market share impacted by the guidance.
    \610\ The BIS estimates that as of year-end 2017, the total 
gross market value outstanding in single-name credit default swaps, 
in multi-name credit default swap instruments, and in equity 
forwards and swaps totaled $501 billion. If the amendment affects 
even 0.02% of the market, the economic impact of the amendment may 
exceed $100 million. See BIS, Semi-annual OTC derivatives statistics 
at December 2017, Table 10.1, available at https://www.bis.org/statistics/d10_1.pdf (accessed May 18, 2018).
---------------------------------------------------------------------------

(a) Costs, Benefits, and Effects on Efficiency, Competition, and 
Capital Formation
    The Commission is cognizant of the fact that SBS Entity 
Registration rules and other elements of the Title VII regime will 
apply to an active market. As analyzed in the economic baseline, the 
Commission recognizes that security-based swap markets involve 
extensive cross-border activity, and nonresident SBS Entities 
intermediate a large percentage of security-based swaps. The Commission 
believes that the nonresident SBS entities that may face uncertainty 
about their ability to comply with certification and opinion of counsel 
requirements and are likely to utilize conditional registration are 
those SBS Entities located in jurisdictions with foreign privacy and 
secrecy laws, blocking statutes, and other legal barriers described 
above.
    Conditional registration may provide SBS Entities currently active 
in security-based swap markets with beneficial flexibility and time to 
relocate some of their operations and/or books and records around the 
constraints of foreign privacy and secrecy laws, blocking statutes, and 
other legal barriers, without disrupting ongoing counterparty 
relationships and market activity. In addition, conditional 
registration may facilitate smooth functioning of active security-based 
swap markets as compliance with the Commission's Title VII rules 
becomes required, may benefit both SBS Entities and counterparties by 
preserving SBS Entity-counterparty relationships, and may enhance 
efficiency and capital formation in security-based swaps.
    However, conditional registration may reduce the assurances of the 
certification and opinion of counsel regarding the Commission's ability 
to inspect and examine some SBS Entities during the 24-month period. In 
addition, 24 months may not be sufficient for the more complex SBS 
Entities to relocate and restructure their security-based swap market 
activity outside the reach of foreign privacy and secrecy laws, 
blocking statutes, and other legal barriers, particularly as foreign 
laws, statutes and legal barriers evolve. Thus, under the amendment 
there may still be a risk of disruptions to counterparty relationships 
and market activity if conditionally registered SBS Entities having 
large market shares, and transacting with hundreds and thousands of 
counterparties, are unable to meet the certification and opinion of 
counsel requirements within the 24-month period.
    Moreover, counterparties that may rely on the Commission's ability 
to inspect and examine a registered SBS Entity as a signal of higher 
quality may reduce their participation in security-based swap markets, 
which may increase adverse selection. Alternatively, they may vote with 
their feet and shift business from conditionally registered SBS 
Entities to non-conditionally registered SBS Entities. This may enhance 
competition between conditionally registered and non-conditionally 
registered SBS Entities and may create a market incentive for 
conditionally registered SBS Entities to provide the certification and 
opinion of counsel.
(b) Alternatives Considered
    The Commission considered alternative approaches. Specifically, the 
Commission considered adopting some, but not other, aspects of the 
above relief. For example, the Commission considered shortening the 
conditional registration period (e.g., to 12 or 18 months). Relative to 
the final approach, these alternatives would provide less relief and 
greater uncertainty to nonresident entities that may seek to register 
with the Commission as an SBS Entity, which may increase the likelihood 
of disruptions of counterparty relationships and risks of adverse 
effects on market activity in security-based swaps. At the same time, 
these alternatives may increase the scope, strength, and/or timeliness 
of the certification and opinion of counsel requirement, which may give 
the Commission further assurances regarding its ability to oversee 
security-based swap activity of nonresident entities applying for 
registration. Importantly, regardless of the certification and opinion 
of counsel requirement, all nonresident SBS Entities would continue to 
have independent ongoing obligations to provide the Commission with 
access to their books and records and to permit on-site inspections and 
examinations.
    The Commission has considered an alternative under which all 
conditionally registered SBS Entities would be required to provide 
disclosures to U.S. counterparties or to all counterparties regarding 
their conditional registration. Such disclosures may help inform 
counterparties regarding the conditional registration status of SBS 
Entities with which they may wish to transact. To the degree that 
counterparties may consider conditional registration as a signal of 
lower quality or may seek to build long-term relationships with non-
conditionally registered SBS Entity counterparties, and to the degree 
such counterparties are otherwise uninformed about SBS Entities' 
registration status, this alternative may facilitate more efficient 
counterparty selection. The alternative may also create reputational 
incentives for conditionally registered SBS Entities to provide the 
requisite certification and opinion of counsel to the Commission, to 
the degree that some counterparties may interpret conditional 
registration as a signal of reduced quality.
    However, such disclosure requirements would involve burdens on SBS 
Entities related to the preparation and production of such disclosures. 
Related costs may be partly or fully passed along to SBS Entities' 
counterparties in the form of more expensive security-based swaps. As 
noted above, the Commission believes that nonresident SBS Entities most 
likely to utilize conditional registration are those SBS Entities that 
face uncertainty regarding their ability to comply with certification 
and opinion of counsel requirements due to privacy and secrecy laws, 
blocking statutes, and other legal barriers in their foreign 
jurisdictions. Based on the analysis of 2017 TIW data, the Commission 
estimates that there are approximately 9,611 unique relationships 
(pairs of counterparties and accounts likely to trigger SBS Entity 
registration requirements with registered office locations in 
jurisdictions with foreign privacy and secrecy laws, blocking statutes, 
and other legal barriers) or approximately 72.6% of all unique dealer-
counterparty pairs active in security-based swap market that may become 
subject to the disclosure requirement.\611\ Limiting such disclosure 
requirements to relationships between dealer accounts in jurisdictions 
with foreign privacy and secrecy laws, blocking statutes, and other 
legal barriers and U.S. non-dealer counterparties may affect 4,322 
unique dealer-U.S. counterparty relationships.

[[Page 6332]]

Since many of the dealer accounts belong to large financial groups, the 
Commission can also use the domicile of the parent organization to 
categorize dealers at the level of the financial group (at the firm-
level) instead of at the level of the dealer (at the account-level). 
Using this more conservative approach, there may be 779 unique dealer-
counterparty ties (or 25.7% of all ties) that may be affected by 
foreign privacy and secrecy laws, blocking statutes, and other legal 
barriers and the alternative disclosure requirement. The Commission 
also notes that, as a baseline matter, SBS Entity registration forms 
are public and the Commission may, in the course of Commission 
business, publish a list of registered SBS Entities and note the 
conditional registration status of such entities on the Commission's 
public website.
---------------------------------------------------------------------------

    \611\ This estimate includes unique dealer-counterparty pairs 
where the counterparty is another dealer. Excluding dealer-dealer 
pairs reduces the estimate by 279, with an estimate of 9,332 unique 
pairs between non-dealer counterparties and dealer accounts with 
registered office locations in jurisdictions with foreign privacy 
and secrecy laws, blocking statutes, and other legal barriers (or 
approximately 70.5% of all unique dealer-counterparty pairs).
---------------------------------------------------------------------------

    The Commission has also considered alternatives providing further 
relief to SBS Entities with respect to the certification and opinion of 
counsel requirements. For example, the Commission has also considered 
lengthening the conditional registration period (to, e.g., 5 or 10 
years) in recognition of the fact that some SBS Entities may be unable 
to provide the requisite certification and opinion of counsel within a 
24-month grace period.\612\ The Commission also considered eliminating 
the opinion of counsel requirement and providing carve-outs from the 
certification for competing blocking, privacy, or secrecy laws, similar 
to the relief available in swap markets.\613\ The Commission could also 
have eliminated the opinion of counsel requirement and changed the 
certification to allow a senior officer to certify, based on reasonable 
due diligence, that the SBS Entity will provide access to its U.S. 
business-related books and records to the Commission upon request.\614\ 
Finally, the Commission has also considered eliminating the 
certification and opinion of counsel requirement as a whole.\615\
---------------------------------------------------------------------------

    \612\ See ISDA letter at 10 n.21.
    \613\ See IIB/SIFMA letter at 20; Credit Suisse/UBS letter at 2; 
ISDA letter at 10.
    \614\ Id.
    \615\ See, e.g., EBF letter at 2; ISDA letter at 10; Credit 
Suisse/UBS letter at 2.
---------------------------------------------------------------------------

    Relative to the final approach, these alternatives may provide more 
relief and greater certainty to nonresident entities that may seek to 
register with the Commission as an SBS Entity. As a result, these 
alternatives may further decrease the likelihood of disruptions of 
counterparty relationships and risks of adverse effects on market 
activity in security-based swaps. These alternatives would further 
reduce or eliminate certification and opinion of counsel burdens, 
related uncertainty, and liability risk. At the same time, as discussed 
in prior sections, the Commission continues to believe that access to 
books and records and the ability to inspect and examine registered SBS 
Entities facilitates Commission oversight of security-based swap 
markets. These alternatives may limit the scope of assurances provided 
to the Commission by SBS Entity applicants regarding the Commission's 
ability to inspect and examine SBS Entities. To the degree that some 
nonresident SBS Entities may be unable to provide certification or 
opinion of counsel due to their inability to become subject to 
Commission inspections and examinations (as a result of, for example, 
foreign privacy and secrecy laws, blocking statutes, and other legal 
barriers), these alternatives may reduce the extent of Commission 
inspections and examinations. Importantly, under the final approach as 
well as under these alternatives, all nonresident SBS Entities would 
continue to have independent ongoing obligations to provide the 
Commission with access to their books and records and to permit onsite 
inspections and examinations.
2. Modifications to Rules 18a-5(a)(10) and (b)(8)
(a) Costs, Benefits, and Effects on Efficiency, Competition, and 
Capital Formation
    The questionnaire requirement is intended to support Commission 
oversight and entity compliance with the substantive requirements of 
Rule 15Fb6 regarding statutory disqualification. The modifications to 
Rule 18a-5: i) eliminate the questionnaire requirement with respect to 
associated persons excluded from the statutory prohibition; and ii) 
modify the questionnaire requirement with respect to associated persons 
if local law in the jurisdiction where the associated person is located 
would prohibit the SBS Entity from collecting certain data otherwise 
required under Rule 18a-5. As discussed above, the Commission received 
comments supporting the proposed modifications to Rule 18a-5.\616\ The 
Commission continues to believe that these modifications are unlikely 
to adversely affect Commission oversight of SBS Entity compliance with 
the statutory prohibition since those associated persons are already 
excluded from the statutory prohibition. In addition, the modifications 
relating to local law still require the SBS Entity to collect those 
data elements generally required under Rule 18a-5 that the SBS Entity 
is not prohibited from collecting under local law. At the same time, 
the modifications may involve modest reductions to corresponding 
paperwork burdens. The Commission continues to believe that, to the 
degree that SBS Entities may pass along these burdens to 
counterparties, the modifications may also result in some benefits to 
counterparties of these SBS Entities.
---------------------------------------------------------------------------

    \616\ See EBF letter at 6-7; IIB/SIFMA letter at 30.
---------------------------------------------------------------------------

    As discussed in Part VII.B, the Commission estimates that the 
addition of paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) to Rule 18a-5 
would reduce initial costs associated with Rule 18a-5 by $49,491 and 
ongoing costs by $61,335.\617\ Therefore, the cost savings to SBS 
Entities and counterparties from this modification are likely to be 
modest.
---------------------------------------------------------------------------

    \617\ Initial cost reduction for all stand-alone and bank SBS 
Entities reduction: (117 x Attorney at $423 per hour) = $49,491. 
Ongoing cost reduction for all stand-alone and bank SBS Entities 
reduction: (145 x Attorney at $423 per hour) = $61,335.
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission is modifying, by 
adding paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B), the questionnaire 
requirement with respect to non-U.S. associated persons of SBS Entities 
if the receipt of that information, or the creation or maintenance of 
records reflecting that information, would result in a violation of 
applicable law in the jurisdiction in which the associated person is 
employed or located. The primary intended benefit of this modification 
is to enable certain nonresident SBS Entities to continue 
intermediating transactions with their counterparties. Specifically, 
due to the existence of foreign privacy and secrecy laws, blocking 
statutes, and other legal barriers, the tailoring of the questionnaire 
requirement can enable more nonresident market participants to register 
as SBS Entities without a potentially costly relocation or business 
restructuring of certain operations and records to jurisdictions 
outside the reach of such laws. This may also reduce costs for 
counterparties (as nonresident SBS Entities may pass along related 
costs to counterparties in the form of more expensive security-based 
swaps) and may preserve valuable counterparty relationships.
    In addition, this modification may also involve some modest burden 
reductions. As discussed in Part VII.B, the modification to add 
paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5 is expected 
to decrease the initial costs associated with Rule 18a-5 by

[[Page 6333]]

$24,534 and ongoing costs by $30,879.\618\ In aggregate, as estimated 
in Part VIII.B, under both modifications, initial and ongoing costs of 
all stand-alone and bank SBS Entities related to complying with Rule 
18a-5 are estimated at $215,730 and $269,874 respectively.\619\
---------------------------------------------------------------------------

    \618\ Initial cost reduction for all stand-alone and bank SBS 
Entities reduction: (58 x Attorney at $423 per hour) = $24,534. 
Ongoing cost reduction for all stand-alone and bank SBS Entities 
reduction: (73 x Attorney at $423 per hour) = $30,879.
    \619\ Initial costs for all stand-alone and bank SBS Entities 
reduction under the modifications to Rule 18a-5(a)(10) and (b)(8): 
((700-127-63) x Attorney at $423 per hour) = $215,730.
    Ongoing costs for all stand-alone and bank SBS Entities 
reduction: ((875-158-79) x Attorney at $423 per hour) = $269,874.
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    The Commission continues to recognize that certain recordkeeping 
requirements may facilitate compliance and Commission oversight of SBS 
Entities. In adopting a tailored questionnaire requirement with respect 
to non-U.S. associated persons, the Commission has considered the value 
of such recordkeeping for compliance with Rule 15Fb6-2 and related 
oversight, as well as the costs and potential disruptions to 
counterparty relationships and market activity that may result when 
foreign jurisdictions do not allow nonresident SBS Entities to receive, 
create, or maintain such records. Importantly, as discussed above, the 
Commission continues to note that the tailoring of the requirement in 
(a)(10)(iii)(B) and (b)(8)(iii)(B) does not eliminate or affect the 
scope of all SBS Entities' ongoing obligations to comply with Section 
15F(b)(6) of the Exchange Act and Rule 15Fb6-2, with respect to every 
associated person that effects or is involved in effecting security-
based swaps and is not subject to an exclusion from the statutory 
disqualification prohibition in Section 15F(b)(6) of the Exchange Act.
    Finally, the adopted approach involves a disparate treatment of 
broker-dealer SBS Entities and stand-alone and bank SBS Entities. Based 
on an analysis of 2017 TIW data and filings with the Commission, out of 
50 participants likely to register with the Commission as security-
based swap dealers, the Commission estimates that 16 market 
participants have already registered with the Commission as broker-
dealers; 9 market participants will be stand-alone security-based swap 
dealers, and up to 25 participants will be bank security-based swap 
dealers.\620\
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    \620\ We note that these figures are based on current market 
activity in security-based swaps. We are unable to quantify the 
number of market participants currently expected to register as 
broker-dealer, bank, or stand-alone security-based swap dealers that 
may choose to restructure their U.S. security-based swap market 
participation in response to the pending substantive requirements of 
Title VII, such as capital and margin requirements.
---------------------------------------------------------------------------

    Under the modifications, SBS Entities that are not stand-alone or 
bank SBS Entities would be required to make and keep current a 
questionnaire or application for employment for associated persons with 
respect to whom the broker-dealer SBS Entity is excluded from the 
prohibition in Exchange Act 15F(b)(6), incurring corresponding 
compliance burdens, albeit modest, estimated above. In addition, to the 
extent that some SBS Entities that are not stand-alone or bank SBS 
Entities are heavily reliant on employees in jurisdictions with foreign 
privacy and secrecy laws, blocking statutes, and other legal barriers 
in their security-based swap business, they may be unable to comply 
with the employee questionnaire requirement and register with the 
Commission. These SBS Entities would be unable to register without a 
relocation or restructuring of various records and or operations, 
involving costs for such SBS Entities--costs that may be passed along 
to counterparties or disrupt existing counterparty relationships. This 
may reduce the competitive standing of SBS Entities cross-registered as 
broker-dealers and their employees in certain foreign jurisdictions and 
improve the competitive standing of stand-alone and bank SBS Entities 
and their employees in foreign data privacy jurisdictions.
    Broker-dealer SBS Entities are already subject to a questionnaire 
requirement under Rule 17a-3(a)(12). The Commission believes that such 
entities are making and keeping current employment questionnaires and 
applications for all of their associated persons in their normal course 
of business. In addition, the Commission believes that such SBS 
Entities have already structured their security-based swap business in 
a manner that would enable them to comply with this requirement without 
disrupting transaction activity or ongoing counterparty relationships. 
The sunk cost nature of such structuring of broker-dealers' security-
based swap business may partly mitigate the above competitive effects.
(b) Alternatives Considered
    The Commission has considered an alternative approach, which would 
provide the same relief (by also amending Rule 17a-3(a)(12) and 
providing the same relief to broker-dealer SBS Entities) with respect 
to: (i) Exemption based on the non-U.S. associated SBS Entity's 
exclusion from the prohibition under Section 15F(b); and (ii) exemption 
based on local law.
    The alternative would benefit a greater number of SBS Entities and 
counterparties by extending the relief (with its benefits discussed 
above) to all SBS Entities in their security-based swap business. 
Moreover, the alternative would eliminate the competitive disparities 
between broker-dealer and stand-alone and bank SBS Entities discussed 
above.
    However, the Commission continues to recognize that recordkeeping 
requirements are essential to the inspection and examination process 
and facilitate effective oversight of the markets the Commission 
regulates. Importantly, as discussed above, broker-dealer SBS Entities 
are already subject to a questionnaire requirement under Rule 17a-
3(a)(12). The Commission believes that broker-dealer SBS Entities have 
already located and structured their security-based swap business in a 
way that would allow them to comply with the questionnaire requirement. 
At the same time, the Commission understands that stand-alone and bank 
SBS Entities active in security-based swap markets are not currently 
subject to similar recordkeeping requirements and that the 
questionnaire requirement, as adopted, may require these entities to 
relocate their security-based swap business and staff to other 
jurisdictions. This may disrupt counterparty relationships and ongoing 
business transactions between stand-alone and bank SBS Entities and 
their customers.
    The Commission also understands that broker-dealer SBS Entities are 
routinely making and keeping current employment questionnaires and 
applications for all of their associated persons, which may reduce the 
benefits of the above alternative. However, if such baseline behavior 
of broker-dealer SBS Entities is a result of Rule 17a-3 currently in 
effect and not of compliance practices optimal for each broker-dealer 
SBS Entity, the alternative may reduce burdens \621\ and provide 
beneficial flexibility in recordkeeping practices for broker-dealer SBS 
Entities with respect to associated persons excluded from the statutory 
prohibition. The Commission continues to note that the recordkeeping 
requirement in Rule 18a-5 is intended to support substantive 
obligations with respect to statutory disqualification and that such 
substantive obligations would no longer

[[Page 6334]]

exist with respect to associated persons of broker-dealer SBS Entities 
effecting or involved in effecting security-based swaps and exempt from 
the statutory prohibition under, for instance, Rule of Practice 
194(c)(2).
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    \621\ As acknowledged above, the overall burdens of compliance 
with Rule 18a-5 are relatively modest; however, fixed costs may be 
more significant for smaller entities.
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VII. Paperwork Reduction Act

    Certain provisions of the amendments to Exchange Act Rules 3a71-3 
and 18a-5 contain ``collection of information'' \622\ requirements 
within the meaning of the Paperwork Reduction Act of 1995 (``PRA''). 
The Commission published notice requesting comment on the collection of 
information requirements \623\ and submitted the proposed collections 
of information to the Office of Management and Budget (``OMB'') for 
review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The 
Commission's earlier PRA assessments have been revised to reflect the 
modifications to the rule amendments from those that were proposed, as 
well as additional information and data now available to the 
Commission. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
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    \622\ 44 U.S.C. 3502(3).
    \623\ See Proposing Release, 84 FR at 24288-89.
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    The title of the new collection of information associated with the 
amendments to Rule 3a71-3 is ``Rule 3a71-3(d)--Conditional Exception 
from De Minimis Counting Requirement in Connection with Certain 
Transactions Arranged, Negotiated, or Executed in the United States,'' 
OMB Control Number 3235-0771.\624\ The title and OMB control number for 
the collection of information the Commission is proposing to modify is 
``Rule 18a-5--Records to be made by certain security-based swap dealers 
and major security-based swap participants,'' OMB Control Number 3235-
0745.
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    \624\ This new collection of information is distinct from an 
existing collection of information related to Exchange Act Rule 
3a71-3(c), which provides an exception from the application of 
certain business conduct requirements in connection with a security-
based swap dealer's ``foreign business.'' See generally Business 
Conduct Adopting Release, 81 FR at 30082.
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    In the Proposing Release, the Commission requested comment on the 
collection of information requirements contained therein, as well as 
the accuracy of the Commission's related estimates and statements 
regarding the associated costs and burdens of the proposed rules. The 
Commission did not receive any comments on these matters. The 
Commission continues to believe that the methodology used for 
calculating the burdens set forth in the Proposing Release is 
appropriate. However, where noted, certain estimates have been 
modified, as necessary, to conform to the adopted rules and to reflect 
the most recent data available to the Commission. Other than these 
changes, the Commission's estimates remain unchanged from those in the 
Proposing Release.

