Document ID: SEC-2023-1451-0001
Agency: sec
Document Type: Rule
Title: Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities
Posted Date: 2023-12-15T05:00Z

[Federal Register Volume 88, Number 240 (Friday, December 15, 2023)]
[Rules and Regulations]
[Pages 87156-87328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24587]

[[Page 87155]]

Vol. 88

Friday,

No. 240

December 15, 2023

Part III

Securities and Exchange Commission

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17 CFR Parts 200, 201, 232, et al.

Security-Based Swap Execution and Registration and Regulation of 
Security-Based Swap Execution Facilities; Final Rule

  Federal Register / Vol. 88 , No. 240 / Friday, December 15, 2023 / 
Rules and Regulations  

[[Page 87156]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 201, 232, 240, 242, and 249

[Release No. 34-98845; File No. S7-14-22]
RIN 3235-AK93

Security-Based Swap Execution and Registration and Regulation of 
Security-Based Swap Execution Facilities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting a set of rules and forms under the 
Securities Exchange Act of 1934 (``SEA'') that would create a regime 
for the registration and regulation of security-based swap execution 
facilities (``SBSEFs'') and address other issues relating to security-
based swap (``SBS'') execution generally. One of the rules being 
adopted implements an element of the Dodd-Frank Act that is intended to 
mitigate conflicts of interest at SBSEFs and national securities 
exchanges that trade SBS (``SBS exchanges''). Other rules being adopted 
address the cross-border application of the SEA's trading venue 
registration requirements and the trade execution requirement for SBS. 
In addition, the Commission is amending an existing rule to exempt, 
from the SEA definition of ``exchange,'' certain registered clearing 
agencies, as well as registered SBSEFs that provide a market place only 
for SBS. The Commission is also adopting a new rule that, while 
affirming that an SBSEF would be a broker under the SEA, exempts a 
registered SBSEF from certain broker requirements. Further, the 
Commission is adopting certain new rules and amendments to its Rules of 
Practice to allow persons who are aggrieved by certain actions by an 
SBSEF to apply for review by the Commission. Finally, the Commission is 
delegating new authority to the Director of the Division of Trading and 
Markets and to the General Counsel to take actions necessary to carry 
out the rules being adopted.

DATES: 
    Effective date: February 13, 2024.
    Compliance dates: See section XVI (Compliance Schedule).

FOR FURTHER INFORMATION CONTACT: Michael E. Coe, Assistant Director; 
David Liu, Special Counsel; Leah Mesfin, Special Counsel; Michou 
Nguyen, Special Counsel; or Geoffrey Pemble, Special Counsel, at (202) 
551-5000, Office of Market Supervision, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 
242.800 through 242.835 (``Regulation SE'') to create a regime for the 
registration and regulation of SBSEFs and to address other issues 
relating to SBS execution generally. Regulation SE consists of 17 CFR 
242.800 through 242.835 (Rules 800 through 835). Key rules within 
Regulation SE include Rule 803, which establishes a process for SBSEF 
registration; Rules 804 to 810, which establish procedures for rule and 
product filings by SBSEFs; Rule 815, which establishes permissible 
execution methods for SBS that are subject to the SEA's trade execution 
requirement; Rule 816, which sets out a procedure for SBSEFs to make an 
SBS available to trade and establish certain exemptions from the trade 
execution requirement; Rules 818 to 831, which implement the 14 Core 
Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832 
to 833, which address cross-border matters; and Rule 834, which imposes 
requirements addressing conflicts of interest involving SBSEFs and SBS 
exchanges, as required by section 765 of the Dodd-Frank Act.
    In addition to the rules described above, the Commission is also 
adopting 17 CFR 249.1701 (Form SBSEF), which is the form that an entity 
will use to register with the Commission as an SBSEF; 17 CFR 249.1702 
(a submission cover sheet), which will be required to accompany filings 
with the Commission made by SBSEFs for rule and rule amendments and for 
product listings; adopting amendments to 17 CFR 232.405 (Rule 405 of 
Regulation S-T) to require various SBSEF filings to be provided in 
Inline eXtensible Business Reporting Language (``Inline XBRL''), a 
structured data language; adopting amendments to 17 CFR 240.3a1-1 (Rule 
3a1-1) to exempt from the SEA definition of ``exchange'' certain 
registered clearing agencies, as well as registered SBSEFs that provide 
a market place only for SBS; adopting 17 CFR 240.15a-12 (Rule 15a-12), 
which, while affirming that an SBSEF would also be a broker under the 
SEA, exempts a registered SBSEF from certain broker requirements; 
providing for the sunset of existing temporary exemptions from the 
requirement to register as a clearing agency that, among other things, 
applies to an entity performing the functions of an SBSEF but that is 
not yet registered as such, and from the requirement to register as an 
SBSEF or a national securities exchange for entities that meet the 
statutory definition of SBSEF; adopting certain new rules and 
amendments to 17 CFR part 201 (Rules of Practice) to allow persons who 
are aggrieved by certain actions by an SBSEF to apply for review by the 
Commission; and adopting amendments to 17 CFR 200.30-3 and 17 CFR 
200.30-14 regarding delegations of authority to the Director of the 
Division of Trading and Markets and to the General Counsel.

Table of Contents

I. Background
II. Introductory Provisions of Regulation SE
    A. Rule 800--Scope
    B. Rule 801--Applicable Provisions
    C. Rule 802--Definitions
III. Registration of SBSEFs
    A. Rule 803--Requirements and Procedures for Registration
    B. Form SBSEF
IV. Rule and Product Filings by SBSEFs
    A. Rule 804--Listing Products for Trading by Certification
    B. Rule 805--Voluntary Submission of New Products for Commission 
Review and Approval
    C. Rule 806--Voluntary Submission of Rules for Commission Review 
and Approval
    D. Rule 807--Self-Certification of Rules
    E. Submission Cover Sheet and Instructions
    F. Rule 808--Availability of Public Information
    G. Rule 809--Staying of Certification and Tolling of Review 
Period Pending Jurisdictional Determination
    H. Rule 810--Product Filings by SBSEFs That Are Not Yet 
Registered and by Dormant SBSEFs
V. Miscellaneous Requirements
    A. Rule 811--Information Relating to SBSEF Compliance
    B. Rule 812--Enforceability
    C. Rule 813--Prohibited Use of Data Collected for Regulatory 
Purposes
    D. Rule 814--Entity Operating Both a National Securities 
Exchange and an SBSEF
    E. Rule 815--Methods of Execution for Required and Permitted 
Transactions
    F. Rule 816--Trade Execution Requirement and Exemptions 
Therefrom
    G. Rule 817--Trade Execution Compliance Schedule
VI. Implementation of Core Principles
    A. Rule 818--Core Principle 1--Compliance With Core Principles
    B. Rule 819--Core Principle 2--Compliance With Rules
    C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to 
Manipulation
    D. Rule 821--Core Principle 4--Monitoring of Trading and Trade 
Processing
    E. Rule 822--Core Principle 5--Ability To Obtain Information
    F. Rule 823--Core Principle 6--Financial Integrity of 
Transactions
    G. Rule 824--Core Principle 7--Emergency Authority
    H. Rule 825--Core Principle 8--Timely Publication of Trading 
Information

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    I. Rule 826--Core Principle 9--Recordkeeping and Reporting
    J. Rule 827--Core Principle 10--Antitrust Considerations
    K. Rule 828--Core Principle 11--Conflicts of Interest
    L. Rule 829--Core Principle 12--Financial Resources
    M. Rule 830--Core Principle 13--System Safeguards
    N. Rule 831--Core Principle 14--Designation of Chief Compliance 
Officer
VII. Cross-Border Rules
    A. Rule 832--Cross-Border Mandatory Trade Execution
    B. Rule 833--Cross-Border Exemptions for Foreign Trading Venues 
and Relating to the Trade Execution Requirement
VIII. Rule 834--Implementation of Section 765 of the Dodd-Frank Act 
and Governance of SBSEFs and SBS Exchanges
    A. Rule 834(a)
    B. Rule 834(b)
    C. Rule 834(c)
    D. Rule 834(d)
    E. Rule 834(e)
    F. Rule 834(f)
    G. Rule 834(g)
    H. Rule 834(h)
IX. Rule 835--Notice to Commission by SBSEF of Final Disciplinary 
Action, Denial or Conditioning of Membership, or Denial or 
Limitation of Access
X. Amendments to Existing Rule 3a1-1 Under the SEA-Exemptions From 
the Definition of ``Exchange''
XI. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain 
Broker Requirements
XII. Termination of Temporary Exemptions
XIII. Electronic Filings Under Regulation SE
    A. Use of Electronic Filing Systems and Structured Data
    B. Use of Identifiers
XIV. Amendments to Commission's Rules of Practice for Appeals of 
SBSEF Actions
    A. Amendment to Rule 101
    B. Amendment to Rule 202
    C. Amendment to Rule 210
    D. Amendment to Rule 401
    E. Rule 442--Right To Appeal
    F. Rule 443--Sua sponte Review by Commission
    G. Amendment to Rule 450
    H. Amendment to Rule 460
XV. Amendments to Delegations of Authority in Rule 30-3 and Rule 30-
14
    A. Delegated Authority Related to SBSEF Registration and Form 
SBSEF
    B. Delegated Authority Related to New Products Proposed by an 
SBSEF
    C. Delegated Authority Related to New Rules or Rule Amendments 
Proposed by an SBSEF
    D. Delegated Authority Related To Request for Joint 
Interpretation
    E. Delegated Authority Related to SBSEF Submissions Contemplated 
by Rule 811
    F. Delegated Authority Related to Information Sharing
    G. Delegated Authority Related to Commission Review Proceedings
XVI. Compliance Schedule
XVII. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Benefits and Costs
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
XVIII. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    E. Collection of Information is Mandatory
    F. Responses To Collection of Information Will Not Be 
Confidential
    G. Retention Period of Recordkeeping Requirements
XIX. Regulatory Flexibility Certification
    A. SBSEFs
    B. Persons Requesting an Exemption Order Pursuant to Rule 833
    C. SBS Exchanges
    D. Certification
XX. Other Matters

I. Background

    The Commission is adopting Regulation SE,\1\ which governs the 
registration and regulation of SBSEFs, as required by section 3D of the 
SEA.\2\ Section 3D was enacted as part of Title VII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ 
The Dodd-Frank Act was enacted, among other reasons, to promote the 
financial stability of the United States by improving accountability 
and transparency in the financial system.\4\ The 2008 financial crisis 
highlighted significant issues in the over-the-counter (``OTC'') 
derivatives markets, which experienced dramatic growth in the years 
leading up to the financial crisis and are capable of affecting 
significant sectors of the U.S. economy.
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    \1\ The Commission proposed Regulation SE on Apr. 6, 2022. See 
Rules Relating to Security-Based Swap Execution and Registration and 
Regulation of Security-Based Swap Execution Facilities (Proposed 
Rule), SEA Release No. 94615 (Apr. 6, 2022), 87 FR 28872 (May 11, 
2022) (``Proposing Release'').
    \2\ 15 U.S.C. 78c-4. In this release, the Commission is defining 
the Securities Exchange Act as the ``SEA'' to distinguish it from 
the Commodity Exchange Act (``CEA'').
    \3\ Public Law 111-203, H.R. 4173, sec. 763(c).
    \4\ See Public Law 111-203 Preamble.
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    Section 3D(a)(1) of the SEA provides that no person may operate a 
facility for the trading or processing of SBS unless the facility is 
registered as an SBSEF or as a national securities exchange. Section 
3D(d) enumerates 14 Core Principles with which SBSEFs must comply.\5\ 
And section 3D(f) requires the Commission to prescribe rules governing 
the regulation of SBSEFs. In addition, section 765 of the Dodd-Frank 
Act directs the Commission to adopt rules to mitigate conflicts of 
interest with respect to clearing agencies that clear SBS (``SBS 
clearing agencies''), SBSEFs, and national securities exchanges that 
post or make available for trading SBS (``SBS exchanges'').
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    \5\ See infra section VI (listing the Core Principles).
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    On April 6, 2022, the Commission proposed Regulation SE, relating 
to the registration and regulation of SBSEFs and to SBS execution 
generally.\6\ As discussed in the Proposing Release, the proposed rules 
superseded previous Commission proposals on these subjects.\7\
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    \6\ See Proposing Release, supra note 1. In 2011, the Commission 
published for comment proposed Regulation SBSEF relating to, among 
other things, the registration and regulation of SBSEFs. 
Registration and Regulation of Security-Based Swap Execution 
Facilities, SEA Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 
28, 2011) (``2011 SBSEF Proposal''). The Proposing Release, which 
contains a more detailed discussion of that and related proposals, 
withdrew the 2011 SBSEF Proposal. See Proposing Release, 87 FR at 
28874.
    \7\ See Proposing Release, supra note 1, 87 FR at 28874. 
However, Rule 834 of proposed Regulation SE would implement section 
765 only with respect to SBSEFs and SBS exchanges. See infra section 
VIII.
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    The SBS market is closely related to the swaps market, which is 
regulated by the Commodity Futures Trading Commission (``CFTC'').\8\ In 
June 2013, the CFTC adopted rules (in 17 CFR chapter I) under Title VII 
of the Dodd-Frank Act for swap execution facilities (``SEFs'').\9\ The 
swaps market has grown and matured within the framework established by 
the CFTC's rules.\10\ As

[[Page 87158]]

discussed in the Proposing Release, the SBS market is a small fraction 
of the overall swaps market, and the swaps market provides greater 
opportunities for revenue capture from swap execution as compared to 
SBS execution.\11\ For example, as of November 25, 2022, the gross 
notional amount outstanding in the SBS market was approximately $8.5 
trillion across the credit, equity, and interest rate asset 
classes,\12\ while the gross notional amount outstanding in the swaps 
market was approximately $352 trillion across the interest rate, 
credit, and foreign-exchange asset classes.\13\ The Commission was 
sensitive in the Proposing Release to the economic impact its proposed 
SBSEF rules could have.\14\
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    \8\ In adopting Regulation SE, the Commission has consulted and 
coordinated with the CFTC and the prudential regulators, in 
accordance with the consultation mandate of the Dodd-Frank Act. 
Section 712(a)(2) of the Dodd-Frank Act provides in relevant 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 relevant 
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.'' 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 
SEA, 15 U.S.C. 78c(a)(74).
    \9\ See CFTC, Core Principles and Other Requirements for Swap 
Execution Facilities, 78 FR 33476 (June 4, 2013) (``2013 CFTC Final 
SEF Rules Release''); CFTC, Process for a Designated Contract Market 
or Swap Execution Facility To Make a Swap Available to Trade, Swap 
Transaction Compliance and Implementation Schedule, and Trade 
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 
(June 4, 2013) (``2013 CFTC Final MAT Rules Release'').
    \10\ In 2018, the CFTC proposed to make fundamental changes to 
the SEF regulatory structure. See CFTC, Swap Execution Facilities 
and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (``2018 
SEF Proposal''). In 2021, the CFTC ultimately declined to finalize 
the 2018 SEF Proposal and elected instead ``to improve the SEF 
framework through targeted rulemakings that address distinct 
issues.'' Accordingly, the CFTC withdrew the unadopted portions of 
its 2018 proposal. See CFTC, Swap Execution Facilities and Trade 
Execution Requirement--Proposed rule; partial withdrawal, 86 FR 
9304, 9304 (Feb. 12, 2021).
    \11\ See Proposing Release, supra note 1, 87 FR at 28874-76.
    \12\ See Report on Security-Based Swaps (Mar. 20, 2023), 
available at https://www.sec.gov/files/report-security-based-swaps-032023.pdf. See also infra note 815 and accompanying text 
(discussing security-based swap transactions data in the credit, 
equity, and interest rate derivatives asset classes reported by 
registered SBSDRs).
    \13\ See CFTC Swaps Report, available at https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27, 
2023).
    \14\ See Proposing Release, supra note 1, 87 FR at 28875.
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    In addition, the Commission recognized that the entities that are 
most likely to register with the Commission as SBSEFs are existing, 
CFTC-registered SEFs, which have already made substantial investments 
in systems, policies, and procedures to comply with and adapt to the 
regulatory system developed by the CFTC. Harmonization between the 
Commission's SBSEF rules and the CFTC's SEF rules could facilitate the 
ability of entities to dually register and minimize costs by allowing 
incumbent SEFs to use their existing systems, policies, and procedures 
to comply with the Commission's SBSEF rules.\15\
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    \15\ See Proposing Release, supra note 1, 87 FR at 28875.
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    Thus, in proposing Regulation SE, the Commission took the general 
approach of harmonizing closely with analogous CFTC SEF rules, except 
where differences in the SEC's statutory authority relative to the 
CFTC's statutory authority, or differences in the SBS market relative 
to the swaps market, necessitated differences between the Commission's 
rules and the CFTC's, or where the benefits of deviating from the 
CFTC's rules would otherwise justify the burdens and costs associated 
with imposing different or additional requirements than the 
corresponding CFTC rule. And the Commission sought public comment on 
this approach.\16\
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    \16\ The comment letters are available at https://www.sec.gov/comments/s7-14-22/s71422.htm. The Commission also received comments 
on topics outside the scope of the proposal that are not addressed 
in this release. See, e.g., Letter from Anonymous (Apr. 27, 2022) 
(discussing CFTC oversight and transparency); Letter from Anonymous 
(Apr. 20, 2022) (discussing securities financial transactions).
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    One commenter opposes this harmonization approach, and argues that 
it does not make sense to harmonize with the ``looser'' rules of SEFs, 
which he believes would allow ``more fraud and false narratives to 
creep into the market,'' and instead advocates that the Commission 
start from scratch with new rules.\17\ Many other commenters, however, 
generally support this harmonization approach.\18\ Many of these 
commenters echo the Commission's rationale for harmonizing with the 
CFTC's SEF rules, and state that such harmonization would minimize the 
compliance burden for dually registered entities.\19\ Two of these 
commenters also state that the CFTC's regulatory framework has been in 
place for almost a decade and has functioned well.\20\ One commenter 
also supports the Commission's decision and rationale in withdrawing 
proposed Regulation MC \21\ and the Commission's 2011 SBSEF 
Proposal.\22\
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    \17\ See Letter from Robert McLaughlin (Apr. 7, 2022).
    \18\ See, e.g., Letter from Robert Laorno, General Counsel, ICE 
Swap Trade, LLC, to Vanessa A. Countryman, Secretary, Commission, at 
1-2 (June 20, 2022) (``ICE Letter''); Letter from Stephen W. Hall, 
Legal Director and Securities Specialist, and Jason Grimes, Senior 
Counsel, Better Markets, Inc., to Vanessa A. Countryman, Secretary, 
Commission, at 9-11 (June 10, 2022) (``Better Markets Letter''); 
Letter from Derek J. Kleinbauer, Vice-President, Bloomberg SEF LLC, 
and Benjamin MacDonald, Global Head Enterprise Products, Bloomberg 
L.P., to Vanessa A. Countryman, Secretary, Commission, at 1-2 (June 
10, 2022) (``Bloomberg Letter''); Letter from Bella Rosenberg, 
Senior Counsel and Head of Legal and Regulatory Practice Group, 
International Swaps and Derivatives Association, Inc., and Kyla 
Brandon, Managing Director, Head of Derivatives Policy, Securities 
Industry and Financial Markets Association, to Vanessa Countryman, 
Secretary, Commission, at 1-2 (June 10, 2022) (``ISDA-SIFMA 
Letter''); Letter from Sarah A. Bessin Associate General Counsel, 
and Nicholas Valderrama, Counsel, Investment Company Institute, at 
1-2 (June 10, 2022) (``ICI Letter''); Letter from Elizabeth Kirby, 
Head of U.S. Market Structure, Tradeweb Markets Inc., to Vanessa A. 
Countryman, Secretary, Commission, at 1-2 (June 10, 2022) 
(``Tradeweb Letter''); Letter from Williams Shields, Chairman, 
Wholesale Markets Brokers' Association, Americas, to Vanessa A. 
Countryman, Secretary, Commission, at 1-2 (June 10, 2022) (``WMBAA 
Letter''); Letter from Lindsey Weber Keljo, Head of SIFMA Asset 
Management Group, and William Thun, Associate General Counsel, SIFMA 
Asset Management Group, to Vanessa A. Countryman, Secretary, 
Commission, at 1-2 (June 10, 2022) (``SIFMA AMG Letter''); Letter 
from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs, 
Managed Funds Association, at 1-2 (June 10, 2022) (``MFA Letter''); 
Letter from Stephen John Berger, Global Head of Government & 
Regulatory Policy, Citadel and Citadel Securities (June 10, 2022) 
(``Citadel Letter''). While these commenters support the 
Commission's general harmonization approach, they also provide 
specific recommendations on changes to the Commission's Regulation 
SE proposal that they believe would improve the rules, as described 
in detail below in the sections discussing these individual rules. 
See infra sections II through XVII.
    \19\ See, e.g., ICE Letter, supra note 18, at 1-2; ISDA-SIFMA 
Letter, supra note 18, at 1-2; ICI Letter, supra note 18, at 1-2; 
Tradeweb Letter, supra note 18, at 1-2; WMBAA Letter, supra note 18, 
at 1-2; MFA Letter, supra note 18, at 1.
    \20\ See, e.g., ISDA-SIFMA Letter, supra note 18, at 1-2; SIFMA 
AMG Letter, supra note 18, at 1-2.
    \21\ Ownership Limitations and Governance Requirements for 
Security-Based Swap Clearing Agencies, Security-Based Swap Execution 
Facilities, and National Securities Exchanges With Respect to 
Security-Based Swaps Under Regulation MC, SEA Release No. 63107 
(Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (``Regulation MC 
Proposal'').
    \22\ See Bloomberg Letter, supra note 18, at 2.
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    The Commission disagrees with the comment that harmonizing with the 
CFTC approach would allow for more fraud and false narratives in the 
SBS markets. Standing up a formal regulatory framework for SBSEFs where 
none yet exists will provide greater accountability and oversight for 
the SBS market and should, contrary to this commenter's views, serve to 
detect and deter abusive and manipulative trading practices by 
providing for a set of Commission rules that SBSEFs must adhere to in 
operating their platforms and by requiring SBSEFs to make filings with 
the Commission regarding the operation of their platforms and to make 
their rules publicly available, as described in detail in sections II 
through XVII below.
    Given the relative size of the SBS market as compared to the swaps 
market, the fact that the CFTC's SEF regulation has been in place for 
many years now, and the cost efficiencies and reduced burdens that 
would result from harmonized rules for dually registered SEFs/SBSEFs, 
it is appropriate to generally harmonize the Commission's SBSEF 
regulatory framework with the CFTC's SEF regulatory framework. At the 
same time, where appropriate, adopted Regulation SE differs in certain 
targeted respects from the CFTC's regulatory framework for SEFs. This 
includes areas where differences in the Commission's statutory 
authority relative to the CFTC's statutory authority or differences in 
the SBS market relative to the swaps market necessitate differences 
between the

[[Page 87159]]

Commission's rules and the CFTC's, or where the benefits of deviating 
from the CFTC's rules would otherwise justify the burdens and costs 
associated with imposing different or additional requirements than the 
corresponding CFTC rule. The specific approach to harmonization that 
the Commission has pursued, along with differences from CFTC's regime 
for SEFs, are described in detail in sections II through XVII below.
    As discussed below, the Commission is modifying the proposed 
provisions of Regulation SE regarding the definition of ``block 
trade,'' \23\ the treatment of package transactions,\24\ the treatment 
of SBS transactions that are intended to be cleared but are not 
accepted for clearing by a registered clearing agency,\25\ permitting 
SBSEFs to contract with designated contract markets (``DCMs'') to 
provide services to assist in complying with the SEA and Commission 
rules thereunder,\26\ the content and timing of the Daily Market Data 
Report,\27\ an exception to ownership and voting restrictions for 
SBSEFs,\28\ the application of deadlines and standard of review for 
Commission review of SBSEF actions,\29\ and the applicability of 
electronic filing and structured-data requirements with respect to 
specific SBSEF filings.\30\ Otherwise, the rules of Regulation SE are 
generally being adopted as proposed, in some instances with minor or 
technical modifications, which are described in more detail below.\31\
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    \23\ See infra section V.E.1(c).
    \24\ See infra section V.E.4.
    \25\ See infra section V.E.7.
    \26\ See infra section VI.B.5.
    \27\ See infra section VI.H.
    \28\ See infra section VIII.B.
    \29\ See infra section XIV.E.
    \30\ See infra section XIII.
    \31\ See infra note 32.
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II. Introductory Provisions of Regulation SE

A. Rule 800--Scope

    Proposed Rule 800 is based on 17 CFR 37.1, which provides that part 
37 of the CFTC's regulations applies to every SEF that is registered or 
applying to become registered as a SEF under section 5h of the CEA. 
Proposed Rule 800 would provide that the provisions of Regulation SE 
apply to every SBSEF that is registered or is applying to become 
registered as an SBSEF under section 3D of the SEA.
    The Commission received no comments on Proposed Rule 800 and is 
adopting Rule 800 as proposed, with minor technical modifications,\32\ 
for the reasons stated in the Proposing Release.
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    \32\ In several instances, here and as noted below, the 
Commission has made technical modifications to the proposed 
regulatory text to conform cross-references in the regulatory text 
to the CFR to the required style, as well as to correct simple 
typographical errors. Here, the Commission has modified Rule 800 to 
change a reference from ``[t]he provisions of this section'' to 
``[t]he provisions of Sec. Sec.  242.800 through 242.835.'' In other 
instances, the Commission has added the words ``of this section'' to 
a CFR cross-reference to conform to the required form of citation. 
Other types of technical modifications, and any substantive 
modifications, are described below with respect to specific 
instances.
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B. Rule 801--Applicable Provisions

    Proposed Rule 801 is based on Sec.  37.2 of the CFTC's rules, which 
provides that a SEF shall comply with the requirements of part 37 and 
all other applicable CFTC regulations, including 17 CFR 1.60 and part 
9, and including any related definitions and cross-referenced sections. 
Proposed Rule 801 would require an SBSEF to comply with the 
requirements of Regulation SE and all other applicable Commission 
rules, including any related definitions and cross-referenced sections.
    The Commission did not receive any comments on Proposed Rule 801 
and is adopting Rule 801 as proposed, with minor technical 
modifications.\33\
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    \33\ See id.
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C. Rule 802--Definitions

    Proposed Rule 802 would set forth the definitions of terms that are 
used in multiple rules in proposed Regulation SE. The majority of these 
terms were adapted from the CFTC's swaps rules. Other terms were taken 
from section 3 of the SEA \34\ or from a Commission rule under the SEA. 
In particular, Proposed Rule 802 would define the term ``security-based 
swap execution facility'' by cross-referencing the definition of that 
term provided in section 3(a)(77) of the SEA,\35\ but with one carve-
out. An entity that is registered with the Commission as a clearing 
agency pursuant to section 17A of the SEA \36\ and limits its SBSEF 
functions to operation of a trading session that is designed to further 
the accuracy of end-of-day valuations--i.e., a ``forced trading 
session''--would be exempt from the definition of ``security-based swap 
execution facility.'' \37\
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    \34\ 15 U.S.C. 78c.
    \35\ 15 U.S.C. 78c(a)(77).
    \36\ 15 U.S.C. 78q-1.
    \37\ See Proposing Release, supra note 1, 87 FR at 28878. This 
provision codifies a series of exemptions granted by the Commission 
to SBS clearing agencies that operate ``forced trading'' sessions. 
See, e.g., Order Granting Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection With Request on Behalf of ICE 
U.S. Trust LLC Related to Central Clearing of Credit Default Swaps, 
and Request for Comments, SEA Release No. 59527 (Mar. 6, 2009), 74 
FR 10791, 10796 (Mar. 12, 2009) (providing, among other things, an 
exemption from sections 5 and 6 of the SEA because ``ICE Trust will 
periodically require ICE Trust Participants to execute certain CDS 
trades at the applicable end-of-day settlement price. Requiring ICE 
Trust Participants to trade CDS periodically in this manner is 
designed to help ensure that such submitted prices reflect each ICE 
Trust Participant's best assessment of the value of each of its open 
positions in Cleared CDS on a daily basis, thereby reducing risk by 
allowing ICE Trust to impose appropriate margin requirements''); 
Order Extending and Modifying Temporary Exemptions Under the 
Securities Exchange Act of 1934 in Connection With Request of 
Chicago Mercantile Exchange Inc. Related to Central Clearing of 
Credit Default Swaps, and Request for Comments, SEA Release No. 
61164 (Dec. 14, 2009), 74 FR 67258, 67262 (Dec. 18, 2009) 
(providing, among other things, an exemption from sections 5 and 6 
of the SEA because, ``[a]s part of the CDS clearing process, CME 
will periodically require CDS clearing members to trade at prices 
generated by their indicative settlement prices where those 
indicative settlement prices generate crossed bids and offers, 
pursuant to CME's price quality auction methodology'').
---------------------------------------------------------------------------

    Although the Commission received comments regarding the proper 
application of the proposed definitions with respect to registration 
requirements, discussed below in section III.A.2, and the proposed 
amendments to Rule 3a1-1, discussed below in section X, the Commission 
did not receive comments suggesting a modification of the definitions 
themselves. The term ``security-based swap execution facility'' is 
defined directly in section 3(a)(77) of the SEA as ``a trading system 
or platform in which multiple participants have the ability to execute 
or trade security-based swaps by accepting bids and offers made by 
multiple participants in the facility or system. . . ,'' \38\ and it is 
appropriate to adopt the same definition in Rule 802, with a narrow 
exception to address certain activities of registered clearing agencies 
in furthering the accuracy of end-of-day valuations.\39\
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    \38\ 15 U.S.C. 78c(a)(77).
    \39\ Because this exception for certain clearing agencies 
specifies ``an entity that is registered with the Commission as a 
clearing agency pursuant to section 17A of the [SEA]'' and meets 
other specified conditions, the exception would not be available to 
any exempt clearing agency.
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    Specifically, it is necessary or appropriate in the public 
interest, and is consistent with the protection of investors, to exempt 
a registered clearing agency that utilizes a forced trading 
functionality for SBS from the definition of ``security-based swap 
execution facility.'' Such an entity will continue to be registered as 
a clearing agency and subject to the requirements of section 17A of the 
SEA. Furthermore, a registered clearing agency is a self-regulatory 
organization (``SRO''); therefore, all of its rules--including

[[Page 87160]]

those governing the forced trading session--have to be submitted to the 
Commission pursuant to section 19 of the SEA. Therefore, codification 
of the exemption from the definitions of ``exchange'' and ``security-
based swap execution facility'' preserves the status quo and eliminates 
a largely duplicative and unnecessary set of regulatory requirements. 
This exemption covers only the forced-trading functionality of an SBS 
clearing agency; any other exchange or SBSEF activity in which a 
clearing agency might engage could subject the clearing agency to the 
SEA provisions and the Commission's rules thereunder applying to 
exchanges or SBSEFs.
    Proposed Rule 802 would have defined the term ``block trade'' to be 
an SBS transaction that, among other requirements, is an SBS based on a 
single credit instrument (or issuer of credit instruments) or a narrow-
based index of credit instruments (or issuers of credit instruments) 
having a notional size of $5 million or greater.\40\ The Commission 
received a number of comments on the proposed definition of ``block 
trade.'' These comments are discussed below in section V.E.1(c) 
relating to Rule 815(a), which specifies mandatory methods of execution 
for a Required Transaction that is not a block trade. As discussed in 
detail below in section V.E.1(c), the Commission is not adopting the 
proposed definition of ``block trade.\41\
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    \40\ See Proposing Release, supra note 1, 87 FR at 28896, 28975.
    \41\ Additionally, as discussed below, the Commission is 
removing the term ``block trade'' from the text of certain rules 
other than Rule 815(a), see infra sections VI.B.1 (Rule 819(a)(3)), 
V.B (Rule 812(b)), VI.B.4 (Rule 819(d)(1)), VI.H (Rule 825(c)(1)(i) 
and (ii)), and is adding language regarding future definition of 
``block trade'' in Rule 825(c)(1)(iii). See infra section VI.H.
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    Therefore, the Commission is adopting Rule 802 as proposed, except 
for the definition of ``block trade,'' which it is reserving, and minor 
technical modifications.\42\
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    \42\ See supra note 32. The Commission has also replaced the 
term ``SBSEF'' with ``security-based swap execution facility,'' 
defined ``SBS exchange'' when the term is first used, added the 
words ``of this definition of trading facility'' to paragraph 
(2)(C)(ii) of the definition of ``trading facility,'' and moved the 
definition of ``dormant security-based swap execution facility'' so 
that it appears in alphabetical order.
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III. Registration of SBSEFS

    Section 3D(a)(1) of the SEA \43\ provides that no person may 
operate a facility for the trading or processing of SBS \44\ unless the 
facility is registered as an SBSEF or as a national securities 
exchange. After issuing the 2011 SBSEF Proposal, the Commission granted 
temporary exemptions pursuant to section 36(a)(1) of the SEA \45\ to 
entities that meet the definition of ``security-based swap execution 
facility'' from having to register with the Commission as an SBSEF or 
national securities exchange (``Temporary SBSEF Exemptions'').\46\ 
According to their terms, the Temporary SBSEF Exemptions expire upon 
the earliest compliance date for the Commission's final rules regarding 
SBSEF registration.\47\
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    \43\ 15 U.S.C. 78c-4(a)(1).
    \44\ The term ``security-based swap'' is defined in section 
3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other 
things, a swap that is based on a single security or loan, including 
any interest therein or on the value thereof. A single security 
could include, for example, a cash equity, a crypto/digital asset 
security, or a security option.
    \45\ 15 U.S.C. 78mm(a)(1).
    \46\ See SEA Release No. 64678 (June 15, 2011), 76 FR 36287 
(June 22, 2011) (temporarily exempting entities that meet the 
definition of ``security-based swap execution facility'' from the 
requirement to register with the Commission as an SBSEF) (``June 
2011 Exemptive Order''); SEA Release No. 64795 (July 1, 2011), 76 FR 
39927 (July 7, 2011) (temporarily exempting entities that meet the 
definition of ``security-based swap execution facility'' from the 
restrictions and requirements of sections 5 and 6 of the SEA) 
(``July 2011 Exemptive Order''). An entity that meets the definition 
of ``security-based swap execution facility'' is required to 
register as an SBSEF under section 3D of the SEA or as an exchange 
under section 6 of the SEA. But because the Commission has not 
previously adopted final rules relating to SBSEFs, such entities 
have been unable to register with the Commission as SBSEFs. The 
Temporary SBSEF Exemptions have allowed such entities to continue 
trading SBS without needing to register either as SBSEFs or national 
securities exchanges before the compliance date of the SBSEF 
registration rules.
    \47\ See June 2011 Exemptive Order, supra note 46, 76 FR at 
36293, 36306; July 2011 Exemptive Order, supra note 46, 76 FR at 
39934, 39939. The July 2011 Exemptive Order also provided an 
exemption from the broker registration requirements of section 
15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), and other requirements of 
the SEA and the Commission's rules thereunder that apply to a 
broker, solely in connection with broker activities involving SBS 
(``Broker Exemptions''). The Broker Exemptions generally expired on 
Oct. 6, 2021; however, because an entity that meets the definition 
of ``security-based swap execution facility'' also would also meet 
the definition of ``broker'' in section 3(a)(4) of the SEA, 15 
U.S.C. 78c(a)(4), the Commission extended the Broker Exemptions 
solely for persons acting as an SBSEF until the expiration of the 
Temporary SBSEF Exemptions (i.e., the earliest compliance date set 
forth in any of the Commission's final rules regarding registration 
of SBSEFs). See SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550, 
68602 (Dec. 16, 2019).
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A. Rule 803--Requirements and Procedures for Registration

1. Summary of Proposed Rule 803
    Proposed Rule 803 of Regulation SE is closely modeled on Sec.  37.3 
of the CFTC's rules and would set forth a process for registration with 
the Commission as an SBSEF.
    Paragraph (a)(1) of Proposed Rule 803 would track the language of 
Sec.  37.3(a)(1) closely, and would provide that any person operating a 
facility that offers a trading system or platform in which more than 
one market participant has the ability to execute or trade security-
based swaps with more than one other market participant on the system 
or platform shall register the facility as a security-based swap 
execution facility under this section or as a national securities 
exchange pursuant to section 6 of the SEA.\48\
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    \48\ A person that registers with the Commission as a national 
securities exchange pursuant to section 6 of the SEA does not fall 
within the statutory definition of ``security-based swap execution 
facility,'' see sec. 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77), and 
thus does not need to register as an SBSEF under Rule 803. 
Furthermore, as discussed below, see infra section X (discussing 
proposed paragraph (a)(4) of SEA Rule 3a1-1), a person that 
registers as an SBSEF under Rule 803 and provides a market place for 
no securities other than SBS is exempt from the definition of 
``exchange'' and does not need to register as such pursuant to 
section 6 of the SEA. 15 U.S.C. 78c(a)(1) (defining ``exchange'' as 
``any organization, association, or group of persons, whether 
incorporated or unincorporated, which constitutes, maintains, or 
provides a market place or facilities for bringing together 
purchasers and sellers of securities or for otherwise performing 
with respect to securities the functions commonly performed by a 
stock exchange as that term is generally understood, and includes 
the market place and the market facilities maintained by such 
exchange'').
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    Paragraph (a)(2) of Rule 803, like Sec.  37.3(a)(2), would require 
an SBSEF, at a minimum, to offer an order book, which would be defined 
in Rule 802 to mean an electronic trading facility, a trading facility, 
or a trading system or platform in which all market participants in the 
trading system or platform have the ability to enter multiple bids and 
offers, observe or receive bids and offers entered by other market 
participants, and transact on such bids and offers.\49\
---------------------------------------------------------------------------

    \49\ Section 37.3(a)(3) defines ``trading facility'' and 
``electronic trading facility'' by cross-referencing definitions of 
those terms in the CEA. Rather than cross-referencing the CEA, the 
Commission adapted the CEA definitions of those terms directly into 
Rule 802. See Proposed Rule 802 (defining ``trading facility'' and 
``electronic trading facility'').
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    Paragraph (a)(3) of Rule 803 is closely modeled on Sec.  37.3(a)(4) 
and would provide a narrow exception to the requirement to provide an 
order book for a Required Transaction \50\ to allow an SBSEF not to 
offer an order book for the SBS component(s) of a package transaction 
that contains a mix of products, with some parts of the

[[Page 87161]]

package being subject to a trade execution requirement and some not.
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    \50\ As discussed below in section V.E.1(a), the Commission is 
incorporating into Regulation SE the concepts of ``Required 
Transaction'' and ``Permitted Transaction'' in a manner closely 
modeled on the CFTC's use of those terms. A Required Transaction 
would be a transaction involving an SBS that is subject to the trade 
execution requirement. Section 37.3 of the CFTC's rules requires an 
order book as a minimum trading functionality for all SEFs and is 
not limited to provision of an order book only for Required 
Transactions.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 803 is closely modeled on Sec.  
37.3(b) and would set out procedures for full registration of an SBSEF. 
Paragraph (b)(1), like Sec.  37.3(b)(1), would provide that an 
applicant requesting registration must file electronically a complete 
Form SBSEF or any successor forms, and all information and 
documentation described in such forms with the Commission using the 
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system 
as an Interactive Data File in accordance with Rule 405 of Regulation 
S-T, and must provide to the Commission, upon the Commission's request, 
any additional information and documentation necessary to review an 
application.
    Paragraph (b)(2) of Proposed Rule 803, like Sec.  37.3(b)(2), would 
provide that an applicant requesting registration as an SBSEF must 
identify with particularity any information in the application that 
will be subject to a request for confidential treatment pursuant to 
Rule 24b-2 under the SEA.\51\ Paragraph (b)(2) would also provide that, 
as set forth in Rule 808, certain information provided in an 
application shall be made publicly available.
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    \51\ See 17 CFR 240.24b-2 (setting forth the procedures for 
identifying and redacting the portion of a submission under the SEA 
for which confidential treatment is requested). As the Commission 
stated in the Proposing Release, it is not necessary or appropriate 
to establish and utilize one set of procedures to handle 
confidential treatment requests made by SBSEFs while utilizing a 
different set of procedures for other persons who request 
confidential treatment from the Commission under the SEA. See 
Proposing Release, supra note 1, 87 FR at 28880 n.50.
---------------------------------------------------------------------------

    Paragraph (b)(3) of Proposed Rule 803 would address amendments to 
the SBSEF registration application. Like Sec.  37.3(b)(3), Rule 
803(b)(3) would provide that an applicant amending a pending 
application or requesting an amendment to an order of registration 
shall file an amended application electronically with the Commission 
using the EDGAR system as an Interactive Data File in accordance with 
Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF 
would be required to submit rule and product filings under Rule 806 or 
Rule 807, as well as provide other updates as may be required pursuant 
to other rules for SBSEFs.
    Paragraph (b)(4) of Proposed Rule 803 would address the effect of 
an incomplete application. Like Sec.  37.3(b)(4), Proposed Rule 
803(b)(4) would provide that, if an application is incomplete, the 
Commission shall notify the applicant that its application will not be 
deemed to have been submitted for purposes of the Commission's review.
    Paragraph (b)(5) of Proposed Rule 803 would establish the 
Commission review period for an application to register as an SBSEF. 
Proposed Rule 803(b)(5) is closely modeled on Sec.  37.3(b)(5) and 
would require the Commission to approve or deny an application for 
registration as an SBSEF within 180 days of the filing of the 
application. Proposed Rule 803(b)(5) would further provide that, if the 
Commission notifies the person that its application is materially 
incomplete and specifies the deficiencies in the application, the 
running of the 180-day period would be stayed from the time of that 
notification until the application is resubmitted in completed form. In 
such a case, the Commission would have not less than 60 days to approve 
or deny the application from the time the application is resubmitted in 
completed form.
    Paragraph (b)(6)(i) of Proposed Rule 803, like Sec.  37.3(b)(6)(i), 
would provide that the Commission shall issue an order granting 
registration upon a Commission determination, in its discretion, that 
the applicant has demonstrated compliance with the SEA and the 
Commission's rules applicable to SBSEFs. Paragraph (b)(6)(i) would 
allow the Commission to issue an order granting registration, subject 
to conditions. Paragraph (b)(6)(ii) of Proposed Rule 803, modeled on 
Sec.  37.3(b)(6)(ii), would provide that the Commission may issue an 
order denying registration upon a Commission determination, in its own 
discretion, that the applicant has not demonstrated compliance with the 
SEA and the Commission's rules applicable to SBSEFs. If the Commission 
denies an application under Rule 803(b)(6)(ii), it would be required to 
specify the grounds for the denial.
    Paragraph (c) of Proposed Rule 803, like Sec.  37.3(d), would 
address reinstatement of a dormant registration. Proposed Rule 803(c) 
would provide that a dormant SBSEF \52\ may reinstate its registration 
under the procedures of Rule 803(b). Proposed Rule 803(c) would further 
provide that the applicant may rely upon previously submitted materials 
if such materials accurately describe the dormant SBSEF's conditions at 
the time that it applies for reinstatement of its registration.
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    \52\ See Proposed Rule 802 (defining ``dormant security-based 
swap execution facility'' to mean ``a security-based swap execution 
facility on which no trading has occurred for the previous 12 
consecutive calendar months; provided, however, that no security-
based swap execution facility shall be considered to be a dormant 
security-based swap execution facility if its initial and original 
Commission order of registration was issued within the preceding 36 
consecutive calendar months''). This definition is modeled on the 
definition of ``dormant swap execution facility'' found in Sec.  
40.1(f).
---------------------------------------------------------------------------

    Paragraph (d) of Proposed Rule 803, like Sec.  37.3(e), would set 
out procedures for an SBSEF to request a transfer of registration. 
Paragraph (d)(1), which is closely modeled on Sec.  37.3(e)(1), would 
provide that an SBSEF seeking to transfer its registration from its 
current legal entity to a new legal entity as a result of a corporate 
change shall file a request for approval to transfer such registration 
with the Commission in the form and manner specified by the Commission. 
Paragraph (d)(2), modeled on Sec.  37.3(e)(2), would provide that a 
request for transfer of registration shall be filed no later than three 
months prior to the anticipated corporate change; or in the event that 
the SBSEF could not have known of the anticipated change three months 
prior to the anticipated change, as soon as it knows of that change.
    Paragraph (d)(3) of Proposed Rule 803, like Sec.  37.3(e)(3), would 
require an SBSEF's request for a transfer of registration to include 
the underlying agreement governing the corporate change, a description 
of the corporate change, a discussion of the transferee's ability to 
comply with the SEA, the governing documents of the transferee, the 
transferee's rules marked to show changes from the rules of the SBSEF, 
and specified representations by the transferee.\53\
---------------------------------------------------------------------------

    \53\ See Proposing Release, supra note 1, 87 FR at 28880-81.
---------------------------------------------------------------------------

    Paragraph (d)(4) of Proposed Rule 803, modeled on Sec.  37.3(e)(4), 
would provide that, upon review of a request for transfer of 
registration, the Commission, as soon as practicable, shall issue an 
order either approving or denying the request.
    Paragraph (e) of Proposed Rule 803, like Sec.  37.3(f), would 
provide that an applicant for registration as an SBSEF may withdraw its 
application by filing a withdrawal request electronically with the 
Commission using the EDGAR system as an Interactive Data File in 
accordance with Rule 405 of Regulation S-T.\54\ Proposed Rule 803(e) 
would further provide that withdrawal of an application for 
registration shall not affect any action taken or to be taken by

[[Page 87162]]

the Commission based upon actions, activities, or events occurring 
during the time that the application was pending with the Commission.
---------------------------------------------------------------------------

    \54\ 17 CFR 232.405. The proposed electronic filing requirement 
discussed above does not appear in the CFTC version of this 
provision. The Commission is adding this specification to implement 
the Inline XBRL and EDGAR electronic filing requirements for certain 
documents required by Regulation SE. See infra section XIII.A.
---------------------------------------------------------------------------

    Paragraph (f) of Proposed Rule 803, like Sec.  37.3(g), would 
provide that an SBSEF may request that its registration be vacated by 
filing a vacation request electronically with the Commission using the 
EDGAR system and must be provided as an Interactive Data File in 
accordance with Rule 405 of Regulation S-T at least 90 days prior to 
the date that the vacation is requested to take effect.
2. Comments and Analysis
(a) Registration Requirements, Generally
    Two commenters support the proposed SBSEF registration requirements 
under Rule 803 being modeled on the CFTC's rules and state that, as 
market participants are familiar with CFTC's requirements, they 
appreciate the Commission's attempts to minimize registration burdens 
and expedite the establishment of the SBSEF regime.\55\
---------------------------------------------------------------------------

    \55\ See SIFMA AMG Letter, supra note 18, at 5; see also 
Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    One commenter states that the Commission should ensure that all 
multilateral trading venues for SBS are required to register as an 
SBSEF, regardless of the specific trading protocol used.\56\ Another 
commenter argues that section 3D(a)(1) of the SEA requires the 
registration of any ``facility for the trading or processing of SBS,'' 
not just those that meet the statutory definition of SBSEF, which 
includes multiple-to-multiple trading.\57\ Accordingly, this commenter 
states that single-dealer platforms should be required to register as 
SBSEFs and to change their operations to offer multiple-to-multiple 
trading, consistent with the definition of SBSEF.\58\
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    \56\ See Citadel Letter, supra note 18, at 9 (``[A] security-
based swap transaction executed via a fully electronic multilateral 
RFQ protocol should be subject to the same regulations as one 
executed by voice with the assistance of a voice broker (who may or 
may not be employed by the SBSEF)'').
    \57\ As discussed above, see supra note 38 and accompanying 
text, the statutory definition of SBSEF provides in relevant part 
that an SBSEF is ``a trading system platform in which multiple 
participants have the ability to execute or trade security-based 
swaps by accepting bids and offers made by multiple participants. . 
. .'' SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added). 
This is sometimes referred to as ``multiple-to-multiple trading.''
    \58\ See Better Markets Letter, supra note 18, at 11-13.
---------------------------------------------------------------------------

    One commenter asks the Commission to ``make clear that the SBSEF 
registration requirement applies only to these types of platforms that 
are within the statutory and proposed regulatory definition and does 
not include any broader CFTC staff interpretations purporting to expand 
the SEF definition.'' \59\ This commenter states that CFTC Staff Letter 
21-19 \60\ maintains that platforms can be required to register as SEFs 
``(i) even where multiple participants cannot simultaneously request, 
make, or accept bids and offers from market participants; or (ii) where 
multiple participants can initiate a one-to-many communication.'' \61\ 
The commenter states that extending the definition of SBSEF to include 
``facilities offering one-to-many or bilateral communications if more 
than one participant is able to submit an RFQ on the platform'' would 
``contradict Congress' express intent'' to limit the scope of SBSEF 
registration requirements to multiple-to-multiple platforms; that the 
Commission should make clear that the CFTC staff guidance is 
inapplicable to SBSEFs; and that the Commission should confirm that it 
is not adopting or incorporating, explicitly or implicitly, similar 
guidance.\62\
---------------------------------------------------------------------------

    \59\ See MFA Letter, supra note 18, at 3.
    \60\ See CFTC Staff Advisory on Swap Execution Facility 
Registration Requirement, Letter No. 21-19 (Sept. 29, 2021), 
available at https://www.cftc.gov/node/238336.
    \61\ See MFA Letter, supra note 18, at 3 (quoting CFTC Staff 
Letter No. 21-19, supra note 60 (emphasis in original)).
    \62\ MFA Letter, supra note 18, at 3-4 (internal quotations 
omitted).
---------------------------------------------------------------------------

    The Commission agrees with the comment that the definition of SBSEF 
applies to multilateral trading facilities regardless of the specific 
trading protocol used. As the statutory definition of SBSEF makes 
clear, a trading facility would fall under the definition of SBSEF if 
it offers ``multiple participants the ability to execute or trade 
security-based swaps by accepting bids and offers made by multiple 
participants in the facility or system, through any means of interstate 
commerce. . . .'' \63\ Whether a specific instance or practice of 
brokering in fact offers multiple participants the ability to accept 
the bids or offers made by multiple participants, though, will depend 
on the attendant facts and circumstances of that instance or practice. 
The Commission does not, however, agree with the comment that the 
language of SEA section 3D(a)(1) means that single-dealer platforms for 
trading SBS must register as SBSEFs and, consistent with the statutory 
definition of SBSEF, change their operations to provide multiple-to-
multiple trading. SEA section 3D is titled ``Security-based swap 
execution facilities,'' and section 3D(a)(1) states, in full, ``No 
person may operate a facility for the trading or processing of 
security-based swaps, unless the facility is registered as a security-
based swap execution facility or as a national securities exchange 
under this section.'' \64\ The Commission is not persuaded that the 
phrase ``facility for the trading or processing of security-based 
swaps'' in this context can reasonably be read to apply more broadly to 
encompass anything other than an SBSEF or an SBS exchange. Since the 
definitions of both SBSEF and exchange include the concept of multiple-
to-multiple trading,\65\ single-dealer ``one-to-many'' trading 
platforms that do not offer multiple-to-multiple trading are outside 
the scope of the provisions of section 3D(a)(1).
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    \63\ SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis 
added).
    \64\ SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1).
    \65\ See SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (defining 
SBSEF in relevant part as ``a trading system or platform in which 
multiple participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple 
participants in the facility or system . . .''); SEA section 
3(a)(1), 15 U.S.C. 78c(a)(1) (defining an exchange in relevant part 
as ``any organization, association, or group of persons, whether 
incorporated or unincorporated, which constitutes, maintains, or 
provides a market place or facilities for bringing together 
purchasers and sellers of securities'') (emphasis added).
---------------------------------------------------------------------------

    It is not necessary to incorporate the guidance in CFTC Staff 
Letter 21-19 into this release, because the CFTC staff letter in large 
part refers to fact-specific circumstances that the Commission has yet 
to encounter since Reg SE is not yet effective and the application of 
the SBSEF definition depends on the particular facts and circumstances 
of a platform's structure and operations. For the same reason, it would 
be premature to reject the possibility of taking a position similar to 
that of the CFTC guidance with regard to SBSEFs, as one commenter 
suggested.\66\ Moreover, because the statutory definition of SBSEF does 
not include the word ``simultaneous,'' the Commission declines to issue 
its own guidance to reflect a requirement for simultaneity here. Where 
operators of SBS trading platforms have questions about the facts and 
circumstances particular to their situations, they can discuss their 
particular circumstances with Commission staff.
---------------------------------------------------------------------------

    \66\ See supra notes 59-62 and accompanying text.
---------------------------------------------------------------------------

(b) Abbreviated Registration Procedures for CFTC-Registered SEFs
    Several commenters state that the Commission should use its 
exemptive authority to provide a streamlined registration process for 
SBSEFs that are already registered with the CFTC as

[[Page 87163]]

SEFs.\67\ One commenter states that, because many entities will likely 
be registering with both the Commission and the CFTC, a streamlined 
SBSEF registration process will ease the burden of new requirements 
imposed on potential dual-registrants.\68\ This commenter further 
states that allowing currently registered CFTC SEFs to become SEC-
registered SBSEFs would be more efficient and would more quickly kick-
start the Commission's SBS regime. This commenter thus supports the use 
of exemptive authority for SEFs that are currently registered, provided 
that the Commission's approach to exemptive authority does not disrupt 
the existing market structure and the relationships between venues and 
participants. Another commenter states that a streamlined registration 
process for SEFs currently registered and in good standing with the 
CFTC would have the potential to lower the costs of registration and 
encourage the entry of market participants.\69\
---------------------------------------------------------------------------

    \67\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg 
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE 
Letter, supra note 18, at 5.
    \68\ See SIFMA AMG Letter, supra note 18, at 5.
    \69\ See Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    One commenter that supports a streamlined SBSEF registration 
process for SEFs states that a prolonged registration process, 
particularly for venues already registered with the CFTC, only further 
delays the introduction of regulated price discovery, liquidity 
formation, and trade execution for SBS.\70\ This commenter also states 
that SBSEF registration also further expedites SBS data reporting to 
the extent SBSEFs will report trades to an SBS swap data repository 
under the Commission's Regulation SBSR, as this service cannot be 
provided until SBSEFs are registered and operational. If the Commission 
were not to retain the exemptive authority within Rule 803, this 
commenter supports a process that gives deference to existing CFTC SEFs 
and provides a more streamlined process for such registrants. The 
commenter states that, as the Commission observed in the proposing 
release, most of the SBS liquidity will likely be centralized around a 
few facilities, with most (if not all) of them already operating CFTC-
regulated SEFs.\71\
---------------------------------------------------------------------------

    \70\ See WMBAA Letter, supra note 18, at 3.
    \71\ See WMBAA Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

    Another commenter states that SEFs that are currently registered 
and in good standing with the CFTC should be permitted to register with 
the Commission utilizing their current documentation filed pursuant to 
the requirements of Form SEF.\72\ This commenter states that CFTC 
registered SEFs are required to keep their Form SEF and its exhibits 
current through post-registration amendments and that, as the 
Commission is modeling proposed Form SBSEF on the CFTC's Form SEF, 
substituting the forms should not be problematic for the Commission to 
review. The commenter states that the Commission should permit 
registered SEFs seeking to register as an SBSEF to submit their Form 
SEF and exhibits, with an accompanying addendum reflecting only those 
changes necessary to fulfill the specific requirements of proposed 
Regulation SE, in lieu of filing a new Form SBSEF.
---------------------------------------------------------------------------

    \72\ See ICE Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    One commenter, however, stated that ``relaxing or eliminating any 
registration requirements would be highly inappropriate,'' and argued 
that the Commission must be ``rigorous in reviewing and approving 
SBSEFs applicants while upholding complete impartiality.'' \73\ This 
commenter further states that both active SEFs and non-SEFs seeking to 
register SBSEFs ``must be held under the same standard to avoid any 
conflict of interests.'' \74\ Therefore, this commenter states that the 
Commission should not use exemptive authority under SEA section 
36(a)(1) to adopt an abbreviated procedure for SEFs seeking to register 
as SBSEFs, because doing so would rely on the ``CFTC's biased 
judgment'' and would not permit an ``unprejudiced determination'' by 
the Commission.\75\
---------------------------------------------------------------------------

    \73\ Letter from J. T. at 1 (May 26, 2022).
    \74\ Id.
    \75\ Id.
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    In the Proposing Release, the Commission stated that it was 
considering that, after adopting final rules establishing a 
registration process for SBSEFs, it could exercise its exemptive 
authority under section 36(a)(1) of the SEA \76\ to relax or eliminate 
entirely certain of the registration requirements for entities that are 
already registered as SEFs with the CFTC.\77\ The Commission recognizes 
that many of the entities that will seek registration with the 
Commission as SBSEFs are already registered with the CFTC as SEFs. 
Entities that seek dual registration presumably see efficiencies in 
utilizing the same systems, policies, and procedures to trade both 
swaps and SBS. As noted throughout this release, the Commission has 
sought to harmonize the SBSEF regulatory regime as closely as 
practicable with the CFTC's SEF regulatory regime, achieving similar 
regulatory benefits as the CFTC regime while minimizing costs so as to 
impose only marginal costs on dually registered SEF/SBSEFs and their 
members. As a result of these harmonized regimes, SEFs that seek dual 
registration with the SEC would likely need to make only minor 
adjustments to their rules and trading procedures to support trading of 
SBS in addition to the trading of swaps.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78mm(a)(1).
    \77\ See Proposing Release, supra note 1, 87 FR at 28882.
---------------------------------------------------------------------------

    While one commenter states that it would be inappropriate to relax 
or eliminate any SBSEF registration requirements for CFTC-registered 
SEFs,\78\ an entity's status as a registered SEF in good standing with 
the CFTC is relevant when considering its application to register as an 
SBSEF and that reducing the registration burden for CFTC-registered 
SEFs, where possible, is appropriate. However, granting exemptive 
relief under section 36(a)(1), which this commenter opposes, or 
providing for a formally abbreviated SBSEF registration regime for 
CFTC-registered SEFs is not necessary to accomplish expedited 
registration and reduced registration burdens.\79\ Requiring all 
applicants to submit Form SBSEF will support consistency in the review 
by the Commission and its staff of applications for registration of 
SBSEFs, which will include a review of the proposed rules for the 
SBSEFs. The Commission expects that prospective SBSEFs will be able to 
use the information in their SEF applications to complete their SBSEF 
applications, as discussed below.
---------------------------------------------------------------------------

    \78\ See supra note 75 and accompanying text.
    \79\ In the Proposing Release, the Commission stated that it was 
``preliminarily considering'' that it would exercise exemptive 
authority under section 36(a)(1) of the Act, 15 U.S.C. 78mm(a)(1), 
``to relax or eliminate entirely certain of the registration 
requirements for entities that are already registered as SEFs with 
the CFTC.'' Proposing Release, supra note 1, 87 FR at 28882.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting Rule 
803 as proposed, with minor technical modifications.\80\
---------------------------------------------------------------------------

    \80\ See supra note 32. The Commission is also deleting the 
header text ``Minimum trading functionality'' from paragraph (a)(3), 
and is adding the header text ``Request to register'' to paragraph 
(b)(1), in order to maintain consistency of style in the regulatory 
text. Additionally, the Commission is removing the requirement to 
use an Interactive Data File for filing requests to withdraw or 
vacate an application for registration pursuant to Rules 803(e) and 
803(f). See infra section XIII.A.
---------------------------------------------------------------------------

B. Form SBSEF

    The Commission proposed new Sec.  249.2001 to require that entities 
use Form SBSEF to register with the Commission as an SBSEF. Form SBSEF 
would also be used for submitting any

[[Page 87164]]

updates, corrections, or supplemental information to a pending 
application for registration. Form SBSEF is closely modeled on the 
CFTC's Form SEF for entities that seek to register with the CFTC as 
SEFs, with only minor changes to remove from the form the concept of 
post-registration amendments, as the proposed rule would not require 
any amendments to Form SBSEF post-registration. The exhibits that were 
proposed along with Form SBSEF are very similar to the exhibits in Form 
SEF. As with Form SEF, each applicant submitting a Form SBSEF would be 
required to provide the Commission with documents and descriptions 
pertaining to its business organization, financial resources, and 
compliance program, including various documents describing the 
applicant's legal and financial status. An applicant would be required 
to disclose any affiliates, provide a brief description of the nature 
of the affiliation, and submit copies of any agreements between the 
SBSEF and third parties that would assist the applicant in complying 
with its duties under the SEA. In addition, an applicant would be 
required to demonstrate operational capability through documentation, 
including technical manuals and third-party service provider 
agreements.
    Under Rule 803(b)(1), an applicant for SBSEF registration would be 
required to complete Form SBSEF and provide, upon the Commission's 
request, any additional necessary information and documentation in 
order review the application. The determination as to when an 
application submission is complete would be at the sole discretion of 
the Commission. The Commission would review Form SBSEF and, at the 
conclusion of its review, by order either: (i) grant registration; (ii) 
deny the application for registration; or (iii) grant registration 
subject to certain conditions. After an applicant is granted 
registration, any updates or amendments to the information contained in 
its Form SBSEF by an active SBSEF would be required to be submitted as 
rules or rule amendments under Rule 806 or Rule 807 or as may be 
required by other rules in Regulation SE.
    One commenter states that the Commission should closely harmonize 
the rules for SBSEF registration with the CFTC's rules, with the 
exception of Exhibits D and H of Form SBSEF, which require: (a) a list 
of all affiliates and a description of any material pending legal 
proceedings of such affiliates, and (b) the financial statements of the 
affiliates. This commenter states that the information required by 
these exhibits is ``burdensome and not fit for purpose'' and should not 
be required unless the affiliate provides support services to the SBSEF 
or the legal proceedings are expected to have a material effect on the 
applicant or the operation of its proposed SBSEF.\81\ As discussed 
above, several commenters expressed support for the Commission 
providing an expedited process for CFTC-registered SEFs that wish to 
register as SBSEFs.
---------------------------------------------------------------------------

    \81\ See Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    The CFTC adopted rules for the registration and regulation of SEFs 
in 2013,\82\ and the CFTC's process for registering SEFs appears to be 
well understood by the industry and well designed for being adapted to 
the SBS market. Therefore, the Commission has used the CFTC's process 
as a basis for its own process for registering SBSEFs, and information 
about SBSEF affiliates is relevant to the Commission's oversight of 
SBSEFs and, in particular, oversight of SBSEF compliance with Rule 828 
(conflicts of interest).\83\ In addition, we assume that most if not 
all SBSEFs will be dually registered as SEFs.
---------------------------------------------------------------------------

    \82\ See 2013 CFTC Final SEF Rules Release, supra note 9.
    \83\ See infra section VI.K.
---------------------------------------------------------------------------

    However, while the content and exhibits of Form SBSEF closely match 
the form and content of Form SEF, exhibits to Form SEF are provided to 
the CFTC as unstructured documents, whereas most exhibits to Form SBSEF 
will be provided to the Commission as structured, machine-readable 
documents. Permitting SBSEFs to provide copies of Form SEF exhibits in 
lieu of Form SBSEF exhibits, while likely resulting in an expedited 
registration process for most SBSEFs, would also potentially result in 
a much higher volume of unstructured data, making the Form SBSEF 
disclosures more difficult for market participants and the Commission 
to analyze in an efficient manner. Thus, notwithstanding some 
commenters' support for an expedited registration process, the final 
rules do not permit SBSEFs to provide copies of Form SEF exhibits in 
lieu of Form SBSEF exhibits. The Commission is therefore adopting 17 
CFR 249.2001 as proposed, but is renumbering it as 17 CFR 249.1701 
under new subpart R (``Forms for Registration of, and Filings by, 
Security-Based Swap Execution Facilities'') and is making a minor 
technical correction.\84\
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    \84\ The Commission is correcting the text in Instruction 20 to 
Form SBSEF to read ``a list with the name(s) of the clearing 
agency(ies)'' instead of ``a list of the name of the clearing 
organization(s).''
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IV. Rule and Product Filings by SBSEFs

    Unlike section 19(b) of the SEA,\85\ which sets out a process 
whereby national securities exchanges and other SROs submit filings to 
the Commission to add, delete, or amend rules (including rules to list 
products), section 3D of the SEA \86\ does not set out an equivalent 
process for SBSEFs, which are not SROs. It can be expected, however, 
that an SBSEF will seek to change its rules over time in order, for 
example, to implement new trading methodologies and to expand its 
product offerings to make its market more attractive to participants, 
and adopting rules for filings related to these changes will promote 
public transparency regarding the changes, as well as consistent 
handling of those filings by the Commission.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78s(b).
    \86\ 15 U.S.C. 78c-4.
---------------------------------------------------------------------------

    An appropriate review process is necessary to assess whether 
changes to an SBSEF's rules and product offerings are consistent with 
section 3D of the SEA and the Commission's rules thereunder, and the 
CFTC's filing procedures are an appropriate model on which to base the 
Commission's own filing procedures. Furthermore, because of the 
likelihood that most if not all SBSEFs will be dually registered with 
the CFTC as SEFs, and that many rule changes for a dual registrant will 
affect both its SBS and swap trading businesses, close harmonization 
with the CFTC's filing procedures would allow a dual registrant to make 
a similar filing to each agency, allowing each agency to carry out its 
oversight functions while minimizing the burdens on dual registrants.
    Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs 
may establish or amend rules and list products. These processes allow a 
SEF to voluntarily submit a rule, rule amendment, or new product for 
CFTC review and approval, or to ``self-certify'' that a rule, rule 
amendment, or new product meets applicable standards under the CEA and 
the CFTC's rules thereunder without obtaining CFTC approval, although 
the CFTC retains the ability, in certain circumstances, to stay the 
self-certification for further review before it may become effective. 
Using its general authority to impose any requirement on SBSEFs and to 
prescribe rules governing the regulation of SBSEFs,\87\ the Commission 
proposed to

[[Page 87165]]

establish similar filing processes for registered SBSEFs in Rules 804 
to 810 of Regulation SE.\88\
---------------------------------------------------------------------------

    \87\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, in 
order to be registered and to maintain registration, to comply with 
any requirement that the Commission may impose by rule or 
regulation); 15 U.S.C. 78c-4(f) (directing the Commission to 
prescribe rules governing the regulation of SBSEFs).
    \88\ The CFTC has proposed to amend the rules that govern how 
CFTC-registered entities submit self-certifications and requests for 
approval of their rules, rule amendments, and new products for 
trading and clearing, as well as the CFTC's review and processing of 
such submissions. See CFTC, Provisions Common to Registered Entities 
(Notice of Proposed Rulemaking), 88 FR 61432 (Sept. 9, 2023). The 
CFTC's proposing release states that the proposed amendments ``are 
intended to clarify, simplify and enhance the utility of those 
regulations for market participants and the [CFTC].'' Id. at 61432. 
The CFTC has not yet taken action on this proposal.
---------------------------------------------------------------------------

A. Rule 804--Listing Products for Trading by Certification

1. Summary of the Proposed Rule
    Proposed Rule 804 is modeled on 17 CFR 40.2 of the CFTC's rules and 
would set forth procedures by which an SBSEF may list a product via 
certification. Paragraph (a)(1) of Proposed Rule 804 would require an 
SBSEF to file its submission electronically with the Commission using 
the EDGAR system as an Interactive Data File in accordance with Rule 
405 of Regulation S-T.
    Paragraph (a)(2) of Proposed Rule 804 would provide that the 
Commission must receive the submission by the open of business on the 
business day that is 10 business days preceding the product's 
listing.\89\
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    \89\ By contrast, the parallel provision in Sec.  40.2(a) 
provides that a DCM or SEF must file the self-certification only one 
business day before listing the product. See Sec.  40.2(a)(2) (one 
of the conditions for a valid self-certification of a product is 
that the CFTC has received the submission by the open of business on 
the business day preceding the product's listing).
---------------------------------------------------------------------------

    Paragraph (a)(3) of Proposed Rule 804 would require a self-
certification to include a copy of the submission cover sheet; \90\ a 
copy of the product's rules, including all rules related to its terms 
and conditions; the intended listing date; a certification by the SBSEF 
that the product to be listed complies with the SEA and the 
Commission's rules thereunder; a concise explanation and analysis of 
the product and its compliance with applicable provisions of the SEA, 
including the Core Principles, and the Commission's rules thereunder; a 
certification that the SBSEF posted a notice of pending product 
certification with the Commission and a copy of the submission, 
concurrent with the filing of a submission with the Commission, on the 
SBSEF's website; \91\ and a request for confidential treatment, if 
appropriate, as permitted pursuant to SEA Rule 24b-2.\92\
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    \90\ The Commission proposed, in new Sec.  249.2002, a 
submission cover sheet (with instructions) that is closely modeled 
on the CFTC's submission cover sheet.
    \91\ Under Rule 804(a)(3)(vi), information that the SBSEF seeks 
to keep confidential can be redacted from the documents published on 
the SBSEF's website but would have to be republished consistent with 
any determination made pursuant to SEA Rule 24b-2.
    \92\ Section 40.2(a)(3) instructs filers to make any request for 
confidential treatment pursuant to Sec.  40.8 of the CFTC's rules, 
which in turn cross-references 17 CFR 145.9. The Commission proposed 
instead to direct filers to make any request for confidential 
treatment pursuant to existing SEA Rule 24b-2. See supra note 51.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 804, modeled on Sec.  40.2(b), would 
provide that, if requested by Commission staff, an SBSEF shall provide 
any additional evidence, information, or data that demonstrates that 
the SBS meets, initially or on a continuing basis, the requirements of 
the SEA or the Commission's rules or policies thereunder.
    Paragraph (c)(1) of Proposed Rule 804 would provide that the 
Commission may stay the certification of a new product by issuing a 
notification informing the SBSEF that the Commission is staying the 
certification on the grounds that the product presents novel or complex 
issues that require additional time to analyze, is accompanied by an 
inadequate explanation, or is potentially inconsistent with the SEA or 
the Commission's rules thereunder.\93\ Under paragraph (c)(1), the 
Commission would have an additional 90 days from the date of the 
notification to conduct the review.
---------------------------------------------------------------------------

    \93\ Rule 807(c) is based on Sec.  40.2(c), which provides that 
the CFTC may stay the listing of a contract pursuant to paragraph 
(a) of this section during the pendency of CFTC proceedings for 
filing a false certification or during the pendency of a petition to 
alter or amend the contract terms and conditions pursuant to section 
8a(7) of the CEA. The SEA does not include the CEA's provisions 
regarding altering or amending the terms and conditions of an SBS 
listed by an SBSEF like the authority granted to the CFTC with 
respect to products listed by SEFs, such that the Commission would 
be able to stay the listing of an SBS that it believes may be 
inconsistent with the SEA, pending proceedings to exercise that 
authority. Nor are proceedings for false certification of an SBS 
contemplated by the SEA. For this reason, in lieu of harmonizing 
with Sec.  40.2(c), the Commission proposed, in Rule 804(c), a 
provision that would allow the Commission to stay the certification 
of a new product in the same manner that Rule 807(c) would allow the 
Commission to stay the self-certification of a new rule or rule 
amendment.
---------------------------------------------------------------------------

    Paragraph (c)(2) would require the Commission to provide a 30-day 
comment period during that 90-day period, and to publish a notice of 
the 30-day comment period on the Commission's website. Comments from 
the public could be submitted as specified in that notice.
    Paragraph (c)(3) would provide that the product that had been 
stayed would become effective, pursuant to the certification, at the 
expiration of the 90-day review period, unless the Commission withdraws 
the stay prior to that time, or the Commission notifies the SBSEF 
during the 90-day time period that it objects to the proposed 
certification on the grounds that the proposed product is inconsistent 
with the SEA or the Commission's rules.
2. Comments and Analysis
    One commenter states that, while the proposed self-certification 
process does include improvements to the CFTC's self-certification 
process, including extending the initial review period from one 
business day to 10 business days and expanding the scope of reasons for 
staying the self-certification, it is still fundamentally flawed. This 
commenter states that the CFTC's self-certification process is mandated 
by statute and that, in the absence of any statutory mandate analogous 
to that applicable to the CFTC, the Commission must, at the very least, 
provide a coherent policy justification for its proposed self-
certification process.\94\
---------------------------------------------------------------------------

    \94\ See Better Markets Letter, supra note 18, at 13.
---------------------------------------------------------------------------

    This commenter states that it is not clear why it is necessary or 
desirable for SBSEFs to be able to bring new products to the market 
``speedily'' and that self-certification turns the regulatory process 
on its head, creating in effect a presumption of regulatory compliance 
and putting the onus on the agency, under a predetermined timeline, to 
fully evaluate a proposed product that may threaten significant harm to 
investors and market stability.\95\ This is especially the case, the 
commenter states, considering the context in which the SEC was given 
comprehensive authority to regulate and oversee the SBS market, i.e., a 
financial crisis caused in large part by SBS and other novel financial 
products whose risks regulators and market participants thought were 
well understood, but in fact were not. Given this context, the 
commenter states, it ``makes little policy sense to establish a regime 
whereby an SBSEF could introduce a new potentially dangerous product to 
the financial system without an affirmative, independent SEC

[[Page 87166]]

determination that such product not only complies with the SBSEF Core 
Principles and other requirements, but also that it does not pose an 
unwarranted danger to investors, the financial system, and the broader 
economy.'' \96\
---------------------------------------------------------------------------

    \95\ See Better Markets Letter, supra note 18, at 13-14; see 
also Letter from Bryce Keeney (Apr. 27, 2022) (``Keeney Letter'') 
(stating that ``[d]erivatives are not the purpose of the market'' 
and that the Commission should ``align rules to focus on the primary 
purpose, not to support tertiary aspects that result in systemic 
risk and systemic abuse''); Letter from Kevin (Apr. 20, 2023) 
(``Kevin Letter'') (stating that the proposed rules do not protect 
retail investors and that ``[c]reating a self governing regime, 
allowing easier swaps trading across borders, exemption exchanges 
and registered brokers . . . sound like a terrible recipe for 
disaster in a multi-trillion marketplace'').
    \96\ Better Markets Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------

    For several reasons the Commission does not agree with the 
objections raised by this commenter. First, the Commission does not 
agree that the self-certification process of Rule 804 either ``turns 
the regulatory process on its head'' or would deny the Commission the 
opportunity to ``fully evaluate a proposed product that may threaten 
significant harm to investors and market stability.'' \97\ The ability 
of the Commission to stay the effectiveness of any product self-
certification, to seek public comment on that self-certification, and 
to object to (i.e., effectively disapprove) the proposed certification 
on the grounds that the product is inconsistent with the SEA or the 
Commission's rules will provide the Commission with sufficient 
opportunity (including the opportunity to seek public comment) to 
consider the self-certified rules and take steps to protect investors 
and maintain fair, orderly, and efficient markets. Further, the self-
certification process does not create a ``presumption of compliance,'' 
because: (a) Rule 804(b) requires an SBSEF to provide, at Commission 
request, any ``additional evidence, information, or data that 
demonstrates that the SBS meets, initially or on a continuing basis, 
the requirements of the SEA or the Commission's rules or policies 
thereunder''; (b) Rule 804(c)(1) permits the Commission to suspend a 
new product certification because ``the product presents novel or 
complex issues that require additional time to analyze, is accompanied 
by an inadequate explanation, or is potentially inconsistent with the 
SEA or the Commission's rules thereunder'' (emphasis added); and (c) 
Rule 804(c)(3) does not create a presumption of compliance but instead 
provides the Commission a mechanism by which to object to a proposed 
certification ``on the grounds that the proposed product is 
inconsistent with the SEA or the Commission's rules.'' \98\
---------------------------------------------------------------------------

    \97\ See supra note 96 and accompanying text.
    \98\ Section IV.D, infra, discusses the process for self-
certification of rule changes, including the Commission's ability to 
stay the effectiveness of such a filing, which would lead to a 
public comment period and the opportunity for the Commission to 
object to the certification.
---------------------------------------------------------------------------

    Second, given the relationship between the swaps market and the SBS 
market, as well as the likelihood that most or all entities seeking to 
register as SBSEFs will be CFTC-registered SEFs, harmonization with the 
CFTC filing procedures for new products should facilitate the ability 
of entities to dually register and minimize costs by allowing incumbent 
SEFs to use their existing systems, policies, and procedures to comply 
with the Commission's SBSEF rules. The aim of the rule is, however, not 
merely to allow SBSEFs to bring products to market ``speedily,'' or at 
minimal cost, and, as discussed below in this section, it is 
appropriate for its rules to provide for a longer review period than 
the CFTC's rules.
    And third, the Commission disagrees with this commenter's view that 
the self-certification process ``would pose an unwarranted danger to 
investors, the financial system, and the broader economy.'' The new-
product provisions of Regulation SE must be read in the context of the 
other relevant provisions of Title VII of the Dodd-Frank Act and the 
Commission's rules thereunder, which include, among other things, rules 
governing the registration and regulation of Security-Based Swap 
Dealers (``SBSDs'') and Major Security-Based Swap Participants 
(``MSBSPs''); \99\ capital, margin, and segregation requirements for 
SBSDs and MSBSPs; \100\ business conduct standards and chief compliance 
officer requirements for SBSDs and MSBSPs; \101\ and post-trade 
reporting and public dissemination of SBS transactions.\102\ Because of 
the significant role these other rules play in addressing potential 
risks posed by SBS, the Commission's ability to require SBSEFs to 
provide any evidence, information, or data demonstrating that the SBS 
meets, initially or on a continuing basis, the requirements of the SEA 
or the Commission's rules or policies thereunder, and the Commission's 
ability to suspend and ultimately object to SBSEF self-certifications, 
are appropriate to protect investors, the financial system, and the 
broader economy with respect to new SBSEF products and rules.\103\ 
Thus, the self-certification process in this context is appropriate for 
the underlying aims of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \99\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, SEA Release No. 75611 
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) (``SBSD and MSBSP 
Registration Release'').
    \100\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 
22, 2019) (``Capital, Margin, and Segregation Release'').
    \101\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, SEA Release No. 
77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016) (``Business 
Conduct Standards Release'').
    \102\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, SEA Release No, 78321 (July 14, 
2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR Release'').
    \103\ The Commission's rules for SBSEFs do not directly affect 
retail investors. Only eligible contract participants (``ECPs'') are 
eligible to trade on an SBSEF, see section 6(l) of the SEA, 15 
U.S.C. 78f(l), and retail investors would have access to an SBS only 
after an SBS exchange has filed a proposed rule change with the 
Commission under Rule 19b-4, 17 CFR 240.19b-4, to amend its rules to 
permit the listing of a registered SBS, with that proposed rule 
change being published for public comment.
---------------------------------------------------------------------------

    Two commenters state that the relatively low volume of SBS products 
expected to be self-certified supports a shorter review period than the 
proposed ten-business-day Commission review period.\104\ Both 
commenters recommend a shorter review period of one day to harmonize 
with the CFTC's approach.\105\ Alternatively, one of the commenters 
suggests a two-day review period.\106\ This commenter suggests that a 
shorter review period would be beneficial to allow market operators to 
meet participants' demands to transact on regulated platforms in a 
reasonable period of time.\107\ The commenter also states that a 
shorter review period would accommodate participants' needs to hedge 
risk in a timely manner.\108\ The other commenter states that a longer 
review period would reduce the competitive benefit to SBSEFs that 
develop new products because a 10-day review period would enable 
competitors to list similar products.\109\ This commenter also suggests 
varying from the one-day review period in certain limited 
circumstances, such as when an SBSEF submits an SBS for a made-
available-to-trade determination.\110\
---------------------------------------------------------------------------

    \104\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra 
note 18, at 2.
    \105\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra 
note 18, at 2.
    \106\ See WMBAA Letter, supra note 18, at 4.
    \107\ See id.
    \108\ See id.
    \109\ See ICE Letter, supra note 18, at 3.
    \110\ See id.
---------------------------------------------------------------------------

    While a ten-day review period differs from the CFTC's one-day 
review period, one business day would not provide the SEC staff 
sufficient time to review a new product filing for error or 
incompleteness, let alone review a new product for compliance with the 
SEA or Regulation SE. Further, if a product does warrant a stay, the 
Commission would also need sufficient time to go through the 
administrative steps of formally issuing the stay.\111\ The

[[Page 87167]]

proposed ten-business-day review period for self-certified products 
also accords with the CFTC's ten-business-day review period for self-
certified rules,\112\ which the Commission is replicating in Rule 
807(a)(3).\113\
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    \111\ See infra sections XV.D and XV.E (delegating authority to 
the Director of the Division of Trading and Markets to stay the 
effectiveness of a self-certification and to extend the period for 
consideration of a new product).
    \112\ See Sec.  40.6(a)(3) (one of the conditions for a valid 
self-certification of a rule or rule amendment is that the CFTC has 
received the submission not later than the open of business on the 
business day that is 10 business days prior to the registered 
entity's implementation of the rule or rule amendment).
    \113\ See infra section IV.D.
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    Further, while a shorter review period may allow SBS to trade on an 
SBSEF more quickly, failing to provide the Commission with a meaningful 
period for review of a new product would hamper the Commission's 
ability to protect market participants and maintain fair, orderly, and 
efficient SBS markets. A ten-day review period would still permit 
market participants to trade SBS on regulated platforms within a 
``reasonable period'' and would provide the Commission the time it 
needs to review submissions. The Commission also disagrees with the 
comment that a shorter review period is necessary to accommodate market 
participants' need to hedge risk in a timely manner. During the 
relatively brief and time-limited period for Commission review of an 
SBSEF new-product filings, market participants would remain able to 
hedge that risk in other ways, such as in the OTC SBS market or other 
related securities markets, depending on the risk to be managed. 
Finally, while the 10-day review period might reduce the first-to-
market competitive advantage of an SBSEF that first lists a given 
SBS,\114\ the extent of such an advantage may vary considerably based 
on other factors in the SBSEF market, and that, in any event, the need 
for the Commission to have sufficient time to review a new product 
before it is listed justifies the potential competitive effect.
---------------------------------------------------------------------------

    \114\ Cf. ICI Letter, supra note 18, at 9 n.29 (discussing 
``first mover'' advantage in the context of an SBSEF that has made 
an SBS available to trade).
---------------------------------------------------------------------------

    Thus, a ten-business-day review period strikes an appropriate 
balance between allowing SBSEFs to list new products quickly and 
affording Commission staff a sufficient time period in which to assess 
those products prior to listing.
    One commenter asks the Commission to confirm that it does not 
expect SBSEFs to self-certify for every security for which there may 
exist a related SBS.\115\ This commenter states that, for example, 
while an SBSEF may publish ``terms and conditions'' relevant for an 
instrument (like a single-name total return SBS) under Rule 804, the 
Commission might receive thousands of underlying national market system 
equity stocks from each SBSEF, exponentially increasing the number of 
products the Commission would need to review. The commenter also states 
that, given the potential 10-day review period (compared to the CFTC's 
shorter timeframe), SBSEFs will be forced to proactively self-certify 
every potential SBS in an attempt to meet all potential participant 
demand without a two-week delay, only increasing the volume of self-
certifications the Commission may receive. This commenter states that 
listing the instrument, and not each equity that may be linked to the 
instrument, is an appropriate approach to balance the SBSEFs and the 
Commission's resources with respect to product self-certification.
---------------------------------------------------------------------------

    \115\ See WMBAA Letter, supra note 18, at 4.
---------------------------------------------------------------------------

    The Commission is conscious of the large number of individual SBS 
that may constitute a ``class'' of SBS, such as single-name, total 
return SBS given as an example by the commenter. While an SBSEF should 
not necessarily be required to make an individual filing for each of 
the securities underlying a single such class of SBS, a filing for a 
simple class certification that merely described the parameters of the 
SBS covered by the certification would not necessarily provide 
sufficient information for the Commission to determine whether all the 
potential products covered by the class are consistent with the SEA and 
the rules thereunder, including Regulation SE. Therefore, while the 
Commission is not providing for ``class certifications'' of SBS, the 
Commission will not necessarily require separate submissions for each 
underlying security.\116\ The Commission will consider submissions for 
an SBS that might overlie one or more of a list of securities, provided 
that those potential underlying securities are specifically identified 
and that the submission addresses, as part of the requirement in Rule 
804 to submit ``a concise explanation and analysis of the product and 
its compliance with applicable provisions of the Act, including core 
principles, and the Commission's rules thereunder,'' \117\ why all 
included underlying securities meet the applicable provisions of the 
SEA and the Commission's rules thereunder.\118\
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    \116\ By contrast, paragraph (d) of Sec.  40.2 provides that a 
DCM or SEF may submit a class certification of swaps based on an 
``excluded commodity,'' subject to certain conditions. See section 
1a(19) of the CEA, 7 U.S.C. 1a(19) (defining ``excluded 
commodity'').
    \117\ Rule 804(a)(3)(v).
    \118\ For example, a submission might cover a single-name total 
return SBS on any of the components of a given index, provided that 
the submission explains why the minimum criteria for inclusion in 
that index are sufficient to ensure that the proposed SBS are 
consistent with the requirements of the SEA and the rules 
thereunder, including Regulation SE.
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is 
adopting Rule 804 as proposed, with the exception of the proposed 
Inline XBRL and EDGAR filing requirements, and with minor technical 
modifications.\119\
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    \119\ See supra note 32. As described in further detail in the 
discussion of electronic filing systems and structured data, the 
Commission will require all rule and product filings required by 
Rules 804 through 807 and 816 to be filed in unstructured format 
through EFFS, rather than in Inline XBRL through EDGAR. See infra 
section XIII.A.
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B. Rule 805--Voluntary Submission of New Products for Commission Review 
and Approval

    Proposed Rule 805 is closely modeled on Sec.  40.3 of the CFTC's 
rules and would set forth procedures by which an SBSEF may voluntarily 
submit new SBS products for Commission review and approval.
    Paragraph (a) of Proposed Rule 805 would adapt these requirements 
for SBSEFs.\120\ First, an SBSEF would be required to file its 
submission electronically with the Commission using the EDGAR system as 
an Interactive Data File in accordance with Rule 405 of Regulation S-T. 
The filing would also have to include a copy of the submission cover 
sheet, a copy of the rules that set forth the terms and conditions of 
the SBS to be listed, and an explanation and analysis of the product 
and its compliance with applicable provisions of the SEA, including the 
Core Principles and the Commission's rules thereunder.\121\ The 
submission would also have to describe any agreements or contracts 
entered into

[[Page 87168]]

with other parties that enable the SBSEF to carry out its 
responsibilities.
---------------------------------------------------------------------------

    \120\ Paragraph (a) of Rule 805 omits two provisions in Sec.  
40.3(a). First, Sec.  40.3(a)(6) requires the submitting entity to 
include the certifications required in 17 CFR 41.22 for product 
approval of a commodity that is a security future or a security 
futures product, as defined in sections 1a(44) or 1a(45) of the CEA, 
respectively. The Commission did not propose to adapt this provision 
into proposed Regulation SE because it pertains to security futures 
and security futures products, not to swaps or SBS. Second, Sec.  
40.3(a)(8) requires the submitting entity to include a filing fee. 
The Commission is not proposing to charge SBSEFs filing fees for 
submitting new product proposals.
    \121\ This explanation and analysis would have to either be 
accompanied by the documentation relied upon to establish the basis 
for compliance with the applicable law, or incorporate information 
contained in such documentation, with appropriate citations to data 
sources.
---------------------------------------------------------------------------

    Furthermore, paragraph (a) of Proposed Rule 805, modeled on Sec.  
40.3(a), would require the SBSEF to include, if requested by Commission 
staff, additional evidence, information, or data demonstrating that the 
SBS meets, initially or on a continuing basis, the requirements of the 
SEA, or other requirement for registration under the SEA, or the 
Commission's rules or policies thereunder. The SBSEF would be required 
to submit the requested information by the open of business on the date 
that is two business days from the date of request by Commission staff, 
or at the conclusion of such extended period agreed to by Commission 
staff after timely receipt of a written request from the SBSEF. 
Paragraph (a) of Proposed Rule 805, like Sec.  40.3(a), would permit 
the submitting SBSEF to include a request for confidential 
treatment.\122\ Finally, paragraph (a) of Proposed Rule 805, like Sec.  
40.3(a), would require the SBSEF to certify that it posted a notice of 
its request for Commission approval of the new product and a copy of 
the submission, concurrent with the filing of a submission with the 
Commission, on the SBSEF's website.\123\
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    \122\ Section 40.3(a), like Sec.  40.2(a)(3), instructs filers 
to make any request for confidential treatment pursuant to Sec.  
40.8 of the CFTC's rules, which in turn cross-references Sec.  
145.9. As noted previously, the Commission proposes instead to 
direct filers to make any request for confidential treatment 
pursuant to SEA Rule 24b-2. See supra note 51.
    \123\ Information that the SBSEF seeks to keep confidential 
could be redacted from the documents published on the SBSEF's 
website but would have to be republished consistent with any 
determination made pursuant to SEA Rule 24b-2.
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    Paragraph (b) of Proposed Rule 805, like Sec.  40.3(b), would 
provide that the Commission shall approve a new product unless the 
terms and conditions of the product violate the SEA or the Commission's 
rules thereunder.
    Paragraph (c) of Proposed Rule 805, modeled on Sec.  40.3(c), would 
provide that a product submitted for Commission approval under Rule 805 
shall be deemed approved by the Commission 45 days after receipt by the 
Commission, or at the conclusion of an extended period as provided 
under Rule 805(d), unless notified otherwise within the applicable 
period, if the submission complies with the requirements of Rule 805(a) 
and the SBSEF does not amend the terms or conditions of the product or 
supplement the request for approval, except as requested by the 
Commission or for correction of typographical errors, renumbering, or 
other non-substantive revisions, during that period. Paragraph (c) 
would also provide that any voluntary, substantive amendment by the 
SBSEF would be treated as a new submission under Rule 805.
    Paragraph (d) of Proposed Rule 805, modeled on Sec.  40.3(d), would 
provide that the Commission may extend the 45-day review period in 
paragraph (c) for an additional 45 days, if the product raises novel or 
complex issues that require additional time to analyze, in which case 
the Commission shall notify the SBSEF within the initial 45-day review 
period and briefly describe the nature of the specific issue(s) for 
which additional time for review is required. Paragraph (d) would also 
provide that the Commission may extend the 45-day review period for any 
length of time to which the SBSEF agrees in writing.
    Paragraph (e) of Proposed Rule 805 would provide that the 
Commission may, at any time during its review, notify the SBSEF that it 
will not, or is unable to, approve the product. This notification would 
have to briefly specify the nature of the issues raised and the 
specific provision of the SEA or the Commission's rules thereunder, 
including the form or content requirements of Rule 805(a), that the 
product violates, appears to violate, or potentially violates but which 
cannot be ascertained from the submission.
    Paragraph (f) of Proposed Rule 805, like Sec.  40.3(f), would 
provide that a notification of the Commission's determination not to 
approve a product does not prejudice the SBSEF from subsequently 
submitting a revised version of the product for Commission approval, or 
from submitting the product as initially proposed pursuant to a 
supplemented submission. Furthermore, the notification would be 
presumptive evidence that the entity may not truthfully certify under 
Rule 804 that the same, or substantially the same, product does not 
violate the SEA or the Commission's rules thereunder.
    The Commission did not receive any comments on this proposed rule. 
It is reasonable and appropriate to supplement the product 
certification procedures in Rule 804 by also including in Regulation 
SE, as Rule 805, procedures for voluntary submission of new products 
for Commission review and approval. Providing this approval process, as 
the CFTC does, can be valuable to an SBSEF seeking the Commission's 
concurrence that a new product does not violate the SEA or the 
Commission's rules thereunder prior to listing it. The CFTC's 
procedures in this regard are well articulated and well understood by 
SEFs, and that closely harmonizing with these procedures would yield 
comparable regulatory benefits while minimizing burdens on SBSEFs.\124\ 
Therefore, the Commission is adopting Rule 805 as proposed, with the 
exception of the proposed Inline XBRL and EDGAR filing requirements, 
and with minor technical modifications.\125\
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    \124\ As stated in the Proposing Release, the Commission does 
not discount the possibility that an entity might elect to register 
as an SBSEF with the SEC but not as a SEF with the CFTC. In such 
case, the SEC-only registrant would not have any familiarity with 
the CFTC's rules and filing procedures. Nevertheless, because most 
if not all entities that will seek SBSEF registration with the SEC 
are or will also be registered as SEFs with the CFTC, such dual 
registrants would benefit from harmonized rules. Furthermore, 
because the Commission is adopting these procedures substantially as 
proposed, is unnecessary to establish and apply one set of 
procedures for dual registrants and a different set for SEC-only 
SBSEFs. See Proposing Release, supra note 1, 87 FR at 28956 (stating 
that if the Commission ``establishe[d] different or additive 
requirements, dually registered entities and their market 
participants might need to incur costs and burdens to modify their 
systems, policies, and procedures to comply with the SEC-specific 
rules''). See also Bloomberg Letter, supra note 18, at 10 (``[A] 
harmonized framework has the potential to lower compliance costs by 
allowing SBSEFs and market participants to integrate with existing 
operational and compliance frameworks. Any potential differences 
would require SBSEF registrants to devote resources toward assessing 
the potential gaps and consequences of regulatory divergence.'').
    \125\ See supra note 32. As described in further detail in the 
discussion of electronic filing systems and structured data, the 
Commission will require all rule and product filings required by 
Rules 804 through 807 and 816 to be filed in unstructured format 
through EFFS, rather than in Inline XBRL through EDGAR. See infra 
section XIII.A.
---------------------------------------------------------------------------

C. Rule 806--Voluntary Submission of Rules for Commission Review and 
Approval

    Proposed Rule 806 is closely modeled on Sec.  40.5 of the CFTC's 
rules and would set forth procedures by which an SBSEF may voluntarily 
submit rules, rule amendments, or dormant rules for Commission review 
and approval.
    Paragraph (a) of Proposed Rule 806 would provide that an SBSEF may 
request that the Commission approve a new rule, rule amendment, or 
dormant rule prior to implementation of the rule. First, an SBSEF must 
file its submission electronically with the Commission using the EDGAR 
system as an Interactive Data File in accordance with Rule 405 of 
Regulation S-T. The filing would be required to include a copy of the 
submission cover sheet and to set forth the text of the rule or rule 
amendment (in the case of a rule amendment, deletions and additions 
must be indicated). Further, the SBSEF would be required to describe 
the proposed effective date of the rule or rule amendment and any 
action taken or anticipated to be taken to adopt the proposed rule by 
the SBSEF or by its governing board or by any committee

[[Page 87169]]

thereof, and to cite the rules of the SBSEF that authorize the adoption 
of the proposed rule. The SBSEF would be required to provide an 
explanation and analysis of the operation, purpose, and effect of the 
proposed rule or rule amendment and its compliance with applicable 
provisions of the SEA, including the Core Principles relating to SBSEFs 
and the Commission's rules thereunder, and, as applicable, a 
description of the anticipated benefits to market participants or 
others, any potential anticompetitive effects on market participants or 
others, and how the rule fits into the SBSEF's framework of regulation.
    Additionally, if a proposed rule affects, directly or indirectly, 
the application of any other rule of the SBSEF, the pertinent text of 
any such rule would be required to be set forth and the anticipated 
effect described. The SBSEF would also be required to provide a brief 
explanation of any substantive opposing views expressed to the SBSEF by 
governing board or committee members, members of the SBSEF, or market 
participants that were not incorporated into the rule, or a statement 
that no such opposing views were expressed.
    The SBSEF could, as appropriate, include a request for confidential 
treatment as permitted under SEA Rule 24b-2. Finally, the SBSEF would 
be required to certify that it posted a notice of the pending rule with 
the Commission and a copy of the submission, concurrent with the filing 
of a submission with the Commission, on the SBSEF's website.\126\
---------------------------------------------------------------------------

    \126\ Information that the SBSEF seeks to keep confidential 
could be redacted from the documents published on the SBSEF's 
website but would have to be republished consistent with any 
determination made pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 806, modeled on Sec.  40.5(b), would 
provide that the Commission shall approve a new rule or rule amendment 
unless the rule or rule amendment is inconsistent with the SEA or the 
Commission's rules thereunder. Paragraph (c) of Proposed Rule 806, like 
Sec.  40.5(c), would provide that a rule or rule amendment submitted 
for Commission approval under Rule 806 shall be deemed approved by the 
Commission 45 days after receipt by the Commission, or at the 
conclusion of such extended period as provided under paragraph (d) of 
this section, unless the SBSEF is notified otherwise within the 
applicable period, if the submission complies with the requirements of 
Rule 806(a) and the SBSEF does not amend the proposed rule or 
supplement the submission, except as requested by the Commission, 
during the pendency of the review period, other than for correction of 
typographical errors, renumbering, or other non-substantive revisions. 
Paragraph (c) would also provide that any amendment or supplementation 
not requested by the Commission would be treated as the submission of a 
new filing under Rule 806.
    Paragraph (d) of Proposed Rule 806, modeled on Sec.  40.5(d), would 
provide that the Commission may further extend the review period in 
paragraph (c) for an additional 45 days, if the proposed rule or rule 
amendment raises novel or complex issues that require additional time 
for review or is of major economic significance, the submission is 
incomplete, or the requestor does not respond completely to Commission 
questions in a timely manner, in which case the Commission shall notify 
the submitting SBSEF within the initial 45-day review period and shall 
briefly describe the nature of the specific issues for which additional 
time for review shall be required. Paragraph (d) would also allow an 
extension to which the SBSEF agrees in writing.
    Paragraph (e) of Proposed Rule 806, like Sec.  40.5(e), would 
provide that, at any time during its review, the Commission may notify 
the SBSEF that it will not, or is unable to, approve the new rule or 
rule amendment. This notification would have to briefly specify the 
nature of the issues raised and the specific provision of the SEA or 
the Commission's rules thereunder, including the form or content 
requirements of Proposed Rule 806, with which the new rule or rule 
amendment is inconsistent or appears to be inconsistent with the SEA or 
the Commission's rules thereunder.
    Paragraph (f) of Proposed Rule 806, like Sec.  40.5(f), would 
provide that such a notification to an SBSEF would not prevent the 
SBSEF from subsequently submitting a revised version of the proposed 
rule or rule amendment for Commission review and approval or from 
submitting the new rule or rule amendment as initially proposed in a 
supplemented submission. Paragraph (f) would further provide that the 
revised submission would be reviewed without prejudice. Finally, 
paragraph (f) would provide that such a notification to an SBSEF of the 
Commission's determination not to approve a proposed rule or rule 
amendment shall be presumptive evidence that the SBSEF may not 
truthfully certify the same, or substantially the same, proposed rule 
or rule amendment under Rule 807(a).
    Paragraph (g) of Proposed Rule 806, like Sec.  40.5(g), would 
provide that, notwithstanding Rule 806(c), changes to a proposed rule 
or a rule amendment, including changes to terms and conditions of a 
product that are consistent with the SEA and the Commission's rules 
thereunder, may be approved by the Commission at such time and under 
such conditions as the Commission shall specify in the written 
notification; provided, however, that the Commission may, at any time, 
alter or revoke the applicability of such a notice to any particular 
product or rule amendment.
    The Commission received no comments on Proposed Rule 806 and the 
Commission is adopting Rule 806 as proposed, with the exception of the 
proposed Inline XBRL and EDGAR filing requirements, and with minor 
technical modifications, for the reasons stated in the Proposing 
Release.\127\
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    \127\ See supra note 32. As described in further detail in the 
discussion of electronic filing systems and structured data, the 
Commission will require all rule and product filings required by 
Rules 804 through 807 and 816 to be filed in unstructured format 
through EFFS, rather than in Inline XBRL through EDGAR. See infra 
section XIII.A.
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D. Rule 807--Self-Certification of Rules

    Proposed Rule 807 is closely modeled on Sec.  40.6 of the CFTC's 
rules and would set forth procedures by which an SBSEF may self-certify 
changes to its rules. Paragraph (a) of Proposed Rule 807, modeled on 
Sec.  40.6(a), would set forth the conditions that an SBSEF must comply 
with before implementing a rule or rule amendment via self-
certification. Like Sec.  40.6(a), Proposed Rule 807(a) would permit an 
SBSEF to implement a rule or rule amendment without obtaining the 
Commission's prior approval under Rule 806, but only if it ``self-
certifies'' the rule or rule amendment in compliance with the 
conditions set forth in Rule 807. Proposed Rule 807(a) would also 
permit an SBSEF to self-certify a rule or rule amendment that the 
Commission had previously approved under Rule 806, or that the SBSEF 
had previously self-certified under Rule 807, but that in the interim 
had become a dormant rule (i.e., unimplemented for 12 consecutive 
calendar months).\128\
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    \128\ Also, like Sec.  40.6(a), Proposed Rule 807(a) would 
include an exception that would allow an SBSEF to implement a 
certain kind of rule without having to comply with the full set of 
conditions set forth in paragraphs (a)(1) through (8) of Rule 807, 
the details of which are discussed below. Specifically, the 
exception would provide that, when submitting a rule delisting or 
withdrawing the certification of a product with no open interest, an 
SBSEF would only be required to meet the conditions of paragraphs 
(a)(1), (a)(2), and (a)(6) of Rule 807. The introductory language in 
paragraph (a) of Proposed Rule 807 would generally track the 
language of Sec.  40.6(a), with slight changes for clarity. However, 
Proposed Rule 807(a) would not include an equivalent of the 
reference in Sec.  40.6(a) to submissions under Sec.  40.10, which 
concerns only systemically important derivatives clearing 
organizations and thus is not relevant to SBSEFs.

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[[Page 87170]]

    Paragraph (a)(1) of Proposed Rule 807 would require the SBSEF to 
file its submission electronically with the Commission using the EDGAR 
system as an Interactive Data File in accordance with Rule 405 of 
Regulation S-T. Paragraph (a)(2) would require the SBSEF to provide a 
certification that the SBSEF posted a notice of the self-certification 
with the Commission and a copy of the submission, concurrent with the 
filing of a submission with the Commission, on the SBSEF's 
website.\129\ Paragraph (a)(3) would provide that the Commission must 
have received the submission not later than the open of business on the 
business day that is 10 business days before the SBSEF's implementation 
of the rule or rule amendment. Paragraph (a)(4) would provide that the 
SBSEF may not implement the rule or rule amendment if the Commission 
has stayed it pursuant to Rule 807(c).
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    \129\ Information that the SBSEF seeks to keep confidential 
could be redacted from the documents published on the SBSEF's 
website but must be republished consistent with any determination 
made pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

    Paragraph (a)(5) of Proposed Rule 807 would set out procedures for 
emergency rule certifications. Paragraph (a)(5)(i) would require a new 
rule or rule amendment that establishes standards for responding to an 
emergency \130\ to be submitted pursuant to Rule 807(a). Paragraph 
(a)(5)(ii) would provide that a rule or rule amendment implemented 
under procedures of the governing board to respond to an emergency 
shall, if practicable, be filed with the Commission prior to 
implementation or, if not practicable, be filed with the Commission at 
the earliest possible time after implementation, but in no event more 
than 24 hours after implementation. In addition, paragraph (a)(5)(ii) 
would provide that any such submission be subject to the certification 
and stay provisions of Rules 807(b) and (c), described below.
---------------------------------------------------------------------------

    \130\ See Sec.  40.1(h) (defining ``emergency'' as ``any 
occurrence or circumstance that, in the opinion of the governing 
board of a registered entity, or a person or persons duly authorized 
to issue such an opinion on behalf of the governing board of a 
registered entity under circumstances and pursuant to procedures 
that are specified by rule, requires immediate action and threatens 
or may threaten such things as the fair and orderly trading in, or 
the liquidation of or delivery pursuant to, any agreements, 
contracts, swaps or transactions or the timely collection and 
payment of funds in connection with clearing and settlement by a 
derivatives clearing organization''). The definition goes on to list 
a series of circumstances that are deemed emergencies under the 
definition. The Commission is adopting a definition of ``emergency'' 
in Rule 802 that is adapted from Sec.  40.1(h).
---------------------------------------------------------------------------

    Paragraph (a)(6) of Proposed Rule 807, modeled on Sec.  40.6(a)(7), 
would set out the required elements for a rule submission under Rule 
807. These requirements would include a copy of the submission cover 
sheet (in the case of a rule or rule amendment that responds to an 
emergency, ``Emergency Rule Certification'' should be noted in the 
description section of the submission cover sheet); the text of the 
rule (in the case of a rule amendment, deletions and additions must be 
indicated); the date of intended implementation; a certification by the 
SBSEF that the rule complies with the SEA and the Commission's rules 
thereunder; a concise explanation and analysis of the operation, 
purpose, and effect of the proposed rule or rule amendment and its 
compliance with applicable provisions of the SEA, including the Core 
Principles relating to SBSEFs and the Commission's rules thereunder; 
and a brief explanation of any substantive opposing views expressed to 
the SBSEF by governing board or committee members, members of the 
SBSEF, or market participants, that were not incorporated into the 
rule, or a statement that no such opposing views were expressed. 
Paragraph (a)(6)(vii) would also permit the SBSEF to include, as 
appropriate, a request for confidential treatment pursuant to the 
procedures provided in Rule 240.24b-2.\131\
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    \131\ Section 40.6(a)(7)(vii) directs the submitting entity to 
follow the procedures in Sec.  40.8 when making a request for 
confidential treatment, which in turn cross-references Sec.  145.9. 
As noted previously, the Commission proposes instead to direct 
filers to make any request for confidential treatment pursuant to 
SEA Rule 24b-2. See supra note 51.
---------------------------------------------------------------------------

    Paragraph (a)(7) of Proposed Rule 807, like Sec.  40.6(a)(8), would 
require an SBSEF to provide, if requested by Commission staff, 
additional evidence, information, or data that may be beneficial to the 
Commission in conducting a due diligence assessment of the filing and 
the SBSEF's compliance with any of the requirements of the SEA or the 
Commission's rules or policies thereunder.
    Paragraph (b) of Proposed Rule 807, modeled on Sec.  40.6(b), would 
provide the Commission 10 business days to review the new rule or rule 
amendment before it is deemed certified and can be made effective, 
unless the Commission notifies the SBSEF during that ten-business-day 
review period that it intends to issue a stay of the certification 
under Rule 807(c).
    Paragraph (c)(1) of Proposed Rule 807, modeled on Sec.  40.6(c)(1), 
would provide that the Commission may stay the certification of a new 
rule or rule amendment by issuing a notification informing the SBSEF 
that the Commission is staying the certification on the grounds that it 
presents novel or complex issues that require additional time to 
analyze, is accompanied by an inadequate explanation, or is potentially 
inconsistent with the SEA or the Commission's rules thereunder. In 
addition, paragraph (c)(1) affords the Commission an additional 90 days 
from the date of the notification to conduct the review.
    Paragraph (c)(2) of Proposed Rule 807, modeled on Sec.  40.6(c)(2), 
would require the Commission to provide a 30-day comment period within 
the 90-day period in which the stay is in effect. The Commission would 
be required to publish a notice of the 30-day comment period on the 
Commission's internet website, and comments from the public could be 
submitted as specified in that notice.
    Paragraph (c)(3) of Proposed Rule 807, modeled on Sec.  40.6(c)(3), 
would provide that the new rule or rule amendment subject to the stay 
shall become effective, pursuant to the certification, at the 
expiration of the 90-day review period, unless the Commission withdraws 
the stay prior to that time, or the Commission notifies the SBSEF 
during the 90-day period that it objects to the proposed certification 
on the grounds that the proposed rule or rule amendment is inconsistent 
with the SEA or the Commission's rules thereunder.
    Paragraph (d) of Proposed Rule 807, modeled on Sec.  40.6(d), would 
provide that certain kinds of rules or rule amendments may be put into 
effect by an SBSEF without certification to the Commission if similar 
enumerated conditions are met. Some would be subject to a Weekly 
Notification of Rule Amendments, which is closely modeled on the CFTC 
notification; others would not be subject to any notification 
requirement.
    Under paragraph (d)(2) of Proposed Rule 807, the following types of 
rules could be put into effect by an SBSEF without self-certification, 
so long as they are disclosed on the Weekly Notification of Rule 
Amendments:
     Non-substantive revisions. Corrections of typographical 
errors, renumbering, periodic routine updates to identifying 
information about the SBSEF, and other such non-substantive revisions 
of a product's terms and conditions that have no effect on the economic 
characteristics of the product;

[[Page 87171]]

     Fees. Fees or fee changes, other than fees or fee changes 
associated with market making or trading incentive programs, that total 
$1.00 or more per contract, and are established by an independent third 
party or are unrelated to delivery, trading, clearing, or dispute 
resolution.
     Survey lists. Changes to lists of banks, brokers, dealers, 
or other entities that provide price or cash market information to an 
independent third party and that are incorporated by reference as 
product terms;
     Approved brands. Changes in lists of approved brands or 
markings pursuant to previously certified or Commission approved 
standards or criteria;
     Trading months. The initial listing of trading months, 
which may qualify for implementation without notice, within the 
currently established cycle of trading months; or
     Minimum tick. Reductions in the minimum price fluctuation 
(or ``tick'').
    Under paragraph (d)(3)(ii) of Rule 807, the following types of 
rules can be put into effect by an SBSEF without self-certification and 
without having to be disclosed on the Weekly Notification of Rule 
Amendments:
     Transfer of membership or ownership. Procedures and forms 
for the purchase, sale, or transfer of membership or ownership, but not 
including qualifications for membership or ownership, any right or 
obligation of membership or ownership, or dues or assessments;
     Administrative procedures. The organization and 
administrative procedures of governing bodies such as a governing 
board, officers, and committees, but not voting requirements, governing 
board, or committee composition requirements or procedures, decision-
making procedures, use or disclosure of material non-public information 
gained through the performance of official duties, or requirements 
relating to conflicts of interest;
     Administration. The routine daily administration, 
direction, and control of employees, requirements relating to gratuity 
and similar funds, but not guaranty, reserves, or similar funds; 
declaration of holidays; and changes to facilities housing the market, 
trading floor, or trading area;
     Standards of decorum. Standards of decorum or attire or 
similar provisions relating to admission to the floor, badges, or 
visitors, but not the establishment of penalties for violations of such 
rules;
     Fees. Fees or fee changes, other than fees or fee changes 
associated with market making or trading incentive programs that are 
less than $1.00 or relate to matters such as dues, badges, 
telecommunication services, booth space, real-time quotations, 
historical information, publications, software licenses, or other 
matters that are administrative in nature.
     Trading months. The initial listing of trading months 
which are within the currently established cycle of trading months.
    One commenter states that the CFTC's self-certification process has 
been relied upon by CFTC registrants for most submissions, leaving 
little that is reviewed or capable of challenge by market participants 
or the CFTC unless it is inconsistent with the statute or CFTC 
regulation.\132\ This commenter states that rulebook or contractual 
changes can alter protections within Commission-regulated markets and 
that the Commission should be able to object to any such change it 
deems inconsistent with Commission policy, including considerations of 
compliance costs and the impact on consumer protections, all of which 
would be best informed by a requirement for public comment prior to 
certification. Under the CFTC regime, the commenter states, there is no 
formal process to allow market participants to object to a submission 
for changes that are submitted for certification. Decisions to adopt or 
modify rules by self-certification are typically made by the 
registrant's board of directors or a board committee, this commenter 
states, with market participants only learning of the rule after the 
registrant has self-certified the rule or amendment. This commenter 
supports an alternative approach in which the Commission can review all 
material rule and contractual changes by SBSEFs, clearing agencies, SBS 
data depositories, and exchanges. This commenter also recommends that 
the Commission adopt a requirement for public comment for such changes.
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    \132\ See SIFMA AMG Letter, supra note 18, at 5-6. Another 
commenter raised questions specifically about self-certification in 
the context of a determination by an SBSEF that an SBS has been 
``made available to trade.'' See MFA Letter, supra note 18, at 6. 
This comment is discussed below in the context of made-available-to-
trade determinations under Rule 816(a). See infra section V.F.2.
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    Regulation SE will afford the Commission a sufficient mechanism to 
assess new SBSEF rules and rule amendments for consistency with section 
3D of the SEA, while also permitting SBSEFs to submit new rules and 
rule amendments using a self-certification process closely aligned with 
Sec.  40.6. The CFTC's procedures are well articulated and well 
understood by SEFs, and closely harmonizing with these procedures 
should yield comparable regulatory benefits while minimizing burdens on 
SBSEFs. It is likely that certain rules of dually registered SEF/SBSEFs 
will apply to member behavior generally--and not to one product market 
(e.g., swaps or SBS) exclusively--and that these rules will thus have 
to be filed with both the SEC and CFTC. Adding a default comment period 
or otherwise altering the standard so that the Commission reviews all 
material rule or contractual changes by SBSEFs, as requested by one 
commenter,\133\ would significantly alter the timing of self-certified 
SBSEF rules compared to their SEF equivalents. By contrast, closely 
harmonizing the SEC's filing procedures and standards of review with 
the CFTC's would allow dually registered entities to submit the same 
(or substantially the same) filing to both agencies for review. 
Moreover, if the Commission exercises its authority to stay the 
effectiveness of a self-certified rule and seek public comment--i.e., 
with respect to a rule that is novel, complex, inadequately explained, 
or potentially inconsistent with the SEA or the regulations thereunder, 
including Regulation SE--market participants would be able to convey 
their concerns regarding that rule to the Commission.
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    \133\ See SIFMA AMG Letter, supra note 18, at 5-6.
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    The specified types of SBSEF rules or rule amendments that may be 
put into effect under Rule 807(d) without certification to the 
Commission are appropriate because they are limited to the types of 
rule changes described earlier in this section (e.g., administration), 
which do not implicate significant protections to market participants, 
including compliance costs and customer protection. Therefore, the 
Commission has harmonized Rule 807(d) with Sec.  40.6(d) to allow such 
filings to be made without self-certification or Commission review.
    Thus, it is not necessary to require SBSEFs to make a substantially 
different type of filing to the SEC than to the CFTC for the same 
underlying rule. For the reasons discussed above, the Commission is 
adopting Rule 807 as proposed, with the exception of the proposed 
Inline XBRL and EDGAR filing requirements, and with minor technical 
modifications.\134\
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    \134\ See supra note 32. The Commission has also moved the word 
``and'' from the end of paragraph (d)(3)(D) to the end of paragraph 
(d)(3)(E)(2). As described in further detail in the discussion of 
electronic filing systems and structured data, the Commission will 
require all rule and product filings required by Rules 804 through 
807 and 816 to be filed in unstructured format through EFFS, rather 
than in Inline XBRL through EDGAR. See infra section XIII.A.

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[[Page 87172]]

E. Submission Cover Sheet and Instructions

    In proposed new Sec.  249.2002, the Commission proposed to require 
that an SBSEF use a submission cover sheet in conjunction with filings 
submitted pursuant to Rules 804 through 807, 809, and 816. The cover 
sheet and the instructions therein are modeled on the cover sheet and 
instructions used by SEFs in conjunction with their analogous filings 
with the CFTC.\135\
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    \135\ The CFTC cover sheet and instructions, found in appendix D 
to part 40 of the CFTC's rules, are designed for rule and product 
filings from a wider range of registered entities than just SEFs, 
and thus include entries that are omitted from the Commission's 
proposed adaptation.
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    The same cover sheet and instructions would be used for a new rule, 
rule amendment, or new product filing, with the SBSEF checking the 
appropriate box to indicate which of these types the filing represents. 
The SBSEF would also be required to check boxes to indicate whether the 
submission was seeking approval by the Commission or whether it was 
being filed as a certification by the SBSEF; and to identify the 
specific provision in the Commission's rules pursuant to which the 
filing was being submitted. The submission cover sheet also includes a 
box that the SBSEF would check if it intends to submit a request for a 
joint interpretation from the Commission and the CFTC regarding whether 
the product is a swap, an SBS, or mixed swap pursuant to SEA Rule 3a68-
2.\136\ Finally, the cover sheet includes a check box by which an SBSEF 
can indicate that it is requesting confidential treatment of materials 
in the submission.
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    \136\ Rule 809 provides that a product filing will be stayed or 
tolled, as applicable, if such a request for a joint interpretation 
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
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    The cover sheet divides the rule and rule amendment filings into 
two categories: one for general rules of the SBSEF and the other for 
rules relating to the terms and conditions of a product. Additional 
boxes would need to be checked if a filing under the terms-and-
conditions category concerned specifically a determination by the SBSEF 
that a particular SBS was now to be considered ``made available to 
trade'' (or ``MAT''); \137\ or if the filing concerned the delisting of 
an SBS with no open interest.\138\ The cover sheet would need to be 
used in conjunction with the weekly notifications that SBSEFs would be 
required to file pursuant to Rule 807(d) for certain changes that do 
not need to be approved or certified, as discussed above.
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    \137\ Rule 809 provides that a product filing will be stayed or 
tolled, as applicable, if such a request for a joint interpretation 
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
    \138\ See supra note 128.
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    Paragraph (a) of the submission cover sheet instructions provides 
that a properly completed submission cover sheet must accompany all 
rule and product submissions filed electronically with the Commission 
by an SBSEF using the Electronic Form Filing System (EFFS).\139\ Per 
paragraph (a), a properly completed submission cover sheet would 
include: (1) the name and platform ID of the SBSEF; \140\ (2) the date 
of the filing; (3) an indication as to whether the filing is a new 
rule, rule amendment, or new product; (4) for rule filings, the rule 
number(s) being adopted or, in the case of rule amendments, the number 
of the rule(s) being modified; and (4) for rule or rule amendment 
filings, a description of the new rule or rule amendment, including a 
discussion of its expected impact on the SBSEF, its members, and the 
overall market. The instructions state that the narrative should 
describe the substance of the submission with enough specificity to 
characterize all material aspects of the filing.
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    \139\ The Electronic Form Filing System (EFFS) is a secure, web-
based system used for filing Forms 19b-4, 19b-7, and SCI. The system 
also supports pre-filings of certain types of Form 19b-4 filings. 
EFFS is used for form filing by SROs, including national securities 
exchanges, national securities associations, clearing agencies, and 
Systems Compliance Integrity (SCI) entities, including SCI SROs, SCI 
alternative trading systems, plan processors, and exempt clearing 
agencies subject to Automation Review Policy. See https://www.sec.gov/tm/electronic-form-filing-system-resources.
    \140\ ``Platform ID'' is a term utilized in Regulation SBSR, 17 
CFR 242.900 et seq., and means the unique identification code 
assigned to a platform on which an SBS is executed. See 17 CFR 
242.900(w). The term ``platform'' includes an SBSEF. See Rule 
900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule 
903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform 
ID an identifier issued by an internationally recognized standards-
setting system (``IRSS'') if the IRSS meets enumerated criteria and 
has therefore been recognized by the Commission pursuant to Rule 
903(a). This identification requirement stems from a registered 
SBSEF's status as a ``participant'' of a registered SBSDR under Rule 
900(u), 17 CFR 242.900(u), because the term ``participant'' includes 
a ``platform,'' as defined in Rule 900(v), 17 CFR 242.900(v), that 
incurs reporting duties under Rule 901(a), 17 CFR 242.901(a). 
Currently, the Global Legal Entity Identifier System (``GLEIS'') is 
the only IRSS that has been recognized by the Commission under Rule 
903(a). See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, SEA Release No. 74244 (Feb. 11, 
2015), 80 FR 14563, 14631-32 (Mar. 19, 2015) (``Regulation SBSR 
Adopting Release I''). Therefore, Legal Entity Identifiers 
(``LEIs'') issued through the GLEIS are currently the only allowable 
platform IDs that may be used by registered SBSEFs.
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    Paragraph (b) of the submission cover sheet instructions states 
that a submission must comply with all applicable filing requirements 
for proposed rules, rule amendments, or products, and that the filing 
of the submission cover sheet does not obviate the SBSEF's 
responsibility to comply with applicable filing requirements.
    Paragraph (c) of the submission cover sheet states that checking 
the box marked ``confidential treatment requested'' does not obviate 
the submitter's responsibility to comply with all applicable 
requirements for requesting confidential treatment under SEA Rule 24b-2 
and does not substitute for notice or full compliance with such 
requirements.
    One commenter states that the submission cover sheet and 
instructions for SBSEF filings should harmonize with those of the 
CFTC.\141\ This commenter states that entities currently registered 
with the CFTC as SEFs will be able to seamlessly enact the necessary 
steps for required SEC filings because of their familiarity with the 
CFTC's filing process. This commenter also states that any identifiers 
regarded as necessary should be included on the cover sheet.
---------------------------------------------------------------------------

    \141\ See Letter from J.T. (May 26, 2022). In section XIII.B, 
infra, the Commission discusses the use of identifiers, such as the 
LEI.
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    The Commission agrees that the use of a submission cover sheet that 
is harmonized with that required for CFTC filings by SEFs is likely to 
facilitate the filing process for SBSEFs that are also registered as 
SEFs. For this reason, the proposed submission coversheet is harmonized 
with the CFTC's, with differences only in the details specific to the 
rules and processes of the SEC. The Commission contemplates providing 
for electronic completion (as well as submission) of the cover sheet 
and attachment of the submissions required by Rules 804, 805, 806, 807, 
and 809, and intends to advise affected persons regarding its use by 
public announcement in advance of the effective date of these 
rules.\142\
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    \142\ Below in section XIII.A, the Commission addresses the 
requirements to use the EDGAR system and Inline XBRL for 
submissions.
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    For the reasons discussed above, the Commission is adopting 17 CFR 
249.2002 as proposed, but is renumbering it as 17 CFR 249.1702 under 
new subpart R (``Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities''), and is also adopting the submission 
cover sheet and instructions as proposed with the exception of the 
proposed Inline

[[Page 87173]]

XBRL and EDGAR filing requirements.\143\
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    \143\ See id.
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F. Rule 808--Availability of Public Information

    Proposed Rule 808 is closely modeled on Sec.  40.8 of the CFTC's 
rules.\144\ Proposed Rule 808(a) would provide that certain parts of an 
application to register as an SBSEF would be made publicly available on 
the Commission's website, unless confidential treatment is obtained 
pursuant to SEA Rule 24b-2. Specifically, Proposed Rule 808(a) would 
make the following parts of a Form SBSEF publicly available: the (i) 
transmittal letter and first part of the application cover sheet; (ii) 
Exhibit C; (iii) Exhibit G; (iv) Exhibit L; and (v) Exhibit M.\145\
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    \144\ Section 40.8 of the CFTC's rules is entitled 
``Availability of public information.''
    \145\ Section 40.8(a) does not provide a list of the exhibits 
required to be made public, but rather refers to a general 
description of items required to be made public. For purposes of 
clarity and ease of reference, however, the Commission proposed to 
list the specific corresponding exhibits in Rule 808 that would be 
made publicly available. Exhibit C would require a narrative that 
sets forth the fitness standards for the governing board and its 
composition; Exhibit G would require a copy of the corporate 
governance documents for the applicant; Exhibit L would require a 
narrative and any other form of documentation that describes the 
manner in which the applicant is able to comply with each core 
principle; and Exhibit M would require a copy of the applicant's 
proposed rules and any technical manuals, guides, or other 
instructions for members.
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    Paragraph (b) of Proposed Rule 808, adapted from Sec.  40.8(c), 
would provide that the Commission shall make publicly available on its 
website, unless confidential treatment is obtained pursuant to SEA Rule 
24b-2,\146\ an SBSEF's filing of new products pursuant to the self-
certification procedures of Rule 804, new products for Commission 
review and approval pursuant to Rule 805, new rules and rule amendments 
for Commission review and approval pursuant to Rule 806, and new rules 
and rule amendments pursuant to the self-certification procedures of 
Rule 807. Paragraph (c), adapted from Sec.  40.8(d), would provide that 
the terms and conditions of a product submitted to the Commission 
pursuant to any of Rules 804 through 807 shall be made publicly 
available at the time of submission unless confidential treatment is 
obtained pursuant to SEA Rule 24b-2.
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    \146\ An application for confidential treatment shall contain, 
among other things, a statement of the grounds of objection 
referring to, and containing an analysis of, the applicable 
exemption(s) from disclosure under the Freedom of Information Act, 
and a justification of the period of time for which confidential 
treatment is sought. See 17 CFR 240.24b-2(b)(2)(ii).
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    The Commission received one comment on Proposed Rule 808. This 
commenter states that the Commission should not allow requests for 
confidential treatment and that these requests are currently abused and 
result in little information being made available to the public.\147\ A 
blanket prohibition on requesting confidential treatment would not be 
appropriate, however, because each request for confidential treatment 
should be addressed on its particular facts and circumstances. 
Moreover, as the Commission stated in the Proposing Release, ``it is 
not necessary or appropriate to establish and utilize one set of 
procedures to handle confidential treatment requests made by SBSEFs 
while utilizing a different set of procedures for other persons who 
request confidential treatment from the Commission under the SEA.'' 
\148\ The Commission anticipates that while SBSEFs may request 
confidential treatment for their filings pursuant to existing SEA Rule 
24-2, the items enumerated in Rule 808 are not of the type that 
typically would constitute confidential information. Finally, it is 
appropriate to adopt a rule that is adapted from Sec.  40.8, because 
Rule 808 will apply to submissions made under Rules 804-807, which are, 
as discussed above, also based on provisions of the CFTC's rules for 
SEFs. Therefore, the Commission is adopting Rule 808 as proposed.
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    \147\ See Keeney Letter, supra note 95.
    \148\ Proposing Release, supra note 1, 87 FR at 28880 n.50.
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G. Rule 809--Staying of Certification and Tolling of Review Period 
Pending Jurisdictional Determination

    Section 718 of the Dodd-Frank Act, entitled ``Determining Status of 
Novel Derivative Products,'' sets forth a mechanism for addressing a 
situation in which a person wishes to list or trade a novel derivative 
product that may have elements of both securities and contracts of sale 
of a commodity for future delivery (or options on such contracts or 
options on commodities)--i.e., a situation in which it is unclear 
whether the product in question is a security under the jurisdiction of 
the SEC or a future under the jurisdiction of the CFTC. Section 718(a) 
provides that the SEC or the CFTC may request that the other agency 
issue a determination as to the classification of that product, and 
section 718(b) provides that the CFTC and SEC may petition for judicial 
review of any such determination.\149\
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    \149\ Section 40.12 of the CFTC's rules is entitled ``Staying of 
certification and tolling of review period pending jurisdictional 
determination'' and reflects the process described in section 718 of 
the Dodd-Frank Act. Section 40.12 provides that if a SEF (among 
other registered entities) certifies, submits for approval, or 
otherwise files a proposal to list or trade such a novel derivative 
product, the product certification shall be stayed or the approval 
review period shall be tolled until a final determination order is 
issued under section 718.
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    As described in the Proposing Release, Proposed Rule 809 is loosely 
modeled on Sec.  40.12, but modified to focus on the products and 
jurisdictional issues that are more likely to be relevant to 
SBSEFs.\150\ Paragraph (a) of Proposed Rule 809, modeled on Sec.  
40.12(b), would provide that a product certification made by an SBSEF 
pursuant to Rule 804 shall be stayed, or the review period for a 
product that has been submitted for Commission approval by an SBSEF 
pursuant to Rule 805 shall be tolled, upon request for a joint 
interpretation of whether the product is a swap, SBS, or mixed swap 
made pursuant to Rule 3a68-2 under the SEA \151\ by the SBSEF, the SEC, 
or the CFTC. Paragraph (b) is modeled on Sec.  40.12(b)(1) and would 
require the SEC to provide the SBSEF with a written notice of the stay 
or tolling pending issuance of a joint interpretation by the SEC and 
CFTC. Paragraph (c) is modeled on Sec.  40.12(b)(2) and would provide 
that the stay shall be withdrawn, or the approval review period shall 
resume, if a joint interpretation finding that the SEC has jurisdiction 
over the product is issued.
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    \150\ As noted in the Proposing Release, an SBSEF might seek to 
list a product where it is unclear whether the product is a swap or 
an SBS. See Proposing Release, supra note 1, 87 FR at 28890.
    \151\ 17 CFR 240.3a68-2.
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    The Commission did not receive any comments on Proposed Rule 809. 
While section 718 of the Dodd-Frank Act addresses situations where it 
is unclear whether a product is a security or a future, the SEC and the 
CFTC have adopted separate rules--SEA Rule 3a68-2 and 17 CFR 1.8, 
respectively--governing requests for interpretation regarding a product 
that might be an SBS, a swap, or a mixed swap. It is appropriate for 
Regulation SE to include a mechanism for the staying or tolling of a 
filing by an SBSEF when it is unclear whether the product is a swap or 
an SBS, and it would be appropriate for Rule 809 to reflect the process 
set forth in SEA Rule 3a68-2. Tailoring, as proposed, the scope of Rule 
809, in relation to Sec.  40.12, appropriately addresses the 
jurisdictional questions that are likely to arise from a product listed 
by an SBSEF.\152\ Therefore, the Commission is adopting Rule 809 as 
proposed.
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    \152\ The objective of Rule 809 is consistent with the objective 
of Sec.  40.12: to provide for a stay or tolling of a product filing 
where it is unclear whether the product is under the jurisdiction of 
the SEC or the CFTC.

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[[Page 87174]]

H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and 
by Dormant SBSEFs

    Proposed Rule 810 is closely modeled on Sec.  37.4 of the CFTC's 
rules and would provide a process whereby a not-yet-registered SBSEF or 
a dormant SBSEF could submit product filings. Specifically, Proposed 
Rule 810 would provide that an applicant for registration as an SBSEF 
may submit an SBS's terms and conditions prior to listing the product 
as part of its application for registration and that any such terms and 
conditions or rules submitted as part of an SBSEF's application for 
registration shall be considered for approval by the Commission at the 
time the Commission issues the SBSEF's order of registration. 
Similarly, any SBS terms and conditions or rules submitted as part of 
an application to reinstate the registration of a dormant SBSEF would 
be considered for approval by the Commission at the time the Commission 
approves the reinstatement of registration of the dormant SBSEF.
    The Commission did not receive any comments on Proposed Rule 810 
and is adopting Rule 810 as proposed, for the reasons stated in the 
Proposing Release.

V. Miscellaneous Requirements

    Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous 
requirements on SEFs, and the Commission proposed to impose similar 
requirements on SBSEFs in Rules 811 to 817 of Regulation SE.

A. Rule 811--Information Relating to SBSEF Compliance

1. Harmonization With Sec.  37.5
    Paragraphs (a) to (c) of Proposed Rule 811 are modeled on Sec.  
37.5, which is entitled ``Information regarding swap execution facility 
compliance.'' Paragraph (a) of Proposed Rule 811 is closely modeled on 
Sec.  37.5(a) and would provide that, upon the Commission's request, an 
SBSEF shall file with the Commission information related to its 
business as an SBSEF in the form and manner, and within the timeframe, 
specified by the Commission. Paragraph (b) is closely modeled on Sec.  
37.5(b) and would provide that, upon the Commission's request, an SBSEF 
shall file with the Commission a written demonstration, containing 
supporting data, information, and documents, that it is in compliance 
with one or more Core Principles or with its other obligations under 
the SEA or the Commission's rules thereunder, as the Commission 
specifies in its request. Also, under Proposed Rule 811(b), the SBSEF 
would be required to file such written demonstration in the form and 
manner, and within the timeframe, specified by the Commission.
    Paragraph (c)(1) of Proposed Rule 811 is closely modeled on Sec.  
37.5(c)(1) and would provide that an SBSEF shall file with the 
Commission a notification of any transaction involving the direct or 
indirect transfer of 50% or more of the equity interest in the SBSEF. 
Also, under Proposed Rule 811(c)(1), the Commission could, upon 
receiving such a notification, request supporting documentation of the 
transaction. Paragraph (c)(2) is closely modeled on Sec.  37.5(c)(2) 
and would provide that the equity interest transfer notice shall be 
filed with the Commission in a form and manner specified by the 
Commission at the earliest possible time, but in no event later than 
the open of business 10 business days following the date upon which the 
SBSEF enters into a firm obligation to transfer the equity Interest. 
Paragraph (c)(3) is closely modeled on Sec.  37.5(c)(3) and would 
provide that, notwithstanding the foregoing, if any aspect of an equity 
interest transfer requires an SBSEF to file a rule, the SBSEF shall 
comply with the applicable rule filing requirements of Rule 806 or Rule 
807.
    Paragraph (c)(4) of Proposed Rule 811 is closely modeled on Sec.  
37.5(c)(4) and would provide that, upon a transfer of an equity 
interest of 50% or more in an SBSEF, the SBSEF shall file with the 
Commission, in a form and manner specified by the Commission, a 
certification that the SBSEF meets all of the requirements of section 
3D of the SEA and the Commission rules thereunder, no later than two 
business days following the date on which the equity interest of 50% or 
more was acquired.
    The Commission did not receive any comments on Rule 811(a) to (c). 
It is appropriate for Regulation SE to include provisions requiring an 
SBSEF to provide the Commission with the information described above. 
Information about an SBSEF's business as an SBSEF and transfers of 50% 
or more of its equity would promote understanding of its operations and 
ownership, which should facilitate oversight of the SBSEF. Therefore, 
the Commission is clarifying, as proposed, that, similar to the CFTC, 
it may request such information from an SBSEF. In addition, as 
anticipated in the Proposing Release, should questions about compliance 
arise, the Commission should be able to obtain from an SBSEF supporting 
data, information, and documents that the SBSEF is in compliance with 
relevant obligations under the SEA, and the rule provides for this. By 
modeling its proposed requirements on existing CFTC rules, the 
Commission seeks to obtain comparable regulatory benefits while 
imposing only marginal additional burdens on dually registered entities 
that are already subject to similar obligations.
    The Commission is changing the phrase ``a transfer of an equity 
interest of 50 percent or more in a security-based swap execution 
facility'' in paragraph (c)(4) to ``an equity transfer described in 
paragraph (c)(1) of this section'' because the text of paragraph (c)(4) 
should be modified to parallel the text of paragraphs (c)(2) and 
(c)(3). For these reasons, the Commission is adopting Rule 811(a) to 
(c) as proposed, with the change described to paragraph (c)(4).
2. Harmonization With Sec.  1.60
    Paragraph (d) of Proposed Rule 811 is not modeled on Sec.  37.5, 
but rather on Sec.  1.60 of the CFTC's rules, which is entitled 
``Pending legal proceedings.'' Because it is conceptually similar to 
Sec.  37.5 in that it would require another type of information 
relevant to the regulatory oversight of a SEF, the Commission proposed 
to adapt this provision into Rule 811.\153\
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    \153\ Section 1.60 requires a SEF (among other entities) to 
provide the CFTC with copies of any legal proceeding to which it is 
a party, or to which its property or assets is subject. Paragraph 
(d) of Rule 811 would adapt paragraphs (a), (c), and (e) of Sec.  
1.60 to apply to SBSEFs. Paragraphs (b) and (d) of Sec.  1.60 apply 
to futures commission merchants and do not appear germane to SEFs or 
SBSEFs. Therefore, the Commission is not adapting these paragraphs 
into Rule 811(d).
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    Paragraph (d)(1) of Proposed Rule 811 is closely modeled on Sec.  
1.60(a) and would provide that an SBSEF shall submit to the Commission 
a copy of the complaint, any dispositive or partially dispositive 
decision, any notice of appeal filed concerning such decision, and such 
further documents as the Commission may thereafter request filed in any 
material legal proceeding to which the SBSEF is a party or to which its 
property or assets are subject. Paragraph (d)(2) is closely modeled on 
Sec.  1.60(c) and would provide that an SBSEF shall submit to the 
Commission a copy of the complaint, any dispositive or partially 
dispositive decision, any notice of appeal filed concerning such 
decision, and such further documents as the Commission may thereafter 
request filed in any material legal proceeding instituted against any 
officer, director, or other official of the SBSEF from conduct in such 
person's capacity as an official of the SBSEF and alleging violations 
of the SEA or any rule, regulation, or order thereunder; the

[[Page 87175]]

constitution, bylaws, or rules of the SBSEF; or the applicable 
provisions of state law relating to the duties of officers, directors, 
or other officials of business organizations.
    Paragraph (d)(3) of Proposed Rule 811 is loosely modeled on Sec.  
1.60(e) and would provide that documents required by Rule 811(d) to be 
submitted to the Commission shall be submitted electronically in a form 
and manner specified by the Commission within 10 days after the 
initiation of the legal proceedings to which they relate, after the 
date of issuance, or after receipt by the SBSEF of the notice of 
appeal, as the case may be.
    Paragraph (d)(4) of Proposed Rule 811 is closely modeled on the 
final two sentences of Sec.  1.60(e) and would provide that, for 
purposes of Rule 811(d), a ``material legal proceeding'' includes but 
is not limited to actions involving alleged violations of the SEA or 
the Commission rules thereunder, and that a legal proceeding is not 
``material'' for the purposes of Rule 811 if the proceeding is not in a 
Federal or State court or if the Commission is a party.
    The Commission did not receive any comments on Proposed Rule 811(d) 
and is adopting Rule 811(d) as proposed, for the reasons stated in the 
Proposing Release.

B. Rule 812--Enforceability

    Proposed Rule 812 generally is modeled on Sec.  37.6. Paragraph (a) 
of Rule 812, which is based on Sec.  37.6(a)(1), and would provide that 
a transaction on or pursuant to the rules of an SBSEF cannot be 
invalidated as a result of a violation by the SBSEF of section 3D of 
the SEA or the Commission's rules thereunder.\154\ An SBS executed on 
an SBSEF should not be invalidated by the SBSEF's violation of any of 
the securities laws, given that swaps executed on SEFs are afforded the 
same legal certainty under Sec.  37.6(a).
---------------------------------------------------------------------------

    \154\ The Commission is not adapting into Rule 812 paragraphs 
(a)(2) and (a)(3) of Sec.  37.6, which provide that a transaction on 
a SEF may not be invalidated by CFTC proceedings that alter or 
supplement SEF rules, terms, and conditions, because the Commission 
has no authority in the SEA analogous to the CFTC's authority under 
section 8a(7) of the CEA to conduct such proceedings. See supra note 
93 and accompanying text. See also Proposing Release, supra note 1, 
87 FR at 28893 n.90.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 812 is modeled on the first sentence 
of Sec.  37.6(b), which requires a SEF to provide each counterparty to 
a transaction that is entered into on or pursuant to the rules of the 
SEF with a written record of all of the terms of the transaction which 
shall legally supersede any previous agreement.\155\ Proposed Rule 
812(b) differs, however, in that it would provide that an SBSEF shall, 
as soon as technologically practicable after the time of execution of a 
transaction entered into on or pursuant to the rules of the facility, 
provide a written record to each counterparty of all of the terms of 
the transaction that were agreed to on the facility, which shall 
legally supersede any previous agreement regarding such terms.
---------------------------------------------------------------------------

    \155\ Furthermore, under Sec.  37.6(b), the confirmation of all 
terms of the transaction must take place at the same time as 
execution, provided that specific customer identifiers for accounts 
included in bunched orders need not be included in confirmations if 
certain conditions are met.
---------------------------------------------------------------------------

    One commenter agrees that Rule 812 should be modeled on Sec.  37.6 
and states that, like Sec.  37.6, Rule 812 should require the SBSEF to 
confirm ``all the terms of the transaction,'' rather than being 
limited, as proposed, to ``all of the terms that were agreed to on the 
facility.'' \156\ This commenter states that Rule 812 as proposed may 
cause issues with clearing SBS because SBS clearing agencies will 
likely require SBSEFs to represent that any transaction executed on the 
SBSEF is final and irrevocable (as CFTC-registered clearing agencies 
require for SEFs). Since Rule 812 only requires an SBSEF confirmation 
to be limited in scope to ``all of the terms that were agreed to on the 
facility,'' this commenter states the SBSEF would not necessarily know 
any terms agreed upon by counterparties outside the SBSEF, and 
therefore could not represent to the clearing agency that the 
transaction is ``final and irrevocable,'' which would be a roadblock 
for straight-through processing and full adoption of clearing for 
SBS.\157\ This commenter states that, to address this issue, SBSEFs 
should have the ability to prohibit trading relationship documentation 
or enablements for cleared SBS transactions executed on an SBSEF, which 
are prohibited for CFTC-registered SEFs in accordance with the CFTC's 
2013 Staff Impartial Access Guidance,\158\ and that Rule 812 should 
require that the SBSEF confirm ``all of the terms of the transaction.'' 
\159\
---------------------------------------------------------------------------

    \156\ See Bloomberg Letter, supra note 18, at 4, 12-13.
    \157\ See infra section VI.F (discussing, among other things, 
straight-through processing).
    \158\ See CFTC Division of Clearing and Risk, Division of Market 
Oversight, and Division of Swap Dealer and Intermediary Oversight, 
Guidance on Application of Certain Commission Regulations to Swap 
Execution Facilities (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
    \159\ See Bloomberg Letter, supra note 18, at 4, 12-13.
---------------------------------------------------------------------------

    Another commenter, however, states that it is not practical or cost 
effective for an SBSEF to collect, review, and store each free-standing 
agreement underlying an SBS transaction entered into between numerous 
counterparties.\160\ This commenter states that the CFTC has not 
required SEFs to comply with the requirements of 37.6(b) since 2014, 
when staff no-action relief was issued due to the impracticability of 
compliance.\161\ Thus, this commenter supports the proposal in Rule 812 
to require an SBSEF to provide a written record of all the terms of the 
transaction that were agreed to on an SBSEF, which shall legally 
supersede any previous agreement regarding such terms.
---------------------------------------------------------------------------

    \160\ See ICE Letter, supra note 18, at 5.
    \161\ See id. (citing CFTC Division of Market Oversight, Staff 
No-Action Position Regarding SEF Confirmations and Recordkeeping 
Requirements under Certain Provisions Included in Regulations 
37.6(b) and 45.2, Letter No. 14-108 (Aug. 18, 2014), available at 
https://www.cftc.gov/csl/14-108/download).
---------------------------------------------------------------------------

    It is appropriate to require an SBSEF to inform counterparties as 
soon as technologically practicable after they have effected a trade on 
or pursuant to the rules of the SBSEF, and to provide them with a 
written record of the terms to which they have agreed to on the SBSEF. 
With respect to uncleared SBS, it would be impractical for an SBSEF to 
be aware of, or responsible for, confirming terms of an SBS that were 
agreed to off the SBSEF's trading platform, such as terms contained in 
a credit support agreement between the two counterparties to an 
uncleared SBS. Thus, the Commission is not including in Rule 812 a 
requirement that the SBSEF provide a written record of any such 
terms.\162\
---------------------------------------------------------------------------

    \162\ Section 37.6(b) requires a SEF to provide a written record 
of ``all of the terms of the transaction which shall legally 
supersede any previous agreement and serve as a confirmation of the 
transaction.'' In the adopting release for the final part 37 rules, 
the CFTC explained that, with respect to uncleared swaps, a SEF 
could satisfy this requirement by incorporating by reference terms 
set forth in agreements previously negotiated by the counterparties, 
provided that such agreements had been submitted to the SEF ahead of 
execution. See 2013 CFTC Final SEF Rules Release, supra note 9, 78 
FR at 33491 n.195. The CFTC staff has taken a no-action position 
with respect to the confirmation requirements for uncleared swaps in 
response to assertions by industry participants that it is 
impracticable for a SEF to satisfy the written confirmation 
requirements by incorporating by reference terms from previously 
negotiated agreements between the counterparties if the SEF must 
receive copies of such agreements prior to execution. See CFTC No 
Action Letter 17-17 (Mar. 24, 2017) (issued by the CFTC's Division 
of Market Oversight). In the no-action letter, the CFTC staff stated 
that it was continuing to assess confirmation requirements, 
including establishing a permanent solution to the issues raised. 
Given these circumstances, it is appropriate to require an SBSEF to 
provide counterparties with a written record of only those terms 
that are agreed to on the SBSEF. Additionally, the CFTC recently 
issued a notice of proposed rulemaking to adopt a rule codifying the 
no-action position, which would enable SEFs to incorporate such 
terms by reference in an uncleared swap confirmation without being 
required to obtain the underlying, previously negotiated agreements. 
See CFTC, Swap Confirmation Requirements for Swap Execution 
Facilities (Notice of Proposed Rulemaking), 88 FR 58145, 58147 (Aug. 
25, 2023). The CFTC has not yet taken action on this proposal.

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

[[Page 87176]]

    In response to the comment that Proposed Rule 812 may cause issues 
with clearing because the rule requires SBSEFs to confirm only the 
terms of an SBS transaction ``that were agreed to on the facility,'' 
additional terms in trading relationship documents or enablements are 
unlikely to hinder the acceptance by a clearing agency of SBS that are 
intended to be cleared or might inhibit impartial access to trading of 
cleared SBS on an SBSEF. First, a cleared SBS would be a standardized 
product, the complete terms of which would be known to the SBSEF, 
agreed to by the counterparties trading that SBS on the SBSEF, and 
capable of being confirmed to the parties in writing by the SBSEF, as 
well as represented to the clearing agency by the SBSEF as ``final and 
irrevocable.'' Thus, all the terms of the cleared transaction are 
confirmed when executed on the SBSEF. And second, Proposed Rule 819(c) 
would require that an SBSEF provide impartial access to its market and 
market services,\163\ and it would not be consistent with an SBSEF's 
impartial access obligations to permit members to incorporate 
additional terms for a cleared SBS in trading relationship 
documentation, enablement documentation, or elsewhere, or to otherwise 
permit improper discrimination with respect to trading in cleared SBS 
against SBSEF members who have a direct or indirect clearing 
relationship with the clearing agency for a given SBS.
---------------------------------------------------------------------------

    \163\ See infra section VI.B.3 (discussing the impartial access 
requirements of Rule 819(c)).
---------------------------------------------------------------------------

    Therefore, for the foregoing reasons, the Commission is adopting 
Rule 812 as proposed.

C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes

    Proposed Rule 813 is modeled on Sec.  37.7, and would provide that 
an SBSEF shall not use, for business or marketing purposes, any 
proprietary data or personal information that it collects or receives 
from or on behalf of any person for the purpose of fulfilling its 
regulatory obligations. An SBSEF would be able to use such data or 
information for business or marketing purposes if the person consents, 
but the SBSEF would not be able to condition access to the SBSEF on the 
person's providing such consent. Finally, Proposed Rule 813 would 
provide that an SBSEF, where necessary for regulatory purposes, may 
share such data or information with another SBSEF or a national 
securities exchange.
    The Commission did not receive any comments on Proposed Rule 813 
and is adopting Rule 813 as proposed, for the reasons stated in the 
Proposing Release.

D. Rule 814--Entity Operating Both a National Securities Exchange and 
an SBSEF

    Proposed Rule 814 is modeled on Sec.  37.8. Paragraph (a) of 
Proposed Rule 814 would provide that an entity intending to operate 
both a national securities exchange and an SBSEF shall separately 
register the two facilities pursuant to section 6 of the SEA and Rule 
803 under the SEA. Paragraph (b), although consistent with Sec.  
37.8(b), draws its specific language from section 3D(c) of the 
SEA,\164\ which contemplates that a single entity may operate both a 
national securities exchange and an SBSEF. Paragraph (b) of Proposed 
Rule 814 would provide that a national securities exchange shall, to 
the extent that the exchange also operates an SBSEF and uses the same 
electronic trade execution system for listing and executing trades of 
SBS on or through the exchange and the facility, identify whether 
electronic trading of SBS is taking place on or through the national 
securities exchange or the SBSEF.
---------------------------------------------------------------------------

    \164\ 15 U.S.C. 78c-4(c).
---------------------------------------------------------------------------

    Two commenters state that the key requirements applicable to SBSEFs 
should also apply to SBS exchanges to create a level regulatory 
environment and avoid encouraging regulatory arbitrage.\165\ One of the 
commenters specifically identifies trading protocols, impartial access, 
limits on pre-execution communication, and straight-through processing 
as important aspects of SBSEF regulation that should also apply to SBS 
exchanges.\166\ Another commenter states that more detailed rules are 
needed to address the separation of SBSEFs from SBS exchanges in order 
to avoid the aggregation of power in the financial markets and to 
clearly separate the roles of an entity operating both an SBSEF and an 
SBS exchange.\167\
---------------------------------------------------------------------------

    \165\ See Citadel Letter, supra note 18, at 17; MFA Letter, 
supra note 18, at 14.
    \166\ See Citadel Letter, supra note 18, at 17.
    \167\ See Keeney Letter, supra note 95.
---------------------------------------------------------------------------

    The comment suggesting that requirements for SBSEFs should be 
applied to SBS exchanges is outside the scope of this rulemaking, which 
is designed to set forth requirements for SBSEFs, not exchanges.
    Additionally, more detailed rules are not necessary to separate the 
roles of an entity operating both an SBSEF and an SBS exchange. Each 
entity would be required to make rule or new product submissions to the 
Commission under a separate set of rules--Rules 804 to 807 for SBSEFs, 
and Rule 19b-4 for national securities exchanges--making it clear which 
rules will apply on which platform. Also, Rule 814(b)--which requires 
that a national securities exchange that also operates an SBSEF 
identify the platform on which an SBS transaction occurs--will provide 
further clarity to the market about the roles of an entity operating 
both an SBSEF and an SBS exchange. Further, the ability of an entity to 
operate both an SBSEF and an SBS exchange is unlikely to lead to the 
aggregation of power in the financial markets, because allowing for a 
variety of SBS trading platforms and ownership models should promote 
competition in the market for SBS trading.
    It is appropriate for proposed Regulation SE to include a rule that 
clarifies the registration status of an entity that operates both an 
exchange and an SBSEF, and that broadly parallels Sec.  37.8. 
Therefore, for the reasons discussed above, the Commission is adopting 
Rule 814 as proposed.