A. Amendment to Rule 3a71-3

1. Summary of the Collection of Information \625\
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    \625\ Because the amendment to Rule 3a71-3 would require the use 
of a registered entity in connection with the transactions at issue, 
the amendment also would implicate collections of information 
associated with security-based swap dealer and/or broker status 
(apart from the collections associated with the specific conditions 
of the exception). Separate collections of information address the 
registration of security-based swap dealers and/or brokers, as well 
as the requirements associated with those registered entities as a 
matter of course, including recordkeeping requirements applicable to 
such registered entities. The separate collections of information 
associated with requirements of general applicability for registered 
security-based swap dealers and/or brokers are not addressed as part 
of this rulemaking, and instead are addressed by the collections of 
information associated with those separate requirements.
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(a) Notification of Limited Title VII Applicability
    The exception to Rule 3a71-3 is conditioned in part on the 
registered entity engaged in arranging, negotiating, or executing 
activity in the United States notifying the counterparties of the non-
U.S. person relying on the exception, contemporaneously with and in the 
same manner as the arranging, negotiating, or executing activity, that 
the non-U.S. person is not registered with the Commission as a 
security-based swap dealer, and that certain Exchange Act provisions or 
rules addressing the regulation of security-based swaps would not be 
applicable in connection with the transaction.\626\ As discussed in 
Part II.C.4, the Commission is adopting an alternative means of 
satisfying this notification condition. As amended, the condition 
allows a single disclosure to cover all subsequent arranging, 
negotiating, or executing activity of a registered entity that has no 
customer relationship with the counterparty. This notification 
condition applies only when the identity of the counterparty is known 
to the registered entity at a reasonably sufficient time prior to the 
execution of the transaction to permit the disclosure.\627\
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    \626\ See Exchange Act Rule 3a71-3(d)(1)(iv).
    \627\ See id.
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(b) Business Conduct-Related Conditions
    The exception to Rule 3a71-3 is conditioned in part on the 
registered entity that engages in arranging, negotiating, or executing 
activity in the United States in connection with the transactions at 
issue complying with certain security-based swap dealer business 
conduct requirements related to disclosure of material risks, 
characteristics, incentives, and conflicts of interest; suitability of 
recommendations; and fair and balanced communications. The registered 
entity must comply with these requirements as if the counterparty to 
the non-U.S. person relying on the exception also were a counterparty 
to that registered entity and, if the registered entity is a broker not 
registered as a security-based swap dealer, also as if it were a 
registered security-based swap dealer.\628\ Each of those underlying 
business conduct requirements itself is associated with a collection of 
information.\629\ The Commission is adopting the disclosure condition 
and the communications condition as proposed, and is adopting an 
alternative method to satisfy the counterparty-specific prong of the 
suitability condition. First, the registered entity could ensure that 
it has a reasonable basis to believe that the recommended security-
based swap or strategy involving a security-based swap is suitable for 
the counterparty, as required by Rule 15Fh-3(f)(1). Alternatively, if 
the registered entity reasonably determines that the counterparty to 
whom it recommends a security-based swap or trading strategy involving 
a security-based swap is an ``institutional counterparty'' as defined 
in Rule 15Fh-3(f)(4), the registered entity instead may disclose to the 
counterparty that it is not undertaking to assess the suitability of 
the security-based swap or trading strategy involving a security-based 
swap for the counterparty.
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    \628\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(1)-(3).
    \629\ See Business Conduct Adopting Release, 81 FR at 30083-85 
(discussing collections of information regarding security-based swap 
dealer requirement for disclosure of information regarding material 
risks, characteristics, incentives and conflicts of interest, 
suitability of recommendations, and fair and balanced 
communications).
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(c) Trade Acknowledgment and Verification Condition
    The exception to Rule 3a71-3 is conditioned in part on the 
registered entity that engages in arranging, negotiating, or executing 
activity in the United States in connection with the

[[Page 6335]]

transactions at issue complying with trade acknowledgment and 
verification requirements. These requirements themselves are associated 
with collections of information.\630\ The registered entity must comply 
with these requirements as if the counterparty to the non-U.S. person 
relying on the exception also were a counterparty to that registered 
entity and, if the registered entity is a broker not registered as a 
security-based swap dealer, also as if it were a registered security-
based swap dealer.\631\
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    \630\ See Trade Acknowledgment and Verification Adopting 
Release, 81 FR at 39829-30 (discussing collections of information 
regarding security-based swap dealers requirement for trade 
acknowledgment and verification).
    \631\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(4).
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(d) Portfolio Reconciliation Condition
    The Commission proposed that the exception to Rule 3a71-3 be 
conditioned in part on registered entity that engages in arranging, 
negotiating, or executing activity in the United States in connection 
with the transactions at issue complying with certain portfolio 
reconciliation requirements.\632\ As discussed in Part II.C.2, the 
Commission is persuaded by comments that the burdens of compliance with 
the proposed condition would outweigh its benefits, and is not adopting 
the condition.
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    \632\ See proposed Exchange Act Rule 3a71-3(d)(1)(ii)(B)(5).
---------------------------------------------------------------------------

(e) Recordkeeping Condition
    The exception to Rule 3a71-3 is conditioned in part on the 
registered entity engaged in arranging, negotiating, or executing 
activity in the United States obtaining from the non-U.S. person 
relying on the exception, and maintaining for not less than three years 
following the activity subject to the exception, the first two years in 
an easily accessible place, trading relationship documentation 
involving the counterparty to the transaction.\633\
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    \633\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(3).
    In addition, the exception is conditioned in part on the 
registered entity creating and maintaining books and records 
relating to the transactions subject to this exception that are 
required, as applicable, by Rules 17a-3 and 17a-4, or Rules 18a-5 
and 18a-6, including books and records relating to: Disclosure of 
risks, characteristics, incentives, and conflicts; assessment of 
suitability; fair and balanced communications; and trade 
acknowledgment and verification. See Exchange Act Rule 3a71-
3(d)(1)(iii)(B) (requiring creation and maintenance of books and 
records relating to the requirements specified in proposed paragraph 
(d)(1)(ii)(B)).
    Because that part of the condition subsumes the collection of 
information that the Commission would expect to be associated with 
the final rules adopting those security-based swap dealer books and 
records requirements, it does not constitute a separate collection 
of information attributable to this exception. See note 624, supra.
---------------------------------------------------------------------------

(f) Consent to Service Condition
    The exception to Rule 3a71-3 is conditioned in part on the 
registered entity engaged in arranging, negotiating, or executing 
activity in the United States obtaining from the non-U.S. person 
relying on the exception, and maintaining for not less than three years 
following the activity subject to the exception, the first two years in 
an easily accessible place, written consent to service of process for 
any civil action brought by or proceeding before the Commission, 
providing that process may be served on the non-U.S. person by service 
on the registered entity in the manner set forth in the registered 
entity's current Form BD, SBSE, SBSE-A or SBSE-BD, as applicable.\634\
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    \634\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(4).
---------------------------------------------------------------------------

(g) ``Listed Jurisdiction'' Condition
    The exception to Rule 3a71-3 is conditioned in part on the non-U.S. 
person relying on the exception being subject to the margin and capital 
requirements of a ``listed jurisdiction.'' \635\ The Commission may 
issue an order designating a jurisdiction on its own initiative or in 
response to applications by persons that may rely on the exception, or 
by foreign financial authorities, which must be filed pursuant to the 
procedures set forth in Exchange Act Rule 0-13.\636\
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    \635\ See Exchange Act Rule 3a71-3(d)(1)(v).
    \636\ See Exchange Act Rule 3a71-3(d)(2)(i).
---------------------------------------------------------------------------

(h) Risk Management Control System Condition
    The exception to Rule 3a71-3 is conditioned in part on certain 
registered entities engaged in arranging, negotiating, or executing 
activity in the United States complying with portions of Exchange Act 
Rule 15c3-4 even though they would not otherwise be required to do 
so.\637\ Rule 15c3-4 requires the establishment of an internal risk 
management control system and involves each entity documenting, 
recording, and maintaining its system of internal risk management 
controls.
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    \637\ See Exchange Act Rule 3a71-3(d)(1)(i)(B)(2) (requiring 
compliance with Exchange Act Rule 15c3-1(a)(10)), which in turn 
requires compliance with portions of Exchange Act Rule 15c3-4, when 
the registered entity is a broker not approved to use models to 
compute deductions for market or credit risk). A broker not approved 
to use models to compute deductions for market or credit risk is not 
subject to Rule 15c3-4 unless it is also a security-based swap 
dealer or an OTC derivatives dealer. The condition to the exception 
requiring such brokers to comply with Rule 15c3-1(a)(10) thus 
imposes a new requirement to comply with portions of Rule 15c3-4. 
Other registered entities--brokers who are approved to use models, 
non-model brokers who are dually registered as a security-based swap 
dealer or an OTC derivatives dealer, and stand-alone security-based 
swap dealers--are already required to comply with Rule 15c3-4. See 
Exchange Act Rule 15c3-1(a)(7) (requiring brokers approved to use 
models to comply with portions of Exchange Act Rule 15c3-4); 
Exchange Act Rule 15c3-1(a)(10) (requiring brokers not approved to 
use models who are dually registered as security-based swap dealers 
to comply with portions of Exchange Act Rule 15c3-4); Exchange Act 
Rule 15c3-4 (requiring compliance by OTC derivatives dealers); 
Exchange Act Rule 18a-1(f) (requiring security-based swap dealers to 
comply with portions of Exchange Act Rule 15c3-4).
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(i) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
    The use of the exception to Rule 3a71-3 for covered inter-dealer 
security-based swaps is conditioned in part on the registered entity 
engaged in arranging, negotiating, or executing activity in the United 
States complying with a number of requirements: (1) Filing with the 
Commission a notice that its associated persons may conduct 
``arranging, negotiating, or executing'' activity in the United States; 
and (2) obtaining from the non-U.S. person relying on the exception, 
and maintaining, documentation regarding such non-U.S. person's 
compliance with the inter-dealer threshold.
2. Use of Information
(a) Notification of Limited Title VII Applicability
    The notification condition is intended to help guard against 
counterparties reasonably presuming that the involvement of U.S. 
personnel in an arranging, negotiating, or executing capacity as part 
of the transaction would be accompanied by the safeguards associated 
with Title VII security-based swap dealer regulation applying to the 
non-U.S. person.
(b) Business Conduct-Related Conditions
    The use of the information associated with the business conduct 
condition is the same as the use of information associated with the 
currently extant security-based swap dealer business conduct 
requirements. These conditions apply the existing requirements to 
transactions that, without the exception to Rule 3a71-3, would have 
counted against the de minimis threshold and could have caused the non-
U.S. entity relying on the exception to register as a security-based 
swap dealer and comply with similar or more stringent business conduct 
requirements. The condition requiring the registered entity to comply 
with requirements for the disclosure of risks, characteristics, 
incentives, and conflicts will assist the counterparty in assessing the 
transaction by providing it

[[Page 6336]]

with a better understanding of the expected performance of the 
security-based swap, and provide additional transparency and insight 
into pricing.\638\ The condition requiring the registered entity to 
comply with requirements regarding the suitability of recommendations 
will assist the registered entity in making appropriate 
recommendations.\639\ The condition requiring the registered entity to 
comply with fair and balanced communication requirements in part better 
equip the counterparty to make more informed investment decisions.\640\
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    \638\ See Business Conduct Adopting Release, 81 FR at 30088.
    \639\ See id.
    \640\ See id.
---------------------------------------------------------------------------

(c) Trade Acknowledgment and Verification Condition
    The use of the information associated with the trade acknowledgment 
and verification condition is the same as the use of information 
associated with the currently extant security-based swap dealer trade 
acknowledgment and verification requirements. The condition applies the 
existing requirements to transactions that, without the exception to 
Rule 3a71-3, would have counted against the de minimis threshold and 
could have caused the non-U.S. entity relying on the exception to 
register as a security-based swap dealer and comply with the same trade 
acknowledgment and verification requirements. In general, the trade 
acknowledgment serves as a written record by which the counterparties 
to the transaction may memorialize the terms of a transaction, and the 
verification requirements ensure that the written record of the 
transaction accurately reflects the terms of the transaction as 
understood by the respective counterparties.\641\
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    \641\ See Trade Acknowledgment and Verification Adopting 
Release, 81 FR at 39830.
---------------------------------------------------------------------------

(d) Recordkeeping Condition
    The condition requiring the registered entity to obtain and 
maintain trading relationship documentation involving the non-U.S. 
person relying on the exception and its counterparty is intended to 
help the Commission obtain a full view of the dealing activities 
connected with transactions relying on the exception, including such 
activities that occur in the non-U.S. person relying on the exception. 
Absent such access, the Commission may be impeded in identifying fraud 
and abuse in connection with transactions that have been arranged, 
negotiated, or executed in the United States, where such fraud or abuse 
may be apparent only in light of relevant information obtained from the 
non-U.S. person relying on the exception or its associated persons.
(e) Consent to Service Condition
    The use of the consent to service condition is to facilitate the 
Commission's ability to serve process on the non-U.S. person relying on 
the exception, which in turn will assist the Commission in efficiently 
taking action to address potential violations of the federal securities 
laws in connection with the transactions at issue.
(f) ``Listed Jurisdiction'' Condition
    The use of information provided by applicants in connection with 
``listed jurisdiction'' applications is to assist the Commission in 
evaluating the effectiveness of the financial responsibility 
requirements of jurisdictions regulating non-U.S. persons relying on 
the exception. This condition is intended to help avoid creating an 
incentive for persons engaged in a security-based swap dealing business 
in the United States to book their transactions into entities that 
solely are subject to the regulation of jurisdictions that do not 
effectively require security-based swap dealers or comparable entities 
to meet certain financial responsibility standards. Avoiding such an 
incentive should help prevent creating an unwarranted competitive 
advantage to non-U.S. persons that conduct security-based swap dealing 
activity in the United States without being subject to strong financial 
responsibility standards. The condition also is consistent with the 
view that applying financial responsibility requirements to such 
transactions between two non-U.S. persons can help mitigate the 
potential for financial contagion to spread to U.S. market participants 
and to the U.S. financial system more generally.
(g) Risk Management Control System Condition
    Compliance with Rule 15c3-4 by the registered entity engaged in 
arranging, negotiating, or executing activity in the United States is 
intended to promote the establishment and maintenance of an effective 
risk management control system by such entities.
(h) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
    The use of information provided by applicants in connection with 
the notice and compliance documentation requirements associated with 
the use of the conditional exception for covered inter-dealer security-
based swaps is to assist the Commission in evaluating compliance with 
the limitations on such use of the exception.
3. Respondents
    As discussed above, the Commission continues to estimate that up to 
24 entities that engage in security-based swap dealing activity may 
rely on the conditional exception from having to count dealing 
transactions with non-U.S. counterparties against the de minimis 
thresholds.\642\ To satisfy the exception, each of those up to 24 
entities will make use of an affiliated registered entity that will be 
required to comply with--and incur collections of information in 
connection with--conditions related to compliance with certain Title 
VII security-based swap dealer requirements related to business conduct 
and trade acknowledgment and verification. Each of those up to 24 
registered entities also will have to provide disclosures to 
counterparties of the non-U.S. persons relying on the exception, to 
obtain and maintain trading relationship documentation involving the 
non-U.S. persons relying on the exception and their counterparties, and 
to comply with the condition that the registered entity obtain from the 
non-U.S. person a consent to service of process.
---------------------------------------------------------------------------

    \642\ This estimate is based on data (see Part VI.A.7, supra) 
indicating that: (1) Six U.S. entities are engaged in security-based 
swap dealing activity above the de minimis thresholds may have the 
incentive to book future security-based swaps with non-U.S. 
counterparties into U.S. affiliates to make use of the proposed 
exception in connection with those transactions. (2) One non-U.S. 
entity would fall below the $3 billion de minimis threshold if its 
transactions with non-U.S. counterparties were not counted. (3) The 
``arranged, negotiated, or executed'' counting standard would result 
in five additional non-U.S. entities incurring assessment costs in 
connection with the de minimis exception.
    The analysis has doubled those numbers--to up to twelve U.S. 
persons that may change its booking practices involving security-
based swaps to make use of the exception, plus up to twelve 
additional non-U.S. persons--to address potential growth of the 
security-based swap market and to account for uncertainty associated 
with the availability of data, leading to the final estimate of 24 
entities. See id.
---------------------------------------------------------------------------

    The Commission estimates that up to 24 entities will make use of 
the exception for covered inter-dealer security-based swaps. To satisfy 
the exception, each of those up to 24 entities will make use of an 
affiliated registered entity that will be required to comply with the 
notice and compliance documentation requirements associated with the 
use of the exception for covered inter-dealer security-based swaps.
    The Commission is unable to estimate how many of the 24 non-U.S. 
relying entities will make use of a registered broker that is not 
approved to use