E. Rule 815--Methods of Execution for Required and Permitted 
Transactions

1. Rule 815(a)
(a) Background
    The Dodd-Frank Act provides that if the Commission makes a 
mandatory clearing determination regarding an SBS, such SBS becomes 
subject to mandatory trade execution if at least one exchange or SBSEF 
makes the product ``available to trade.'' \168\ The Dodd-Frank Act does 
not require, however, that all SBS be subject to mandatory clearing or 
mandatory trade execution, and it does not impose any execution 
requirements for transactions in an SBS unless the SBS is subject to 
mandatory clearing and it has been made available to trade. Section 
37.9 of the CFTC's rules addresses these issues for SEFs using the 
concepts of ``Required Transactions'' and ``Permitted Transactions,'' 
and the Commission proposed Rule 815 of Regulation SE to adapt Sec.  
37.9 for

[[Page 87177]]

SBSEFs. Rule 815(a)(1) defines ``Required Transaction'' as ``any 
transaction involving a security-based swap that is subject to the 
trade execution requirement in section 3C(h) of the Act.''
---------------------------------------------------------------------------

    \168\ See 15 U.S.C. 78c-3(a)(1) (mandatory clearing for SBS) and 
78c-3(h) (trade execution for SBS). See also infra section V.F.3 
(discussing the six factors that an SBSEF shall consider, as 
appropriate, before making an SBS ``available to trade'').
---------------------------------------------------------------------------

(b) Methods of Execution for Required Transactions
(i) Background
    Proposed Rule 815(a)(2) would require that, except for block trades 
or the exceptions described in paragraph (d) or (e) of the rule and 
discussed below,\169\ the mandatory execution methods for a Required 
Transaction would be either: (a) an order book or (b) an RFQ system in 
conjunction with an order book, and the rule permits the SBSEF to use 
any means of interstate commerce for providing these execution 
methods.\170\
---------------------------------------------------------------------------

    \169\ See infra section V.E.3.
    \170\ Proposed Rule 815(a)(2)(ii) would provide that any means 
of interstate commerce includes, but is not limited to, the mail, 
internet, email, and telephone, provided that the chosen execution 
method satisfies the requirements for order books in 17 CFR 
242.800(x) or in paragraph (a)(3) of Rule 815.
---------------------------------------------------------------------------

    Proposed Rule 815(a)(3) would define an RFQ system as ``a trading 
system or platform in which a market participant transmits a request 
for a quote to buy or sell a specific instrument to no less than three 
market participants in the trading system or platform, to which all 
such market participants may respond'' and would specify other 
requirements for an RFQ system to be recognized as such under the rule. 
The three market participants to which the RFQ is addressed could not 
be affiliates of or controlled by the requester and cannot be 
affiliates of or controlled by each other. The proposed rule would also 
provide that an SBSEF that offers an RFQ system in connection with a 
Required Transaction must have the following functionalities: (i) at 
the same time that the requester receives the first responsive bid or 
offer, the SBSEF must communicate to the requester any firm bid or 
offer pertaining to the same SBS resting on any of the SBSEF's order 
books; (ii) the SBSEF must provide the requester with the ability to 
execute against those firm resting bids or offers along with any 
responsive orders; and (iii) the SBSEF must ensure that its trading 
protocols provide each of its members with equal priority in receiving 
requests for quotes and in transmitting and displaying for execution 
responsive orders. The requirements of Proposed Rule 815(a)(3) are 
referred to as the ``RFQ-to-3 requirement.''
(ii) Comments on the RFQ-to-3 Requirement
    The Commission received comments on the proposed RFQ-to-3 
requirement in Proposed Rule 815(a)(3).\171\ One commenter suggests 
that the Commission expand the permitted modes of SBS execution for 
swaps mandated for trading on SBSEFs in order to provide for a less 
prescriptive, more principles-based approach that balances 
transparency, competition, and liquidity through a flexible set of 
rules and states that any means of execution that provides sufficient 
pre-trade price transparency and preserves competition should be 
available.\172\ This commenter, while supporting general harmonization 
between the Commission's and the CFTC's rules on trading protocols and 
methods of execution, argues that the Commission's rule also needs to 
balance harmonization with the need to reflect the unique and sensitive 
liquidity conditions that exist in SBS markets.
---------------------------------------------------------------------------

    \171\ See ISDA-SIFMA Letter, supra note 18, at 5-6; SIFMA AMG 
Letter, supra note 18, at 8-9.
    \172\ See SIFMA AMG Letter, supra note 18, at 8.
---------------------------------------------------------------------------

    Stating that an RFQ-to-3 requirement for Required Transactions that 
are SBSs means something completely different than for swaps, this 
commenter urges the Commission to consider a lower RFQ threshold given 
the nature of the SBS market. This commenter states that, in some 
cases, for an asset manager to seek three quotes would effectively 
require the asset manager to contact many of the primary price makers 
in the SBS market, as there simply are not the same number of liquidity 
providers, particularly for less liquid, more thinly traded SBSs, as 
the number of participants, the trading volume, and the depth of market 
liquidity are very different in the SBS market. The commenter suggests 
that requesting quotes from two participants, for example, would allow 
the asset manager to retain some control over the information 
disseminated about its interest to the market while preserving the 
statute's ``multiple to multiple'' definition requirement.\173\
---------------------------------------------------------------------------

    \173\ See id. at 9.
---------------------------------------------------------------------------

    Another commenter also urges the Commission to consider an 
alternative approach to the proposed RFQ-to-3 requirement, and to 
provide a ``phased-in compliance'' with the required methods of 
execution, whereby a MAT SBS product may be executed on an SBSEF via 
any method of execution until such time as it is determined through 
notice and comment that an appropriate level of liquidity exists to 
enable an order book or RFQ-to-3 system.\174\ This commenter states 
that, considering the lack of liquidity in SBS products, pre-trade 
transparency via the proposed RFQ-to-3 requirement could negatively 
impact liquidity provision for end-users. The commenter states that, if 
clients are required to ``show their hand to three liquidity 
providers,'' it may lead to information leakage and an inability to 
hedge the clients' risks through the SBS markets.\175\ The commenter 
asserts that this is particularly so given that there are a relatively 
small number of active dealers for many SBS products, stating that, 
based on DTCC \176\ data on credit SBS for the top 700 issuers, there 
are on average 2.7 dealers, and 400 of the top 700 issuers have fewer 
than three active dealers per month.\177\
---------------------------------------------------------------------------

    \174\ See ISDA-SIFMA Letter, supra note 18, at 5-6.
    \175\ Id. at 6.
    \176\ ``DTCC'' refers to the Depository Trust and Clearing 
Corporation.
    \177\ See ISDA-SIFMA Letter, supra note 18, at 6.
---------------------------------------------------------------------------

    This commenter further argues that an RFQ-to-3 requirement would be 
problematic for SBS equities, where the current execution processes are 
very different from their swaps counterpart. The commenter states that 
clients in SBSs typically ask their preferred dealer to execute shares 
in SBS at market price (or some other pricing structure), the dealer 
then purchases the shares directly for hedging purposes, and the dealer 
then executes the swap at the end of the day with the client at an 
average market price.\178\ The commenter states that, in this case, the 
dealer's interaction is more akin to a broker than a dealer 
counterparty, and that these trading practices would not be possible on 
an RFQ-to-3 or order book system. In addition, the commenter states 
that it has ``compared the credit swaps activity that occurred on-venue 
back in 2012 before the CFTC trade execution requirement kicked in, 
with the credit SBS activity that occurs on-venue today'' and asserts 
that the results suggest ``that the swaps market was much more ready 
for the implementation of the trade execution requirement than the SBS 
market is today.'' \179\ This commenter states that, ``[a]bsent a 
phased-in implementation approach, the SBS market could suffer from 
significant disruptions.'' \180\
---------------------------------------------------------------------------

    \178\ The commenter also stipulates that at the onset of the 
relationship, clients will negotiate a grid with dealers where 
certain short/long benchmarks and spreads are agreed for equity 
issuers on a jurisdictional or other basis. See ISDA-SIFMA Letter, 
supra note 18, at 6.
    \179\ Id.
    \180\ Id.
---------------------------------------------------------------------------

    While the Commission acknowledges that there are differences 
between the liquidity in the SBS market and the

[[Page 87178]]

swaps market, the process required before the execution requirement 
would apply to an SBS will reduce the risk of ``substantial 
disruptions.'' The required methods of execution would be applied to an 
SBS only to the extent that it is subject to the clearing mandate and 
has been ``made available to trade.'' Before making an SBS subject to 
the clearing mandate, the Commission would be able to take into account 
a number of factors, including the existence of significant outstanding 
notional exposures, trading liquidity, and the adequacy of pricing 
data.\181\
---------------------------------------------------------------------------

    \181\ See SEA section 3C(b)(4)(i), 15 U.S.C. 78c-3(b)(4)(i). See 
also SEA section 3C(b)(4)(ii) through (v), 15 U.S.C. 78c-3(b)(4)(ii) 
through (v) (discussing other factors that the Commission would be 
required to take into account when making a mandatory clearing 
determination).
---------------------------------------------------------------------------

    Further, to make an SBS ``available to trade,'' an SBSEF would, 
under Proposed Rule 816(a)(1),\182\ have to make a filing with the 
Commission under Rule 806 or Rule 807--both of which would allow the 
Commission to find that a filing was not consistent with the 
requirements of the SEA or Regulation SE.\183\ Moreover, the SBSEF's 
filing would, under Proposed Rule 816(b), have to address, as 
appropriate, a number of relevant factors, including whether there are 
ready and willing buyers and sellers; the frequency or size of 
transactions; the trading volume; the number and types of market 
participants; the bid/ask spread; and the usual number of resting firm 
or indicative bids and offers. Similarly, a national securities 
exchange that wished to make an SBS ``available to trade'' would have 
to file a rule change under Rule 19b-4,\184\ and that proposed rule 
change would be subject to Commission review for compliance with the 
requirements of the SEA, which requires that the rules of a national 
securities exchange, among other things, promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system, protect investors 
and the public interest, and not impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the 
SEA.\185\ Thus, before an SBS becomes subject to the trade execution 
requirement, the Commission would have had multiple opportunities to 
consider the trading characteristics of that SBS.
---------------------------------------------------------------------------

    \182\ See infra section V.F.2.
    \183\ See supra sections IV.A and B.
    \184\ 17 CFR 240.19b-4.
    \185\ See Section 6(b)(5) and (8) of the SEA, 15 U.S.C. 
78f(b)(5) and (8).
---------------------------------------------------------------------------

    Additionally, most, if not all, SBSEFs are likely to be dually 
registered with the CFTC as SEFs, and that most, if not all, market 
participants in the SBS market will be participants in the swaps 
market. The Commission remains concerned that different or additive 
requirements--particularly for the key concept of a ``Required 
Transaction''--could introduce complexity and confusion if one set of 
trading protocols applied to Required Transactions for swaps but 
different protocols--different from ones that have been understood and 
utilized for many years--applied to Required Transactions for SBS 
transactions.
    Thus, it is not appropriate to modify the requirement that a 
qualifying RFQ system under Proposed Rule 815(c) transmit a request for 
a quote to no fewer than three market participants in the trading 
system or platform. The question whether sufficient liquidity exists in 
the market for a given SBS to trade RFQ-to-3 can be addressed when the 
SBS is subject to the clearing mandate and when a national securities 
exchange or SBSEF seeks to make that SBS available to trade. Until that 
time, SBSs would be Permitted Transactions on SBSEFs and thus could be 
traded using other methods of execution, thus avoiding any potential 
disruptions to liquidity in the SBS markets.
(iii) RFQ Functionalities
    The Commission also received two comment letters on the 
functionalities required for RFQ systems under Proposed Rule 
815(a)(3).\186\ Both commenters suggest that the proposed rule be 
amended to require an SBSEF to communicate any firm bid or offer 
pertaining to the same instrument resting on any of the SBSEF's trading 
systems or protocols, not just firm bids or offers on the SBSEF's order 
book.\187\ One of the commenters argues that, in practice, order books 
continue to be infrequently used on SEFs that offer RFQ systems and 
that, therefore, the same interaction requirement on SEFs has had 
little impact.\188\ The commenter cites, for example, that ``request 
for stream'' trading protocols, which allow liquidity providers to 
stream firm prices, are not required to be communicated to clients 
sending an RFQ.
---------------------------------------------------------------------------

    \186\ See Citadel Letter, supra note 18, at 13-14; MFA Letter, 
supra note 18, at 8.
    \187\ See Citadel Letter, supra note 18, at 13; MFA Letter, 
supra note 18, at 8. Rule 813(a)(3)(i) requires an SBSEF to 
communicate to the requester any firm bid or offer pertaining to the 
same instrument resting on any of the SBSEF's order books.
    \188\ See Citadel Letter, supra note 18, at 13; see also MFA 
Letter, supra note 18, at 8 (also referencing the request-for-stream 
protocol).
---------------------------------------------------------------------------

    This commenter also suggests that the proposed rule should be 
modified to ensure that the RFQ requester has the ability to execute 
against all of the prices provided in connection with an RFQ on the 
same screen. The commenter argues that this will prevent an SBSEF from 
requiring the RFQ requester to click through multiple screens in order 
to execute against firm prices, which, the commenter argues, serves to 
disadvantage those prices versus other prices provided in response to 
an RFQ.\189\ Finally, the commenter recommends that the requirements of 
Rule 815(a)(3) be modified to apply to all SBS transactions on an 
SBSEF, not solely Required Transactions, as they argued that this will 
help ensure that market participants transacting on SBSEFs are always 
provided with the necessary transparency to achieve the most favorable 
execution possible.\190\
---------------------------------------------------------------------------

    \189\ See Citadel Letter, supra note 18, at 13-14.
    \190\ See id. at 14.
---------------------------------------------------------------------------

    The other commenter also urges the Commission to modify the 
requirement to ensure that the SBSEF communicates to the requester any 
firm prices available on the SBSEF, in addition to resting firm bids or 
quotes on the SBSEFs order book(s), and that they make this 
functionality available for Permitted Transactions as well.\191\ In the 
commenter's view, this approach is necessary in order to ensure the 
availability of quotes for SBS transactions that will be essential to 
maintaining liquidity and promoting open and equitable participation in 
the markets.
---------------------------------------------------------------------------

    \191\ See MFA Letter, supra note 18, at 8.
---------------------------------------------------------------------------

    As previously noted, given that most if not all SBSEFs will be 
dually registered as SEFs, there is a public interest in harmonizing 
its requirements for trading protocols with those of the CFTC.\192\ The 
commenters' suggestions to apply the proposed interaction requirement 
to all trading systems and protocols on the SBSEF would be a deviation 
from the CFTC's requirements for SEFs that would likely introduce 
operational and compliance challenges created by having different 
standards. This would undercut the Commission's goal of minimizing 
operational and compliance burdens by seeking to harmonize requirements 
between SEFs and SBSEFs. For instance, the commenters' suggestions to 
apply the order interaction requirement to all transactions on the 
SBSEF, not only Required Transactions, or to require that firm interest 
outside the SBSEF's order

[[Page 87179]]

book be communicated in response to RFQs, would be a significant 
deviation from the CFTC's method-of-execution requirements and would 
have wide ramifications for the SBS markets, particularly in view of 
the liquidity and information leakage concerns that other commenters 
expressed elsewhere regarding the less liquid and thinly traded SBS 
products that may trade on an SBSEF.\193\ As a result, applying such 
requirements to Permitted Transactions, which the CFTC does not do, 
would be likely to have the undesirable effect of discouraging market 
participants from voluntarily executing Permitted Transactions on 
SBSEFs, which would lessen market transparency and would not provide 
greater opportunities for market participants to interact with trading 
interest not subject to the trade execution requirement. Further, it is 
not necessary for the Commission to mandate the technical details of 
how the SBSEF displays responses to RFQs to its members. Rule 819(c), 
discussed below,\194\ requires SBSEFs to provide all ECPs and 
independent software vendors with impartial access market and market 
services, and this requirement is sufficient to address a situation in 
which an SBSEF designed its RFQ responses to systematically 
disadvantage certain market participants or types of market 
participants.
---------------------------------------------------------------------------

    \192\ See supra section I.
    \193\ See supra note 175 and accompanying text.
    \194\ See infra section VI.B.3.
---------------------------------------------------------------------------

(c) Block-Trade Exception
(i) General Treatment of Block Trades
    Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF 
to specify trading procedures to be used in entering and executing 
orders on the facility, including block trades.\195\ The CFTC 
implemented this provision by excepting block trades from the required 
execution methods in Sec.  37.9(a)(2).\196\ Proposed Rule 815(a)(2) 
would also exclude block trades from the required execution methods 
using language closely modeled on Sec.  37.9(a)(2). Specifically, 
Proposed Rule 815(a)(2)(i) would apply required methods of execution to 
``[e]ach Required Transaction that is not a block trade.'' \197\
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78c-4(d)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
    \196\ That rule cross-references Sec.  43.2, which defines the 
term ``block trade'' for purposes of public dissemination of swap 
transactions.
    \197\ See Proposed Rule 815(a)(2)(i) (emphasis added).
---------------------------------------------------------------------------

    Thus, the Commission's proposal to include an exception from the 
required methods of execution for block trades in Regulation SE is 
consistent with the approach taken by the CFTC. The purpose of having a 
block-trade exception to the required methods of execution is to 
balance the promotion of price competition and all-to-all trading 
against the potential costs to market participants who wish to trade 
large orders. Forcing a market participant who seeks liquidity to 
expose a large order to an order book or to utilize RFQ-to-3 could 
cause the market to move against the liquidity requester before it can 
obtain an execution. Under the CFTC's rules, a block trade in a product 
that is subject to mandatory trade execution may be traded on-SEF using 
flexible means of execution on the SEF's non-order-book trading system 
or platform, or away from a SEF's trading system or platform, provided 
that it is executed pursuant to the SEF's rules and procedures. As 
noted above, the Commission proposed a similar approach for block 
trades on SBSEFs, excepting block trades from the required execution 
methods of Proposed Rule 815(a)(2).
    The Commission received a number of comments on its proposal for a 
block trade exception. Commenters generally support the inclusion of a 
block trade exception from the Required Transaction requirement in Rule 
815(a)(2).\198\
---------------------------------------------------------------------------

    \198\ See Bloomberg Letter, supra note 18, at 14; Citadel 
Letter, supra note 18, at 9-10, ICI Letter, supra note 18, at 10-13; 
SIFMA AMG Letter, supra note 18, at 9-10; ISDA-SIFMA Letter, supra 
note 18, at 7-9; MFA Letter, supra note 18, at 5-6. Many of these 
commenters raised questions about the proposed size of the block-
trade threshold. See infra section V.E.1(c).
---------------------------------------------------------------------------

    One commenter, supporting the Commission's harmonization with the 
CFTC's approach to block trades by providing an exception for those 
trades, states that a flexible block execution regime permits trading 
of larger-sized transactions in a manner that incentivizes dealers to 
provide liquidity and capital without creating market distortions.\199\ 
Another commenter asserts that exempting block trades from order book 
and RFQ execution requirements is critical to the functioning of the 
SBS markets, particularly to execute large trades without affecting 
price.\200\ This commenter expresses concerns that, absent such an 
exception, market participants would have difficulty executing, or 
would be unable to execute, large bona fide trades, since they would be 
required to do so only through the order book. This would increase the 
cost of trading and hedging, the commenter says, which could reduce 
participation in certain markets, resulting in less liquidity and 
increased volatility.
---------------------------------------------------------------------------

    \199\ See SIFMA AMG Letter, supra note 18, at 10.
    \200\ See MFA Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    Another commenter states that the proposed exception for block 
trades would provide important flexibility for market participants 
executing SBS transactions of a significantly large size, and that 
rules that facilitate swap block trades allow market participants, such 
as regulated funds, to engage in large transactions while mitigating 
the risks of information leakage and impairment of market 
liquidity.\201\ Another commenter also supports the Commission's 
proposal to align closely its approach to block trades with the 
approach taken by the CFTC.\202\ This commenter agrees with the 
Proposing Release's assessment that the block exception to the required 
methods of execution balances the promotion of price competition and 
all-to-all trading against the potential costs to the market 
participants who wish to trade large orders, the importance of which 
they note is more acute in the SBS market, which is a smaller and less 
liquid market than the swaps market.
---------------------------------------------------------------------------

    \201\ See ICI Letter, supra note 18, at 10.
    \202\ See Bloomberg Letter, supra note 18, at 14.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that a block-trade 
exception is appropriate, not only to maintain harmonization with the 
CFTC regime for swaps but also to facilitate trading of SBS. This 
approach, which is consistent with the approach of the CFTC for swaps, 
will be especially important in the smaller, less liquid SBS markets if 
and when a clearing determination has been made for one or more SBS. A 
block-trade exception for SBSs subject to the trade-execution 
requirement, provided that ``block trade'' is appropriately defined for 
those SBSs, can help ensure that large trades are not significantly 
more difficult and costly to execute because of the risks posed by 
information leakage and the potential for adverse price movement, which 
could significantly impair liquidity in the markets for those SBSs. 
Therefore, the Commission is adopting Rule 815(a) as proposed, but is, 
as discussed immediately below, modifying the proposal with respect to 
the definition of ``block trade'' in Rule 802.
(ii) Block-Trade Definition for Credit SBS
    The Commission also proposed to align the regulatory text defining 
``block trade'' in proposed Regulation SE with the CFTC's definition. 
The proposed definition in Rule 802 of Regulation SE was based on the 
four-pronged definition found in Sec.  43.2(a), but with one 
modification. The third prong of the

[[Page 87180]]

CFTC definition characterizes a block trade in a particular swap as 
having ``a notional or principal amount at or above the appropriate 
minimum block size applicable to such swap.'' \203\
---------------------------------------------------------------------------

    \203\ Appendix F to the CFTC's part 43 divides swap asset 
classes into a number of categories and sets forth a minimum block 
size threshold to each category. SBSs are not within the CFTC's 
jurisdiction, so the CFTC had not considered what an appropriate 
minimum block size threshold would be for any SBS asset class. In 
this respect, there was no CFTC-defined threshold for the Commission 
to harmonize with, so the Commission proposed to establish a 
threshold tailored specifically for the SBS market, see Proposing 
Release, supra note 1, 87 FR at 28956, as discussed below.
---------------------------------------------------------------------------

    For the third prong of the ``block trade'' definition, the 
Commission proposed that the SBS be based on a single credit instrument 
(or issuer of credit instruments) or a narrow-based index of credit 
instruments (or issuers of credit instruments) having a notional size 
of $5 million or greater,\204\ considered the distribution of 
transactions in the single-name CDS market \205\ and took into 
consideration that FINRA applies a $5 million cap when disseminating 
transaction reports of economically similar cash debt securities.\206\
---------------------------------------------------------------------------

    \204\ See Proposing Release, supra note 1, 87 FR at 28896.
    \205\ See id. at 28944.
    \206\ See id. at 28944 n.369.
---------------------------------------------------------------------------

    A number of commenters question the basis for the proposed $5 
million block threshold size and advocate a variety of different 
approaches to establishing the block size threshold for SBS products, 
as alternatives to the proposed $5 million notional size block trade 
threshold.\207\
---------------------------------------------------------------------------

    \207\ See Citadel Letter, supra note 18, at 9; ICI Letter, supra 
note 18, at 10-12; MFA Letter, supra note 18, at 5-8; SIFMA AMG 
Letter, supra note 18, at 10; ISDA-SIFMA Letter, supra note 18, at 
7-9.
---------------------------------------------------------------------------

    One commenter presents data that it argues supports its assertion 
that the block threshold for credit SBS should be recalibrated.\208\ 
The commenter recommends that the Commission first establish an 
appropriate methodology to determine block thresholds based on current 
market-wide data. This commenter states that, otherwise, the already 
illiquid SBS market will be required to comply with an arbitrary, 
``one-size-fits-all'' threshold amount that fails to consider the 
unique levels of market liquidity and risk sensitivity of various 
instruments. The commenter suggests that average daily volume (``ADV'') 
is an appropriate indicator of liquidity levels because it represents a 
measure of how much trading occurs in a given issuer across the market 
as a whole, and that the lower the ADV, the lower the liquidity of the 
product. Based on its analysis of ADV data for credit default swaps 
(``CDS''), which it retrieved from the DTCC Trade Information 
Warehouse, the commenter posits that liquidity in single-name CDS is 
significantly lower than in broad-based CDS. Thus, the commenter 
argues, it is not appropriate to mirror the block threshold for credit 
SBS to the threshold for debt securities, when there are clear 
differences in liquidity levels within the CDS market itself.
---------------------------------------------------------------------------

    \208\ See ISDA-SIFMA Letter, supra note 18, at 7-9.
---------------------------------------------------------------------------

    This commenter also asserts that the data reveal that liquidity in 
single-name CDS is disproportionately concentrated in the most actively 
traded issuers, which, the commenter contends, corroborates its 
assertion that block thresholds should be calibrated at a more granular 
level in order to reflect the different liquidity levels of credit SBS 
products. The commenter cautions that, absent a data-based approach to 
setting block thresholds for credit SBS instruments, the proposal runs 
the risk that $5 million may be an inappropriately high threshold for 
those products, which may widen bid/offer spreads, further reduce 
liquidity, and force large-sized transactions to be publicly reported 
with their full size, leaving the dealer that ``wins'' in the position 
of risking the market moving against the dealer before the dealer is 
able to adequately lay-off its exposure. This risk to the dealer, the 
commenter asserts, could increase the costs of transacting with 
immediacy substantially, leading to overall increased costs and time 
delays in executing hedges, and adding to or taking down positions, 
which would have a direct impact on clients and end-users, who will 
ultimately bear the increased costs and inefficiencies when forced to 
split large trades into smaller sizes for liquidity purposes. The 
commenter states that these clients, end-users, and liquidity providers 
may decide that it is more economical to exit the market entirely, 
given that most of them do not trade in large volumes of SBS.\209\
---------------------------------------------------------------------------

    \209\ See id.
---------------------------------------------------------------------------

    The same commenter also states that, because ``the appropriate 
block threshold depends on factors such as liquidity and risk 
sensitivity[,] which can change over time, . . . the rules should 
provide a formal adjustment mechanism that would allow market 
participants to petition the Commission to temporarily change block 
thresholds based on observed market conditions, or enable the 
Commission's staff to do so, subject to a public comment process.'' 
\210\
---------------------------------------------------------------------------

    \210\ Id. at 9 n.23.
---------------------------------------------------------------------------

    Several commenters argue for establishing a range of block trade 
threshold sizes, based on the product.\211\ One commenter recommends 
that the Commission delay implementation of the required execution 
methods until it considers its approach to block trades more 
comprehensively.\212\ This commenter argues that calibrating 
appropriate block threshold sizes for SBSs has significant implications 
for market participants from both a pre- and a post-trade transparency 
perspective. With respect to pre-trade transparency, the commenter 
states that requiring a fund to disclose its trading interest in an SBS 
of a large notional size to multiple participants--via an order book or 
an RFQ system--would ``enable opportunistic market participants to 
piece together information about the fund's holdings or investment 
strategy and lead to frontrunning of those potential trades.'' \213\ 
With respect to post-trade transparency, the commenter states that 
setting a block trade threshold that is too high would unnecessarily 
limit the ability to report large-sized SBS transactions on a delay, 
which would make it difficult for liquidity providers to hedge such 
positions, leading to higher trading costs and less efficient trading 
for funds and other market participants. The commenter also states that 
the magnitude of these risks depends on, among other factors, an SBS's 
liquidity profile. The commenter also states that having a single 
threshold--across all applicable SBSs with respect to SBSEF trading and 
for any additional future rulemaking related to post-trade public 
reporting--does not adequately account for varying levels of liquidity 
across different categories or types of SBSs. The commenter recommends 
that, given the differences in liquidity across different SBSs, the 
Commission should base its thresholds on more comprehensive transaction 
data obtained pursuant to Regulation SBSR. The commenter asserts that 
taking such a data-driven approach would allow the Commission to assess 
the liquidity of different SBSs based on, for example, swap term, 
underlying security, and other characteristics. The commenter also 
argues that this would enable the Commission, similar to the CFTC, to 
formulate different types or categories of

[[Page 87181]]

SBSs and propose differing block trade sizes that are more 
appropriately tailored to the liquidity characteristics of each type or 
group.
---------------------------------------------------------------------------

    \211\ See MFA Letter, supra note 18, at 7; ICI Letter, supra 
note 18, at 11; SIFMA AMG Letter, supra note 18, at 10.
    \212\ See ICI Letter, supra note 18, at 11-12.
    \213\ Id. at 11.
---------------------------------------------------------------------------

    Another commenter states that the CFTC sets different minimum block 
sizes for different categories of swaps and argues that the Commission 
should similarly develop a more structured and tailored approach.\214\ 
The commenter expresses concerns that setting a miscalibrated block 
size will likely limit the utility of the block trade exception, 
thereby preventing many market participants from executing transactions 
on SBSEFs. Another commenter recommends that the Commission adopt the 
CFTC's approach for block trades based on a ``67 percent notional 
amount calculation.'' \215\ That commenter also recommends that the 
Commission reserve the ability to update block thresholds on a regular 
basis to ensure they remain representative of current market 
conditions.\216\ Another commenter states that the proposed block 
threshold is not a result of any empirical analysis on the market 
conditions for credit SBSs and suggested that, as the SBS market 
develops and grows, it may become more appropriate for amendments to 
the credit SBS threshold.\217\
---------------------------------------------------------------------------

    \214\ See MFA Letter, supra note 18, at 7.
    \215\ See Citadel Letter, supra note 18, at 9.
    \216\ See id. at 10.
    \217\ See SIFMA AMG Letter, supra note 18, at 10.
---------------------------------------------------------------------------

    The Commission has considered the comments received and has 
determined, for the reasons discussed below, not to adopt a definition 
of ``block trade.'' While the Commission had proposed the single block 
threshold for credit SBS based on its preliminary view that the block-
trade threshold applicable to an SBS trade should be consistent with 
any reporting cap for that SBS trade, and any reporting cap applicable 
to the cash markets for the securities,\218\ the Commission 
acknowledges commenters' concerns that the proposed $5 million block-
trade threshold for all credit SBSs would not be sufficiently tailored 
to the unique and varying trading and risk characteristics of the full 
range of credit SBS, creating the potential for the adverse market 
risks that commenters point out may arise from having a one-size-fits-
all block threshold.
---------------------------------------------------------------------------

    \218\ See 2019 Cross-Border Application of Certain Security-
Based Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85 
FR 6270, 6347 (Feb. 4, 2020) (``2019 Cross-Border Adopting 
Release'').
---------------------------------------------------------------------------

    Further, unless and until the Commission has made a clearing 
determination for a given SBS and an SBSEF or a national securities 
exchange has made that SBS ``available to trade,'' all transactions in 
that SBS will be Permitted Transactions. On the effective date of 
Regulation SE, and until the Commission has made a clearing 
determination for an SBS, no SBSEF or national securities exchange will 
be able to make that SBS ``available to trade.'' Consequently, there 
could be no mandatory trading requirement and thus there are no 
transactions to be excepted. Without a mandatory trading requirement, a 
block-trade threshold, therefore, has no effect on the ability of 
market participants to choose their preferred means of execution for 
trades in that SBS. Unless and until the Commission has made a 
mandatory clearing determination regarding an SBS, it is not necessary 
to define a block-trade threshold for SBS, and it would be appropriate 
for the Commission to identify a block-trade threshold in the future 
after considering credit SBS transaction data and credit SBS markets at 
that time. In addition, the Commission agrees with commenters that 
additional consideration of credit SBS transaction data, including data 
reported under Regulation SBSR, would help the Commission determine the 
appropriate block threshold for credit SBS products, including whether 
different thresholds should apply to different types or groups of SBS. 
The Commission also agrees with commenters that the credit SBS markets 
are likely to evolve over time and that analysis of market data 
continues to be an important aspect of setting appropriate thresholds 
for both block trades and credit SBS public trade reporting.\219\
---------------------------------------------------------------------------

    \219\ In adopting Regulation SBSR, the Commission directed its 
staff to make reports in connection with the determination of block 
thresholds and reporting delays for security-based swap transaction 
data. See 17 CFR 242.901 (Appendix) (discussing the studies for the 
determination of block thresholds and reporting delays); see also 
Regulation SBSR Adopting Release I, supra note 140, 80 FR at 14625. 
The Commission stated that it intends to use these reports to inform 
its specification of the criteria for determining what constitutes a 
large notional SBS transaction (i.e., block trade) for particular 
markets and contracts; and the appropriate time delay for reporting 
large notional SBS transactions to the public. See 17 CFR 242.901 
(Appendix). The reports for each asset class are to be completed no 
later than two years following the initiation of public 
dissemination of security-based swap transaction data by the first 
registered SDR in that asset class--in other words, the reports are 
anticipated to be complete by Feb. 14, 2024--and then published for 
comment in the Federal Register. See id.
---------------------------------------------------------------------------

    Therefore, the Commission is not adopting the proposed definition 
of ``block trade'' under Proposed Rule 802, or any other block-trade 
threshold.\220\ In conjunction with any mandatory clearing 
determination by the Commission for SBS, or with any Commission 
proposal to specify the criteria for determining what constitutes a 
large notional SBS transaction for particular markets and contracts 
with respect to trade reporting, the Commission will have the 
opportunity to engage in rulemaking to propose a definition of ``block 
trade'' for purposes of Regulation SE--and to solicit public comment on 
Commission's proposal and its economic analysis of the proposed 
definition--before it considers adopting a definition.
---------------------------------------------------------------------------

    \220\ Because the Commission is not adopting a definition of 
``block trade'' at this time, it is also modifying other rules 
within Regulation SE that reference block trades. See supra note 41.
---------------------------------------------------------------------------

    In response to the comment that the Commission should delay 
implementation of the trade execution requirement until it has 
considered block trades more comprehensively, unless and until the 
Commission has made a clearing determination for a given SBS and an 
SBSEF or a national securities exchange has made that SBS ``available 
to trade,'' all transactions in that SBS will be Permitted 
Transactions. Thus, it is not necessary to formally delay the 
implementation of the trade execution requirement, because the 
Commission will have the opportunity if and when it makes a clearing 
determination for SBS--i.e., before any SBS transaction becomes a 
Required Transaction--to address whether a block-trade threshold should 
be set; what methodology should be used to determine that threshold; 
and what that threshold would be. At that time, because amending Rule 
802 to define ``block trade'' would entail notice-and-comment 
rulemaking, market participants would have the opportunity to comment 
on the Commission's proposed action.
    For the reasons discussed above, the Commission is not adopting the 
definition of ``block trade'' in Rule 802 as proposed but is instead 
adding a note to Rule 802 informing stakeholders the Commission has not 
yet adopted a definition of ``block trade.'' \221\
---------------------------------------------------------------------------

    \221\ The Commission has corrected a cross-reference from 
242.800(x) to 242.802.
---------------------------------------------------------------------------

(iii) Block-Trade Definition for Equity SBS
    In the Proposing Release, the Commission did not propose a 
definition of ``block trade'' applicable to equity SBS. Accordingly, no 
equity SBS would qualify for the exception to required means of 
execution for block trades in Proposed Rule 815(a)(2).\222\
---------------------------------------------------------------------------

    \222\ As discussed in the Proposing Release, appendix F to part 
43 of the CFTC's rules does not define a block trade for equity 
swaps, and accordingly, no equity swap transaction could qualify for 
the exception to the required means of execution for block trades 
under Sec.  37.9(a)(2). See Proposing Release, supra note 1, 87 FR 
at 28896.

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

[[Page 87182]]

    Several commenters submitted comment letters on the proposal to 
exclude equity swaps from the proposed block-trade exception.\223\ One 
commenter states that, in its view, the use of block trades for equity 
SBS is at least as necessary as for credit SBS, due to the need to 
customize the size of transactions and to obtain timely and efficient 
executions.\224\ This commenter asserts that requiring equity SBS 
trades to be executed only through the order book or RFQ system could 
result in these trades having ``significant price impact'' on SBSEF 
products, which would ultimately inhibit the ability of market 
participants to efficiently arrange and execute large, customized 
trades that are essential for market participants' risk management 
activities.\225\ The commenter also asserts that this would 
disincentivize market participants from using equity SBS for their 
legitimate business purposes, including hedging, which could increase 
volatility and reduce liquidity in equity SBS markets (as well as 
underlying equity markets). The commenter also argues that excluding 
equity SBS block trades would ultimately inhibit capital formation as 
an inability to execute blocks in equity SBS would make it riskier, 
more expensive, and more difficult to hedge, which would in turn 
inhibit market participants from participating in offerings.
---------------------------------------------------------------------------

    \223\ See MFA Letter, supra note 18, at 6-7; ICI Letter, supra 
note 18, at 12-13; ISDA-SIFMA Letter, supra note 18, at 9; SIFMA AMG 
Letter, supra note 18, at 10.
    \224\ See MFA Letter, supra note 18, at 6-7.
    \225\ Id. at 6.
---------------------------------------------------------------------------

    This commenter further states that equity SBS are quite distinct 
from CFTC equity swaps in ways that make it more critical to allow 
block trades in equity SBS. Specifically, the commenter states that 
since CFTC-regulated equity swaps are based on broad-based equity 
indices, which reflect markets and not individual issuers, they are 
used to assume or hedge exposure to the relevant market or sector 
generally. By contrast, the commenter posits that equity SBS may 
reference a single name and are therefore a preferred tool for hedging 
exposure to specific equities, which makes them essential to capital 
formation. The commenter also argues that markets for SBS on individual 
equities will, in many cases, be less liquid than the markets for 
broad-based equity index swaps, further necessitating the opportunity 
for block trades.\226\
---------------------------------------------------------------------------

    \226\ See MFA Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    Another commenter also recommends that the Commission conduct 
further analysis before determining block treatment for equity 
SBSs.\227\ That commenter states that it previously disagreed with 
CFTC's similar approach with respect to equity swaps. The commenter 
argues that the Commission should undertake additional analysis to 
demonstrate that the CFTC's justifications for its approach apply 
equally to the categories or types of equity-based swaps specifically 
under its jurisdiction, which include, for example, total return swaps 
based on a single security or loan, or a narrow-based security index. 
The commenter also recommends that the Commission determine whether 
block treatment would be appropriate for equity-based SBSs in the pre-
trade transparency context. The commenter argues that similar to other 
categories or types of large-sized SBSs that would qualify for block 
treatment, flexible execution with respect to large-sized, equity-based 
SBSs is important to avoid information leakage regarding a market 
participant's investment strategies.
---------------------------------------------------------------------------

    \227\ See ICI Letter, supra note 18, at 12-13.
---------------------------------------------------------------------------

    One commenter suggests that, if there is the ability to have 
fungible, single-name total return swaps in equity products, and they 
become subject to mandatory clearing in the future, that the commenter 
would expect there to be appropriately calibrated block size thresholds 
that are applied to those equity-based swaps.\228\ Another commenter 
suggests that if an equity SBS product becomes subject to mandatory 
trade execution, there should be an appropriate methodology for 
establishing equity block thresholds.\229\
---------------------------------------------------------------------------

    \228\ See SIFMA AMG Letter, supra note 18, at 10.
    \229\ See ISDA-SIFMA Letter, supra note 18, at 9.
---------------------------------------------------------------------------

    While the Commission acknowledges commenters' concerns, the general 
concerns expressed about the need for equity blocks lack specificity or 
analysis regarding a particular definition of ``block trade'' for 
equity SBS--whether a specific threshold or a methodology--that the 
Commission could adopt. Commenters' concerns focus on the need to 
customize the size of equity SBS transactions, to obtain timely and 
efficient executions, and to avoid information leakage. And commenters 
state that the lack of a block-trade exception could result in 
significant price impact and inhibit the large, customized trades 
essential for risk management and hedging, which would discourage 
hedging, increase volatility and reduce liquidity in equity SBS markets 
(as well as underlying equity markets), and ultimately inhibit capital 
formation and participation in offerings.
    With respect to the stated need for certain parties to use an 
equity SBS block-trade exception, a relevant consideration for the 
Commission in determining whether to establish a block-size threshold 
for equity SBSs, if and when it makes a clearing determination for 
those SBSs, is whether establishing that block-trade threshold would 
have the potential to create a situation where SBSEFs provide less 
transparency than exists in the underlying cash equity markets or the 
listed options markets. An inappropriate block-trade threshold for 
equity SBSs could create incentives for market participants to favor 
equity SBS markets over cash equities or listed options markets, either 
of which may be used, in many cases, to achieve economically equivalent 
trading objectives as strategies using equity SBS, and neither of which 
provides for block-trade reporting delays. If transactions were to 
migrate from cash equities or listed options markets to the SBS market, 
this could lead to decreased market transparency and could potentially 
undercut the goal of the Dodd-Frank Act to bring transparency to the 
trading of SBS.\230\
---------------------------------------------------------------------------

    \230\ See Proposing Release, supra note, 87 FR at 28894 (``The 
legislative history of the Dodd-Frank Act indicates that exchange 
trading is a mechanism to `provide pre- and post-trade transparency 
for end users, market participants, and regulators.' '' S. Rep. No. 
111-176, at 34 (2010)).
---------------------------------------------------------------------------

    Additionally, as a general matter, it is important to harmonize the 
treatment of equity SBS with the treatment of equity swaps. There is no 
block-trade exception for equity swaps in the CFTC's rules, and the 
Commission does not wish to create incentives for market participants 
to trade equity SBS over swaps. And while a commenter states that 
equity SBS are quite distinct from equity swaps, the treatment of 
equity SBS transactions should be broadly consistent with the treatment 
of transactions in the cash equities underlying them to avoid, as 
discussed above, creating incentives for market participants to trade 
equity SBS instead of the underlying cash instruments.
    For these reasons and those discussed above regarding credit 
SBS,\231\ the Commission has determined not to adopt a definition of 
``block trade'' in Rule 802. Thus, with respect to commenters' 
concerns, until the Commission has made a clearing determination with 
respect to equity SBS, equity SBS will be able to trade OTC, just as 
their underlying cash equities can trade OTC. Moreover, before making a 
clearing determination for an equity SBS--which would create

[[Page 87183]]

the circumstances in which equity SBS might be MAT and therefore 
subject to the trade-execution requirement--the Commission would have 
the opportunity to solicit and consider additional public comment on 
the effect of such a determination, including comment with respect to 
the concerns commenters have raised to date regarding, among other 
things, timely and efficient executions, hedging, and capital 
formation.
---------------------------------------------------------------------------

    \231\ See supra section V.E.1(c)(ii).
---------------------------------------------------------------------------

2. Rule 815(b)
    Paragraph (b) of Proposed Rule 815 would require a time delay for 
certain orders being entered by a broker or dealer on an SBSEF's order 
book. This provision would only apply to situations in which the broker 
or dealer is seeking to trade against a customer order (a 
``facilitation cross'') or to cross two customer orders (a ``customer 
cross''), following some form of pre-arrangement or pre-negotiation of 
such orders, and where the transaction is a Required Transaction.\232\ 
Under Proposed Rule 815(b)(1), an SBSEF would require that the broker 
or dealer must expose one of the two orders in this transaction on the 
SBSEF order book for a minimum time period of 15 seconds so that other 
market participants have the opportunity to offer a better price than 
the broker or dealer had intended for the cross. Proposed Rule 
815(b)(2) would permit the SBSEF to adjust the time period of the 
required delay based on the SBS's liquidity or other product-specific 
considerations, provided that the time delay is a sufficient period of 
time so that an order is exposed to the market and other market 
participants have a meaningful opportunity to execute against the 
order.
---------------------------------------------------------------------------

    \232\ The Commission has modified the text of Rule 815(b)(1) to 
specify that the requirements in this provision only apply with 
regards to Required Transactions.
---------------------------------------------------------------------------

    The Commission received comments on the provisions regarding the 
prearrangement or pre-negotiation of trades in Proposed Rule 
815(b).\233\ One commenter requests that the Commission address the 
extent to which market participants may utilize ``pre-execution 
communications'' when trading on an SBSEF, noting that the CFTC has 
specified that such communications may occur pursuant to a SEF's rules 
that have been certified or approved by the CFTC.\234\ This commenter 
urges the Commission to align its rules to those of the CFTC in this 
respect, given that pre-execution communication is a standard market 
practice that investment advisers use to guard against information 
leakage and obtain fair pricing for large-sized trades and packaged 
transactions, among other types of transactions, on behalf of funds and 
other clients.
---------------------------------------------------------------------------

    \233\ See Citadel Letter, supra note 18, at 14-15; ICI Letter, 
supra note 18, at 13-14.
    \234\ See ICI Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------

    Another commenter, arguing that the Proposing Release and the CFTC 
rules are silent with respect to the permissibility of pre-arrangement 
on RFQ systems, urges the Commission to require SBSEF rulebooks to 
prohibit the pre-arrangement of Required Transactions, arguing that it 
is important that pre-trade transparency and the RFQ-to-3 requirement 
not be undermined through bilateral pre-arrangement of a Required 
Transaction followed by a directed RFQ that merely formalizes the 
transaction.\235\
---------------------------------------------------------------------------

    \235\ See Citadel Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    The Commission agrees with the comment that it should view pre-
execution communications in a way that is consistent with CFTC guidance 
on this matter.\236\ The CFTC has viewed pre-execution communications 
as communications between market participants to discern interest in 
the execution of a transaction prior to the exposure of the market 
participants' orders (e.g., price, size, and other terms) to the market 
and has stated that such communications include discussion of the size, 
side of market, or price of an SBS order or a potentially forthcoming 
order.\237\ Consistent with the CFTC's approach, the Commission is 
generally of the view that the terms ``pre-negotiation'' and ``pre-
arrangement'' within the meaning of Rule 802(b) should ordinarily be 
understood to include all communications between market participants to 
discern interest in the execution of a transaction prior to the 
exposure of the market participants' orders (e.g., price, size, and 
other terms) to the market, including discussion of the size, side of 
market, or price of an SBS order, or a potentially forthcoming order.
---------------------------------------------------------------------------

    \236\ See ICI Letter, supra note 18, at 13-14.
    \237\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR 
at 33503.
---------------------------------------------------------------------------

    Additionally, while the CFTC has acknowledged that pre-execution 
communications may be permitted by a SEF, it has stated that any SEF 
that allows pre-execution communications must adopt rules regarding 
such communications that have been certified to or approved by the 
CFTC.\238\ Consistent with this view, the rulebook of an SBSEF 
generally should address, with clarity, the application of the terms 
``pre-arrangement'' and ``pre-negotiation'' in Rule 802(b) so that 
market participants will know what types of pre-execution 
communications are covered by the rule. An SBSEF's rules in this regard 
must, of course, also comply with the other provisions of the SEA and 
the rules thereunder, including the impartial access requirement of 
Rule 819(c).\239\
---------------------------------------------------------------------------

    \238\ See id.
    \239\ See infra section VI.B.3.
---------------------------------------------------------------------------

    With respect to the comment that the Commission should ban pre-
arrangement or pre-negotiation of RFQ trades on an SBSEF, while the 
CFTC regulation is silent regarding the permissibility of pre-
arrangement on RFQ systems, the CFTC's adopting release with respect to 
its SEF rules expressly contemplates the permissible pre-arrangement of 
trades executed via RFQ.\240\ Moreover, the CFTC explained in its 
adopting release that it refrained from requiring a time delay for 
Required Transactions entered into RFQ systems because the requirement 
to send an RFQ to three other market participants already provides pre-
trade price transparency.\241\ Thus, the CFTC has acknowledged that 
pre-arranged Required Transactions may be submitted into a SEF's RFQ 
system, and without a time delay.
---------------------------------------------------------------------------

    \240\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR 
at 33504.
    \241\ See id.
---------------------------------------------------------------------------

    The Commission recognizes that, as one of the commenters also 
states, pre-execution communications are a standard practice for many 
participants in the SBS market, and that to prohibit them entirely 
would be a major departure from the CFTC's approach and could have 
significant negative ramifications on the ability of market 
participants to effect their SBS transactions. Accordingly, and to 
maintain harmonization with the CFTC's treatment of pre-arrangement and 
pre-negotiation of swaps transactions, the Commission is not modifying 
Rule 815(b) to prohibit the use of pre-arrangement or pre-negotiation 
with respect to SBS transactions via RFQ or to impose a time delay 
before any such SBS can be executed via RFQ.
    One of the commenters also requests that the Commission require 
SBSEFs to provide periodic regulatory reporting around pre-arranged 
trading on their platforms, including reporting the percentage of pre-
arranged orders for which other SBSEF participants step in to join the 
trade, and that it also require an SBSEF to demonstrate that it offers 
a bona fide order book in order for the SBSEF to permit the execution 
of pre-arranged orders (such as a minimum

[[Page 87184]]

level of trading activity on the order book or a minimum percentage of 
pre-arranged orders where pricing is improved as a result of other 
SBSEF participants stepping in).\242\
---------------------------------------------------------------------------

    \242\ See Citadel Letter, supra note 18, at 14-15.
---------------------------------------------------------------------------

    The suggested reporting requirements or ``bona fide order book'' 
standard, however, would exceed what SEFs are required to do under the 
CFTC rules. The Commission is concerned that different or additive 
requirements to the key concept of an order book, such as whether that 
order book is ``bona fide,'' could introduce complexity and confusion 
if one set of trading protocols applied to Required Transactions for 
swaps but different protocols--different from ones that have been 
understood and utilized for many years--applied to Required 
Transactions for SBS transactions. Moreover, the commenter's proposed 
reporting requirements--such as a minimum percentage of pre-arranged 
orders where pricing is improved as a result of other SBSEF 
participants stepping in--appear to be primarily relevant to an 
evaluation of a particular SBSEF has met the standard for having a 
``bona fide'' order book. Accordingly, because the added complexity and 
costs associated with imposing the ``bona fide'' order book standard 
have not been justified, it is not appropriate to adopt the proposed 
regulatory reporting requirement suggested by the commenter with 
respect to cross-trading.
    For the reasons discussed above, the Commission is adopting Rule 
815(b) as proposed, with a clarifying change to the rule text to 
reiterate that the requirement applies only to Required 
Transactions.\243\
---------------------------------------------------------------------------

    \243\ The heading of the proposed rule text already indicated 
that it was a ``Time delay requirement for Required Transactions on 
an order book.'' The rule text has been modified only to add ``With 
regard to Required Transactions,'' at the beginning of the rule 
text, to reiterate the parameters indicated in the title and to 
clarify its application.
---------------------------------------------------------------------------

3. Rule 815(c)
    Proposed Rule 815(c) is modeled on Sec.  37.9(c) of the CFTC's 
rules and would define a ``Permitted Transaction'' as a transaction not 
involving an SBS that is subject to the mandatory trade execution 
requirement. This rule provides that an SBSEF may offer any method of 
execution for Permitted Transactions.
    The Commission did not receive any comments on the definition of 
Permitted Transactions \244\ and is adopting Rule 815(c) as proposed, 
for the reasons discussed in the Proposing Release.
---------------------------------------------------------------------------

    \244\ As discussed above, one commenter recommends that the 
requirements of Rule 815(a)(3) be modified to apply to all SBS 
transactions on an SBSEF, which would include Permitted 
Transactions. See supra note 190 and accompanying text (describing 
and discussing that comment).
---------------------------------------------------------------------------

4. Rule 815(d)
    Paragraph (d) of Sec.  37.9 provides an exception for package 
transactions that allows for flexible methods of execution for what 
would otherwise be Required Transactions. The Commission proposed to 
include similar exceptions in Proposed Rule 815(d). Proposed Rule 
815(d)(1) would define ``package transaction'' as two or more component 
transactions executed between two or more counterparties where at least 
one component is a Required Transaction, execution of each component is 
contingent upon the execution of all other components, and the 
component transactions are priced or quoted together as one economic 
transaction with simultaneous (or near-simultaneous) execution of all 
components. Proposed Rule 815(d)(2) would provide that a Required 
Transaction that is executed as a component of a package transaction 
that includes a component SBS that is subject exclusively to the 
Commission's jurisdiction, but is not subject to mandatory clearing, 
may be executed on an SBSEF using any method of execution as if it were 
a Permitted Transaction.
    Proposed Rule 815(d)(3) would provide that a Required Transaction 
that is executed as a component of a package transaction that includes 
a component that is not an SBS may be executed on an SBSEF using any 
method of execution as if it were a Permitted Transaction. Proposed 
Rule 815(d)(3) would further state that this general exception, which 
allows flexible means of execution for certain package transactions, 
shall not apply to a Required Transaction that is executed as a 
component of a package transaction in which all other non-SBS 
components are U.S. Treasury securities; a Required Transaction that is 
executed as a component of a package transaction in which all other 
non-SBS components are contracts for the purchase or sale of a 
commodity for future delivery; a Required Transaction that is executed 
as a component of a package transaction in which all other non-SBS 
components are agency mortgage-backed securities; or a Required 
Transaction that is executed as a component of a package transaction 
that includes a component transaction that is the issuance of a bond in 
a primary market.
    The Commission received comments on the proposed exception for 
packaged transactions.\245\ Several commenters support the Commission's 
proposal.\246\ One commenter supports the proposal to harmonize with 
the CFTC rules, but suggested modifications to the proposed rule 
text.\247\ First, the commenter suggests that Rule 815(d)(2) be 
modified so that the package-transaction exception is not available if 
the other SBS in the package is either subject to the clearing 
requirement or intended to be cleared. This commenter states that, 
because the scope of any future clearing requirement for SBSs is 
unclear, there may be significant trading activity in packages 
containing SBSs that are intended to be cleared, but not subject to the 
clearing requirement, and the commenter states that, for purposes of 
the package transaction exception, SBS that are cleared, whether by 
mandate or intention, should be treated the same. This commenter also 
recommends that Rule 815(d)(3) be modified to clarify that the 
exception would not apply to package transactions where all of the 
other components are swaps subject to the CFTC's trade execution 
requirement. The commenter states that this modification would prevent 
evasion for packages containing only SBSs and swaps that are subject to 
trade execution requirements on the Commission and the CFTC side, 
respectively.\248\
---------------------------------------------------------------------------

    \245\ See Bloomberg Letter, supra note 18, at 14, Citadel 
Letter, supra note 18, at 12-13, and ISDA-SIFMA Letter, supra note 
18, at 9-10.
    \246\ See Bloomberg Letter, supra note 18, at 14 and ISDA-SIFMA 
Letter, supra note 18, at 9-10.
    \247\ See Citadel Letter, supra note 18, at 12-13.
    \248\ See id.
---------------------------------------------------------------------------

    Another commenter, while agreeing that it is appropriate to treat 
package transactions differently from outright, single-legged 
transactions, suggests that the Commission take a different approach 
from that of the CFTC, stating that the current state of the CFTC's 
rules reflect the culmination of a phased implementation approach 
developed over time via no-action letters.\249\ That commenter argues 
that it would be better for the Commission to tailor its rules for 
packaged transactions to address the particular market dynamics 
relevant to the SBS market instead of the swaps market. The commenter 
recommends that the Commission build into the MAT determination process 
a framework for identifying what types of package transactions exist 
for prospectively MAT SBS and then develop tailored rules around the 
execution of such transactions.
---------------------------------------------------------------------------

    \249\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

    Rule 815(d) is closely modeled on Sec.  37.9(d) and is designed to 
balance the goal of promoting transparency in the

[[Page 87185]]

SBS market through required methods of execution against the market 
efficiency of allowing multiple instruments to trade as a package using 
flexible methods of execution.\250\ As noted in the Proposing Release, 
a rule that was too lenient could subvert the goal of promoting 
transparency and competition through all-to-all trading, while a rule 
that was too strict could cause market participants to break the 
package into its individual components, thereby increasing transaction 
costs and reducing the economic purpose and efficiency of the package 
transaction.\251\
---------------------------------------------------------------------------

    \250\ To the extent that counterparties may be facilitating a 
package transaction that involves a ``swap,'' as defined in section 
1(a)(47) of the CEA, 7 U.S.C. 1a(47), or any contract for the 
purchase or sale of a commodity for future delivery (or option on 
such a contract), or any component agreement, contract, or 
transaction over which the Commission does not have exclusive 
jurisdiction, the Commission does not opine on whether such activity 
complies with other applicable law and regulations.
    \251\ See Proposing Release, supra note 1, 87 FR at 28896.
---------------------------------------------------------------------------

    The Commission agrees with a commenter's suggestions that Proposed 
Rule 815(d)(2) and (3) should be modified to narrow the scope of the 
package-transaction exception. Accordingly, the Commission is modifying 
these rules so that neither an SBS that is intended to be cleared (even 
if it is not required to be cleared) nor a swap subject to a CFTC trade 
execution requirement would create an exception from required methods 
of execution for a Required Transaction that is part of the same 
package. For purposes of exempting a Required Transaction in a package 
transaction from the required means of execution, there is no reason to 
distinguish mandatorily cleared SBS from voluntarily cleared SBS, or 
cleared swaps from cleared SBS. Therefore, the Commission is adding the 
words ``and is not intended to be cleared'' to Rule 815(d)(2) so that 
it covers only a Required Transaction that is executed as a component 
of a package transaction that includes a component security-based swap 
that is subject exclusively to the Commission's jurisdiction but is not 
subject to the clearing requirement under section 3C of the SEA and is 
not intended to be cleared. And the Commission is adding new subsection 
(iv) to Rule 815(d)(3) to provide that a Required Transaction in a 
package transaction is ineligible to be treated as a Permitted 
Transaction if it is ``[a] Required Transaction that is executed as a 
component of a package transaction in which all other non-SBS 
components are swaps that are subject to a trade execution requirement 
under the CFTC's rules.''
    With respect to the suggestion that the Commission take a different 
approach from that of the CFTC and develop tailored rules for SBS, the 
package-transaction rule is not the appropriate place to recognize the 
differences between the swaps and the SBS market. Rather, the clearing 
determinations and MAT determinations will necessarily consider the 
trading characteristics of a given SBS, and both these determinations 
will have to be made before the package transaction exception would 
ever potentially be relevant to a transaction in that SBS.
    For the foregoing reasons, the Commission is adopting Rule 815(d) 
with the modifications to paragraph (d)(2) and (d)(3), as described 
above.
5. Rule 815(e)
    Proposed Rule 815(e) is modeled on Sec.  37.9(e), which requires 
SEFs to maintain rules and procedures for resolution of operational and 
clerical error trades, which could be for swaps that otherwise would be 
subject to required methods of execution. Proposed Rule 815(e) would 
also require an SBSEF to maintain rules and procedures that facilitate 
the resolution of error trades and sets forth certain requirements 
designed to promote resolution in a fair, transparent, and consistent 
manner. Definitions of the terms ``correcting trade,'' ``error trade,'' 
and ``offsetting trade'' would be included in Rule 802 rather than in 
Rule 815(e).\252\
---------------------------------------------------------------------------

    \252\ See Proposed Rule 802 (defining ``correcting trade'' as a 
trade executed and submitted for clearing to a registered clearing 
agency with the same terms and conditions as an error trade other 
than any corrections to any operational or clerical error and the 
time of execution); Proposed Rule 802 (defining ``error trade'' as 
any trade executed on or subject to the rules of an SBSEF that 
contains an operational or clerical error); Proposed Rule 802 
(defining ``offsetting trade'' as a trade executed and submitted for 
clearing to a registered clearing agency with terms and conditions 
that economically reverse an error trade that was accepted for 
clearing). These definitions are modeled on the definitions of the 
same terms in Sec.  37.9(e)(1).
---------------------------------------------------------------------------

    The Commission received one comment letter on this provision.\253\ 
The commenter states that, with respect to a cleared SBS, correcting an 
error trade that was rejected by a clearing agency is not feasible 
unless the rejected error trade is declared by the SBSEF void ab 
initio. Otherwise, the commenter states, the parties might be 
encumbered by unresolved obligations related to the rejected SBS trade, 
and this might further prevent a timely and efficient resolution of the 
error. For this reason, the commenter recommends that the SBSEF should 
be able to declare void ab initio any trade rejected by a clearing 
agency.\254\
---------------------------------------------------------------------------

    \253\ See Bloomberg Letter, supra note 18, at 3, 14.
    \254\ See id.
---------------------------------------------------------------------------

    The CFTC's rules for addressing error trades are well articulated 
and well understood by the market, and they continue to serve as an 
appropriate model for the Commission's rules. Furthermore, because most 
if not all SBSEFs also will be registered with the CFTC as SEFs, close 
harmonization in this regard would allow dually registered entities to 
employ the same procedures for addressing error trades, whether they 
arise in the context of swap trading or SBS trading. Therefore, the 
rules for addressing error trades should not differ between the SBS 
regime and the swaps regime. While the Commission appreciates the 
difficulties that might arise in trying to correct an error trade that 
has been rejected by a clearing agency, under Proposed Rule 815(e), an 
SBSEF would be required to adopt rules and procedures for addressing 
such situations, which it could do by, among other things, declaring 
trades rejected by a clearing agency as void ab initio, as it would be 
required to do for non-error trades that are rejected for clearing 
under Rule 815(g). For the foregoing reasons, the Commission is 
adopting Rule 815(e) as proposed.
6. Rule 815(f)
    Rule 815(f) is modeled on Sec.  37.9(f), which addresses 
counterparty anonymity and is widely referred to as the prohibition on 
``post-trade name give-up'' (``PTNGU''). Proposed Rule 815(f) would 
generally prohibit any person, directly or indirectly (including 
through a third-party service provider), from disclosing the identity 
of a counterparty to an SBS that is executed anonymously on an SBSEF 
and intended to be cleared and requires the SBSEF to establish and 
maintain rules to that effect. Furthermore, it provides that ``executed 
anonymously'' as used in the rule includes an SBS that is pre-arranged 
or pre-negotiated anonymously, including by an SBSEF participant. 
Finally, Rule 815(f) provides that, for a package transaction that 
includes a component SBS that is not intended to be cleared, disclosing 
the identity of a counterparty would not violate the rule.
    The Commission received several comments on Proposed Rule 
815(f).\255\ Most of the commenters support the

[[Page 87186]]

rule.\256\ Several commenters state that they strongly support the 
proposal harmonizing with the CFTC rules to prohibit PTNGU for SBSs 
executed anonymously on SBSEFs and that are intended to be 
cleared.\257\ One commenter asserts that PTNGU has no legitimate 
purpose for centrally cleared financial instruments, since trading 
counterparties face the central clearinghouse and do not have any 
credit, operational, or legal exposure to each other post-trade.\258\ 
This commenter states that PTNGU functions as a source of uncontrolled 
information leakage since a market participant has no control over who 
it will be matched with when executing through a pre-trade anonymous 
trading protocol, such as an order book. Accordingly, a buy-side firm 
must be comfortable potentially sharing its trading activity with every 
other participant on the trading venue, including other buy-side firms 
before using an anonymous order book with PTNGU. The commenter 
considers this an unattractive proposition for buy-side firms that 
completely undermines the anonymous nature of the trading protocol and 
deters access and participation. The commenter also argues that PTNGU 
is a discriminatory practice that impedes market participant access to 
trading venues by allowing dealers to monitor whether buy-side firms 
have started to transact in anonymous order books and use this 
information as a policing mechanism to deter buy-side access and 
participation.\259\ The commenter also states that Rule 815(f)(3) \260\ 
is drafted to prevent evasion by voice brokers. Other commenters 
express similar views.\261\
---------------------------------------------------------------------------

    \255\ See Bloomberg Letter, supra note 18, at 14-15, Citadel 
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at 
10-12, WMBAA Letter, supra note 18, at 5.
    \256\ See Bloomberg Letter, supra note 18, at 14-15, Citadel 
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at 
10-12.
    \257\ See Citadel Letter, supra note 18, at 10; SIFMA AMG 
Letter, supra note 18, at 10.
    \258\ See Citadel Letter, supra note 18, at 10.
    \259\ See Citadel Letter, supra note 18, at 11. This commenter 
also cites news articles relating the accounts of buy-side firms of 
dealers contacting them to get them not to join SEF platforms. See 
id. at 11 n.20.
    \260\ Rule 815(f)(3) provides that SBSs that are ``executed 
anonymously'' include SBSs that are pre-arranged or pre-negotiated 
anonymously, which would include voice broker trades.
    \261\ See SIFMA AMG Letter, supra note 18, at 10 (stating that 
PTNGU for anonymously traded cleared SBSs is unnecessary and does 
not provide any advantages to clients, but rather leads to 
uncontrolled information leakage); Bloomberg Letter, supra note 18, 
at 15 (stating that prohibiting PTNGU facilitates and promotes 
trading on SBSEFs and promotes pre-trade price transparency by 
encouraging more participants to bid anonymously, whereas the 
practice of requiring disclosure of one counterparty's name to the 
other counterparty increases the risk of information leakage and can 
deter participation by liquidity seekers on SBSEFs).
---------------------------------------------------------------------------

    Another commenter states that if the Commission prohibits PTNGU, 
its policy would mirror the CFTC's approach and that certain traders 
would be more likely to participate on venues that offer anonymous 
execution, including order book functionality.\262\ This, in turn, the 
commenter argues, could result in deeper liquidity pools on SBSEFs and 
promote the development, innovation, and growth of the SBS market.\263\ 
The commenter asserts that the Commission's rules should be designed to 
better promote the development, innovation, and growth of the swaps 
market, with the intent of attracting liquidity formation onto SBSEFs, 
in a manner that adds to efficiency for the market and market 
participants.
---------------------------------------------------------------------------

    \262\ See SIFMA AMG Letter, supra note 18, at 10.
    \263\ See id. at 11.
---------------------------------------------------------------------------

    One commenter also states that PTNGU was a more important feature 
of the market when few swaps were centrally cleared and market 
participants needed to know their counterparty's identity to manage the 
associated credit risk; however, with the prevalence of central 
clearing, the need for PTNGU is diminished for cleared swaps.\264\
---------------------------------------------------------------------------

    \264\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    A few commenters, while generally supportive of the rule, suggest 
some modifications to it.\265\ One commenter argues that Rule 815(f)(4) 
\266\ is overbroad and may significantly limit the scope of the 
prohibition.\267\ Specifically, this commenter states that many 
security-based swaps are transacted as part of a package transaction 
with other instruments (e.g., single-name CDS and index CDS). The 
commenter argues that, at a minimum, any exception for package 
transactions should only apply to packages that include a component 
that is not an SBS intended to be cleared or a swap that is intended to 
be cleared. The commenter expresses concern that the current language 
would appear to exempt packages containing CFTC-regulated swaps, even 
if those instruments should be subject to an equivalent prohibition 
(notwithstanding the working of the corresponding CFTC exception for 
packages). The commenter encourages the Commission to work with the 
CFTC to avoid creating a loophole for common packages containing swaps 
and security-based swaps that are all intended to be cleared. 
Furthermore, the commenter questions the need for Rule 815(f)(4) at 
all. The commenter states that, as proposed, the prohibition on PTNGU 
applies only to security-based swaps that are executed anonymously and 
intended to be cleared. The commenter argues that PTNGU could still be 
used for the uncleared security-based swap leg of a package transaction 
containing both a cleared security-based swap and an uncleared 
security-based swap, even without Rule 815(f)(4).
---------------------------------------------------------------------------

    \265\ See Bloomberg Letter, supra note 18, at 15, Citadel 
Letter, supra note 18, at 11, WMBAA Letter, supra note 18, at 5.
    \266\ Rule 815(f)(4) provides that, for a package transaction 
that includes a component transaction that is not an SBS intended to 
be cleared, disclosing the identity of a counterparty shall not 
violate the other provisions in the rule that prohibit the 
disclosure of the identity of a counterparty for SBSs executed 
anonymously.
    \267\ See Citadel Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    One commenter argues that the Commission should take an 
evolutionary approach to the prohibition on name give-up, which 
initially should apply only to Required Transactions, and not Permitted 
Transactions on an SBSEF where clearing may not be certain leading up 
to or at the time of trade execution.\268\ This commenter believes that 
this approach would encourage liquidity formation and further 
development of less liquid SBSs where an SBSEF trading mandate is not 
required.
---------------------------------------------------------------------------

    \268\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    One commenter suggests that the Commission augment the rule with a 
prohibition on trade-relationship documentation for SBS that are 
intended to be cleared and grant the SBSEF the ability to void ab 
initio trades rejected from clearing to avoid the necessity of post-
trade name disclosure in case of an error trade.\269\
---------------------------------------------------------------------------

    \269\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    The Commission agrees with commenters that prohibiting post-trade 
name give-up for cleared trades is reasonably necessary to facilitate 
and promote trading on SBSEFs, and Proposed Rule 815(f) would 
accomplish these goals.
    The Commission disagrees with the comment that Rule 815(f)(4) is 
overbroad and unnecessary. The Commission finds that Rule 815(f)(4) is 
necessary and important to provide clarity about the application of the 
PTNGU prohibition to package transactions and also to provide 
consistency with the CFTC's approach. Narrowing the exception in Rule 
815(f)(4) as suggested by one commenter so that it would not apply if a 
component of a package transaction were a cleared swap would cause the 
Commission's approach to PTNGU to differ from that of the CFTC and 
create the potential for different PTNGU rules to apply to different 
components of the same package transaction. That is, if the Commission 
modified Rule 815(f)(4) as the commenter suggests, in the case of a 
package transaction comprising an

[[Page 87187]]

SBS that is intended to be cleared and a swap that is intended to be 
cleared, Rule 815(f)(4) would prohibit PTNGU, but Sec.  37.9(f)(4) 
would permit PTNGU.\270\ To avoid this situation, the Commission 
declines to modify Rule 815(f)(4) as suggested.
---------------------------------------------------------------------------

    \270\ Section 37.9(f)(4) provides, in relevant part, that 
``[f]or a package transaction that includes a component transaction 
that is not a swap intended to be cleared, disclosing the identity 
of a counterparty shall not violate'' the prohibition against PTNGU. 
17 CFR 37.9(f)(4).
---------------------------------------------------------------------------

    Further, the Commission disagrees with the comment that the 
prohibition on PTNGU should initially apply only to Required 
Transactions. The prohibition on PTNGU is designed to promote pre-trade 
price transparency by encouraging a greater number, and a more diverse 
set, of market participants to anonymously post bids and offers on 
regulated markets, and it does so by preventing the sharing of the 
names of counterparties where such sharing is unnecessary--namely, when 
a transaction is cleared. Whether clearing the transaction is required 
or voluntary is not relevant to the purposes of prohibiting PTNGU. With 
regards to trades rejected from clearing, the prohibition on PTNGU 
would apply to all trades that are intended to be cleared, not just 
those that are successfully cleared, so that prohibition would also 
apply to a trade that is submitted but then rejected for clearing. For 
the foregoing reasons, the Commission is adopting Rule 815(f), as 
proposed, with minor technical modifications.\271\
---------------------------------------------------------------------------

    \271\ The Commission has corrected a reference in paragraph 
(f)(2) to a ``security-based swap execution facility'' to refer 
instead to a ``security-based swap.'' The Commission has also 
changed first instance of the word ``paragraph'' in paragraph (f)(4) 
to ``paragraphs.''
---------------------------------------------------------------------------

7. Rule 815(g)
    One commenter states that in order to protect counterparty 
anonymity in the event of an SBS that is executed anonymously and 
intended to be cleared, but is nonetheless rejected for clearing, the 
SBSEF should declare the trade void ab initio.\272\ The commenter 
suggests that the Commission augment the rule to prohibit trade 
relationship documentation for SBS that are intended to be cleared and 
to grant SBSEFs the ability to declare trades rejected from clearing 
void ab initio in order to avoid post-trade name disclosure in the case 
of a rejected trade.
---------------------------------------------------------------------------

    \272\ See Bloomberg Letter, supra note 18, at 14-15. See also 
Citadel Letter, supra note 18, at 5 (stating that the CFTC guidance 
regarding trades that are void ab initio has eased trading of 
cleared swaps on SEFs and ``facilitated the entry of new liquidity 
providers that do not have legacy bilateral trading documentation in 
place with clients'').
---------------------------------------------------------------------------

    The Commission agrees that declaring such trades void ab initio, 
which helps prevent trades rejected from clearing from effectively 
becoming bilateral transactions where the identity of counterparties 
might be disclosed. This approach is also consistent with practices in 
the swaps market with respect to such trades.\273\ Therefore, the 
Commission is amending Rule 815 to add a new paragraph (g), which 
specifies that SBSEFs shall establish and enforce rules that provide 
that a security-based swap that is intended to be cleared at the time 
of the transaction, but is not accepted for clearing at a registered 
clearing agency, shall be void ab initio. In light of new paragraph 
(g), the Commission is generally of the view that it would not be 
consistent with the impartial-access requirements of Rule 819(c) for an 
SBSEF to permit its members to require bilateral relationship 
documentation from their counterparties with respect to SBS that are 
intended to be cleared.\274\ Consequently, the Commission finds that it 
is not necessary to include a prohibition on trade relationship 
documentation in Rule 815 for SBS that are intended to be cleared.
---------------------------------------------------------------------------

    \273\ See CFTC, Division of Clearing and Risk and Division of 
Market Oversight Staff Guidance on Swaps Straight-Through Processing 
(Sept. 26, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf 
(``CFTC 2013 STP Guidance'').
    \274\ See also infra section VI.B.3.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission adopting Rule 815(f)(1) 
through (4), with minor technical modifications,\275\ and is also 
adding a new paragraph (g), as discussed above.
---------------------------------------------------------------------------

    \275\ See supra note 271.
---------------------------------------------------------------------------

F. Rule 816--Trade Execution Requirement and Exemptions Therefrom

    Section 3C of the SEA \276\ sets out a procedure whereby an SBS 
becomes subject to mandatory clearing. Section 3C(h) of the SEA 
provides that, if a transaction involving an SBS is subject to the 
mandatory clearing requirement, the counterparties shall execute the 
transaction on an exchange, on an SBSEF registered under section 3D of 
the SEA, or on an SBSEF that is exempt from registration under section 
3D(e) of the SEA, unless no national securities exchange or SBSEF makes 
the SBS available to trade or the SBS transaction is subject to an 
exception from the clearing requirement under section 3C(g) of the SEA. 
This obligation under section 3C(h) is commonly referred to as the 
``trade execution requirement.''
---------------------------------------------------------------------------

    \276\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------

    Proposed Rule 816 of Regulation SE establishes procedures for an 
SBSEF to make an SBS ``available to trade'' (assuming it is also 
subject to the clearing requirement), thereby activating the trade 
execution requirement with respect to that SBS. Rule 816 also includes 
three proposed exemptions from the trade execution requirement.
    Paragraphs (a) through (d) of Rule 816 are modeled on Sec.  37.10 
of the CFTC's rules and establish a process whereby an SBS product is 
MAT by an SBSEF. An SBSEF may list an SBS that is subject to mandatory 
clearing, but listing the product does not by itself subject the 
product to the trade execution requirement in section 3C(h) of the SEA. 
Only if a product that is subject to mandatory clearing is listed and a 
MAT determination has been made would the SBS then become subject to 
the trade execution requirement. A MAT determination would have to be 
made and filed by an SBSEF pursuant to Rule 816 to trigger the trade 
execution requirement, similar to the MAT process of Sec.  37.10.
1. General Comments on Harmonization With CFTC MAT Process
    Several commenters cite efforts by the CFTC to review its MAT 
process as an indication that the Commission should take a different 
approach for making MAT determinations rather than align with the 
CFTC's current rule.\277\ One commenter cites to the findings of the 
Market Risk Advisory Committee (``MRAC''), an advisory committee that 
provided recommendations to the CFTC, and states that the MRAC and the 
CFTC raised concerns regarding the current MAT process for swaps.\278\ 
This commenter states that reforming the MAT process was included as an 
agenda item in the CFTC 2021 fall rulemaking agenda and that, for this 
reason, the Commission should align the MAT process for SBS with the 
recommendations made by the MRAC or, in the alternative, coordinate 
with the CFTC to ensure that the MAT process is aligned and conducted 
in a manner that allows input from a variety of stakeholders and the 
Commission. Another commenter also urges the Commission to review the 
CFTC MRAC's recommendations with an eye towards adopting a more 
flexible regime given the unique characteristics of the

[[Page 87188]]

SBS market.\279\ One commenter strongly recommends that the Commission 
refrain from adopting a MAT determination process that is based on the 
existing CFTC process, but rather coordinate with the CFTC as it 
considers potential reforms to improve its MAT process.\280\
---------------------------------------------------------------------------

    \277\ See Bloomberg Letter, supra note 18, at 15-16; ISDA-SIFMA 
Letter, supra note 18, at 5.
    \278\ See Bloomberg Letter, supra note 18, at 15-16.
    \279\ See ISDA-SIFMA Letter, supra note 18, at 5.
    \280\ See ICI Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    It is appropriate for Regulation SE to establish a MAT SBS process 
that aligns with the CFTC's process as closely as possible. While 
commenters state that the CFTC may be considering changes to its MAT 
process, the CFTC has not yet proposed any such changes, so it is not 
certain that the CFTC would adopt the recommendations of the MRAC, 
either in whole or in part, or with modification, or when the CFTC 
might act if it does make changes to its MAT process. Additionally, 
because no MAT determination can be made with respect to an SBS unless 
and until the Commission has made a mandatory clearing determination as 
to that SBS, the Commission would have the opportunity, if and when it 
makes a mandatory clearing determination with respect to an SBS, or 
category of SBS, to consider whether changes to the process for a MAT 
determination with respect to that SBS would be appropriate. Further, 
in the event that the CFTC does move forward with changes to its MAT 
process, the Commission will have the opportunity to reassess its own 
MAT process and to consider further harmonization with the CFTC regime, 
as appropriate. For the present, the CFTC's procedures are well 
articulated and well understood by SBS markets, so closely harmonizing 
with these procedures would yield comparable regulatory benefits while 
minimizing burdens on SBSEFs. In particular, even though the SEF and 
SBSEF markets differ in ways that are relevant to the application of 
the criteria for MAT determinations, the criteria themselves are 
equally applicable to the SEF and SBSEF markets. Thus, the Commission 
is adopting the rule as proposed, without any different or additional 
criteria that would have to be considered by an SBSEF in order to MAT 
an SBS product.
2. Rule 816(a)
    Paragraph (a)(1) of Rule 816 provides that an SBSEF that makes an 
SBS available to trade in accordance with paragraph (b) of the rule 
must submit to the Commission its determination with respect to that 
SBS, pursuant to the procedures under Rule 806 (voluntary submission 
for Commission review and approval) or Rule 807 (self-
certification).\281\ Paragraph (a)(2) provides that an SBSEF that makes 
an SBS available to trade must demonstrate that it lists or offers that 
SBS for trading on its trading system or platform.
---------------------------------------------------------------------------

    \281\ See supra sections IV.C (discussing Rule 806) and IV.D 
(discussing Rule 807).
---------------------------------------------------------------------------

    The Commission received a number of comments on Rule 816(a).\282\ 
Many commenters raise concerns about an SBSEF having the sole ability 
to make a MAT determination and generally advocate that the Commission 
and other market participants have a greater role in making MAT 
determinations.\283\ One commenter states that experience with the 
existing CFTC regime suggests that the scope of the trade execution 
requirement should not be determined solely by the SBSEFs.\284\ This 
commenter states that the trade execution requirement is a key pillar 
of the G20 post-crisis reforms and recommends that the Commission also 
be able to propose MAT determinations for public comment, based on its 
independent assessment of the criteria set forth in Rule 816(b). One 
commenter asserts that it has long believed that a MAT determination 
should not rest solely with a single SBSEF.\285\ This commenter states 
that such an approach risks introducing commercial and other motives 
beyond an objective assessment of the factors set forth in the rule.
---------------------------------------------------------------------------

    \282\ See Bloomberg Letter, supra note 18, at 15-16; Citadel 
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 4-10; 
ISDA-SIFMA Letter, supra note 18, at 4-5; MFA Letter, supra note 18, 
at 9; SIFMA AMG Letter, supra note 18, at 6-8; WMBAA Letter, supra 
note 18, at 5; Tradeweb Letter, supra note 18, at 3-4.
    \283\ See Citadel Letter, supra note 18, at 15-16; see Bloomberg 
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 5-8; 
ISDA-SIFMA Letter, supra note 18, at 4-5.
    \284\ See Citadel Letter, supra note 18, at 15-16.
    \285\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Another commenter states that it does not believe that a trading 
venue should be solely responsible for identifying the types of 
products that should be subject to a trade execution requirement.\286\ 
Instead, the commenter states that a Commission-led process is more 
appropriate. The commenter argues that a Commission-led process would 
ensure that the views of all relevant market participants (including 
SBSEFs) are considered in making a MAT determination. In addition, the 
commenter asserts that the Commission is likely to have better access 
to data regarding the overall SBS market than any individual trading 
venue will have. The commenter requests that the Commission provide in 
Regulation SE that MAT determinations are to be made by the Commission 
following a notice and comment rulemaking process that takes into 
account the views of SBSEFs and other market participants.
---------------------------------------------------------------------------

    \286\ See Tradeweb Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

    Because no MAT determination can be made for an SBS until the 
Commission has made a mandatory clearing determination for that SBS, 
the MAT-determination process is, in that sense, inherently a 
Commission-led process. Moreover, because the SBSEFs will have direct 
experience with the trading of SBSs on SBSEFs, they will be best 
positioned make the initial decision as to whether it is appropriate to 
submit a MAT determination for an SBS. However, the Commission would 
still play a primary role in the MAT process, as it will have the 
opportunity to review all SBSEF MAT determinations, whether they are 
self-certified or voluntarily filed for Commission approval, to 
determine whether those determinations are adequately supported by 
evidence and consistent with the SEA and the rules thereunder, 
including the six factors to be considered for MAT determinations under 
Rule 816(b), which are discussed below. In the absence of such 
evidence, the Commission can decline to approve or can stay and then 
object to a MAT petition, which will ultimately allow the Commission to 
prevent an inappropriate MAT determination from taking effect.
    Some commenters also recommend that the MAT process provide other 
market participants the ability to provide comment on any MAT 
proposal.\287\ One commenter proposes that market participants have a 
meaningful opportunity to review and opine on a petitioning SBSEF's 
proposed MAT determination.\288\ This commenter argues that the MAT 
factors are intended to measure trading liquidity that is available and 
that this assessment should include the perspectives of market 
participants.\289\ Another commenter also states that it has long 
believed that market participants should have the ability or a forum to 
comment on proposed MAT determinations.\290\ One commenter recommends 
that, in order to support the MAT process and to guard against 
inappropriate MAT determinations, the Commission permit market 
participants and other interested parties to participate in the MAT 
analysis by introducing a public notice and

[[Page 87189]]

comment period into the MAT assessment timeline.\291\ This commenter 
states that this would provide market participants, who would be those 
most affected by a MAT determination, with the opportunity to identify 
specific aspects of individual SBS products that may limit their 
liquidity, which would help ensure each MAT determination is 
appropriate for the relevant SBS product. Another commenter states that 
one of the shortcomings of the MAT process is that it puts too much 
responsibility in the hands of the trading platform and does not 
require, or even consider, input from market participants.\292\ This 
commenter states that the implications of this outcome are even more 
evident in the context of an SBS MAT determination, as such a 
determination would only be relevant to a small segment of the global 
SBS market, which the commenter states is much smaller and less liquid 
than its swaps counterpart.
---------------------------------------------------------------------------

    \287\ See SIFMA AMG Letter, supra note 18, at 7; MFA Letter, 
supra note 18, at 9; ICI Letter, supra note 18, at 5, 7-8.WMBAA 
Letter, supra note 18, at 5.
    \288\ See SIFMA AMG Letter, supra note 18, at 7.
    \289\ See id.
    \290\ See WMBAA Letter, supra note 18, at 5.
    \291\ See MFA Letter, supra note 18, at 9.
    \292\ See ISDA-SIFMA Letter, supra note 18, at 4-5.
---------------------------------------------------------------------------

    One commenter also states that the proposed approach will give 
SBSEFs the sole ability to dictate the scope of SBSEF trading for 
market participants based on the commercial interests of SBSEFs.\293\ 
This commenter recommends that the Commission require a 30-day public 
comment period for all MAT determinations. The commenter expresses 
concern that, under the proposal, it would be possible for a MAT 
determination to become effective without an opportunity for public 
comment and that the MAT process would be controlled almost entirely by 
one segment of the SBS markets, the SBSEFs. The commenter states that 
market participants can provide the Commission with invaluable 
commentary, insights, and data on the potential effects of proposed 
rules, as well as help to ensure that rules are implemented in a fair 
and orderly manner. The commenter asserts that, because MAT 
determinations are data intensive, 30 days would give market 
participants sufficient time to analyze the data presented by the 
SBSEF, prepare their own data and analyses, and comment effectively on 
operational and technological implications. This commenter also 
recommends that the Commission consider creating an advisory board to 
provide recommendations both to the Commission and to SBSEFs on SBSs 
that should be added to or removed from the list of SBSs that are 
subject to the trade execution requirements.\294\ The commenter states 
that the advisory board should have appropriate expertise and balanced 
representation, including from the buy side, sell side, and other 
stakeholders. The commenter asserts that this would help further 
address some of their concerns about the MAT process and ensure that 
the SBSs made subject to the trade execution requirement are only the 
most liquid. Furthermore, the commenter argues that the advisory board 
could also help the Commission assess the functioning of the MAT 
determination process and of the overall SBS regulatory framework and 
provide recommendations for improvement.\295\
---------------------------------------------------------------------------

    \293\ See ICI Letter, supra note 18, at 5, 7-8.
    \294\ See id. at 9-10.
    \295\ See id.
---------------------------------------------------------------------------

    Another commenter states that the process for MAT determinations 
should include input from both market participants and the 
Commission.\296\ The commenter states that market participants may 
trade on multiple venues and in multiple jurisdictions and have a 
greater or different perspective from the SBSEF making the MAT 
determination. Additionally, the commenter states that the Commission's 
input should be considered as well.
---------------------------------------------------------------------------

    \296\ See Bloomberg Letter, supra note 18, at 15-16.
---------------------------------------------------------------------------

    The Commission will have sufficient opportunity to assess self-
certified MAT determinations for consistency with the criteria of Rule 
816(b), as well as with the SEA and the other regulations thereunder, 
while also permitting SBSEFs to use a self-certification process 
closely aligned with Sec.  40.6. The CFTC's procedures are well 
articulated and well understood by SEFs, and closely harmonizing with 
these procedures should yield comparable regulatory benefits while 
minimizing burdens on SBSEFs. Certain MAT determinations of dually 
registered SEF/SBSEFs may apply to SBSs and swaps that are related and 
that related MAT determinations will thus have to be filed with both 
the SEC and CFTC. Adding a default comment period or otherwise altering 
the standard so that the Commission reviews all MAT determinations by 
SBSEFs, as commenters requested, would significantly alter the timing 
of self-certified SBSEF MAT determinations compared to their SEF 
equivalents. By contrast, closely harmonizing the SEC's filing 
procedures and standards of review with the CFTC's would allow dually 
registered entities to submit related MAT determinations to both 
agencies for review. Moreover, if the Commission exercises its 
authority to stay the effectiveness of a self-certified MAT 
determination and seek public comment--i.e., with respect to a rule 
that is novel, complex, inadequately explained, or potentially 
inconsistent with the SEA or the regulations thereunder, including 
Regulation SE--market participants would be able to convey their 
concerns regarding that rule to the Commission.
    For SBS MAT determinations submitted under the Rule 806 process 
that present novel or complex issues or meet other criteria under Rule 
806(d), the initial 45-day review period for rule approval submissions 
may be extended for an additional 45 days. The Commission recognizes 
the importance of public input regarding any MAT determination, and not 
only does Rule 808(b) provide that the Commission make publicly 
available on its website Rule 806 filings, such as an SBSEF's MAT 
filing, but the Commission is also, as discussed below, delegating to 
its staff the authority to make filings under Rule 806 available on the 
Commission's website, which will expedite the process of providing 
interested persons with the ability to review a MAT-determination 
filing so that they can communicate their views to the Commission. 
Thus, in either process, if MAT petitions present novel or complex 
issues, the Commission will have sufficient time to receive and 
consider public comment for those submissions. Further, accepting 
public comment from all interested market participants in the context 
of a specific MAT determination would more efficiently aid the 
Commission's review of SBSEF MAT-determination filings than forming a 
formal advisory board to offer opinions on adding or removing SBS from 
the list of products that have been MAT.
    Several commenters question the extent of the Commission's role in 
the MAT determination process.\297\ One commenter cites the lack of 
Commission authority to delay or decline an SBSEF submission for a MAT 
determination, particularly without comment from market participants, 
as the basis for its concerns about the proposed MAT process.\298\ 
Another commenter recommends that the Commission enhance its oversight 
by ensuring that it has a more meaningful ability to review and reject 
MAT determinations, as well as the ability to initiate determinations 
itself as appropriate.\299\ This commenter also expresses concern that 
the Commission would not have adequate time to consider, or authority 
to

[[Page 87190]]

challenge, the basis for a MAT determination. The Commission, however, 
does have the authority to prevent an SBSEF MAT determination under 
either Rule 806 or Rule 807 from taking effect. As noted above, under 
Rule 806, the Commission has a 45-day period to consider a submission 
under Rule 806, which could be extended for another 45 days. The 
Commission can, if it finds the determination to be inconsistent with 
the SEA or the rules thereunder, notify the SBSEF that it will not, or 
is unable to, approve the new rule or rule amendment. Under Rule 807, 
MAT determinations cannot go into effect for at least 10 business days, 
during which the Commission has the opportunity to determine whether 
the determination presents novel or complex issues, if it is 
inadequately explained, or if it is potentially inconsistent with the 
SEA or the rules thereunder. If the Commission determines that any of 
these concerns is present, the Commission can stay the MAT 
determination for a 90-day period for further review. Within those 90 
days, the Commission will have the opportunity to object to the 
proposed certification on the grounds that the proposed rule or rule 
amendment is inconsistent with the SEA or the Commission's rules 
thereunder, thereby preventing the self-certified MAT determination 
from going into effect. Therefore, the processes for submitting MAT 
determinations do afford the Commission sufficient time and authority 
to review and, where appropriate, decline to approve, or object to, MAT 
determinations.
---------------------------------------------------------------------------

    \297\ See SIFMA AMG Letter, supra note 18, at 6; ICI Letter, 
supra note 18, at 6-7.
    \298\ See SIFMA AMG Letter, supra note 18, at 6.
    \299\ See ICI Letter, supra note 18, at 5-8.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting Rule 
816(a) as proposed.
3. Rule 816(b)
    Paragraph (b) of Rule 816 sets forth six factors that an SBSEF 
shall consider, as appropriate, when making a MAT determination for an 
SBS product, which are the same six factors enumerated in the CFTC 
rule. Those factors are: (1) whether there are ready and willing buyers 
and sellers; (2) the frequency or size of transactions; (3) the trading 
volume; (4) the number and types of market participants; (5) the bid/
ask spread; and (6) the usual number of resting firm or indicative bids 
and offers.
    The Commission received several comments on the factors for making 
a MAT determination described in Rule 816(b).\300\ Several commenters 
express concern that the factors for consideration enumerated in Rule 
816(b) are not mandatory.\301\ One commenter states that the rule 
requires that an SBSEF's submission consider the factors in the rule, 
as appropriate, when making a MAT determination.\302\ This commenter 
proposes that all of the MAT factors must be considered for mandatory 
SBSEF trading. This commenter also urges the Commission to assess the 
MAT factors on the basis of the current trading activity of the 
relevant SBSs on the SBSEF against stringent standards, and in the 
aggregate, in order to determine whether there is proven liquidity on 
SBSEFs to support mandatory SBSEF trading. The commenter also proposes 
that the Commission expand the MAT factors to require evidence 
demonstrating that the SBSEF has the requisite infrastructure to 
support mandatory SBSEF trading by: (a) adding an assessment of 
technological readiness, and (b) requiring threshold numbers of SBSEFs 
as well as liquidity providers on the SBSEF transacting in the relevant 
SBS. The commenter argues that, while the expansion of MAT factors may 
be viewed as requiring more intervention and resources by the 
Commission, the revised approach will ultimately lead to a streamlined 
process, while at the same time avoiding a potential sacrifice of 
liquidity if a particular SBS is mandated for SBSEF trading 
prematurely.
---------------------------------------------------------------------------

    \300\ See SIFMA AMG Letter, supra note 18, at 6-8; ICI Letter, 
supra note 18, at 5; MFA Letter, supra note 18, at 9; WMBAA Letter, 
supra note 18, at 5.
    \301\ See SIFMA AMG Letter, supra note 18, at 7-8; ICI Letter, 
supra note 18, at 5; WMBAA Letter, supra note 18, at 5.
    \302\ See SIFMA AMG Letter, supra note 18, at 6-8.
---------------------------------------------------------------------------

    One commenter also expresses concern that the factors in Rule 
816(b) are neither mandatory nor based on calculated thresholds, and 
that they would permit SBSEFs to assert that an SBS should be MAT even 
absent objective evidence of a sufficiently liquid trading market.\303\ 
This commenter states that this could have negative consequences for 
buy-side participants such as funds--requiring SBSs with insufficient 
liquidity to be traded via order book or an RFQ system, which would 
raise a significant risk of revealing advisers' sensitive portfolio 
management strategies. This commenter also states that, without 
requiring SBSEFs to consider any objective factors (e.g., threshold 
levels), it is not clear how the Commission could ever find that a MAT 
determination is inconsistent with the SEA or the Commission's rules. 
This commenter recommends that the Commission enhance the MAT 
determination factors by: clarifying that all factors must be 
evaluated, rather than just one or a subset; adding as a factor the 
number of SBSEFs that list the SBS; requiring that at least two SBSEFs 
list the SBS; and requiring a minimum amount of trading history (e.g., 
that an SBS has been listed for at least 90 days). The commenter also 
recommends that the Commission make the MAT determination factors more 
robust by establishing at least some objective mandatory criteria. The 
commenter argues that adopting these recommendations would provide the 
Commission with greater authority to reject a MAT determination and 
would address the conflict raised by an SBSEF's commercial incentive to 
make an SBS MAT, as well as ensure that there is enough liquidity in an 
SBS before it is subject to a MAT determination. The commenter urges 
that a more robust MAT determination process is critical to bring 
consistency to the SBS market over time, as having objective standards 
would avoid MAT determinations based on subjective assessments of 
liquidity that may change over time.
---------------------------------------------------------------------------

    \303\ See ICI Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    The Commission's approach of requiring the MAT factors to be 
considered as appropriate, rather than mandating the consideration of 
all the factors, is consistent with the approach the CFTC has taken. 
The CFTC adopted its approach to provide more flexibility so that its 
markets could accommodate swaps with different trading characteristics 
that can be supported in a centralized trading environment.\304\ And a 
similarly flexible approach is appropriate for the different SBSs that 
would be traded on its SBSEFs, as the appropriate thresholds on any of 
the factors may vary depending on the SBS and over time. Adopting 
specific thresholds would create excessive rigidity at the outset. MAT 
submissions, under Rules 806(a)(5) and 807(a)(6), would be required to 
contain an explanation and analysis of the SBSEF's determination, 
including a discussion of the factors enumerated in the rule, and how 
it complies with the SEA and the Commission's regulations thereunder. 
Rule 816(b) requires SBSEFs to consider all the factors enumerated in 
the rule, as appropriate. However, such consideration, to be 
meaningful, generally should discuss the factors in the context of the 
general market, relative to some outside benchmark. And the SBSEF would 
have the burden of providing support for any assertions it makes 
regarding the adequacy of any of the factors it considers, with

[[Page 87191]]

reference to some external, objective standard. The explanations and 
analyses provided by the SBSEF generally should provide adequate 
justification as to how all the factors considered apply to the SBS MAT 
determination, as well as to why any factors enumerated in Rule 816(b) 
that are not addressed are not relevant. A failure, on the part of the 
SBSEF, to address any factors that are relevant or to adequately 
support its assertions would be a basis for the Commission to find that 
a MAT determination is inconsistent with the SEA and its rules.
---------------------------------------------------------------------------

    \304\ See 2013 CFTC Final MAT Rules Release, supra note 9, 78 FR 
at 33613.
---------------------------------------------------------------------------

    One commenter, while supporting harmonization with the CFTC's MAT 
standards, expresses concern with the current framework for determining 
whether mandatorily cleared SBS should also be mandated for SBSEF 
trading through the MAT process. This commenter urges that there be a 
substantive analysis of whether an SBS has sufficient liquidity 
available to market participants on the SBSEF. The commenter states 
that, absent a robust MAT process requiring the SBSEF to demonstrate 
that voluntary exchange trading has met minimum liquidity and other 
standards, an absence of liquidity for the newly MAT-ed product on the 
SBSEF could shut out asset managers from accessing liquidity for their 
clients once OTC trading is prohibited. To this end, the commenter 
recommends that the Commission specify that the MAT standards are not 
synonymous with the clearing requirement standards. The commenter 
asserts that its assessment reflects the fact that necessary market 
conditions that make central clearing appropriate are different from 
the necessary market conditions that make mandatory SBSEF execution 
appropriate.\305\
---------------------------------------------------------------------------

    \305\ See SIFMA AMG Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the Commission's 
approach to MAT determinations and the six factors enumerated in the 
rule, urges the Commission to take a cautious approach in its 
assessment of whether a MAT determination is appropriate. Specifically, 
the commenter recommends that the Commission carefully consider each 
factor, individually and collectively, in assessing whether a 
particular SBS has sufficient liquidity to support mandatory SBSEF 
trading. The commenter also cautions that the Commission should avoid 
broad MAT categorizations for specific types of SBS when individual SBS 
products within each category may be more or less suitable for a MAT 
designation.\306\
---------------------------------------------------------------------------

    \306\ See MFA Letter, supra note 18, at 9.
---------------------------------------------------------------------------

    From the factors enumerated in Rule 816(b), it is clear that 
additional factors, beyond the fact that a product is subject to 
mandatory clearing, will need to be considered in determining whether 
an SBS is suitable to be MAT, and these factors are directly relevant 
to the liquidity of trading in a given SBS: whether there are willing 
buyers and sellers, the frequency and size of transactions, the trading 
volume, the number and types of market participants, the bid/ask 
spread, and the usual number of resting firm or indicative bids and 
offers. Adopting specific thresholds, however, would be too rigid an 
approach to accommodate the different kinds of SBSs that may be traded 
on an SBSEF, particularly at this early stage. As stated above, the 
Commission or its staff will review SBS products on a case-by-case 
basis, and for SBS products presenting novel or complex issues there 
will be an extended period for the Commission to review the submission 
and consider public comments on the appropriateness of a MAT 
determination on a case-by-case basis, taking into account the facts 
and circumstances of the SBS subject to the determination, including 
when a filing seeks to include a broad category of SBS within a MAT 
determination.
    The Commission has carefully considered the concerns raised by 
commenters regarding the determination of when an SBS is appropriate 
for a MAT determination by an SBSEF, and the Commission is adopting 
Rule 816(b) as proposed. The Commission appreciates that a MAT 
determination for an SBS will be consequential for market participants, 
and that the enumerated factors in Rule 816(b) are important components 
of an analysis of whether an SBS is appropriate for a MAT 
determination. Rule 816(b) will require SBSEFs to consider each of the 
factors enumerated in Rule 816(b), as appropriate. As noted above, a 
flexible approach to the enumerated factors will accommodate the 
different kinds of SBSs that will be traded on SBSEFs. While the rule 
does not require that every factor be considered in every case, to the 
extent that a factor is relevant and an SBSEF's MAT determination 
submission fails to sufficiently address that factor, the Commission 
would be in a position to either disapprove the submission, if made 
under Rule 806, or stay and ultimately object to the submission, if 
self-certified under Rule 807.
    Furthermore, the rules for filing MAT determinations require SBSEFs 
to provide, among other things, an explanation and analysis of the 
proposed MAT determination, including a discussion of its compliance 
with the SEA, the Core Principles for SBSEFs, and the Commission's 
rules thereunder. In the case of a MAT determination, the SBSEF 
generally should do more than simply state that it is consistent with 
the SEA and the Commission's rules thereunder, but should also provide 
supporting analysis, and supporting documentation as appropriate, for 
its conclusion. If an SBSEF fails to provide adequate explanation or 
analyses of the MAT determination, it would be difficult for the 
Commission to find that the determination is consistent with the SEA 
and the Commission's rules thereunder. Thus, MAT determination filings 
generally should be accompanied with adequate discussion and support 
for a MAT determination based on all relevant factors in Rule 816(b), 
including discussion supporting a conclusion that the SBS product 
subject to the MAT determination achieves the appropriate thresholds 
for that category of products. Furthermore, for MAT determinations 
presenting novel or complex issues, there will be an extended period 
for the Commission to solicit and consider public comments on, among 
other things, the appropriateness of the factors considered.
    For the reasons discussed above, the Commission is adopting Rule 
816(b) as proposed.
4. Rule 816(c)
    Paragraph (c) of Rule 816 provides that, upon a determination that 
an SBS has been MAT on an SBSEF or SBS exchange,\307\ all other SBSEFs 
and SBS exchanges shall comply with the requirements of section 3C(h) 
of the SEA in listing or offering that SBS for trading.
---------------------------------------------------------------------------

    \307\ An SBS exchange, like all national securities exchanges, 
must submit any rule change--including a rule change to list a new 
derivative securities product and/or to MAT an SBS product--pursuant 
to SEA Rule 19b-4, 17 CFR 240.19b-4. The proposed rule text did not 
establish a new procedure for SBS exchanges to list or MAT SBS 
products. See Proposing Release, 87 FR at 28898 n.107.
---------------------------------------------------------------------------

    The Commission received no comments on Rule 816(c) and the 
Commission is adopting Rule 816(c) as proposed for the reasons stated 
in the Proposing Release.
5. Rule 816(d)
    Paragraph (d) of Rule 816 provides that the Commission may issue a

[[Page 87192]]

determination that an SBS is no longer MAT upon determining that no 
SBSEF or SBS exchange lists that SBS for trading.
    The Commission received one comment on Rule 816(d).\308\ This 
commenter recommends that the Commission modify its proposed approach 
to removing an SBS from the trade execution requirement. The commenter 
states that the proposed approach raises a significant risk that an SBS 
may be required to be traded on an SBSEF merely because it is listed on 
one SBSEF, even if there is no liquidity to sustain trading in that 
SBS, which could be detrimental for both buy-side and sell-side market 
participants. To ensure that there is adequate liquidity in MAT SBSs, 
the commenter recommends that the Commission adopt a process for 
removing an SBS from the MAT scope that is similar to the process for 
making a MAT determination. The commenter also urges the Commission, 
given the industry's recent experience with the COVID-19 crisis, and 
consistent with the MRAC Report, to consider the implications that a 
temporary outage at one or more SBSEFs or a major market disruption 
would have for SBSs subject to the trade execution requirement. For 
this reason, the commenter recommends that the Commission consider the 
circumstances under which it would allow for a temporary suspension of 
the trade execution requirement and any possible terms for such a 
suspension, as well as any other relief measures the Commission may be 
able to provide.\309\
---------------------------------------------------------------------------

    \308\ See ICI Letter, supra note 18, at 9.
    \309\ See id.
---------------------------------------------------------------------------

    The commenter's concern that an SBS may be required to be traded on 
an SBSEF merely because a single SBSEF has listed that SBS, even if 
there is no liquidity to sustain trading in that SBS, is addressed by 
the requirements in Rule 816(b) that must be met by an SBSEF before it 
submits a MAT determination under Rule 806 or Rule 807, as well as by 
the Commission's ability to disapprove, or stay and then object to, any 
MAT determination by an SBSEF. In considering an SBSEF's MAT 
submission, the Commission will generally consider how many SBSEFs list 
and trade a given SBS, as well as the liquidity and trading 
characteristics of that SBS. Further, to the extent market 
circumstances change to make a previous MAT determination unsuitable 
for then-prevailing market conditions, and if the SBSEF that has made a 
MAT determination is unwilling to withdraw that determination, the 
Commission would be able to grant exemptive relief (including on an 
emergency basis) pursuant to its authority in section 36 of the SEA in 
order to address that situation.\310\ For these reasons, the Commission 
would have the ability to address market circumstances that disrupt the 
ability of market participants to trade SBS in compliance with the 
trade execution requirement.
---------------------------------------------------------------------------

    \310\ See 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    Therefore, the Commission is adopting Rule 816(d) as proposed.
6. Rule 816(e)
    Paragraph (e) of Proposed Rule 816 has no analog in Sec.  37.10, 
but instead is adapted from 17 CFR 36.1 of the CFTC's rules, which sets 
out certain exemptions from the trade execution requirement. The 
exemptions incorporated into Sec.  36.1 result from the CFTC's many 
years of experience in administering the CEA's trade execution 
requirement.
    Paragraph (e)(1) of Rule 816 provides that an SBS transaction that 
is executed as a component of a package transaction and that also 
includes a component transaction that is the issuance of a bond in a 
primary market is exempt from the trade execution requirement in 
section 3C(h) of the SEA. In addition, paragraph (e)(1) provides that, 
for purposes of paragraph (e), a package transaction consists of two or 
more component transactions executed between two or more counterparties 
where: at least one component transaction is subject to the trade 
execution requirement in section 3C(h) of the SEA; execution of each 
component transaction is contingent upon the execution of all other 
component transactions; and the component transactions are priced or 
quoted together as one economic transaction with simultaneous or near-
simultaneous execution of all components.
    Paragraph (e)(2) of Rule 816, which is adapted from Sec.  36.1(b), 
provides that section 3C(h) of the SEA does not apply to an SBS 
transaction that qualifies for an exception \311\ under section 3C(g) 
of the SEA, or any exemption from the clearing requirement that is 
granted by the Commission, for which the associated requirements are 
met.\312\ Unlike the CFTC, the Commission does not have a specific rule 
to cite to regarding exemptions from the clearing requirement, so Rule 
816(e)(2) would refer only generally to such exemptions.
---------------------------------------------------------------------------

    \311\ Section 3C(g) of the SEA is entitled ``Exceptions,'' not 
``Exemptions.''
    \312\ As with section 2(h)(8) of the CEA, section 3C(h) of the 
SEA provides that the trade execution requirement does not apply to 
SBS that are excepted from the clearing requirement pursuant to 
section 3C(g) of the SEA. However, the Commission could, like the 
CFTC, grant exemptions from the clearing requirement pursuant to 
other statutory authority, such as section 36 of the SEA.
---------------------------------------------------------------------------

    Paragraph (e)(3) of Rule 816, which is adapted from Sec.  36.1(c), 
provides that section 3C(h) of the SEA does not apply to an SBS 
transaction that is executed between counterparties that qualify as 
``eligible affiliate counterparties.'' \313\ Counterparties would be 
``eligible affiliate counterparties'' for purposes of Rule 816(e)(3) 
if: (i) one counterparty, directly or indirectly, holds a majority 
ownership interest in the other counterparty, and the counterparty that 
holds the majority interest in the other counterparty reports its 
financial statements on a consolidated basis under Generally Accepted 
Accounting Principles (``GAAP'') or International Financial Reporting 
Standards (``IFRS''), and such consolidated financial statements 
include the financial results of the majority-owned counterparty; or 
(ii) a third party, directly or indirectly, holds a majority ownership 
interest in both counterparties, and the third party reports its 
financial statements on a consolidated basis under GAAP or IFRS, and 
such consolidated financial statements include the financial results of 
both of the counterparties. In addition, for purposes of Rule 
816(e)(3), a counterparty or third party directly or indirectly would 
hold a majority ownership interest if it directly or indirectly holds a 
majority of the equity securities of an entity, or the right to receive 
upon dissolution, or the contribution of, a majority of the capital of 
a partnership.
---------------------------------------------------------------------------

    \313\ Section 36.1(c) provides that section 2(h)(8) of the CEA 
does not apply to a swap transaction that is executed between 
counterparties that have eligible affiliate counterparty status 
pursuant to paragraph (a) of Sec.  50.52 of the CFTC's rules, which 
provides an exception from the clearing requirement for inter-
affiliate swaps, subject to conditions. Counterparties to a swap 
that have eligible affiliate counterparty status may rely on the 
Sec.  36.1(c) even if they clear the swap transaction. Since the 
Commission does not have an equivalent to Sec.  50.52 to reference, 
the Commission is instead defining the term ``eligible affiliate 
counterparties'' directly in Rule 816(e)(3). These definitions are 
closely modeled on the equivalent definitions used in Sec.  50.52, 
which are incorporated into Sec.  36.1(c).
---------------------------------------------------------------------------

    The Commission received comments on Rule 816(e).\314\ One commenter 
supports the proposed carve-out for package transactions.\315\ Another 
commenter, however, states that the CFTC's rules for package 
transactions were ``developed by the CFTC, initially via staff no-
action relief, after SEFs had adopted various MAT determinations and 
market participants had provided input to the CFTC regarding the 
particular types of package transactions

[[Page 87193]]

common in the market for the relevant types of MAT swaps.'' \316\ The 
commenter states that it is for this reason that particular types of 
package transactions addressed by the CFTC generally focus on 
transactions common in the interest-rate swaps market, which make up 
the majority of MAT swaps. In addition, the commenter asserts that the 
current state of the CFTC's rules in this area reflect the culmination 
of a phased implementation approach developed over time via no-action 
letters. The commenter argues that, in light of this, it would be 
better for the Commission to tailor its rules for package transactions 
to address the particular market dynamics relevant to the SBS market 
instead of those in the swaps market. The commenter recommends that the 
Commission build into the MAT determination process a framework for 
identifying what types of package transactions exist for prospective 
MAT SBS and then develop tailored rules around the execution of such 
transactions.\317\
---------------------------------------------------------------------------

    \314\ See ISDA-SIFMA Letter, supra note 18, at 9-10; SIFMA AMG 
Letter, supra note 18, at 6.
    \315\ See SIFMA AMG Letter, supra note 18, at 6.
    \316\ ISDA-SIFMA Letter, supra note 18, at 9.
    \317\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

    The Commission does not agree that it is necessary to tailor the 
Commission's rules for package transactions to address the particular 
market dynamics relevant to the SBS market, because no MAT 
determinations for SBS have been made, and no MAT determinations can 
yet be made because no SBS are required to be cleared. Moreover, the 
Commission does not yet have a sufficient basis on which to tailor the 
rules for package transactions to address SBS market dynamics, because 
the market dynamics relevant to trading of SBS on SBSEFs have yet to 
develop. It would be preferable to address those dynamics with respect 
to package transactions if and when it becomes necessary or appropriate 
to do so, because, at that point, the Commission and commenters would 
be better informed about the nature of trading various SBS on SBSEFs. 
In the meantime, it is desirable for Rule 816(e) to be harmonized with 
Sec.  36.1 of the CFTC's rules to promote similar treatment of package 
trades, whether they involve SBS or swaps, as this will facilitate the 
participation of current SEF participants on SBSEFs. If, after SBSEFs 
have become operational and MAT determinations have been made, the 
Commission observes that the rules for package transactions are no 
longer suitable for the SBS market, the Commission could consider 
amending Rule 816(e) at that time.
    For the reasons discussed above, the Commission is adopting Rule 
816(e) as proposed.

G. Rule 817--Trade Execution Compliance Schedule

    Proposed Rule 817 is modeled on Sec.  37.12 of the CFTC's rules, 
which is designed to inform market participants of the precise date on 
which the trade execution requirement for a particular product 
commences.\318\ Accordingly, paragraph (a) of Rule 817 provides that an 
SBS transaction shall be subject to the requirements of section 3C(h) 
of the SEA upon the later of (1) a determination by the Commission that 
the SBS is required to be cleared as set forth in section 3C(a) or any 
later compliance date that the Commission may establish as a term or 
condition of such determination or following a stay and review of such 
determination pursuant to section 3C(c) of the SEA and Rule 3Ca-1 
thereunder; and (2) 30 days after the available-to-trade determination 
submission or certification for that SBS is, respectively, deemed 
approved under Rule 806 or deemed certified under Rule 807. Paragraph 
(b) of Rule 817 also provides that a counterparty may voluntarily 
comply with the trade execution requirement sooner than required by 
paragraph (a).
---------------------------------------------------------------------------

    \318\ Rule 3Ca-1 under the SEA provides that the Commission may 
determine, following a submission from a clearing agency, that an 
SBS (or a group, category, type, or class of SBS) must be cleared. 
This determination could follow a stay of the clearing requirement 
for additional review. 17 CFR 240.3Ca-1.
---------------------------------------------------------------------------

    The Commission received several comment letters about the 
sufficiency of the time period allotted for compliance with a MAT 
determination.\319\ One commenter encourages the Commission to provide 
an extended duration of time until any MAT determination becomes 
effective so that asset managers and other market participants have 
adequate time to make the necessary operational and market structure 
arrangements to accommodate the trade execution requirement.\320\ 
Another commenter urges the Commission to ensure that all SBSEFs and 
market participants have adequate time to prepare for the operational 
and market conditions that come along with a MAT determination.\321\
---------------------------------------------------------------------------

    \319\ See Bloomberg Letter, supra note 18, at 16; ICI Letter, 
supra note 18, at 8-9; ISDA-SIFMA Letter, supra note 18, at 5, SIFMA 
AMG Letter, supra note 18, at 7; WMBAA Letter, supra note 18, at 5.
    \320\ See SIFMA AMG Letter, supra note 18, at 7.
    \321\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Some commenters recommend that a MAT determination not be effective 
for at least 90 days.\322\ One commenter emphasizes that, after a MAT 
determination, market participants should be provided with sufficient 
time to comply with any new trade execution requirement, and that 
commenter believes that market participants would benefit from 90 days 
to comply.\323\ Another commenter, citing its experience with the MAT 
requirement, states that it has observed that 30 days provides 
insufficient time to adjust trading protocols and ensure a smooth 
transition to trading on SEFs.\324\ In this regard, the commenter asks 
the Commission to extend the time between when a MAT determination is 
made and when it becomes effective from the proposed 30 days to 90 
days. The commenter also asserts that this is consistent with the 
recommendations of the CFTC MRAC report that examined the 
appropriateness, efficacy, and sustainability of the MAT process.
---------------------------------------------------------------------------

    \322\ See Bloomberg Letter, supra note 18, at 16; ICI Letter, 
supra note 18, at 8; ISDA-SIFMA Letter, supra note 18, at 5.
    \323\ See Bloomberg Letter, supra note 18, at 16.
    \324\ See ISDA-SIFMA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Another commenter also cites the CFTC MRAC's report in recommending 
that the Commission provide 90 days after a MAT determination is final 
before it becomes effective. This commenter emphasizes that market 
participants will need an adequate compliance period after a mandatory 
clearing determination is made and after the SBS is first made 
available to trade on an SBSEF to prepare. The commenter expresses 
concern that, under the proposed approach, if an SBS is made available 
to trade fewer than 30 days before a mandatory clearing determination, 
then the SBS would be subject to mandatory trading on an SBEF with a 
less than 30-day compliance period. This commenter urges the Commission 
to clarify that the scope of eligible SBS for MAT determination is 
limited to only those that have already been determined to be subject 
to mandatory clearing. This commenter also asserts that, even when an 
SBS is already subject to mandatory clearing, the proposed 30-day 
compliance period would still be inadequate given the complex 
operational and technological steps that must be taken to trade a new 
SBS on an SBSEF. The commenter states that market participants such as 
regulated funds will need time to onboard to an SBSEF if necessary, and 
to further update their systems, processes, and procedures to transact 
via an SBSEF's order book or RFQ system.\325\
---------------------------------------------------------------------------

    \325\ See ICI Letter, supra note 18, at 3, 8.

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

[[Page 87194]]

    The Commission has considered commenters' requests for an extended 
compliance period for the mandatory trading requirement once a MAT 
determination has been made with respect to an SBS. The presence of 
ready and willing buyers and sellers and the number and types of market 
participants, among other things, are relevant factors in a MAT 
determination under Rule 816(b).\326\ As noted above, the extent to 
which a MAT determination is likely to be disruptive to the market for 
a given SBS is best addressed in the context of making the MAT 
determination, which, as discussed above, allows for the Commission 
oversight of the determination through its review and approval or 
disapproval of a filing under Rule 806, or through staying and seeking 
public comment on a self-certification under Rule 807.\327\ Further, 
with respect to the suggestion that the Commission clarify that the 
scope of eligible SBS for MAT determination is limited to only those 
that have already been determined to be subject to mandatory clearing, 
a MAT determination filing would not have any relevance until there are 
any SBSs subject to the clearing requirement.
---------------------------------------------------------------------------

    \326\ See supra section V.F.3.
    \327\ See supra section V.F.2.
---------------------------------------------------------------------------

    It is not necessary to revise the 30-day period for compliance with 
a MAT determination, because the readiness of the market to comply with 
a MAT determination for a particular SBS would be relevant to the MAT 
determination itself, including the analysis of the six factors 
enumerated in Rule 816(b), and because an analysis of that readiness 
would best be undertaken based on the facts and circumstances attending 
a specific MAT determination.
    For the reasons discussed above, the Commission is adopting Rule 
817 as proposed.

VI. Implementation of Core Principles

    Section 3D(d) of the SEA \328\ sets forth 14 Core Principles with 
which SBSEFs must comply. These provisions, with one exception, 
correspond to the 15 Core Principles for SEFs set forth in section 
5h(f) of the CEA.\329\
---------------------------------------------------------------------------

    \328\ 15 U.S.C. 78c-4(d).
    \329\ Compare 7 U.S.C. 7b-3(f) (enumerating 15 Core Principles 
for SEFs), with 15 U.S.C. 78c-4(d) (enumerating 14 Core Principles 
for SBSEFs). CEA Core Principle 6 for SEFs (Position Limits or 
Accountability) has no analog in the SEA, so the numbering of the 
subsequent Core Principles between the two statutes differs by one.

------------------------------------------------------------------------
          Core principle title                 CEA #           SEA #
------------------------------------------------------------------------
Compliance with Core Principles.........               1               1
Compliance with Rules...................               2               2
(Security-Based) Swaps Not Readily                     3               3
 Susceptible to Manipulation............
Monitoring of Trading and Trade                        4               4
 Processing.............................
Ability to Obtain Information...........               5               5
Position Limits or Accountability.......               6             n/a
Financial Integrity of Transactions.....               7               6
Emergency Authority.....................               8               7
Timely Publication of Trading                          9               8
 Information............................
Recordkeeping and Reporting.............              10               9
Antitrust Considerations................              11              10
Conflicts of Interest...................              12              11
Financial Resources.....................              13              12
System Safeguards.......................              14              13
Designation of Chief Compliance Officer.              15              14
------------------------------------------------------------------------

    It continues to be appropriate to closely harmonize with the CFTC 
rules that implement the SEF Core Principles, although there are some 
instances where close harmonization is not practicable. Where there are 
substantive differences between an existing CFTC rule and the SEC rule 
being adopted, the discussion below addresses those differences. The 
discussion below will also address where there is not, or at least 
there is not intended to be, a difference between the SEC rule and the 
analogous existing CFTC rule.
    Part 37 of the CFTC's rules includes an appendix B, setting forth 
``Guidance on, and Acceptable Practices in, Compliance with Core 
Principles.'' The introduction to appendix B provides that the guidance 
for the Core Principle is illustrative only and ``is not intended to be 
used as a mandatory checklist.'' \330\ Where the CFTC has included 
guidance and/or accepted practices pertaining to a Core Principle for 
SEFs, the discussion below addresses how (if at all) the Commission has 
incorporated the substance of these statements into Regulation SE.
---------------------------------------------------------------------------

    \330\ 17 CFR appendix-B-to-part-37 1.
---------------------------------------------------------------------------

A. Rule 818--Core Principle 1--Compliance With Core Principles

    Core Principle 1 \331\ requires an SBSEF, to be registered and 
maintain registration as an SBSEF, and to comply with the Core 
Principles and any requirement that the Commission may impose by rule 
or regulation. Core Principle 1 also provides that an SBSEF shall have 
reasonable discretion in establishing the manner in which it complies 
with the Core Principles.\332\ Proposed Rule 818, like Sec.  37.100 of 
the CFTC's rules, repeats the relevant statutory text of the Core 
Principle.
---------------------------------------------------------------------------

    \331\ Section 3D(d)(1) of the SEA, 15 U.S.C. 78c-4(d)(1).
    \332\ CEA Core Principle 1 is substantively identical. See 7 
U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 818 and is 
adopting Rule 818 as proposed for the reasons stated in the Proposing 
Release.

B. Rule 819--Core Principle 2--Compliance With Rules

    Core Principle 2 requires an SBSEF to establish and enforce 
compliance with any rule that is established by the SBSEF, including 
the terms and conditions of the SBS that it trades or processes, and 
any limitation on access to the SBSEF.\333\ It further requires the 
SBSEF to establish and enforce trading, trade processing, and 
participation rules that will deter abuses, and to have the capacity to 
detect, investigate, and enforce those rules, including the means to 
provide market participants with impartial access to the market and to 
capture information that may be used in establishing whether rule 
violations have occurred. Finally, Core Principle 2 requires an SBSEF 
to establish rules governing the operation of the facility, including 
rules specifying trading procedures to be used in entering and 
executing orders traded or posted on the

[[Page 87195]]

facility, including block trades. Core Principle 2 for SEFs \334\ is 
substantively identical, except that it includes an additional 
paragraph requiring a SEF to provide in its rules that, when a swap 
dealer or major swap participant enters into or facilitates a swap that 
is subject to the mandatory clearing requirement, the swap dealer or 
major swap participant shall be responsible for compliance with the 
trade execution requirement.\335\
---------------------------------------------------------------------------

    \333\ Section 3D(d)(2) of the SEA, 15 U.S.C. 78c-4(d)(2).
    \334\ 7 U.S.C. 7b-3(f)(2).
    \335\ See 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

    As described in the Proposing Release, the Commission modeled Rules 
819 (a) through (g) on subpart C of part 37 of the CFTC's rules,\336\ 
and Rules 819 (h) through (k) on other parts of the CFTC's rules.\337\
---------------------------------------------------------------------------

    \336\ See Proposing Release, supra note 1, 87 FR at 28901-05.
    \337\ See id. at 28905-09.
---------------------------------------------------------------------------

1. Rule 819(a)--General
    Paragraph (a) of Proposed Rule 819, like Sec.  37.200 of the CFTC's 
rules,\338\ would repeat the statutory text of Core Principle 2.\339\ 
The Commission did not receive any comments on Proposed Rule 819(a). It 
is appropriate to repeat the statutory text of Core Principle 2 in Rule 
819(a) and is adopting Rule 819(a) as proposed, except that it is 
deleting the words ``including block trades,'' in light of its decision 
not to adopt a definition of ``block trade.'' \340\
---------------------------------------------------------------------------

    \338\ 17 CFR 37.200; see also Proposing Release, supra note 1, 
87 FR at 28901.
    \339\ See Proposing Release, supra note 1, 87 FR at 28902.
    \340\ See supra section V.E.1(c).
---------------------------------------------------------------------------

2. Rule 819(b)--Operation of Security-Based Swap Execution Facility and 
Compliance With Rules
    Paragraph (b) of Proposed Rule 819 is closely modeled on Sec.  
37.201 of the CFTC's rules,\341\ and would require an SBSEF to specify 
trading procedures (including for block trades, if offered) and to 
establish and impartially enforce compliance with the rules of the 
SBSEF.\342\ The Commission did not receive any comments on Proposed 
Rule 819(b). It is appropriate for an SBSEF to specify trading 
procedures and to establish and impartially enforce compliance with its 
rules, and the Commission is adopting Rule 819(b) as proposed, except 
that it is deleting the words ``including block trades, if offered,'' 
in light of its decision not to adopt a definition of ``block trade,'' 
\343\ which will have no effect on the requirement as compared to the 
proposed rule.
---------------------------------------------------------------------------

    \341\ 17 CFR 37.201; see also Proposing Release, supra note 1, 
87 FR at 28901.
    \342\ See Proposing Release, supra note 1, 87 FR at 28902.
    \343\ See supra section V.E.1(c).
---------------------------------------------------------------------------

3. Rule 819(c)--Access Requirements
    Paragraph (c) of Proposed Rule 819 is closely modeled on Sec.  
37.202 of the CFTC's rules,\344\ and would require an SBSEF, consistent 
with section 3D(d)(2)(B)(i) of the SEA,\345\ to provide any ECP and any 
independent software vendor with impartial access to its market(s) and 
market services, including any indicative quote screens or any similar 
pricing data displays. An SBSEF will also be required to establish 
nondiscriminatory fee structures for ECPs and independent software 
vendors based on the level of access to or services provided by the 
SBSEF. Rule 819 further requires an SBSEF to establish and impartially 
enforce rules governing any decision to allow, deny, suspend, or 
permanently bar an ECP's access to the SBSEF, including when a decision 
is made as part of a disciplinary or emergency action taken by the 
SBSEF.
---------------------------------------------------------------------------

    \344\ 17 CFR 37.202; see also Proposing Release, supra note 1, 
87 FR at 28901.
    \345\ 15 U.S.C. 78c-4(d)(2)(B)(i) (``a security-based swap 
execution facility shall . . . establish and enforce trading, trade 
processing, and participation rules that will deter abuses and have 
the capacity to detect, investigate, and enforcement those rules, 
including means . . . to provide market participants with impartial 
access to the market'').
---------------------------------------------------------------------------

    Several commenters express general support for the adoption of 
impartial access standards for SBSEFs.\346\ One commenter specifically 
supports the Commission's close harmonization with CFTC rules.\347\
---------------------------------------------------------------------------

    \346\ See Citadel Letter, supra note 18, at 6-7; SIFMA AMG 
Letter, supra note 18, at 4; MFA Letter, supra note 18, at 10.
    \347\ See MFA Letter, supra note 18, at 10.
---------------------------------------------------------------------------

    One commenter expresses support for Proposed Rule 819(c), but 
states that the Commission's proposal does not provide market 
participants with sufficient clarity regarding how Proposed Rule 819(c) 
will be interpreted and applied in practice, and the commenter 
encourages the Commission to provide in the final rule that access to 
SBSEFs should be based on ``objective, pre-established'' criteria, and 
that any ECP should be able to demonstrate financial soundness by 
showing that it is a clearing member or that it has clearing 
arrangements in place with a clearing member.\348\
---------------------------------------------------------------------------

    \348\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    This commenter states that the CFTC has provided market 
participants with extensive guidance regarding impartial access and 
encourages the Commission to provide similar clarity when finalizing 
the SBSEF rules, including guidance with respect to membership 
criteria, trading protocols and functionality, and fee arrangements. 
Specifically, this commenter urges the Commission to provide in the 
final rule that an SBSEF may not limit membership to (i) self-clearing 
members; (ii) registered security-based swap dealers; (iii) banks or 
liquidity providers with a minimum amount of Tier 1 capital; (iv) 
liquidity providers that have been ``enabled'' by, or have bilateral 
documentation with, a minimum number of other liquidity providers; or 
(v) liquidity providers with a minimum amount of transaction 
volume.\349\
---------------------------------------------------------------------------

    \349\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    This commenter also states that SBSEFs should not be permitted to 
apply trading protocols in a manner that results in impermissible 
discrimination among market participants. Specifically, the commenter 
states that SBSEFs should not allow participants to selectively 
restrict their trading with other SBSEF participants through 
``enablement mechanisms''; that market participants should be permitted 
to act as both liquidity providers and liquidity takers on an SBSEF; 
that all SBSEF participants should be permitted to both send and 
receive RFQs (instead of only designated liquidity providers being 
eligible to receive RFQs); and that SBSEFs should not be permitted to 
require participants to have bilateral documentation in place to trade 
cleared security-based swaps, as this could provide a pretext for some 
participants to restrict trading with other participants. This 
commenter further states that SBSEFs should not be permitted to use fee 
arrangements to effect otherwise impermissible discrimination with 
respect to access.\350\
---------------------------------------------------------------------------

    \350\ See id.
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    Another commenter also urges the Commission to incorporate the 
CFTC's impartial access requirement guidance with respect to SBSEFs, 
which would assist market participants in interpreting how the 
impartial access rules should work. Coordination of impartial access 
``not only affects an entity operating both an SEF and SBSEF but also 
their clients, many of whom use the same individual traders to trade 
both instrument types.\351\ One commenter specifically encourages the 
Commission to address the potential use of restrictive requirements to 
obtain access to SBSEFs and to make clear that an SBSEF's reasonable 
discretion in establishing access criteria must be impartial,

[[Page 87196]]

transparent, and applied in a fair and nondiscriminatory manner.\352\
---------------------------------------------------------------------------

    \351\ See MFA Letter, supra note 18, at 10.
    \352\ See SIFMA AMG Letter, supra note 18, at 4.
---------------------------------------------------------------------------

    One commenter states that the trading documentation requirement of 
Rule 15Fi-5 may at times conflict with the impartial access requirement 
of Proposed Rule 819(c) because it is unlikely that all SBSEF members 
trading cleared swaps will have trading relationship documentation with 
all other members trading cleared SBS.\353\ This commenter encourages 
the Commission to adopt the CFTC guidance regarding enablement 
mechanisms and states that such mechanisms were historically used to 
eliminate credit risk, but that no such risk exists if an SBSEF 
intended to be cleared is void ab initio if rejected for clearing.
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    \353\ See Bloomberg Letter, supra note 18, at 3-4.
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    The Commission agrees with commenters that impartial access to an 
SBSEF encompasses both impartial access to membership in an SBSEF and 
the ability to fully interact on the SBSEF's order book or RFQ system, 
and that an SBSEF's rules must incorporate impartial criteria for this 
access. The Commission expects that most, if not all, entities that 
will seek SBSEF registration with the SEC are or will also be 
registered as SEFs with the CFTC and that ensuring consistency of 
access to SBSEFs and SEFs will provide market participants with greater 
certainty about permissible practices regarding access to these 
platforms.\354\ Efforts to undermine the principle of impartial access 
may take myriad forms over time. The text of Rule 819(c) is consistent 
with the text of Sec.  37.202 of the CFTC's regulations and emphasizes 
the general principal that access to an SBSEF and its services must be 
impartial. The Commission does not find it necessary to describe within 
819(c) specific practices that would violate its requirements. For the 
purposes of the Commission's review process for a denial or limitation 
of access or membership that is inconsistent with Rule 918(c), the 
Commission will apply a standard of review consistent with standards of 
review that the Commission uses in similar contexts.\355\
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    \354\ See Proposing Release, supra note 1, 87 FR at 28876.
    \355\ See Rule 819(c)(4). The Commission is adopting Rule 819(c) 
with the addition of paragraph (c)(4). The Commission notes that the 
CFTC has a standard of review applicable to its process. See 17 CFR 
9.2(c); 17 CFR 9.33(c).
---------------------------------------------------------------------------

    The Commission is aware of the CFTC staff guidance on impartial 
access related to Sec.  37.202 of the CFTC's regulations.\356\ The 
Commission finds it is appropriate to similarly provide guidance as to 
certain criteria or practices that are inconsistent with Rule 819(c)'s 
requirement to provide impartial access. The Commission agrees that it 
is inconsistent with providing impartial access for an SBSEF to limit 
membership based on an ECP's status, such as by limiting membership to 
(1) self-clearing members; (2) registered security-based swap dealers; 
(3) banks or liquidity providers with a minimum amount of Tier 1 
capital; (4) liquidity providers that have been ``enabled'' by, or have 
bilateral documentation with, a minimum number of other liquidity 
providers; or (5) liquidity providers with a minimum amount of 
transaction volume.\357\ Access to an SBSEF generally should be 
determined, for example, on an SBSEF's ``impartial evaluation of an 
applicant's disciplinary history and financial and operational 
soundness against objective, pre-established criteria.'' \358\ As one 
example of such criteria, any ECP should be able to demonstrate 
financial soundness either by showing that it is a clearing member of a 
clearing agency that clears products traded on that SBSEF or by showing 
that it has clearing arrangements in place with such a clearing 
member.\359\
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    \356\ See Division of Clearing and Risk, Division of Market 
Oversight and Division of Swap Dealer and Intermediary Oversight 
Guidance on Application of Certain Commission Regulations to Swap 
Execution Facilities, CFTC (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
    \357\ See Citadel Letter, supra note 18, at 6. Membership 
requirements based on any combination of these factors would 
similarly be inconsistent with providing impartial access.
    \358\ See 2013 CFTC Final SEF Rules Release, supra note 9, at 78 
FR at 33598 (discussing ``impartial access'' to swap execution 
facilities).
    \359\ See id. Similarly, it is not consistent with impartial 
access for an SBSEF to require that an ECP have clearing 
arrangements in order to trade security-based swaps that are not 
intended to be cleared. In such a case, the SBSEF's standards of 
financial soundness should be objective and impartial and should 
have a relevant relationship to trading on the SBSEF.
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    Further, providing impartial access as required by Proposed Rule 
819(c) means providing all of an SBSEF's market participants--dealers 
and non-dealers alike--with the ability to fully interact on the order 
book or RFQ system as liquidity providers, liquidity takers, or both, 
including viewing, placing, or responding to all indicative or firm 
bids and offers and to place, receive, and respond to RFQs. Therefore, 
it would be incompatible with impartial access for an SBSEF's rules to 
permit mechanisms, schemes, functionalities, counterparty filters, or 
other arrangements that prevent an SBSEF participant from interacting 
or trading with, or viewing the bids and offers (firm or indicative) 
displayed by, any other market participant on that SBSEF, whether by 
means of any condition or restriction on its ability or authority to 
display a quote to any other market participant or to respond to any 
quote issued by any other market participant on that SBSEF with respect 
to security-based swap transactions that are intended to be cleared.
    It is also inconsistent with impartial access for an SBSEF's rules 
to require bilateral documentation or to permit bilateral enablements 
in order to trade security-based swaps that are intended to be cleared, 
because providing for such documentation or enablements solely to 
address occasional trade rejections by a clearing agency would undercut 
the ability of all ECPs to post or interact with interest on security-
based swaps that are intended to be cleared, and because such 
documentation or enablements are unnecessary in light of the provisions 
of Rule 815(g), which, as discussed supra section V.E.7, would require 
an SBSEF's rules to provide that a trade that is intended to be cleared 
at the time of the transaction, but is not accepted for clearing by a 
registered clearing agency, is void ab initio. Providing that such 
trades are void ab initio also reflects the economic reality that an 
uncleared transaction is significantly different from a cleared 
transaction in terms of the credit risk faced by the counterparties. 
Lastly, it is inconsistent with impartial access for an SBSEF to employ 
fee structures that would have a disproportionate or adverse effect on 
certain market participants based on their status, as described 
above,\360\ with respect to the ability to fully interact on the order 
book or RFQ system as liquidity providers, liquidity takers, or both, 
including viewing, placing, or responding to all indicative or firm 
bids and offers and to place, receive, and respond to RFQs.
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    \360\ See supra note 357 and accompanying text.
---------------------------------------------------------------------------

    With respect to the comment that the documentation requirements of 
Rule 15Fi-5 may, at times, conflict with the impartial access 
requirement of Proposed Rule 819(c), no such conflict exists, because 
Rule 15Fi-5(a)(1)(ii) provides that the rule does not apply to cleared 
swaps, and Rule 15Fi(a)(1)(iii) further provides that the rule does not 
apply to security-based swap transactions executed anonymously on an 
SBSEF or a national securities

[[Page 87197]]

exchange, provided that certain conditions are met.\361\
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    \361\ See 17 CFR 240.15Fi-5(a)(1)(ii) and (iii). Rule 15Fi-
5(a)(1)(iii) provides in part that SBSs executed anonymously on an 
SEF or a national securities exchange are exempt from the provisions 
of Rule 15Fi-5, provided that: (1) the SBSs are intended to be 
cleared and are actually submitted for clearing to a clearing 
agency; (2) all terms of the SBSs conform to the rules of the 
clearing agency; and (3) upon acceptance of such an SBS by the 
clearing agency the original SBS is extinguished; the original SBS 
is replaced by equal and opposite SBS with the clearing agency; and 
all terms of the SBS conform to the product specifications of the 
cleared SBS established under the clearing agency's rules. See 17 
CFR 240.15Fi-5(a)(1)(iii).
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4. Rule 819(d)--Rule Enforcement Program
    Paragraph (d) of Proposed Rule 819 is closely modeled on Sec.  
37.203. Paragraph (d)(1) of Proposed Rule 819 would require an SBSEF to 
prohibit abusive trading practices generally, enumerating certain 
practices in particular.\362\ Paragraph (d)(2) would require an SBSEF 
to have arrangements and resources for effective enforcement of its 
rules, including the authority to collect information and documents on 
both a routine and non-routine basis and to supervise its market to 
determine whether a rule violation has occurred. Paragraph (d)(3) would 
require an SBSEF to establish and maintain sufficient compliance staff 
and resources to ensure that it can conduct effective audit trail 
reviews, trade practice surveillance, market surveillance, and real-
time market monitoring. Paragraph (d)(4) would require an SBSEF to 
maintain an automated trade surveillance system that meets certain 
criteria. Paragraph (d)(5) would require real-time market monitoring of 
all trading activity on the SBSEF. The SBSEF would also be required to 
have the authority to adjust trade prices or cancel trades when 
necessary to mitigate market disrupting events caused by malfunctions 
in its system(s) or platform(s) or errors in orders submitted by 
members. Paragraph (d)(6) is modeled on Sec.  37.203(f), again using 
the same structure and rule text. Like Sec.  37.203(f), Rule 819(d)(6) 
addresses investigations and investigation reports and includes 
provisions relating to procedures, timeliness, the reporting 
requirements when a reasonable basis does or does not exist for finding 
a violation, and warning letters.\363\
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    \362\ To promote uniformity throughout proposed Regulation SE, 
it is appropriate to denote all persons who have a right to 
participate in an SBSEF's market as ``members.''
    \363\ Rule 819(d)(6)(v) provides that the rules of an SBSEF may 
authorize its compliance staff to issue a warning letter to a person 
or entity under investigation or to recommend that a disciplinary 
panel take such an action, and that no more than one warning letter 
could be issued to the same person or entity found to have committed 
the same rule violation within a rolling 12-month period.
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    The Commission did not receive any comments on Rule 819(d) and is 
adopting Rule 819(d) as proposed, except that, in light of its decision 
not to adopt a definition of ``block trade,'' \364\ the Commission is 
deleting the words ``block trades or other types of'' from the phrase 
``pre-arranged trading (except for block trades or other types of 
transactions approved by or certified to the Commission pursuant to 
Sec.  242.806 or Sec.  242.807, respectively).'' While the deletion of 
this text would remove an automatic exemption for block trades from the 
prohibition against pre-arranged trading that an SBSEF's rules would be 
required to include, it is appropriate given that a definition of block 
trade has not been adopted. At such time as the Commission adopts a 
definition of block trade, an SBSEF could submit a rule change under 
Rule 806 or Rule 807 to address trades that meet the definition of 
block trade.
---------------------------------------------------------------------------

    \364\ See supra section V.E.1(c).
---------------------------------------------------------------------------

5. Rule 819(e)--Regulatory Services Provided by a Third Party
    Paragraph (e) of Proposed Rule 819 is modeled on Sec.  37.204 and 
would allow an SBSEF to contract with a regulatory services provider. 
If it does so, the SBSEF would have to ensure that such provider has 
the capacity and resources necessary to provide timely and effective 
regulatory services, retain sufficient compliance staff to supervise 
the quality and effectiveness of the regulatory services provided on 
its behalf, hold regular meetings with the regulatory service provider, 
and conduct periodic reviews of the adequacy and effectiveness of 
services provided on its behalf. The SBSEF would at all times remain 
responsible for the performance of any regulatory services received and 
retain exclusive authority in all substantive decisions made by its 
regulatory service provider.
    One commenter states that SBSEFs should be able to use regulatory 
service providers and that the types of regulatory service providers 
permitted under Proposed Rule 819(e)(1) are appropriate.\365\ Another 
commenter also supports the use of regulatory service providers but 
believes that the Commission should include DCMs among the types of 
entities permitted to act as regulatory service providers, as they are 
``uniquely qualified'' and are permitted to act as regulatory service 
provider under the CFTC SEF regime.\366\ This commenter states that 
DCMs have well-established regulatory protocols and are subject to CFTC 
oversight, conduct regulatory activities similar to registered futures 
associations, have developed expertise in securities markets, and are 
permitted to list futures on individual stocks and to list swap 
contracts for trading.\367\
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    \365\ See Bloomberg Letter, supra note 18, at 16.
    \366\ See ICE Letter, supra note 18, at 3.
    \367\ See id. at 3-4 (also stating that, for example, ICE 
Futures U.S., Inc. is a DCM that provides regulatory services to 
SEFs).
---------------------------------------------------------------------------

    The Commission agrees that SBSEFs should be able to contract with 
DCMS for the provision of regulatory services. As the commenter states, 
DCMs have well-established regulatory protocols and are subject to CFTC 
oversight, and they are permitted to act as regulatory service 
providers for SEFs. Additionally, permitting an SBSEF to use the same 
regulatory service provider as an affiliated SEF may create 
efficiencies for both the SBSEF and SEF, while maintaining regulatory 
oversight of the entity that is providing the regulatory services. 
While the CFTC's regulation for SEFs does not contain a reciprocal 
provision permitting national securities exchanges to perform 
regulatory services for SEFs, harmonization in practical terms with 
this aspect of the CFTC regime--i.e., so that DCMs can perform 
regulatory services for both SBSEFs and SEFs--is appropriate in light 
of the relative size of the SBSEF market compared to the swaps market 
and because most if not all entities that will seek to register as 
SBSEFs are already registered as SEFs. Significantly, regardless of the 
type of entity acting as regulatory service provider for an SBSEF, the 
SBSEF will at all times remain responsible for the performance of any 
regulatory services received and retain exclusive authority in all 
substantive decisions made by its regulatory service provider. 
Accordingly, the Commission is adopting Rule 819(e) as amended to 
permit SBSEFs to contract with DCMs for the provision of services to 
assist in complying with the SEA and Commission rules thereunder, as 
approved by the Commission.\368\
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    \368\ Specifically, the Commission is adding to Rule 819(e) the 
language ``a board of trade designated as a contract market (under 
section 5 of the Commodity Exchange Act)''--in other words, a DCM--
to the list of entities with which an SBSEF may enter into a 
contract for the provision of regulatory services.
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6. Rule 819(f)--Audit Trail
    Paragraph (f) of Proposed Rule 819 is modeled on Sec.  37.205, 
using the same paragraph structure and rule text. Paragraph (f) would 
require an SBSEF to

[[Page 87198]]

capture and retain all audit trail data necessary to detect, 
investigate, and prevent customer and market abuses, and imposes other 
requirements on the SBSEF's audit trail pertaining to the records that 
must be kept, electronic analysis capability, safe-storage capability, 
and enforcement of the audit trail requirements.
    The Commission did not receive any comments on Proposed Rule 
819(f). An audit trail is a crucial component of a trading venue's 
ability to ensure compliance with its rules. These requirements should 
be modeled on the parallel CFTC regulations regarding SEFs, as most, if 
not all, entities that will register as SBSEFs will be SEFs registered 
with the CFTC, and that consistent requirements will promote a 
consistent approach to compliance. Accordingly, the Commission is 
adopting Rule 819(f) as proposed, with minor technical 
modifications.\369\
---------------------------------------------------------------------------

    \369\ The Commission has corrected a reference to Core Principle 
9 and corrected the phrase ``account(s) owner(s)'' to read 
``account's owner(s).''
---------------------------------------------------------------------------

7. Rule 819(g)--Disciplinary Procedures and Sanctions
    Paragraph (g) of Proposed Rule 819 is based on Sec.  37.206 of the 
CFTC's rules and generally tracks all of its rule text but would 
include additional language derived from guidance in appendix B of part 
37 of the CFTC's rules. Converting the guidance to rule text, and thus 
grouping conceptually related items together, yields the most coherent 
and readable ruleset, instead of incorporating the guidance into a 
stand-alone section of the rules. Accordingly, paragraph (g)(1)(i) of 
Proposed Rule 819 is taken from Sec.  37.206(a) and would require an 
SBSEF to establish and maintain sufficient enforcement staff and 
resources to effectively and promptly prosecute possible rule 
violations within the disciplinary jurisdiction of the SBSEF. 
Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B 
guidance and would provide, respectively, that:
     The enforcement staff of an SBSEF shall \370\ not include 
members or other persons whose interests conflict with their 
enforcement duties.
---------------------------------------------------------------------------

    \370\ In this bullet and the next bullet, the word used in the 
corresponding CFTC guidance was ``should,'' but the Commission 
proposed to replace ``should'' with ``shall'' in both places to 
convert the guidance into an enforceable rule.
---------------------------------------------------------------------------

     A member of the enforcement staff shall not operate under 
the direction or control of any person or persons with trading 
privileges at the SBSEF.
     The enforcement staff of an SBSEF may operate as part of 
the SBSEF's compliance department.
    Paragraph (g)(2) of Rule 819 is modeled on Sec.  37.206(b) and 
would require an SBSEF to establish one or more disciplinary panels 
that are authorized to fulfill their obligations under Proposed Rule 
819. Section 37.206(b) provides that disciplinary panels must meet the 
composition requirements of part 40. To help ensure fairness and 
prevent special treatment or preference of any person or member and to 
provide for consistency in the makeup of members of SBSEF major 
disciplinary committees and hearing panels, the Commission proposed 
instead to require the disciplinary panels established under Proposed 
Rule 819(g)(2) to meet the composition requirements of Rule 834(d), 
which apply to each major disciplinary committee and hearing panel of 
an SBSEF.\371\
---------------------------------------------------------------------------

    \371\ Proposed Rule 834(d) would require each SBSEF and SBS 
exchange to ensure that its disciplinary processes preclude any 
member, or group or class of its members, from dominating or 
exercising disproportionate influence on the disciplinary process, 
and that each major disciplinary committee or hearing panel include 
sufficient different groups or classes of its members so as to 
ensure fairness and to prevent special treatment or preference for 
any person or member in the conduct of the responsibilities of the 
committee or panel. See infra section VIII.
---------------------------------------------------------------------------

    Paragraphs (g)(3) through (8) of Proposed Rule 819 have no parallel 
in Sec.  37.206 itself but derive from the guidance in appendix B 
pertaining to Sec.  37.206, following the paragraph structure and 
wording of the guidance closely. Paragraph (g)(3) would impose 
procedural requirements relating to the notice of charges made to a 
respondent. Paragraph (g)(4) would provide that a respondent has a 
right to representation. Paragraph (g)(5) would provide that a 
respondent must be given adequate time to respond to any charges. 
Paragraph (g)(6) would state that the rules of an SBSEF may provide 
that, if a respondent admits or fails to deny any of the charges, a 
disciplinary panel may find that the violations alleged in the notice 
of charges have been committed. Paragraph (g)(6) would further state 
that, if the SBSEF's rules so provide, then: (i) The disciplinary panel 
may impose a sanction for each violation found to have been committed; 
(ii) The disciplinary panel shall promptly notify the respondent in 
writing of any sanction to be imposed and shall advise the respondent 
that the respondent may request a hearing on such sanction within the 
period of time, which shall be stated in the notice; and (iii) The 
rules of the SBSEF may provide that, if a respondent fails to request a 
hearing within the period of time stated in the notice, the respondent 
will be deemed to have accepted the sanction.
    Paragraph (g)(7) of Proposed Rule 819 would provide that, where a 
respondent has requested a hearing on a charge that is denied, or on a 
sanction set by the disciplinary panel, the respondent shall be given 
an opportunity for a hearing in accordance with the rules of the SBSEF. 
Paragraph (g)(8) would address settlement offers.
    Paragraph (g)(9) of Proposed Rule 819 returns to the text of Sec.  
37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is 
modeled on Sec.  37.206(c)(1) and would require an SBSEF to have rules 
requiring a hearing to be fair, conducted before members of the 
disciplinary panel, and promptly convened after reasonable notice to 
the respondent. The Commission proposed an additional provision, which 
derives from the guidance, that an SBSEF need not apply the formal 
rules of evidence for a hearing; nevertheless, the procedures for the 
hearing may not be so informal as to deny a fair hearing.
    Paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 are also 
adapted from the guidance in appendix B of part 37. Paragraph 
(g)(9)(ii) would bar a member of the disciplinary panel for the hearing 
from having a financial, personal, or other direct interest in the 
matter under consideration. Paragraph (g)(9)(iii) would address the 
respondent's access to evidence in the SBSEF's possession. Paragraph 
(g)(9)(iv) would provide that the SBSEF's enforcement and compliance 
staffs shall \372\ be parties to the hearing, and the enforcement staff 
shall present their case on those charges and sanctions that are the 
subject of the hearing. Paragraph (g)(9)(v) would provide that the 
respondent shall be entitled to appear personally at the hearing, to 
cross-examine any persons appearing as witnesses at the hearing, to 
call witnesses, and to present such evidence as may be relevant to the 
charges. Paragraph (g)(9)(vi) would provide that the SBSEF shall 
require persons within its jurisdiction who are called as witnesses to 
participate in the hearing and produce evidence.
---------------------------------------------------------------------------

    \372\ The CFTC's guidance in appendix B that is adapted into 
paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 uses the 
word ``should'' here and in other similar instances. The Commission 
uses the word ``shall'' in such instances instead.
---------------------------------------------------------------------------

    Paragraph (g)(9)(vii) of Proposed Rule 819 is modeled on the text 
of Sec.  37.206(c)(2) and would require that, if the respondent has 
requested a hearing, a copy of the hearing shall be made and shall 
become a part of the record of the proceeding. Paragraph (g)(9)(vii) 
would not require the record to be transcribed

[[Page 87199]]

unless the transcript is requested by Commission staff or the 
respondent, the decision is appealed pursuant to the rules of the 
SBSEF, or the decision is reviewed by the Commission pursuant to Sec.  
201.442.\373\ In all other instances, a summary record of a hearing is 
permitted.
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    \373\ See infra section XIV.E (discussing Rule 442, which 
establishes the right to appeal to the Commission certain actions 
taken by an SBSEF and sets out certain procedural matters relating 
to any such appeal).
---------------------------------------------------------------------------

    Paragraph (g)(10) of Proposed Rule 819 is modeled on Sec.  
37.206(d) and would provide that, promptly following a hearing 
conducted in accordance with the rules of the SBSEF, the disciplinary 
panel shall render a written decision based upon the weight of the 
evidence contained in the record of the proceeding and shall provide a 
copy to the respondent. The written decision must include six 
enumerated elements, all of which are closely modeled on those in Sec.  
37.206(d).
    Paragraph (g)(11) of Proposed Rule 819 would address emergency 
disciplinary actions and is drawn from the guidance in appendix B of 
part 37. It would provide that an SBSEF may impose a sanction, 
including suspension, or take other summary action against a person or 
entity subject to its jurisdiction upon a reasonable belief that such 
immediate action is necessary to protect the best interest of the 
market place. Furthermore, any emergency disciplinary action would have 
to be taken in accordance with an SBSEF's procedures that provide for 
notice (if practicable), rights for representation in all proceedings, 
an opportunity for a hearing as soon as reasonably practicable, and the 
rendering of a written decision promptly following the hearing based 
upon the weight of the evidence contained in the record. Proposed Rule 
819(g)(11) would seek to balance the need to allow an SBSEF to take 
summary action against the need to afford due process to 
respondents.\374\
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    \374\ Compare Proposed Rule 819(g)(11)(i) (allowing an SBSEF to 
impose a sanction, including suspension, or take other summary 
action against a person or entity subject to its jurisdiction upon a 
reasonable belief that such immediate action is necessary to protect 
the best interest of the market place), with Proposed Rule 
819(g)(11)(ii)(A) (providing that, if practicable, a respondent 
should be served with a notice before the action is taken, or 
otherwise at the earliest possible opportunity).
---------------------------------------------------------------------------

    Paragraph (g)(12) of Proposed Rule 819 also is drawn from the 
appendix B guidance and would provide that, if the rules of the SBSEF 
permit appeals,\375\ the SBSEF shall establish an appellate panel that 
is authorized to hear appeals. The composition of the panel would have 
to be consistent with Rule 834(d) \376\ and could not include any 
members of the SBSEF's compliance staff or any person involved in 
adjudicating any other stage of the same proceeding. Promptly following 
the appeal or review proceeding, the appellate panel would be required 
to issue a written decision and to provide a copy to the respondent. As 
to the Commission's process of reviewing disciplinary actions, the 
Commission will apply a standard of review consistent with standards of 
review that the Commission uses in similar contexts.\377\
---------------------------------------------------------------------------