[[Page 6337]]

models to compute deductions for market or credit risk, and is 
therefore required to maintain minimum net capital equivalent to that 
of a security-based swap dealer not approved to use models and 
establish and maintain risk management control systems as if the entity 
were a security-based swap dealer. For purposes of calculating burdens 
associated with establishing and maintaining a risk management control 
system, the Commission estimates that up to 24 non-U.S. relying 
entities will make use, for purposes of the exception, of a registered 
broker that is not approved to use models to compute deductions for 
market or credit risk.
    Applications for listed jurisdiction determinations may be 
submitted by the up to 24 non-U.S. persons that will rely on the 
exception. In practice the Commission expects that the greater portion 
of such listed jurisdiction applications will be submitted by foreign 
financial authorities, given their expertise in connection with the 
relevant financial responsibility requirements, information access 
provisions, and supervisory and enforcement oversight with regard to 
the financial responsibility requirements.\643\
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    \643\ As discussed below, the Commission estimates that three 
non-U.S. persons will submit listed jurisdiction applications.
---------------------------------------------------------------------------

4. Total Annual Reporting and Recordkeeping Burdens (Summarized in 
Table 6)
(a) Notification of Limited Title VII Applicability
    The Commission continues to estimate that up to 12 U.S. entities 
may book transactions into their non-U.S. affiliates to make use of the 
conditional exception and in the aggregate would annually engage in 
nearly 76,000 security-based swap dealing transactions with non-U.S. 
counterparties.\644\ Here--and in connection with the other two groups 
addressed below--the analysis doubles that amount to estimate the 
number of total notifications, recognizing that there will be 
situations in which the registered entity engaged in arranging, 
negotiating, or executing activity in the United States makes the 
required notifications but a transaction does not result.\645\
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    \644\ Available data indicates that the six U.S. entities that 
are engaged in security-based swap dealing activity above the de 
minimis thresholds in the aggregate annually engage in 37,827 
transactions with non-U.S. counterparties. To address potential 
growth in the market and data-related uncertainty, the analysis 
doubles that estimate to 75,654 transactions annually (and also 
doubles the estimated number of entities).
    \645\ This produces an estimate of 151,308 (75,654 x 2) annual 
disclosures pursuant to the condition.
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    The Commission also continues to estimate that two non-U.S. persons 
may fall below the de minimis thresholds due to the conditional 
exception and in the aggregate would annually engage approximately 
20,000 security-based swap dealing transactions with non-U.S. 
counterparties,\646\ doubled here to account for notices that are not 
followed by a transaction.\647\
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    \646\ Available data indicates that the one non-U.S. entity that 
would fall below the de minimis thresholds due to the exception 
annually engages in 10,064 transactions with non-U.S. 
counterparties. To address potential growth in the market and data-
related uncertainty, the analysis doubles that estimate to 20,128 
transactions annually (and also doubles the estimated number of 
entities).
    \647\ This produces an estimate of 40,256 (20,128 x 2) annual 
disclosures pursuant to the condition.
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    The Commission further continues to estimate that an additional ten 
non-U.S. entities may rely on the conditional exception and in the 
aggregate would annually engage in approximately 2,100 security-based 
swap dealing transactions, with non-U.S. persons, that may be subject 
to the exception,\648\ doubled here to account for notices that are not 
followed by a transaction.\649\
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    \648\ Available data indicates that would result in five 
additional non-U.S. persons that would be expected to incur 
assessment costs due to the ``arranged, negotiated, or executed'' 
counting standard engage in a total of 1,056 annual security-based 
swap transactions with non-U.S. counterparties. To address potential 
growth in the market and data-related uncertainty, the analysis 
doubles that estimate to 2,112 transactions annually (and also 
doubles the estimated number of entities).
    \649\ This produces an estimate of 4,224 (2,112 x 2) annual 
disclosures pursuant to the condition.
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    In light of the limited contents of those notices, the Commission 
continues to believe that each such notice on average would be expected 
to take no more than five minutes. Accordingly, the Commission 
continues to estimate that the 12 U.S. entities that may book 
transactions into their non-U.S. affiliates to make use of the 
conditional exception in the aggregate will annually spend a total of 
approximately 12,609 hours to provide the notices required by the 
conditions.\650\ The alternative means of satisfying this condition 
through a single notice, discussed in Part II.C.4 above, does not alter 
the burden estimates for these 12 U.S. entities because the single 
disclosure is not available when the counterparty is a customer or 
security-based swap counterparty of the registered entity, and it is 
likely that the 12 U.S. entities described above would make use of the 
exception with respect to ``arranging, negotiating, or executing'' 
activity for its own customers and counterparties. The Commission 
further continues to estimate that the two non-U.S. entities that may 
fall below the de minimis thresholds due to the exception in the 
aggregate will annually spend a total of approximately 3,355 hours to 
provide the disclosures required by the conditions,\651\ while the 
other ten non-U.S. entities that may rely on the conditional exception 
in the aggregate will annually spend a total of approximately 352 hours 
to provide the disclosures required by the conditions.\652\ However, 
the Commission is unable to estimate how many of these non-U.S. 
entities would be able to rely on the single disclosure, and therefore, 
for purposes of calculating reporting and recordkeeping burdens, the 
Commission estimates that none of these entities would rely on the 
single disclosure.
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    \650\ 151,308 aggregate annual disclosures x 5 minutes per 
transaction. This averages to approximately 1,050.75 hours for each 
of those 12 firms.
    \651\ 40,256 aggregate annual disclosures x 5 minutes per 
transaction. This averages to approximately 1,677 hours for each of 
those two firms.
    \652\ 4,224 aggregate annual disclosures x 5 minutes per 
transaction. This averages to 35.2 hours for each of those ten 
firms.
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    The Commission also continues to believe that each of those 24 
total entities would initially spend 100 hours and incur approximate 
costs of $30,598 to develop policies and procedures to help ensure that 
appropriate disclosures are provided.\653\
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    \653\ Applied to the estimated 24 entities at issue here, this 
would amount to 2,400 hours and $734,352.
    These estimates are based on prior estimates, made in connection 
with the adoption of the ``arranged, negotiated, or executed'' 
counting standard, that non-U.S. persons would incur 100 hours and 
$28,300 to establish policies and procedures to restrict 
communications with U.S. personnel in connection with the non-U.S. 
persons' dealing activity. See ANE Adopting Release, 81 FR at 8628. 
That $28,300 estimate has been adjusted to $30,598 in current 
dollars (28,300 x 1.0812).
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(b) Business Conduct-Related Conditions
    The Commission estimated the reporting and recordkeeping burdens 
associated with the relevant security-based swap dealer business 
conduct requirements under Title VII when it adopted those 
requirements. The Commission continues to believe that those estimates 
are instructive for calculating the per-entity reporting and 
recordkeeping burdens associated with the business conduct-related 
conditions, given that the conditions in effect would require 
compliance with those business conduct requirements.
     Disclosures of material risks, characteristics, and 
conflicts and

[[Page 6338]]

incentives. When the Commission earlier considered the compliance 
burdens associated with those disclosure requirements (along with 
clearing rights and daily mark disclosure requirements not applicable 
under this exception),\654\ the Commission estimated that 
implementation of those requirements: (i) Initially would require three 
persons from trading and structuring, three persons from legal, two 
persons from operations, and four persons from compliance, for 100 
hours each; \655\ (ii) half of those persons would be required to spend 
20 hours annually to re-evaluate and modify disclosures and systems 
requirements; \656\ and (iii) those entities would require eight full-
time persons for six months of systems development, programming, and 
testing,\657\ along with two full-time persons annually for maintenance 
of this system.\658\
---------------------------------------------------------------------------

    \654\ See Business Conduct Adopting Release, 81 FR at 30091-92. 
In connection with those prior estimates, the Commission noted that 
entities that are dually registered with the CFTC already provide 
their counterparties with similar disclosures.
    \655\ Applied to the 24 entities at issue here, this would 
amount to an aggregate initial burden of 28,800 hours (24 entities x 
12 persons x 100 hours).
    \656\ Applied to the 24 entities at issue here, this would 
amount to an aggregate annual burden of 2,880 hours (24 entities x 6 
persons x 20 hours).
    \657\ Applied to the 24 entities at issue here, this would 
amount to an aggregate initial burden of 192,000 hours (24 entities 
x 8 persons x 1,000 hours).
    \658\ Applied to the 24 entities at issue here, this would 
amount to an aggregate annual burden of 96,000 hours (24 entities x 
2 persons x 2,000 hours).
    In adopting those disclosure requirements, the Commission also 
incorporated an estimate of one hour per security-based swap for an 
entity to evaluate whether more particularized disclosures are 
necessary and to develop additional disclosures. See Business 
Conduct Adopting Release, 81 FR at 30092. The Commission does not 
believe that particular category of costs would be applicable in the 
context of the transactions at issue here.
    Under the exception, the disclosure condition extends not only 
to incentives and conflicts of the registered entity, but also 
incentives and conflicts of its non-U.S. affiliate. The Commission 
believes, however, that the existing burden estimates are sufficient 
to account for this aspect of the disclosure, given that the two 
entities' affiliation should facilitate the transfer of any relevant 
incentive and conflict information for the registered entity to 
convey.
---------------------------------------------------------------------------

     Suitability of recommendations. When the Commission 
previously analyzed the burdens associated with the security-based swap 
dealer recommendation suitability requirement, it estimated that most 
security-based swap dealers would obtain representations from 
counterparties to comply with the institutional counterparty 
suitability provisions of the requirement.\659\ The Commission further 
particularly estimated: (i) That for security-based swap market 
participants that also are swap market participants, most of the 
requisite representations have been drafted for the swaps context, and 
that to the extent that any modifications are necessary to adapt those 
representations to the security-based swap context, each market 
participant would require two hours to assess the need for 
modifications and make any required modifications; \660\ and (ii) other 
market participants (apart from special entities not relevant here) 
would require five hours for each market participant to review and 
agree to the relevant representations.\661\ The suitability condition 
that the Commission is adopting lessens the institutional counterparty 
suitability requirements, upon which this prior analysis was based, in 
connection with transactions subject to the exception. Accordingly, 
when complying with the institutional counterparty suitability 
requirements, the registered entity does not have to obtain 
representations or other information demonstrating that the 
counterparty or its agent is capable of independently evaluating 
investment risks with regard to the security-based swap or trading 
strategy involving a security-based swap, nor must it obtain 
representations that the counterparty or agent is exercising 
independent judgment in evaluating the registered entity's 
recommendations. To reflect this reduced reporting and recordkeeping 
burden, the Commission estimates: (i) That for registered entities that 
also are swap market participants, most of the requisite 
representations have been drafted for the swaps context, and to the 
extent that any modifications are necessary to adapt those 
representations to the context of the suitability condition, each 
market participant would require one hour \662\ to assess the need for 
modifications and make any required modifications; \663\ and (ii) other 
market participants (apart from special entities not relevant here) 
would require two and a half hours \664\ for each market participant to 
review and agree to the relevant representations.\665\
---------------------------------------------------------------------------

    \659\ See id. at 30092-93.
    \662\ The Commission previously estimated that, for security-
based swap market participants that also are swap market 
participants, each market participant would require two hours 
perform this task in connection with the more stringent suitability 
requirements described above. See Business Conduct Adopting Release, 
81 FR at 30092.
    \663\ Analysis of current data indicates that six U.S. entities 
engaged in security-based swap dealing activity above the de minimis 
thresholds in the aggregate have 161 unique non-U.S. counterparties 
that are swap market participants, and 70 unique non-U.S. 
counterparties that are not swap market participants. One non-U.S. 
entity may fall below the de minimis threshold due to the exception 
and has 391 unique non-U.S. counterparties that are swap market 
participants, and 178 unique non-U.S. counterparties that are not 
swap market participants. Five additional non-U.S. persons would be 
expected to incur assessment costs in connection with the 
``arranged, negotiated, or executed'' counting standard in the 
aggregate have six unique non-U.S. counterparties that are swap 
market participants, and one unique non-U.S. counterparty that is 
not a swap market participant. Adding together those estimates and 
then doubling them (in light of the uncertainty associated with the 
estimate and to account for potential growth of the security-based 
swap market) produces a total estimate of 1,116 unique non-U.S 
counterparties that are swap market participants, and 498 that are 
not. Only non-U.S. counterparties are relevant for purposes of this 
analysis because the proposed exception does not address security-
based swap transactions involving U.S. person counterparties.
    Consistent with these assumptions, the potential burden 
associated with such modifications in connection with the proposed 
condition would amount to 1,116 hours (1,116 non-U.S. security-based 
swap market participants that also are swap market participants x 1 
hour).
    \664\ The Commission previously estimated that other market 
participants would require five hours for each market participant to 
perform this task in connection with the more stringent suitability 
requirements described above. See Business Conduct Adopting Release, 
81 FR at 30092.
    \665\ Consistent with the above assumptions, the burden 
associated with such modifications in connection with the condition 
would amount to 1,245 hours (498 non-U.S. security-based swap market 
participants that are not also swap market participants x 2.5 
hours).
---------------------------------------------------------------------------

     Fair and balanced communications. The Commission's earlier 
analysis of the burdens associated with the fair and balanced 
communications requirement \666\ took the view that each registered 
entity would incur: (i) $6,000 in initial legal costs to draft or 
review statements of potential opportunities and corresponding risks in 
marketing materials; \667\ (ii) an additional initial six hours for 
internal review of other communications such as emails and Bloomberg 
messages; \668\ and (iii) $8,400 in initial legal costs associated with 
marketing materials for more bespoke transactions.\669\
---------------------------------------------------------------------------

    \666\ See Business Conduct Adopting Release, 81 FR at 30093.
    \667\ In connection with the exception, the potential burden 
associated with such drafting or review would amount to $155,693 (24 
entities x $6,000 x 1.0812 adjustment to current dollars).
    \668\ In connection with the exception, the potential burden 
associated with such internal review would amount to 144 hours (24 
entities x 6 hours).
    \669\ In connection with the exception, the potential burden 
associated with such drafting or review would amount to $217,970 (24 
entities x $8,400 x 1.0812 adjustment to current dollars).
     In adopting the fair and balanced communication requirement, 
the Commission also incorporated an estimate of ongoing compliance 
costs (associated with review of email communications sent to 
counterparties) over the term of the security-based swap. See 
Business Conduct Adopting Release, 81 FR at 30093. Those costs are 
not incorporated into this estimate because the registered entity 
that engaged in market-facing activity in the United States in 
connection with the transactions at issue here would not be expected 
to have ongoing communications with the counterparty to the 
security-based swap.

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[[Page 6339]]

(c) Trade Acknowledgment and Verification Condition
    The Commission estimated the reporting and recordkeeping burdens 
associated with the trade acknowledgment and verification requirements 
under Title VII when it adopted those requirements.\670\ The Commission 
continues to believe that those estimates are instructive for 
calculating the per-entity reporting and recordkeeping burdens 
associated with the trade acknowledgment and verification condition, 
given that the condition in effect would require compliance with that 
trade acknowledgment and verification requirement by additional persons 
and/or in additional circumstances.
---------------------------------------------------------------------------

    \670\ See id. at 39830-31.
---------------------------------------------------------------------------

    When the Commission earlier considered the compliance burdens 
associated with the trade acknowledgment and verification requirements, 
the Commission estimated that each applicable entity would incur: (i) 
355 Hours initially to develop an internal order and trade management 
system; \671\ (ii) 436 hours annually for day-to-day technical support, 
as well as amortized annual burden associated with system or platform 
upgrades and updates; \672\ (iii) 80 hours initially for the 
preparation of written policies and procedures to obtain verification 
of transaction terms; \673\ and (iv) 40 hours annually to maintain 
those policies and procedures.\674\
---------------------------------------------------------------------------

    \671\ In connection with the exception, the potential burden 
associated with such system development would amount to 8,520 hours 
(24 entities x 355 hours).
    \672\ In connection with the exception, the potential annual 
burden associated with such support and updates would amount to 
10,464 hours (24 entities x 436 hours).
    \673\ In connection with the exception, the potential burden 
associated with such preparation would amount to 1,920 hours (24 
entities x 80 hours).
    \674\ In connection with the exception, the potential annual 
burden associated with such policies and procedures would amount to 
960 hours (24 entities x 40 hours).
---------------------------------------------------------------------------

(d) Recordkeeping Condition
    To comply with the recordkeeping conditions relating to trading 
relationship documentation, the registered entity and the non-U.S. 
person relying on the exception jointly would need to develop policies 
and procedures to provide for the identification of such records and 
for their transfer to the registered affiliate. For each use of the 
exception, the Commission continues to estimate that such policies and 
procedures would impose a one-time initial burden of 20 hours.\675\
---------------------------------------------------------------------------

    \675\ Across the 24 potential uses of the exception, this would 
amount to a total of 480 hours (24 entities x 20 hours).
---------------------------------------------------------------------------

    The Commission also continues to estimate that the non-U.S. person 
relying on this exception also would need to expend two hours per week 
to identify such records and to electronically convey the records to 
its registered affiliate.\676\ The Commission further continues to 
estimate that the registered affiliate would need to expend one hour 
per week in connection with the receipt and maintenance of those 
records and the records related to the consent to service condition 
described below.\677\
---------------------------------------------------------------------------

    \676\ Across the 24 potential uses of the exception, this would 
amount to a total of 2,496 hours annually (24 entities x 2 hours x 
52 weeks).
    \677\ Across the 24 potential uses of the exception, this would 
amount to a total of 1,248 hours annually (24 entities x 1 hour x 52 
weeks).
     The recordkeeping condition also specifies that, for the 
exception to be available, the registered entity must create and 
maintain books and records as required by applicable rules, 
including any books and records requirements relating to the 
provisions specified in paragraph (d)(1)(ii)(B) (i.e., relating to 
disclosure of risks, characteristics, incentives, and conflicts; 
suitability; fair and balanced communications; and trade 
acknowledgment and verification). Because that part of the condition 
subsumes the collection of information that we would expect to be 
associated with the final rules adopting those security-based swap 
dealer books and records requirements, it does not constitute a 
separate collection of information. See note 624, supra.
---------------------------------------------------------------------------

(e) Consent To Service Condition
    To comply with the condition that the affiliated registered entity 
obtain from the non-U.S. person relying on the exception, and maintain 
for not less than three years following the activity subject to the 
exception, the first two years in an easily accessible place, written 
consent to service of process for civil actions, one or the other of 
those parties would have to draft such a consent or use an industry-
standard consent provision, and the registered entity must obtain that 
consent from the non-U.S. person. The Commission continues to estimate 
that the parties jointly must expend two hours in connection with 
obtaining this consent.\678\ The burden associated with the registered 
entity's maintenance of records related to the consent to service 
condition are included in the Commission's estimate of the burden 
associated with the registered entity's maintenance of records related 
to the recordkeeping provisions.\679\
---------------------------------------------------------------------------

    \678\ Across the 24 expected uses of the exception, this would 
amount to a total of 48 hours (24 entities x 2 hours).
    \679\ See note 677, supra.
---------------------------------------------------------------------------

(f) ``Listed Jurisdiction'' Condition
    The Commission continues to believe that burden estimates 
associated with applications for substituted compliance determinations 
are instructive with regard to the burdens that would be associated 
with applications by market participants in connection with ``listed 
jurisdiction'' status.\680\
---------------------------------------------------------------------------

    \680\ Notwithstanding the substantive differences between the 
standards associated with listed jurisdiction determinations and 
substituted compliance assessments, see Part II.C.5, supra, the two 
sets of applications will be submitted pursuant to Rule 0-13 and may 
be expected to address certain analogous elements.
---------------------------------------------------------------------------