    \375\ Neither Sec.  37.206 nor the associated guidance from 
appendix B requires a SEF to allow appeals. The guidance states, 
rather, that a SEF's rules ``may permit'' appeals and includes 
certain procedural requirements only if the rules of a swap 
execution facility permit appeals. The Commission adhered to this 
permissive approach in the proposal but sought comment on whether 
the final rules should require an SBSEF to create an appeals 
procedure.
    \376\ See infra section VIII.D.
    \377\ See Rule 819(g)(14); see also supra note 355.
---------------------------------------------------------------------------

    Paragraph (g)(13) of Proposed Rule 819 is adapted partly from Sec.  
37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i) 
is drawn from Sec.  37.206(e) and would provide that all disciplinary 
sanctions imposed by an SBSEF or its disciplinary panels shall be 
commensurate with the violations committed and shall be clearly 
sufficient to deter recidivism or similar violations by other members. 
All disciplinary sanctions, including sanctions imposed pursuant to an 
accepted settlement offer, would have to take into account the 
respondent's disciplinary history. In the event of demonstrated 
customer harm, any disciplinary sanction would have to include full 
customer restitution, except where the amount of restitution or to whom 
it should be provided cannot be reasonably determined. Paragraph 
(g)(13)(i) is adapted from the appendix B guidance and would allow an 
SBSEF to adopt a summary fine schedule for violations of rules relating 
to the failure to timely submit accurate records required for clearing 
or verifying each day's transactions.
    The Commission received no comments on Proposed Rule 819(g) and, 
apart from the addition of paragraph (g)(14) regarding Commission 
review,\378\ is adopting Rule 819(g) as proposed for the reasons stated 
in the Proposing Release.
---------------------------------------------------------------------------

    \378\ See supra note 377 and accompanying text.
---------------------------------------------------------------------------

8. Rule 819(h)--Activities of Security-Based Swap Execution Facility's 
Employees, Governing Board Members, Committee Members, and Consultants
    Paragraph (h) of Proposed Rule 819 would generally prohibit persons 
who are employees of an SBSEF, or who otherwise might have access to 
confidential information because of their role with the SBSEF, from 
improperly utilizing that information. Proposed Rule 819(h) is modeled 
on Sec.  1.59 of the CFTC's rules, which requires a SEF (among other 
CFTC-regulated entities) to place restrictions on trading by its 
governing board members, committee members, consultants, and employees 
and to prohibit any such person from disclosing any material, non-
public information obtained as a result of their official duties with 
the SRO.
    Paragraph (h)(2)(i) of Proposed Rule 819 would require an SBSEF to 
maintain in effect rules that, at a minimum, prohibit an employee of 
the SBSEF from trading, directly or indirectly, any ``covered 
interest.'' Proposed Rule 819(h)(1)(i) would define ``covered 
interest'' to mean, with respect to an SBSEF: an SBS that trades on the 
SBSEF; a security of an issuer that has issued a security that 
underlies an SBS that is listed on the SBSEF; or a derivative based on 
a security that falls within the immediately preceding prong. The 
opportunity to observe order submission and trading in an SBS on an 
SBSEF could yield material non-public information about the future 
performance not just of that SBS, but of all securities issued by that 
entity.\379\
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    \379\ The single-name CDS market, in particular, is a market for 
assessing the creditworthiness of particular issuers. Non-public 
information derived from activity on the SBSEF pertaining to the 
market's assessment of an issuer's creditworthiness is likely to be 
material to the markets for that issuer's cash securities as well as 
to markets for derivatives based on the issuer's cash securities 
(e.g., single-stock options).
---------------------------------------------------------------------------

    Paragraph (h)(2)(ii), modeled on Sec.  1.59(b)(1)(ii), would 
prohibit an SBSEF employee from disclosing to any other person any 
material non-public information that the employee obtains as a result 
of their employment at the SBSEF, and where the employee has or should 
have a reasonable expectation that the information disclosed may assist 
another person in trading any covered interest. In addition, paragraph 
(h)(2)(ii), like Sec.  1.59(b)(1)(ii), would provide an exception for 
disclosures made in the course of an employee's duties, or disclosures 
made to another SBSEF, court of competent jurisdiction, or 
representative of any agency or department of the Federal or State

[[Page 87200]]

government acting in their official capacity.
    Paragraph (h)(3) of Proposed Rule 819, modeled on Sec.  1.59(b)(2), 
would allow an SBSEF to adopt rules setting forth circumstances under 
which exemptions from the employee trading prohibition may be granted. 
In particular, paragraph (h)(3) would include the following possible 
carve-outs from the employee trading prohibition: (1) participation by 
an employee in a ``pooled investment vehicle'' where the employee has 
no direct or indirect control with respect to transactions executed for 
or on behalf of such vehicle; (2) trading by an employee in a 
derivative based on such a pooled investment vehicle; (3) trading by an 
employee in a derivative based on an index in which no covered interest 
constitutes more than 10% of the index; and (4) trading by an employee 
under circumstances enumerated in rules which the SBSEF determines are 
not contrary to applicable law, the public interest, or just and 
equitable principles of trade.\380\
---------------------------------------------------------------------------

    \380\ The first and the fourth carve-outs listed above are 
comparable to those listed in Sec.  1.59(b)(2). The Commission 
proposed to include the second and third carve-outs to permit an 
SBSEF employee to trade derivatives that provide indirect exposure 
to a covered interest where the exposure to the covered interest is 
sufficiently diluted. In such cases, it would be unlikely that the 
employee would be using material non-public information about the 
covered interest to gain an unfair advantage when trading the 
derivative.
---------------------------------------------------------------------------

    The first and the fourth carve-outs listed above are comparable to 
those listed in Sec.  1.59(b)(2). The Commission proposed to include 
the second and third carve-outs to permit an SBSEF employee to trade 
derivatives that provide indirect exposure to a covered interest where 
the exposure to the covered interest is sufficiently diluted.\381\ In 
such cases, it would be unlikely that the employee would be using 
material non-public information about the covered interest to gain an 
unfair advantage when trading the derivative. The Commission proposed 
to depart from the CFTC definition of ``pooled investment vehicle'' 
\382\ to adapt it for the SBS and securities markets. Rule (h)(1)(ii) 
defines ``pooled investment vehicle'' to mean an investment company 
registered under the Investment Company Act of 1940 in which no covered 
interest constitutes more than 10% of the investment company's assets. 
Thus, under this definition, if an SBSEF were to list a single-name CDS 
on company XYZ, a ``pooled investment vehicle'' would include a broad-
based mutual fund or ETF that contains a security issued by company 
XYZ, assuming that the XYZ security does not exceed 10% of the fund's 
holdings. The 10% limit on a covered interest's composition of the fund 
is designed to permit SBSEF employees to trade most index-based mutual 
funds and ETFs that contain covered interests, except those where a 
component of the fund becomes sufficiently large that material non-
public information about an issuer derived from activity on the SBSEF 
could provide an unfair advantage to an SBSEF employee when trading 
that fund.
---------------------------------------------------------------------------

    \381\ See Proposing Release, supra note 1, 87 FR at 28905.
    \382\ See Sec.  1.59(a)(10) (defining ``pooled investment 
vehicle'' to mean ``a trading vehicle organized and operated as a 
commodity pool within the meaning of Sec.  4.10(d) of this chapter, 
and whose units of participation have been registered under the 
Securities Act of 1933, or a trading vehicle for which Sec.  4.5 of 
this chapter makes available relief from regulation as a commodity 
pool operator, i.e., registered investment companies, insurance 
company separate accounts, bank trust funds, and certain pension 
plans'').
---------------------------------------------------------------------------

    Finally, under Proposed Rule 819(h)(3)--as with Sec.  1.59(b)(2)--
the exemptions from the trading restrictions would not be automatically 
available to SBSEF employees. Proposed Rule 819(h)(3) would still 
require the SBSEF to adopt rules that set forth circumstances under 
which exemptions from the trading prohibition may be granted. 
Furthermore, Proposed Rule 819(h)(3), which is modeled on Sec.  
1.59(b)(2), would state that any exemption must be administered by the 
SBSEF ``on a case-by-case basis.''
    Paragraph (h)(4) of Proposed Rule 819, like Sec.  1.59(d), would 
address prohibited conduct not just by employees of an SBSEF, but also 
of governing board members, committee members, and consultants of the 
SBSEF. Paragraph (h)(4)(i)(A) is modeled on Sec.  1.59(d)(1)(i) and 
would prohibit any employee, governing board member, committee member, 
or consultant of the SBSEF from trading for their own account, or for 
or on behalf of any other account, in any covered interest on the basis 
of any material, non-public information obtained through special access 
related to the performance of their official duties as an employee, 
governing board member, committee member, or consultant. Paragraph 
(h)(4)(i)(B), modeled on Sec.  1.59(d)(1)(ii), would prohibit any 
employee, governing board member, committee member, or consultant of 
the SBSEF from disclosing for any purpose inconsistent with the 
performance of their official duties as an employee, governing board 
member, committee member, or consultant any material, non-public 
information obtained through special access related to the performance 
of those duties. Paragraph (h)(4)(ii), modeled on Sec.  1.59(d)(2), 
would provide that no person shall trade for their own account, or for 
or on behalf of any other account, in any covered interest on the basis 
of any material, non-public information that the person knows was 
obtained in violation of paragraph (h)(4) of this section from an 
employee, governing board member, committee member, or consultant.
    The Commission received no comments on Proposed Rule 819(h) and is 
adopting Rule 819(h) as proposed, with minor technical 
modifications,\383\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \383\ See supra note 32.
---------------------------------------------------------------------------

9. Rule 819(i)--Service on Security-Based Swap Execution Facility 
Boards or Committees by Persons With Disciplinary Histories
    Paragraph (i) of Proposed Rule 819 would bar persons with specified 
disciplinary histories from serving on the governing board or 
committees of an SBSEF and would impose certain other duties on the 
SBSEF associated with that fundamental requirement. Rule 819(i) is 
modeled on Sec.  1.63 of the CFTC's rules, which imposes similar 
requirements in connection with SEFs and certain other entities.
    Paragraph (i) of Proposed Rule 819 is closely modeled on Sec.  
1.63. Paragraph (i)(1), like Sec.  1.63(b), would require an SBSEF to 
maintain rules \384\ that render a person ineligible to serve on its 
disciplinary committees,\385\ arbitration

[[Page 87201]]

panels, oversight panels,\386\ or governing boards if that person falls 
into any of six enumerated criteria, all of which are modeled closely 
on the criteria in Sec.  1.63(b).\387\ Paragraph (i)(2), modeled on 
Sec.  1.63(c), would impose a direct bar on any person from serving on 
a disciplinary committee, arbitration panel, oversight panel, or 
governing board of an SBSEF if that person meets any of the six 
criteria enumerated in Rule 819(i)(1). Paragraph (i)(3), modeled on 
Sec.  1.63(d), would require an SBSEF to submit to the Commission a 
schedule listing the rule violations that constitute disciplinary 
offenses that would trigger the bar and, to the extent necessary to 
reflect revisions, would have to submit an amended schedule within 30 
days of the end of each calendar year. The SBSEF would be required to 
maintain and keep current this schedule and post it on its website so 
that it is in a public place designed to provide notice to members and 
otherwise ensure its availability to the general public. Paragraph 
(i)(4), like Sec.  1.63(e), would require an SBSEF to submit to the 
Commission within 30 days of the end of each calendar year a certified 
list of any persons who have been removed from its disciplinary 
committees, arbitration panels, oversight panels, or governing board 
pursuant to Rule 819(i) during the prior year. Paragraph (i)(5), 
modeled on Sec.  1.63(f), would provide that, whenever an SBSEF finds 
by final decision that a person has committed a disciplinary offense 
and that finding makes the person ineligible to serve on that SBSEF's 
disciplinary committees, arbitration panels, oversight panels, or 
governing board, the SBSEF shall inform the Commission of that finding 
and the length of the ineligibility, in a form and manner specified by 
the Commission.
---------------------------------------------------------------------------

    \384\ Section 1.63(b), in relevant part, requires a SEF to 
maintain rules that have been submitted to the CFTC pursuant to 
section 5c(c) of the CEA and part 40 of the CFTC's rules. As noted 
above, the Commission proposed to adapt Sec. Sec.  40.5 (Voluntary 
submission of rules for Commission review and approval) and 40.6 
(Self-certification of rules) into Proposed Rules 806 and 807, 
respectively. Therefore, Proposed Rule 819(i)(1) would require an 
SBSEF to maintain in effect rules that have been submitted to the 
Commission pursuant to Rule 806 or Rule 807.
    \385\ Proposed Rule 802 would define ``disciplinary committee'' 
as any person or committee of persons, or any subcommittee thereof, 
that is authorized by an SBSEF or SBS exchange to issue disciplinary 
charges, to conduct disciplinary proceedings, to settle disciplinary 
charges, to impose disciplinary sanctions, or to hear appeals 
thereof in cases involving any violation of the rules of the SBSEF 
or SBS exchange, except those cases where the person or committee is 
authorized summarily to impose minor penalties for violating rules 
regarding decorum, attire, the timely submission of accurate records 
for clearing or verifying each day's transactions, or other similar 
activities. The CFTC rules contain two slightly different 
definitions of ``disciplinary committee'' that appear in Sec.  
1.63(a)(2) and Sec.  1.69(a)(1), respectively. Because the 
definition in Sec.  1.69(a)(1) is more comprehensive, the Commission 
has modeled its definition of ``disciplinary committee'' on Sec.  
1.69(a)(1) rather than on Sec.  1.63(a)(2). The Commission is 
locating the definition in Rule 802, since the term is used by 
multiple rules in Regulation SE.
    \386\ Proposed Rule 802 would define ``oversight panel'' as any 
panel, or any subcommittee thereof, authorized by an SBSEF or SBS 
exchange to recommend or establish policies or procedures with 
respect to the surveillance, compliance, rule enforcement, or 
disciplinary responsibilities of the SBSEF or SBS exchange. The 
CFTC's definitions of ``oversight panel'' are contained in Sec.  
1.63(a)(4) and Sec.  1.69(a)(4), respectively. Because the 
definition in Sec.  1.69(a)(4) is more comprehensive, the Commission 
has modeled its definition of ``oversight panel'' on Sec.  
1.69(a)(4) rather than on Sec.  1.63(a)(4). As with the definition 
of ``disciplinary committee,'' the Commission is locating the 
definition of ``oversight panel'' in Rule 802, since the term is 
used by multiple rules in Regulation SE.
    \387\ Section 1.63(b)(5) provides that one criterion for the bar 
would be that the person in question is subject to or has had 
imposed on him within the prior three years a CFTC registration 
revocation or suspension in any capacity for any reason, or has been 
convicted within the prior three years of any of the felonies listed 
in section 8a(2)(D)(ii) through (iv) of the CEA. Since the SEC is 
not subject to the CEA and cannot cross-reference those provisions, 
the Commission proposed for the equivalent criterion in Rule 
819(i)(1)(v) that a person would be barred for having been convicted 
within the prior three years of any felony, without limitation on 
the type of felony. See Proposing Release, supra note 1, 87 FR at 
28907 n.145.
---------------------------------------------------------------------------

    Paragraph (i)(6) of Proposed Rule 819 would define the terms 
``arbitration panel,'' ``disciplinary offense,'' and ``final decision'' 
that are used in Rule 819(i).\388\ These definitions are closely 
modeled on those provided in Sec.  1.63(a).\389\
---------------------------------------------------------------------------

    \388\ Proposed Rule 819(i)(6)(i) would define ``arbitration 
panel'' as any person or panel empowered by an SBSEF to arbitrate 
disputes involving the SBSEF's members or their customers. Rule 
819(i)(6)(ii) defines ``disciplinary offense'' as: any violation of 
the rules of an SBSEF, except a violation resulting in fines 
aggregating to less than $5000 within a calendar year involving 
decorum or attire, financial requirements, or reporting or 
recordkeeping; any rule violation which involves fraud, deceit, or 
conversion or results in a suspension or expulsion; any violation of 
the SEA or the Commission's rules thereunder; or any failure to 
exercise supervisory responsibility when such failure is itself a 
violation of either the rules of the SBSEF, the SEA, or the 
Commission's rules thereunder. Proposed Rule 819(i)(6)(iii) would 
define ``final decision'' as a decision of an SBSEF which cannot be 
further appealed within the SBSEF, is not subject to the stay of the 
Commission or a court of competent jurisdiction, and has not been 
reversed by the Commission or any court of competent jurisdiction; 
or any decision by an administrative law judge, a court of competent 
jurisdiction, or the Commission which has not been stayed or 
reversed.
    \389\ Since these terms are used only in Proposed Rule 819(i) 
and not elsewhere in Regulation SE, the Commission has defined them 
in Proposed Rule 819(i) and not the omnibus definitions rule in 
Regulation SE (Proposed Rule 802).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 819(i) and is 
adopting Rule 819(i) as proposed, with minor technical 
modifications,\390\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \390\ See supra note 32.
---------------------------------------------------------------------------

10. Rule 819(j)--Notification of Final Disciplinary Action Involving 
Financial Harm to a Customer
    Paragraph (j) of Proposed Rule 819 is a modified version of Sec.  
1.67 of the CFTC's rules. Paragraph (j)(1) of Proposed Rule 819 would 
be designed to replicate for SBSEFs the fundamental duty of Sec.  1.67 
and provides that, upon any final disciplinary action in which an SBSEF 
finds that a member has committed a rule violation that involved a 
transaction for a customer, whether executed or not, and that resulted 
in financial harm to the customer, the SBSEF must promptly provide 
written notice of the disciplinary action to the member. In addition, 
the SBSEF would be required to have established a rule pursuant to Rule 
806 or Rule 807 that requires a member that receives such a notice to 
promptly provide that notice to the customer, as disclosed on the 
member's books and records.\391\ Paragraph (j)(2) would provide that 
the written notice must include the principal facts of the disciplinary 
action and a statement that the SBSEF has found that the member has 
committed a rule violation that involved a transaction for the 
customer, whether executed or not, and that resulted in financial harm 
to the customer.
---------------------------------------------------------------------------

    \391\ The provision on which Proposed Rule 819(j)(1)(i)(B) is 
based, Sec.  1.67(b)(1)(ii), requires a futures commission merchant 
or other registrant that receives such a notice to forward it to the 
injured customer. Because of differences in the respective agencies' 
statutory authority, the Commission proposed to require the SBSEF to 
establish a rule that requires the relevant member to forward the 
notice, not to propose a Commission rule that would impose such a 
duty on the member directly.
---------------------------------------------------------------------------

    Paragraph (j)(3) of Proposed Rule 819 would provide definitions for 
two terms used in Rule 819(j). The definition of ``final disciplinary 
action'' is closely modeled on the CFTC's definition in Sec.  
1.67(a).\392\ The definition of ``customer'' is only loosely modeled on 
the definition of ``customer'' provided in Sec.  1.3, which includes 
complexities deriving from the CEA that are not necessary or 
appropriate to adapt into a rule that applies to SBSEFs.\393\ The 
Commission proposed to define ``customer'' in Rule 819(j)(3)(i) as a 
person that utilizes an agent in connection with trading on an SBSEF.
---------------------------------------------------------------------------

    \392\ See Proposed Rule 819(j)(3)(ii) (defining ``final 
disciplinary action'' as any decision by or settlement with an SBSEF 
in a disciplinary matter that cannot be further appealed at the 
SBSEF, is not subject to the stay of the Commission or a court of 
competent jurisdiction, and has not been reversed by the Commission 
or any court of competent jurisdiction).
    \393\ The definitions of ``customer'' and ``final disciplinary 
action'' would apply only within Proposed Rule 819(j), so the 
Commission has not included them in the omnibus definitions rule for 
proposed Regulation SE (Proposed Rule 802).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 819(j) and is 
adopting Rule 819(j) as proposed, with minor technical 
modifications,\394\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \394\ See supra note 32.
---------------------------------------------------------------------------

11. Rule 819(k)--Designation of Agent for Non-U.S. Member
    Paragraph (k) of Proposed Rule 819 would require non-U.S. persons 
who trade on an SBSEF to have an agent for service of process, which 
could be an agent of its own choosing or, by default, the SBSEF. 
Proposed Rule 819(k) is modeled on Sec.  15.05(i) of the CFTC's rules, 
which concerns the designation of agents for foreign persons 
participating

[[Page 87202]]

on ``reporting markets,'' a category in the CFTC's rules that includes 
SEFs.\395\
---------------------------------------------------------------------------

    \395\ A ``reporting market'' is defined in Sec.  15.00(q) to 
mean a DCM or registered entity under section 1a(40) of the CEA. The 
term ``registered entity'' as defined in section 1a(40) of the CEA 
includes SEFs, among other entities.
---------------------------------------------------------------------------

    Paragraph (k)(1) of Proposed Rule 819 is modeled on Sec.  15.05(i) 
and would provide that an SBSEF that admits a non-U.S. person as a 
member shall be deemed to be the agent of the ``non-U.S. member'' \396\ 
with respect to any SBS executed by the non-U.S. member. Under Proposed 
Rule 819(k)(1), service or delivery of any communication issued by or 
on behalf of the Commission to the SBSEF would constitute valid and 
effective service upon the non-U.S. member. If an SBSEF is served with 
a communication issued by or on behalf of the Commission to a non-U.S. 
member, the SBSEF would be required to transmit the communication to 
the non-U.S. member. Paragraph (k)(2) of Proposed Rule 819 is modeled 
on Sec.  15.05(i)(1) and would provide that it shall be unlawful for an 
SBSEF to permit a non-U.S. member to execute SBS transactions on the 
facility unless the SBSEF informs the non-U.S. member in writing of the 
requirements of Rule 819(k).
---------------------------------------------------------------------------

    \396\ ``Non-U.S. member'' is a defined term in Rule 819(k) that 
does not appear in Sec.  15.05 of the CFTC's rules but which 
appropriately conveys the meaning of the CFTC rule for purposes of 
SBSEFs in Proposed Rule 819(k). A foreign trader that executes 
contracts on a trading platform such as an SBSEF must be a member of 
that platform. Therefore, to promote uniformity throughout 
Regulation SE, the Commission is using the term ``member'' for this 
concept. Furthermore, the Commission has defined the term ``U.S. 
person'' for purposes of the cross-border application of its Title 
VII rules, see Rule 3a71-3(a)(4), Sec.  240.3a71-3(a)(4), and has 
thus defined ``non-U.S. member'' in Rule 802 as ``a member of a 
security-based swap execution facility that is not a U.S. person.''
---------------------------------------------------------------------------

    Paragraph (k)(3) of Proposed Rule 819 is modeled on Sec.  
15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize 
an agent for service of process other than the SBSEF. The non-U.S. 
member would have to provide a copy of its agreement with the alternate 
agent to the SBSEF, and the SBSEF would then have to file the agreement 
with the Commission, before executing any transaction on the SBSEF. 
Paragraph (k)(4) of Proposed Rule 819, modeled on Sec.  15.05(i)(3), 
would require the non-U.S. member to notify the Commission if the 
agency agreement is no longer in effect.
    For an SBSEF to have an effective regulatory program and thereby 
comply with Core Principle 2 (Compliance with Rules), the SBSEF must 
have jurisdiction over all of its members, including members who are 
not U.S. persons. Proposed Rule 819(k) would further an SBSEF's ability 
to ensure compliance by its non-U.S. members with its rules by 
requiring each non-U.S. member of the SBSEF to have an agent for 
service of process, whether an agent of its own choosing that has been 
disclosed to the SBSEF and the Commission or, as a default, the SBSEF 
itself. This would eliminate any question of how to provide valid 
notice to a non-U.S. member of any proceedings involving potential rule 
violations.
    The Commission received no comments on Proposed Rule 819(k) and is 
adopting Rule 819(k) as proposed for the reasons stated in the 
Proposing Release.

C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to 
Manipulation

    Core Principle 3 \397\ provides that an SBSEF may permit trading 
only in SBS that are not readily susceptible to manipulation. CEA Core 
Principle 3 for SEFs is substantively identical.\398\ Proposed Rule 820 
is modeled after Sec.  37.300 of the CFTC's rules and would implement 
Core Principle 3.
---------------------------------------------------------------------------

    \397\ Section 3D(d)(3) of the SEA, 15 U.S.C. 78c-4(d)(3).
    \398\ See Section 5h(f)(3) of the CEA, 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 820, and is 
adopting Rule 820 as proposed for the reasons stated in the Proposing 
Release.

D. Rule 821--Core Principle 4--Monitoring of Trading and Trade 
Processing

    Core Principle 4 \399\ requires an SBSEF to establish and enforce 
rules or terms and conditions defining or specifications detailing: (1) 
trading procedures to be used in entering and executing orders traded 
on or through the facilities of the SBSEF; and (2) procedures for trade 
processing of SBS on or through the facilities of the SBSEF. Core 
Principle 4 also requires an SBSEF to monitor trading in SBS to prevent 
manipulation, price distortion, and disruptions of the delivery or cash 
settlement process through surveillance, compliance, and disciplinary 
practices and procedures, including methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions. CEA Core Principle 4 for SEFs \400\ is substantively 
identical.
---------------------------------------------------------------------------

    \399\ Section 3D(d)(4) of the SEA, 15 U.S.C. 78c-4(d)(4).
    \400\ Section 5h(f)(4) of the CEA, 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------

    Proposed Rule 821 would implement Core Principle 4 and is closely 
modeled on the rules in subpart E of part 37 and the CFTC's guidance 
and acceptable practices in appendix B to part 37. As explained in the 
Proposing Release, paragraph (a) of Proposed Rule 821, like Sec.  
37.400 of the CFTC's rules, incorporates the requirements of Core 
Principle 4 described above, and the remaining paragraphs of Proposed 
Rule 821 are modeled on Sec. Sec.  37.401 to 37.408 of the CFTC's rules 
and also incorporate guidance and acceptable practices from appendix B 
to part 37.\401\
---------------------------------------------------------------------------

    \401\ See Proposing Release, supra note 1, 87 FR at 28910-11.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 821 would specify an SBSEF's market-
oversight obligations. Paragraph (c) of Proposed Rule 821 would specify 
requirements for an SBSEF's monitoring of physical-delivery SBS. 
Paragraph (d) of Proposed Rule 821 would specify additional 
requirements for cash-settled SBS. Paragraph (e) of Proposed Rule 821 
would specify requirements for an SBSEF's ability to obtain 
information. Paragraph (f) of Proposed Rule 821 would require an SBSEF 
to establish and maintain risk control mechanisms to prevent and reduce 
the potential risk of market disruptions. Paragraph (g) of Proposed 
Rule 821 would require an SBSEF to have the ability to comprehensively 
and accurately reconstruct all trading on its facility and requires an 
SBSEF to make all audit-trail data and reconstructions available to the 
Commission. And paragraph (h) of Proposed Rule 821 would provide that 
an SBSEF shall comply with the rules in this section through a 
dedicated regulatory department or by contracting with a regulatory 
service provider pursuant to Rule 819(e).
    The Commission received no comments on Proposed Rule 821 and is 
adopting Rule 821 as proposed for the reasons stated in the Proposing 
Release.

E. Rule 822--Core Principle 5--Ability To Obtain Information

    Core Principle 5 \402\ requires an SBSEF to establish and enforce 
rules that will allow the SBSEF to obtain any necessary information to 
perform any of the functions described in the Core Principles, provide 
the information to the Commission on request, and have the capacity to 
carry out such international information-sharing agreements as the 
Commission may require. CEA Core Principle 5 for SEFs \403\ is 
substantively identical.
---------------------------------------------------------------------------

    \402\ Section 3D(d)(5) of the SEA, 15 U.S.C. 78c-4(d)(5).
    \403\ Section 5h(f)(5) of the CEA, 7 U.S.C. 7b-3(f)(5).
---------------------------------------------------------------------------

    Proposed Rule 822 implements Core Principle 5 and is substantively 
identical to subpart F of part 37. Paragraph (a) of Proposed Rule 822

[[Page 87203]]

would repeat the statutory text of Core Principle 5. Paragraph (b), 
modeled on Sec.  37.501, would require that an SBSEF establish and 
enforce rules that will allow the SBSEF to have the ability and 
authority to obtain sufficient information to allow it to fully perform 
its operational, risk management, governance, and regulatory functions 
and any requirements under Regulation SE. Paragraph (c), like Sec.  
37.502, would require an SBSEF to have rules that allow it to collect 
information on a routine basis, allow for the collection of non-routine 
data from its members, and allow for its examination of books and 
records kept by members on its facility.\404\ Paragraph (d), like Sec.  
37.503, would require that an SBSEF provide information in its 
possession to the Commission upon request, in a form and manner 
specified by the Commission. Finally, paragraph (e), like Sec.  37.504, 
would require an SBSEF to share information with other regulatory 
organizations, data repositories, and third-party data reporting 
services as required by the Commission or as otherwise necessary and 
appropriate to fulfill its regulatory and reporting responsibilities, 
and that appropriate information-sharing agreements can be established 
with such entities, or the Commission can act in conjunction with the 
SBSEF to carry out such information sharing.
---------------------------------------------------------------------------

    \404\ While Sec.  37.502 of subpart F uses the term ``market 
participant,'' Proposed Rule 822 would substitute the term 
``member'' in these places, since the rule pertains to market 
participants who are acting as members of the SEF/SBSEF. See supra 
note 362.
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 822 and is 
adopting Rule 822 as proposed for the reasons stated in the Proposing 
Release.

F. Rule 823--Core Principle 6--Financial Integrity of Transactions

    Core Principle 6 sets forth requirements related to the financial 
integrity of transactions that are entered on or through the facilities 
of an SBSEF.\405\ Specifically, paragraph (a) of Proposed Rule 823 
would require an SBSEF to establish and enforce rules and procedures 
for ensuring the financial integrity of SBS entered on or through the 
facilities of the SBSEF, including the clearance and settlement of SBS 
pursuant to section 3C(a)(1) of the SEA.\406\ Paragraph (b) would 
provide that transactions required to be cleared or voluntarily cleared 
must be cleared through a registered clearing agency (or an exempt 
clearing agency). Paragraph (c) addresses the manner in which an SBSEF 
shall provide for the financial integrity of transactions. Finally, 
paragraph (d) would require an SBSEF to monitor its members to ensure 
that they continue to qualify as eligible contract participants. As 
described in the Proposing Release, the Commission modeled Rule 823 on 
subpart H of part 37 of the CFTC's rules,\407\ which implements CEA 
Core Principle 7 for SEFs.\408\
---------------------------------------------------------------------------

    \405\ Section 3D(d)(6)(A) of the SEA, 15 U.S.C. 78c-4(d)(6).
    \406\ 15 U.S.C. 78c-3(a)(1). See supra note 168 and accompanying 
text (discussing mandatory clearing provisions).
    \407\ See Proposing Release, supra note 1, 87 FR at 28912.
    \408\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
---------------------------------------------------------------------------

1. Rule 823(a)--General
    Paragraph (a) of Proposed Rule 823 would repeat the statutory text 
of SEA Core Principle 6 in the same manner that Sec.  37.700 of the 
CFTC's rules \409\ repeats the statutory language of CEA Core Principle 
7 for SEFs.\410\ Proposed Rule 823(a) would require an SBSEF to 
establish and enforce rules and procedures for ensuring the financial 
integrity of SBS entered on or through the facilities of the SBSEF, 
including the clearance and settlement of SBS pursuant to section 
3C(a)(1) of the SEA.\411\ The Commission did not receive any comments 
on Proposed Rule 823(a) and is adopting Rule 823(a) as proposed for the 
reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \409\ 17 CFR 37.700; see also Proposing Release, supra note 1, 
87 FR at 28912.
    \410\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
    \411\ 15 U.S.C. 78c-3(a)(1).
---------------------------------------------------------------------------

2. Rule 823(b)--Required Clearing
    Paragraph (b) of Proposed Rule 823 is closely modeled on Sec.  
37.701 of the CFTC's rules,\412\ and it would provide that transactions 
executed on or through an SBSEF that are required to be cleared under 
section 3C(a)(1) of the SEA or are voluntarily cleared by the 
counterparties shall be cleared through a registered clearing agency or 
a clearing agency that has obtained an exemption from clearing agency 
registration to provide central counterparty services for SBS. The 
Commission did not receive any comments on Proposed Rule 823(b) and is 
adopting Rule 823(b) as proposed for the reasons stated in the 
Proposing Release.
---------------------------------------------------------------------------

    \412\ 17 CFR 37.701; see also Proposing Release, supra note 1, 
87 FR at 28912.
---------------------------------------------------------------------------

3. Rule 823(c)--General Financial Integrity
    Paragraph (c) of Proposed Rule 823 is closely modeled on Sec.  
37.702 of the CFTC's rules,\413\ and would require an SBSEF to provide 
for the financial integrity of transactions by establishing minimum 
financial standards for its members, which shall at a minimum require 
members to be ECPs. Proposed Rule 823(c) would further require an SBSEF 
to provide for the financial integrity of transactions by ensuring that 
the SBSEF, for transactions cleared by a registered clearing agency, 
has the capacity to route transactions to the registered clearing 
agency in a manner acceptable to the clearing agency, and by 
coordinating with each registered clearing agency to which it submits 
transactions for clearing in the development of rules and procedures to 
facilitate prompt and efficient transaction processing.
---------------------------------------------------------------------------

    \413\ 17 CFR 37.702; see also Proposing Release, supra note 1, 
87 FR at 28912.
---------------------------------------------------------------------------

    One commenter characterizes the CFTC regime as providing detailed 
straight-through-processing (``STP'') standards for swaps executed on 
SEFs that are intended to be cleared but believes that the Commission's 
proposal lacks such standards.\414\ The commenter observes that there 
is a lack of market consistency regarding the execution-to-clearing 
workflow for SBS that are intended to be cleared, which complicates the 
trading of cleared SBS. The commenter highlights ``clearing submission 
timeframes'' and ``clearing certainty'' as key issues and discusses the 
manner in which the CFTC has addressed these issues in its rules and 
guidance. The commenter states that the CFTC's STP standards, including 
``pre-execution credit checks'' and ``well-defined submission 
timeframes,'' have been successfully implemented by the industry since 
2013, enhancing the SEF trading environment. The commenter argues that 
the timeframes minimize delays between execution and clearing 
acceptance and increase pre-trade clearing certainty, decreasing 
market, credit, and operational risks for market participants and 
clearing agencies, and broadens the range of trading counterparties. 
For these reasons, the commenter recommends harmonizing with the CFTC 
by establishing STP standards, incorporating relevant CFTC guidance, 
and prohibiting breakage agreements for SBS that are intended to be 
cleared.\415\
---------------------------------------------------------------------------

    \414\ See Citadel Letter, supra note 18, at 4-6.
    \415\ See id.
---------------------------------------------------------------------------

    Another commenter agrees that applying the CFTC's approach to STP 
would further harmonize SBSEFs with SEFs and would provide greater 
certainty of execution and clearing, encourage more clearing, 
facilitate

[[Page 87204]]

electronic trading, and promote accessible, competitive markets and 
access to best execution.\416\ Lastly, a third commenter supports 
harmonization and encourages the Commission to both codify the guidance 
in appendix B to part 37 of the CFTC regulations and the CFTC's staff 
guidance regarding STP.\417\ The commenter believes that the STP 
requirements have been successfully implemented by market participants 
for nearly a decade, and modifying them now would introduce significant 
market, operational, and credit risk, along with additional complexity 
and cost for market participants.\418\
---------------------------------------------------------------------------

    \416\ See MFA Letter, supra note 18, at 12.
    \417\ See SIFMA AMG Letter, supra note 18, at 9.
    \418\ See id.
---------------------------------------------------------------------------

    As previously stated, harmonization with the CFTC regime for SEFs 
is an important consideration for the Commission, given that it expects 
most registered SBSEFs to also be registered SEFs. Consistent with this 
view, Proposed Rule 823 is largely based on subpart H of part 37, and 
the key language of Rule 823(c)(2) relevant to STP is substantively 
identical to Sec.  37.702(b). Both provisions require an SBSEF or SEF 
to (i) ensure that it has the capacity to route transactions to the 
relevant clearing agency in a manner acceptable to the clearing agency 
for purposes of clearing; and (ii) coordinate with each relevant 
clearing agency to which it submits transactions for clearing, in the 
development of rules and procedures to facilitate prompt and efficient 
transaction processing. Rule 249.1701, Exhibit T further requires 
SBSEFs to provide ``the name(s) of the clearing agency(ies) that will 
clear the Applicant's trades, and a representation that clearing 
members of that organization will be guaranteeing such trades.'' \419\
---------------------------------------------------------------------------

    \419\ See Form SBSEF (Exhibits Instructions, Instruction No. 20, 
Exhibit T); see also supra note 84.
---------------------------------------------------------------------------

    The Commission generally expects an SBSEF's rules and procedures to 
demonstrate compliance with these requirements with respect to SBS that 
are intended to be cleared or that would become subject to a mandatory 
clearing requirement in the future. Since SBSEFs are required to 
establish rules and procedures for clearing in coordination with each 
relevant clearing agency to which it submits trades, SBSEFs should be 
able to route executed trades to relevant clearing agencies promptly, 
particularly if fully automated systems are used. Furthermore, if an 
SBSEF were to act to purposefully delay clearing submission in order to 
favor certain market participants over others, that type of action 
could be addressed under the impartial access requirements of Rule 
819(c).\420\ Lastly, as noted previously, the Commission is adopting 
Rule 815(g), which specifies that SBSEFs shall establish and enforce 
rules that provide that a security-based swap that is intended to be 
cleared at the time of the transaction, but is not accepted for 
clearing at a registered clearing agency, shall be void ab initio. 
Together, these provisions should help ensure that SBSEFs will process 
trades promptly and efficiently. These provisions are also consistent 
with the CFTC's staff guidance related to SEFs. The CFTC staff guidance 
also addressed regulatory requirements related to intermediaries and 
clearing organizations that are beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    \420\ See supra section VI.B.3 (discussing the impartial access 
requirements of Proposed Rule 819(c)). For example, if an SBSEF 
purposefully delayed clearing submission of only certain market 
participants that the SBSEF favors, that would be contrary to the 
requirement of Proposed Rule 819(c) of providing impartial access to 
market services.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission is adopting Rule 
823(c) as proposed.\421\
---------------------------------------------------------------------------

    \421\ While one commenter suggests that the Commission 
incorporate guidance from appendix B to part 37 of the CFTC rules, 
the appendix does not contain any guidance or acceptable practices 
under Core Principle 7 of section 5h of the CEA--Financial Integrity 
of Transactions.
---------------------------------------------------------------------------

4. Rule 823(d)--Monitoring for Financial Soundness
    Paragraph (d) of Proposed Rule 823 is closely modeled on Sec.  
37.703 of the CFTC's rules,\422\ and it would require an SBSEF to 
monitor its members to ensure that they continue to qualify as ECPs. 
The Commission did not receive any comments on Rule 823(d) and is 
adopting Rule 823(d) as proposed for the reasons stated in the 
Proposing Release.
---------------------------------------------------------------------------

    \422\ 17 CFR 37.703; see also Proposing Release, supra note 1, 
87 FR at 28912.
---------------------------------------------------------------------------

G. Rule 824--Core Principle 7--Emergency Authority

    SEA Core Principle 7 \423\ requires an SBSEF to adopt rules to 
provide for the exercise of emergency authority, in consultation or 
cooperation with the Commission, as is necessary and appropriate, 
including the authority to liquidate or transfer open positions in any 
SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8 
for SEFs \424\ is substantively identical, and the CFTC implemented 
Core Principle 8 for SEFs in subpart I of part 37. Section 37.800 of 
subpart I repeats the statutory text of the Core Principle. Section 
37.801 provides that a SEF ``may refer'' to the guidance in appendix B 
to part 37 ``to demonstrate to the Commission compliance with [Core 
Principle 8].''
---------------------------------------------------------------------------

    \423\ Section 3D(d)(7) of the SEA, 15 U.S.C. 78c-4(d)(7).
    \424\ Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8).
---------------------------------------------------------------------------

    Proposed Rule 824 would implement SEA Core Principle 7 and is 
closely modeled on subpart I of part 37 and the guidance for CEA Core 
Principle 8 in appendix B to part 37. Paragraph (a) of Proposed Rule 
824 would repeat the statutory text of the Core Principle. Paragraph 
(b) of Proposed Rule 824 would incorporate much of the language in 
paragraph (a)(1) of the CFTC's guidance on CEA Core Principle 8. Under 
paragraph (b), an SBSEF would be required to adopt rules that are 
reasonably designed to:
    (1) Allow the SBSEF to intervene as necessary to maintain markets 
with fair and orderly trading and to prevent or address manipulation or 
disruptive trading practices, whether the need for intervention arises 
exclusively from the SBSEF's market or as part of a coordinated, cross-
market intervention;
    (2) Have the flexibility and independence to address market 
emergencies in an effective and timely manner consistent with the 
nature of the emergency, as long as all such actions taken by the SBSEF 
are made in good faith to protect the integrity of the markets;
    (3) Take market actions as may be directed by the Commission, 
including, in situations where an SBS is traded on more than one 
platform, emergency action to liquidate or transfer open interest as 
directed, or agreed to, by the Commission or the Commission's staff;
    (4) Include procedures and guidelines for decision-making and 
implementation of emergency intervention that avoid conflicts of 
interest;
    (5) Include alternate lines of communication and approval 
procedures to address emergencies associated with real-time events;
    (6) Allow the SBSEF, to address perceived market threats, to impose 
or modify position limits, impose or modify price limits, impose or 
modify intraday market restrictions, impose special margin 
requirements, order the liquidation or transfer of open positions in 
any contract, order the fixing of a settlement price, extend or shorten 
the expiration date or the trading hours, suspend or curtail trading in 
any contract, transfer customer contracts and the margin, or alter any 
contract's settlement terms or conditions, or, if applicable, provide 
for the carrying out of such actions through its agreements

[[Page 87205]]

with its third-party provider of clearing or regulatory services.
    Paragraph (c) of Proposed Rule 824 is based on paragraph (a)(2) of 
the CFTC's guidance on CEA Core Principle 8 and would require an SBSEF 
to promptly notify the Commission of its exercise of emergency action, 
explaining its decision-making process, the reasons for using its 
emergency authority, and how conflicts of interest were minimized, 
including the extent to which the SBSEF considered the effect of its 
emergency action on the underlying markets and on markets that are 
linked or referenced to the contracts traded on its facility, including 
similar markets on other trading venues. In addition, Proposed Rule 
824(c) would require information on all regulatory actions carried out 
pursuant to an SBSEF's emergency authority to be included in a timely 
submission of a certified rule pursuant to Rule 807.
    The Commission received no comments on Proposed Rule 824 and is 
adopting Rule 824 as proposed, with minor technical modifications,\425\ 
for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \425\ The Commission has corrected a reference to ``exercise of 
emergency action'' to read ``exercise of emergency authority.'' The 
Commission has also made two non-substantive corrections to the text 
of Proposed Rule 824. The Commission has replaced a period with a 
semicolon at the end of paragraph (b)(3) and has added the word 
``and'' to the end of paragraph (b)(5).
---------------------------------------------------------------------------

H. Rule 825--Core Principle 8--Timely Publication of Trading 
Information

    SEA Core Principle 8 \426\ requires an SBSEF to make public timely 
information on price, trading volume, and other trading data on SBS to 
the extent prescribed by the Commission, and to have the capacity to 
electronically capture and transmit and disseminate trade information 
with respect to transactions executed on or through the facility. CEA 
Core Principle 9 \427\ is substantively identical to SEA Core Principle 
8, and the CFTC implemented CEA Core Principle 9 in subpart J of part 
37.
---------------------------------------------------------------------------

    \426\ Section 3D(d)(8) of the SEA, 15 U.S.C. 78c-4(d)(8).
    \427\ Section 5h(f)(9) of the CEA, 7 U.S.C. 7b-3(f)(9).
---------------------------------------------------------------------------

    Proposed Rule 825 would implement SEA Core Principle 8 and is 
closely modeled on subpart J of part 37. Paragraph (a) of Proposed Rule 
825, like Sec.  37.900, would repeat the statutory language of the Core 
Principle. While Sec.  37.901 provides that a SEF shall report swap 
transaction data pursuant to parts 43 and 45 of the CFTC's rules, 
paragraph (b) of Proposed Rule 825 would direct SBSEFs to report SBS 
transaction data in a manner specified in the SEC's Regulation 
SBSR.\428\
---------------------------------------------------------------------------

    \428\ Section 13(m)(1) of the SEA, 15 U.S.C. 78m(m)(1), 
authorizes the Commission to make SBS transaction, volume, and 
pricing data available to the public in such form and at such times 
as the Commission determines appropriate to enhance price discovery. 
The Commission has adopted rules relating to the reporting and 
public dissemination of SBS transaction and pricing data as 
Regulation SBSR. Rule 901(a)(1) of Regulation SBSR, 17 CFR 
242.901(a)(1), imposes certain reporting duties on SBSEFs.
---------------------------------------------------------------------------

    Paragraph (c) of Proposed Rule 825 would require the publication, 
on an SBSEF's website, of a ``Daily Market Data Report.'' The data 
fields that the Commission proposed to require for the Daily Market 
Data Report approximated, although they were not the same as, those 
required by part 16. Under Proposed Rule 825(c)(1), the Daily Market 
Data Report for a business day would be required to contain the 
following information for each tenor of each SBS traded on that SBSEF 
during that business day:
    (i) The trade count (including block trades but excluding error 
trades, correcting trades, and offsetting trades);
    (ii) The total notional amount traded (including block trades but 
excluding error trades, correcting trades, and offsetting trades 
\429\);
---------------------------------------------------------------------------

    \429\ Each of these terms is defined in Proposed Rule 802 and 
also used in Proposed Rule 815.
---------------------------------------------------------------------------

    (iii) The number of block trades;
    (iv) The total notional amount of block trades;
    (v) The opening and closing price;
    (vi) The price that is used for settlement purposes, if different 
from the closing price; and
    (vii) The lowest price of a sale or offer, whichever is lower, and 
the highest price of a sale or bid, whichever is higher, that the SBSEF 
reasonably determines accurately reflects market conditions. Bids and 
offers vacated or withdrawn shall not be used in making this 
determination. A bid is vacated if followed by a higher bid or price 
and an offer is vacated if followed by a lower offer or price.
    Paragraph (c)(2) of Proposed Rule 825 would require an SBSEF to 
provide certain explanatory information regarding data presented on the 
Daily Market Data Report:
    (i) The method used by the SBSEF in determining nominal prices and 
settlement prices; and
    (ii) If discretion is used by the SBSEF in determining the opening 
and/or closing ranges or the settlement prices, an explanation that 
certain discretion may be employed by the SBSEF and a description of 
the manner in which that discretion may be employed. Discretionary 
authority would have to be noted explicitly in each case in which it is 
applied (for example, by use of an asterisk or footnote).
    Paragraph (c)(3) of Proposed Rule 825 would set out various 
requirements regarding the form and manner by which an SBSEF makes 
available its Daily Market Data Report. Paragraph (c)(3)(i) would 
require the SBSEF to post on its website its Daily Market Data Report 
in a downloadable and machine-readable format using the most recent 
versions of the associated XML schema and PDF renderer as published on 
the Commission's website. Paragraph (c)(3)(ii) would require the SBSEF 
to make available its Daily Market Data Report without fees or other 
charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing 
any encumbrances on access or usage restrictions with respect to the 
Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF 
from requiring a user to agree to any terms before being allowed to 
view or download the Daily Market Data Report, such as by waiving any 
requirements of Rule 825(c)(3). Paragraph (c)(3)(iv) would further 
provide that any such waiver agreed to by a user would be null and 
void.\430\
---------------------------------------------------------------------------

    \430\ The presence of any such waiver requirements on a click-
through screen could chill use of the Daily Market Data Report, 
because the user would be compelled to agree to the waiver even to 
view the report. The Commission recognizes that individual users may 
not have the time or the incentive to contest the appropriateness of 
any such waiver provisions in order to secure access. Proposed Rule 
825(c)(3)(iv) is designed to assure such users that, even if an 
SBSEF were to insist on the waiver click-through as a condition of 
access, users would not in fact be sacrificing their ability to use 
the data free of charges and usage restrictions because the waiver 
would be null and void.
---------------------------------------------------------------------------

    Paragraph (c)(4) of Proposed Rule 825 would require the SBSEF to 
publish the Daily Market Data Report on its website no later than the 
SBSEF's commencement of trading on the next business day after the day 
to which the information pertains. Finally, paragraph (c)(5) would 
require the SBSEF to keep each Daily Market Data Report available on 
its website in the same location as all other Daily Market Data Reports 
for no less than one year after the date of first publication.
    Several commenters criticized the Daily Market Data Report required 
by Proposed Rule 825.\431\ One commenter states that the Daily Market 
Report would require inappropriate and

[[Page 87206]]

detrimental disclosures that would undermine the Commission's goal of 
fostering a competitive and efficient market for SBS trading.\432\ This 
commenter states that there are significant differences in the 
information required to be reported under the SEC and CFTC regimes. The 
commenter states that Proposed Rule 825(c)(1) increases the burden on 
SBSEFs compared to SEFs by requiring additional information regarding 
sale and offer prices, as well as qualitative descriptions of certain 
data that are reported.
---------------------------------------------------------------------------

    \431\ See MFA Letter, supra note 18, at 13; WMBAA Letter, supra 
note 18, at 5-6; ISDA-SIFMA Letter, supra note 18, at 10; Bloomberg 
Letter, supra note 18, at 5, 17. Eleven commenters supported general 
transparency in markets but did not address the Daily Market Data 
Report specifically. See, e.g., Letter from David Mounts (Oct. 29, 
2022); Letter from Katie K. (Apr. 7, 2022).
    \432\ See MFA Letter, supra note 18, at 13.
---------------------------------------------------------------------------

    This commenter further states that the Commission's proposal does 
not address why the CFTC's approach would not be acceptable in the 
context of SBSEFs and does not justify the increased operational costs 
to SBSEFs (which will ultimately be passed on to members). The 
commenter also states that the Commission has not considered the costs 
and potential for duplicative requirements in the context of Regulation 
SBSR reporting requirements. The commenter concludes that, in sum, the 
Daily Market Data Report is overly granular and duplicative, is 
unnecessary for transparency purposes, and could negatively impact the 
market and market participants. The commenter states that the 
Commission should therefore remove the Daily Market Data Report in 
favor of harmonizing with the analogous CFTC rules and that, if the 
Commission does not eliminate the Daily Market Data Report requirement 
altogether, it should adopt additional masking protections for trades, 
specifically with respect to block trades. Failure to do so, the 
commenter states, would cause inappropriate and detrimental disclosures 
and would ``negate the benefits that the rule purports to achieve by 
exempting block trades from clearing [sic] requirements.'' \433\
---------------------------------------------------------------------------

    \433\ See id. Regulation SE does not address any exemption from 
clearing requirements.
---------------------------------------------------------------------------

    Another commenter states that the requirement for a Daily Market 
Data Report is a departure from the otherwise generally harmonized rule 
proposal and risks overly complicating the SBSEF regime for limited 
benefit, particularly with SBS reporting and dissemination in place 
through Regulation SBSR.\434\ The commenter states that the Daily 
Market Data Report serves as a duplicative source of information that 
fails to improve price discovery or liquidity formation, and that the 
Daily Market Data Report could negatively impact conditions, 
particularly for block trades, especially given the relatively illiquid 
SBS market, which has a relatively small number participants. This 
commenter encourages the Commission to remove the proposed Daily Market 
Data Report and review this issue with the benefit of several years' 
experience with these rules, particularly once Regulation SBSR is fully 
operational.
---------------------------------------------------------------------------

    \434\ See WMBAA Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    One commenter states that the Daily Market Report is not necessary 
because the CFTC SEF regulatory framework, which does not impose such a 
requirement, provides sufficient price transparency.\435\ This 
commenter states that the Commission has not pointed to any observable 
issues with the SEF transparency framework to justify a need for these 
reports, and the commenter states that the daily publication of 
information related to block trade numbers and block notional amounts, 
coupled with aggregate pricing information, would magnify the problems 
associated with the ``winner's curse.'' This is particularly 
concerning, the commenter states, where a dealer is unable to fully 
lay-off its risk from a block trade within the course of a single day--
a scenario that is extremely likely considering the thin nature of SBS 
markets. Based on the information published in the report as proposed, 
the commenter states, SBSEF participants may be able to identify a 
particular block trade and the likely price point, and then use that 
information to up-charge the dealer who is seeking to lay off the rest 
of its risk, thus frustrating the key objective of block trading.
---------------------------------------------------------------------------

    \435\ See ISDA-SIFMA Letter, supra note 18, at 10.
---------------------------------------------------------------------------

    This commenter further states that the issues it has identified are 
amplified even further if the Daily Market Report does not follow the 
cap requirements that apply in the public price dissemination of data 
under the Commission's trade reporting rule and related Commission no-
action relief. The commenter states that publication of uncapped trade 
sizes could, in certain cases, reveal the exact notional amount of a 
trade to the public, which is not permitted under the Commission's SBS 
trade reporting rules. The commenter states that this is especially 
concerning given that the proposed Daily Market Report provides 
detailed information by SBS product and tenor. The commenter states 
that the Commission should abandon its proposed Daily Market Report or, 
if it does not, require publication of the proposed report on a monthly 
or quarterly basis and make it subject to the cap size requirements 
imposed on SBSDRs. This, the commenter states, would ensure that the 
report does not conflict with the protections afforded to market 
participants per the cap size requirements and under the Commission's 
SBS trade reporting rules and related relief for SBS.\436\
---------------------------------------------------------------------------

    \436\ See id.
---------------------------------------------------------------------------

    Another commenter states that, in its experience with the reports 
required under CFTC part 16, which requires the compilation of similar 
information as the proposed Daily Market Data Report, the timeline for 
publication proposed under Rule 825(c)(4) would be impractical, if not 
technologically impossible.\437\ This commenter states that it operates 
a SEF with trading hours that run from 00:01 hours to 24:00 hours, 
Sunday through Friday. The commenter envisions SBS trading to be 
permitted during the same trading hours and states that the break 
between the end of trading one day and the beginning of trading the 
next day--one minute--means that it would likely not be possible to 
compile the required report ``no later than the SBSEF's commencement of 
trading on the next business day.'' This commenter proposes 
synchronizing Rule 825(c)(4) with CFTC Rule 16.01(d)(2) to allow 
additional time for the publication of the Daily Market Data Report. 
With regard to the content of the report, this commenter states that 
the settlement price required under Rule 825(c)(1) should be included 
in the report only to the extent it is calculated by an SBSEF.
---------------------------------------------------------------------------

    \437\ See Bloomberg Letter, supra note 18, at 5, 17.
---------------------------------------------------------------------------

    Many of the reporting requirements of the Daily Market Data Report 
under Proposed Rule 825 are closely aligned with the data required to 
be disclosed on a daily basis by SEFs under Sec.  16.01 of the CFTC's 
rules. Both rules require the daily disclosure of: (1) a measure of 
trading volume in terms of trades or contracts; \438\ (2) the total 
notional volume traded; \439\ (3) the notional amount of block trades; 
\440\ (4) the opening and closing prices; \441\ (5) the price used for 
settlement, if different

[[Page 87207]]

from the closing price; \442\ (6) the lowest price of a sale or offer, 
whichever is lower, and the highest price of a sale or bid, whichever 
is higher, that the facility reasonably determines accurately reflects 
market conditions; \443\ (7) the method used by the facility in 
determining nominal prices and settlement prices, and if discretion is 
used in determining the opening or closing ranges or the settlement 
prices, an explanation that certain discretion may be employed and a 
description of the manner in which that discretion may be employed; 
\444\ and (8) in each instance in which such discretion was applied, an 
explicit notation that discretion was applied.\445\
---------------------------------------------------------------------------

    \438\ Compare Proposed Rule 825(c)(1)(i) (trade count, including 
block trades but excluding error trades, correcting trades, and 
offsetting trades), with 17 CFR 16.01(a)(1)(iii) (trading volume and 
open contracts by product type term life of the swap).
    \439\ Compare Proposed Rule 825(c)(1)(ii) (total notional amount 
traded, including block trades but excluding error trades, 
correcting trades, and offsetting trades), with 17 CFR 
16.01(a)(2)(iv) (total trading volume in terms of the number of 
contracts traded for standard-sized contract or in terms of notional 
value for non-standard-sized contracts).
    \440\ Compare Proposed Rule 825(c)(1)(iv) (total notional amount 
of block trades), with 17 CFR 16.01(a)(2)(vi) (total volume of block 
trades included in the total volume of trading).
    \441\ See Proposed Rule 825(c)(1)(v); 17 CFR 16.01(b)(2)(i).
    \442\ See Proposed Rule 825(c)(1)(vi); 17 CFR 16.01(b)(2)(ii).
    \443\ See Proposed Rule 825(c)(1)(vii); 17 CFR 16.01(b)(2)(iii).
    \444\ See Proposed Rule 825(c)(2)(i); 17 CFR 16.01(b)(4)(i).
    \445\ See Proposed Rule 825(c)(2)(ii); 17 CFR 16.01(b)(4)(ii).
---------------------------------------------------------------------------

    Further, the Commission is modifying Proposed Rule 825 to resolve 
the two differences between the proposed Daily Market Data Report and 
the existing CFTC reporting scheme under Sec.  16.01: (1) that the 
Daily Market Data Report would include the number of block trades 
executed; \446\ and (2) that the Daily Market Data Report would be 
posted on the SBSEF's website no later than the beginning of trading on 
the next business day,\447\ while the information required by Sec.  
16.01 must be made public no later than the next business day.\448\
---------------------------------------------------------------------------

    \446\ See Proposed Rule 825(c)(1)(iii).
    \447\ See Proposed Rule 825(c)(4).
    \448\ See 17 CFR 16.01(e). The Commission views the requirement 
to keep each Daily Market Data Report on an SBSEF's website for one 
year, see Proposed Rule 825(c)(5), as a small additional burden for 
an SBSEF and does not view it as a significant departure from 
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

    A number of commenters raised specific concerns that the 
disclosures in the Daily Market Data Report would hamper the efficient 
trading of block trades.\449\ The Commission agrees that the additional 
disclosed data element for SBSEFs--the number of block trades--could 
lead to additional information leakage while a dealer that facilitated 
a block trade might still be laying off the risk it undertook in 
facilitating that trade. Therefore, consistent with the CFTC's 
disclosure elements under Sec.  16.01, the Commission is modifying Rule 
825(c)(1) as proposed to delete paragraph (c)(1)(iii), which requires 
the disclosure of the number of block trades, and to renumber the 
following paragraphs accordingly. The Commission is also, pursuant to 
its determination not to adopt a definition of ``block trade,'' \450\ 
deleting the words ``including block trades but'' from the text of 
paragraph (c)(i) and (ii) of Rule 825, and is adding the words ``after 
such time as the Commission adopts a definition of `block trade' '' to 
paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of Proposed 
Rule 825 \451\), which will have no effect on the requirement as 
compared to the proposed rule.
---------------------------------------------------------------------------

    \449\ See supra notes 433-436 and accompanying text.
    \450\ See supra section V.E.1(c)(ii).
    \451\ The Commission is also correcting the form of a cross-
reference in paragraph (b) to ``Regulation SBSR'' to read 
``Sec. Sec.  242.900 through 242.909 (Regulation SBSR).''
---------------------------------------------------------------------------

    The Commission is also modifying Proposed Rule 825 to address the 
comment that an SBSEF that operates nearly 24 hours a day might not be 
able to comply with the requirement to publish the Daily Market Data 
Report before the beginning of trading on the next business day. 
Accordingly, the Commission is modifying Proposed Rule 825(c)(4) to 
require the publication of the Daily Market Data Report ``as soon as 
reasonably practicable on the next business day after the day to which 
the information pertains, but in no event later than 7 a.m. on the next 
business day.'' This modified requirement, while less stringent than 
the requirement as proposed, would differ slightly from the CFTC's 
requirement that such information must be made public ``no later than 
the next business day.'' \452\ Making each trading day's information 
available to market participants before the beginning of the next 
trading is reasonably designed to foster transparency and efficiency in 
the market for SBS.
---------------------------------------------------------------------------

    \452\ See 17 CFR 16.01(e). The Commission views the requirement 
to keep each Daily Market Data Report on an SBSEF's website for one 
year, see Proposed Rule 825(c)(5), as a small additional burden for 
an SBSEF and does not view it as a significant departure from 
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

    With these modifications, the proposed Daily Market Data Report for 
SBSEFs is consistent with the required daily disclosures for SEFs. 
While one commenter states that Proposed Rule 825(c)(1) increases the 
burden on SBSEFs compared to SEFs, including by calling for qualitative 
descriptions of certain data, the data called for by Rule 825(c)(1), as 
modified, does not differ materially from that required to be published 
daily under Sec.  16.01. Thus, the Commission does not agree with the 
commenter that the data required under the Commission approach differs 
materially from that required under the CFTC approach or that the Daily 
Market Data Report will result in an unjustified increase in 
operational costs.
    Further, the Commission does not agree with commenters that the 
Daily Market Data Report would serve as a duplicative source of 
information to reporting under Regulation SBSR and therefore risks 
overly complicating the SBSEF regime for limited benefit, without 
benefit to price improvement or liquidity formation. Regulation SBSR 
requires the reporting and public dissemination of SBS 
transactions,\453\ but because the transaction reports for credit SBS 
are permitted to be capped at a notional volume of $5 million,\454\ 
market participants would be unable to glean the information provided 
by the Daily Market Data Report--which would publish daily total 
notional volumes based on uncapped transaction amounts--from the 
individual reports of SBS transactions under Regulation SBSR. Thus, the 
Daily Market Data Report would provide market participants with 
information about pricing and trading volume for SBS on SBSEFs that 
goes beyond the information that could be obtained from SBS transaction 
reports that are publicly disseminated pursuant to Regulation SBSR. And 
because individual trades would not be reported--and, with the 
modification the Commission is making, the number of block trades would 
also not be reported--a size cap on reporting volume used to provide 
summary data to the market is not necessary or appropriate. 
Additionally, with the respect to the comment that the settlement price 
required under Proposed Rule 825(c)(1) should be included in the report 
only to the extent it is calculated by an SBSEF, the language of the 
requirement--``[t]he price that is used for settlement. . .'' \455\--
means that if no settlement price is calculated for a given SBS, that 
data element does not need to be reported.
---------------------------------------------------------------------------

    \453\ See 17 CFR 242.900 et seq.
    \454\ See 2019 Cross-Border Adopting Release, supra note 218, 85 
FR at 6347 (providing no-action relief with respect to Rule 902 of 
Regulation SBSR, 17 CFR 242.902, for reports of credit SBS 
transaction disseminated with a capped size of $5 million).
    \455\ See Proposed Rule 825(c)(1)(vi) (emphasis added).
---------------------------------------------------------------------------

    With respect to the means of publication of the information, while 
the means of publishing the Daily Market Data Report varies from that 
specified under the CFTC regime, the difference is not material. The 
Commission proposed that this information be posted on an SBSEF's 
website in the most recent XML schema and PDF renderer, without fees or 
charges, without any encumbrances on access or usage, and without 
requiring

[[Page 87208]]

a user to agree to any terms before viewing or downloading the 
report.\456\ And the CFTC, in addition to requiring that this 
information be provided to the CFTC, requires it be made available to 
news media and the general public ``in a format that readily enables 
the consideration of such data.'' \457\
---------------------------------------------------------------------------

    \456\ See Proposed Rule 825(c)(3).
    \457\ 17 CFR 16.01(e).
---------------------------------------------------------------------------

    Proposed Rule 825(c)(3) is designed to promote wide use of the SBS 
trading information contained in the Daily Market Data Report by 
prohibiting an SBSEF from imposing any financial, legal, or operational 
burdens on that use, and, as the Commission stated in the Proposing 
Release, the prohibition against an SBSEF imposing any usage 
restrictions on its Daily Market Data Report would necessarily 
encompass a prohibition on bulk redistribution of the Daily Market Data 
Report or any information contained therein.\458\ The Commission seeks 
to encourage market observers to access the Daily Market Data Report 
and scrub, reconfigure, aggregate, analyze, repurpose, or otherwise add 
value to the information contained in the report as they see fit.
---------------------------------------------------------------------------

    \458\ See Proposing Release, supra note 1, 87 FR at 28915.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting Rule 
825 as modified.\459\
---------------------------------------------------------------------------

    \459\ See supra note 32.
---------------------------------------------------------------------------

I. Rule 826--Core Principle 9--Recordkeeping and Reporting

    SEA Core Principle 9 \460\ sets forth recordkeeping and reporting 
obligations for SBSEFs. Core Principle 9 requires an SBSEF to maintain 
records of all activities relating to the business of the facility, 
including a complete audit trail, in a form and manner acceptable to 
the Commission for a period of five years. The Core Principle further 
requires an SBSEF to report to the Commission, in a form and manner 
acceptable to the Commission, such information as the Commission 
determines to be necessary or appropriate for the Commission to perform 
its duties. Finally, under Core Principle 9, the Commission must adopt 
data collection and reporting requirements for SBSEFs that are 
comparable to requirements for clearing agencies and SBS data 
repositories.\461\ CEA Core Principle 10 for SEFs, although it includes 
an additional clause not present in the equivalent SEA Core Principle 
9,\462\ is substantively identical.
---------------------------------------------------------------------------

    \460\ Section 3D(d)(9) of the SEA, 15 U.S.C. 78c-4(d)(9).
    \461\ As discussed below in this section, the Commission is 
adopting Rule 826 to require an SBSEF to maintain records of all 
activities relating to the business of the SBSEF for a period of not 
less than five years. Similarly, Rule 17a-1 under the SEA, 17 CFR 
240.17a-1, requires a clearing agency to keep and preserve one copy 
of all documents made or received in the course of its business and 
conduct of its self-regulatory activities for a period of not less 
than five years. In addition, Rule 13n-7(b) under the SEA, 17 CFR 
240.13n-7(b), requires an SBS data repository to keep and preserve a 
copy of all documents made or received by it in the course of its 
business for at least five years.
    \462\ CEA Core Principle 10 includes a clause stating that a SEF 
shall keep any records relating to certain swaps open to inspection 
and examination by the SEC. See 7 U.S.C. 7b-3(f)(10)(A)(iii).
---------------------------------------------------------------------------

    To implement SEA Core Principle 9, the Commission proposed Rule 
826, which roughly approximates Sec. Sec.  1.31 and 45.2 of the CFTC's 
rules,\463\ while also drawing on concepts from the books and records 
requirements applicable to brokers, SEC-registered SROs, and other SEC-
registered entities.\464\
---------------------------------------------------------------------------

    \463\ Section 1.31 imposes on ``records entities'' (which term 
includes SEFs) various requirements relating to record retention and 
production. Section 45.2 imposes various recordkeeping, retention, 
and retrieval requirements applicable to SEFs (among others) to 
support trade reporting.
    \464\ See infra section XI (discussing in the context of 
Proposed Rule 15a-12 that an SBSEF registered with the Commission is 
also a registered broker and, as such, is subject to the SEA's 
recordkeeping and reporting requirements applicable to brokers).
---------------------------------------------------------------------------

    Paragraph (a) of Proposed Rule 826 would repeat the statutory text 
of the Core Principle. Paragraph (b) would require an SBSEF to keep 
full, complete, and systematic records,\465\ together with all 
pertinent data and memoranda, of all activities relating to its 
business with respect to SBS. Under paragraph (b), such records would 
be required to include, without limitation, the audit trail information 
required under Rule 819(f) and all other records that an SBSEF is 
required to create or obtain under Regulation SE.
---------------------------------------------------------------------------

    \465\ While Sec.  1.31(a) defines the terms ``regulatory 
records'' and ``electronic regulatory records'' and utilizes them 
throughout Sec.  1.31, the Commission is utilizing instead the term 
``records,'' which is defined in section 3(a)(37) of the SEA, 15 
U.S.C. 78c(a)(37). In doing so, the Commission seeks to avoid any 
ambiguities or inconsistencies that could arise by using variants of 
a term that is defined in the Commission's governing statute. The 
Commission has included a definition of ``records'' in Rule 802 that 
cross-references section 3(a)(37) of the SEA.
---------------------------------------------------------------------------

    Paragraph (c) of Proposed Rule 826 would require an SBSEF to keep 
records of any SBS from the date of execution until the termination, 
maturity, expiration, transfer, assignment, or novation date of the 
transaction, and for a period of not less than five years, the first 
two years in an easily accessible place, after such date. Paragraph (c) 
also would require an SBSEF to keep each record (other than a record of 
an SBS noted in the previous sentence) for a period of not less than 
five years, the first two years in an easily accessible place, from the 
date on which the record was created. The five-year retention 
requirements would be consistent with section 3D(d) of the SEA \466\ 
and are modeled on the requirements for SEFs in Sec. Sec.  1.31 and 
45.2. The proposed requirement that the records be kept ``in an easily 
accessible place'' for the first two years derives from an analogous 
requirement in the Commission's principal books and records rule for 
exchange members, brokers, and dealers.\467\
---------------------------------------------------------------------------

    \466\ See 15 U.S.C. 78c-4(d)(9)(A)(i) (requiring an SBSEF to 
``maintain records of all activities relating to the business of the 
facility, including a complete audit trail, in a form and manner 
acceptable to the Commission, for a period of five years'') 
(emphasis added).
    \467\ See Rule 17a-4(b) under the SEA, 17 CFR 240.17a-4(b).
---------------------------------------------------------------------------

    Paragraph (d)(1) of Proposed Rule 826 would require an SBSEF to 
retain all records in a form and manner that ensures the authenticity 
and reliability of such records in accordance with the SEA and the 
Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF, 
upon request of any representative of the Commission, to promptly \468\ 
furnish to the representative legible, true, complete, and current 
copies of any records required to be kept and preserved under Rule 826. 
Paragraph (d)(3) would provide that an electronic record shall be 
retained in a form and manner that allows for prompt production at the 
request of any representative of the Commission. Paragraph (d)(3) would 
also include provisions modeled on Sec.  1.31(c)(2) requiring an SBSEF 
that maintains electronic records to establish appropriate systems and 
controls that ensure the authenticity and reliability of electronic 
records.
---------------------------------------------------------------------------

    \468\ In this context, ``prompt'' or ``promptly'' means making 
reasonable efforts to produce records that are requested by the 
staff during an examination without delay. In many cases, it is 
likely that an SBSEF could furnish records immediately or within a 
few hours of a request, and it would therefore be required to do so. 
An SBSEF generally should produce records within 24 hours unless 
there are unusual circumstances.
---------------------------------------------------------------------------

    Paragraph (e) of Proposed Rule 826 would provide that all records 
required to be kept by an SBSEF pursuant to Rule 826 would be subject 
to examination by any representative of the Commission pursuant to 
section 17(b) of the SEA, which is the source of the Commission's 
examination authority for registered brokers (among other types of 
registered entities). Proposed Rule 826(e) is designed only to remind 
SBSEFs of this statutory authority and would not seek to limit or 
expand that authority using the Commission's powers over SBSEFs in 
section 3D of the SEA.

[[Page 87209]]

    Proposed Rule 826 would include a paragraph (f) that is not modeled 
on any provision of Sec.  1.31 or Sec.  45.2, but rather on Sec.  
1.37(c) of the CFTC's rules, which would provide: ``Each designated 
contract market and swap execution facility shall keep a record in 
permanent form, which shall show the true name, address, and principal 
occupation or business of any foreign trader executing transactions on 
the facility or exchange. In addition, upon request, a designated 
contract market or swap execution facility shall provide to the 
Commission information regarding the name of any person guaranteeing 
such transactions or exercising any control over the trading of such 
foreign trader.'' Proposed Rule 826(f) is modeled closely on Sec.  
1.37(c), except that it would use the term ``non-U.S. member'' rather 
than ``foreign trader.'' \469\
---------------------------------------------------------------------------

    \469\ Since a ``foreign trader'' in Sec.  1.37(c) is executing 
transactions on the SEF, it must be a member of the SEF. Because the 
term ``member'' is used elsewhere in the CFTC rules pertaining to 
SEFs, the term ``member'' as used throughout Regulation SE is 
defined in Rule 802. The term ``non-U.S. member,'' also found in 
Rule 802, is defined as ``a member of a security-based swap 
execution facility that is not a U.S. person.''
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 826 and is 
adopting Rule 826 as proposed, with minor technical modifications,\470\ 
for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \470\ See supra note 32.
---------------------------------------------------------------------------

J. Rule 827--Core Principle 10--Antitrust Considerations

    SEA Core Principle 10 \471\ provides that, unless necessary or 
appropriate to achieve the purposes of the SEA, an SBSEF shall not: (1) 
adopt any rules or take any actions that result in any unreasonable 
restraint of trade, or (2) impose any material anticompetitive burden 
on trading or clearing. CEA Core Principle 11 \472\ is substantively 
identical. Proposed Rule 827 would implement SEA Core Principle 10 and 
reiterate the statutory text of the Core Principle.\473\
---------------------------------------------------------------------------

    \471\ Section 3D(d)(10) of the SEA, 15 U.S.C. 78c-4(d)(10).
    \472\ Section 5h(f)(11) of the CEA, 7 U.S.C. 7b-3(f)(11).
    \473\ The Commission has not adapted the guidance from appendix 
B pertaining to CEA Core Principle 11 into its rule. As explained in 
the Proposing Release, it is not appropriate to adapt this guidance 
into a rule that applies to SBSEFs because the SEA (which applies to 
SBSEFs) does not have a provision that is closely comparable to 
section 15(b) of the CEA (which applies to SEFs). See Proposing 
Release, supra note 1, 87 FR at 28917 n.196. Furthermore, the 
guidance pertaining to CEA Core Principle 10 for SEFs sets out only 
a general approach to how the CFTC addresses antitrust issues 
applying to SEFs and does not include provisions that can readily be 
adapted into rule text. Id.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 827 
and is adopting Rule 827 as proposed, for the reasons stated in the 
Proposing Release.

K. Rule 828--Core Principle 11--Conflicts of Interest

    SEA Core Principle 11 \474\ requires an SBSEF to establish and 
enforce rules to minimize conflicts of interest in its decision-making 
process and to establish a process for resolving the conflicts of 
interest. CEA Core Principle 12 \475\ is substantively identical, and 
the CFTC implemented CEA Core Principle 12 in subpart M of part 
37.\476\
---------------------------------------------------------------------------

    \474\ Section 3D(d)(11) of the SEA, 15 U.S.C. 78c-4(d)(11).
    \475\ 7 U.S.C. 7b-3(f)(12).
    \476\ Section 37.1200 of subpart M repeats the statutory text of 
Core Principle 12. There are no other provisions in subpart M, nor 
is there any guidance or acceptable practices associated with Core 
Principle 12 in appendix B to part 37. The CFTC has proposed 
additional rules regarding the mitigation of conflicts of interest 
but has not adopted any such rules. See CFTC, Requirements for 
Derivatives Clearing Organizations, Designated Contract Markets, and 
Swap Execution Facilities Regarding the Mitigation of Conflicts of 
Interest, 75 FR 63732 (Oct. 18, 2010); CFTC, Governance Requirements 
for Derivatives Clearing Organizations, Designated Contract Markets, 
and Swap Execution Facilities; Additional Requirements Regarding the 
Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).
---------------------------------------------------------------------------

    Proposed Rule 828 would implement SEA Core Principle 11. Paragraph 
(a) of Rule 828, like Sec.  37.1200, would repeat the statutory text of 
the Core Principle. Paragraph (b) would direct an SBSEF to comply with 
the requirements of Rule 834, which, as discussed below, would 
implement section 765 of the Dodd-Frank Act for both SBSEFs and SBS 
exchanges.\477\
---------------------------------------------------------------------------

    \477\ See infra section VIII.
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 828 and is 
adopting Rule 828 as proposed for the reasons stated in the Proposing 
Release.

L. Rule 829--Core Principle 12--Financial Resources

    Core Principle 12 \478\ sets forth certain requirements related to 
the financial resources of an SBSEF. Paragraph (a)(1) requires an SBSEF 
to have adequate financial, operational, and managerial resources to 
discharge each responsibility of the SBSEF, as determined by the 
Commission. Paragraph (a)(2) would provide that the financial resources 
of an SBSEF shall be considered to be adequate if the value of the 
financial resources: (i) enables the organization to meet its financial 
obligations to its members and participants notwithstanding a default 
by the member or participant creating the largest financial exposure 
for that organization in extreme but plausible market conditions; and 
(ii) exceeds the amount that would enable the SBSEF to cover operating 
costs of the SBSEF for a one-year period, as calculated on a rolling 
basis. Finally, paragraphs (b) through (g) provide details and 
instruction on how to comply with the requirements of Core Principle 
12.
---------------------------------------------------------------------------

    \478\ Section 3D(d)(12) of the SEA, 15 U.S.C. 78c-4(d)(12).
---------------------------------------------------------------------------

    CEA Core Principle 13 for SEFs \479\ is substantively identical to 
SEA Core Principle 12 but lacks the clause in section 3D(d)(12)(B)(i) 
of the SEA relating to an SBSEF meeting financial obligations to 
members and participants notwithstanding a default by the member or 
participant creating the largest financial exposure for the SBSEF in 
extreme but plausible market conditions. As described in the Proposing 
Release, the Commission modeled Rule 829 on subpart N of part 37 of the 
CFTC's rules,\480\ which implements CEA Core Principle 13 for SEFs.
---------------------------------------------------------------------------

    \479\ Section 5h(f)(13) of the CEA, 7 U.S.C. 7b-3(f)(13).
    \480\ See Proposing Release, supra note 1, 87 FR at 28919.
---------------------------------------------------------------------------

1. Rule 829(a)--General
    Paragraph (a) of Proposed Rule 829 would repeat the statutory text 
of SEA Core Principle 12.
    One commenter states that the language in paragraph (a)(2)(i) of 
Proposed Rule 829 that requires an SBSEF to have sufficient financial 
resources ``to meet its financial obligations to its members 
notwithstanding a default by a member creating the largest financial 
exposure for that organization in extreme but plausible market 
conditions'' is not adequate.\481\ The commenter believes that an SBSEF 
should be required to have resources significantly in excess of this 
requirement because, during financial uncertainties and stress, the 
SBSEF would need even greater resources.\482\
---------------------------------------------------------------------------

    \481\ See Letter from Chris Barnard to Commission at 2 (May 21, 
2022) (submitted under cover email dated June 6, 2022).
    \482\ See id.
---------------------------------------------------------------------------

    Another commenter states that the same provision, paragraph 
(a)(2)(i) of Proposed Rule 829, is overly burdensome and 
unnecessary.\483\ The commenter states that the provision would add 
significantly to the amount of capital required to operate an SBSEF 
with little corresponding benefit to the market. The commenter argues 
that trading platforms such as SEFs and SBSEFs will have credit 
exposure to a member in limited circumstances and

[[Page 87210]]

for very limited periods of time. Therefore, this commenter states, 
requiring a trading platform to maintain capital sufficient to cover 
the largest financial exposure of a member trading on the SBSEF, when 
the trading platform will not be called upon to cover the cost of a 
default, is unnecessary and overly burdensome. The commenter also 
states that the provision is not in the parallel CFTC rule. The 
commenter suggests eliminating the provision or, in the alternative, 
affirm that satisfying the financial requirements in Rule 829(b), 
relating to having adequate resources to enable an SBSEF to comply with 
the SEA and applicable Commission rules for one year, would be 
sufficient to satisfy the requirements of Rule 829(a) as well.\484\
---------------------------------------------------------------------------

    \483\ See Bloomberg Letter, supra note 18, at 8.
    \484\ See id.
---------------------------------------------------------------------------

    The requirements of Proposed Rule 829(a)(2)(i), which repeats the 
statutory text of SEA Core Principle 12, do not need to be more 
stringent, as suggested by the first commenter. The provision requires 
an SBSEF to have adequate resources to ``meet its financial obligations 
to its members'' even in case of a default by a member creating the 
largest financial exposure. By the plain meaning of its terms, the 
provision requires that an SBSEF meet its financial obligations. The 
Commission does not see a benefit to requiring an SBSEF to have the 
financial resources that exceed its obligations. As long as an SBSEF's 
obligations are met, its members can be made whole with respect to any 
obligations of the SBSEF and the SBSEF can continue to operate. 
Therefore, ensuring that an SBSEF can meet its financial obligations is 
sufficient. Furthermore, the provision itself already envisions 
``extreme but plausible market conditions,'' analogous to the 
``conditions of financial uncertainty and stress'' that the commenter 
discusses.
    At the same time, Proposed Rule 829(a)(2)(i) should not be 
eliminated, and the rules should not be interpreted in a manner that 
allows the requirements of Proposed Rule 829(a)(2)(i) to be satisfied 
by complying with Proposed Rule 829(b). First, the requirement that an 
SBSEF be able to cover its financial obligations even when its largest 
member defaults is in the statutory language of the SEA, and the 
Commission is not adopting a rule inconsistent with this requirement. 
The statutory language is an appropriate requirement to impose on 
SBSEFs because it seeks to address a plausible risk caused by the 
default of a member, a financial risk that, if an SBSEF has not 
accounted for it, could endanger the SBSEF's ability to continue to 
operate. While, the commenter is correct that the CFTC's rules do not 
have a similar provision, it is also the case that the CEA does not 
have a similar provision. Therefore, while the Commission is, as 
explained above, generally striving for harmonization with the CFTC, 
the Commission is not modifying Proposed Rule 829(a) to remove the 
requirement that an SBSEF have adequate resources to meet its financial 
obligations to its members even in case of a default by a member 
creating the largest financial exposure. Second, the Commission will 
not affirm that it will, as requested by a commenter, interpret the 
rules in a manner that allows the requirement of Rule 829(a) to be 
satisfied by satisfying the requirements of Rule 829(b). The scope of 
Proposed Rule 829(a) and Proposed Rule 829(b) are different. Proposed 
Rule 829(a) would in general address having adequate financial (and 
operational and managerial) resources to discharge each responsibility 
of an SBSEF. Proposed Rule 829(b) would specifically address the 
financial (not operational or managerial) resources that are necessary 
to comply with one type (not each type) of responsibility of the SBSEF, 
i.e., compliance with section 3D of the SEA and the applicable 
Commission rules. Because Proposed Rule 829(a) would address topics 
beyond the scope of Proposed Rule 829(b), including the topic of a 
default by a member creating the largest financial exposure, the 
requirements of Proposed Rule 829(a) cannot be satisfied by merely 
satisfying the requirements of Proposed Rule 829(b).
    For the reasons discussed above, the Commission is adopting Rule 
829(a) as proposed, with a minor technical modification.\485\
---------------------------------------------------------------------------

    \485\ The technical modification removes a stray parenthesis.
---------------------------------------------------------------------------

2. Rule 829(b)--General Requirements
    Paragraph (b) of Proposed Rule 829 is closely modeled on Sec.  
37.1301 of the CFTC's rules,\486\ and it requires an SBSEF to maintain 
financial resources that are adequate to enable it to comply with the 
SBSEF Core Principles set forth in the SEA and the Commission rules for 
a one-year period, calculated on a rolling basis.
---------------------------------------------------------------------------

    \486\ 17 CFR 37.1301; see also Proposing Release, supra note 1, 
87 FR at 28918.
---------------------------------------------------------------------------

    The Commission did not receive any comments and is adopting Rule 
829(b) as proposed for the reasons stated in the Proposing Release.
3. Rule 829(c)--Types of Financial Resources
    Paragraph (c) of Proposed Rule 829 is closely modeled on Sec.  
37.1302 of the CFTC's rules,\487\ and it describes the types of 
financial resources that may satisfy the requirements of Rule 829(b).
---------------------------------------------------------------------------

    \487\ 17 CFR 37.1302; see also Proposing Release, supra note 1, 
87 FR at 28918.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 829(c) 
and is adopting Rule 829(c) as proposed for the reasons stated in the 
Proposing Release.
4. Rule 829(d)--Liquidity of Financial Resources
    Paragraph (d) of Proposed Rule 829 is closely modeled on Sec.  
37.1303 of the CFTC's rules,\488\ and would provide that the financial 
resources allocated by an SBSEF to meet the financial resources 
requirements shall include unencumbered, liquid financial assets equal 
to at least the greater of three months of projected operating costs or 
the projected costs needed to wind down the SBSEF's operations. If an 
SBSEF lacks sufficient unencumbered, liquid financial assets, it may 
satisfy this obligation by obtaining a committed line of credit in an 
amount at least equal to the deficiency.
---------------------------------------------------------------------------

    \488\ 17 CFR 37.1303; see also Proposing Release, supra note 1, 
87 FR at 28919.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 829(d) 
and is adopting Rule 829(d) as proposed for the reasons stated in the 
Proposing Release.
5. Rule 829(e)--Computation of Costs To Meet Financial Resources 
Requirement
    Paragraph (e) of Proposed Rule 829 is closely modeled on Sec.  
37.1304 of the CFTC's rules,\489\ and would require an SBSEF, each 
fiscal quarter, to make a reasonable calculation of its projected 
operating costs and wind-down costs in order to determine its 
applicable obligations under Rule 829. Paragraph (e) would further 
provide that the SBSEF shall have reasonable discretion in determining 
the methodology used to compute such amounts, provided that the 
Commission may review the methodology and require changes as 
appropriate. Proposed Rule 829(e) would also append language based on 
the CFTC guidance from appendix B to part 37 concerning the following 
topics, all of which relate to computation of costs: (i) reasonableness 
of calculating projected operating costs and what may be excluded from 
such calculation; (ii)

[[Page 87211]]

proration of expenses; and (iii) allocation of expenses among 
affiliates.
---------------------------------------------------------------------------

    \489\ 17 CFR 37.1304; see also Proposing Release, supra note 1, 
87 FR at 28919.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 829(e) 
and is adopting Rule 829(e) as proposed, with a minor technical 
modification for the reasons stated in the Proposing Release.\490\
---------------------------------------------------------------------------

    \490\ The technical modification corrects an incorrect internal 
cross-reference to a paragraph in the rule.
---------------------------------------------------------------------------

6. Rule 829(f)--Valuation of Financial Resources
    Paragraph (f) of Proposed Rule 829 is closely modeled on Sec.  
37.1305 of the CFTC's rules,\491\ and would provide that, no less than 
each fiscal quarter, an SBSEF must compute the current market value of 
each financial resource used to meet its obligations under Rule 829 and 
that reductions in value to reflect market and credit risk 
(``haircuts'') shall be applied as appropriate.
---------------------------------------------------------------------------

    \491\ 17 CFR 37.1305; see also Proposing Release, supra note 1, 
87 FR at 28919.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 829(f) 
and is adopting Rule 829(f) as proposed for the reasons stated in the 
Proposing Release.
7. Rule 829(g)--Reporting to the Commission
    Paragraph (g) of Proposed Rule 829 is closely modeled on Sec.  
37.1306 of the CFTC's rules,\492\ and would address reporting to the 
Commission regarding an SBSEF's financial resources. Paragraph (g)(1) 
would generally provide that, each fiscal quarter, or at any time upon 
Commission request, an SBSEF shall report the amount of financial 
resources necessary to meet the requirements of Rule 829 and the market 
value of each financial resource available, and shall provide the 
Commission with financial statements prepared in accordance with GAAP. 
Paragraph (g)(2) would provide that the calculations required under 
Rule 829(g) shall be made as of the last business day of the SBSEF's 
fiscal quarter. Paragraph (g)(3) would generally require the SBSEF to 
provide the Commission with sufficient documentation to explain its 
methodology for computing its financial requirements. Paragraph (g)(4) 
would generally provide the timing for submission of reports and 
supporting documentation. Paragraph (g)(5) would require an SBSEF to 
provide notice to the Commission no later than 48 hours after it knows 
or reasonably should know that it no longer meets its obligations under 
Rule 829(b) and (d). Paragraph (g)(6) would require the use of EDGAR to 
submit reports and documentation required under Rule 829.
---------------------------------------------------------------------------

    \492\ 17 CFR 37.1306; see also Proposing Release, supra note 1, 
87 FR at 28919.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 829(g) 
and is adopting Rule 829(g) as proposed, with minor technical 
modifications, for the reasons stated in the Proposing Release.\493\
---------------------------------------------------------------------------

    \493\ See supra note 32. The Commission has also changed the 
word ``paragraph'' in Rule 829(g)(5) to the plural form.
---------------------------------------------------------------------------

M. Rule 830--Core Principle 13--System Safeguards

    Paragraph (A) of SEA Core Principle 13 \494\ provides that an SBSEF 
must establish and maintain a program of risk analysis and oversight to 
identify and minimize sources of operational risk, through the 
development of appropriate controls and procedures, and automated 
systems, that are reliable and secure and that have adequate scalable 
capacity. Paragraph (B) requires that an SBSEF must also establish and 
maintain emergency procedures, backup facilities, and a plan for 
disaster recovery that allow for the timely recovery and resumption of 
operations; and the fulfillment of the responsibilities and obligations 
of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires 
an SBSEF to periodically conduct tests to verify that the backup 
resources of the SBSEF are sufficient to ensure continued order 
processing and trade matching; price reporting; market surveillance; 
and maintenance of a comprehensive and accurate audit trail. CEA Core 
Principle 14 \495\ is substantively identical to SEA Core Principle 13, 
and the CFTC implemented this Core Principle through subpart O of part 
37, which is entitled ``System Safeguards.''
---------------------------------------------------------------------------

    \494\ Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c-4(d)(13).
    \495\ Section 5h(f)(14) of the CEA, 7 U.S.C. 7b-3(f)(14).
---------------------------------------------------------------------------

    Proposed Rule 830 is closely modeled on subpart O of part 37 of the 
CFTC's rules, except in one aspect. Subpart O includes language 
relating to ``critical financial markets,'' \496\ which is a 
designation applied by the CFTC to certain of its registrants that 
would subject them to more stringent requirements, although the CFTC 
has not yet adopted any such requirements.\497\ A similar concept in 
the SEC's rules is ``SCI entity.'' \498\ When adopting Regulation SCI, 
the Commission considered whether it should apply Regulation SCI to 
SBSEFs, among other entities, and determined not to do so,\499\ and 
when proposing amendments to Regulation SCI in 2023 to, among other 
things, expand the definition of ``SCI entity,'' the Commission did not 
propose to include SBSEFs as SCI entities.\500\
---------------------------------------------------------------------------

    \496\ See Sec.  37.1401(c) (providing that SEFs determined by 
the CFTC to be critical financial markets are subject to more 
stringent requirements); Sec.  37.1401(d); Sec.  37.1401(j) 
(providing that part 40 governs the obligations of registered 
entities that the CFTC has determined to be critical financial 
markets, with respect to maintenance and geographic dispersal of 
disaster recovery resources sufficient to meet a same-day recovery 
time objective in the event of a wide-scale disruption).
    \497\ The provisions in subpart O relating to ``critical 
financial markets'' reference Sec.  40.9 of the CFTC's rules, which 
is marked as ``Reserved.''
    \498\ See Rule 1000 of Regulation SCI (defining ``SCI entity''). 
In Nov. 2014, the Commission adopted Regulation Systems Compliance 
and Integrity (``SCI'') to strengthen the technology infrastructure 
of the U.S. securities markets, reduce the occurrence of systems 
issues in those markets, improve their resiliency when technological 
issues arise, and establish an updated and formalized regulatory 
framework, thereby helping to ensure more effective Commission 
oversight of such systems. See Regulation Systems Compliance and 
Integrity, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 
5, 2014).
    \499\ See id., 79 FR at 72363-64 (reviewing comments received 
regarding the potential application of Regulation SCI to SBSEFs, 
among others).
    \500\ See Regulation Systems Compliance and Integrity, SEA 
Release No. 97143 (Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023) 
(Proposed Amendments) (File No. S7-07-23).
---------------------------------------------------------------------------

    One commenter states that it has seen no changes in the SBS market 
that should cause the Commission to revisit its decision not to apply 
Regulation SCI to SBSEFs. The commenter states that, as the Commission 
has noted, the greatest operations risk to a dually registered entity 
is likely to arise from the swap business rather than the SBS business. 
From this standpoint, according to the commenter, it is appropriate for 
the Commission to align with the CFTC approach to ensure that SEFs and 
SBSEFs alike have adequate system safeguards and business continuity 
protocols that are aligned with this risk.\501\
---------------------------------------------------------------------------

    \501\ See Bloomberg Letter, supra note 18, at 18.
---------------------------------------------------------------------------

    Subpart O is reasonably designed to promote SEF operational 
capability, and that the most appropriate way to implement SEA Core 
Principle 13 is to closely harmonize with the CFTC's rules that 
implement the corresponding Core Principle. As with SEA Core Principle 
12 (Financial resources),\502\ the Commission recognizes that the swap 
business of a dually registered SEF/SBSEF is likely to be much larger 
than its SBS business. Therefore, the greatest operational risk to a 
dually registered entity is likely to arise from the swap business 
rather than the SBS business, so it would be logical for the SEC to

[[Page 87212]]

defer to the CFTC's approach for ensuring that SEFs have adequate 
system safeguards and business continuity protocols. Different or 
additive requirements imposed by the SEC could increase costs for SEF/
SBSEFs while generating benefits that are marginal at best. The 
Commission does not observe any differences in the SBS market relative 
to the swaps market that warrant imposing different or additive 
operational capability requirements on SBSEFs. Additionally, because 
SBSEFs are not SCI entities and the corresponding CFTC rule has not 
imposed additional requirements on critical financial markets, it is 
not necessary or appropriate to adapt into Rule 830 the language of 
subpart O applicable to critical financial markets.\503\
---------------------------------------------------------------------------

    \502\ See supra section VI.L (discussing Core Principle 12).
    \503\ While subpart O frequently uses the term ``market 
participant,'' Proposed Rule 830 would substitute the term 
``member'' in these places, since the rule pertains to market 
participants who are engaging as members of the SEF/SBSEF. See supra 
note 362.
---------------------------------------------------------------------------

    Therefore, the Commission is adopting Rule 830 as proposed, with 
minor technical modifications.\504\
---------------------------------------------------------------------------

    \504\ See supra note 32.
---------------------------------------------------------------------------

N. Rule 831--Core Principle 14--Designation of Chief Compliance Officer

    SEA Core Principle 14 \505\ requires each registered SBSEF to 
designate a chief compliance officer (``CCO''), and requires the CCO to 
review the SBSEF's compliance with the Core Principles, resolve 
conflicts of interest, be responsible for establishing and 
administering policies and procedures required under the Core 
Principles, establish procedures for the remediation of noncompliance, 
prepare and sign an annual report that describes the SBSEF's 
compliance, certify that the report is accurate and complete, and 
submit the report to the Commission. CEA Core Principle 15 for SEFs 
\506\ is substantively identical.
---------------------------------------------------------------------------

    \505\ Section 3D(d)(14) of the SEA, 15 U.S.C. 78c-4(d)(14).
    \506\ Section 5h(f)(15) of the CEA, 7 U.S.C. 7b-3(f)(15).
---------------------------------------------------------------------------

    Proposed Rule 831 would implement SEA Core Principle 14 and is 
closely modeled on subpart P of part 37, with two minor substantive 
exceptions.\507\ The first relates to disqualification of the CCO. 
Section 37.1501(b)(2)(ii) states: ``No individual disqualified from 
registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve 
as a chief compliance officer.'' The Commission proposed instead, in 
Rule 831(c)(2), that no individual that would be disqualified from 
serving on an SBSEF's governing board \508\ or committees pursuant to 
the criteria set forth in Sec.  242.819(i) may serve as the CCO. As 
noted above,\509\ the disqualification criteria in Rule 819(i) are 
adapted from Sec.  1.63 of the CFTC's rules. Second, the Commission 
adapted the acceptable practices pertaining to CEA Core Principle 15 
into paragraph (c) of Proposed Rule 831.\510\
---------------------------------------------------------------------------

    \507\ In addition, the requirement in Proposed Rule 831 that the 
CCO's annual compliance report be submitted electronically to the 
Commission, based on Sec.  37.1501(e)(2), includes an added clause 
to provide that the submission must be made using the EDGAR system 
and must be provided as an Interactive Data File in accordance with 
Rule 405 of Regulation S-T, in conformance with other rules in 
Regulation SE requiring electronic submissions. See Proposed Rule 
831(j)(2).
    \508\ Subpart P uses the term ``board of directors,'' while the 
Commission proposed to use the term ``governing board'' instead 
throughout proposed Regulation SE. See Proposing Release, supra note 
1, 87 FR at 28877 n.29.
    \509\ See supra section VI.B.9.
    \510\ Proposed Rule 831(c) would provide that, in determining 
whether the background and skills of a potential CCO are appropriate 
for fulfilling the responsibilities of the role of the CCO, an SBSEF 
would have the discretion to base its determination on the totality 
of the qualifications of the potential CCO, including, but not 
limited to, compliance experience, related career experience, 
training, potential conflicts of interest, and any other relevant 
factors.
---------------------------------------------------------------------------

    The Commission received one comment on Proposed Rule 831. The 
commenter states that he fully supports the intent of the proposed 
regulations and believes that the CCO role is the single most important 
compliance role in an SBSEF and that it is critical that its job 
description, and the entity's rules, structures, and procedures, act to 
secure and maintain the CCO's independence. For example, the commenter 
states, the CCO should have a single compliance role and no other 
competing role or responsibility that could create conflicts of 
interest or threaten its independence. Therefore, the commenter 
suggests that the rules restrict the CCO position from being held by an 
attorney who represents the SBSEF or its board of directors, such as an 
in-house or general counsel. The commenter also states that the 
remuneration of the CCO must be specifically designed in such a way 
that avoids potential conflicts of interest with its compliance 
role.\511\
---------------------------------------------------------------------------

    \511\ See Letter from Chris Barnard (May 20, 2022) (submitted 
under cover email dated June 6, 2022).
---------------------------------------------------------------------------

    The commenter further states that although the CCO would normally 
report to an executive officer, the CCO must also have a direct 
reporting line to the independent directors, and the CCO should report 
to the audit committee at least yearly. The commenter strongly 
recommends amending Sec.  242.831 such that the authority and sole 
responsibility to designate or remove the CCO, or to materially change 
its duties and responsibilities, vests only with the independent 
directors and not with the full board. This would help, the commenter 
states, to ensure the independence of the CCO within the entity and 
would possibly mitigate the need to promulgate rules requiring the 
SBSEF to insulate the CCO from undue pressure and coercion or to 
address the potential conflict between and among compliance interests, 
commercial interests and ownership interests of an SBSEF.\512\
---------------------------------------------------------------------------

    \512\ See id.
---------------------------------------------------------------------------

    The CFTC has implemented CEA Core Principle 14 for SEFs in an 
appropriate way, and that closely harmonizing with subpart P of part 37 
would yield comparable regulatory benefits while imposing only marginal 
additional costs. While the commenter's suggestions would support the 
independence of the CCO, key provisions of paragraph (b) of Proposed 
Rule 831 would sufficiently protect the independence and authority of 
an SBSEF's CCO in performing the required functions. Significantly, 
paragraph (b)(1) would require that the position of CCO carry with it 
sufficient authority and resources to fulfill the position's duties, 
and paragraph (b)(2) would provide that the CCO shall have supervisory 
authority over all staff acting at the CCO's direction. The SBSEF 
remains responsible for establishing and administering required 
policies and procedures.
    The Commission also recognizes that most SBSEFs are likely to be 
dually registered SEF/SBSEFs and that the swaps business of a dually 
registered SEF/SBSEF is likely to be much larger than its SBS business. 
Therefore, the greatest compliance risks to a dually registered entity 
are likely to arise from the swap business rather than the SBS 
business, and it is thus logical for the SEC to harmonize with the 
CFTC's rules regarding the CCO. There are strong economic incentives 
for a dually registered entity to appoint the same individual to serve 
as the CCO for both the swap and SBS businesses, and for the CCO to 
carry out their functions under a similar set of rules. Different or 
additive requirements imposed by the SEC could increase costs for SEF/
SBSEFs while generating benefits that are marginal at best. The 
Commission does not observe any differences in the SBS market relative 
to the swaps market that warrant imposing different or additive CCO 
requirements on SBSEFs relating to the CCO.
    For the reasons discussed above, the Commission is adopting Rule 
831 as

[[Page 87213]]

proposed, with minor technical modifications.\513\
---------------------------------------------------------------------------

    \513\ See supra note 32. The Commission has also deleted an 
extraneous ``and'' at the end of the text of Rule 831(a)(1)(v).
---------------------------------------------------------------------------

VII. Cross-Border Rules

A. Rule 832--Cross-Border Mandatory Trade Execution

    Given the global nature of the SBS market, where there is frequent 
interaction among counterparties domiciled in different jurisdictions, 
the Commission proposed Rule 832 to address when the trade execution 
requirement would apply to a cross-border SBS transaction.\514\ The 
proposed rule would be consistent with the Commission's territorial 
approach to applying Title VII requirements in other contexts, where 
relevant activity need not occur wholly within the United States or 
solely between U.S. persons for Title VII requirements to apply.\515\ 
As discussed further below, the relevant activity here is ``to engage 
in a security-based swap'' in whole or in part in the United 
States.\516\
---------------------------------------------------------------------------

    \514\ See supra section V.F (discussing the trade execution 
requirement of section 3C(h) of the SEA); see also Proposing 
Release, supra note 1, 87 FR at 28922-25 (discussing proposed Rule 
832 in more detail).
    \515\ See Proposing Release, supra note 1, 87 FR at 28922-23.
    \516\ See SEA section 3C(a)(1), 15 U.S.C. 78c-3(a)(1).
---------------------------------------------------------------------------

    Paragraph (a) of Rule 832 would provide that the trade execution 
requirement set forth in section 3C(h) of the SEA shall not apply to an 
SBS unless at least one counterparty to the SBS is a ``covered person'' 
as defined in paragraph (b). Paragraph (b) of Rule 832 would define the 
term ``covered person'' with respect to a particular security-based 
swap, as any person that is: (1) a U.S. person; \517\ (2) a non-U.S. 
person whose performance under an SBS is guaranteed by a U.S. person; 
or (3) a non-U.S. person who, in connection with its SBS dealing 
activity, uses U.S. personnel located in a U.S. branch or office, or 
personnel of an agent of such non-U.S. person located in a U.S. branch 
or office, to arrange, negotiate, or execute a transaction. Taken 
together, the provisions of Rule 832 apply to persons who are--
consistent with the relevant statutory provisions added by Title VII--
engaging in SBS in the United States.
---------------------------------------------------------------------------

    \517\ Transactions effected through the foreign branch of a U.S. 
person would be subject to the trade execution requirement, as ``a 
foreign branch has no separate existence from the U.S. person 
itself.'' See Proposing Release, supra note 1, 87 FR at 28923.
---------------------------------------------------------------------------

    Two commenters express support for Rule 832 or its subparts. 
Specifically, one commenter states that inclusion of paragraphs (b)(2) 
and (b)(3) in the proposed rule--where one counterparty of an SBS 
transaction is a non-U.S. person whose performance under an SBS is 
guaranteed by a U.S. person (``guaranteed person transactions''), and 
where one counterparty of an SBS transaction is a non-U.S. person who, 
in connection with its SBS dealing activity, uses U.S. personnel 
located in a U.S. branch or office, or personnel of an agent of such 
non-U.S. person located in a U.S. branch or office, to arrange, 
negotiate, or execute a transaction (``ANE transactions''), 
respectively--are ``appropriately broad [and] will help prevent 
attempted evasion of the trade execution requirement by ensuring that 
it will apply where there is a significant connection to the U.S., even 
when neither counterparty is a U.S. person.'' \518\
---------------------------------------------------------------------------

    \518\ Better Markets Letter, supra note 18, at 14-15.
---------------------------------------------------------------------------

    While generally supportive of Rule 832, this commenter believes 
that, in addition to guaranteed person transactions, the rule should 
also cover transactions that include a ``de facto guarantee'' by a U.S. 
person, which this commenter states represents ``an unspoken but 
nevertheless powerful arrangement whereby a parent or other U.S. person 
has a virtually irresistible incentive to cover the losses incurred by 
another affiliated entity'' given the reputational impact a failure of 
even a non-guaranteed affiliate could have.\519\
---------------------------------------------------------------------------

    \519\ Id. at 15-16. This commenter cited Citigroup's experience 
with certain structured investment vehicles during the 2008 
financial crisis, which this commenter states Citigroup ``chose'' to 
bring onto its balance sheet even though it had no legal obligation 
to do so. See id.
---------------------------------------------------------------------------

    Another commenter expresses support for paragraph (b)(3) of Rule 
832 relating to ANE transactions.\520\ This commenter agrees that such 
transactions fall within the Commission's jurisdiction, even if they 
are booked to non-U.S. entities, and believes that, given the 
Commission's supervisory interests and policy objectives, it is 
warranted for the Commission to exercise its jurisdiction over ANE 
transactions. This commenter states that, ``following the CFTC granting 
no-action relief from the trade execution requirement for ANE 
transactions, interdealer trading activity in EUR interest rate swaps 
began to be booked almost exclusively to non-U.S. entities, a fact 
pattern that academic research found was `consistent with (although not 
direct proof of) swap dealers strategically choosing the location of 
the desk executing a particular trade in order to avoid trading in a 
more transparent and competitive setting.' '' \521\ The commenter 
states that this is ``an outcome to avoid in the SBS market.'' \522\
---------------------------------------------------------------------------

    \520\ See Citadel Letter, supra note 18, at 16.
    \521\ Id. (citing Benos, E., Payne, R., and Vasios, M., 
Centralized trading, transparency and interest rate swap market 
liquidity: evidence from the implementation of the Dodd-Frank Act, 
Bank of England Staff Working Paper, at 30 (May 2018), available at 
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update).
    \522\ Id.
---------------------------------------------------------------------------

    Several commenters oppose certain aspects of Rule 832. One 
commenter disagrees with the Commission's application of the trade 
execution requirement to transactions involving foreign branches of 
U.S. persons, as well as to guaranteed person transactions.\523\ This 
commenter believes that ``mandatory trade execution is not designed to 
address or mitigate systemic risk'' and, thus, it is unnecessary to 
extend SBSEF rules to transactions with non-U.S. counterparties ``where 
the lack of such rules would have no ability of posing risk to the U.S. 
financial system.'' \524\ This commenter states that guaranteed 
entities (by definition non-U.S. persons) and foreign branches of U.S. 
persons are both subject to the laws and regulations of their home 
country or the foreign jurisdictions in which they and their 
counterparties operate, respectively, and the commenter states that 
imposing the rule's mandatory trading obligations on them in 
transactions with non-U.S. counterparties would result in duplicative 
regulation, which would increase compliance costs and add complexity 
and inefficiencies to cross-border trading.\525\ This commenter also 
states that foreign trading venues are already subject to comprehensive 
regulatory oversight in their home jurisdictions and, based on its 
experience with the CFTC's SEF trading rules prior to the grant of 
equivalency to major foreign trading platforms in Europe and Asia, 
``foreign platforms will deny access to any entity with any connection 
to the United States, no matter how remote, for fear of being captured 
by the SEC's regime'' and will further fragment SBS markets.\526\
---------------------------------------------------------------------------

    \523\ See ISDA-SIFMA Letter, supra note 18, at 12-13.
    \524\ Id. at 12.
    \525\ See id. at 13.
    \526\ Id.
---------------------------------------------------------------------------

    Several commenters also oppose subjecting ANE transactions to the 
trade execution requirement in Rule 832(b)(3). One commenter believes 
that ANE transactions fall outside the jurisdictional reach of Title 
VII, and that

[[Page 87214]]

``the location of personnel or agents within the United States should 
not form the basis for extending the [Commission's] trading mandate. . 
. .'' \527\ This commenter states that, when assessing the necessity of 
extending the extraterritorial reach of a particular ruleset, ``it is 
important to consider the objectives of individual rulesets'' and 
further states that ``platform trading rules are not intended to 
address or mitigate risk, and therefore, the Commission should exercise 
more flexibility'' when deciding whether these rules should extend to 
ANE transactions.\528\ This commenter believes that including ANE 
transactions ``would bring a random selection of additional 
transactions into scope merely due to some supporting role played by a 
U.S. based sales person, trader or other function caught up in ANE.'' 
\529\
---------------------------------------------------------------------------

    \527\ Id. at 11.
    \528\ Id. This commenter states that rules related to mandatory 
platform execution are intended to provide counterparties with a 
sufficient level of pre-trade price transparency and that they 
should be addressed by the market regulators in the jurisdiction 
where the majority of trading activity is taking place. See id.
    \529\ Id. at 12.
---------------------------------------------------------------------------

    Several commenters warn of negative implications for the SBS market 
from applying the trade execution requirements to ANE 
transactions.\530\ One commenter expresses concern generally about the 
rule's ``complexities and over-broad reach.'' \531\ Another commenter 
states that firms and platforms would be required to make 
representations ``that no ANE touchpoint is present in the U.S. for any 
SBS subject to the trading mandate'' so as not to run afoul of Rule 
832's requirements, which this commenter states would ``require the 
development of a costly parallel infrastructure completely devoid of 
U.S. touchpoints. . . .'' \532\ Similarly, another commenter states 
that, without regulatory certainty and clear jurisdictional boundaries, 
market participants may be unsure of which rules apply to a particular 
SBS transaction because ``non-U.S. counterparties and platform 
operators frequently do not know whether a transaction involves U.S. 
ANE activities,'' which this commenter states will likely result in 
confusion among market participants and platform operators and may 
result in some market participants deciding not to transact in SBS at 
all.\533\
---------------------------------------------------------------------------

    \530\ See SIFMA AMG Letter, supra note 18, at 11; Tradeweb 
Letter, supra note 18, at 3-4; ISDA-SIFMA Letter, supra note 18, at 
11-12.
    \531\ SIFMA AMG Letter, supra note 18, at 11.
    \532\ ISDA-SIFMA Letter, supra note 18, at 12.
    \533\ Tradeweb Letter, supra note 18, at 4-5.
---------------------------------------------------------------------------

    These commenters also state that foreign jurisdictions have adopted 
robust regulatory regimes that already subject non-U.S. persons and 
foreign trading venues to comparable and comprehensive regulations in 
their respective jurisdictions.\534\ These commenters contrast the 
Commission's proposed approach with the CFTC's efforts ``to curtail the 
U.S.' approach to extra-territoriality in light of the progress made by 
other jurisdictions in establishing robust derivatives regulatory 
regimes,'' \535\ with one noting that, in adopting its cross-border 
rules for certain swap-market participants in 2020, the CFTC announced 
that it would not consider ANE as a relevant factor in non-U.S. 
dealers' swap transactions.\536\ Another commenter asks the Commission 
to be mindful of whether CFTC-registered SEFs would be forced to change 
their rules in order comply with the new proposed SBSEF rules.\537\
---------------------------------------------------------------------------

    \534\ See id. at 4; ISDA-SIFMA Letter, supra note 18, at 12. See 
also SIFMA AMG Letter, supra note 18, at 11.
    \535\ ISDA-SIFMA Letter, supra note 18, at 12. See also Tradeweb 
Letter, supra note 18, at 4; SIFMA AMG Letter, supra note 18, at 11. 
Section VII.B, infra, discusses the exemptions under Rule 833.
    \536\ ISDA-SIFMA Letter, supra note 18, at 12 n.28. See also 
CFTC, Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants, 85 FR 56924, 56961-63 (Sept. 14, 2020); CFTC Release 
No. 8212-20 (July 23, 2020) (CFTC Withdraws ``ANE'' Staff Advisory 
and Issues New Cross-Border No-Action Relief).
    \537\ SIFMA AMG Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    Finally, one commenter requests that the Commission make more 
explicit that the ``covered person'' definition in Rule 832 is a 
transaction-based test,\538\ while another commenter requests 
additional clarity about the application of the rule.\539\
---------------------------------------------------------------------------

    \538\ See ISDA-SIFMA Letter, supra note 18, at 11 n.26. 
Specifically, this commenter appreciates the Commission's 
clarification that the ``covered person'' definition is a 
transaction-based test but believes that the rule text could be more 
explicit in such regard by replacing: in prong (2) of the definition 
``a security-based swap'' with ``that security-based swap;'' and in 
prong (3) of the definition ``a transaction'' with ``that security-
based swap transaction.''
    \539\ See SIFMA AMG Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

    The Commission has considered the comments received for Rule 832 
and is adopting the rule as proposed, with minor technical 
modifications.\540\ As an initial matter, the Commission disagrees with 
those comments suggesting that Rule 832 may exceed the Commission's 
statutory authority. The trade execution requirement of section 
3C(h)(1) provides that the Commission's authority with respect to trade 
execution is co-extensive with the Commission's authority to require 
SBS clearing under section 3C(a)(1) of SEA.\541\ And the clearing 
requirement of section 3C(a)(1) provides for SBS clearing when a person 
is ``engage[d] in a security-based swap'' in the United States.\542\ 
Thus, consistent with the Commission's territorial approach and Title 
VII, the relevant domestic activity that triggers the execution 
requirement is engaging in an SBS in the United States.
---------------------------------------------------------------------------

    \540\ See supra note 32.
    \541\ Section 3C(h)(1) of the SEA (requiring trade execution 
``[w]ith respect to transactions involving security-based swaps 
subject to the clearing requirement of subsection (a)(1)'' of the 
SEA).
    \542\ Section 3C(a)(1) of the SEA (``It shall be unlawful for 
any person to engage in a security-based swap unless that person 
submits such security-based swap for clearing to a clearing agency 
that is registered under this Act or a clearing agency that is 
exempt from registration . . . .'').
---------------------------------------------------------------------------

    Rule 832 fits comfortably within the bounds of that statutory 
authority. A U.S. person undertaking SBS transactions within the United 
States is, as no commenter disputes, engaging in an SBS in the United 
States (irrespective of whether the counterparty is overseas). And this 
is true even if the U.S. person is undertaking the SBS transaction from 
a foreign office. As the Commission has explained, ``a foreign office 
has no separate existence from the U.S. person itself.'' \543\ It is 
the U.S. based entity that has legal and financial responsibility for 
the SBS transaction and for the ensuing obligations that will flow from 
the transaction over the life of the SBS. Thus, it is reasonable to 
understand the U.S. entity to have engaged in the United States in the 
SBS even if the initial undertaking (i.e., the SBS transaction) 
occurred in the entity's foreign office.
---------------------------------------------------------------------------

    \543\ Proposing Release, supra note 1, 87 FR at 28923 (citing 
Application of ``Security-Based Swap Dealer'' and ``Major Security-
Based Swap Participant'' Definitions to Cross-Border Security-Based 
Swap Activities; Republication, SEA Release No. 72472 (June 25, 
2014), 79 FR 47278, 47289 (Aug. 12, 2014) (``2014 Cross-Border 
Adopting Release'')).
---------------------------------------------------------------------------

    For similar reasons, a non-U.S. person who enters an SBS with 
another non-U.S. person has nonetheless engaged in an SBS in the United 
States (at least in part) if that SBS arrangement is guaranteed by a 
U.S. person. When a non-U.S. person operates with a guarantee from a 
U.S. person for the non-U.S. person's performance under an SBS, the SBS 
arrangement is economically equivalent and substantially identical with 
a transaction entered into directly with the U.S. guarantor. With such 
an arrangement, an essential element of the transaction from the 
viewpoint of the

[[Page 87215]]

guaranteed person's counterparty is the legal and financial obligations 
such a guarantee imposes on the U.S. guarantor (without which there 
would be no need to include the U.S. guarantor) and brings the U.S. 
person legally and financially into the transaction as an interested 
party. This economic reality makes it appropriate to include guaranteed 
non-U.S. persons within the definition of ``covered persons'' in Rule 
832.
    Further, the statutory language is, in the Commission's view, 
reasonably understood to encompass a non-U.S. person who, in connection 
with its SBS dealing activity, uses U.S. personnel located in a U.S. 
branch or office, or personnel of an agent of such non-U.S. person 
located in a U.S. branch or office, to arrange, negotiate, or execute 
an SBS transaction. These activities rise to the level of engaging in 
an SBS in the United States. Undertaking critical steps in an SBS 
transaction qualifies as engaging in an SBS in the United States, no 
less than placing ultimate legal or financial responsibility for an SBS 
with a person in the United States (as occurs in the cases discussed 
above of an SBS transaction involving either a foreign office of a U.S. 
person or a U.S. guarantor).
    The Commission's assessment of the relevant domestic activities 
that constitute engaging in an SBS is consistent not only with the 
statutory text, but also the statutory objectives underlying the 
execution requirement. These objectives include, among other things, 
helping to ensure the financial stability of U.S. persons engaged in 
SBS transactions, the promotion of transparency in price formation for 
SBS transactions that have a nexus to the U.S. securities markets, and 
the prevention of manipulation, price distortion and disruptions of the 
delivery or cash settlement process within the U.S. market system. Each 
of the components of Rule 832 helps to advance one or more of these 
statutory goals and, thus, further supports the Commission's reasonable 
understanding of what constitutes engaging in an SBS in the United 
States.\544\
---------------------------------------------------------------------------

    \544\ In the alternative, the Commission relies on the anti-
evasion authority of section 30(c) of the SEA, 15 U.S.C. 78dd(c), as 
statutory authority for Rule 832. Section 30(c) authorizes the 
Commission to apply Title VII requirements to persons transacting a 
business ``without the jurisdiction of the United States'' if they 
contravene rules that the Commission has prescribed as ``necessary 
or appropriate to prevent the evasion of any provision'' of Title 
VII. For example, without Rule 832(b)(2), U.S. persons could have an 
incentive to evade the trade execution requirement by engaging in 
SBS via a guaranteed affiliate, while the economic reality of 
transactions arising from that activity--including the risks these 
transactions introduce to the U.S. market--would be no different in 
most respects than transactions entered into directly by U.S. 
persons. See Proposing Release, supra note 1, 87 FR at 28923 n.228. 
And, without Rule 832(b)(3), non-U.S. persons could retain the 
benefits of operating in the United States while avoiding compliance 
with the trade execution requirement. See id. at 28923 n.230.
---------------------------------------------------------------------------

    With that general explanation of how Rule 832 fits comfortably 
within our statutory authority, the Commission will address the 
specific comments that were received on the rule. For the reasons 
discussed above, the Commission disagrees with the comment that Rule 
832 should not extend the trade execution requirement to transactions 
involving foreign branches of U.S. persons or guaranteed person 
transactions.\545\ With respect to the commenter that believes Rule 
832's definition of ``covered person'' should also cover a transaction 
that includes a ``de facto guarantee'' by a U.S. person,\546\ the 
Commission appreciates that, even for an affiliate that is not a 
guaranteed person, a dealer or large trader might be unwilling to allow 
such an affiliate to fail because of the reputational and other 
consequences such a failure might have on its interactions with 
potential counterparties. At the same time, given the lack of a legal 
obligation by the ``de facto guarantor,'' it is not clear how the 
Commission could determine--before the fact--which ``de facto 
guarantees'' exist and which such ``de facto guarantors'' should be 
included, or how market participants, including counterparties, would 
be able to determine the applicability of Regulation SE to a 
transaction potentially subject to a ``de facto guarantee.'' Thus, the 
Commission is not including ``de facto guarantee'' transactions within 
Rule 832's definition of ``covered persons.''
---------------------------------------------------------------------------

    \545\ See supra note 523 and accompanying text.
    \546\ See supra note 519 and accompanying text.
---------------------------------------------------------------------------

    For the reasons discussed above, as well as the reasons discussed 
immediately below, the Commission also disagrees with the argument that 
the Commission should not extend SBSEF rules, which include mandatory 
trade execution, to transactions with non-U.S. counterparties (even if 
they involve guaranteed persons) where the lack of such rules would 
have no ability of posing risk to the U.S. financial system.\547\ While 
Title VII's trade execution requirements do not relate to systemic risk 
in precisely the same manner that certain other Title VII rules--such 
as capital, margin, and segregation requirements for SBSDs and 
MSBSPs,\548\ post-trade reporting and public dissemination of SBS 
transactions,\549\ registration and regulation of SBSDs and 
MSBSPs,\550\ among others--the Commission disagrees with the notion 
that the trade execution and other SBSEF requirements are not important 
in addressing and mitigating risk, including potentially systemic risk, 
to the U.S. financial system. The application of the trade execution 
requirement to a cross-border SBS transaction is not simply a matter of 
whether a particular form of execution (such as RFQ-to-3 or the use of 
an order book) is required. Instead, the application of this 
requirement to such a transaction would subject the transaction to the 
various requirements of Regulation SE, many of which relate to 
mitigating risks to the counterparties of the transaction and, 
ultimately, the U.S. financial system. The Core Principles for SBSEFs--
which are set forth in the Dodd-Frank Act \551\ and implemented in the 
rules of Regulation SE--seek to, among other things, provide for 
transparency in price formation for SBS,\552\ impartial access to SBS 
trading,\553\ the financial resources of SBS trading venues,\554\ the 
efficient submission of eligible SBS transactions to central 
clearing,\555\ and the prevention of manipulation, price distortion, 
and disruptions of the delivery or cash settlement process.\556\
---------------------------------------------------------------------------

    \547\ See supra note 524 and accompanying text.
    \548\ See Capital, Margin, and Segregation Release, supra note 
100.
    \549\ See Regulation SBSR Release, supra note 102.
    \550\ See SBSD and MSBSP Registration Release, supra note 99.
    \551\ Core Principles of section 3D(d) of the SEA, 15 U.S.C. 
78c-4(d).
    \552\ See, e.g., Rule 815 (methods of execution); Rule 816 
(trade execution requirement); Rule 825 (Core Principle 8--timely 
publication of trading information).
    \553\ See, e.g., Rule 819(c) (Core Principle 2--access 
requirements).
    \554\ See, e.g., Rule 829 (Core Principle 12--financial 
resources).
    \555\ See, e.g., Rule 823(c) (Core Principle 6--financial 
integrity of transactions).
    \556\ See, e.g., Rule 820 (Core Principle 3--SBS not readily 
susceptible to manipulation); Rule 821(Core Principle 4--monitoring 
of trading and trade processing); Rule 823 (Core Principle 6--
financial integrity of transactions).
---------------------------------------------------------------------------

    With respect to commenters' views opposing the inclusion of ANE 
transactions in Rule 832,\557\ the Commission understands that this 
differs from the CFTC's policy towards ANE transactions and is 
cognizant of the potential complexities and costs that can arise if 
market participants are unsure of which jurisdictions' rules apply to a 
particular SBS transaction.

[[Page 87216]]

The Commission also recognizes commenters' views that certain foreign 
jurisdictions have adopted ``robust'' regulatory regimes.\558\ However, 
the purpose of Rule 832 is to ``address when the . . . trade execution 
requirement applies to a cross-border SBS transaction.'' \559\ Absent 
an exemption, the trade execution requirement applies in cross-border 
contexts wherever covered persons are involved in an SBS transaction, 
regardless of whether the relevant foreign jurisdictions have robust 
regulatory regimes--such as those the Commission may consider in 
connection with a foreign trading venue's application to the Commission 
for an exemption from the trade execution requirement under Rule 
833(b).\560\
---------------------------------------------------------------------------

    \557\ See supra notes 527-537 and accompanying text.
    \558\ See supra note 534 and accompanying text.
    \559\ Proposing Release, supra note 1, 87 FR at 28924.
    \560\ See infra section VII.B (discussing cross-border 
exemptions under Rule 833, including exemptions relating to the 
trade execution requirement under Rule 833(b)). The Commission may 
consider, among other things, the extent to which the SBS traded in 
a foreign jurisdiction are subject to a comparable trade-execution 
requirement.
---------------------------------------------------------------------------

    In adopting Rule 832, the Commission has been mindful of its impact 
on CFTC-registered SEFs and, as a commenter suggests,\561\ whether they 
might be forced to change their rules because of the Commission's ANE 
approach for SBSEFs. As discussed below in section VII.B with respect 
to applications for exemptions relating to the trade execution 
requirement under Rule 833(b), foreign trading venues that have already 
received exemptive relief from the CFTC for swaps trading where robust 
regulatory regimes may exist with requirements comparable to those 
applicable to SBS transactions in the United States may apply for 
exemptive relief under Rule 833(b). If exempted under Rule 833(b), 
trading of SBS on such foreign trading venues would not require CFTC-
registered SEFs to change their rules.\562\ Similarly, for SBS 
transactions that the Commission exempts from the trade execution 
requirement based on an application submitted under Rule 833(b), the 
concerns expressed by commenters regarding complexities and costs would 
no longer be applicable,\563\ and commenters' concerns regarding the 
Commission's treatment of ANE transactions should be allayed as well, 
because the effect of such exemptions would likely result in SBS 
transactions in foreign jurisdictions with what may be considered 
robust regulatory regimes being exempt from the Commission's trade 
execution requirement and, in practice, have similar treatment of 
transactions on applicable foreign trading venues as the CFTC. On the 
other hand, if the Commission does not grant an exemption to such an 
SBS transaction, that would mean that the Commission would not have 
made a finding that granting such an exemption would be in the public 
interest and consistent with the protection of investors, in light of 
any information submitted with the application which the Commission may 
have considered regarding comparable requirements in that foreign 
jurisdiction. For such SBS transactions, it would be appropriate for 
the trade execution requirements to apply.
---------------------------------------------------------------------------

    \561\ See supra note 537 and accompanying text.
    \562\ See infra notes 624-627 and accompanying text.
    \563\ According to one commenter, these issues no longer apply 
in the SBS markets given that the CFTC resolved it ``when it granted 
equivalency to major foreign trading platforms in Europe and Asia.'' 
See supra note 526 and accompanying text. The CFTC has granted 
orders of exemptions to certain markets pursuant to CEA section 
5h(g), which authorizes the CFTC to exempt, conditionally or 
unconditionally, a SEF from registration under CEA section 5h if the 
CFTC finds that the facility is ``subject to comparable, 
comprehensive supervision and regulation on a consolidated basis by 
. . . the appropriate governmental authorities in the home country 
of the facility.'' See ``Exemption of Foreign Swap Trading 
Facilities from SEF Registration,'' available at https://www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs.
---------------------------------------------------------------------------

    The Commission also disagrees with the characterization of Rule 832 
with respect to ANE transactions as bringing ``a random selection of 
additional transactions into scope'' and the belief that the location 
of personnel in the United States should not form the basis for 
applying the Commission's trade execution requirement.\564\ The mere 
fact that an entity has personnel located in the U.S. does not subject 
an SBS transaction to the trade execution requirement; rather, it is 
the role such personnel play in arranging, negotiating, or executing 
the transaction that brings them within the definition of ``covered 
person'' for purposes of Rule 832. ANE transactions would not be a 
``random selection of additional transactions;'' \565\ instead, it 
would be appropriate to apply its carefully considered and tailored 
guidance given in other Title VII requirements for the phrase 
``arranged, negotiated, or executed'' for the purposes of the 
application of the trade execution requirement in the cross-border 
context.
---------------------------------------------------------------------------

    \564\ See supra notes 527 and 529 and accompanying text.
    \565\ See supra note 564 and accompanying text.
---------------------------------------------------------------------------

    Specifically, the Commission has clarified that Title VII 
requirements using an ``arranged, negotiated, or executed'' test are 
not triggered in certain circumstances where 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.'' 
\566\ Such instances arise when U.S. personnel provide ``market color'' 
in connection with SBS transactions, where such market color is 
``limited to background information regarding pricing or market 
conditions associated with particular instruments or with markets more 
generally'' \567\ and when the U.S. personnel have no client 
responsibility \568\ and do not receive any transaction-linked 
compensation.\569\ However, market-facing activity by personnel located 
in the United States also would not be ``market color'' (i.e., would be 
considered to be ``arranged, negotiated, or executed'') if such 
activity involves: 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 SBS 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 an SBS 
transaction.\570\
---------------------------------------------------------------------------

    \566\ See 2019 Cross-Border Adopting Release, supra note 218, 85 
FR at 6274.
    \567\ Id. at 6275-76. 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. See id. at 6275.
    \568\ No client responsibility would mean that the U.S. 
personnel have not been assigned, and do not otherwise exercise, 
client responsibility in connection with the transaction. See id. at 
6275-76.
    \569\ Not receiving any transaction-linked compensation means 
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. See id.
    \570\ See id. at 6275.
---------------------------------------------------------------------------

    With this existing guidance that applies to cross-border ANE 
transactions subject to Rule 832,\571\ declining to apply Title VII 
requirements to SBS transactions of foreign entities that use U.S. 
personnel to engage in ANE transactions would allow such entities to 
exit the Title VII regulatory regime without exiting the U.S. 
market.\572\ This is problematic

[[Page 87217]]

because, as the Commission stated in the Proposing Release, ``applying 
the trade execution requirement to such persons is necessary or 
appropriate as a prophylactic measure to help prevent the evasion of 
the provisions of the SEA that were added by the Dodd-Frank Act, and 
thus help prevent the relevant purposes of the Dodd-Frank Act from 
being undermined. Without this rule, non-U.S. persons could retain the 
benefits of operating in the United States while avoiding compliance 
with the trade execution requirement.'' \573\
---------------------------------------------------------------------------

    \571\ See supra notes 566-570 and accompanying text.
    \572\ See Proposing Release, supra note 1, 87 FR at 28923 
(citing Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, SEA Release No. 78321 (July 14, 2016), 81 FR 
53546, 53591 (Aug. 12, 2016) (``Regulation SBSR Adopting Release 
II'')).
    \573\ Proposing Release, supra note 1, 87 FR at 28923 n.230. See 
also supra note 521 and accompanying text (providing an example of 
swap dealers strategically choosing the location of the desk 
executing a particular trade in order to avoid trading in a more 
transparent and competitive setting after no-action relief from the 
trade execution requirement for ANE transaction).
---------------------------------------------------------------------------

    Finally, with respect to the request by one commenter that the 
Commission revise the ``covered person'' definition in Rule 832 to make 
more explicit that it is a transaction-based test,\574\ the Commission 
affirms again that the definition is intended to apply on a 
transaction-by-transaction basis,\575\ and views the language in the 
rule (e.g., ``with respect to a particular security-based swap'') as 
sufficiently clear in this regard.\576\
---------------------------------------------------------------------------

    \574\ See supra note 538 and accompanying text.
    \575\ See Proposing Release, supra note 1, 87 FR at 28922 n.221 
(``The proposed term `covered person' is designed to apply on a 
transaction-by-transaction basis.'').
    \576\ With respect to the commenter that requested additional 
clarity with respect to Rule 832, see supra note 539 and 
accompanying text, the Commission's discussion of the rule in this 
section including, for example, the applicability of existing 
guidance with respect to ANE transactions and the availability of 
exemptions under Rule 833(b) from the mandatory trade execution 
requirement as discussed in section VII.B below, should provide 
market participants with more clarity on when and to whom the rule's 
requirements would apply.
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is 
adopting Rule 832 as proposed, with minor technical modifications.\577\
---------------------------------------------------------------------------

    \577\ See supra notes 32 and 540.
---------------------------------------------------------------------------

B. Rule 833--Cross-Border Exemptions for Foreign Trading Venues and 
Relating to the Trade Execution Requirement

    As discussed above, Rule 832 specifies when the trade execution 
requirement applies to an individual cross-border SBS transaction. When 
covered persons (as defined in Rule 832) are members of a foreign 
trading venue for SBS (a ``foreign SBS trading venue'') with respect to 
SBS transacted on that venue, whether or not such SBS are subject to 
the trade execution requirement, the foreign SBS trading venue could be 
required to register with the Commission as a national securities 
exchange or SBSEF \578\ or, because the foreign SBS trading venue would 
be facilitating the execution of SBS between persons, a broker.\579\
---------------------------------------------------------------------------

    \578\ See 15 U.S.C. 78c-4(a)(1) (stating that no person may 
operate a facility for the trading or processing of SBS, unless the 
facility is registered as an SBSEF or national securities exchange).
    \579\ A ``broker'' is generally defined as a person engaged in 
the business of effecting transactions in securities for the account 
of others. See Section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4). 
Section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), generally provides 
that it shall be unlawful for any broker to make use of the mails or 
any means or instrumentality of interstate commerce to effect any 
transactions in, or to induce or attempt to induce the purchase or 
sale of, any security unless such broker is registered in accordance 
with SEA section 15(b). See also infra section XI (discussing Rule 
15a-12).
---------------------------------------------------------------------------

    To address the situation of a foreign SBS trading venue that wishes 
to avoid registering with the Commission in one or more of these 
capacities, the Commission proposed Rule 833(a). Rule 833(a), which 
would specify that a foreign SBS trading venue can request that the 
Commission grant it an exemption under section 36(a)(1) of the SEA 
\580\ by submitting, pursuant to SEA Rule 0-12,\581\ a complete 
application for exemptive relief. Rule 833(a) would also provide that 
such an application under section 36(a)(1) and Rule 0-12, relating to 
the status of the foreign SBS trading venue under the SEA, may state 
that the application is also submitted pursuant to Rule 833(a).\582\ 
When such an application is submitted pursuant to Rule 833(a), the 
Commission would consider the submission as an application to exempt 
the foreign SBS trading venue, with respect to its providing a market 
place for SBS, from: the definition of ``exchange'' in section 3(a)(1) 
of the SEA; \583\ the definition of ``security-based swap execution 
facility'' in section 3(a)(77) of the SEA; \584\ the definition of 
``broker'' in section 3(a)(4) of the SEA; \585\ and section 3D(a)(1) of 
the SEA.\586\ Because a foreign SBS trading venue for which the 
Commission grants an exemptive order under SEA section 36 and Rule 
833(a) \587\ would be exempt from these definitions and from section 
3D(a)(1) of the SEA, the foreign SBS trading venue would not be 
required to register with the Commission as a national securities 
exchange, SBSEF, or broker, or to comply with other requirements 
applicable to such entities under the SEA or Commission rules 
thereunder.\588\
---------------------------------------------------------------------------

    \580\ 15 U.S.C. 78mm(a)(1).
    \581\ 17 CFR 240.0-12 (setting forth procedures for filing 
applications for orders for exemptive relief under section 36 of the 
SEA).
    \582\ An application for an exemption under Rule 833(a) could be 
submitted by a foreign SBS trading venue itself or by another 
interested party. For example, a financial regulatory authority in a 
foreign jurisdiction could submit an application under Rule 833(a) 
on behalf of one or more SBS trading venues licensed and regulated 
in that jurisdiction.
    \583\ 15 U.S.C. 78c(a)(1).
    \584\ 15 U.S.C. 78c(a)(77).
    \585\ 15 U.S.C. 78c(a)(4).
    \586\ 15 U.S.C. 78c-4(a)(1) (stating that no person may operate 
a facility for the trading or processing of SBS, unless the facility 
is registered as an SBSEF or national securities exchange).
    \587\ For the remainder of this discussion, an exemption under 
SEA section 36 and Rule 833(a) will be referred to simply as a 
``Rule 833(a) exemption.'' In addition, the Commission will use the 
term ``trading venue covered by an exemption order under Rule 833'' 
(or a similar formulation) rather than ``exempt exchange,'' ``exempt 
SBSEF'' or ``exempt broker'' because, pursuant to an exemption 
granted under Rule 833(a), the covered trading venue would no longer 
be an exchange, SBSEF, or broker (as defined by the SEA).
    \588\ However, as discussed further below, the Rule 833(a) 
exemption is designed to address only activities related to 
providing a market place for SBS. An entity that engages in other 
SBS-related activity or any activity involving non-SBS securities 
would, with respect to such other SBS-related activity or any 
activity involving non-SBS securities, still be subject to any 
applicable requirements to register with the Commission as a 
national securities exchange, SBSEF, or broker, or to comply with 
other requirements applicable to such entities under the SEA or 
Commission rules thereunder.
---------------------------------------------------------------------------

    As with other exemptions issued pursuant to section 36, to issue a 
Rule 833(a) exemption, the Commission would be required to find that 
the exemption is necessary or appropriate in the public interest, and 
consistent with the protection of investors.\589\ As contemplated in 
section 36(a)(1), the Commission may issue a Rule 833(a) exemption with 
conditions.
---------------------------------------------------------------------------

    \589\ See 15 U.S.C. 78mm(a)(1). Unlike the CFTC, which has 
exemptive authority under section 5h(g) of the CEA, the Commission 
would not be required to find that the foreign trading venue is 
subject to comparable, comprehensive supervision and regulation by a 
U.S. or foreign regulator.
---------------------------------------------------------------------------

    The Commission also proposed Rule 833(b), which would address 
requests for exemptive relief relating to the application of the trade 
execution requirement to transactions executed on a foreign SBS trading 
venue. Rule 833(b)(2) would provide that, in considering whether to 
issue a Rule 833(b) exemption, the Commission may consider: (i) the 
extent to which the SBS traded in the foreign jurisdiction covered by 
the request are subject to a trade execution requirement comparable to 
that in section 3C(h) of the SEA and the Commission's rules thereunder; 
(ii) the extent to which trading venues in the foreign jurisdiction 
covered by the request are subject to regulation and supervision 
comparable to that under the SEA, including section 3D of the SEA, and 
the Commission's rules thereunder; (iii) whether the foreign trading 
venue or venues where covered

[[Page 87218]]

persons intend to trade SBS have received an exemptive order 
contemplated by Rule 833(a); and (iv) any other factor that the 
Commission believes is relevant for assessing whether the exemption is 
in the public interest and consistent with the protection of 
investors.\590\
---------------------------------------------------------------------------

    \590\ For a more detailed discussion of the items in Rule 
833(b)(2) that the Commission may consider, see Proposing Release, 
supra note 1, 87 FR at 28925-26.
---------------------------------------------------------------------------

    As with other exemptions issued pursuant to section 36, to issue a 
Rule 833(b) exemption, the Commission would be required to find that 
the exemption is necessary or appropriate in the public interest, and 
consistent with the protection of investors. As contemplated by section 
36(a)(1), the Commission may issue a Rule 833(b) exemption with 
conditions.
    One commenter expresses general support for the establishment of a 
rule granting exemptions for foreign trading venues and for cross-
border trade execution exemptions, noting that ``difficulties that can 
arise when the trade execution requirement applies in two separate 
jurisdictions'' and that ``it is important for market participants and 
trading venues to have regulatory certainty while maintaining 
flexibility in where transactions may be consummated.'' \591\
---------------------------------------------------------------------------

    \591\ Bloomberg Letter, supra note 18, at 18. However, as 
discussed below in this section VII.B, this commenter criticizes 
various aspects of Rule 833.
---------------------------------------------------------------------------

    Another commenter believes the Commission's proposed exemption rule 
should be made more robust to prevent evasion of the SBSEF registration 
and trade execution requirements. This commenter believes that Rule 833 
does not provide meaningful standards for how the Commission will 
assess requests for such exemptions, which this commenter believes is 
insufficient, and provides the Commission with ``unreasonably broad, 
nearly unlimited, discretion, in how it assess foreign swaps regulatory 
frameworks,'' which this commenter believes may result in the 
Commission ``facilitating evasion of Title VII.'' \592\ This commenter 
states that the Dodd-Frank Act ``requires that the SEC must, at the 
very least . . . make an affirmative determination that such an 
application demonstrates that the exemption could not be used to evade 
those requirements[, which would] require the SEC [to] make a credible, 
comprehensive determination that the foreign regulatory requirements 
applicable to the applicant is actually written, applied and enforced, 
are the same as those that would otherwise apply to the applicant 
absent an exemption.'' \593\
---------------------------------------------------------------------------

    \592\ Better Markets Letter, supra note 18, at 16.
    \593\ Id.
---------------------------------------------------------------------------

    One commenter argues that Rule 833(b)'s requirements are 
unnecessary if a foreign trading venue has received an exemption under 
Rule 833(a), given that the Commission would be required to find that 
the Rule 833(a) exemption is ``necessary or appropriate in the public 
interest and consistent with the protection of investors,'' which this 
commenter believes ``should be sufficient for the purposes of trading 
SBS on foreign trading venues, even when the trade execution 
requirement applies.'' \594\ Thus, this commenter requests that the 
Commission ``remove the 833(b) exemption and clarify that . . . if a 
foreign trading venue has been granted an 833(a) exemption . . ., a 
market participant should be permitted to trade SBS on that venue.'' 
\595\
---------------------------------------------------------------------------

    \594\ Bloomberg Letter, supra note 18, at 7.
    \595\ Id.
---------------------------------------------------------------------------

    Another commenter does not believe the exemptions in Rule 833 are 
sufficiently clear, and requests that the Commission consider setting 
forth charts or examples to better facilitate compliance.\596\
---------------------------------------------------------------------------

    \596\ See SIFMA AMG Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

    With respect to Rule 833(b) specifically, several comments appear 
to anticipate that, in order for a transaction on a foreign SBS trading 
venue to qualify for the trade execution exemption under Rule 833(b), 
the relevant foreign jurisdiction would have to require RFQ-to-3 or an 
order book for Required Transactions.\597\ One commenter states that 
``the CFTC, appropriately in our view, recognized that there are 
multiple ways that a regulator can ensure appropriate pre-trade 
transparency and competition, such that restricting execution methods 
to [central limit order books] and RFQ-to-3 systems are not the only 
ways to achieve these objectives. Failing to recognize this fact in the 
course of making comparability determinations would incorrectly turn 
the statutory comparability standard into a test for identical rules.'' 
\598\ Two commenters state that it would be difficult for many foreign 
SBS trading venues to demonstrate comparability if RFQ-to-3 and an 
order book were required, with one stating that ``[f]ew jurisdictions 
require RFQ to 3, and some do not require SBS to be traded on an 
organized trading venue.'' \599\
---------------------------------------------------------------------------

    \597\ See Bloomberg Letter, supra note 18, at 6; Tradeweb 
Letter, supra note 18, at 5-6; ISDA-SIFMA Letter, supra note 18, at 
14. See also ICE Letter, supra note 18, at 4.
    \598\ Tradeweb Letter, supra note 18, at 6.
    \599\ Bloomberg Letter, supra note 18, at 6. See also ICE 
Letter, supra note 18, at 4 (stating that ``EU and UK based 
multilateral trading facilities are not required under their home 
country regulation to ensure that a request-for-quote be sent to 
three different recipients or offer a central-limit-order-book'' and 
thus the proposed criteria cannot be satisfied from the outset); 
Bloomberg Letter, supra note 18, at 19 (stating that ``at least 
three Bloomberg-affiliated [foreign venues] would seek an 
exemption'' but may be ``effectively barred at the door by the 
Proposal's requirement that security-based swaps are subject to a 
trade execution requirement in the foreign jurisdiction that is 
comparable to that in 15 U.S.C. 78c-3(h) and the Commission's rules 
thereunder''); ISDA-SIFMA Letter, supra note 18, at 14 (stating that 
hardly any (if any at all) foreign trading venues would be able to 
enjoy an Exempt SBSEF status and that, as far as the commenter is 
aware, none of the CFTC recognized multilateral trading facilities 
or organized trading facilities are required to offer a central 
limit order books on their platforms).
---------------------------------------------------------------------------

    Two commenters oppose requiring an exemption under Rule 833 to 
depend upon a ``rule-by-rule'' comparison or analysis. One commenter 
states that this would be ``unduly burdensome and at odds with the 
overall goal of achieving comparable outcomes.'' \600\ The other 
commenter requests that the Commission adopt ``a more flexible approach 
to the recognition of foreign trading venues--one that relies on 
holistic outcomes and governing principles, rather than a rule-by-rule 
analysis.'' \601\
---------------------------------------------------------------------------

    \600\ Bloomberg Letter, supra note 18, at 7.
    \601\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    Several commenters believe that Rule 833, as they understand it, 
would result in various negative consequences. One commenter states 
that covered persons would not be able to fulfill the trade execution 
requirement and that, as a result, market participants would then be 
forced to trade on a limited subset of venues, disrupting liquidity and 
requiring them to expend time and resources in onboarding to a 
compliant trading venue.\602\ Another commenter warns that ``the 
limited liquidity in the SBS market is not going to withstand 
significant disruptions, increased costs, and market fragmentation, 
thus making it more likely for market participants to exit the SBS 
markets entirely.'' \603\ This commenter believes that the Commission's 
approach ``will force market participants to trade SBS within the 
jurisdictional borders of the United States, restricting access to 
global liquidity and thus further diminishing already thin SBS 
markets,'' rather than ``the decision where to trade the most 
standardized and liquid swaps [being] dictated by the available 
liquidity and

[[Page 87219]]

prices in global markets.'' \604\ Similarly, another commenter 
contrasts the approach taken under Rule 833 with the approach the CFTC 
has taken to exempt certain foreign SEFs from SEF registration, and 
states that Rule 833 would prevent covered persons from trading SBS on 
such exempt SEFs and would impair their ability to manage risk 
effectively.\605\ If covered persons are no longer able to trade SBS on 
these venues, this commenter states, they also ``may not find it 
feasible to trade other instruments, such as swaps and foreign 
corporate debt, due to the bifurcation of liquidity that will result.'' 
\606\ This commenter states that the ability to combine trading 
interest in related products on the same trading platform is critical 
to the effective transfer of risk within the financial system, and 
preventing ``this single pool of liquidity jeopardizes that risk 
transfer and impairs price formation and ultimately increases systemic 
risk.'' \607\
---------------------------------------------------------------------------

    \602\ See Bloomberg Letter, supra note 18, at 6-7. See also 
Tradeweb Letter, supra note 18, at 6.
    \603\ ISDA-SIFMA Letter, supra note 18, at 15. See also Tradeweb 
Letter, supra note 18, at 6.
    \604\ ISDA-SIFMA Letter, supra note 18, at 14.
    \605\ See ICE Letter, supra note 18, at 4.
    \606\ Id.
    \607\ Id. at 4-5.
---------------------------------------------------------------------------

    These commenters argue that the Commission should instead align 
with the CFTC's approach to exemptions, which does not require exempt 
foreign SEFs to have order books or to satisfy the RFQ-to-3 
requirement, stating that the CFTC's ``flexible, outcomes-based 
approach serves market participants well.'' \608\ One commenter argues 
for the Commission to avoid the ``unintended economic disadvantage if 
other global market participants avoid trading with the managers' non-
US fund clients solely to avoid being subject to the Commission's SBSEF 
requirements'' and the significant costs and burdens that would arise 
if the two regulatory approaches produce different outcomes for swaps 
and SBS.\609\ These commenters state that the CFTC has ``already 
granted exemptions to a number of foreign trading venues across 
jurisdictions in Europe and Asia,'' \610\ with one commenter stating 
that the ``CFTC process, while imperfect, provides a more streamlined 
and workable approach for the Commission.'' \611\
---------------------------------------------------------------------------

    \608\ Bloomberg Letter, supra note 18, at 7. See also ISDA-SIFMA 
Letter, supra note 18, at 14-15; Tradeweb Letter, supra note 18, at 
6.
    \609\ ICI Letter, supra note 18, at 14.
    \610\ Bloomberg Letter, supra note 18, at 7. See also ICE 
Letter, supra note 18, at 4. See also ISDA-SIFMA Letter, supra note 
18, at 14.
    \611\ Bloomberg Letter, supra note 18, at 7.
---------------------------------------------------------------------------

    These commenters argue that the Commission should ``ensure that its 
proposed approach to granting exemption will produce outcomes similar 
to those of the CFTC'' so as to ``further harmonize with the CFTC's SEF 
framework, and promote consistency and simplicity. . . .'' \612\ 
Several of these commenters recommend that the Commission grant 
automatic exemptions for trading venues that are currently exempt under 
the CFTC's rules.\613\ Some commenters stated that this approach would 
be consistent with the Commission's general approach of harmonizing 
closely with the CFTC's SEF rules where appropriate and also stated 
that, as there are no distinctions outside of the United States between 
the regulation of swaps and the regulation of SBS, SBS are currently 
traded on foreign venues that have been recognized by the CFTC.\614\ 
Three commenters requested that the Commission recognize such 
exemptions (i.e., CFTC-exempt SEFs as ``exempt'' SBSEFs) at the 
adoption of Regulation SE.\615\ And one of these three commenters also 
requests that, in the alternative, and ``in order to avoid duplicative 
or conflicting regulation . . . the Commission grant an exemption from 
the trade execution requirement if the SBS transaction at issue is 
subject to mandatory trading in another jurisdiction.'' \616\
---------------------------------------------------------------------------

    \612\ ICI Letter, supra note 18, at 14. See also Bloomberg 
Letter, supra note 18, at 7, 18; ISDA-SIFMA Letter, supra note 18, 
at 14-15; Tradeweb Letter, supra note 18, at 6.
    \613\ See Bloomberg Letter, supra note 18, at 7, 18; ISDA-SIFMA 
Letter, supra note 18, at 14-15; Tradeweb Letter, supra note 18, at 
6.
    \614\ See Bloomberg Letter, supra note 18, at 18-19; ISDA-SIFMA 
Letter, supra note 18, at 14-15.
    \615\ See ICE Letter, supra note 18, at 5; ISDA-SIFMA Letter, 
supra note 18, at 15; Tradeweb Letter, supra note 18, at 6.
    \616\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    The Commission has considered the comments received for Rule 833 
and is adopting the rule as proposed. As the Commission stated in the 
Proposing Release,\617\ Rule 833(a) is designed to address only 
activities relating to providing a market place for SBS and would not 
extend to trading in any other type of security or to other activities 
with respect to SBS.\618\ A foreign SBS trading venue covered by an 
exemptive order under Rule 833(a) might offer trading in other types of 
securities; however, the exemptive order would permit covered persons 
to trade only SBS on that trading venue without causing the trading 
venue to have to register with the Commission as a national securities 
exchange, SBSEF, or broker. The exemptive order would not address any 
registration obligations that might arise from any other SBS-related 
activity or any activity involving non-SBS securities by the foreign 
trading venue.\619\
---------------------------------------------------------------------------

    \617\ See Proposing Release, supra note 1, 87 FR at 28924.
    \618\ For example, although a foreign trading venue covered by a 
Rule 833(a) exemption would be exempt from the definition of 
``broker,'' that exemption would extend only to the operation of a 
market place for SBS and would not permit the foreign trading venue 
to otherwise act as a securities broker using U.S. jurisdictional 
means.
    \619\ The Commission also emphasizes that a Rule 833(a) 
exemption would not have any impact on section 6(l) of the SEA, 15 
U.S.C. 78f(l), which makes it unlawful for any person to effect a 
transaction in an SBS with or for a person that is not an ECP, 
unless such transaction is effected on a national securities 
exchange registered pursuant to section 6(b) of the SEA. Because a 
foreign SBS trading venue covered by a Rule 833(a) exemption would 
not be registered as a national securities exchange, the foreign SBS 
trading venue would not be permitted to effect SBS transactions with 
or for a covered person that is not an ECP.
---------------------------------------------------------------------------

    The bulk of the comments received opposing Rule 833 appear to 
emanate from commenters' interpretation--and misunderstanding--of what 
would be required in order to receive a Rule 833(b) exemption. The 
Commission proposed Rule 833(b) to address requests for exemptive 
relief relating to the application of the trade execution requirement 
under section 3C(h) of the SEA to transactions executed on a foreign 
SBS trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is 
subject to the trade execution requirement must be executed on an 
exchange, on an SBSEF registered under section 3D of the SEA, or on an 
SBSEF that is exempt from registration under section 3D(e) of the 
SEA.\620\ As a result, a covered person (as defined in Rule 832) would 
not be permitted to execute an SBS that is subject to the trade 
execution requirement on a foreign SBS trading venue unless that venue 
has registered with the Commission as a national securities exchange or 
an SBSEF, or has received an exemption under section 3D(e) of the SEA.
---------------------------------------------------------------------------

    \620\ Section 3D(e) of the SEA gives the Commission authority to 
exempt an SBSEF from registration if it is subject to comparable, 
comprehensive supervision and regulation by the CFTC. See 15 U.S.C. 
78c-4(e).
---------------------------------------------------------------------------

    Several commenters interpret the rule and the Commission's 
discussion of the rule in the Proposing Release to mean that a foreign 
SBS trading venue must have RFQ-to-3 and an order book for Required 
Transactions in order for transactions on that venue to qualify for a 
Rule 833(b) exemption.\621\ These commenters, however, are incorrect in 
this understanding of the requirements for a Rule 833(b) exemption.
---------------------------------------------------------------------------

    \621\ See supra notes 597-599 and accompanying text.
---------------------------------------------------------------------------

    First, Rule 833(b)(2) does not contain a list of items that ``are 
required,'' but rather lists items that the Commission ``may consider'' 
when it receives a

[[Page 87220]]

request for a Rule 833(b) exemption.\622\ And second, Rule 833(b)(2)(i) 
states, in relevant part, that the Commission may consider ``the extent 
to which the security-based swaps traded in the foreign jurisdiction 
covered by the request are subject to a trade execution requirement 
comparable to that in section 3C(h) of the Act . . . and the 
Commission's rules thereunder.'' (Emphasis added.) In the Proposing 
Release, the Commission described this requirement by stating that ``a 
trade execution requirement in a foreign jurisdiction would not be 
comparable to the trade execution requirement under the SEA if the 
foreign jurisdiction's rules did not require SBS products subject to 
that requirement to be executed through means comparable to Required 
Transactions as described in Rule 815 (e.g., if the foreign 
jurisdiction allowed the use of single-dealer platforms to discharge 
any mandatory trading execution requirement in that jurisdiction).'' 
\623\ That is, the Commission's proposed rule would not require foreign 
SBS trading venues to have RFQ-to-3 and an order book in order for the 
Commission to consider their SBS executions for an exemption under Rule 
833(b).
---------------------------------------------------------------------------

    \622\ Rule 833(b)(2).
    \623\ Proposing Release, supra note 1, 87 FR at 28925 (emphasis 
added).
---------------------------------------------------------------------------

    While, as commenters correctly state, for Required Transactions, 
Rule 815 requires SBS transactions to be executed through a limit order 
book or an RFQ-to-3 system,\624\ neither the text of Rule 833(b) nor 
the Commission's description of Rule 833(b) states that a limit order 
book or an RFQ-to-3 system is required to receive a Rule 833(b) 
exemption.\625\ The phrase ``comparable to'' does not carry the same 
meaning as phrases such as ``identical to'' or ``substantially similar 
to,'' and the Commission uses this phrase with respect to Rule 833(b) 
exemptions because SBS transactions would not be disqualified from 
receiving a Rule 833(b) exemption simply because they were not executed 
through a limit order book or an RFQ-to-3 system. Rather, the 
Commission agrees with commenters that there may be foreign SBS trading 
venues--many of which have already received exemptive relief from the 
CFTC for swaps trading \626\--that may be appropriate candidates for 
exemptive relief, that are subject to what may be considered robust 
regulatory regimes for SBS trading. With respect to such foreign SBS 
trading venues, the Commission encourages market participants to submit 
a request for exemptive relief under Rule 833(b) if they seek to be 
exempt from the Commission's trade execution requirement for their SBS 
transactions.\627\
---------------------------------------------------------------------------

    \624\ See supra section V.E (discussing methods of execution and 
Rule 815).
    \625\ In the Proposing Release, the Commission stated its 
preliminary belief that ``the use of single-dealer platforms to 
discharge any mandatory trading execution requirement'' would not 
meet the proposed rule's requirements. See Proposing Release, supra 
note 1, 87 FR at 28925.
    \626\ See www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs (listing foreign swap trading facilities that the CFTC 
has exempted from its SEF registration requirements, including 
certain such facilities in the European Union, Japan, and 
Singapore). Market practices continued in this regard without change 
after the United Kingdom (``UK'') withdrew from the European Union, 
based upon a CFTC staff no-action letter addressing certain UK swap 
trading facilities. See CFTC Letter No. 22-16 (Dec. 1, 2022), 
available at https://www.cftc.gov/csl/22-16/download.
    \627\ Several commenters describe the negative consequences that 
would occur because, they believe, the Commission's Rule 833(b) 
exemption would require foreign jurisdictions to require RFQ-to-3 
and order book methods of execution, which these commenters believe 
forecloses many foreign trading venues from obtaining exemptive 
relief from the Commission for their SBS trading even though they 
have received similar exemptions from their CFTC. See supra notes 
602-611 and accompanying text. Similarly, one commenter requests 
that, in the alternative, the Commission grant an exemption from the 
trade execution requirement if the SBS transaction at issue is 
subject to mandatory trading in another jurisdiction. See supra note 
616 and accompanying text. As the Commission has explained, Rule 
833(b) exemptions are not limited to those jurisdictions that 
require RFQ-to-3 and order books, but rather Rule 833(b)(2)(i) 
states that the Commission may consider the extent to which SBS 
transactions are subject to a trade execution requirement comparable 
to such methods of execution. Accordingly, SEFs would not be 
foreclosed from obtaining exemptive relief from the Commission for 
their SBS trading. For this reason, the Commission also does not 
agree with the commenter's suggested alternative to grant an 
exemption from the trade execution requirement if the SBS 
transaction at issue is subject to mandatory trading in another 
jurisdiction, because exemptive relief under 833(b) may be applied 
for in such instances, which would give the Commission the 
opportunity to appropriately consider the applicable facts and 
circumstances.
---------------------------------------------------------------------------

    Certain commenters also object that, in their understanding, a Rule 
833(b) exemption request would require a ``rule-by-rule'' comparison or 
analysis,\628\ which one commenter characterized as unduly 
burdensome.\629\ In addition to Rule 833(b)(2)(i) discussed above, 
another relevant factor (among others) that the Commission may consider 
is whether the trading venues in the foreign jurisdiction are subject 
to regulation and supervision comparable to that under the SEA, 
including section 3D of the SEA and the Commission's rules thereunder, 
which the Commission described in the Proposing Release to include 
being subject to rules designed to foster comparable levels of pre- and 
post-trade transparency, access, and liquidity.\630\
---------------------------------------------------------------------------

    \628\ See supra notes 600-601 and accompanying text.
    \629\ See supra note 600 and accompanying text.
    \630\ See Proposed Rule 833(b)(2)(ii) and Proposing Release, 
supra note 1, 87 FR at 28925.
---------------------------------------------------------------------------

    An 833(b) exemptive request generally should include an analysis 
that could assist the Commission's determination as to whether the 
regulation and supervision of a foreign SBS trading venue in an 
applicable foreign jurisdiction is subject to regulation and 
supervision comparable to that under the SEA. Given the central roles 
the jurisdiction's applicable laws, rules and regulations, as well as a 
foreign SBS trading venue's own rules, play in such a determination, an 
exemptive request generally should include an analysis of these 
requirements. A precise form of any such analysis--whether it is done 
as a ``rule-by-rule'' comparison or through some other methodology 
(e.g., in a more holistic manner)--is not specified by Rule 833(b), 
would be at the discretion of the entity submitting the exemptive 
request, and should be provided in order to help the Commission and its 
staff understand what requirements apply to the foreign SBS trading 
venue.
    With respect to the comments that the Commission should 
automatically provide exemptions for foreign trading venues that have 
received a parallel exemption from the CFTC for their SEF trading,\631\ 
and that the Commission should do so contemporaneously with adopting 
Regulation SE,\632\ while doing so would promote consistency, 
simplicity, and harmonization with the CFTC's SEF rules, such a blanket 
exemption would not afford the Commission the opportunity to 
appropriately consider the relevant facts and circumstances in support 
of a finding that an exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors. 
However, persons interested in submitting a request for exemptive 
relief should be mindful of the implementation period that will take 
place before Regulation SE's requirements take effect, as described in 
more detail below.\633\
---------------------------------------------------------------------------

    \631\ See supra notes 612-615 and accompanying text.
    \632\ See supra note 615 and accompanying text. See also supra 
note 626.
    \633\ See infra section VIII. See also infra note 787 and 
accompanying text.
---------------------------------------------------------------------------

    With respect to the comment that the provisions of Rule 833 are not 
robust enough,\634\ the Commission disagrees. Importantly, in order to 
issue any exemption under Rule 833, the Commission would be required to 
find that the exemption is necessary or

[[Page 87221]]

appropriate in the public interest and consistent with the protection 
of investors, and the Commission may issue the exemptive relief with 
conditions. A blanket grant of exemptive relief would be inconsistent 
with carefully considering whether a specific exemptive request meets 
the applicable standard and might lead to a greater percentage of SBS 
transactions being executed beyond the scope of any U.S. regulatory 
oversight.
---------------------------------------------------------------------------

    \634\ See supra note 593 and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission disagrees with the commenter that suggested 
that Rule 833(b)'s requirements are unnecessary if a foreign trading 
venue has received an exemption under Rule 833(a).\635\ The two 
exemptions under Rule 833 provide exemptive relief from different 
requirements of the SEA and are also directed at different entities. 
Specifically, a Rule 833(a) exemption provides exemptive relief to a 
foreign trading venue that, absent the exemption, could be required to 
register with the Commission as an exchange, SBSEF, and/or broker if it 
traded SBS (regardless of whether such SBS are subject to the trade 
execution requirement). On the other hand, Rule 833(b)'s exemption 
provides exemptive relief to the counterparties of an SBS transaction 
with respect to the trading execution requirement in section 3C(h) of 
the SEA.\636\
---------------------------------------------------------------------------

    \635\ See supra note 595 and accompanying text.
    \636\ With respect to the commenter that requested additional 
clarity with respect to Rule 833, see supra note 596 and 
accompanying text, the Commission's discussion of the exemptions, 
including the standard of ``comparable to'' and the type of analysis 
that should be presented, should provide market participants with 
more clarity on how a person could seek exemptive relief.
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is 
adopting Rule 833 as proposed.