    When the Commission initially adopted Rules 0-13 and 3a71-6, 
providing for substituted compliance in connection with security-based 
swap dealer business conduct requirements, the Commission concluded 
that the ``great majority'' of substituted compliance applications 
would be submitted by foreign authorities, and that ``very few'' 
applications would be submitted by SBS Entities, and the Commission 
concluded that three such registered entities would submit substituted 
compliance applications.\681\ The Commission further estimated that the 
one-time paperwork burden associated with preparing and submitting all 
three substituted compliance requests in connection with those 
requirements would be approximately 240 hours, plus $240,000 for the 
services of outside professionals.\682\ The Commission subsequently 
relied on those estimates in connection with the paperwork burdens 
associated with amendments to Rule 3a71-6 related to trade 
acknowledgment and verification.\683\
---------------------------------------------------------------------------

    \681\ See Business Conduct Adopting Release, 81 FR at 30097.
    \682\ This was based on the estimate that each request would 
require approximately 80 hours of in-house counsel time, plus 
$80,000 for the services of outside professionals (based on 200 
hours of outside time x $400/hour). See id.
    \683\ See Trade Acknowledgment and Verification Adopting 
Release, 81 FR at 39832.
---------------------------------------------------------------------------

    The Commission similarly believes that the majority of ``listed 
jurisdiction'' applications would be made by foreign authorities rather 
than by the up to 24 non-U.S. persons that potentially would rely on 
the exception. Consistent with the estimates in connection with the 
substituted compliance rule, moreover, the Commission estimates that 
three non-U.S. persons that seek to rely on the exception would file 
listed jurisdiction applications, and that in the aggregate those three 
persons would incur initial paperwork burdens, associated with 
preparing and submitting the requests, of approximately 240 hours, plus 
$259,488 for the services of outside

[[Page 6340]]

professionals (incorporating an eight percent addition to reflect 
current dollars).
(g) Risk Management Control System Condition
    The Commission estimated the burdens associated with compliance 
with the Rule 15c3-4 requirement to establish an internal risk 
management control system when it adopted those requirements for 
entities dually registered as a brokers or dealer and as a security-
based swap dealer.\684\ The Commission believes that those estimates 
are instructive for calculating the per-entity burdens associated with 
the creation of an internal risk management control system.
---------------------------------------------------------------------------

    \684\ See Capital, Margin, and Segregation Adopting Release, 84 
FR 43963.
---------------------------------------------------------------------------

    The Commission staff estimates that the requirement to comply with 
Rule 15c3-4 will result in one-time and annual hour burdens to the 
registered entity. The Commission staff estimates that the average 
amount of time an entity will spend implementing its risk management 
control system will be 2,000 hours, resulting in an industry-wide one-
time hour burden of 48,000 hours across the 24 registered entities not 
already subject to Rule 15c3-4.\685\ In implementing its policies and 
procedures, the registered entity is required to document and record 
its system of internal risk management controls. The Commission staff 
estimates that each of these 24 registered entities will spend 
approximately 250 hours per year reviewing and updating their risk 
management control systems to comply with Rule 15c3-4, resulting in an 
industry-wide annual hour burden of approximately 6,000 hours.\686\
---------------------------------------------------------------------------

    \685\ 24 registered entities x 2,000 hours = 48,000 hours.
    \686\ 24 registered entities x 250 hours = 6,000 hours.
---------------------------------------------------------------------------

    The registered entities engaged in arranging, negotiating, or 
executing activity in the United States may incur start-up costs to 
comply with the provisions of Rule 15c3-4, including information 
technology costs. The Commission estimates that a registered entity 
will incur an average of approximately $16,000 for initial hardware and 
software expenses, while the average ongoing cost will be approximately 
$20,500 per registered entity, for a total industry-wide initial cost 
of $384,000 and an ongoing cost of $492,000 per year.\687\
---------------------------------------------------------------------------

    \687\ 24 registered entities x $16,000 = $384,000; 24 registered 
entities x $20,500 = $492,000.
---------------------------------------------------------------------------

(h) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
     Filing Notice with the Commission. The Commission 
estimates that the notice requirement associated with the use of the 
conditional exception for covered inter-dealer security-based swaps 
will result in annual hour burdens to registered entities. The 
Commission estimates each registered entity will file one notice with 
the Commission. In addition, the Commission estimates that it will take 
a registered entity approximately 30 minutes to file this notice, 
resulting in an industry-wide annual hour burden of 12 hours.\688\
---------------------------------------------------------------------------

    \688\ Across the 24 potential uses of the exception, this would 
amount to a total of 12 hours (24 entities x \1/2\ hours). The 
estimate is based on a notice requirement associated with the 
alternative compliance mechanism outlined in Rule 18a-10. See 
Capital, Margin, and Segregation Adopting Release, 84 FR 43967.
---------------------------------------------------------------------------

     Creating, Obtaining, and Maintaining Threshold Compliance 
Documentation. To comply with the condition that the affiliated 
registered entity obtain from the non-U.S. person, and maintain, copies 
of documentation regarding such non-U.S. person's compliance with the 
inter-dealer threshold, the registered entity and the non-U.S. person 
jointly would need to develop policies and procedures to provide for 
the creation of such records and for their transfer to and maintenance 
by the registered affiliate. For each use of the exception, the 
Commission estimates that such policies and procedures would impose a 
one-time initial burden of 20 hours.\689\
---------------------------------------------------------------------------

    \689\ Across the 24 potential uses of the exception, this would 
amount to a total of 480 hours (24 entities x 20 hours).
---------------------------------------------------------------------------

    The Commission also estimates that the non-U.S. person relying on 
this exception also would need to expend two hours per week to create 
such records and to electronically convey the records to its registered 
affiliate.\690\ The Commission further estimates that the registered 
affiliate would need to expend one hour per week in connection with the 
receipt and maintenance of those records.\691\
---------------------------------------------------------------------------

    \690\ Across the 24 potential uses of the exception, this would 
amount to a total of 2,496 hours annually (24 entities x 2 hours x 
52 weeks).
    \691\ Across the 24 potential uses of the exception, this would 
amount to a total of 1,248 hours annually (24 entities x 1 hour x 52 
weeks).

                                       Table 6--Rule 3a71-3 Amendment--Summary of Paperwork Reduction Act Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Initial burden                                             Annual burden
             Burden type             -------------------------------------------------------------------------------------------------------------------
                                                Per-firm                    Aggregate                     Per-firm                    Aggregate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Disclosure of limited Title VII
 applicability: *
    disclosure by 12 U.S. dealing     ...........................  ...........................  1,050.75 hr................  12,609 hr.
     entities (A).
    disclosure by 2 non-U.S. dealing  ...........................  ...........................  1,677.3 hr.................  3,355 hr.
     entities (B).
    disclosure by other non-U.S.      ...........................  ...........................  35.2 hr....................  352 hr.
     entities (C).
    related policies and procedures.  100 hr.....................  2,400 hr...................
    (same)..........................  $30,598....................  $734,352...................
Disclosure of risks, characteristics
 et al:
    structuring, legal, operations,   1,200 hr...................  28,800 hr.                                                ...........................
     compliance.
    re-evaluation and modification..  ...........................  ...........................  120 hr.....................  2,880 hr.
    systems development,              8,000 hr...................  192,000 hr.                                               ...........................
     programming, testing.
    system maintenance..............  ...........................  ...........................  4,000 hr...................  96,000 hr.
Suitability:
    reps. by participants also in     1 hr.......................  1,116 hr.                                                 ...........................
     swap market.
    representations by other          2.5 hr.....................  1,245 hr.                                                 ...........................
     counterparties.
Fair and balanced communications:
    statement drafting..............  $6,487.2...................  $155,693.                                                 ...........................
    additional internal review......  6 hr.......................  144 hr.                                                   ...........................
    legal costs.....................  $9082......................  $217,970.                                                 ...........................
Trade acknowledgment and
 verification:
    internal order and trade mgt.     355 hr.....................  8,520 hr.                                                 ...........................
     systems.
    daily tech. support/amortized     ...........................  ...........................  436 hr                       10,464 hr.
     upgrades.
    initial preparation of policies   80 hr......................  1,920 hr.                                                 ...........................
     and procedures.
    maintenance of policies and       ...........................  ...........................  40 hr......................  960 hr.
     procedures.

[[Page 6341]]

 
Copies of trading relationship
 documentation:
    joint development of policies/    20 hr......................  480 hr.                                                   ...........................
     procedures.
    non-US entity identification and  ...........................  ...........................  104 hr.....................  2,496 hr.
     conveyance.
    registered entity receipt and     ...........................  ...........................  52 hr......................  1,248 hr.
     maintenance.
Consent to service of process:
    joint drafting/transfer to        2 hr.......................  48 hr.                                                    ...........................
     registered entity.
``Listed jurisdiction''
 applications:
    applications by non-regulators..  80 hr......................  240 hr.                                                   ...........................
    (same)..........................  $86,496....................  $259,488.                                                 ...........................
Notice of ANE activity filed with     \1/2\ hr...................  12 hr.                                                    ...........................
 the Commission.
Compliance with inter-dealer
 threshold documentation:
    joint development of policies/    20 hr......................  480 hr.                                                   ...........................
     procedures.
    non-US entity creation and        ...........................  ...........................  104 hr.....................  2,496 hr.
     conveyance.
    registered entity receipt and     ...........................  ...........................  52 hr......................  1,248 hr.
     maintenance.
Risk mgmt. control systems:
    establishment of the systems....  2,000 hr...................  48,000 hr.                                                ...........................
    maintenance and review of the     ...........................  ...........................  250 hr.....................  6,000 hr.
     systems.
    information technology costs....  $16,000....................  $384,000...................  $20,500....................  $492,000.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* (A) Twelve U.S. dealing entities may book future security-based swaps with non-U.S. counterparties into non-U.S. affiliates. (B) Two non-U.S. entities
  may fall below the de minimis threshold if ``arranged, negotiated, or executed'' transactions are not counted. (C) Ten additional non-U.S. entities
  may make use of the exception to avoid incurring assessment costs in connection with the ``arranged, negotiated, or executed'' de minimis test.

5. Collection of Information Is Mandatory
    The collections of information associated with the amendments to 
Rule 3a71-3 are mandatory to the availability of the exception.
6. Confidentiality
    Any disclosures to be provided in connection with the arranging, 
negotiating, or executing activity of a registered entity in compliance 
with the requirements of the exception would be provided to the non-
U.S. counterparties of the non-U.S. person relying on this exception; 
therefore, the Commission would not typically receive confidential 
information as a result of this collection of information. To the 
extent that the Commission receives records related to such disclosures 
from a registered entity through the Commission's examination and 
oversight program, or through an investigation, or some other means, 
such information would be kept confidential, subject to the provisions 
of applicable law.
7. Retention Period of Recordkeeping Requirements
    By virtue of being registered as a security-based swap dealer and/
or as a broker, the entity engaged in market facing conduct in the 
United States will be required to retain the records and information 
required under the amendment to Rule 3a71-3 for the retention periods 
specified in Exchange Act Rules 17a-4 and 18a-6, as applicable.\692\
---------------------------------------------------------------------------

    \692\ The registered entity would have to create and/or maintain 
certain records in connection with the following conditions: 
Disclosure of limited Title VII applicability; business conduct; 
trade acknowledgment and verification; obtaining and maintaining 
relationship documentation and questionnaires; and consent to 
service of process.
    The conditions do not require the non-U.S. person relying on the 
exception to make or retain any particular types of records 
(although that non-U.S. person will be required to convey certain 
documentation to its registered affiliate).
---------------------------------------------------------------------------

B. Amendments to Rule 18a-5

1. Summary of Collections of Information
    The amendments to Rule 18a-5 relate to the requirements that stand-
alone and bank SBS Entities make and keep current certain records.\693\ 
These amendments to Rule 18a-5 reduce the burden associated with Rule 
18a-5 by providing generally that a stand-alone or bank SBS Entity need 
not: (i) Make and keep current a questionnaire or application for 
employment for an associated person if the SBS Entity is excluded from 
the prohibition under Exchange Act Section 15F(b)(6) with respect to 
such associated person (e.g., the exclusion in Rule of Practice 
194(c)(2)), and (ii) include the information described in paragraphs 
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5, 
unless the SBS Entity (1) is required to obtain such information under 
applicable law in the jurisdiction in which the associated person is 
employed or located or (2) obtains such information in conducting a 
background check that is customary for such firms in that jurisdiction, 
and the creation or maintenance of records reflecting that information 
would not result in a violation of applicable law in the jurisdiction 
in which the associated person is employed or located. The security-
based swap dealer or major security-based swap participant still must 
comply with Section 15F(b)(6) of the Exchange Act.
---------------------------------------------------------------------------

    \693\ See 17 CFR 240.18a-5.
---------------------------------------------------------------------------

2. Use of Information
    Rule 18a-5, as amended, is designed, among other things, to promote 
the prudent operation of SBS Entities, and to assist the Commission, 
SROs, and state securities regulators in conducting effective 
examinations.\694\ Thus, the collections of information under Rule 18a-
5, as amended, are expected to facilitate inspections and examinations 
of SBS Entities.
---------------------------------------------------------------------------

    \694\ As noted above, Rule 18a-5 is patterned after Exchange Act 
Rule 17a-3, the recordkeeping rule for registered broker-dealers. 
See, e.g., Books and Records Requirements for Brokers and Dealers 
Under the Securities Exchange Act of 1934, Exchange Act Release No. 
47910 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (``The Commission 
has required that broker-dealers create and maintain certain records 
so that, among other things, the Commission, [SROs], and State 
Securities Regulators . . . may conduct effective examinations of 
broker-dealers'' (footnote omitted)).
---------------------------------------------------------------------------

3. Respondents
    The Commission estimated the number of respondents in the Proposing 
Release. The Commission received no comment on these estimates. The 
Commission slightly modified its proposed estimates in the 
Recordkeeping and Reporting Adopting Release.\695\ We continue to 
believe the modified estimates are appropriate.
---------------------------------------------------------------------------

    \695\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68607-09.
---------------------------------------------------------------------------

    Consistent with the Recordkeeping and Reporting Adopting Release, 
based on available data regarding the single-name CDS market--which the 
Commission believes will comprise the majority of security-based 
swaps--the Commission estimates that the number

[[Page 6342]]

of major security-based swap participants likely will be five or fewer 
and, in actuality, may be zero.\696\ Therefore, to capture the likely 
number of major security-based swap participants that may be subject to 
the collections of information for purposes of this PRA, the Commission 
estimates for purposes of this PRA that five entities will register 
with the Commission as major security-based swap participants. Also 
consistent with the Recordkeeping and Reporting Adopting Release, the 
Commission estimates that approximately four major security-based swap 
participants will be stand-alone entities.\697\
---------------------------------------------------------------------------

    \696\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68607; see also Capital, Margin, and Segregation Adopting Release 84 
FR at 43960, and Registration Adopting Release, 80 FR at 48990.
    \697\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68610.
---------------------------------------------------------------------------

    Consistent with prior releases, the Commission estimates that 50 or 
fewer entities ultimately may be required to register with the 
Commission as security-based swap dealers, of which 16 are broker-
dealers that will likely seek to register as security-based swap-
dealers.\698\ The Commission continues to estimate that approximately 
75% of the 34 non-broker-dealer security-based swap dealers (i.e., 25 
firms) will register as bank security-based swap dealers, and the 
remaining 25% (i.e., 9 firms) will register as stand-alone security-
based swap dealers.\699\
---------------------------------------------------------------------------

    \698\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68607; see also Capital, Margin, and Segregation Adopting Release 84 
FR at 43959-60, and Registration Adopting Release, 80 FR at 48990.
    \699\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68608; see also see also Capital, Margin, and Segregation Adopting 
Release 84 FR at 43959-60. The Commission does not anticipate that 
any firms will be dually registered as a broker-dealer and a bank.
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    Finally, as indicated in the Recordkeeping and Reporting Adopting 
Release, the Commission estimates that three stand-alone SBSDs will 
elect to operate under Rule 18a-10 which contains an alternative 
compliance mechanism that allows a stand-alone SBSD that is registered 
as a swap dealer and predominantly engages in a swaps business to elect 
to comply with the recordkeeping and reporting requirements of the CEA 
and the CFTC's rules in lieu of complying with Rule 18a-5 (among 
others).\700\
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    \700\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68621.
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    Further, the Commission continues to estimate that each security-
based swap dealer will employ approximately 420 associated persons that 
are natural persons and each major security-based swap participant will 
employ approximately 62 associated persons that are natural 
persons.\701\ The Commission has no data regarding how many associated 
persons of SBS Entities who are non-U.S. natural persons may: (a) Not 
effect or be involved in effecting security-based swap transactions 
with or for counterparties that are U.S. persons (other than a 
security-based swap transaction conducted through a foreign branch of a 
counterparty that is a U.S. person); (b) effect or be involved in 
effecting security-based swap transactions with or for counterparties 
that are U.S. persons, but who may be employed or located in 
jurisdictions where the receipt of information required by the 
questionnaire or employment application, or the creation or maintenance 
of records reflecting that information, would result in a violation of 
applicable law; or (c) effect or be involved in effecting security-
based swap transactions with or for counterparties that are U.S. 
persons, who are employed or located in jurisdictions where local law 
would not restrict the receipt, creation or maintenance of information 
required by the questionnaire or employment application. Given that, 
the Commission estimates, for purposes of this Paperwork Reduction Act 
analysis, that non-U.S. associated persons are evenly split into each 
of these categories.
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    \701\ See Proposing Release, 84 at 24286; see also Rule of 
Practice 194 Adopting Release, 84 FR at 4926. Commission staff also 
checked with the staff at the National Futures Association regarding 
an approximate number of associated persons employed by registered 
swap dealers. NFA staff provided anecdotal information indicating 
that the number of natural persons that are associated persons of 
swap dealers is substantially similar to Commission staff estimates. 
NFA staff further indicated that they believe about half of the 
total number of natural persons that are associated persons of swap 
dealers are located in the U.S. and the other half are located in 
foreign jurisdictions.
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4. Total Initial and Annual Recordkeeping and Reporting Burden
    As indicated in the Recordkeeping and Reporting Adopting Release, 
Rule 18a-5 will impose collection of information requirements that 
result in initial and annual burdens for SBS Entities. The amendments 
to Rule 18a-5 will decrease these burdens for certain SBS Entities.
    Rule 18a-5 requires that stand-alone SBS Entities make and keep 
current 13 types of records, including records on associated 
persons.\702\ The Commission estimated, in the Recordkeeping and 
Reporting Adopting Release, that those 13 paragraphs would impose an 
initial burden of 260 hours and an ongoing annual burden of 325 hours 
on each stand-alone SBS Entity.\703\ In addition, Rule 18a-5 would 
require that bank SBS Entities make and keep current 10 types of 
records, including records on associated persons.\704\ The Commission 
estimated, in the Recordkeeping and Reporting Adopting Release, that 
these ten paragraphs will impose an initial burden of 200 hours and an 
ongoing burden of 250 hours on each bank SBS Entity.\705\ The 
Commission further stated that while Rule 18a-5 will impose a burden to 
make and keep current these records, it would not require the firm to 
perform the underlying task.\706\ The Commission continues to believe 
these estimated burdens are appropriate.
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    \702\ 17 CFR 240.18a-5(a)(10).
    \703\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68610. Of these total initial and ongoing annual burdens for the 13 
types of records a firm would be required to make and keep current 
under paragraph (a)(10) of Rule 18a-5, Commission staff believes 
that the burdens associated with making and keeping current 
questionnaires or applications for employment would be an initial 
burden of 20 hours (or 260/13) and an ongoing burden of 25 hours (or 
325/13).
    \704\ 17 CFR 240.18a-5(b)(8).
    \705\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68611. Of these total initial and ongoing annual burdens for the 10 
types of records a firm would be required to make and keep current 
under paragraph (b)(8) of Rule 18a-5, Commission staff believes that 
the burdens associated with making and keeping current 
questionnaires or applications for employment would be an initial 
burden of 20 hours (or 200/10) and an ongoing burden of 25 hours (or 
250/10).
    \706\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68610. In estimating the burden associated with Rule 18a-5, the 
Commission recognizes that entities that will register stand-alone 
and bank SBS Entities likely already make and keep current some 
records as a matter of routine business practice, but the Commission 
does not have information about the records that such entities 
currently keep. Therefore, the Commission assumes, solely for 
purposes of estimating PRA burdens for these entities, that they 
currently keep no records.
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    The amendments to paragraphs (a)(10) and (b)(8) of Rule 18a-5 (a) 
exempt stand-alone and bank SBS Entities from the requirement to make 
and keep current a questionnaire or application for employment for an 
associated person if the SBS Entity is excluded from the prohibition in 
section 15F(b)(6) of the Exchange Act with respect to the associated 
person (e.g., the exclusion in Rule of Practice 194(c)(2)), and (b) 
allow SBS Entities to exclude information from their associated person 
records unless the SBS Entity (1) is required to obtain such 
information under applicable law in the jurisdiction in which the 
associated person is employed or located or (2) obtains such 
information in conducting a background check that is customary for such 
firms in that jurisdiction, and the creation or maintenance of records 
reflecting that information would not result in a

[[Page 6343]]

violation of applicable law in the jurisdiction in which the associated 
person is employed or located.
(a) Addition of Paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A)
    The Commission estimates that the amendment to add paragraphs 
(a)(10)(iii)(A) and (b)(8)(iii)(A) to Rule 18a-5 would eliminate the 
paperwork burden for stand-alone and bank SBS Entities associated with 
making and keeping current questionnaires or applications for 
employment records, otherwise required by Rule 18a-5, with respect to 
any associated person if the SBS Entity is excluded from the 
prohibition in Exchange Act Section 15F(b)(6), including the exclusion 
in Rule of Practice 194(c)(2) with respect to a natural person who is 
(i) not a U.S. person and (ii) does not effect and is not involved in 
effecting security-based swap transactions with or for counterparties 
that are U.S. persons (other than a security-based swap transaction 
conducted through a foreign branch of a counterparty that is a U.S. 
person).
    As indicated above, the Commission estimates that there will be 
approximately 4 stand-alone major security-based swap participants, 6 
stand-alone security-based swap dealers and 25 bank security-based swap 
dealers. Further, as indicated above, we estimate that each security-
based swap dealer will have approximately 420 associated persons and 
half of those associated persons, or 210, would not be employed or 
located in the U.S. The Commission estimates that stand-alone and bank 
SBS dealers would not need to obtain the questionnaire or application 
for employment for one third of those associated persons, or 70, 
because Rule of Practice 194(c)(2) provides an exclusion from the 
prohibition in Section 15F(b)(6) of the Exchange Act with respect to 
associated persons who are not located in the U.S. and do not effect 
and are not involved in effecting security-based swap transactions with 
or for counterparties that are U.S. persons (other than a security-
based swap transaction conducted through a foreign branch of a 
counterparty that is a U.S. person).\707\ Similarly, as indicated 
above, each major security-based swap participant would have 
approximately 62 associated persons and half of those associated 
persons, or 31, would not be employed or located in the U.S. The 
Commission estimates that stand-alone major security-based swap 
participants would not need to obtain the questionnaire or application 
for employment for one third of those associated persons, or 10, 
because Rule of Practice 194(c)(2) provides an exclusion from the 
prohibition in Section 15F(b)(6) of the Exchange Act with respect to 
those associated persons.\708\
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    \707\ 70 associated persons/420 associated persons per security-
based swap dealer = a reduction of approximately 16.7%. Security-
based swap dealers would be able to utilize this paragraph relative 
to other exclusions from the requirements of Exchange Act Section 
15F(b)(6) that the Commission may provide, however the analysis is 
focusing solely on the exclusion provided by the addition of 
paragraph (c)(2) to Rule of Practice 194 for purposes of the 
Paperwork Reduction Act estimate.
    \708\ 10 associated persons/62 associated persons per major 
security-based swap participant = a reduction of approximately 
16.1%. Major security-based swap participants would be able to 
utilize this paragraph relative to other exclusions from the 
requirements of Exchange Act Section 15F(b)(6) that the Commission 
may provide, however the analysis is focusing solely on the 
exclusion provided by the addition of paragraph (c)(2) to Rule of 
Practice 194 for purposes of this Paperwork Reduction Act estimate.
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    Given this, the addition of paragraphs (a)(10)(iii)(A) and 
(b)(8)(iii)(A) to Rule 18a-5 will reduce the initial burden associated 
with Rule 18a-5 by 117 hours \709\ and it will reduce the ongoing 
burden associated with Rule 18a-5 by 145 hours.\710\
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    \709\ Initial burden hours associated with paragraphs (a)(10) 
and (b)(8) of Rule 18a-5 for stand-alone and bank security-based 
swap dealers and major security-based swap participants--
    20 hours x (6 stand-alone security-based swap dealers + 25 bank 
security-based swap dealers) = 20 hours x 31 security-based swap 
dealers = 620 initial burden hours for security-based swap dealers.
    20 hours x 4 stand-alone major security-based swap participants 
= 80 initial burden hours for major security-based swap 
participants.
    Initial burden hour reduction:
    620 initial burden hours for security-based swap dealers x 16.7% 
(see n.707, supra) = 104 hours. 80 initial burden hours for major 
security-based swap participants x 16.1% (see n.708, supra) = 13 
hours. A 104 hour reduction in the initial burden for security-based 
swap dealers + a 13 hour reduction in the initial burden for major 
security-based swap participants = a 117 hour reduction in initial 
burden hours across all entities able to rely on Rule 18a-5(a)(10) 
and (b)(8).
    \710\ Ongoing burden hours associated with paragraph (a)(10) and 
(b)(8) of Rule 18a-5 for stand-alone and bank security-based swap 
dealers and major security-based swap participants--
    25 hours x (6 stand-alone security-based swap dealers + 25 bank 
security-based swap dealers) = 25 hours x 31 security-based swap 
dealers = 775 ongoing burden hours for security-based swap dealers.
    25 hours x 4 stand-alone major security-based swap participants 
= 100 ongoing burden hours for major security-based swap 
participants.
    Ongoing burden hour reduction:
    775 ongoing burden hours for security-based swap dealers x 16.7% 
(see n.707, supra) = 129 hours. 100 ongoing burden hours for major 
security-based swap participants x 16.1% (see n.708, supra) = 16 
hours. A 129 hour reduction in the ongoing burden for security-based 
swap dealers + a 16 hour reduction in the ongoing burden for major 
security-based swap participants = a 145 hour reduction in ongoing 
burden hours across all entities able to rely on Rule 18a-5(a)(10) 
and (b)(8).
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(b) Addition of Paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B)
    The Commission estimates that the amendment to add paragraphs 
(a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5 will decrease the 
paperwork burden for stand-alone and bank SBS Entities by permitting 
the exclusion of information mandated by the questionnaire requirement 
with respect to associated natural persons who effect or are involved 
in effecting security-based swap transactions with U.S. counterparties, 
unless the SBS Entity (1) is required to obtain such information under 
applicable law in the jurisdiction in which the associated person is 
employed or located or (2) obtains such information in conducting a 
background check that is customary for such firms in that jurisdiction, 
and the creation or maintenance of records reflecting that information 
would not result in a violation of applicable law in the jurisdiction 
in which the associated person is employed or located.
    As indicated above, the Commission estimates that there will be 
approximately 4 stand-alone major security-based swap participants, 6 
stand-alone security-based swap dealers and 25 bank security-based swap 
dealers. Further, as indicated above, each security-based swap dealer 
would have approximately 420 associated persons and half of those 
associated persons, or 210, would not be employed or located in the 
U.S. The Commission estimates that these new paragraphs will permit 
stand-alone and bank security-based swap dealers to exclude certain 
information mandated by the questionnaire requirement for approximately 
one third of those associated persons, or 70.\711\ Similarly, as 
indicated above, each major security-based swap participant would have 
approximately 62 associated persons and half of those associated 
persons, or 31, would not be employed or located in the U.S. The 
Commission estimates that these new paragraphs will permit stand-alone 
major security-based swap participants to exclude certain information 
mandated by the questionnaire requirement for approximately one third 
of those associated persons, or 10.\712\
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    \711\ See text accompanying note 707, supra.
    \712\ See text accompanying note 708, supra.
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    The Commission estimates that this will reduce the burdens 
associated with obtaining the information specified in the 
questionnaire requirement by 50% for the affected associated persons. 
Given this, the addition of paragraphs (a)(10)(iii)(B) and 
(b)(8)(iii)(B) to Rule

[[Page 6344]]

18a-5 will reduce the initial burden associated with Rule 18a-5 by 58 
hours \713\ and will reduce the ongoing burden associated with Rule 
18a-5 by 73 hours.\714\
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    \713\ Initial burden hours associated with paragraphs (a)(10) 
and (b)(8) of Rule 18a-5 for stand-alone and bank security-based 
swap dealers and major security-based swap participants--
    20 hours x (6 stand-alone security-based swap dealers + 25 bank 
security-based swap dealers) = 20 hours x 31 security-based swap 
dealers = 620 initial burden hours for security-based swap dealers.
    20 hours x 4 stand-alone major security-based swap participants 
= 80 initial burden hours for major security-based swap 
participants.
    Initial burden hour reduction:
    (620 initial burden hours for security-based swap dealers x 
16.7% (see n.707, supra) x 50%) = 52 hours. (80 initial burden hours 
for major security-based swap participants x 16.1% (see n.708, 
supra) x 50%) = 6 hours. A 52 hour reduction in the initial burden 
for security-based swap dealers + a 6 hour reduction in the initial 
burden for major security-based swap participants = a 58 hour 
reduction in initial burden hours across all entities able to rely 
on Rule 18a-5(a)(10) and (b)(8).
    \714\ Ongoing burden hours associated with paragraph (a)(10) and 
(b)(8) of Rule 18a-5 for stand-alone and bank security-based swap 
dealers and major security-based swap participants--
    25 hours x (6 stand-alone security-based swap dealers + 25 bank 
security-based swap dealers) = 20 hours x 34 security-based swap 
dealers = 775 ongoing burden hours for security-based swap dealers.
    25 hours x 4 stand-alone major security-based swap participants 
= 100 ongoing burden hours for major security-based swap 
participants.
    Ongoing burden hour reduction:
    (775 ongoing burden hours for security-based swap dealers x 
16.7% (see n.707 supra) x 50%) = 65 hours. (100 ongoing burden hours 
for major security-based swap participants x 16.1% (see n.708 supra) 
x 50%) = 8 hours. A 65 hour reduction in the ongoing burden for 
security-based swap dealers + a 8 hour reduction in the ongoing 
burden for major security-based swap participants = a 73 hour 
reduction in ongoing burden hours across all entities able to rely 
on Rule 18a-5(a)(10) and (b)(8).
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    Thus, in total, the addition of both paragraphs (a)(10)(iii)(A) and 
(b)(8)(iii)(A) and paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) will 
reduce the initial burden associated with the questionnaire requirement 
in Rule 18a-5 by 175 hours,\715\ and the ongoing burden associated with 
the questionnaire requirement in Rule 18a-5 by 218 hours.\716\
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    \715\ A 127 hour reduction in initial burden hours associated 
with the addition of paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) 
and a 63 hour reduction in initial burden hours associated with the 
addition of paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) = a 190 
hour reduction in initial burden hours.
    \716\ A 158 hour reduction in ongoing burden hours associated 
with the addition of paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) 
and a 79 hour reduction in ongoing burden hours associated with the 
addition of paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) = a 237 
hour reduction in ongoing burden hours.
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5. Collection of Information Is Mandatory
    The collections of information pursuant to Rule 18a-5, as amended, 
are mandatory for SBS Entities.
6. Confidentiality
    Information that an SBS Entity is required to make and keep current 
under Rule 18a-5 will be maintained by the firm. To the extent that the 
Commission collects such records during an inspection or examination of 
a registered SBS Entity, or through some other means, such records 
would generally be kept confidential, subject to the provisions of 
applicable law.\717\
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    \717\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
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7. Retention Period for Recordkeeping Requirements
    Rule 18a-6 establishes the required retention periods for SBS 
Entities to maintain records collected in accorded with Rule 18a-
5.\718\ Under paragraph (d)(1) of Rule 18a-6, an SBS Entity is required 
to maintain and preserve in an easily accessible place the records 
required under paragraphs (a)(10) and (b)(8) of Rule 18a-5 until at 
least three years after the associated person's employment and any 
other connection with the SBS Entity has terminated.
---------------------------------------------------------------------------

    \718\ See 17 CFR 240.18a-6(d)(1).
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VIII. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\719\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
major rule, as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \719\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IX. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act of 1980 (``RFA'') \720\ requires the 
Commission to consider the impact of the rules on ``small entities,'' 
\721\ a term that includes ``small businesses,'' ``small 
organizations,'' and ``small governmental jurisdictions.'' \722\ In the 
Proposing Release, the Commission certified, pursuant to Section 605(b) 
of the RFA,\723\ that the proposed amendments to Exchange Act Rules 
3a71-3, 15Fb2-1, 0-13, 18a-5 and Rule of Practice 194 would not have a 
significant economic impact on a substantial number of small 
entities.\724\ The Commission received no comments on this 
certification.
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    \720\ 5 U.S.C. 601-612.
    \721\ 5 U.S.C. 605(b).
    \722\ 5 U.S.C. 601(3)-(6).
    \723\ 5 U.S.C. 605(b).
    \724\ See Proposing Release, 84 FR at 24290.
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    For purposes of Commission rulemaking in connection with the 
RFA,\725\ a small business or small organization 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; 
\726\ 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,\727\ 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.\728\ The Commission has not adopted a definition 
for the term ``small governmental jurisdiction,'' so the RFA's default 
definition of the term applies; accordingly, the term includes 
``governments of cities, counties, towns, townships, villages, school 
districts, or special districts, with a population of less than fifty 
thousand.'' \729\ The Small Business Administration defines small 
businesses in the finance and insurance industry to include the 
following: (i) For depository credit intermediation and credit card 
issuing, business concerns with $600 million or less in assets; \730\ 
(ii) for non-depository credit

[[Page 6345]]

intermediation and certain other activities related to credit 
intermediation, business concerns with annual receipts not exceeding a 
threshold between $8 million and $41.5 million depending on the type of 
business; \731\ (iii) for financial investments and related activities, 
business concerns with $41.5 million or less in annual receipts; \732\ 
(iv) for insurance carriers and related activities, business concerns 
with annual receipts not exceeding a threshold between $8 million and 
$41.5 million depending on the type of business; \733\ and (v) for 
funds, trusts, and other financial vehicles, business concerns with $35 
million or less in annual receipts.\734\
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    \725\ Although the RFA, 5 U.S.C. 601(3)-(6), defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the 
terms ``small business'' and ``small organization'' for the purposes 
of Commission rulemaking in accordance with the RFA. Those 
definitions, as relevant to this proposed rulemaking, are set forth 
in Rule 0-10 under the Exchange Act, 17 CFR 240.0-10. See Exchange 
Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982) 
(File No. AS-305).
    \726\ See 17 CFR 240.0-10(a).
    \727\ See 17 CFR 240.17a-5(d).
    \728\ See 17 CFR 240.0-10(c).
    \729\ 5 U.S.C. 601(5).
    \730\ See 13 CFR 121.201 (Subsector 522). A financial 
institution's assets are determined by averaging the assets reported 
on it four quarterly financial statements for the preceding year. 
See id. at n.8.
    \731\ See id. at Subsector 522.
    \732\ See id. at Subsector 523.
    \733\ See id. at Subsector 524.
    \734\ See id. at Subsector 525. In the Proposing Release, the 
Commission erroneously reported outdated thresholds in the Small 
Business Administration's definition of small businesses engaged in 
the finance and insurance industry. See Proposing Release, 84 FR at 
24289. This error did not impact the Commission's certification that 
the proposed rules would not have a significant impact on a 
substantial number of small entities.
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    For purposes of the exception to Exchange Act Rule 3a71-3, the 
Commission continues to believe, based on feedback from market 
participants and information about the security-based swap markets, 
that the types of entities that would engage in more than a de minimis 
amount of dealing activity involving security-based swaps are part of 
large financial institutions that exceed the thresholds defining 
``small entities'' as set forth above. Accordingly, the Commission 
expects that all of the firms that are likely to make use of the 
exception to Rule 3a71-3 would not be ``small entities'' for purposes 
of the RFA.\735\ The exception to Exchange Act Rule 3a71-3 is subject 
to conditions requiring arranging, negotiating, or executing activity 
to be conducted by registered security-based swap dealers or by 
registered brokers, in each case that are affiliated with the non-U.S. 
persons relying on the exception. It is possible that some non-U.S. 
persons may set up new security-based swap dealers or new brokers to 
make use of the exception, while other non-U.S. persons that seek to 
make use of the exception instead may make use of an existing 
affiliated registered security-based swap dealer or existing affiliated 
registered broker.\736\ By definition, any such affiliated existing or 
new broker would not be a ``small entity.'' \737\ Moreover, even in the 
unlikely event that some non-U.S. persons were to satisfy the 
exception's conditions via the use of affiliated registered security-
based swap dealers that fall within the definition of ``small entity'' 
for purposes of the RFA,\738\ the Commission continues to believe that 
there would not be a substantial number of such entities.\739\
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    \735\ See also ANE Adopting Release, 81 FR at 8636; Application 
of Certain Title VII Requirements to Security-Based Swap 
Transactions Connected With a Non-U.S. Person's Dealing Activity 
That A 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, 27503 
(May 13, 2015) (``ANE Proposing Release''); Cross-Border Adopting 
Release, 79 FR at 47368.
    \736\ See Part VI.A.7, supra (discussing likely broker or 
security-based swap dealer affiliates of persons expected to rely on 
the exception).
    \737\ The ``small entity'' definition applied to brokers 
excludes brokers that are affiliated with a person that is not a 
``small entity.'' See Exchange Act Rule 0-10(c)(2), (i)(1), 17 CFR 
240.0-10(c)(2), (i)(1) (basing affiliation on an 25 percent 
ownership standard that is narrower than the majority ownership 
standard used in connection with this conditional exception). 
Because the non-U.S. persons relying on this exception would not be 
``small entities,'' see note 735, supra, and accompanying text, any 
such affiliated broker also would not be a ``small entity.''
    \738\ As noted above, the Commission continues to believe, based 
on feedback from market participants and information about the 
security-based swap markets, that the types of entities that would 
engage in more than a de minimis amount of dealing activity 
involving security-based swaps are part of large financial 
institutions that do not qualify as ``small entities.'' If the 
affiliated registered security-based swap dealer itself engages in 
security-based swap dealing activity above the de minimis 
thresholds, then the Commission accordingly believes that this 
affiliated registered security-based swap dealer would not be a 
``small entity.''
    \739\ Similarly, the Commission believes that there would not be 
a significant number of ``small entities'' that may file ``listed 
jurisdiction'' applications pursuant to the proposed amendments to 
Exchange Act Rule 0-13. This conclusion reflects the same reasons, 
as well as the expectation that the majority of such applications 
would be filed by foreign authorities that do not qualify as ``small 
entities.''
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    Based on feedback from industry participants about the security-
based swap markets, the Commission continues to believe that entities 
that will qualify as SBS Entities exceed the thresholds defining 
``small entities.'' Thus, the Commission believes that any SBS Entities 
that may seek to rely on the proposed amendment to Rule 15Fb2-1 would 
not be ``small entities'' for purposes of the RFA.\740\
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    \740\ See Registration Adopting Release, 80 FR at 49013.
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    The Commission also continues to believe that any SBS Entities--
i.e., registered security-based swap dealers and registered major 
security-based swap participants--with associated persons that may be 
the subject of the proposed amendments to Rule of Practice 194 would 
not be ``small entities'' for purposes of the RFA.\741\
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    \741\ We previously have concluded, based on feedback from 
market participants and the Commission's information regarding the 
security-based swap market, that the types of entities that may have 
security-based swap positions above the level required to register 
as SBS Entities would not be ``small entities'' for purposes of the 
RFA. See Cross-Border Adopting Release, 79 FR at 47368; see also 
Applications by Security-based Swap Dealers or Major Security-Based 
Participants for Statutorily Disqualified Associated Persons to 
Effect or Be Involved in Effecting Security-Based Swaps, Exchange 
Act Release No. 75612 (Aug. 5, 2015), 80 FR 51684, 51718 (Aug. 25, 
2015) and Rule of Practice 194 Adopting Release, 84 FR at 4944.
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    The Commission further continues to believe that it is unlikely 
that the requirements applicable to SBS Entities that would be 
established under the amendments to Rule 18a-5 would have a significant 
economic impact on any small entity because no SBS Entity will be a 
small entity.\742\
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    \742\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68645.
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    Accordingly, the Commission believes that it is unlikely that the 
rule amendments would have a significant economic impact on a 
substantial number of small entities.\743\
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    \743\ See also Parts VI (Economic Analysis) and VII (Paperwork 
Reduction Act) (discussing, among other things, the economic impact 
of the rules, including estimated compliance costs and burdens).
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    For the foregoing reasons, the Commission certifies that the 
amendments to Exchange Act Rules 3a71-3, 15Fb2-1, 0-13, and 18a-5, and 
Rule of Practice 194 would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA.