VIII. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and 
Governance of SBSEFs and SBS Exchanges

    Section 765(a) of the Dodd-Frank Act \637\ provides in relevant 
part that, to mitigate conflicts of interest, the Commission ``shall 
adopt rules which may include numerical limits on the control of, or 
the voting rights with respect to'' any clearing agency that clears 
SBS, or on the control of any SBSEF or SBS exchange by certain bank 
holding companies, certain nonbank financial companies, an affiliate of 
such a bank holding company or nonbank financial company, an SBS 
dealer, major SBS participant, or person associated with an SBS dealer 
or major SBS participant.\638\ Section 765(b) states that the purpose 
of the statutory provision is ``to improve the governance of, or to 
mitigate systemic risk, promote competition, or mitigate conflicts of 
interest in connection with'' an SBS dealer or major SBS participant's 
conduct of business with, a clearing agency, SBSEF, or SBS exchange and 
in which such SBS dealer or major SBS participant ``has a material debt 
or equity investment.'' Finally, section 765(c) provides in relevant 
part that, in adopting rules pursuant to section 765, the Commission 
shall consider any conflicts of interest arising from the amount of 
equity owned by a single investor, the ability to vote, cause the vote 
of, or withhold votes entitled to be cast on any matters by the holders 
of the ownership interest.
---------------------------------------------------------------------------

    \637\ 15 U.S.C. 8343.
    \638\ The Commission recognizes that promulgating rules under 
section 765 alone will not result in a highly competitive market for 
SBS. There could be other ways for anticompetitive forces to impede 
the growth of SBS trading on transparent, regulated platforms other 
than by misuse of a large voting interest in the trading venue. For 
example, a large SBS dealer or coalition of SBS dealers, even absent 
any voting interest in any SBSEF or SBS exchange, could threaten to 
move their business elsewhere unless given an unfair advantage by 
the trading venue. A large SBS dealer or coalition of SBS dealers 
also could conspire to shut out end users who sought to trade more 
actively on these transparent, regulated venues rather than 
continuing to trade in the bilateral OTC markets. The Commission 
will be alert to any such anticompetitive practices and consider 
appropriate prophylactic measures. At present, adopting rules under 
section 765 is a necessary and appropriate first step to guard 
against conflicts of interest arising on SBSEFs and SBS exchanges. 
See Proposing Release, supra note 1, 87 FR at 28930.
---------------------------------------------------------------------------

    In 2010, the Commission proposed Regulation MC to implement section 
765.\639\ In view of the significant amount of time that had elapsed 
and the significant evolution in the swap and SBS markets since the 
proposal of Regulation MC, the Commission withdrew that proposal,\640\ 
and proposed Rule 834 to implement section 765 of the Dodd-Frank Act 
with respect to SBSEFs and SBS exchanges.\641\
---------------------------------------------------------------------------

    \639\ See Regulation MC Proposal, supra note 21.
    \640\ See Proposing Release, supra note 1, 87 FR at 28874.
    \641\ See id. at 29001-03.
---------------------------------------------------------------------------

A. Rule 834(a)

    Paragraph (a) of Proposed Rule 834 would define terms used in Rule 
834. The Commission received no comments on of Proposed Rule 834(a) and 
is adopting Rule 834(a) as proposed for the reasons stated in the 
Proposing Release.

B. Rule 834(b)

    Paragraph (b) of Proposed Rule 834 would impose a cap on the size 
of the voting rights that an individual member of an SBSEF or SBS 
exchange may own or direct, barring an SBSEF or SBS exchange from 
permitting any of its members, either alone or together with any 
officer, principal, or employee of the member, to:
    (1) Own, directly or indirectly, 20% or more of any class of voting 
securities or of other voting interest in the SBSEF or SBS exchange; or
    (2) Directly or indirectly vote, cause the voting of, or give any 
consent or proxy with respect to the voting of, any interest that 
exceeds 20% of the voting power of any class of securities or of other 
ownership interest in the SBSEF or SBS exchange.
    One commenter supports the Commission's goal to adopt rules that 
aim to achieve better governance and mitigation of conflicts of 
interest that arise out of the operation of SBSEFs, but the commenter 
opposes Rule 834 because it believes that the rule would disrupt the 
closely harmonized rules with the CFTC, as the CFTC has not adopted 
corresponding provisions for its SEF registrants. This commenter 
recommends that the Commission, like the CFTC, should focus on board 
governance, conflicts of interest, and antitrust considerations rather 
than proscriptive, bright line rules. The commenter states that the 
Commission's concerns regarding conflicts of interest ``can best be 
addressed by ensuring compliance with the SBSEF Core Principles rather 
than an additional regulation,'' \642\ and specifically that the 
proposed 20 percent limitation on the voting interest that may be held 
by members of any SBSEF or SBS exchange ``goes beyond what is necessary 
to effectively mitigate conflicts of interest.'' \643\ Rather, this 
commenter states, the ownership limit would limit access to necessary 
capital and act as barriers to entry for SBSEFs and SBS exchanges. The 
commenter also states that section 765 of Dodd-Frank does not require 
the Commission to restrict the ability to hold significant ownership 
interests in SBSEFs and that the statutory language instead provides 
that the Commission is authorized to adopt rules upon determining, 
after review, that such restrictions are necessary or appropriate to 
improve the governance of SBSEFs or to mitigate systemic risk, to 
promote competition, or mitigate conflicts of interest.\644\
---------------------------------------------------------------------------

    \642\ SIFMA AMG Letter, supra note 18, at 12.
    \643\ Id.
    \644\ See id.
---------------------------------------------------------------------------

    Another commenter states that that the proposed 20% voting cap 
requirement could potentially thwart the Commission's objective to 
ensure that only incremental changes would be

[[Page 87222]]

necessary to adopt the SBSEF framework. The proposed cap, this 
commenter states, may require SEFs to set up an entirely new legal 
entity with a different governance structure, making it more 
challenging to obtain dual registration. The commenter also states that 
the conflicts of interest rules implemented by the CFTC, which do not 
include a 20% voting cap, sufficiently address any conflicts of 
interest concerns, as SEFs have operated under those rules for almost 
10 years, and there have been no observable issues that would warrant 
such a regulatory shift.\645\
---------------------------------------------------------------------------

    \645\ See ISDA-SIFMA Letter, supra note 18, at 16.
---------------------------------------------------------------------------

    One commenter states that it strongly opposes Rule 834 and that, as 
written, Rule 834 would have the effect of prohibiting certain SBSEF 
participants from having common ownership and control as the SBSEF. An 
SBSEF, the commenter states, would likely not be able to onboard an 
affiliated introducing broker, even if the introducing broker would be 
subject to the same rules and practices as an unaffiliated participant. 
The commenter states that some CFTC-registered SEFs, including the 
commenter's member firms, have affiliated introducing-broker 
participants that execute their respective swaps business on their 
affiliated SEFs, and the affiliated transactions make up a majority of 
the SEF's business. The commenter states that these firms may choose 
not to register as an SBSEF and take on the costs and burdens of being 
an SBSEF if they cannot accommodate their affiliate's trade execution 
needs, which would thwart the goal of developing a competitive 
landscape of regulated SBS market places.\646\
---------------------------------------------------------------------------

    \646\ See WMBAA Letter, supra note 18, at 2.
---------------------------------------------------------------------------

    This commenter further states that it and many others previously 
opposed these hard caps when they were proposed in 2010, and that--with 
a decade of experience operating SEFs and venues for other financial 
products, including Commission regulated alternative trading systems--
the commenter still believes the rule's approach is ``too heavy-
handed'' a way to solve a problem that has been more than adequately 
addressed through less burdensome measures.\647\ The commenter states 
that the CFTC never adopted its proposed ownership/governance 
prohibition for SEFs, that the CFTC's existing conflicts of interest 
rules have proven satisfactory, and that, rather than mandating 
ownership limits, the Commission should instead permit SBSEFs to 
exercise reasonable discretion as to its mechanisms for mitigating 
conflicts of interest and should rely instead on the conflict of 
interest and antitrust provisions already embedded in the SBSEF 
regulatory regime.\648\
---------------------------------------------------------------------------

    \647\ Id.
    \648\ See id. at 2-3.
---------------------------------------------------------------------------

    The Commission has considered the comments and, as discussed below, 
is modifying Proposed Rule 834 to provide an exemption from the 
ownership and voting caps for an SBSEF that has mitigated the potential 
conflict of interest with respect to compliance with the rules of the 
SBSEF by entering into an agreement with a registered futures 
association or a national securities association for the provision of 
regulatory services that encompass, at a minimum, real-time market 
monitoring, investigations, and investigation reports.
    The 20% cap in Proposed Rule 834(b) is designed to balance 
competing policy interests. On one hand, execution venues need capital, 
expertise, and liquidity to establish and grow. Historically, market 
participants who become members of an execution venue are a source of 
all three components, and any person contributing capital to a new 
venture might reasonably expect to have a voting interest commensurate 
with the amount of capital contributed. Too low a cap, even if imposed 
in the name of eliminating conflicts of interest, could have the 
unintended effect of impeding the development of execution venues for 
SBS altogether, if market participants who become members have no (or 
substantially limited) ability to vote their equity interest.
    On the other hand, allowing a member of an SBSEF or SBS exchange 
too large a voting interest could undermine the public policy benefits 
of having transparent, fair, and regulated markets for the trading of 
SBS. A member of an SBSEF or SBS exchange with a sufficiently large 
voting interest could exercise undue influence over the rules and 
policies applicable to members, the venue's access criteria, decisions 
regarding access, and disciplinary matters, among other things. In 
particular, members who are SBS dealers and conduct a significant 
amount of business in the bilateral OTC market have incentives to 
restrict the scope of SBS that an SBSEF or SBS exchange makes eligible 
for trading. Trading in a market with robust order competition and pre-
trade transparency reduces search costs for end users and liquidity 
seekers and reduces the information and bargaining asymmetry of end 
users and liquidity seekers relative to SBS dealers. An SBS dealer with 
a large voting interest in an SBSEF or SBS exchange, if it perceived 
that trading on the regulated venue was diminishing the rents obtained 
from its bilateral OTC business, might seek to utilize its voting 
influence in a number of ways to degrade the capability of the 
regulated venue, thus making the OTC market by comparison a more 
attractive option.
    Capping a member's voting interest at 20% strikes a reasonable 
balance between these competing interests, absent additional measures 
to ensure that a member or members with large voting power could tilt 
the playing field in their favor. And the Commission does not agree 
with the comment that a more general focus on board governance, 
conflicts of interest, and antitrust considerations, or on simply 
ensuring compliance with the SBSEF Core Principles,\649\ is sufficient 
to address this concern because, based on its long experience in 
regulating the markets on which the instruments underlying SBS trade, 
the ownership and voting structure of a regulated entity can give rise 
to conflicts of interest between the organization's business interests 
and its regulatory obligations. Further, even if the CFTC has not to 
date adopted its own ownership and governance prohibitions for SEFs, 
the appropriate comparison with respect to ownership and governance for 
SBSEFs is national securities exchanges, because both types of entities 
operate markets to which fair or impartial access requirements 
comprehensively apply.\650\ Therefore, SBSEFs should be subject to 
ownership restrictions that are similar to those in the rules of 
national securities exchanges, as approved by the Commission, which 
limit ownership by any one member and do not permit an exchange to 
merely ``exercise reasonable discretion'' with respect to its 
mechanisms for mitigating conflicts of interest.
---------------------------------------------------------------------------

    \649\ See supra note 642.
    \650\ See SEA sections 6(b)(2) and 6(c), 15 U.S.C. 78f(b)(2) and 
78f(c). Alternative Trading Systems, by contrast, are subject to 
``fair access'' requirements only if they meet certain volume 
trading thresholds. See Rule 301(b)(5)(i), 17 CFR 242.301(b)(5)(i).
---------------------------------------------------------------------------

    The Commission, however, appreciates the concerns expressed by 
commenters that a cap of 20% on voting interest in all cases could 
prevent would-be SBSEFs from onboarding their affiliated introducing 
brokers, and that the burdens imposed in setting up an SBSEF that is 
legally remote from affiliated introducing brokers may dissuade current 
SEFs from registering as SBSEFs, which would lead to their ceasing to 
offer SBS trading on their

[[Page 87223]]

platforms.\651\ Therefore, the Commission is modifying Rule 834 as 
proposed to add new paragraph (b)(3) to provide an exemption from the 
20% cap for an SBSEF that has entered into an agreement with a 
registered futures association or a national securities association for 
the provision of regulatory services that encompass, at a minimum, 
real-time market monitoring and investigations and investigation 
reports.
---------------------------------------------------------------------------

    \651\ See supra notes 645-648.
---------------------------------------------------------------------------

    This exemption, which is conditioned upon an SBSEF conducting its 
market monitoring and investigative activities through a self-
regulatory body that has broader membership than an individual SBSEF 
and that does not operate its own SBSEF, would mitigate concerns that 
members with large ownership shares might be given preferential 
treatment with respect to their compliance with the SBSEF's rules. And 
the exemption should also, by permitting SBSEFs to exceed the 20% 
ownership and voting cap, serve to facilitate the formation and 
registration of SBSEFs, thereby also facilitating the movement of SBS 
trading to venues that are more transparent and that have affirmative 
regulatory obligations.
    The Commission acknowledges that this exemption, because it focuses 
on surveillance and compliance functions, does not directly address 
concerns about an SBSEF adopting rules that hamper impartial access to 
an SBSEF, restrict the scope of SBS that might trade on a given SBSEF, 
or degrade the capability of a given SBSEF in ways that would favor a 
member's OTC SBS business. These concerns, however, can be addressed in 
other ways. With respect to impartial access, the requirements of 
Proposed Rule 819(c), together with the guidance the Commission has 
provided regarding the application of that rule,\652\ set clear limits 
on the ability of an SBSEF to favor the interest of any members, 
including its large members, by unfairly excluding other market 
participants. And competition among SBSEFs will discourage any 
individual SBSEF from declining to list particular SBS or from 
degrading the capability of the SBSEF to favor a member, as trading in 
the affected SBS may migrate not to the OTC market, but to a direct 
competitor.
---------------------------------------------------------------------------

    \652\ See infra section VI.B.3.
---------------------------------------------------------------------------

    Because the Commission has modified Proposed Rule 834 to provide 
for an exemption from the 20% ownership and voting cap, it is not the 
case that, as one commenter states, existing SEFs would necessarily be 
required to set up a new legal entity to operate an SBSEF, making it 
more challenging to obtain dual registration and potentially thwarting 
the Commission's objective to ensure that only incremental changes 
would be necessary to adopt the SBSEF framework. And although the 
Commission's proposed ownership rule departs from the CFTC's rules for 
SEFs, which do not include caps on ownership or voting, the Commission 
is also mindful of the trading relationship between SBS and their 
underlying securities--which trade on exchanges that have a similar 20% 
ownership and voting cap as a result of their Commission-approved 
rules--and the Commission wishes to avoid creating a regulatory 
incentive for activity to migrate from trading securities on national 
securities exchanges to trading SBS on SBSEF. For similar reasons, it 
would not be appropriate to extend the exemption in new paragraph 
(b)(3) of Proposed Rule 834 to SBS exchanges. Providing an exemption 
from the 20% ownership and voting cap requirements for SBS exchanges in 
Proposed Rule 834(b)(1) would result in different treatment from other 
national securities exchanges simply because one set of exchanges 
trades SBS, and this is not a sufficient reason to permit different 
ownership structures only for those exchanges, as this could lead to 
regulatory arbitrage by creating incentives for new exchanges to 
register first as SBS exchanges, without the ownership and voting caps, 
and then seek to amend their rulebooks to commence trading in cash 
equities. As it stated in the Proposing Release, the Commission 
proposed to apply the 20% ownership and voting on SBS exchanges based 
on its ``long experience with handling questions of member influence 
over national securities exchanges raised in applications to register 
with the Commission on Form 1 and in governance rule filings made on 
SEA Form 19b-4,'' \653\ and SBSEF rules seeking to manage conflicts of 
interest would not by themselves be sufficient to mitigate conflict-of-
interest concerns when those concerns arise from one or a few SBS 
dealers or a major SBS participants having majority voting rights in an 
SBSEF or SBS exchange in which they are a member.
---------------------------------------------------------------------------

    \653\ See Proposing Release, supra note 1, 87 FR at 28927 and 
n.257.
---------------------------------------------------------------------------

    Finally, the Commission reiterates that Proposed Rule 834(b) would 
cover both direct and indirect voting interests. The purpose of 
including indirect voting interest is to prevent potential 
circumvention of the 20% cap if, for example, a member placed its 
voting interest in an SBSEF or SBS exchange of 20% or more in a shell 
company or other affiliate and directed how the shell company or 
affiliate casts those votes. Accordingly, Proposed Rule 834(b) would 
look through the non-member entities holding interests in SBSEFs and 
SBS exchanges to consider whether any member could indirectly control 
20% or more of the voting interest through the non-member entity having 
the direct interest. Furthermore, Proposed Rule 834(b) would look 
through the corporate structure of the SBSEF or SBS exchange to 
consider whether any member could indirectly have 20% or more of the 
voting interest in the underlying trading venue. For example, an SBSEF 
or SBS exchange could be wholly owned by a holding company. In such a 
case, the voting restriction in Proposed Rule 834(b) would apply to the 
voting interest in the parent holding company held by a member of the 
child SBSEF or SBS exchange, since a direct voting interest of 20% or 
more in the parent would equate to an indirect voting interest of 20% 
or more in the child trading venue.
    And, similar to its approach to indirect voting interest, Proposed 
Rule 834(b) would aggregate the voting interest of the member itself 
with the voting interest held by any officer, principal, or employee of 
the member for purposes of determining compliance with the 20% cap. 
Without this provision, the member--or an officer, principal, or 
employee of the member--could split the voting interest held in the 
SBSEF or SBS exchange across multiple persons who would likely be 
voting that interest in concert, thereby potentially acting as a 
conflict of interest. The Commission did not receive comments on the 
aggregation-of-interest aspect of Proposed Rule 834(b).
    For these reasons, the Commission is adopting Rule 834(b) with the 
modifications discussed above.

C. Rule 834(c)

    Paragraph (c) of Proposed Rule 834 would include requirements 
designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would 
require the rules of each SBSEF and SBS exchange to be reasonably 
designed, and have an effective mechanism, to:
    (1) Deny effect to the portion of any voting interest held by a 
member in excess of the 20% limitation;
    (2) Compel a member who possesses a voting interest in excess of 
the 20% limitation to divest enough of that voting interest to come 
within that limit; and
    (3) Obtain information relating to its ownership and voting 
interests owned

[[Page 87224]]

or controlled, directly or indirectly, by its members.
    The Commission received no comments on Proposed Rule 834(c) and is 
adopting Rule 834(c) as proposed, with minor technical 
modifications,\654\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \654\ The Commission has corrected an internal cross-reference 
within Proposed Rule 834.
---------------------------------------------------------------------------

D. Rule 834(d)

    Paragraph (d) of Proposed Rule 834 is designed to mitigate 
conflicts of interest in the disciplinary process of an SBSEF or SBS 
exchange and would provide as follows: ``Each security-based swap 
execution facility and SBS exchange shall ensure that its disciplinary 
processes preclude any member, or group or class of its members, from 
dominating or exercising disproportionate influence on the disciplinary 
process. Each major disciplinary committee or hearing panel thereof 
shall include sufficient different groups or classes of its members so 
as to ensure fairness and to prevent special treatment or preference 
for any person or member in the conduct of the responsibilities of the 
committee or panel.'' Paragraph (d) of Proposed Rule 834 would 
recognize that one way that a conflict of interest could manifest 
itself is in the disciplinary process. Therefore, the Commission 
proposed, as the first sentence of Proposed Rule 834(d), that each 
SBSEF and SBS exchange should ``preclude any member, or group or class 
of its members, from dominating or exercising disproportionate 
influence on the disciplinary process.''
    The second sentence of Proposed Rule 834(d) is adapted from Sec.  
1.64 of the CFTC's rules, which addresses the composition of various 
SRO governing boards and major disciplinary committees.\655\ Proposed 
Rule 834(d) would reflect the Commission's belief that an SBSEF or SBS 
exchange should be mindful of its different membership interests, and 
how they are represented on disciplinary committees and hearing panels 
in particular matters, to avoid potential conflicts of interest.
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    \655\ Proposed Rule 834(a)(2) would define ``major disciplinary 
committee'' as a committee of persons who are authorized by an SBSEF 
to conduct disciplinary hearings, to settle disciplinary charges, to 
impose disciplinary sanctions, or to hear appeals thereof in cases 
involving any violation of the rules of the SBSEF except those which 
are related to decorum or attire, financial requirements, or 
reporting or recordkeeping and do not involve fraud, deceit, or 
conversion.
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    The Commission received no comments on Proposed Rule 834(d) and is 
adopting Rule 834(d) as proposed for the reasons stated in the 
Proposing Release.

E. Rule 834(e)

    Paragraph (e) of Proposed Rule 834 is closely modeled on Sec.  
1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange 
to ensure that 20% or more of the persons who are eligible to vote 
routinely on matters being considered by the governing board (excluding 
those members who are eligible to vote only in the case of a tie vote 
by the governing board) are persons who are knowledgeable of SBS 
trading or financial regulation, or otherwise capable of contributing 
to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of 
Proposed Rule 834 are based on four of the prongs in Sec.  
1.64(b)(1)(ii) and would provide that 20% or more of the persons who 
are eligible to vote routinely on matters being considered by the 
governing board (excluding those members who are eligible to vote only 
in the case of a tie vote by the governing board) must not be: members 
of the SBSEF or SBS exchange; \656\ salaried employees of the SBSEF or 
SBS exchange; primarily performing services for the SBSEF or SBS 
exchange in a capacity other than as a member of the governing board; 
or officers, principals, or employees of a firm which holds a 
membership at the SBSEF or SBS exchange, either in its own name or 
through an employee on behalf of the firm.
---------------------------------------------------------------------------

    \656\ Proposed Rule 834(e)(1)(ii), read together with Proposed 
Rule 834(b), would allow four members of an SBSEF or SBS exchange to 
control up to 80% of the voting interest (assuming that each of the 
four holds 20%). Under Proposed Rule 834(e)(1)(ii), at least 20% of 
the voting interest would have to be held by non-members.
---------------------------------------------------------------------------

    Paragraph (e)(2) of Proposed Rule 834, modeled on Sec.  1.64(b)(3), 
would require each SBSEF and SBS exchange to ensure that membership of 
its governing board includes a diversity of groups or classes of its 
members.
    The Commission did not receive comments on Proposed Rule 834(e) and 
is adopting Rule 834(e) as proposed, for the reasons stated in the 
Proposing Release.

F. Rule 834(f)

    Paragraph (f) of Proposed Rule 834 is based closely on Sec.  
1.64(d) and would require each SBSEF and SBS exchange to submit to the 
Commission, within 30 days after each governing board election, a list 
of the governing board's members, the groups or classes of members that 
they represent, and how the composition of the governing board 
otherwise meets the requirements of Rule 834.
    The Commission received no comments on Proposed Rule 834(f) and is 
adopting Rule 834(f) as proposed for the reasons stated in the 
Proposing Release.

G. Rule 834(g)

    Paragraph (g) of Proposed Rule 834 is modeled on Sec.  1.69, which 
requires an SRO to further address the avoidance of conflicts of 
interest in the execution of its self-regulatory functions. Proposed 
Rule 834(g) closely follows the paragraph structure and language of 
Sec.  1.69, with a few minor exceptions (beyond modifying the rule's 
application to SBSEFs and SBS exchanges, rather than, in the CFTC 
original, all SROs). First, paragraph (g)(1)(i)(A) of Proposed Rule 834 
is based closely on Sec.  1.69(b)(1)(i) and would set out the types of 
relationships with the named party of interest that would create a 
conflict of interest for a member of the governing board, disciplinary 
committee, or oversight panel.\657\ Second, Proposed Rule 
834(g)(1)(ii)(C) is a simplified version of Sec.  1.69(b)(2)(iii). 
Rather than incorporating the first four prongs of Sec.  
1.69(b)(2)(iii), which cross-reference definitions elsewhere in the 
CFTC's rules, Rule 834(g)(1)(ii)(C) would instead incorporate only the 
final, catch-all prong, which would cover any positions held by any 
member of an SBSEF's governing board, disciplinary committees, or 
oversight committees that would have been covered under the other four 
prongs.\658\ Third, Proposed Rule 834(g)(1)(ii)(C) would omit a 
requirement in Sec.  1.69(b)(2)(iv) that an SRO, when making a 
determination of whether a conflict of interest exists, must take into 
consideration ``[t]he most recent large trader reports and clearing 
records available to the self-regulatory organization.'' These types of 
reports

[[Page 87225]]

may not be as prevalent in the securities and SBS markets as the swaps 
market. The final, catch-all prong in Sec.  1.69(b)(2)(iv)--``Any other 
source of information that is held by and reasonably available to the 
self-regulatory organization''--would suffice, and proposed it as Rule 
834(g)(1)(ii)(C)(2).
---------------------------------------------------------------------------

    \657\ Paragraph (g)(1)(i)(A) of Proposed Rule 834, however, 
would incorporate only four of the five prongs in Sec.  
1.69(b)(1)(i). The Commission did not propose to include a prong 
about being associated with a named party of interest through a 
``broker association,'' as defined in Sec.  156.1 of the CFTC's 
rules, as that concept does not exist under the SEA.
    \658\ Thus, the relevant language in Rule 834(g)(1)(ii)(C) would 
read, ``Such determination must include a review of any positions, 
whether maintained at that security-based swap execution facility, 
SBS exchange, or elsewhere, held in the member's personal accounts 
or the proprietary accounts of the member's affiliated firm that the 
security-based swap execution facility or SBS exchange reasonably 
expects could be affected by the significant action.'' Proposed Rule 
834(a)(3) would define a ``member's affiliated firm'' as a firm in 
which the member is a principal or an employee, and Proposed Rule 
834(a)(5) would define ``significant action'' to include several 
types of actions or rule changes by an SBSEF or SBS exchange that 
could be implemented without the Commission's prior approval related 
to addressing an emergency and certain changes in margin levels.
---------------------------------------------------------------------------

    The Commission did not receive comments on paragraph (g) of 
Proposed Rule 834 and is adopting Rule 834(g) as proposed, for the 
reasons stated in the Proposing Release.

H. Rule 834(h)

    Proposed Rule 834(h) would require each SBSEF and SBS exchange to 
maintain in effect various rules that would be required under Rule 834. 
An SBSEF would be required to file these rules under Rule 806 or Rule 
807 of Regulation SE; an SBS exchange would be required to file such 
rules under existing SEA Rule 19b-4.\659\ Proposed Rule 834(h) is 
loosely modeled on various provisions in Sec. Sec.  1.64 and 1.69 
providing that the SRO rules required under those CFTC rules must be 
filed with the CFTC pursuant to relevant provisions of the CEA and the 
CFTC's rules thereunder.
---------------------------------------------------------------------------

    \659\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 834(h) and is 
adopting Rule 834(h) as proposed for the reasons stated in the 
Proposing Release.

IX. Rule 835--Notice to Commission by SBSEF of Final Disciplinary 
Action, Denial or Conditioning of Membership, or Denial or Limitation 
of Access

    The Commission proposed Rule 835 to require an SBSEF to provide the 
Commission notice of a final disciplinary action, a final action with 
respect to a denial or conditioning of membership, or a final action 
with respect to a denial or limitation of access. Such notice is 
designed to ensure that the Commission is kept aware of significant 
disciplinary actions, denials or conditionings of membership, or 
denials or limitations on access by SBSEFs that could be the subject of 
an aggrieved person's request for review by the Commission. The 
requirement to provide notice to the Commission would also obligate an 
SBSEF to be cognizant of, and make records for, each such instance, and 
such records would become a necessary part of the record should the 
aggrieved person seek Commission review of the SBSEF's action.
    Specifically, paragraph (a) of Proposed Rule 835 would provide 
that, if an SBSEF issues a final disciplinary action against a member, 
or takes a final action with respect to a denial or conditioning of 
membership, or a final action with respect to a denial or limitation of 
access of a person to any services offered by the SBSEF, the SBSEF 
shall file a notice of such action with the Commission within 30 days 
and serve a copy on the affected person. Proposed Rule 835(a) would use 
the phrase ``final disciplinary action against a member'' (emphasis 
added) because an SBSEF may utilize its disciplinary authority under 
Core Principle 2 (Compliance with Rules) in section 3D of the SEA \660\ 
only with respect to its members; but uses the phrase ``denies or 
limits access of a person'' (emphasis added) because the person whose 
access is denied or limited might not be a member. For example, a 
person that is denied membership by an SBSEF would fall under this 
category.
---------------------------------------------------------------------------

    \660\ 15 U.S.C. 78c-4(d)(2).
---------------------------------------------------------------------------

    Paragraph (b)(1) of Proposed Rule 835 would provide that, for 
purposes of paragraph (a), a disciplinary action would not be 
considered final unless: (1) the affected person has sought an 
adjudication or hearing with respect to the matter, or otherwise 
exhausted their administrative remedies at the SBSEF; and (2) the 
disciplinary action is not a summary action permitted under Rule 
819(g)(13)(ii).\661\ In addition, paragraph (b)(2) of Proposed Rule 835 
would provide that, for purposes of paragraph (a), a disposition of a 
matter with respect to a denial or conditioning of membership, or a 
denial or limitation of access, would not be considered final unless 
such person has sought an adjudication or hearing, or otherwise 
exhausted their administrative remedies at the SBSEF with respect to 
such matter.
---------------------------------------------------------------------------

    \661\ As discussed above, see supra section VI.B.7, Proposed 
Rule 819(g)(13)(ii) would permit an SBSEF to adopt a summary fine 
schedule for violations of rules relating to the failure to timely 
submit accurate records required for clearing or verifying each 
day's transactions, which may be summarily imposed against persons 
within the SBSEF's jurisdiction for violating such rules. 
Furthermore, an SBSEF's summary fine schedule could allow for 
warning letters to be issued for first-time violations or violators. 
If adopted, a summary fine schedule would be required by Proposed 
Rule 819(g)(13)(ii) to provide for progressively larger fines for 
recurring violations. A summary fine schedule, if an SBSEF elects to 
adopt one, would have to be part of the SBSEF's rules, and thus 
would need to be submitted to the Commission. See Proposed Rule 
819(g)(13)(ii).
---------------------------------------------------------------------------

    Paragraph (c) of Proposed Rule 835 would provide that the notice 
required under Rule 835(a) must include the name of the member or the 
associated person and last known address, as reflected in the SBSEF's 
records, of the member or associated person, as well as the name of the 
person, committee, or other organizational unit of the SBSEF that 
initiated the disciplinary action or access restriction. In the case of 
a final disciplinary action, the notice would be required to include a 
description of the acts or practices, or omissions to act, upon which 
the sanction is based, including, as appropriate, the specific rules 
that the SBSEF has found to have been violated; a statement describing 
the respondent's answer to the charges; and a statement of the sanction 
imposed and the reasons for such sanction. In the case of a denial or 
conditioning of membership or a denial or limitation of access, the 
notice would be required to include: the financial or operating 
difficulty of the prospective member or member (as the case may be) 
upon which the SBSEF determined that the prospective member or member 
could not be permitted to do, or continue to do, business with safety 
to investors, creditors, other members, or the SBSEF; the pertinent 
failure to meet qualification requirements or other prerequisites for 
membership or access and the basis upon which the SBSEF determined that 
the person concerned could not be permitted to have membership or 
access with safety to investors, creditors, other members, or the 
SBSEF; or the default of any delivery of funds or securities to a 
clearing agency by the member. Finally, the notice would be required to 
include the effective date of such final disciplinary action, denials 
or conditioning of membership, or denial or limitation of access, as 
well as any other information that the SBSEF may deem relevant.
    The Commission received no comments on Proposed Rule 835. Because 
the language of paragraphs (b)(1)(i) and (b)(2) should more clearly 
state that certain actions by an SBSEF shall not be ``final'' unless 
the affected person has exhausted their administrative remedies at the 
SBSEF, the Commission is modifying the phrase ``person has sought an 
adjudication or hearing, or otherwise exhausted their administrative 
remedies'' in both paragraphs (b)(1)(i) and (b)(2) so that it now reads 
simply, ``person has exhausted their administrative remedies,'' and is 
adopting Rule 835 as modified.

X. Amendments to Existing Rule 3a1-1 Under the Sea--Exemptions From the 
Definition of ``Exchange''

    An entity that meets the definition of ``security-based swap 
execution facility'' would also likely meet the definition of 
``exchange'' set forth in section 3(a)(1) of

[[Page 87226]]

the SEA \662\ and the interpretation of that definition set forth in 
Rule 3b-16 thereunder.\663\ Thus, absent an exemption, an entity 
needing to register with the Commission as an SBSEF would also likely 
need to register with the Commission as a national securities 
exchange.\664\ The Commission has previously stated that it ``believes 
that Congress specifically provided a comprehensive regulatory 
framework for SBSEFs in the [SEA], as amended by the Dodd Frank Act, 
and therefore that such entities that are registered as SBSEFs should 
not also be required to register and be regulated as national 
securities exchanges.'' \665\
---------------------------------------------------------------------------

    \662\ 15 U.S.C. 78c(a)(1).
    \663\ 17 CFR 240.3b-16. See also supra section III.A (discussing 
Rule 803 and the requirements and procedures for registration, 
including the overlap between the definitions of ``exchange'' and 
``security-based swap execution facility''). See also infra note 678 
and accompanying text (discussing the Commission's proposed 
amendments to Rule 3b-16).
    \664\ See Sec.  3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1) (``No 
person may operate a facility for the trading or processing of 
security-based swaps, unless the facility is registered as a 
security-based swap execution facility or as a national securities 
exchange under this section'').
    \665\ 2011 SBSEF Proposal, supra note 6, 76 FR at 10958.
---------------------------------------------------------------------------

    Therefore, the Commission proposed to exercise its authority under 
section 36(a)(1) of the SEA \666\ to exempt an SBSEF from the 
definition of ``exchange''--and thus the obligation to register as a 
national securities exchange--if it provides a market place solely for 
the trading of SBS (and no securities other than SBS) and has 
registered with the Commission as an SBSEF. To effect this exemption, 
the Commission proposed to amend Rule 3a1-1 under the SEA \667\ by 
adding new paragraph (a)(4).
---------------------------------------------------------------------------

    \666\ 15 U.S.C. 78mm(a)(1).
    \667\ 17 CFR 240.3a1-1.
---------------------------------------------------------------------------

    The proposed amendment would add new paragraph (a)(4) to existing 
Rule 3a1-1 to provide that an organization, association, or group of 
persons that has registered with the Commission as an SBSEF pursuant to 
Rule 803 and provides a market place for no securities other than SBS 
is exempt from the definition of ``exchange'' under section 3(a)(1) of 
the SEA, and thus would not be subject to the requirement in section 5 
of the SEA to register as a national securities exchange or obtain a 
low-volume exemption.\668\
---------------------------------------------------------------------------

    \668\ An SBSEF that fails to comply with the condition to the 
exemption provided under paragraph (a)(4) of Rule 3a1-1 would no 
longer qualify for the exemption and might thus be operating as an 
unregistered exchange under the section 5 of the SEA. 15 U.S.C. 78e. 
Section 5 also generally provides that a broker or dealer may not 
use any facility of an exchange to effect or report any transaction 
in a security unless that exchange is registered as a national 
securities exchange or is exempt from registration by reason of the 
limited volume of transactions effected on the exchange. Brokers and 
dealers who are members of a registered SBSEF would not be in 
violation of section 5 by effecting or reporting any SBS 
transactions on that SBSEF, because an SBSEF that qualifies for the 
exemption under Rule 3a1-1(a)(4) would not be an exchange within the 
meaning of section 5.
---------------------------------------------------------------------------

    In addition, the Commission proposed new paragraph (a)(5) to 
existing Rule 3a1-1 under the SEA, which would provide that an 
organization, association, or group of persons shall be exempt from the 
definition of the term ``exchange'' if that organization, association, 
or group of persons has registered with the Commission as a clearing 
agency pursuant to section 17A of the SEA and limits its exchange 
functions to operation of a trading session that is designed to further 
the accuracy of end-of-day valuations.\669\ As noted above, this 
provision would codify a series of exemptions that the Commission has 
granted over several years to SBS clearing agencies that operate 
``forced trading'' sessions.\670\ As part of the clearing and risk 
management processes, an SBS clearing agency must establish an end-of-
day valuation for any SBS in which any of its members has a cleared 
position. Certain SBS clearing agencies utilize a valuation mechanism 
whereby they require clearing members to submit indicative settlement 
prices for SBS products, and, to provide an incentive for accurate 
submissions, the clearing agency can require those members to trade at 
those quoted prices. The precise means by which the clearing agency 
matches quotes from different clearing members could cause the clearing 
agency to fall within the definition of ``exchange'' in section 3(a)(1) 
of the SEA. The Commission has previously found that it was necessary 
or appropriate in the public interest and consistent with the 
protection of investors to exempt clearing agencies that engage in this 
activity from the definition of ``exchange,'' \671\ and the Commission 
proposed to codify this exemption.\672\
---------------------------------------------------------------------------

    \669\ As discussed above, see supra note 37 and accompanying 
text, such a trading session is also referred to as a ``forced-
trading session.''
    \670\ See supra note 37; Proposing Release, supra note 1, 87 FR 
at 28878.
    \671\ See id.
    \672\ See Proposing Release, supra note 1, 87 FR at 28878. This 
exemption would cover only the forced-trading session of an SBS 
clearing agency; any other exchange activity that a clearing agency 
might engage in could remain subject to the SEA provisions and the 
Commission's rules thereunder applying to national securities 
exchanges or alternative trading systems.
---------------------------------------------------------------------------

    Finally, the Commission proposed to amend the introductory language 
of paragraph (b) of Rule 3a1-1 to cover only paragraphs (a)(1) through 
(a)(3), not paragraph (a) as a whole.\673\ The changed language is 
designed to clarify that the revocation provisions would not apply to 
organizations, associations, or groups of persons who fall within 
amended Rule 3a1-1(a)(4) or (a)(5). Thus, even if a registered SBSEF 
were to become a substantial market, Rule 3a1-1(b), as proposed to be 
amended, would not afford a basis for the Commission to revoke an 
SBSEF's exemption from the definition of ``exchange'' under Rule 3a1-
1(a)(4), which would force the SBSEF to register as a national 
securities exchange (to avoid being an unregistered exchange).
---------------------------------------------------------------------------

    \673\ Specifically, the Commission proposed to amend the 
introductory language of existing paragraph (b) of Rule 3a1-1, which 
states: ``Notwithstanding paragraph (a) of this rule, an 
organization, association, or group of persons shall not be exempt 
under this rule from the definition of `exchange' if . . . .'' 
Paragraph (b) then sets out procedural and substantive criteria for 
the Commission to revoke an exemption under paragraph (a) of Rule 
3a1-1 if an exchange's share of the market in any one of the 
specified classes of securities exceeds a defined threshold.
---------------------------------------------------------------------------

    The Commission received two comment letters regarding the proposed 
amendments to Rule 3a1-1.\674\ One commenter does not support an 
exemption for clearing agencies from the definition of exchange, 
stating that the exemption would create a loophole.\675\ However, the 
limited scope of the exemption--which applies solely to trades that a 
clearing agency requires its members to undertake in support of the 
accuracy of the clearing agency's end-of-day valuation process--is 
sufficiently narrow to prevent use of the exemption as a loophole 
allowing clearing agencies to act as, or on behalf of exchanges, 
without sufficient public reporting. The language of new paragraph 
(a)(5) of Rule 3a1-1, however, should more precisely reflect that the 
Commission is codifying exemptive relief that was provided with respect 
to trading sessions to support end-of-day valuations of SBS,\676\ and 
the Commission is therefore modifying paragraph (a)(5) to add the words 
``of

[[Page 87227]]

security-based swaps'' at the end of the paragraph.
---------------------------------------------------------------------------

    \674\ See Keeney Letter, supra note 95; ISDA-SIFMA Letter, supra 
note 18, at 17.
    \675\ See Keeney Letter, supra note 95 (stating that the 
exemption would permit clearing agencies to ``do the bidding of 
exchanges'' while being exempt from reporting requirements).
    \676\ See Proposing Release, supra note 1, 87 FR at 28932 
(``This exemption would cover only the forced-trading session of an 
SBS clearing agency; any other exchange activity that a clearing 
agency might engage in could remain subject to the SEA provisions 
and the Commission's rules thereunder applying to exchanges.'').
---------------------------------------------------------------------------

    Another commenter supports the proposed amendments and also 
addresses another Commission rulemaking related to the definition of 
``exchange.'' \677\ The Commission has separately proposed certain 
amendments to Rule 3b-16, a rule which defines certain terms used in 
the statutory definition of ``exchange'' under section 3(a)(1) of the 
SEA.\678\ The commenter states that the Commission should exempt from 
the definition of ``exchange'' any market place that solely trades SBS, 
whether or not that market place is registered as an SBSEF.\679\ This 
commenter states that the Commission has ``proposed to expand Rule 3b-
16 substantially'' and that this proposal, if adopted, would ``reverse 
the previous relationship between the `exchange' definition (as 
interpreted in Rule 3b-16) and the SBSEF definition.'' \680\ This 
commenter states that an organization that makes available certain 
methods for parties to interact regarding SBS might fall within the 
expanded definition of exchange but outside the definition of SBSEF and 
therefore be required to register as an exchange because SBSEF 
registration would be unavailable.\681\
---------------------------------------------------------------------------

    \677\ See ISDA-SIFMA Letter, supra note 18, at 17.
    \678\ See Amendments Regarding the Definition of ``Exchange'' 
and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and 
Agency Securities, National Market System (NMS) Stocks, and Other 
Securities, SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 
18, 2022) (File No. S7-02-22) (``Rule 3b-16 Proposal''). See also 
Reopening of Comment Periods for ``Private Fund Advisers; 
Documentation of Registered Investment Adviser Compliance Reviews'' 
and ``Amendments Regarding the Definition of `Exchange' and 
Alternative Trading Systems (ATSs) That Trade U.S. Treasury and 
Agency Securities, National Market System (NMS) Stocks, and Other 
Securities,'' SEA Release No. 94868 (May 9, 2022), 87 FR 29059 (May 
12, 2022) (S7-02-22); Supplemental Information and Reopening of 
Comment Period for Amendments Regarding the Definition of 
``Exchange,'' SEA Release No. 97309 (Apr. 14, 2023), 88 FR 29448 
(May 5, 2023) (File No. S7-02-22).
    \679\ See ISDA-SIFMA Letter, supra note 18, at 17.
    \680\ Id.
    \681\ See id.
---------------------------------------------------------------------------

    The Commission does not agree with the commenter's request to 
extend the Rule 3a1-1 exemption from the ``exchange'' definition to any 
entity that provides a market place for no securities other than SBS, 
regardless of whether they are registered as an SBSEF.
    The purpose of the exemption under Rule 3a1-1(a)(4) is not to 
universally exempt from the definition of ``exchange'' all entities 
that provide a market place for no securities other than SBS. Rather, 
given that Congress has provided a regulatory framework for SBSEFs 
through the Dodd Frank Act, the exemption is narrowly designed to avoid 
burdening registered SBSEFs with a second regulatory framework--namely, 
registration as national securities exchanges. Further, creating that 
commenter's suggested exemption in Rule 3a1-1(a) would create a 
regulatory gap in which some entities that meet the definition of 
exchange are registered neither as national securities exchanges nor as 
SBSEFs. The language of new paragraph (a)(4) of Rule 3a1-1, however, 
should more closely track the language and scope of section 3(a)(1) of 
the SEA, which uses the term ``market place or facilities,'' rather 
than the term ``market place,'' \682\ and the Commission is therefore 
modifying proposed paragraph (a)(4) of Rule 3a1-1 to replace the term 
``market place'' with the term ``market place or facilities.''
---------------------------------------------------------------------------

    \682\ See 15 U.S.C. 78c(a)(1).
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is 
adopting the amendments to Rule 3a1-1 with the modifications to 
paragraphs (a)(4) and (a)(5) discussed above and with minor technical 
modifications.\683\
---------------------------------------------------------------------------

    \683\ See supra note 32.
---------------------------------------------------------------------------

XI. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain 
Broker Requirements

    An SBSEF, by facilitating the execution of SBS between persons, 
also is engaged in the business of effecting transactions in securities 
for the account of others and therefore meets the SEA definition of 
``broker.'' \684\ Absent an exception or exemption, an SBSEF--in 
addition to being subject to the registration and regulatory 
requirements for SBSEFs--would also be required to register with the 
Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA 
\685\ and would be subject to all regulatory requirements applicable to 
brokers.\686\ For example, brokers and dealers must comply with a 
number of rules that govern their conduct, including those relating to 
customer confirmations and disclosure of credit terms in margin 
transactions.\687\
---------------------------------------------------------------------------

    \684\ See SEA section 3(a)(4), 15 U.S.C. 78c(a)(4).
    \685\ 15 U.S.C. 78o(a) and 78o(b). Section 15(a)(1) generally 
provides that, absent an exception or exemption, a broker or dealer 
that uses the mails or any means of interstate commerce to effect 
transactions in, or to induce or attempt to induce the purchase or 
sale of, any security must register with the Commission. Section 
15(b) generally provides the manner of registration of brokers and 
dealers and other requirements applicable to registered brokers and 
dealers.
    \686\ As discussed in note 47, supra, a person that is acting as 
a broker solely because it is acting as an SBSEF is currently exempt 
from the requirement to register with the Commission as a broker and 
the Commission's rules under the SEA that apply to brokers. This 
exemption will expire upon the earliest compliance date for the 
Commission's final rules regarding SBSEF registration.
    \687\ See 17 CFR 240.10b-10 and 240.10b-16.
---------------------------------------------------------------------------

    The Commission proposed new Rule 15a-12 under the SEA, which would 
deem registration with the Commission as an SBSEF to also constitute 
registration as a broker, and which would exempt a registered SBSEF 
from many broker requirements in light of the SBSEF regulatory regime 
to which it would also be subject. The accommodation provided in Rule 
15a-12, however, would not be available to an SBSEF that engages in 
other types of brokerage activity.
    Paragraph (a) of Proposed Rule 15a-12 would define the term 
``SBSEF-B'' to mean an SBSEF that does not engage in any securities 
activity other than facilitating the trading of SBS on or through the 
SBSEF. Thus, an SBSEF that acts as agent to SBS counterparties or that 
acts in a discretionary manner with respect to the execution of SBS 
transactions, could not avail itself of Rule 15a-12. Also, if an inter-
dealer broker elects not to separate its inter-dealer broker functions 
from its SBSEF (by, for example, housing them in separate legal 
entities), and instead chooses to operate the SBSEF in the same legal 
entity as the inter-dealer broker, the entity could avail itself of 
Rule 15a-12 because it would not be an SBSEF-B under the rule.
    Paragraph (b) of Proposed Rule 15a-12 would provide that an SBSEF-
B, if it registered as an SBSEF pursuant to Rule 803, would be deemed 
also to have registered with the Commission pursuant to sections 15(a) 
and (b) of the SEA.\688\
---------------------------------------------------------------------------

    \688\ The Commission's proposal would not have exempted SBSEFs 
from registration as brokers. Rather, given the registration and 
regulatory requirements that were being proposed for SBSEFs through 
Regulation SE, the Commission proposed for such SBSEFs to be deemed 
registered as brokers so as to prevent subjecting those entities to 
a second, separate registration process as well as duplicative 
additional regulatory requirements. As discussed in the Proposing 
Release, an additional layer of registration processes and 
duplicative requirements would not be appropriate or necessary. See 
Proposing Release, supra note 1, 87 FR 28933.
---------------------------------------------------------------------------

    Paragraphs (c) and (d) of Proposed Rule 15a-12 would set out the 
scope of broker requirements from which an SBSEF-B is exempt and which 
broker requirements would continue to apply. Paragraph (c) would 
provide that an SBSEF-B would be exempt from any provision of the SEA 
or the Commission's rules thereunder applicable to brokers that by its 
terms requires, prohibits, restricts, limits, conditions, or affects 
the activities of a broker, unless such provision specifies

[[Page 87228]]

that it applies to an SBSEF. Paragraph (d) of Proposed Rule 15a-12 
would provide that, notwithstanding paragraph (c), an SBSEF-B is still 
subject to section 15(b)(4),\689\ section 15(b)(6),\690\ and section 
17(b) of the SEA.\691\
---------------------------------------------------------------------------

    \689\ 15 U.S.C. 78o(b)(4).
    \690\ 15 U.S.C. 78o(b)(6).
    \691\ 15 U.S.C. 78q(b).
---------------------------------------------------------------------------

    Finally, paragraph (e) of Proposed Rule 15a-12 would exempt an 
SBSEF-B from the Securities Investor Protection Act (``SIPA'').\692\ 
SIPA established the Securities Investor Protection Corporation 
(``SIPC''), which oversees the liquidation of member firms that close 
when a member firm is bankrupt or in financial trouble and customer 
assets are missing.\693\ SIPC protection is funded by assessments made 
on member firms.\694\
---------------------------------------------------------------------------

    \692\ 15 U.S.C. 78aaa, et seq.
    \693\ See https://www.sipc.org/about-sipc/sipc-mission (``In a 
liquidation under the Securities Investor Protection Act, SIPC and 
the court-appointed Trustee work to return customers' securities and 
cash as quickly as possible. Within limits, SIPC expedites the 
return of missing customer property by protecting each customer up 
to $500,000 for securities and cash (including a $250,000 limit for 
cash only).'').
    \694\ See 15 U.S.C. 78ddd(d).
---------------------------------------------------------------------------

    Section 2 of SIPA \695\ states that, unless otherwise provided, the 
SEA shall apply as if SIPA constituted an amendment to, and was 
included as a section of, the SEA. An SBSEF-B, by definition, would 
operate only as an SBSEF. It would not be equitable to require an 
SBSEF-B to become a member of SIPC and pay SIPC assessments, because 
the SBSEF-B would not have brokerage customers and would not hold any 
customer funds or securities. Accordingly, under section 36(a)(1) of 
the SEA,\696\ the Commission finds that it is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors, to exempt SBSEF-Bs from any requirement under SIPA, 
including the requirement to pay assessments to the SIPC insurance 
fund. The Commission is codifying this exemption as Rule 15a-12(e).
---------------------------------------------------------------------------

    \695\ 15 U.S.C. 78bbb.
    \696\ 15 U.S.C. 78mm(a)(1) (giving the Commission exemptive 
authority, including the ability to exempt any person or classes of 
persons from any provision of the SEA or any rules thereunder, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of 
investors).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 15a-12 and is 
adopting Rule 15a-12 as proposed, with minor technical 
modifications,\697\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

    \697\ See supra note 32.
---------------------------------------------------------------------------

XII. Termination of Temporary Exemptions

    As discussed above and in the Proposing Release, after issuing the 
2011 SBSEF Proposal,\698\ the Commission granted the Temporary SBSEF 
Exemptions.\699\ In relevant part, Temporary SBSEF Exemptions have:
---------------------------------------------------------------------------

    \698\ See supra note 6.
    \699\ See supra notes 45-47 and accompanying text.
---------------------------------------------------------------------------

    (1) Allowed an entity that trades SBS and is not currently 
registered as a national securities exchange, or that cannot yet 
register as an SBSEF because final rules for such registration have not 
yet been adopted, to continue trading SBS during this temporary period 
without registering as a national securities exchange or SBSEF; \700\
---------------------------------------------------------------------------

    \700\ See June 2011 Exemptive Order, supra note 46, 76 FR at 
36293 (granting temporary exemptive relief from SEA section 
3D(a)(1), 15 U.S.C. 78c-4(a)(1)).
---------------------------------------------------------------------------

    (2) Exempted national securities exchanges (to the extent that they 
also operate an SBSEF and use the same electronic trade execution 
system for listing and executing trades of SBS on or through the 
exchange and the facility) from the requirement to identify whether 
electronic trading of those SBS is taking place on or through the 
national securities exchange or the SBSEF; \701\
---------------------------------------------------------------------------

    \701\ See id. at 36293 (granting temporary exemptive relief from 
SEA section 3D, 15 U.S.C. 78c-4).
---------------------------------------------------------------------------

    (3) Exempted any person, other than a clearing agency acting as a 
central counterparty in security-based swaps, that, solely due to its 
activities relating to security-based swaps, would fall within the 
definition of exchange and thus be required to register as an exchange 
from the requirement to register as a national securities exchange in 
sections 5 and 6 of the Exchange Act; \702\
---------------------------------------------------------------------------

    \702\ See July 2011 Exemptive Order, supra note 46, 76 FR at 
39934.
---------------------------------------------------------------------------

    (4) Permitted brokers and dealers to effect transactions in SBS on 
an exchange that is operating without registering as a national 
securities exchange in reliance on the exemption described above; \703\
---------------------------------------------------------------------------

    \703\ See id.
---------------------------------------------------------------------------

    (5) Exempted SBSEFs from the broker registration requirements of 
section 15(a)(1) of the SEA; \704\ and
---------------------------------------------------------------------------

    \704\ See id.; see also Requirements for Security-Based Swap 
Dealers, Major Security-Based Swap Participants, and Broker-Dealers; 
Capital Rule for Certain Security-Based Swap Dealers, SEA Release 
No. 87005 (Sept. 19, 2019), 84 FR 68550, 68602 (Dec. 16, 2019) 
(``Recordkeeping and Reporting Adopting Release'').
---------------------------------------------------------------------------

    (6) Exempted any SBS contract entered into on or after July 16, 
2011, from being void or considered voidable by reason of section 29 of 
the SEA \705\ because any person that is a party to the SBS contract 
violated a provision of the Exchange Act that was amended or added by 
subtitle B of Title VII of the Dodd Frank Act and for which the 
Commission has taken the view that compliance will be triggered by 
registration of a person or by adoption of final rules by the 
Commission, or for which the Commission has provided an exception or 
exemptive relief herein, until such date as the Commission 
specifies.\706\
---------------------------------------------------------------------------

    \705\ 15 U.S.C. 78cc(b).
    \706\ See June 2011 Exemptive Order, supra note 46, 76 FR at 
36305-06.
---------------------------------------------------------------------------

    In the Temporary SBSEF Exemptions, the Commission specified that 
the exemptive relief would expire ``on the earliest compliance date set 
forth in any of the final rules regarding registration of SBSEFs,'' 
\707\ or in the case of the relief regarding section 29 of the SEA, 
``until such date as the Commission specifies.'' \708\
---------------------------------------------------------------------------

    \707\ See id. at 36293; July 2011 Exemptive Order, supra note 
46, 76 FR at 39934.
    \708\ See June 2011 Exemptive Order, supra note 46, 76 FR at 
36306.
---------------------------------------------------------------------------

    Additionally, in 2020, the Commission adopted Rule 17Ad-24 under 
the SEA \709\ to exempt from the definition of ``clearing agency'' in 
section 3(a)(23) of the SEA \710\ certain entities, including a 
registered SBSEF, that would be deemed to be a clearing agency solely 
by reason of (a) functions performed by such institution as part of 
customary dealing activities or providing facilities for comparison of 
data respecting the terms of settlement of securities transactions 
effected on such registered SBSEF, respectively; or (b) acting on 
behalf of a clearing agency or participant therein in connection with 
the furnishing by the clearing agency of services to its participants 
or the use of services of the clearing agency by its participants.\711\ 
In adopting the rule, the Commission explained that an entity 
performing such functions that triggers the requirement to register as 
a clearing agency--but that is not yet registered with the Commission 
as an SBSEF--could rely on a temporary exemption from the requirement 
to register as a clearing agency that the Commission issued in 
2011.\712\ In the Proposing Release, the Commission sought public 
comment on whether it should ``sunset'' the 2011 Clearing Agency 
Exemption and stated that it

[[Page 87229]]

preliminarily believed that, if it adopted a framework for the 
registration of SBSEFs, the 2011 Clearing Agency Exemption would no 
longer be necessary because entities carrying out the functions of 
SBSEFs would be able to register with the Commission as such, thereby 
falling within the exemption from the definition of ``clearing agency'' 
in existing Rule 17Ad-24.\713\
---------------------------------------------------------------------------

    \709\ 17 CFR 240.17Ad-24.
    \710\ 15 U.S.C. 78c(a)(23).
    \711\ See SEA Release No. 90667 (Dec. 16, 2020), 86 FR 7637 
(Feb. 1, 2021).
    \712\ See id., 86 FR at 7650; SEA Release No. 64796 (July 1, 
2011), 76 FR 39963, 39964 (July 7, 2011) (``2011 Clearing Agency 
Exemption'').
    \713\ See Proposing Release, supra note 1, 87 FR at 28934.
---------------------------------------------------------------------------

    The Commission received no comment regarding the sunsetting of past 
exemptive relief for entities operating as SBSEFs. Upon the 
effectiveness of Regulation SE, the exemptive relief described above 
would no longer be necessary, because SBSEFs will be able to register 
with the Commission and will be subject to regulatory obligations under 
Regulation SE. Therefore, the Commission is sunsetting the exemptive 
relief consistent with the compliance schedule for Regulation SE.\714\ 
Thus, the exemptive relief described above will terminate 180 days 
after the Effective Date of Regulation SE, which will be 60 days after 
the date of publication in the Federal Register, except that (1) with 
respect to an SBSEF that has filed an application to register with the 
Commission on Form SBSEF within 180 days of the Effective Date of 
Regulation SE, as well as trading of SBS on such an SBSEF, the relief 
will terminate 240 days after the Effective Date of Regulation SE; and 
(2) with respect to an SBSEF that filed an application to register on 
Form SBSEF within 180 days after the Effective Date of Regulation SE 
and whose application on Form SBSEF is complete for purposes of Rule 
803(b)(5) (having responded to requests by the Commission's staff for 
revisions or amendments) within 240 days after the effective date, as 
well as trading of SBS on such an SBSEF, the exemptive relief will 
terminate 30 days after the Commission acts to approve or deny the 
SBSEF's application on Form SBSEF. Specifically with respect to the 
exemptive relief providing that any SBS contract entered into on or 
after July 16, 2011, will not be void or considered voidable by reason 
of section 29 of the SEA \715\ because any person that is a party to 
the SBS contract violated a provision of the Exchange Act that was 
amended or added by subtitle B of Title VII of the Dodd Frank Act and 
for which the Commission has taken the view that compliance will be 
triggered by registration of a person or by adoption of final rules by 
the Commission, or for which the Commission has provided an exception 
or exemptive relief herein, this exemptive relief will continue to 
apply to SBS entered into between July 16, 2011, and the date 30 days 
after the Commission acts to approve the first SBSEF registration.
---------------------------------------------------------------------------

    \714\ See infra section XVI (discussing compliance schedule).
    \715\ 15 U.S.C. 78cc(b).
---------------------------------------------------------------------------

    For any entity currently relying on the 2011 Clearing Agency 
Exemption that becomes required to register as a clearing agency, the 
exemptive relief will terminate 180 days after the Effective Date of 
Regulation SE, which will be 60 days after the date of publication in 
the Federal Register, except that (1) with respect to an entity that 
has filed an application to register as a clearing agency with the 
Commission on Form CA-1 within 180 days of the Effective Date of 
Regulation SE, the relief will terminate 240 days after the Effective 
Date of Regulation SE; and (2) with respect to an entity that has filed 
an application on Form CA-1 within 180 days after the Effective Date of 
Regulation SE and whose application on Form CA-1 is complete (having 
responded to requests by the Commission's staff for revisions or 
amendments) within 240 days after the effective date, the exemptive 
relief will terminate 30 days after the Commission acts to approve or 
disapprove the application on Form CA-1.