X. Effective Date and Compliance Dates

A. Effective Date

    These final rules will be effective on the later of March 1, 2020, 
or 60 days following publication of this release in the Federal 
Register (the ``Effective Date''). The Commission is setting the 
Effective Date not to occur before March 1, 2020, to provide certainty 
for market participants regarding the timing of both the Effective Date 
and the compliance dates discussed below.

B. Compliance Dates

    As explained in the Recordkeeping and Reporting Adopting Release, 
the compliance date for registration of SBS Entities (the 
``Registration Compliance Date'') will be 18 months after the Effective 
Date set forth above in Part X.A. As the Commission noted in its 
adopting releases for rules regarding SBS Entity registration \744\ and 
treatment of non-U.S. persons' security-based swap dealing transactions 
that are arranged, negotiated, or executed by U.S. personnel,\745\ 
``for purposes of

[[Page 6346]]

complying with the [SBS Entity] registration and other requirements, 
persons are not required to begin calculating whether their activities 
meet or exceed [registration thresholds] until two months prior to the 
Registration Compliance Date.'' \746\ Accordingly, the compliance date 
for the amendments to Exchange Act Rule 3a71-3 will be two months prior 
to the Registration Compliance Date. The compliance date for the 
amendments to Exchange Act Rules 18a-5 and 15Fb2-1 will be the same as 
the Registration Compliance Date. Finally, the compliance date for the 
amendments to Exchange Act Rule 0-13 and Rule of Practice 194 will be 
the same as the Effective Date.
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    \744\ See Registration Adopting Release, 80 FR at 48988.
    \745\ See ANE Adopting Release, 81 FR at 8637.
    \746\ Registration Adopting Release, 80 FR at 48988; see also 
ANE Adopting Release, 81 FR at 8637.
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    In addition, the Commission has coordinated the compliance dates 
for several additional rules relevant to SBS Entities with the 
Registration Compliance Date: (1) SBS Entity segregation requirements 
and nonbank SBS Entity capital and margin requirements; \747\ (2) SBS 
Entity recordkeeping and reporting requirements; \748\ (3) SBS Entity 
business conduct standards; \749\ and (4) SBS Entity trade 
acknowledgment and verification requirements.\750\ Compliance with each 
of these rules will be required beginning on the Registration 
Compliance Date.
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    \747\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43954.
    \748\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68600-01.
    \749\ See Business Conduct Adopting Release, 81 FR at 30081-82.
    \750\ See Trade Acknowledgment and Verification Adopting 
Release, 81 FR at 39828-29.
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    One commenter stated that, if the Commission determines to retain 
requirements that a non-U.S. person count against security-based swap 
dealer registration thresholds its dealing transactions with a non-U.S. 
counterparty that were arranged, negotiated, or executed by U.S. 
personnel, potential registrants would need an additional 18 months 
beyond 18 months after the Effective Date to come into compliance.\751\ 
Two commenters stated that the Commission should delay the Registration 
Compliance Date for SBS Entities until 18 months after the Commission 
issues substituted compliance decisions for all relevant 
jurisdictions.\752\ By contrast, two other commenters urged the 
Commission to implement Title VII without further delay.\753\
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    \751\ See ISDA letter at 5.
    \752\ See IIB/SIFMA letter at 31-32; Credit Suisse/UBS letter at 
3.
    \753\ See Better Markets letter at 4; Citadel letter at 6.
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    The Commission believes that the Registration Compliance date 
previously adopted in the Capital, Margin, and Segregation Adopting 
Release will allow sufficient time to prepare for and come in to 
compliance with the requirements for SBS Entities noted above, 
including the requirements for counting of transactions that are 
arranged, negotiated, or executed by U.S. personnel.\754\ The 
Commission adopted in February 2016 its final rules regarding counting 
of security-based swap transactions that are arranged, negotiated, or 
executed by U.S. personnel, and has not proposed to eliminate these 
requirements. The Commission does not believe it is necessary to 
further delay the Registration Compliance Date until the Commission has 
acted on any substituted compliance applications. The Commission 
considered the need for action with respect to applications for 
substituted compliance when it set the extended Registration Compliance 
Date \755\ and continues to believe that 18 months after the Effective 
Date should afford the Commission and potential registrants with 
sufficient time. As noted above in Part III.H.2, the Commission 
welcomes requests for substituted compliance ahead of the Registration 
Compliance Date and encourages potential applicants to begin the 
process of requesting substituted compliance as soon as 
practicable.\756\
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    \754\ One commenter also suggested that the compliance date for 
Regulation SBSR should be extended for non-U.S. SBS Entities who are 
part of non-U.S. financial groups. See IIB/SIFMA letter at 33. As 
discussed in Part X.C, infra, the Commission is issuing a statement 
regarding compliance with Regulation SBSR. This statement takes 
account of these comments.
    \755\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68600-01.
    \756\ See also Capital, Margin, and Segregation Adopting 
Release, 84 FR at 43957.
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C. Compliance With Rules for Security-Based Swap Data Repositories and 
Regulation SBSR

    The issuance of this release has certain implications for the 
compliance schedule for Regulation SBSR, which governs regulatory 
reporting and public dissemination of security-based swap (``SBS'') 
transactions.\757\ Under Regulation SBSR, the first compliance date 
(``Compliance Date 1'') for affected persons with respect to an SBS 
asset class is the first Monday that is the later of: (1) Six months 
after the date on which the first SBS data repository (``SDR'') that 
can accept transaction reports in that asset class registers with the 
Commission; or (2) one month after the Registration Compliance 
Date.\758\ As explained in the Recordkeeping and Reporting Adopting 
Release, the Registration Compliance Date will be 18 months after the 
Effective Date set forth above in Part X.A of this release. Although 
the second condition precedent of Regulation SBSR compliance has now 
been determined, the first condition precedent remains undetermined, as 
no SDR has registered with the Commission.
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    \757\ In 2015, the Commission adopted Regulation SBSR. See 17 
CFR 242.900 to 242.909; Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14564 (Mar. 19, 2015) (``Regulation SBSR 
Adopting Release''). Also in 2015, the Commission adopted rules that 
establish registration standards, duties, and core principles for 
SDRs. See 17 CFR 240.13n-1 to 240.13n-12; SDR Rules and Core 
Principles Adopting Release, 80 FR 14438. In 2016, the Commission 
adopted additional provisions of Regulation SBSR. See Regulation 
SBSR Amendments Adopting Release, 81 FR 53546. Regulation SBSR and 
the SDR rules are hereinafter referred to collectively as the ``SBS 
reporting rules.''
    \758\ See Regulation SBSR Amendments Adopting Release, 81 FR at 
53603. There could be different compliance dates for different asset 
classes, depending on whether the first SDR that registers with the 
Commission can accept transaction reports in all SBS asset classes 
or only certain asset classes.
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    In issuing this release and in light of the completion of many 
other Title VII rulemakings as well as the changing regulatory 
landscape since the Commission's consideration of Regulation SBSR and 
the SDR rules, the Commission has considered how all of the Title VII 
rules will work on full implementation and, in particular, the role of 
SDRs. The Commission recognizes that the CFTC rules analogous to the 
SBS reporting rules have been in force for several years \759\

[[Page 6347]]

and multiple entities have registered with the CFTC as swap data 
repositories.\760\ Most of the participants in the SBS market are also 
participants in the swap market, including the two entities that 
previously sought registration with the Commission as SDRs.\761\ The 
Commission understands that these market participants and swap data 
repositories have invested in systems and developed policies and 
procedures to comply with the CFTC's swap reporting rules. Although 
Regulation SBSR's Compliance Date 1 has not yet been determined, 
certain persons subject to both the swap and SBS reporting rules have 
identified operational inefficiencies that could arise from differences 
between these rules. For example, two commenters have argued that 
differences among the data fields, reporting mechanics, and cross-
border application of the swap and SBS reporting rules limit the 
ability of affected entities to use common systems across the two 
rulesets.\762\
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    \759\ In 2011, the CFTC adopted its Part 49 rules that establish 
registration standards, duties, and core principles for swap data 
repositories. See 17 CFR part 49; Swap Data Repositories: 
Registration Standards, Duties and Core Principles, 76 FR 54538 
(Sept. 1, 2011) (adopting release). In 2012, the CFTC adopted its 
Part 43 rules, 17 CFR part 43, that provide for real-time public 
dissemination of swap transactions. See Real-Time Public Reporting 
of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012) (adopting 
release). Also in 2012, the CFTC adopted its Part 45 rules, 17 CFR 
part 45, that provide for regulatory reporting of swap transactions. 
See Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136 
(Jan. 13, 2012) (adopting release). The Part 45 rules were 
subsequently amended to provide for regulatory reporting of pre-
enactment and transition swaps, see Amendments to Swap Data 
Recordkeeping and Reporting Requirements, 77 FR 35200 (Jun. 12, 
2012) (adopting release), and to establish recordkeeping and 
reporting requirements for cleared swaps, see Swap Data 
Recordkeeping and Reporting Requirements: Pre-Enactment and 
Transitions Swaps, 81 FR 41736 (Jun. 27, 2016) (adopting release). 
The Part 43 rules were subsequently amended to provide for the 
public dissemination of block transactions. See Procedures to 
Establish Appropriate Minimum Block Sizes for Large Notional Off-
Facility Swaps and Block Trades, 78 FR 32866 (May 31, 2013) 
(adopting release). The Part 43, Part 45, and Part 49 rules, as 
amended, are hereinafter referred to collectively as the ``swap 
reporting rules.''
    \760\ See https://sirt.cftc.gov/sirt/sirt.aspx?Topic=DataRepositories.
    \761\ See Exchange Act Release No. 77699 (April 22, 2016), 81 FR 
25475 (April 28, 2016) (notice of filing of SDR application of ICE 
Trade Vault); Exchange Act Release No. 78216 (June 30, 2016), 81 FR 
44379 (July 7, 2016) (notice of filing of SDR application of DDR).
    \762\ See Memorandum prepared by Institute of International 
Bankers and Securities Industry and Financial Markets Associated 
(June 21, 2018), available at: https://www.sec.gov/comments/s7-05-14/s70514-3938974-167037.pdf.
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    The Commission also is cognizant that the CFTC has announced a 
review of the swap reporting rules with a ``focus on changes to the 
existing regulations and guidance with two goals in mind: (a) To ensure 
that the CFTC receives accurate, complete, and high quality data on 
swaps transactions for its regulatory oversight role; and (b) to 
streamline reporting, reduce messages that must be reported, and right-
size the number of data elements that are reported to meet the agency's 
priority use-cases for swaps data.'' \763\ As part of that effort, the 
CFTC earlier in 2019 proposed amendments to its rules for swap data 
repositories \764\ and indicated that this was the first of three 
anticipated rulemakings to revise the swap reporting rules.\765\
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    \763\ CFTC Letter 17-33 (July 10, 2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-33.pdf.
    \764\ See Certain Swap Data Repository and Data Reporting 
Requirements, 84 FR 21044 (May 13, 2019) (proposing release).
    \765\ See id. at 21045-46.
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    The Commission is mindful of the time and costs that may be 
incurred by swap data repositories and swap market participants to 
implement aspects of the SBS reporting rules that have no analog in, or 
are not wholly consistent with, the swap reporting rules. 
Implementation of SEC-specific requirements could require changes to 
the systems, policies, and procedures currently utilized to comply with 
the swap reporting rules. These burdens could be exacerbated if 
affected parties must begin complying with the SBS reporting rules at 
or near the same time that they are making changes to their systems, 
policies, and procedures to accommodate amendments made by the CFTC to 
the swap reporting rules.
    The Commission believes that implementation of the SBS reporting 
rules can and should be done in a manner that carries out the 
fundamental policy goals of the SBS reporting rules while minimizing 
burdens as much as practicable. The Commission continues to believe 
that this should be done pursuant to the compliance schedule noted 
above.\766\ However, in light of the Commission's efforts to promote 
harmonization, the CFTC's announced reconsideration of its swap 
reporting rules, and ongoing concerns among market participants about 
incurring unnecessary burdens, the Commission takes the following 
position with respect to the SBS reporting rules for four years 
following Regulation SBSR's Compliance Date 1 in each SBS asset class. 
After the first SDR that can accept transaction reports in a particular 
SBS class is registered by the Commission, certain actions with respect 
to the SBS reporting rules will not provide a basis for a Commission 
enforcement action, as set forth below:\767\
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    \766\ See note 719, supra.
    \767\ Unless specified otherwise, all terms shall have the 
definitions set forth in Section 3(a) of the Exchange Act, 15 U.S.C. 
78c, and the rules and regulations thereunder, including Regulation 
SBSR.
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    1. With respect to Rule 901(a) of Regulation SBSR if a person with 
a duty to report an SBS transaction (or a duty to participate in the 
selection of the reporting side) under Rule 901(a) does not report the 
transaction (or does not participate in the selection of the reporting 
side) because, under the swap reporting rules in force at the time of 
the transaction, a different person (or no person) would have the duty 
to report a comparable swap transaction.
    2. With respect to Rules 901(c)(2)-(7) and 901(d) of Regulation 
SBSR, if a person with a duty to report a data element of an SBS 
transaction, as required by any provision of Rules 901(c)(2)-(7) and 
901(d), does not report that data element because the swap reporting 
rules in force at the time of the transaction do not require that data 
element to be reported.
    3. With respect to Rule 901(e) of Regulation SBSR, if a person does 
not report a life cycle event of an SBS transaction in a manner 
consistent with Rule 901(e) and the person acts instead in a manner 
consistent with the swap reporting rules for the reporting of life 
cycle events that are in force at the time of the life cycle event.
    4. With respect to Rule 902 of Regulation SBSR, if a registered SDR 
does not disseminate an SBS transaction in a manner consistent with 
Rule 902 but instead disseminates (or does not disseminate) the SBS 
transaction in a manner consistent with Part 43 of the CFTC's swap 
reporting rules in force at the time of the transaction, provided that 
for an SBS based on a single credit instrument or a narrow-based index 
of credit instruments having a notional size of $5 million or greater, 
the registered SDR that receives the report of the SBS transaction does 
not utilize any capping or bucketing convention under Part 43 of the 
CFTC's swap reporting rules but instead disseminates a capped size of 
$5 million (e.g., ``$5MM+'' or similar) in lieu of the true notional 
size.\768\
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    \768\ The Commission notes that the Financial Industry 
Regulatory Authority applies a $5 million cap when disseminating 
transaction reports of economically similar cash debt securities. 
See, e.g., FINRA Regulatory Notice 12-39, available at https://www.finra.org/rules-guidance/notices/12-39.
---------------------------------------------------------------------------

    5. With respect to Rule 903(b), a registered SDR permits the 
reporting or public dissemination of SBS transaction information that 
includes codes in place of certain data elements even if the 
information necessary to interpret such codes is not widely available 
to users of the information on a non-fee basis.\769\
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    \769\ An international initiative has been developing a system 
for the assignment of unique product identifiers (``UPIs'') for 
products involved in over-the-counter derivatives transactions. The 
UPIs that would be assigned by a UPI Service Provider are 
anticipated to serve as product IDs under Regulation SBSR. As this 
initiative continues to develop, the Commission anticipates that it 
will inform market participants of the availability of UPIs and 
address any related issues raised under Rule 903(b) of Regulation 
SBSR.
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    6. With respect to Rule 906(a) of Regulation SBSR, if a registered 
SDR does not send reports of missing unique identification codes to its 
participants.
    7. With respect to Rule 906(b) of Regulation SBSR, if a registered 
SDR does not collect ultimate parent and affiliate information from its 
participants.
    8. With respect to Rule 907(a)(1) of Regulation SBSR, if a 
registered SDR does not enumerate in its policies and procedures for 
reporting transaction information one or more specific data elements 
that are required by Rule 901(c) or 901(d) of Regulation SBSR,

[[Page 6348]]

because such data element(s) are not required under the swap reporting 
rules, except that the registered SDR's policies and procedures must 
set out how a participant must identify the SBS and any security 
underlying the SBS and thereby comply with Rule 901(c)(1).
    9. With respect to Rule 907(a)(3) of Regulation SBSR, if a 
registered SDR does not enumerate in its policies and procedures for 
handling life cycle events provisions that are not required under swap 
reporting rules that pertain to the reporting of life cycle events.
    10. With respect to Rule 907(a)(4) of Regulation SBSR, if a 
registered SDR does not have policies and procedures for establishing 
and directing its participants to use condition flags in the reporting 
of SBS transactions, provided that the registered SDR instead complies 
with analogous CFTC rules regarding condition flags or other trade 
indicators.
    11. With respect to Rule 907(a)(5) of Regulation SBSR, if a 
registered SDR does not have policies and procedures for assigning 
UICs.
    12. With respect to Rule 907(a)(6) of Regulation SBSR, if a 
registered SDR does not have policies and procedures for obtaining from 
its participants information about each participant's ultimate parent 
and affiliates.
    Notwithstanding the above, the Commission's position with respect 
to Rule 901(a) of Regulation SBSR does not extend to instances where a 
transaction falls within Rule 901(a)(2)(ii)(E) and one or both sides is 
relying on the exception to the de minimis counting requirement for ANE 
transactions (i.e., is a ``relying entity''). The Commission expects 
that a foreign dealing entity that is a relying entity would utilize 
staff of an affiliated U.S. registered SBS dealer or broker-dealer to 
report an ANE transaction.\770\ Furthermore, the Commission's position 
with respect to Rule 902(a) of Regulation SBSR does not extend to: (1) 
A covered inter-dealer security-based swap transaction that at least 
one side of the transaction arranges, negotiates, or executes in 
reliance on the exception in Rule 3a71-3(d); or (2) a security based 
swap transaction between a relying entity and a registered SBS dealer 
(whether or not it is a U.S. person). All other aspects of the 
Commission's position extend to the transactions described in this 
paragraph.
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    \770\ The Commission notes that Rule 906(c) of Regulation SBSR, 
in relevant part, requires each participant of a registered SDR that 
is a registered SBS dealer or a registered broker-dealer that incurs 
reporting duties to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to ensure that 
it complies with any obligation to report information to a 
registered SDR in the manner consistent with Regulation SBSR. In 
light of the rule amendments adopted today regarding ANE 
transactions, the Commission expects a registered SBS dealer or 
registered broker-dealer that arranges, negotiates, or executes SBS 
transactions on behalf of a foreign affiliate that is a relying 
entity to include in its Rule 906(c) policies and procedures a 
mechanism for noting, with respect to a specific security-based swap 
transaction, the foreign affiliate on whose behalf it is arranging, 
negotiating, or executing the transaction; for ensuring that any 
such transaction is reported to a registered SDR (or, as applicable, 
ensuring that it engages with the other side to select which side 
will incur the reporting duty); and for ensuring that inter-dealer 
ANE transactions where it is acting on behalf of the reporting side 
are publicly disseminated. The Commission may review the Rule 906(c) 
policies and procedures of registered SBS dealers and registered 
broker-dealers to evaluate whether the Commission's position is 
being applied as set forth in this statement.
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    Similarly, the Commission takes the position that, for a period of 
four years following Regulation SBSR's Compliance Date 1 in a 
particular SBS asset class, certain actions with respect to the SDR 
rules will not provide a basis for a Commission enforcement action 
against a registered SDR that can accept transaction reports in that 
asset class, as set forth below.
    1. With respect to Section 13(n)(5)(B) of the Exchange Act \771\ 
and Rule 13n-4(b)(3) thereunder,\772\ if a registered SDR does not 
confirm with both counterparties to the SBS the accuracy of the data 
that was submitted to the SDR.
---------------------------------------------------------------------------

    \771\ 15 U.S.C. 78m(n)(5)(B).
    \772\ 17 CFR 240.13n-4(b)(3).
---------------------------------------------------------------------------

    2. With respect to Rule 13n-5(b)(1)(iii) under the Exchange Act, if 
a registered SDR does not establish, maintain, and enforce written 
policies and procedures reasonably designed to satisfy itself that the 
transaction data that has been submitted to the SDR is complete and 
accurate, and clearly identifies the source for each trade side and the 
pairing method (if any) for each transaction in order to identify the 
level of quality of the transaction data that was submitted to the SDR.
    3. A registered SDR does not adhere to any provision of Section 
11A(b) of the Exchange Act \773\ pertaining to securities information 
processors.
---------------------------------------------------------------------------

    \773\ 15 U.S.C. 78k-1.
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    The Commission will assess an application to register as an SDR and 
make applicable findings pursuant to Rule 13n-1(c) under the Exchange 
Act \774\ in light of this position. Thus, an applicant will not need 
to include materials in its application explaining how it would comply 
with the provisions noted above, and could instead rely on its 
discussion about how it complies with comparable CFTC requirements. 
Specifically, an entity wishing to register with the Commission as an 
SDR must still submit an application on Form SDR. However, the entity 
need not provide an Exhibit S to describe its functions as a securities 
information processor and may instead represent in its application that 
it: (1) Is registered with the CFTC as an swap data repository; (2) is 
in compliance with applicable requirements under the swap reporting 
rules; (3) satisfies the standard for Commission registration of an SDR 
under Rule 13n-1(c); and (4) intends to rely on this position for the 
period set forth in this release with respect to any SBS asset 
class(es) for which it intends to accept transaction reports. 
Furthermore, an entity submitting an application to register would not 
need to comply with the requirement in Rule 13n-1(b) and Rule 13n-
11(f)(5) to file Form SDR and all amendments ``electronically in a 
tagged data format'' but instead would be able to submit such documents 
to the Commission electronically as portable document format (PDF) 
files, consistent with the CFTC SDR application procedures under Part 
49.3(a)(1).\775\
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    \774\ 17 CFR 240.13n-1(c) (``The Commission shall grant the 
registration of a security-based swap data repository if the 
Commission finds that such security-based swap data repository is so 
organized, and has the capacity, to be able to assure the prompt, 
accurate, and reliable performance of its functions as a security-
based swap data repository, comply with any applicable provision of 
the federal securities laws and rules and regulations thereunder, 
and carry out its functions in a manner consistent with the purposes 
of section 13(n) of the [Exchange] Act and the rules and regulations 
thereunder.'').
    \775\ Accordingly, compliance with General Instructions I on 
Form SDR or the applicable provisions of Regulation S-T also would 
not be required.
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    The Commission believes that the approach outlined above would 
result in useful transaction data being made available to the 
Commission, other relevant authorities, and the public while the 
Commission assesses whether and, if so, how to take further steps 
toward harmonization and the CFTC undertakes its review of swap 
reporting rules.\776\
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    \776\ This relief is consistent with the Commission's efforts to 
harmonize other of its Title VII requirements with the CFTC's. For 
example, in the Capital, Margin, and Segregation Adopting Release, 
the Commission adopted new Rule 18a-10 under the Exchange Act, 17 
CFR 240.18a-10, which permits an SBS dealer that is also registered 
with the CFTC as a swap dealer to comply with the capital, margin, 
and segregation requirements of the CEA and the CFTC's rules--rather 
than comparable SEC rules--provided that the firm's SBS business is 
not a significant part of the SBS market and predominantly involves 
dealing in swaps as compared to SBS. See Capital, Margin, and 
Segregation Adopting Release, 84 FR at 43943-44. The Commission 
stated that Rule 18a-10 was designed to ``address the concern raised 
by the commenters that it would be inefficient to impose differing 
requirements on a firm that is predominantly a swap dealer.'' Id. at 
43944. Also, in the Recordkeeping and Reporting Adopting Release, 
the Commission added the recordkeeping and reporting requirements to 
that alternative compliance mechanism and crafted a ``limited 
alternative compliance mechanism'' that allow an SBS dealer or major 
SBS participant to comply with the recordkeeping requirements of the 
CEA and the rules thereunder applicable to swap dealers and major 
swap participants in lieu of complying with the requirements in 
Rules 17a-3 and 18a-5 under the Exchange Act, 17 CFR 240.17a-3 and 
240.18a-5, to make and keep current trade blotters, customer account 
ledgers, and stock records solely with respect to information 
required to be included in these records regarding SBS transactions 
and positions, subject to certain conditions. See Recordkeeping and 
Reporting Adopting Release, 84 FR at 68593-94.

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[[Page 6349]]

    The Commission's position applies only to the exercise of its 
enforcement discretion and is expressly limited to the Commission's SBS 
reporting rules discussed above. Nothing in this position excuses 
compliance with the other SBS reporting rules or any other Commission 
rule, including a rule that implements one or more other provisions of 
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010. This position will remain in effect until the earlier of 
(1) four years following Regulation SBSR's Compliance Date 1 in a 
particular SBS asset class, or (2) 12 months after the Commission 
provides notice that the position will expire.

D. Effect on Existing Commission Exemptive Relief

    Compliance with certain provisions of the Exchange Act and certain 
rules and regulations thereunder in connection with security-based swap 
transactions, positions, and/or activity is currently subject to 
temporary exemptive relief granted by the Commission.\777\ As set forth 
in the Commission's prior releases, certain portions of this temporary 
exemptive relief will expire on the Registration Compliance Date,\778\ 
while certain other portions of this relief are subject to conditions 
that will be triggered upon the Registration Compliance Date.\779\ 
Other portions of this temporary relief are scheduled to expire on 
February 5, 2020.\780\ Similarly, the Commission's 2018 statement of 
position regarding certain actions with respect to provisions of the 
Commission's business conduct rules for SBS Entities contains a sunset 
provision that will begin to run starting on the Registration 
Compliance Date.\781\
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    \777\ See, e.g., Temporary Exemptions and Other Temporary 
Relief, Together With Information on Compliance Dates for New 
Provisions of the Securities Exchange Act of 1934 Applicable to 
Security-Based Swaps, Exchange Act Release No. 64678 (June 15, 
2011), 76 FR 36287 (June 22, 2011); 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); Order Granting Conditional 
Exemptions Under the Securities Exchange Act of 1934 in Connection 
With Portfolio Margining of Swaps and Security-Based Swaps, Exchange 
Act Release No. 68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012) 
(``Portfolio Margining Order'').
    \778\ See, e.g., Order Pursuant to Sections 15F(b)(6) and 36 of 
the Securities Exchange Act of 1934 Extending Certain Temporary 
Exemptions and an Temporary and Limited Exception Related to 
Security-Based Swaps, Exchange Act Release No. 75919 (Sept. 15, 
2015), 80 FR 56519, 56522 (Sept. 18, 2015); Registration Adopting 
Release, 80 FR at 49003; Business Conduct Adopting Release, 81 FR at 
29967-68; Trade Acknowledgment and Verification Adopting Release, 81 
FR at 39825 n.189; Capital, Margin, and Segregation Adopting 
Release, 84 FR at 43955-57; Recordkeeping and Reporting Adopting 
Release, 84 FR at 68001-02.
    \779\ See Portfolio Margining Order, 77 FR 75211; Capital, 
Margin, and Segregation Adopting Release, 84 FR at 43956-57.
    \780\ See Order Granting a Limited Exemption From the Exchange 
Act Definition of ``Penny Stock'' for Security-Based Swap 
Transactions Between Eligible Contract Participants; Granting a 
Limited Exemption From the Exchange Act Definition of ``Municipal 
Securities'' for Security-Based Swaps; and Extending Certain 
Temporary Exemptions Under the Exchange Act in Connection With the 
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, Exchange Act Release No. 84991, (Jan. 25, 2019), 84 FR 
863 (Jan. 31, 2019).
    \781\ See Commission Statement on Certain Provisions of Business 
Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 84511 
(Oct. 31, 2018), 83 FR 55486 (Nov. 6, 2018).
---------------------------------------------------------------------------

XI. Statutory Basis and Text of the Rule Amendments

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and 
particularly Sections 3(a)(71), 3(b), 15F (as added by Section 764(a) 
of the Dodd-Frank Act), 17(a), 23(a) and 30(c) thereof, and Section 
761(b) of the Dodd-Frank Act, the Commission is amending Rule of 
Practice 194 and Rules 0-13, 3a71-3, 15Fb2-1 and 18a-5 under the 
Exchange Act. Additionally, the Commission is adopting Rule 3a71-
3(d)(4) under the Exchange Act pursuant to Exchange Act Sections 15(a) 
and 36 and Rule 3a71-3(d)(5) under the Exchange Act pursuant to 
Exchange Act Section 36.

List of Subjects

17 CFR Part 201

    Administrative practice and procedure, Brokers, Claims, 
Confidential business information, Equal access to justice, Lawyers, 
Penalties, Securities.

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 Commission is amending 
Title 17, Chapter II of the Code of the Federal Regulations as follows:

PART 201--RULES OF PRACTICE

0
1. The authority citation for subpart D is revised to read as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 
77sss, 77ttt, 78(c)(b), 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 
78o-10(b)(6), 78s, 78u-2, 78u-3, 78v, 78w, 80a-8, 80a-9, 80a-37, 
80a-38, 80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-
12, 7202, 7215, and 7217.

0
2. Amend Sec.  201.194 by redesignating paragraph (c) as paragraph 
(c)(1), adding paragraph (c) subject heading, and adding paragraph 
(c)(2) to read as follows:

Sec.  201.194   Applications by security-based swap dealers or major 
security-based swap participants for statutorily disqualified 
associated persons to effect or be involved in effecting security-based 
swaps.

* * * * *
    (c) Exclusions.
* * * * *
    (2) Exclusion for certain associated natural persons. A security-
based swap dealer or major security-based swap participant shall be 
excluded from the prohibition in section 15F(b)(6) of the Exchange Act 
(15 U.S.C. 78o-10(b)(6)) with respect to an associated person who is a 
natural person who (i) is not a U.S. person (as defined in 17 CFR 
240.3a71-3(a)(4)(i)(A)) and (ii) does not effect and is not involved in 
effecting security-based swap transactions with or for counterparties 
that are U.S. persons (as defined in 17 CFR 240.3a71-3(a)(4)), other 
than a security-based swap transaction conducted through a foreign 
branch (as that term is defined in 17 CFR 240.3a71-3(a)(3)) of a 
counterparty that is a U.S. person; provided, however, that this 
exclusion shall not be available if the associated person of that 
security-based swap dealer or major security-based swap participant is 
currently subject to any order described in subparagraphs (A) and (B) 
of section 3(a)(39) of the Exchange Act, with the limitation that an 
order by a foreign financial regulatory authority described in 
subparagraphs (B)(i) and (B)(iii) of section 3(a)(39) (15 U.S.C. 
78c(a)(39)(B)(i) and (B)(iii)) shall only apply to orders by a foreign 
financial regulatory authority in the jurisdiction where the associated 
person is employed or located.
* * * * *

[[Page 6350]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
3. The general authority citation for part 240 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
4. Amend Sec.  240.0-13 by revising the section heading and paragraphs 
(a), (b), and (e) to read as follows:

Sec.  240.0-13  Commission procedures for filing applications to 
request a substituted compliance or listed jurisdiction order under the 
Exchange Act.

    (a) The application shall be in writing in the form of a letter, 
must include any supporting documents necessary to make the application 
complete, and otherwise must comply with Sec.  240.0-3. All 
applications must be submitted to the Office of the Secretary of the 
Commission, by a party that potentially would comply with requirements 
under the Exchange Act pursuant to a substituted compliance or listed 
jurisdiction order, or by the relevant foreign financial regulatory 
authority or authorities. If an application is incomplete, the 
Commission may request that the application be withdrawn unless the 
applicant can justify, based on all the facts and circumstances, why 
supporting materials have not been submitted and undertakes to submit 
the omitted materials promptly.
    (b) An applicant may submit a request electronically. The 
electronic mailbox to use for these applications is described on the 
Commission's website at www.sec.gov in the ``Exchange Act Substituted 
Compliance and Listed Jurisdiction Applications'' section. In the event 
electronic mailboxes are revised in the future, applicants can find the 
appropriate mailbox by accessing the ``Electronic Mailboxes at the 
Commission'' section.
* * * * *
    (e) Every application (electronic or paper) must contain the name, 
address, telephone number, and email address of each applicant and the 
name, address, telephone number, and email address of a person to whom 
any questions regarding the application should be directed. The 
Commission will not consider hypothetical or anonymous requests for a 
substituted compliance or listed jurisdiction order. Each applicant 
shall provide the Commission with any supporting documentation it 
believes necessary for the Commission to make such determination, 
including information regarding applicable requirements established by 
the foreign financial regulatory authority or authorities, as well as 
the methods used by the foreign financial regulatory authority or 
authorities to monitor and enforce compliance with such rules. 
Applicants should also cite to and discuss applicable precedent.
* * * * *

0
5. Amend Sec.  240.3a71-3 by adding paragraphs (a)(10) through (13), 
revising paragraph (b)(1)(iii)(C), and adding paragraph (d) to read as 
follows:

Sec.  240.3a71-3  Cross-border security-based swap dealing activity.

    (a) * * *
    (10) An entity is a majority-owned affiliate of another entity if 
the entity directly or indirectly owns a majority interest in the 
other, or if a third party directly or indirectly owns a majority 
interest in both entities, where ``majority interest'' is the right to 
vote or direct the vote of a majority of a class of voting securities 
of an entity, the power to sell or direct the sale of a majority of a 
class of voting securities of an entity, or the right to receive upon 
dissolution, or the contribution of, a majority of the capital of a 
partnership.
    (11) Foreign associated person means a natural person domiciled 
outside the United States who--with respect to a non-U.S. person 
relying on the exception set forth in paragraph (d) of this section--is 
a partner, officer, director, or branch manager of such non-U.S. person 
(or any person occupying a similar status or performing similar 
functions), any person directly or indirectly controlling, controlled 
by, or under common control with such non-U.S. person, or any employee 
of such non-U.S. person.
    (12) Listed jurisdiction means any jurisdiction that the Commission 
by order has designated as a listed jurisdiction for purposes of the 
exception specified in paragraph (d) of this section.
    (13) Covered inter-dealer security-based swap means any security-
based swap between:
    (i) A non-U.S. person relying on the exception in paragraph (d) of 
this section; and
    (ii) A non-U.S. person that is, or is an affiliate of, a registered 
security-based swap dealer or registered broker that has filed with the 
Commission a notice pursuant to paragraph (d)(1)(vi) of this section; 
provided, however, that a covered inter-dealer security-based swap does 
not include a security-based swap with a non-U.S. person that the non-
U.S. person relying on the exception in paragraph (d) of this section 
reasonably determines at the time of execution of the security-based 
swap is neither a registered security-based swap dealer or registered 
broker that has filed with the Commission a notice pursuant to 
paragraph (d)(1)(vi) of this section nor an affiliate of such a 
registered security-based swap dealer or registered broker.
    (b) * * *
    (1) * * *
    (iii) * * *
    (C) Except as provided in paragraph (d) of this section, or 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
* * * * *
    (d) Exception from counting certain transactions. The counting 
requirement described by paragraph (b)(1)(iii)(C) of this section will 
not apply to the security-based swap dealing transactions of a non-U.S. 
person if the conditions of paragraph (d)(1) of this section have been 
satisfied.
    (1) Conditions--(i) Entity conducting U.S. activity. All activity 
that otherwise would cause a security-based swap transaction to be 
described by paragraph (b)(1)(iii)(C) of this section--namely, all 
arranging, negotiating or executing activity that is conducted by 
personnel of the entity (or its agent) located in a branch or office in 
the United States--is conducted by such U.S. personnel in their 
capacity as persons associated with an entity that:
    (A) Is registered with the Commission as:
    (1) A broker registered under section 15 of the Act (15 U.S.C. 78o) 
that is subject to and complies with Sec.  240.15c3-1(a)(7);
    (2) A broker registered under section 15 of the Act (15 U.S.C. 
78o), other than a broker that is subject to Sec.  240.15c3-1(a)(7), 
that complies with Sec.  240.15c3-1(a)(10), as if that entity were 
registered with the Commission as a security-based swap dealer, if it 
is not so registered; or
    (3) A security-based swap dealer; and

[[Page 6351]]

    (B) Is a majority-owned affiliate of the non-U.S. person relying on 
this exception.
    (ii) Compliance with specified security-based swap dealer 
requirements--(A) Compliance required. In connection with such 
transactions, the registered entity described in paragraph (d)(1)(i) of 
this section complies with the requirements described in paragraph 
(d)(1)(ii)(B) of this section
    (1) As if the counterparties to the non-U.S. person relying on this 
exception also were counterparties to that entity; and
    (2) As if that entity were registered with the Commission as a 
security-based swap dealer, if it is not so registered.
    (B) Applicable requirements. The compliance obligation described in 
paragraph (d)(1)(ii)(A) of this section applies to the following 
provisions of the Act and the rules and regulations thereunder:
    (1) Section 15F(h)(3)(B)(i), (ii) and Sec.  240.15Fh-3(b), 
including in connection with material incentives and conflicts of 
interest associated with the non-U.S. person relying on the exception;
    (2) Section 240.15Fh-3(f)(1); provided, however, that if the 
registered entity described in paragraph (d)(1)(i) of this section 
reasonably determines that the counterparty to whom it recommends a 
security-based swap or trading strategy involving a security-based swap 
is an ``institutional counterparty'' as defined in Sec.  240.15Fh-
3(f)(4), the registered entity instead may fulfill its obligations 
under Sec.  240.15Fh-3(f)(1)(ii) if it discloses to the counterparty 
that it is not undertaking to assess the suitability of the security-
based swap or trading strategy involving a security-based swap for the 
counterparty;
    (3) Section 15F(h)(3)(C) of the Act and Sec.  240.15Fh-3(g); and
    (4) Sections 240.15Fi-1 and 240.15Fi-2.
    (iii) Commission access to books, records and testimony. (A) The 
non-U.S. person relying on this exception promptly provides 
representatives of the Commission (upon request of the Commission or 
its representatives or pursuant to a supervisory or enforcement 
memorandum of understanding or other arrangement or agreement reached 
between any foreign securities authority, including any foreign 
government, as specified in section 3(a)(50) of the Act, and the 
Commission or the U.S. Government) with any information or documents 
within the non-U.S. person's possession, custody, or control, promptly 
makes its foreign associated persons available for testimony, and 
provides any assistance in taking the evidence of other persons, 
wherever located, that the Commission or its representatives requests 
and that relates to transactions subject to this exception; provided, 
however, that if, after exercising its best efforts, the non-U.S. 
person is prohibited by applicable foreign law or regulations from 
providing such information, documents, testimony, or assistance, the 
non-U.S. person may continue to rely on this exception until the 
Commission issues an order modifying or withdrawing an associated 
``listed jurisdiction'' determination pursuant to paragraph (d)(2)(iii) 
of this section.
    (B) The registered entity described in paragraph (d)(1)(i) of this 
section:
    (1) Creates and maintains books and records relating to the 
transactions subject to this exception that are required, as 
applicable, by Sec. Sec.  240.17a-3 and 240.17a-4, or by Sec. Sec.  
240.18a-5 and 240.18a-6, including any books and records requirements 
relating to the provisions specified in paragraph (d)(1)(ii)(B) of this 
section;
    (2) Obtains from the non-U.S. person relying on the exception, and 
maintains for not less than three years following the activity 
described in paragraph (d)(1)(i) of this section, the first two years 
in an easily accessible place, documentation regarding such non-U.S. 
person's compliance with the condition in paragraph (d)(1)(vii) of this 
section;
    (3) Obtains from the non-U.S. person relying on the exception, and 
maintains for not less than three years following the activity 
described in paragraph (d)(1)(i) of this section, the first two years 
in an easily accessible place, documentation encompassing all terms 
governing the trading relationship between the non-U.S. person and its 
counterparty relating to the transactions subject to this exception, 
including, without limitation, terms addressing payment obligations, 
netting of payments, events of default or other termination events, 
calculation and netting of obligations upon termination, transfer of 
rights and obligations, allocation of any applicable regulatory 
reporting obligations, governing law, valuation, and dispute 
resolution; and
    (4) Obtains from the non-U.S. person relying on this exception, and 
maintains for not less than three years following the activity 
described in paragraph (d)(1)(i) of this section, the first two years 
in an easily accessible place, written consent to service of process 
for any civil action brought by or proceeding before the Commission, 
providing that process may be served on the non-U.S. person by service 
on the registered entity in the manner set forth in the registered 
entity's current Form BD, SBSE, SBSE-A or SBSE-BD, as applicable.
    (iv) Counterparty notification In connection with the transaction, 
the registered entity described in paragraph (d)(1)(i) of this section 
notifies the counterparties of the non-U.S. person relying on this 
exception that the non-U.S. person is not registered with the 
Commission as a security-based swap dealer, and that certain Exchange 
Act provisions or rules addressing the regulation of security-based 
swaps would not be applicable in connection with the transaction, 
including provisions affording clearing rights to counterparties. Such 
notice shall be provided contemporaneously with, and in the same manner 
as, the arranging, negotiating, or executing activity at issue; 
provided, however, that during a period in which a counterparty is 
neither a customer (as such term is defined in Sec.  240.15c3-3) of the 
registered entity described in paragraph (d)(1)(i) of this section (if 
such registered entity is a registered broker or dealer) nor a 
counterparty to a security-based swap with the registered entity 
described in paragraph (d)(1)(i) of this section, such notice need only 
be provided contemporaneously with, and in the same manner as, the 
first such arranging, negotiating, or executing activity during such 
period. This disclosure will not be required if the identity of that 
counterparty is not known to that registered entity at a reasonably 
sufficient time prior to the execution of the transaction to permit 
such disclosure.
    (v) Subject to regulation of a listed jurisdiction. The non-U.S. 
person relying on this exception is subject to the margin and capital 
requirements of a listed jurisdiction when engaging in the transactions 
subject to this exception.
    (vi) Notice by registered entity. Before an associated person of 
the registered entity described in paragraph (d)(1)(i) of this section 
commences the activity described in paragraph (d)(1)(i) of this 
section, such registered entity shall file with the Commission a notice 
that its associated persons may conduct such activity. Such registered 
entity shall file this notice by submitting it to the electronic 
mailbox described on the Commission's website at www.sec.gov at the 
``ANE Exception Notices'' section. The Commission shall publicly post 
such notice on the same section of its website.

[[Page 6352]]

    (vii) Limitation for covered inter-dealer security-based swaps. The 
aggregate gross notional amount of covered inter-dealer security-based 
swap positions connected with dealing activity subject to the exception 
in this paragraph (d) engaged in by persons described in paragraph 
(d)(6)(i) of this section over the course of the immediately preceding 
12 months does not exceed $50 billion.
    (2) Order for listed jurisdiction designation. The Commission by 
order, may conditionally or unconditionally determine that a foreign 
jurisdiction is a listed jurisdiction for purposes of this section. The 
Commission may make listed jurisdiction determinations in response to 
applications, or upon the Commission's own initiative.
    (i) Applications. Applications for an order requesting listed 
jurisdiction status may be made by a party or group of parties that 
potentially would seek to rely on the exception provided by paragraph 
(d) of this section, or by any foreign financial regulatory authority 
or authorities supervising such a party or its security-based swap 
activities. Applications must be filed pursuant to the procedures set 
forth in Sec.  240.0-13.
    (ii) Criteria considered. In considering a foreign jurisdiction's 
potential status as a listed jurisdiction, the Commission may consider 
factors relevant for purposes of assessing whether such an order would 
be in the public interest, including:
    (A) Applicable margin and capital requirements of the foreign 
financial regulatory system; and
    (B) The effectiveness of the supervisory compliance program 
administered by, and the enforcement authority exercised by, the 
foreign financial regulatory authority in connection with such 
requirements, including the application of those requirements in 
connection with an entity's cross-border business.
    (iii) Withdrawal or modification of listed jurisdiction status. The 
Commission may, on its own initiative, by order after notice and 
opportunity for comment, modify or withdraw a jurisdiction's status as 
a listed jurisdiction, if the Commission determines that continued 
listed jurisdiction status no longer would be in the public interest, 
based on:
    (A) The criteria set forth in paragraph (d)(2)(ii) of this section;
    (B) Any laws or regulations that have had the effect of preventing 
the Commission or its representatives, on request, to promptly access 
information or documents regarding the activities of persons relying on 
the exception provided by this paragraph (d), to obtain the testimony 
of their foreign associated persons, and to obtain the assistance of 
persons relying on this exception in taking the evidence of other 
persons, wherever located, as described in paragraph (d)(1)(iii)(A) of 
this section; and
    (C) Any other factor the Commission determines to be relevant to 
whether continued status as a listed jurisdiction would be in the 
public interest.
    (3) Exception for person that engages in arranging, negotiating, or 
executing activity as agent. The registered entity described in 
paragraph (d)(1)(i) of this section need not count, against the de 
minimis thresholds described in Sec.  240.3a71-2(a)(1), the 
transactions described by paragraph (d) of this section.
    (4) Limited exemption from registration as a broker. A registered 
security-based swap dealer and its associated persons who conduct the 
activities described in paragraph (d)(1)(i) of this section shall not 
be subject to registration as a broker pursuant to section 15(a)(1) of 
the Act solely because the registered entity or the associated person 
conducts any activity described in paragraph (d)(1)(i) of this section 
with or for a person that is an eligible contract participant, provided 
that:
    (i) The conditions of paragraph (d)(1) of this section are 
satisfied in connection with such activities; and
    (ii) If Sec.  240.10b-10 would apply to an activity subject to the 
exception in paragraph (d)(1)(i), such registered security-based swap 
dealer provides to the customer the disclosures required by Sec.  
240.10b-10(a)(2) (excluding Sec.  240.10b-10(a)(2)(i) and (ii)) and 
Sec.  240.10b-10(a)(8) in accordance with the time and form 
requirements set forth in Sec.  240.15Fi-2(b) and (c) or, 
alternatively, promptly after discovery of any defect in the registered 
security-based swap dealer's good faith effort to comply with such 
requirements.
    (5) Exemption from Sec.  240.10b-10. A broker or dealer that is 
also a registered security-based swap dealer or registered broker 
described in paragraph (d)(1)(i) of this section shall be exempt from 
the requirements of Sec.  240.10b-10 with respect to activity described 
in paragraph (d)(1)(i) of this section, provided that such broker or 
dealer:
    (i) Complies with paragraph (d)(1)(ii)(B)(4) of this section in 
connection with such activity; and
    (ii) Provides to the customer the disclosures required by Sec.  
240.10b-10(a)(2) (excluding Sec.  240.10b-10(a)(2)(i) and (ii)) and 
Sec.  240.10b-10(a)(8) in accordance with the time and form 
requirements set forth in Sec.  240.15Fi-2(b) and (c) or, 
alternatively, promptly after discovery of any defect in the broker or 
dealer's good faith effort to comply with such requirements.
    (6) Limitation for covered inter-dealer security-based swaps--(i) 
Scope of limitation for covered inter-dealer security-based swaps. The 
threshold described in paragraph (d)(1)(vii) of this section applies to 
covered inter-dealer security-based swap positions connected with 
dealing activity subject to the exception in this paragraph (d) engaged 
in by any of the following persons:
    (A) The non-U.S. person relying on the exception in this paragraph 
(d); and
    (B) Any affiliate of such person, except for an affiliate that is 
deemed not to be a security-based swap dealer pursuant to Rule 3a71-
2(b).
    (ii) Impact of exceeding exception threshold. If the threshold 
described in paragraph (d)(1)(vii) of this section is exceeded, then
    (A) As of the date the condition in paragraph (d)(1)(vii) of this 
section is no longer satisfied, the non-U.S. person that is no longer 
able to satisfy that condition may not rely on the exception in this 
paragraph (d) for future security-based swap transactions.
    (B) For purposes of calculating the amount of security-based swap 
positions connected with dealing activity under Sec.  240.3a71-2(a)(1), 
the non-U.S. person that is no longer able to satisfy the condition in 
paragraph (d)(1)(vii) of this section shall include all covered inter-
dealer security-based swap positions connected with dealing activity 
subject to the exception in this paragraph (d) engaged in by persons 
described in paragraph (d)(6)(i) of this section over the course of the 
immediately preceding 12 months, such positions to be included in such 
calculation as of the date that the condition in paragraph (d)(1)(vii) 
of this section is no longer satisfied.
* * * * *

0
6. Section 240.15Fb2-1 is amended by revising paragraphs (d) and (e) to 
read as follows:

Sec.  240.15Fb2-1   Registration of security-based swap dealers and 
major security-based swap participants

* * * * *
    (d) Conditional registration. (1) An applicant that has submitted a 
complete Form SBSE-C (Sec.  249.1600c of this chapter) and a complete 
Form SBSE (Sec.  249.1600 of this chapter) or Form SBSE-A (Sec.  
249.1600a of this chapter) or Form SBSE-BD (Sec.  249.1600b of this 
chapter), as applicable, in accordance with paragraph (c) within the 
time periods set forth in Sec.  240.3a67-8 (if the

[[Page 6353]]

person is a major security-based swap participant) or Sec.  240.3a71-
2(b) (if the person is a security-based swap dealer), and has not 
withdrawn its registration shall be conditionally registered.
    (2) Notwithstanding paragraph (d)(1) of this section, an applicant 
that is a nonresident security-based swap dealer or nonresident major 
security-based swap participant (each as defined in Sec.  240.15Fb2-
4(a)) that is unable to provide the certification and opinion of 
counsel required by Sec.  240.15Fb2-4(c)(1) shall instead provide a 
conditional certification and opinion of counsel as discussed in 
paragraph (d)(3) of this section, and upon the provision of such 
conditional certification and opinion of counsel, shall be 
conditionally registered, if the nonresident applicant submits a Form 
SBSE-C (Sec.  249.1600c of this chapter) and a Form SBSE (Sec.  
249.1600 of this chapter), SBSE-A (Sec.  249.1600a of this chapter) or 
SBSE-BD (Sec.  249.1600b of this chapter), as applicable, in accordance 
with paragraph (c) of this section within the time periods set forth in 
Sec.  240.3a67-8 (if the person is a major security-based swap 
participant) or Sec.  240.3a71-2(b) (if the person is a security-based 
swap dealer), that is complete in all respects but for the failure to 
provide the certification and the opinion of counsel required by Sec.  
240.15Fb2-4(c)(1), and has not withdrawn from registration.
    (3) For purposes of this section, a conditional certification and 
opinion of counsel means a certification as required by Sec.  
240.15Fb2-4(c)(1)(i) and an opinion of counsel as required by Sec.  
240.15Fb2-4(c)(1)(ii) that identify, and are conditioned upon, the 
occurrence of a future action that would provide the Commission with 
adequate assurances of prompt access to the books and records of the 
nonresident security-based swap dealer or nonresident major security-
based swap participant, and the ability of the nonresident security-
based swap dealer or nonresident major security-based swap participant 
to submit to onsite inspection and examination by the Commission. Such 
future action could include:
    (i) Entry by the Commission and the foreign financial regulatory 
authority of the jurisdiction(s) in which the nonresident security-
based swap dealer or nonresident major security-based swap participant 
maintains the books and records that are addressed by the certification 
and opinion of counsel required by Sec.  240.15Fb2-4(c)(1) into a 
memorandum of understanding, agreement, protocol, or other regulatory 
arrangement providing the Commission with adequate assurances of:
    (A) Prompt access to the books and records of the nonresident 
security-based swap dealer or nonresident major security-based swap 
participant; and
    (B) The ability of the nonresident security-based swap dealer or 
nonresident major security-based swap participant to submit to onsite 
inspection or examination by the Commission; or
    (ii) Issuance by the Commission of an order granting substituted 
compliance in accordance with Sec.  240.3a71-6 to the jurisdiction(s) 
in which the nonresident security-based swap dealer or nonresident 
major security-based swap participant maintains the books and records 
that are addressed by the certification and opinion of counsel required 
by Sec.  240.15Fb2-4(c)(1); or
    (iii) Any other action that would provide the Commission with the 
assurances required by Sec.  240.15Fb2-4(c)(1)(i) and by Sec.  
240.15Fb2-4(c)(1)(ii).
    (e) Commission Decision. (1) The Commission may deny or grant 
ongoing registration to a security-based swap dealer or major security-
based swap participant based on a security-based swap dealer's or major 
security-based swap participant's application, filed pursuant to 
paragraph (a) of this section. The Commission will grant ongoing 
registration if it finds that the requirements of section 15F(b) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(b)) are satisfied. 
The Commission may institute proceedings to determine whether ongoing 
registration should be denied if it does not or cannot make such 
finding or if the applicant is subject to a statutory disqualification 
(as described in sections 3(a)(39)(A) through (F) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(39)(A)-(F)), or the Commission 
is aware of inaccurate statements in the application. Such proceedings 
shall include notice of the grounds for denial under consideration and 
opportunity for hearing. At the conclusion of such proceedings, the 
Commission shall grant or deny such registration.
    (2) If an applicant that is a nonresident security-based swap 
dealer or nonresident major security-based swap participant has become 
conditionally registered in reliance on paragraph (d)(2) of this 
section, the applicant will remain conditionally registered until the 
Commission acts to grant or deny ongoing registration in accordance 
with (e)(1) of this section. If none of the future actions in paragraph 
(d)(3) that are included in an applicant's conditional certification 
and opinion of counsel occurs within 24 months of the compliance date 
for Sec.  240.15Fb2-1, and there is not otherwise a basis that would 
provide the Commission with the assurances required by Sec.  240.15Fb2-
4(c)(1)(i) and by Sec.  240.15Fb2-4(c)(1)(ii), the Commission may 
institute proceedings thereafter to determine whether ongoing 
registration should be denied, in accordance with paragraph (e)(1) of 
this section.

0
7. Section 240.18a-5 is amended by adding paragraphs (a)(10)(iii) and 
(b)(8)(iii) to read as follows:

Sec.  240.18a-5   Records to be made by certain security-based swap 
dealers and major security-based swap participants

* * * * *
    (a) * * *
    (10) * * *
    (iii) Notwithstanding paragraph (a)(10)(i) of this section:
    (A) A security-based swap dealer or major security-based swap 
participant is not required to make and keep current a questionnaire or 
application for employment executed by an associated person if the 
security-based swap dealer or major security-based swap participant is 
excluded from the prohibition in section 15F(b)(6) of the Exchange Act 
(15 U.S.C. 78o-10(b)(6)) with respect to such associated person; and
    (B) A questionnaire or application for employment executed by an 
associated person who is not a U.S. person (as that term is defined in 
Sec.  240.3a71-3(a)(4)(i)(A)) need not include the information 
described in paragraphs (a)(10)(i)(A) through (H) of this section, 
unless the security-based swap dealer or major security-based swap 
participant is required to obtain such information under applicable law 
in the jurisdiction in which the associated person is employed or 
located or obtains such information in conducting a background check 
that is customary for such firms in that jurisdiction and the creation 
or maintenance of records reflecting that information, would not result 
in a violation of applicable law in the jurisdiction in which the 
associated person is employed or located; provided, however, the 
security-based swap dealer or major security-based swap participant 
must comply with section 15F(b)(6) of the Exchange Act (15 U.S.C. 78o-
10(b)(6)).
* * * * *
    (b) * * *
    (8) * * *
    (iii) Notwithstanding paragraph (b)(8)(i) of this section;
    (A) A security-based swap dealer or major security-based swap 
participant is not required to make and keep current a questionnaire or 
application for employment executed by an associated

[[Page 6354]]

person if the security-based swap dealer or major security-based swap 
participant is excluded from the prohibition in section 15F(b)(6) of 
the Exchange Act (15 U.S.C. 78o-10(b)(6)) with respect to such 
associated person; and
    (B) A questionnaire or application for employment executed by an 
associated person who is not a U.S. person (as that term is defined in 
Sec.  240.3a71-3(a)(4)(i)(A)) need not include the information 
described in paragraphs (b)(8)(i)(A) through (H) of this section, 
unless the security-based swap dealer or major security-based swap 
participant is required to obtain such information under applicable law 
in the jurisdiction in which the associated person is employed or 
located or obtains such information in conducting a background check 
that is customary for such firms in that jurisdiction and the creation 
or maintenance of records reflecting that information would not result 
in a violation of applicable law in the jurisdiction in which the 
associated person is employed or located; provided, however, the 
security-based swap dealer or major security-based swap participant 
must comply with Section 15F(b)(6) of the Exchange Act (15 U.S.C. 78o-
10(b)(6)).
* * * * *

    By the Commission.

    Dated: December 18, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-27760 Filed 2-3-20; 8:45 am]
 BILLING CODE 8011-01-P