XIII. Electronic Filings Under Regulation SE

A. Use of Electronic Filing Systems and Structured Data

    Various provisions of proposed Regulation SE would have required 
registered SBSEFs (or SBSEF applicants) to file specified information 
electronically with the Commission using the EDGAR system in Inline 
XBRL, a structured, machine-readable data language.\716\ These 
provisions include:
---------------------------------------------------------------------------

    \716\ The structured data requirements are generally consistent 
with objectives of the recently enacted Financial Data Transparency 
Act (``FDTA''), which directs the Commission and other financial 
regulators of data standards for collections of information. Such 
data standards would need to meet specified criteria relating to 
openness and machine-readability and promote interoperability of 
financial regulatory data across members of the Financial Stability 
Oversight Council. See James M. Inhofe National Defense 
Authorization Act for Fiscal Year 2023, Public Law 117-263, tit. 
LVIII, 136 Stat. 2395, 3421-39 (Dec. 23, 2022).
---------------------------------------------------------------------------

     Rule 803(b)(1)(i) and (b)(3), regarding filings of, and 
amendments to, a Form SBSEF application.
     Rules 803(e) and 803(f), regarding requests to withdraw or 
vacate an application for registration.
     Rule 804(a)(1), regarding filings for listing products for 
trading by certification.
     Rule 805(a)(1), regarding filings for voluntary submission 
of new products for Commission review and approval.
     Rule 806(a)(1), regarding filings for voluntary submission 
of rules for Commission review and approval.
     Rule 807(a)(1), regarding filings for self-certification 
of rules.
     Rule 807(d), regarding filings of weekly notifications to 
the Commission of rules and rule amendments that were not required to 
be certified.
     Rule 829(g)(6), regarding submission to the Commission of 
reports related to financial resources and related documentation.
     Rule 831(j)(2), regarding submission to the Commission of 
the annual compliance report of SBSEF's CCO.
    In addition to including these requirements in each of the rules 
listed above, the Commission proposed to amend Rule 405 of Regulation 
S-T to reflect these requirements.\717\ The Commission received 
comments specifically regarding the proposed methods and formats of 
electronic filing in Regulation SE discussed above.\718\ One commenter 
states that if certain entities report a portion of needed data to one 
regulator (CFTC) and the rest of the data to a different regulator 
(SEC), data consumers will be required to extract data from two 
different datasets to provide a complete picture. The commenter states 
that if data reported to the CFTC is in PDF or HTML format, and data 
reported to the SEC is in machine-readable (XBRL) format, this will 
increase the complexity of data access.\719\ Another commenter does not 
believe that EDGAR is the appropriate system for these filings. The 
commenter believes that requiring the use of EDGAR will require most 
filers to retain a third-party vendor and incur substantial costs and 
may have the potential to deter market participants from entering this 
space, noting that a more appropriate alternative filing process, the 
Commission's Electronic Form Filing System (EFFS), a secure, web-based 
electronic filing application used to process filings from SROs and SCI 
entities, is already available, and its use would harmonize the filing 
approach with SBS exchanges, and more broadly with the approach taken 
by the CFTC. Alternatively, the

[[Page 87230]]

commenter encourages the Commission to adopt the process used by the 
CFTC, which permits filings (including initial registration filings, 
quarterly financial filings and rulebook filings) to be made via a 
dedicated portal in PDF form.\720\ As discussed in further detail 
below, taking into account comments received, the Commission is 
requiring SBSEFs to submit the information related to rule and product 
filings under Rules 804 to 807 of Regulation SE in unstructured format 
via EFFS in order to alleviate compliance burdens on SBSEFs.
---------------------------------------------------------------------------

    \717\ See Proposing Release, supra note 1, 87 FR at 28872, 
28972-73.
    \718\ See Letter from Campbell Pryde, President and CEO, XBRL 
US, to Secretary, Commission, at 2 (June 10, 2022) (``XBRL US 
Letter''); Bloomberg Letter, supra note 18, at 20-21.
    \719\ See XBRL US Letter, supra note 718, at 2.
    \720\ See Bloomberg Letter, supra note 18, at 20-21.
---------------------------------------------------------------------------

    The Commission has considered the comments received on the 
provisions regarding electronic filing in Regulation SE discussed above 
and is adopting Inline XBRL and EDGAR requirements for some, but not 
all, of the disclosures that Regulation SE will require. Specifically, 
Regulation SE will require SBSEFs to file the information under the 
following rules electronically via EDGAR using Inline XBRL:
     Rule 829, regarding submission to the Commission of 
reports related to financial resources and related documentation.
     Rule 831, regarding submission to the Commission of the 
annual compliance report of the SBSEF's CCO.
     Exhibits C through F to Form SBSEF, regarding governing 
board fitness standards and composition; organizational structure; 
personnel qualifications; and staffing requirements, respectively.
     Exhibits H through L to Form SBSEF, regarding material 
pending legal proceedings; financial information (except for any copies 
of agreements filed with the exhibit); affiliate financial information; 
dues, fees, and other charges for services; and compliance with Core 
Principles, respectively.
     Exhibit P through S to Form SBSEF, regarding disciplinary 
and enforcement protocols; operation of trading systems or platforms; 
rules prohibiting specific trade practices; and the maintenance of 
trading data, respectively.
    For these specific disclosures, the Commission is adopting as 
proposed the requirement that they be made through EDGAR using Inline 
XBRL and is adopting the amendments to Rule 405 as proposed, with minor 
technical modifications.\721\
---------------------------------------------------------------------------

    \721\ The Commission is, in light of its renumbering of the 
provisions relating to Form SBSEF, see supra section III.B, and 
because Form SBSEF will not appear in the Code of Federal 
Regulations, replacing ``17 CFR 249.2001 of this chapter'' with 
``referenced in 17 CFR 249.1701 of this chapter.''
---------------------------------------------------------------------------

    For certain other disclosures required under Regulation SE, in a 
change from the proposal, the Commission is requiring the use of a 
custom XML data language rather than Inline XBRL. Specifically, 
Regulation SE will require SBSEFs to file the following information 
electronically via EDGAR using custom XML:
     Rules 803(e) and 803(f), regarding requests for withdrawal 
or vacation applications.
     The Form SBSEF Cover Sheet.
     Exhibit A to Form SBSEF, regarding the SBSEF's ownership 
information (except for any copies of agreements filed along with the 
Exhibit).
     Exhibit B to Form SBSEF, regarding the officers, 
directors, and other control persons of the SBSEF.
     Exhibit G to Form SBSEF, regarding organizational 
documents (except for copies of organizational documents filed with the 
Exhibit).
     Exhibit M to Form SBSEF, regarding rules and technical 
manuals (except for copies of rules and technical manuals filed with 
the Exhibit).
     Exhibit N to Form SBSEF, regarding agreements and 
contracts (except for copies of agreements and contracts).
     Exhibit T to Form SBSEF, regarding clearing agencies.\722\
---------------------------------------------------------------------------

    \722\ In addition to the custom XML exhibits to Form SBSEF that 
will be submitted via EDGAR, the Commission is also adopting as 
proposed the requirement in Rule 825 of Regulation SE that SBSEFs 
post Daily Market Data Reports on their websites using a custom XML 
schema and a PDF renderer, both of which the Commission will make 
available on its website. See supra section VI.H.
---------------------------------------------------------------------------

    The Commission is requiring some disclosures to be structured in 
Inline XBRL, and other disclosures to be structured in custom XML, 
because Inline XBRL is well-suited for certain types of content--such 
as financial statements and extended narrative discussions--whereas 
other types of content can be readily captured using custom XML data 
languages that yield smaller file sizes than Inline XBRL and thus 
facilitate more streamlined data processing. Such custom XML languages 
also enable EDGAR to generate fillable web forms that will permit 
SBSEFs to input disclosures into form fields rather than encode their 
disclosures in custom XML themselves, thus likely easing compliance 
burdens on SBSEFs.
    Certain Form SBSEF exhibits also include requirements to attach 
copies of existing documents, such as copies of by-laws, written 
agreements, and compliance manuals. The Commission is requiring SBSEFs 
to file these copies of documents as unstructured PDF attachments to 
the otherwise structured Form SBSEF filing.\723\ Requiring SBSEFs to 
retroactively structure such existing documents, which were prepared 
for purposes outside of fulfilling the Commission's disclosure 
requirements, could impose compliance burdens on SBSEFs that may not be 
justified in light of the commensurate informational benefits 
associated with having such documents in structured form. The specific 
requirements to include these attached copies are included in the 
following provisions of Regulation SE:
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    \723\ In addition to these copies of existing documents, the 
Commission is requiring Exhibit U to Form SBSEF, which includes any 
information in the application that is subject to a confidential 
treatment request, to be filed as an unstructured PDF attachment. 
The confidential information that an applicant includes on Exhibit U 
could be responsive to disclosure requirements set forth in multiple 
other Form SBSEF Exhibits (potentially spanning multiple different 
data languages or formats). As a result, implementing technical 
validations on the structuring of the information on Exhibit U would 
not be technically feasible.
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     Exhibit A to Form SBSEF (specifically, copies of 
agreements through which persons may control or direct the management 
or policies of the SBSEF).
     Exhibit G to Form SBSEF (specifically, copies of the 
SBSEF's organizational documents).
     Exhibit I to Form SBSEF (specifically, copies of 
agreements supporting the SBSEF's conclusions regarding the liquidity 
of its financial assets).
     Exhibit M to Form SBSEF (specifically, copies of the 
SBSEF's rules, technical manuals, guides, or other instructions).
     Exhibit N to Form SBSEF (specifically, copies of 
agreements or contracts that enable the SBSEF's compliance with Core 
Principles).
     Exhibit O to Form SBSEF (specifically, copies of the 
SBSEF's compliance manual).
    To implement the reduced scope of Inline XBRL requirements for Form 
SBSEF compared to the proposed rules, the Commission is making changes 
to the rule text for Form SBSEF, Rule 803 of Regulation SE, and Rule 
405 of Regulation S-T. In the Registration Instructions to Form SBSEF, 
rather than requiring the disclosures on Form SBSEF to be provided as 
an Interactive Data File in accordance with Rule 405 of Regulation S-T 
as proposed, the final rule text lists a subset of Form SBSEF Exhibits 
that are to be provided as an Interactive Data File in accordance with 
Rule 405 of Regulation S-T, and clarifies that the Interactive Data 
File requirement does not extend to copies of existing documents.\724\ 
In Rule 803 of

[[Page 87231]]

Regulation SE, rather than requiring SBSEF applicants to file Form 
SBSEF as an Interactive Data File in accordance with Rule 405 of 
Regulation S-T as proposed, the final rule text requires SBSEF 
applicants to file the information specified in the Registration 
Instructions to Form SBSEF (i.e., the listed Exhibits) as an 
Interactive Data File in accordance with Rule 405 of Regulation S-
T.\725\ In Rule 405 of Regulation S-T, the final rule text omits 
references to subparagraphs of Rule 803 that were included within the 
scope of the proposed rule text, while retaining the references to 
information specified in the Registration Instructions to Form 
SBSEF.\726\
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    \724\ See Registration Instructions to Form SBSEF, referenced in 
17 CFR 249.1701. Rule 405 of Regulation S-T sets forth the 
requirements for Interactive Data File submissions. Rule 405(b) of 
Regulation SE sets forth the content to be included within the 
Interactive Data File, and Rule 405(a)(3) of Regulation S-T 
specifies Inline XBRL as the data language to be used for 
Interactive Data File submissions. In a technical change from the 
proposed rule text, the Commission is expanding the group of 
entities listed within Rule 405(a)(3) of Regulation S-T to add 
electronic filers subject to Regulation SE, reflecting the addition 
of electronic filers subject to Regulation SE to Rule 405(b) of 
Regulation S-T in the proposed and final rule text.
    \725\ See Rule 803(b)(1)(i) of Regulation SE. We have made 
conforming changes to Rules 803(b)(3), (e), and (f) to narrow the 
proposed Inline XBRL requirements for Form SBSEF amendments, 
withdrawal requests, and vacation requests. See Rules 803(b)(3), 
803(e), and 803(f) of Regulation SE.
    \726\ See the introductory text, subparagraphs (a)(2), (a)(4), 
and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S-T.
---------------------------------------------------------------------------

    Requiring use of EDGAR and structured data languages for certain 
disclosures under Regulation SE has benefits. Requiring SBSEFs to make 
required certain filings via EDGAR will provide the Commission and the 
public with a centralized, publicly accessible electronic database for 
SBSEF-provided data in the form that is most accessible and useful to 
regulators, market participants, and the public alike. The use of EDGAR 
also enables technical validation of the disclosures, thus potentially 
reducing the incidence of non-discretionary errors (e.g., the inclusion 
of text for a disclosure that should contain only numbers) in those 
Regulation SE disclosures that are filed via EDGAR. Moreover, requiring 
structured data languages for many of the reported disclosures will 
make those disclosures more easily available and accessible to, and 
reusable by, market participants and the Commission for retrieval, 
aggregation, and comparison across different SBSEFs and time periods, 
as compared to an unstructured PDF, HTML, or ASCII format requirement 
for those disclosures.\727\ Permitting all Regulation SE disclosures to 
be filed entirely in PDF, HTML, or ASCII format, while perhaps simpler 
for the SBSEF making the filings, would reduce the accessibility of 
information in the filings to the Commission and to market participants 
who will access these filings through EDGAR. Further, harmonizing with 
the CFTC in this regard by permitting all Regulation SE filings to be 
made entirely in PDF format, as the CFTC does, would not carry 
comparable benefits to harmonization of other aspects of Regulation SE. 
The benefits of using EDGAR and structured data highlighted above 
justify the potential inconvenience to registrants, as well as to data 
users, of having to access two separate databases to extract 
information regarding SEC-regulated SBSEFs and CFTC-regulated SEFs.
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    \727\ See Securities Act Release No. 10514 (June 28, 2018), 83 
FR 40846, 40847 (Aug. 16, 2018). Inline XBRL allows filers to embed 
XBRL data directly into an HTML document, eliminating the need to 
tag a copy of the information in a separate XBRL exhibit. See id., 
83 FR at 40851.
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    As discussed above, in a change from the proposal, the Commission 
is requiring SBSEFs to provide the rule and product filings required 
under Rules 804 through 807and 816 of Regulation SE through EFFS in an 
unstructured format, rather than providing them through EDGAR in Inline 
XBRL. While the information in SBSEF rule and product filings will not 
be machine-readable, the absence of structuring requirements for rule 
and product filings under Regulation SE (which aligns with the current 
rule and product filing process for SROs) \728\ will help contain 
compliance burdens for SBSEFs, because SBSEFs will not be subject to 
compliance costs associated with structuring those filings.\729\ In 
light of the significant volume of other machine-readable data 
regarding SBSEFs that will be available to the market and data users 
under Regulation SE, this requirement having a lower compliance burden 
justifies the lack of machine-readability for the information in rule 
and product filings required under Rules 804 through 807 and 816 of 
Regulation SE.
---------------------------------------------------------------------------

    \728\ See supra note 139.
    \729\ See infra section XVII.C.3(f).
---------------------------------------------------------------------------

    To implement the change from the proposed Inline XBRL and EDGAR 
filing requirement to the final unstructured format and EFFS 
requirement for rule and product filings, the Commission is modifying 
the rule text for Rules 804 through 807 of Regulation SE, the Security-
Based Swap Execution Facility Cover Sheet that the Commission is 
adopting as Sec.  249.1702, and Rule 405 of Regulation S-T. For Rules 
804 through 807, the final rule text specifies that SBSEFs must file 
the rule and product filings through the EFFS system, rather than 
through the EDGAR system as an Interactive Data File in accordance with 
Rule 405 of Regulation S-T as proposed.\730\ The Commission is not 
making analogous changes to Rule 816 of Regulation SE, because Rule 816 
instructs SBSEFs to follow the procedures under Rule 806 or 807 of 
Regulation SE.\731\ For the Security-Based Swap Execution Facility 
Cover Sheet, the final rule text specifies that SBSEFs must file the 
cover sheet using the EFFS system, rather than using the EDGAR system 
in accordance with Rule 405 of Regulation S-T as proposed.\732\ In Rule 
405 of Regulation S-T, the final rule text omits references to 
subparagraphs of Rules 804 through 807 and the Security-Based Swap 
Execution Facility Cover Sheet that were included within the scope of 
the proposed rule text.\733\
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    \730\ See Rules 804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), and 
807(d)(1) of Regulation SE.
    \731\ See Rule 816(a)(1) of Regulation SE.
    \732\ See Instruction (a) to the Security-Based Swap Execution 
Facility Sheet adopted as Sec.  249.1702.
    \733\ See the introductory text, subparagraphs (a)(2), (a)(4), 
and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S-T.
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B. Use of Identifiers

    As discussed above, the Commission is adopting, as Sec.  249.1702, 
a submission cover sheet and instructions that an SBSEF must use for 
filings submitted pursuant to Rules 804 through 807 and 816.
    Paragraph (a) of the submission cover sheet instructions provides 
that a properly completed submission cover sheet must accompany all 
rule and product submissions submitted electronically to the Commission 
by an SBSEF.\734\ Per paragraph (a), a properly completed submission 
cover sheet would include, among other things, the name and platform ID 
of the SBSEF.\735\ Currently, LEIs issued through the GLEIS are the 
only allowable platform IDs that may be used by registered SBSEFs.\736\
---------------------------------------------------------------------------

    \734\ See supra section IV.E.
    \735\ See supra note 140.
    \736\ Id.
---------------------------------------------------------------------------

    The Commission received comments on the use of LEIs, as well as the 
potential use of other identifiers in filings to the Commission under 
Regulation SE.\737\ One commenter supports the Commission's effort to 
include the LEI for identifying SBSEFs, stating that the Commission's 
decision to include the LEI creates consistency and transparency for 
the identification

[[Page 87232]]

of execution facilities, while also enabling information sharing across 
agencies.\738\ The commenter points out that the LEI is the only global 
standard for legal entity identification and argues that by 
implementing the LEI more comprehensively the Commission would set 
forth a consistent identification scheme highlighted by the LEI. The 
commenter also supports the inclusion of the Unique Product Identifier 
(``UPI''), which is also an International Organization for 
Standardization (``ISO'') standard, as well as the Financial Instrument 
Global Identifier (``FIGI''), an adopted U.S. standard, arguing that 
open, non-proprietary data standards, which are established by 
voluntary standard bodies, facilitate the open exchange of information 
for regulators.\739\
---------------------------------------------------------------------------

    \737\ See Letter from Stephan Wolf, CEO, Global Legal Entity 
Identifier Foundation, at 1-2 (June 10, 2022) (``GLEIF Letter'') at 
1-2; Bloomberg Letter, supra note 18, at 11-12.
    \738\ See GLEIF Letter, supra note 737, at 1.
    \739\ See id. at 1-2.
---------------------------------------------------------------------------

    Another commenter agrees that standard identifiers such as LEI, 
FIGI, and UPI should be included in an SBSEF's other reporting 
obligations under Regulation SE. In particular, this commenter 
highlights a number of the potential benefits of FIGI, a unique, 
publicly available identifier that covers financial instruments across 
asset classes that arise, expire, and change on a daily basis. The 
commenter states that it developed FIGI to help solve licensing 
challenges and shortcomings in data organizations and governance that 
persist in the current regionally based security identifier numbering 
approaches. The commenter states that one of the benefits of FIGI is 
that it enables interoperability between other identification systems 
and does not force the use of a single identification system, which 
could lower costs when interacting between legacy systems, which may 
depend upon a single identifier, and newer systems, which typically 
have a more modern architecture. As a general matter, the commenter 
believes that firms should be permitted to choose among identifiers and 
have the flexibility to adopt, integrate, or switch to other 
identifiers as appropriate. According to the commenter, this would 
allow firms to orient decisions around reducing costs of integration or 
realizing added benefits that offset any such integration cost 
concerns.\740\
---------------------------------------------------------------------------

    \740\ See Bloomberg Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

    The Commission has considered the comments received on the 
provisions regarding LEIs and other identifiers. The Commission is 
adopting the submission cover sheet and instructions as proposed 
because LEIs issued through the GLEIS are currently the only allowable 
platform IDs that may be used by registered SBSEFs, and as such it is 
appropriate and acceptable for them to be used on the submission cover 
sheet. With respect to other identifiers discussed by the commenters 
(i.e., UPI and FIGI), as well as other identifiers that may be under 
development globally by various entities, because they are not 
currently allowable IDs, it would not be appropriate or acceptable for 
them to be used on the submission cover sheet.

XIV. Amendments to Commission's Rules of Practice for Appeals of SBSEF 
Actions

    As noted above,\741\ SEA Core Principle 2 directs an SBSEF to 
exercise regulatory powers over its market.\742\ Under Rule 819 of 
Regulation SE, an SBSEF could take a variety of disciplinary actions 
against a member that is found to violate the SBSEF's rules, including 
fining the member, limiting the member's access, or barring the member 
entirely.\743\ SEA Core Principle 2 also requires an SBSEF to establish 
rules governing access to its market.\744\ An SBSEF could apply those 
rules in such a way as to limit a person's access to the SBSEF or to 
deny access entirely without due process. Recognizing these concerns, 
in the Proposing Release, the Commission proposed a number of 
amendments to its Rules of Practice to allow for appeals for final 
disciplinary actions taken by an SBSEF, for denials or conditionings of 
membership, and for limitations or denials of access, noting that the 
CFTC has similar procedures with respect to SEFs.\745\
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    \741\ See supra section VI.B.
    \742\ See, e.g., 15 U.S.C. 78c-4(d)(2)(A) (directing an SBSEF to 
``establish and enforce compliance'' with its rules) (emphasis 
added); 15 U.S.C. 78c-4(d)(2)(C) (directing an SBSEF to ``establish 
and enforce trading, trade processing, and participation rules that 
will deter abuses and have the capacity to detect, investigate, and 
enforce those rules'') (emphasis added).
    \743\ See supra section VI.B. See also Rule 819(c)(3) (relating 
to limitations on access, including suspensions and permanent bars); 
Rule 819(g) (relating to disciplinary procedures and sanctions).
    \744\ See 15 U.S.C. 78c-4(d)(2)(A)(ii) (directing an SBSEF to 
establish and enforce compliance with any rule that imposes any 
limitation on access to the facility); 15 U.S.C. 78c-4(d)(2)(B)(i) 
(requiring an SBSEF to provide market participants with impartial 
access to the market).
    \745\ See Proposing Release, supra note 1, 87 FR at 18935-37; 
See also part 9 of the CFTC's rules (Rules Relating to Review of 
Exchange Disciplinary, Access Denial or Other Adverse Actions). For 
purposes of part 9, the term ``exchange'' includes a SEF.
---------------------------------------------------------------------------

    The Commission did not receive any comments on these proposed 
amendments to its Rules of Practice. General principles of due process 
necessitate an appeals procedure for SBSEF members aggrieved by 
disciplinary action taken by an SBSEF. Therefore, the Commission is 
adopting the amendments to its Rules of Practice as proposed, as 
detailed below, with a minor modification to Rule 442.

A. Amendment to Rule 101

    Existing Rule 101 of the Commission's Rules of Practice \746\ sets 
out definitions for several terms used in the Rules of Practice. In 
particular, existing Rule 101(a)(9) defines ``proceeding'' with respect 
to applications of review of actions by a variety of entities that are 
subject to the Commission's jurisdiction. The Commission proposed a new 
paragraph (a)(9)(ix) of Rule 101 that provides that an application for 
a review of a determination (such as a final disciplinary action or a 
limitation or denial of access to any service) by an SBSEF would be a 
``proceeding'' and thereby trigger the applicability of the Rules of 
Practice.
---------------------------------------------------------------------------

    \746\ 17 CFR 201.101.
---------------------------------------------------------------------------

    The Commission received no comment on the proposed amendment to 
Rule 101 and is adopting this amendment to Rule 101 as proposed.

B. Amendment to Rule 202

    Existing Rule 202 of the Commission's Rules of Practice \747\ 
permits a party in certain proceedings before the Commission to make a 
motion to specify certain procedures with respect to such proceeding. 
Rule 202(a) excludes certain types of proceedings, including 
enforcement or disciplinary proceedings, proceedings to review a 
determination by an SRO, and proceedings to review a determination of 
the Public Company Accounting Oversight Board (``PCAOB''). Because the 
Commission proposed new Rules 442 and 443, which set out specific 
procedures with respect to proceedings to review a determination of an 
SBSEF,\748\ the Commission proposed to revise Rule 202(a) to add these 
SBSEF-related proceedings to the list of exclusions.
---------------------------------------------------------------------------

    \747\ 17 CFR 201.202.
    \748\ See infra sections XIV.E and F.
---------------------------------------------------------------------------

    The Commission received no comment on the proposed amendment to 
Rule 202 and is adopting this amendment to Rule 202 as proposed.

C. Amendment to Rule 210

    Existing Rule 210 of the Commission's Rules of Practice \749\ sets 
out Commission rules with respect to parties, limited participants, and 
amici curiae in various proceedings before the Commission. Paragraph 
(a)(1) of Rule

[[Page 87233]]

210 states that persons shall not be granted leave to become a party or 
non-party participant on a limited basis in an enforcement or 
disciplinary proceeding, a proceeding to review a determination by an 
SRO, or a proceeding to review a determination by the PCAOB, except as 
authorized by paragraph (c) of Rule 210 (which permits limited 
instances in which persons may participate for Commission disciplinary 
and enforcement proceedings). Because the Commission proposed new Rules 
442 and 443, which set out specific procedures with respect to 
proceedings to review a determination of an SBSEF,\750\ the Commission 
proposed to revise Rule 210 to exclude proceedings to review a 
determination by an SBSEF among the types of proceedings from which 
persons may be granted leave to become a party or a non-party 
participant on a limited basis.
---------------------------------------------------------------------------

    \749\ 17 CFR 201.210.
    \750\ See infra sections XIV.E and F.
---------------------------------------------------------------------------

    The Commission received no comment on the proposed amendment to 
Rule 210 and is adopting this amendment to Rule 210 as proposed.

D. Amendment to Rule 401

    The Commission proposed to amend existing Rule 401 of its Rules of 
Practice by adding a new paragraph (f). Paragraph (f)(1) would permit 
any person aggrieved by a stay of action by an SBSEF entered in 
accordance with Rule 442(c) to make a motion to lift the stay. The 
Commission could also, at any time, on its own motion determine whether 
to lift the automatic stay. Paragraph (f)(2) would provide that the 
Commission may lift a stay summarily, without notice and opportunity 
for hearing. Finally, paragraph (f)(3) would provide that the 
Commission may expedite consideration of a motion to lift a stay of 
action by an SBSEF, consistent with the Commission's other 
responsibilities. Where consideration is expedited, persons opposing 
the lifting of the stay could file a statement in opposition within two 
days of service of the motion requesting lifting of the stay unless the 
Commission, by written order, specifies a different period.
    It is appropriate to allow persons affected by certain stays of 
action by an SBSEF the opportunity to make a motion to request the 
lifting of the stay. As discussed below, pursuant to Rule 442, an 
aggrieved person can file an application for review with the Commission 
with respect to a final disciplinary action, a final action with 
respect to a denial or conditioning of membership, or a final action 
with respect to a denial or limitation of access. The filing of such an 
application would operate as a stay of the SBSEF's determination, and 
because of this automatic stay procedure, an aggrieved person or the 
SBSEF itself should be afforded a mechanism by which it could request 
the Commission to lift the stay, in addition to the Commission's 
ability under Rule 401(f)(2) to lift a stay summarily, without notice 
and opportunity of hearing.
    The Commission received no comment on Proposed Rule 401(f) and is 
adopting Rule 401(f) as proposed.

E. Rule 442--Right to Appeal

    Proposed Rule 442 would establish the right to an appeal to the 
Commission of certain final actions taken by an SBSEF and would set out 
certain procedural matters relating to any such appeal. Paragraph (a) 
of Rule 442 provides that an application for review by the Commission 
may be filed by any person who is aggrieved by a determination of an 
SBSEF with respect to any: (1) final disciplinary action, as defined in 
Rule 835(b)(1); (2) final action with respect to a denial or 
conditioning of membership, as defined in Rule 835(b)(2); or (3) final 
action with respect to a denial or limitation of access to any service 
offered by the SBSEF, as defined in Rule 835(b)(2).
    Paragraph (b) of Rule 442 sets forth the procedure in such cases. 
Specifically, an aggrieved person can file an application for review 
with the Commission (pursuant to existing Rule 151) within 30 days 
after the notice filed by the SBSEF with the Commission pursuant to 
Rule 835 is received by the aggrieved person, and must serve the 
application on the SBSEF at the same time.\751\ The Commission is 
modifying the text of Rule 442(b) from the proposal to clarify that the 
30-day period for filing an application for review will not be extended 
absent a showing of extraordinary circumstances and that Rule 442(b) 
will be the exclusive remedy for seeking an extension of the 30-day 
period. Strict compliance with filing deadlines facilitates finality 
and encourages parties to act timely in seeking review.
---------------------------------------------------------------------------

    \751\ Such an application would be required to identify the 
SBSEF's determination complained of, set forth in summary form a 
statement of alleged errors in the action and supporting reasons 
therefor, and state an address where the applicant can be served. 
The application would be expected not to exceed two pages in length, 
and the notice of appearance required by Sec.  201.102(d) would have 
to accompany the application if the applicant is to be represented 
by a representative. Any exception to an action not supported in an 
opening brief that complies with Sec.  201.450(b) could, at the 
discretion of the Commission, be deemed to have been waived by the 
applicant.
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    Paragraph (c) of Rule 442 provides that filing an application for 
review with the Commission pursuant to Rule 835(b) would operate as a 
stay of the SBSEF's determination, unless the Commission otherwise 
orders either pursuant to a motion filed in accordance with Rule 401(f) 
or upon its own motion.\752\
---------------------------------------------------------------------------

    \752\ 17 CFR 201.442(c).
---------------------------------------------------------------------------

    It is appropriate for the filing of an application for review to 
operate as an automatic stay of the SBSEF's determination, because that 
determination could have the effect of significantly or even 
permanently damaging an aggrieved person's business while the 
Commission was conducting a review, which could take substantial 
time.\753\ In addition, the Commission proposed in Rule 401(f) a 
procedure whereby a person aggrieved by such stay, including the SBSEF, 
can request that the Commission lift the stay.\754\ The rules also 
contain certain requirements relating to certification of the record 
and service of the index.\755\ Specifically, within 14 days after 
receipt of an application for review, an SBSEF would be required to 
certify and file with the Commission one unredacted copy of the record 
upon which it took the complained-of action. The SBSEF would be 
required to file electronically with the Commission one copy of an 
index of the record and serve one copy of the index on each party, 
subject to the requirements in Rule 442(d)(2) relating to sensitive 
personal information; if applicable, these filings would have to be 
certified that they have complied with the requirements relating to 
sensitive personal information. These requirements are appropriate to 
ensure that sensitive personal information is not improperly or 
inadvertently disseminated by an SBSEF as part of its filing of the 
record relating to the appeal review.
---------------------------------------------------------------------------

    \753\ The Commission received one comment describing the ability 
of persons aggrieved by certain actions by an SBSEF to apply for 
Commission review as ``some kind of mandatory arbitration process, 
overseen by a self governing regulatory body,'' and stating that 
this would not help retail investors. See Kevin Letter, supra note 
95. The review of SBSEF action under Rule 442 would not be 
arbitration by a self-governing regulatory body but instead review 
by the Federal agency tasked by Congress with regulating SBSEFs. 
Further, only ECPs would be eligible to trade SBS on an SBSEF, and 
any offer or sale of SBS to ``retail investors'' would have to be 
effected on a national securities exchange. See SEA section 6(l), 15 
U.S.C. 78f(l) (``It shall be unlawful for any person to effect a 
transaction in a security-based swap with or for a person that is 
not an eligible contract participant, unless such transaction is 
effected on a national securities exchange . . . .'').
    \754\ See supra section XIV.D.
    \755\ 17 CFR 201.442(d) and (e).

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[[Page 87234]]

    The Commission received no comment on Proposed Rule 442 and is 
adopting Rule 442 as proposed, with the modification to Rule 442(b) 
described above.

F. Rule 443--Sua sponte Review by Commission

    New Rule 443 \756\ provides that the Commission, on its own 
initiative, can order review of any determination by an SBSEF (which 
would include a final disciplinary action, a final action with respect 
to a denial or conditioning of membership, or a final action with 
respect to a denial or limitation of access to any services) that could 
be subject to an application for review pursuant to Rule 442(a) within 
40 days after the SBSEF filed notice thereof.
---------------------------------------------------------------------------

    \756\ 17 CFR 201.443.
---------------------------------------------------------------------------

    Rule 443 further provides that the Commission can, at any time 
before issuing its decision, raise or consider any matter that it deems 
material, whether or not raised by the parties. If it does so, the 
Commission must, under Rule 443, give notice to the parties and an 
opportunity for supplemental briefing with respect to issues not 
briefed by the parties, where the Commission believes that such 
briefing could significantly aid the decisional process. It is 
appropriate that the Commission have the ability to review any 
determination filed by an SBSEF that could be subject to an application 
for review under Rule 442(a), even without an appeal of that 
determination by an aggrieved party, should the Commission believe that 
further consideration is warranted. Therefore, the rule provides the 
Commission authority to obtain additional information through 
supplemental briefings, as needed.
    The Commission received no comment on Proposed Rule 443 and is 
adopting Rule 443 as proposed.

G. Amendment to Rule 450

    Existing Rule 450 of the Commission's Rules of Practice \757\ sets 
out requirements for briefs filed with the Commission. Rule 450(a) sets 
out a briefing schedule, and paragraph (a)(2) provides that the 
briefing schedule order shall be issued within 21 days, or such longer 
time as provided by the Commission, of receipt by the Commission of 
various types of appeals. The Commission proposed to amend Rule 450 by 
adding a new paragraph (a)(2)(iv) providing that the 21 days would be 
triggered by ``[r]eceipt by the Commission of an Index to the record of 
a determination by a security-based swap execution facility filed 
pursuant to Sec.  201.442(d).''
---------------------------------------------------------------------------

    \757\ 17 CFR 201.450.
---------------------------------------------------------------------------

    The Commission received no comment on the proposed amendment to 
Rule 450 and is adopting this amendment to Rule 450 as proposed.

H. Amendment to Rule 460

    Existing Rule 460 of the Commission's Rules of Practice \758\ 
states that the Commission shall determine each matter on the basis of 
the record. Rule 460(a) defines the contents of the record with respect 
to various types of action. The Commission proposed a new paragraph 
(a)(4) of Rule 460, which states that, in a proceeding for a final 
decision before the Commission reviewing a determination of an SBSEF, 
the record shall consist of: (i) the record certified by the SBSEF 
pursuant to Sec.  201.442(d); (ii) any application for review; and 
(iii) any submissions, moving papers, and briefs filed on appeal or 
review.
---------------------------------------------------------------------------

    \758\ 17 CFR 201.460.
---------------------------------------------------------------------------

    The Commission received no comment on the proposed amendment to 
Rule 460 and is adopting this amendment to Rule 460 as proposed.

XV. Amendments to Delegations of Authority in Rule 30-3 and Rule 30-14

    In connection with the adoption of Regulation SE, the Commission is 
revising its rules delegating authority to the Director of the Division 
of Trading and Markets (``TM Division Director'') and to the General 
Counsel in order to delegate authority to take actions necessary to 
carry out the rules under Regulation SE and to facilitate the operation 
of the regulatory structure created in Regulation SE.\759\ These 
revisions are intended to conserve Commission resources and increase 
the effectiveness and efficiency of the Commission's process for 
handling certain processes required by Regulation SE and for resolving 
appeals of SBSEF final actions.\760\ Congress has authorized such 
delegation by Public Law 87-592, 76 Stat. 394, 15 U.S.C. 78d-1(a), 
which provides that the Commission ``shall have the authority to 
delegate, by published order or rule, any of its functions to . . . an 
employee or employee board, including functions with respect to 
hearing, determining, ordering, certifying, reporting, or otherwise 
acting as to any work, business or matter.''
---------------------------------------------------------------------------

    \759\ 17 CFR 200.30-3.
    \760\ In the Proposing Release, the Commission stated that it 
``may address delegations of its authority in the adopting release 
for Regulation SE.'' Proposing Release, supra note 1, 87 FR at 
28877.
---------------------------------------------------------------------------

    The Commission finds, in accordance with the Administrative 
Procedure Act (``APA''), that these amendments to the delegations of 
authority relate solely to agency organization, procedure, or 
practice.\761\ Accordingly, the APA's provisions regarding notice of 
rulemaking and opportunity for public comment are not applicable to 
these rules. These rules do not substantially affect the rights or 
obligations of non-agency parties and pertain to increasing efficiency 
of internal Commission operations. For the same reasons, the provisions 
of the Small Business Regulatory Enforcement Fairness Act are not 
applicable to these rules.\762\ Additionally, the provisions of the 
Regulatory Flexibility Act,\763\ which apply only when notice and 
comment are required by the APA or other law, are not applicable to 
these rules.\764\ The amendments to these rules do not contain any 
collection of information requirements as defined by the Paperwork 
Reduction Act of 1995.\765\ To the extent that these rules relate to 
agency information collections during the conduct of administrative 
proceedings, they are exempt from review under the PRA. Further, 
because these amendments impose no new burdens on private parties, the 
amendments will not have any impact on competition for purposes of 
section 23(a)(2) of the Exchange Act.\766\
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    \761\ 5 U.S.C. 553(b)(3)(A).
    \762\ See 5 U.S.C. 804(3)(C) (the term ``rule'' does not include 
``any rule of agency organization, procedure, or practice that does 
not substantially affect the rights or obligations of non-agency 
parties'').
    \763\ 5 U.S.C. 60 et seq.
    \764\ See 5 U.S.C. 601(2).
    \765\ See 5 CFR 1320.3.
    \766\ 15 U.S.C. 78w(a)(2).
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    Accordingly, the Commission is amending its rules, by adding new 
paragraphs (95)-(102) to Rule 30-3, to delegate authority to the 
Division Director to perform certain actions necessitated by Regulation 
SE. The Commission is also amending paragraphs (4), (5), (7), and (8) 
of Rule 30-14 (17 CFR 200.30-14) to delegate authority to the General 
Counsel to perform certain actions in connection with Commission review 
proceedings of SBSEF actions. Under these delegations, the Division 
Director or the General Counsel, as applicable, (or, under his or her 
direction, such person or persons as might be designated from time to 
time by the Chairman of the Commission \767\) is authorized to perform 
the actions discussed below. Notwithstanding these

[[Page 87235]]

delegations, the Division Director or the General Counsel, as 
applicable, may submit any matter he or she believes appropriate to the 
Commission.\768\ Furthermore, any action taken by the Division Director 
or the General Counsel, as applicable, pursuant to delegated authority 
would be subject to Commission review as provided by Rules 430 and 431 
of the Commission's Rules of Practice, 17 CFR 201.430-201.431 and 15 
U.S.C. 78d-1(b).
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    \767\ See 17 CFR 200.30-3 and 17 CFR 200.30-14 (sub-delegation 
language applicable as a result of the addition of subparagraphs 
related to Regulation SE to the existing rules).
    \768\ 17 CFR 200.30-3(l) and 17 CFR 200.30-14(l).
---------------------------------------------------------------------------

A. Delegated Authority Related to SBSEF Registration and Form SBSEF

    With respect to certain Commission actions related to the 
registration process for SBSEFs and the review of Form SBSEF under Rule 
803 and Rule 808, the Division Director has delegated authority: to 
publish notice on the Commission's website of a completed Form SBSEF 
and make available on the Commission's website certain specified parts 
of a Form SBSEF; to notify the applicant that its application is 
incomplete; to request from the applicant additional information and 
documentation necessary; to notify the applicant that its application 
is materially incomplete and to specify the deficiencies in the 
application, for purposes of staying the 180-day period for Commission 
review of the Form SBSEF; and to issue an order vacating the SBSEF's 
registration and to send a copy of the related request and order of 
vacation to all other SBSEFs, SBS exchanges, and registered clearing 
agencies that clear security-based swaps.\769\
---------------------------------------------------------------------------

    \769\ See 17 CFR 200.30-3(a)(95), as adopted herein.
---------------------------------------------------------------------------

B. Delegated Authority Related to New Products Proposed by an SBSEF

    With respect to certain Commission actions related to self-
certification of new products by an SBSEF under Rule 804, the Division 
Director has delegated authority: to stay for a period of up to 90 days 
the effectiveness of a security-based swap execution facility's self-
certification of a new product; to publish notice on the Commission's 
website of a 30-day period for public comment; and to withdraw the stay 
or notify the security-based swap execution facility that the 
Commission objects to the proposed certification.\770\
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    \770\ See 17 CFR 200.30-3(a)(96), as adopted herein.
---------------------------------------------------------------------------

    With respect to certain Commission actions related to voluntary 
submission of new products by an SBSEF under Rule 805, the Division 
Director has delegated authority: to notify the submitting SBSEF that a 
submission for a new product does not comply with paragraph (a) of Rule 
805; to make the SBSEF's submission publicly available on the 
Commission's website; to extend by an additional 45 days the period for 
consideration of a new product voluntarily submitted by an SBSEF if the 
product raises novel or complex issues that require additional time to 
analyze, and to notify the SBSEF of the same; to issue an extension of 
such longer period as to which the SBSEF agrees in writing; to approve 
a proposed new product and provide notice of the approval to the SBSEF; 
to notify the SBSEF that the Commission will not, or is unable to, 
approve the product, and to specify the nature of the issues raised and 
the specific provision of the SEA or the Commission's rules thereunder, 
that the product violates, appears to violate, or potentially violates 
but which cannot be ascertained from the submission.\771\
---------------------------------------------------------------------------

    \771\ See 17 CFR 200.30-3(a)(97), as adopted herein.
---------------------------------------------------------------------------

C. Delegated Authority Related to New Rules or Rule Amendments Proposed 
by an SBSEF

    With respect to certain Commission actions related to proposed 
rules or rule amendments proposed by an SBSEF under Rule 806, the 
Division Director will have delegated authority: to notify the 
submitting SBSEF that a submission for a new rule or rule amendment 
does not comply with paragraph (a) of Rule 806; to make the SBSEF's 
submission publicly available on the Commission's website; to extend by 
an additional 45 days the period for consideration of a proposed rule 
or rule amendment voluntarily submitted by an SBSEF if the proposed 
rule or rule amendment raises novel or complex issues that require 
additional time to review or is of major economic significance, the 
submission is incomplete, or the requester does not respond completely 
to the Commission questions in a timely manner, and to notify the SBSEF 
of the same; to issue an extension of such longer period as to which 
the SBSEF agrees in writing; to approve a proposed rule or rule 
amendment and provide notice of the approval to the SBSEF; to notify 
the SBSEF that the Commission will not, or is unable to, approve the 
new rule or rule amendment, and to specify the nature of the issues 
raised and the specific provisions of the SEA or the Commission's rules 
thereunder, including the form or content requirements of Rule 806, 
with which the new rule or rule amendment is inconsistent or appears to 
be inconsistent; and to approve a proposed rule or a rule amendment, 
including changes to terms and conditions of a product, on an expedited 
basis under such conditions as shall be specified in the written 
notification.\772\
---------------------------------------------------------------------------

    \772\ See 17 CFR 200.30-3(a)(98), as adopted herein.
---------------------------------------------------------------------------

    In addition, the Division Director has delegated authority to 
undertake certain Commission actions related to proposed rules or rule 
amendments self-certified by an SBSEF under Rule 807. Specifically, the 
Division Director has delegated authority: to make publicly available 
on the Commission's website a security-based swap execution facility's 
filing of new rules and rule amendments pursuant to the self-
certification procedures of Rule 807; to stay for a period of up to 90 
days the effectiveness of an SBSEF's self-certification of a new rule 
or rule amendment; to publish notice on the Commission's website of a 
30-day period for public comment; and to withdraw the stay or notify 
the security-based swap execution facility that the Commission objects 
to the proposed certification.\773\
---------------------------------------------------------------------------

    \773\ See 17 CFR 200.30-3(a)(99), as adopted herein.
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D. Delegated Authority Related To Request for Joint Interpretation

    With respect to a request by an SBSEF, the Commission, or the CFTC, 
for a joint interpretation of whether a proposed product is a swap, 
security-based swap, or mixed swap under existing SEA Rule 3a68-2, as 
contemplated by Rule 809, the Division Director has delegated authority 
to provide written notice to an SBSEF of a stay or tolling pending 
issuance of a joint interpretation.\774\
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    \774\ See 17 CFR 200.30-3(a)(100), as adopted herein.
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E. Delegated Authority Related to SBSEF Submissions Contemplated by 
Rule 811

    With respect to information relating to SBSEF compliance under Rule 
811, the Division Director has delegated authority: to request pursuant 
to Rule 811(a) that an SBSEF file with the Commission information 
related to its business as a security-based swap execution facility, 
and to specify the form, manner, and timeframe for the filing; to 
request pursuant to Rule 811(b) that an SBSEF file with the Commission 
a written demonstration that it is in compliance with one or more Core 
Principles or with its other obligations under the SEA or the 
Commission's rules thereunder and to specify the form, manner, and 
timeframe for such a filing; to specify, pursuant to Rule 811(c)(2), 
the form and manner of the notification required pursuant to Rule 
811(c)(1) by an SBSEF of any

[[Page 87236]]

transaction involving the direct or indirect transfer of 50 percent or 
more of the equity interest in the security-based swap execution 
facility, and to request supporting documentation of the transaction; 
to specify the form and manner of the certification required pursuant 
to Rule 811(c)(4) that an SBSEF meets all of the requirements of 
section 3D of the SEA and the Commission rules thereunder; and to 
specify the form and manner of the submission by an SBSEF of documents 
filed in any material legal proceeding to which the security-based swap 
execution facility is a party or its property or assets is subject, as 
specified in Rule 811(d)(1), or in any material legal proceeding 
instituted against any officer, director, or other official of the 
SBSEF from conduct in such person's capacity as an official of the 
SBSEF, as specified in Rule 811(d)(2), and to request further 
documents.\775\
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    \775\ See 17 CFR 200.30-3(a)(101), as adopted herein.
---------------------------------------------------------------------------

F. Delegated Authority Related to Information Sharing

    With respect to certain Commission actions related to information 
sharing under Rule 822, the Division Director has delegated authority 
to require that an SBSEF provide information in its possession to the 
Commission and to specify the form and manner of that provision, and to 
require an SBSEF share information with other regulatory organizations, 
data repositories, and third-party data reporting services as necessary 
and appropriate to fulfill the SBSEF's regulatory and reporting 
responsibilities.\776\
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    \776\ See 17 CFR 200.30-3(a)(102), as adopted herein.
---------------------------------------------------------------------------

G. Delegated Authority Related to Commission Review Proceedings

    With respect to Commission review proceedings for final 
disciplinary actions taken by an SBSEF, for denials or conditionings of 
membership, and for limitations or denials of access, the General 
Counsel has delegated authority: to determine that an application for 
review has been abandoned and then to issue an order dismissing the 
application; to determine applications to stay Commission orders 
pending appeal of those orders to the federal courts and to determine 
application to vacate such stays; to grant or deny requests for oral 
argument before the Commission; and to determine whether to lift the 
automatic stay of a disciplinary sanction imposed by an SBSEF.\777\
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    \777\ See 17 CFR 200.30-14(4) through (5) and (7) through (8), 
as adopted herein.
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XVI. Compliance Schedule

    In the Proposing Release, the Commission stated that it intended to 
include a compliance schedule along with any final rules, and it sought 
public comment to assist it in developing an appropriate compliance 
schedule.\778\ The Commission received several comments.
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    \778\ See Proposing Release, supra note 1, 87 FR at 28937.
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    One commenter agrees that SEF operators can leverage their 
experience with SEF registration and operation in order to comply with 
any final SBSEF rules, but states that creating and maintaining a new 
platform, regardless of any similarities to existing systems, will 
inevitably require substantial time and resources to ensure 
operational, technical, and regulatory compliance. This commenter 
suggests that the Commission provide a compliance timeline of at least 
12 months following the effective date of any final rules.\779\
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    \779\ See Tradeweb Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    Another commenter states that, while substantial harmonization 
should lower compliance and operations costs by allowing SBSEFs and 
market participants to use their existing procedures and systems, it is 
still important to allow sufficient lead time for potential SBSEFs and 
market participants to come into compliance with the new regulatory 
framework. The commenter states that existing SEFs will need to make 
certain technological changes to their platform to conform to the new 
rules and that additional time will be required for testing, finalizing 
a new rulebook, and putting in place the requisite agreements with 
SBSEF clients. This commenter states that the Commission should set a 
compliance date that is at least 18 months from the date of 
effectiveness of any final rule.\780\
---------------------------------------------------------------------------

    \780\ See Bloomberg Letter, supra note 18, at 21.
---------------------------------------------------------------------------

    One commenter states that, absent a phased-in implementation 
approach, the SBS market could suffer from significant disruptions. 
Therefore, this commenter states, the Commission should provide 
``phased-in compliance'' with the required methods of execution, 
whereby a MAT SBS product may be executed on an SBSEF via any method of 
execution until such time as it is determined through notice and 
comment that an appropriate level of liquidity exists to enable an 
order book or RFQ-to-3 system. This commenter states that, when 
considering the lack of liquidity in SBS products, pre-trade price 
transparency via the proposed RFQ-to-3 requirement could negatively 
affect liquidity provision for end-users because, if clients are 
required to show their hand to three liquidity providers, it may lead 
to information leakage and an inability to hedge their risks through 
SBS markets. This is particularly so, the commenter says, because there 
are only a relatively small number of active dealers for many SBS 
products.\781\
---------------------------------------------------------------------------

    \781\ See ISDA-SIFMA Letter, supra note 18, at 6.
---------------------------------------------------------------------------

    This commenter further states that an RFQ-to-3 requirement would 
also be problematic for SBS equities, where current execution processes 
are very different from their swaps counterpart, and where common 
trading practices and counterparty exchanges would not be possible on 
an RFQ-to-3 or order book system. The commenter states that it has 
compared the credit swaps activity that occurred on-venue in 2012 
(before the CFTC trade execution requirement became effective) with the 
credit SBS activity that occurs on venue today. The commenter reports 
that the result is that 48.2% of AMRS CDX trading client volume was on-
venue in 2012, while only 4.9% of AMRS SNCDS trading client volume 
occurred on-venue in 2022 (up to the date of the commenter's letter). 
The commenter states that this shows that the swaps market was much 
more ready for the implementation of the trade execution requirement 
than the credit SBS market is today.\782\
---------------------------------------------------------------------------

    \782\ See id.
---------------------------------------------------------------------------

    The Commission agrees that some period of time will be required for 
would-be SBSEFs not only to register with the Commission, but also to 
create a new platform; put in place policies, procedures, and 
arrangements to ensure operational, technical and regulatory 
compliance; establish its own rules; and put in place the requisite 
agreements with SBSEF clients. The Commission does not agree, however, 
with the comment that a separate, ``phased-in'' compliance schedule 
should be put in place for the required methods of execution and that 
the Commission should engage in future notice and comment before 
applying the required methods of execution to SBS that have been made 
available to trade. First, no SBS are currently subject to a clearing 
determination, so it would not be possible for any SBSEF to make an SBS 
available to trade and subject it to the required methods of execution. 
Second, as discussed above, before an SBS becomes subject to the trade 
execution requirement, the Commission would have had multiple 
opportunities to consider the trading characteristics of the SBS.\783\ 
Even after the Commission has made a clearing determination with

[[Page 87237]]

respect to an SBS, to make that SBS ``available to trade,'' an SBSEF 
would, under Rule 816(a)(1), have to make a filing with the Commission 
under Rule 806 or Rule 807--both of which would allow the Commission to 
find that a filing was not consistent with the requirements of the SEA 
or Regulation SE.\784\ This filing would, under Rule 816(b), have to 
address, as appropriate, a number of relevant factors, including 
whether there are ready and willing buyers and sellers; the frequency 
or size of transactions; the trading volume; the number and types of 
market participants; the bid/ask spread; and the usual number of 
resting firm or indicative bids and offers. And a national securities 
exchange that wished to make an SBS ``available to trade'' would have 
to file a rule change under Rule 19b-4,\785\ and that proposed rule 
change would be subject to Commission review for compliance with the 
requirements of the SEA. Therefore, the Commission is not adopting a 
separate, ``phased-in'' compliance schedule for the required methods of 
execution.
---------------------------------------------------------------------------

    \783\ See supra notes 181-185 and accompanying text.
    \784\ See supra sections IV.A and B.
    \785\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Further, with respect to commenters who proposed specific 
timeframes for implementation (e.g., 12 months or 18 months), the 
Commission's proposed compliance schedule is better designed to 
facilitate timely and achievable implementation of Regulation SE 
because it reflects that the entities that are likely to register as 
SBSEFs have been accustomed to operating SBS trading platforms pursuant 
to exemptive relief granted by the Commission.\786\ Thus, it is 
appropriate to provide these entities with a reasonable period of 
time--through a compliance schedule tied to the completion of the steps 
required for registration as an SBSEF--to come into compliance with the 
requirements of Regulation SE. Further, because most, if not all, 
entities that seek to register as SBSEFs will be CFTC-registered SEFs--
and because the Commission has sought to harmonize both the 
registration form and exhibits for SBSEFs and the substance of the 
rules applicable to SBSEFs with the CFTC regulations applicable to 
SEFs--the entities seeking to register as SBSEFs will be able to 
complete the each of the steps necessary for registration in the 
allotted periods.
---------------------------------------------------------------------------

    \786\ See supra section XII.
---------------------------------------------------------------------------

    Therefore, the Commission is adopting the following compliance 
schedule for Regulation SE. The SBSEF rules shall become effective 60 
days after the date of publication in the Federal Register (``Effective 
Date''). Once Regulation SE has become effective, any entity that meets 
the definition of SBSEF may file an application to register with the 
Commission on Form SBSEF at any time after the Effective Date.\787\ As 
discussed above,\788\ the Temporary SBSEF Exemptions will expire 180 
days after the Effective Date for any entity that has not filed an 
application to register with the Commission on Form SBSEF. Thus, an 
entity that meets the definition of SBSEF and engages in such 
activities but fails to submit an application on Form SBSEF by 180 days 
after the Effective Date would be in violation of the registration 
requirement of Rule 803. For an entity that has submitted an 
application on Form SBSEF by 180 days after the Effective Date, the 
exemptive relief relating to SBSEF registration would expire 240 days 
after the Effective Date, except with respect to an entity whose 
application on Form SBSEF is complete (having responded to requests by 
the Commission's staff for revisions or amendments) within 240 days of 
the Effective Date. An entity that has submitted an application within 
180 days of the Effective Date and whose application is complete within 
240 days of the Effective Date will continue to benefit from the 
exemption from registration until 30 days after the Commission acts to 
approve or disapprove the application on Form SBSEF.
---------------------------------------------------------------------------

    \787\ Once Regulation SE has become effective, applications for 
exemptions under Rule 833 may also be submitted. See supra section 
VII.B (discussing cross-border exemptions for foreign trading venues 
and relating to the trade execution requirement).
    \788\ See supra section XII (discussing the rescission of 
exemptive relief).
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XVII. Economic Analysis

A. Introduction

    To increase the transparency and oversight of the OTC derivatives 
market,\789\ Title VII of the Dodd-Frank Act requires the Commission to 
undertake a number of rulemakings to implement the regulatory framework 
for SBS that is set forth in the legislation, including among other 
things, (1) the registration and regulation \790\ of SBSEFs; and (2) 
mitigating conflicts of interest with respect to SBSEFs, SBS exchanges, 
and SBS clearing agencies. To satisfy these statutory mandates, the 
Commission is adopting Regulation SE and associated forms under section 
3D of the SEA that would create a regime for the registration and 
regulation of SBSEFs and address other issues relating to SBS execution 
generally.\791\ One of the rules being adopted as part of Regulation 
SE, Rule 834, implements section 765 of the Dodd-Frank Act, which is 
intended to mitigate conflicts of interest at SBSEFs and SBS exchanges. 
Other rules being adopted as part of Regulation SE address the cross-
border application of the SEA's trading venue registration requirements 
and the trade execution requirement for SBS.
---------------------------------------------------------------------------

    \789\ See Public Law 111-203 Preamble.
    \790\ The regulation of SBSEFs includes, among other things, 
requiring SBSEFs to comply with the Core Principles set forth in 
section 3D(d) of the SEA. See supra section VI.
    \791\ Among other things, the Commission is adopting Form SBSEF 
for persons seeking to register with the Commission as an SBSEF and 
a submission cover sheet and instructions to be used in rule and 
product filings made by SBSEFs.
---------------------------------------------------------------------------

    In addition, the Commission is amending existing Rule 3a1-1 under 
the SEA to exempt, from the SEA definition of ``exchange,'' registered 
SBSEFs that provide a market place for no securities other than SBS, 
and certain registered clearing agencies. The Commission is also 
adopting new Rule 15a-12 under the SEA that, while affirming that an 
SBSEF also would be a broker under the SEA, would exempt a registered 
SBSEF from certain broker requirements. The Commission is also adopting 
certain new rules and amendments to its Rules of Practice to allow 
persons who are aggrieved by certain actions by an SBSEF to apply for 
review by the Commission.
    Currently, SBS trade in the OTC market, rather than on regulated 
trading venues. The existing market for SBS is opaque, with little, if 
any, pre-trade transparency. With limited transparency, the information 
asymmetry between liquidity providers (i.e., SBS dealers) and end users 
could be significant. Specifically, liquidity providers may observe 
information about the trading process (e.g., trading interest, quotes, 
order flows, and trades) that end users typically cannot observe. The 
SBS market also is decentralized such that market participants incur 
search costs to locate other market participants in order to trade.
    While the SBS market is decentralized, it also is interconnected 
and global in scope.\792\ SBS dealers can have hundreds of 
counterparties, consisting of end users and other SBS dealers. Trading 
venues may serve hundreds of end user and SBS dealer participants. SBS 
transactions arranged, negotiated, or executed by personnel located in 
the U.S. may involve wholly foreign counterparties. Furthermore, U.S. 
persons may choose to trade SBSs on foreign venues, which are subject 
to

[[Page 87238]]

OTC derivatives regulations imposed by local regulatory authorities.
---------------------------------------------------------------------------

    \792\ See also section VII.A supra and XVII.B.2 infra 
(discussing the global nature of the SBS market).
---------------------------------------------------------------------------

    The adopted rules and amendments will affect SBSEFs, SBS exchanges, 
foreign SBS trading venues, and ECPs (i.e., SBS dealers and end 
users).\793\ In addition, the adopted rules and amendments will affect 
entities that act as third-party service providers to SBSEFs.
---------------------------------------------------------------------------

    \793\ Only ECPs are eligible to trade on an SBSEF, and retail 
investors would have access to an SBS only after an SBS exchange has 
filed a proposed rule change with the Commission under Rule 19b-4, 
17 CFR 240.19b-4, to amend its rules to permit the listing of a 
registered SBS, with that proposed rule change being published for 
public comment. See supra note 103.
---------------------------------------------------------------------------

    The Commission is mindful of the economic effects, including the 
costs and benefits, of the adopted rules and amendments. Section 3(f) 
of the SEA, 15 U.S.C. 78c(f), directs the Commission, when engaging in 
rulemaking where it is required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation. In addition, 
section 23(a)(2) of the SEA, 15 U.S.C. 78w(a)(2), requires the 
Commission, when making rules under the SEA, to consider the impact 
that the rules would have on competition, and prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the SEA.
    The analysis below addresses the likely economic effects of the 
adopted rules and amendments, including their anticipated and estimated 
benefits and costs 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 received a number of comments related to 
various aspects of the economic analysis in the Proposing Release. The 
Commission has considered and responds to these comments in the 
sections that follow.

B. Economic Baseline

1. Existing Regulatory Framework
    The economic analysis appropriately considers existing regulatory 
requirements, including recently adopted rules, as part of its economic 
baseline against which the costs and benefits of the adopted rules and 
amendments are measured.\794\ The analysis includes provisions of the 
SEA, as amended by the Dodd-Frank Act, that currently govern the SBS 
market, and rules adopted by the Commission thereunder, including in 
the Intermediary Definitions Adopting Release,\795\ the Cross-Border 
Adopting Release,\796\ the SDR Rules and Core Principles Adopting 
Release,\797\ the Regulation SBSR Adopting Release I,\798\ the 
Registration Adopting Release,\799\ the ANE Adopting Release,\800\ the 
Business Conduct Adopting Release,\801\ the Trade Acknowledgement and 
Verification Adopting Release,\802\ the Regulation SBSR Adopting 
Release II,\803\ the Rule of Practice 194 Adopting Release,\804\ the 
Capital, Margin, and Segregation Adopting Release,\805\ the 
Recordkeeping and Reporting Adopting Release,\806\ the Risk Mitigation 
Adopting Release,\807\ the Cross-Border Amendments Adopting 
Release,\808\ and the Clearing Exemption Adopting Release.\809\ The 
baseline also includes the Temporary SBSEF Exemptions \810\ and the 
CFTC rules that apply to CFTC-registered SEFs.
---------------------------------------------------------------------------

    \794\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C. 
Cir. 2022). This approach also follows SEC staff guidance on 
economic analysis for rulemaking. See Staff's ``Current Guidance on 
Economic Analysis in SEC Rulemaking'' (Mar. 16, 2012), available at 
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic 
consequences of proposed rules (potential costs and benefits 
including effects on efficiency, competition, and capital formation) 
should be measured against a baseline, which is the best assessment 
of how the world would look in the absence of the proposed 
action.''); Id. at 7 (``The baseline includes both the economic 
attributes of the relevant market and the existing regulatory 
structure.''). The best assessment of how the world would look in 
the absence of the proposed or final action typically does not 
include recently proposed actions, because doing so would improperly 
assume the adoption of those proposed actions.
    \795\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' SEA 
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) 
(``Intermediary Definitions Adopting Release'').
    \796\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, SEA Release No. 72472 (June 
25, 2014), 79 FR 47278 (Aug. 12, 2014) (``Cross-Border Adopting 
Release'').
    \797\ See Security-Based Swap Data Repository Registration, 
Duties, and Core Principles, SEA Release No. 74246 (Feb. 11, 2015), 
80 FR 14438 (Mar. 19, 2015) (``SDR Rules and Core Principles 
Adopting Release'').
    \798\ See Regulation SBSR Adopting Release I, supra note 140.
    \799\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, SEA Release No. 75611 
(Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (``Registration Adopting 
Release'').
    \800\ See 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, SEA Release No. 77104 (Feb. 10, 2016), 81 FR 8598 
(Feb. 19, 2016) (``ANE Adopting Release'').
    \801\ See Business Conduct Standards Release, supra note 101.
    \802\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, SEA Release No. 78011 (June 8, 2016), 81 FR 
39808 (June 17, 2016) (``Trade Acknowledgment and Verification 
Adopting Release'').
    \803\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, SEA Release No. 78321 (July 14, 
2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR Adopting 
Release II'').
    \804\ 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, SEA Release No. 84858 (Dec. 19, 2018), 84 FR 4906 (Feb. 
19, 2019) (``Rule of Practice 194 Adopting Release'').
    \805\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 
22, 2019) (``Capital, Margin, and Segregation Adopting Release'').
    \806\ See Recordkeeping and Reporting Adopting Release, supra 
note 704.
    \807\ See Risk Mitigation Techniques for Uncleared Security-
Based Swaps, SEA Release No. 87782 (Dec. 18, 2019), 85 FR 6359 (Feb. 
4, 2020) (``Risk Mitigation Adopting Release'').
    \808\ See Cross-Border Application of Certain Security-Based 
Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85 FR 6270 
(Feb. 4, 2020) (``Cross-Border Amendments Adopting Release'').
    \809\ See Exemption from the Definition of ``Clearing Agency'' 
for Certain Activities of Security-Based Swap Dealers and Security-
Based Swap Execution Facilities, SEA Release No. 90667 (Dec. 16, 
2020), 86 FR 7637 (Feb. 1, 2021) (``Clearing Exemption Adopting 
Release'').
    \810\ See supra section III and note 46.
---------------------------------------------------------------------------

2. Security-Based Swap Data, Market Participants, Dealing Structures, 
Levels of Security-Based Swap Trading Activity, and Market Participant 
Domiciles
    Final SBS Entity registration rules have been adopted and 
compliance was required as of November 1, 2021.\811\ As of September 
28, 2023, there were 51 entities registered with the Commission as SBS 
dealers, and no entity registered as a major SBS participant.\812\ One 
commenter asserts that not all registered SBS dealers are consistently 
active in trading SBS. Trading activity in the SBS markets tends to be 
more concentrated among a subset of such registered SBS

[[Page 87239]]

dealers, which increases liquidity concerns in these markets.\813\
---------------------------------------------------------------------------

    \811\ See Key Dates for Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants, available at 
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
    \812\ See List of Registered Security-Based Swap Dealers and 
Major Security-Based Swap Participants, available at https://www.sec.gov/files/list-sbsds-msbsps-9-28-2023-locked-final.xlsx 
(providing the list of registered SBS dealers and major SBS 
participants that was updated as of Sept. 28, 2023).
    \813\ See ISDA-SIFMA Letter, supra note 18, at 2 n.5.
---------------------------------------------------------------------------

    Market participants such as SBS dealers and major SBS participants 
were required to report security-based swap transactions to registered 
security-based swap data repositories (``SBSDRs'') pursuant to 
Regulation SBSR beginning on November 8, 2021.\814\
---------------------------------------------------------------------------

    \814\ See SEC Approves Registration of First Security-Based Swap 
Data Repository; Sets the First Compliance Date for Regulation SBSR, 
available at https://www.sec.gov/news/press-release/2021-80.
---------------------------------------------------------------------------

    The Commission uses information reported pursuant to Regulation 
SBSR to two registered SBSDRs--Depository Trust & Clearing Corporation 
Data Repository (``DDR'') and ICE Trade Vault (``ITV'')--to describe 
the baseline.\815\ Table 1 shows that U.S. security-based swaps market 
activity is split across three asset classes: credit, equity, and 
interest rate.\816\ Based on information reported to DDR, as of 
November 25, 2022, there were approximately 523,000, 3.4 million, and 
5,700 active security-based swaps in the credit, equity, and interest 
rate asset classes, respectively. The gross notional amounts 
outstanding in the credit, equity, and interest rate asset classes were 
respectively, approximately $2.8, $3.6, and $0.18 trillion.\817\ Based 
on information reported to ITV, as of November 25, 2022, there were 
approximately 155,000 active credit security-based swaps with gross 
notional amount outstanding of approximately $1.9 trillion.
---------------------------------------------------------------------------

    \815\ DDR operates as a registered SBSDR for security-based swap 
transactions in the credit, equity, and interest rate derivatives 
asset classes. ITV operates as a registered SBSDR for security-based 
swap transactions in the credit derivatives asset class. See 
Security-Based Swap Data Repositories; DTCC Data Repository (U.S.) 
LLC; Order Approving Application for Registration as a Security-
Based Swap Data Repository, Exchange Act Release No. 91798 (May 7, 
2021), 86 FR 26115 (May 12, 2021); Security-Based Swap Data 
Repositories; ICE Trade Vault, LLC; Order Approving Application for 
Registration as a Security-Based Swap Data Repository, Exchange Act 
Release No. 92189 (June 16, 2021), 86 FR 32703 (June 22, 2021). The 
statistics presented herein are based on the Report on Security-
Based Swaps Pursuant to section 13(m)(2) of the Securities Exchange 
Act of 1934, that the Commission issued on Mar. 20, 2023 and is 
available at https://www.sec.gov/files/report-security-based-swaps-032023.pdf (``SBS Report'').
    \816\ In this release, interest-rate security-based swaps refer 
to non-CDS debt security-based swaps, which are primarily total 
return swaps that replicate the payoff of a bond or a narrow index 
of bonds, where the buyer usually pays either a fixed or floating 
benchmark rate to the seller in exchange for the total return of the 
bond or the narrow index of bonds. These swaps are a subset of over-
the-counter derivatives in the interest-rate asset class.
    \817\ Active security-based swaps are those that have been 
neither terminated nor reached their scheduled maturity and are 
therefore open positions as of Nov. 25, 2022. Gross notional amount 
outstanding represents the total outstanding notional value of 
active, market-facing security-based swaps on Nov. 25, 2022. 
Security-based swaps are considered to be ``market-facing'' when 
they are executed at arms-length between third parties. While a 
reporting party is only required to report a transaction to one 
SBSDR--either DDR or ITV--some uncleared security-based swaps in DDR 
also appear in ITV. As of Nov. 25, 2022, there were 605 active 
credit security-based swaps in ITV that were reported as uncleared 
(0.4% of the 154,903 active credit security-based swaps in ITV). The 
605 active credit security-based swaps had a gross notional 
outstanding of $4.73 billion (0.3% of the approximately $1,900 
billion gross notional outstanding of all active credit security-
based swaps in ITV). These statistics provide an upper bound of the 
overlap between ITV and DDR and indicate that the overlap is very 
limited in scope. See SBS Report, supra note 815, at 4, 10.
---------------------------------------------------------------------------

    Table 1 also shows that U.S. SBS market participants trade a 
variety of security-based swaps in each of the three asset classes. 
Based on information reported to DDR, as of November 25, 2022, for 
active credit security-based swaps, single-name corporate CDS 
constitute the largest product type, with approximately 364,000 active 
CDS and $1.6 trillion gross notional amount outstanding. The second 
largest active credit security-based swaps product type consists of 
single-name sovereign CDS, with approximately 94,000 active CDS and 
$0.9 trillion gross notional amount outstanding.
    For active equity security-based swaps, equity portfolio swaps 
constitute the largest product type, with approximately 2.3 million 
active equity portfolio swaps and $1.7 trillion gross notional amount 
outstanding. The second largest active equity security-based swaps 
product type consists of equity swaps, with approximately 492,000 
active equity swaps and $1.2 trillion gross notional amount 
outstanding.\818\
---------------------------------------------------------------------------

    \818\ An equity swap references a single underlier while an 
equity portfolio swap involves a portfolio wrapper under which 
multiple swaps can be traded with operational efficiency. See ISDA, 
Central Clearing in the Equity Derivatives Market: An ISDA Study 
(June 2014) at 10, available at https://www.isda.org/a/6PDDE/central-clearing-in-the-eqd-market-final.pdf; ISDA Taxonomy 2.0--
Finalized, ISDA.org (Sept. 4, 2019), available at https://www.isda.org/a/o1MTE/ISDA-Taxonomy_EQ-CR-FX-IR_v2.0__3-_September_2019-FINAL.xls.
---------------------------------------------------------------------------

    In the interest rate asset class, exotics constitute the largest 
product type, with approximately $0.1 trillion gross notional amount 
and 4,400 active exotic swaps outstanding.
    Based on information reported to ITV, as of November 25, 2022, 
active credit security-based swaps fall into two product types. Single-
name corporate CDS constitute the largest product type, with 
approximately 135,000 active CDS and $1.3 trillion gross notional 
amount outstanding. The second largest active credit security-based 
swaps product type consists of single-name sovereign CDS, with 
approximately 20,000 active CDS and $0.5 trillion gross notional amount 
outstanding.

   Table 1--Gross Notional Amount And Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
                                    Asset Class and Product Classification a
----------------------------------------------------------------------------------------------------------------
                                                                                  Gross notional
                                                                                      amount          Active
               SBSDR                     Asset class            Product type        outstanding   security-based
                                                                                   (millions of     swap count
                                                                                       USD)
----------------------------------------------------------------------------------------------------------------
DDR...............................  Credit...............  Index................          44,407           2,992
                                                           Single-Name:                1,556,315         364,465
                                                            Corporate.
                                                           Single-Name:                  900,072          93,807
                                                            Sovereign.
                                                           Total Return Swap \b\         156,849          49,867
                                                           Other \c\............         122,970          12,081
                                                                                 -------------------------------
                                                            Total...............       2,780,613         523,212
                                    Equity...............  Portfolio Swap.......       1,688,672       2,266,706
                                                           Swap.................       1,183,279         491,508
                                                           Contract For                  398,952         642,965
                                                            Difference.
                                                           Option...............           6,915           1,281
                                                           Forward..............           5,663           1,393

[[Page 87240]]

 
                                                           Other \d\............         330,136          41,115
                                                                                 -------------------------------
                                                            Total...............       3,613,617       3,444,968
                                    Interest Rate........  Exotic...............         153,306           4,419
                                                           Forward..............          23,818           1,164
                                                           Other \e\............             868             122
                                                                                 -------------------------------
                                                            Total...............         177,992           5,705
                                                                                 -------------------------------
ITV...............................  Credit...............  Single-Name:                1,348,002         134,741
                                                            Corporate.
                                                           Single-Name:                  544,414          20,162
                                                            Sovereign.
                                                            Total...............       1,892,416         154,903
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps in DDR, this table incorporates only one of the two security-based swaps
  that result from the clearing process. For ITV, this table incorporates all of the cleared security-based
  swaps.
\b\ As a general matter, total return swaps include non-CDS debt-based security swaps, equity-based security
  swaps, and mixed swaps. Counterparties in the total return swaps market use the contracts to obtain exposure,
  usually leveraged, to the total economic performance of a security or index and benefit from not having to own
  the security itself. Market participants, such as mutual funds, hedge funds, and endowments, use total return
  swaps to obtain exposure in markets where they would face difficulties purchasing or selling the underlying
  security (e.g., a market participant may find it difficult to buy a foreign company's security or locate a
  security to sell short) while taking advantage of the capital efficiencies of not holding the security in
  their inventories.
\c\ Includes the following products reported to SBSDRs: exotic, index tranche, swaptions, and other single-name
  (e.g., asset-backed, loan, and municipal security-based swaps).
\d\ ``Other'' is a category in the DDR Equity Product ID field. All Product ID categories are listed in the
  table.
\e\ Includes the following products reported to SBSDRs: inflation, debt option, and cross-currency.

    Table 2 shows that both SBS Entities and non-SBS Entities 
participate in all three asset classes in the U.S. security-based swap 
market. Based on information reported to DDR, as of November 25, 2022, 
SBS Entities and non-SBS Entities had, respectively, entered into 
approximately 813,000 and 234,000 active credit security-based 
swaps.\819\ The gross notional amounts outstanding of the active credit 
security-based swaps held by SBS Entities and non-SBS Entities were, 
respectively, approximately $4.4 and $1.2 trillion.
---------------------------------------------------------------------------

    \819\ For cleared security-based swaps where at least one 
counterparty is an SBS Entity, Table 2 reflects the security-based 
swaps entered into by each of the original counterparties, but does 
not include the positions of the clearing agencies themselves. For 
uncleared security-based swaps, Table 2 reflects the security-based 
swaps entered into by each of the original counterparties. See SBS 
Report, supra note 815, at 5.
---------------------------------------------------------------------------

    In the equity asset class, SBS Entities and non-SBS Entities had, 
respectively, entered into approximately 4.0 million and 2.9 million 
active equity security-based swaps. The gross notional amounts 
outstanding of the active equity security-based swaps held by SBS 
Entities and non-SBS Entities were, respectively, approximately $4.5 
and $2.7 trillion.
    In the interest rate asset class, SBS Entities and non-SBS Entities 
had, respectively, entered into approximately 6,200 and 5,200 active 
interest rate security-based swaps. The gross notional amounts 
outstanding of the active interest rate security-based swaps held by 
SBS Entities and non-SBS Entities were, respectively, approximately 
$0.2 and $0.1 trillion.
    Based on information reported to ITV, as of November 25, 2022, SBS 
Entities and non-SBS Entities had, respectively, entered into 
approximately 123,000 and 33,000 active credit security-based swaps. 
The gross notional amounts outstanding of the active credit security-
based swaps held by SBS Entities and non-SBS Entities were, 
respectively, approximately $1.6 and $0.3 trillion.

   Table 2--Gross Notional Amount and Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
                                        Asset Class and Registrant Type a
----------------------------------------------------------------------------------------------------------------
                                                                                  Gross notional
                                                                                      amount          Active
               SBSDR                     Asset class          Registrant type       outstanding   security-based
                                                                                   (millions of     swap count
                                                                                       USD)
----------------------------------------------------------------------------------------------------------------
DDR...............................  Credit...............  Total................       5,561,226       1,046,424
                                                            SBS Entities........       4,403,130         812,647
                                                            Other...............       1,158,096         233,777
                                    Equity...............  Total................       7,227,234       6,889,936
                                                            SBS Entities........       4,490,592       4,013,393
                                                            Other...............       2,736,642       2,876,543
                                    Interest Rate........  Total................         355,984          11,410
                                                            SBS Entities........         210,663           6,214
                                                            Other...............         145,321           5,196
ITV...............................  Credit...............  Total................       1,897,249         155,578
                                                            SBS Entities........       1,632,251         122,831

[[Page 87241]]

 
                                                            Other...............         264,998          32,747
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps where at least one counterparty is an SBS Entity, Table 2 reflects the
  security-based swaps entered into by each of the original counterparties, but does not include the positions
  of the clearing agencies themselves. For uncleared security-based swaps, Table 2 reflects the security-based
  swaps entered into by each of the original counterparties.

    In addition to information reported to registered SBSDRs, the 
Commission also uses nonpublic data from the DTCC Derivatives 
Repository Limited Trade Information Warehouse (``DTCC-TIW'') to 
describe the baseline, specifically the single-name CDS market. DTCC-
TIW provided data regarding the activity of market participants in the 
single-name CDS market during the period from November 2006 to 
September 2022.\820\ The Commission acknowledges that limitations in 
the data constrain the extent to which it is possible to quantitatively 
characterize the security-based swap market.\821\
---------------------------------------------------------------------------

    \820\ DTCC-TIW provided weekly positions and monthly transaction 
files for single-name and index-based CDS that had been received 
voluntarily from market participants. These data cover all positions 
and transactions where one of the counterparties is a U.S. entity or 
the reference entity is a U.S. entity, with status as a U.S. entity 
determined by DTCC-TIW. In DTCC-TIW, the Commission observes end of 
week CDS positions for all U.S. entities, foreign counterparties to 
a U.S. entity, or foreign counterparties trading a CDS referencing a 
U.S. underlying entity. The DTCC-TIW data have limitations. The data 
do not address two foreign counterparties with CDS referencing 
foreign underlying entities. In addition, the DTCC-TIW data do not 
provide any intra-weekly CDS position information, nor any 
information on the underlying security holdings of reference 
entities. The Commission had used DTCC-TIW data in prior 
rulemakings, most recently in Prohibition Against Fraud, 
Manipulation, or Deception in Connection with Security-Based Swaps; 
Prohibitions Against Undue Influence over Chief Compliance Officers, 
SEA Release No. 97656 (June 7, 2023), 88 FR 42546 (June 30, 2023).
    \821\ See supra note 820 (discussing DTCC-TIW data limitations). 
The Commission also relies on qualitative information regarding 
market structure and evolving market practices provided by 
commenters and the knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

    Firms that act as SBS dealers \822\ play a central role in the 
single-name CDS market. Based on an analysis of single-name CDS data in 
DTCC-TIW in the 12-month period from October 2021 to September 2022, 
accounts of registered SBS dealer firms intermediated transactions with 
a gross notional amount of approximately $1.7 trillion, with 
approximately 66% of the gross notional intermediated by the top five 
SBS dealer accounts.
---------------------------------------------------------------------------

    \822\ Dealers are generally persons engaged in the business of 
buying and selling securities for their own account, through a 
broker or otherwise. 15 U.S.C. 78c(a)(5). SEA Rule 3a71-1 defines 
the term security-based swap dealer. 17 CFR 240.3a71-1.
---------------------------------------------------------------------------

    These SBS dealers transact with hundreds or thousands of 
counterparties. One SBS dealer (when accounts are sorted by number of 
counterparties) transacted with over a thousand counterparty accounts, 
consisting of both other SBS dealers and non-SBS dealers. The next 13% 
of SBS dealers each transacted with 500 to 1,000 counterparty accounts; 
the following 21% of SBS dealers each transacted with 100 to 500 
counterparty accounts; and 64% of SBS dealers each transacted security-
based swaps with fewer than 100 counterparty accounts in the 12-month 
period from October 2021 to September 2022. The median number of 
counterparty accounts across SBS dealers is 18 (the mean is 
approximately 172). Non-SBS dealer counterparties transacted almost 
exclusively with these SBS dealers. The median non-SBS dealer 
counterparty transacted with one SBS dealer account (with an average of 
approximately 1.8 SBS dealer accounts) in the 12-month period from 
October 2021 to September 2022.
    Non-SBS dealer single-name CDS market participants include, but are 
not limited to, investment companies, pension funds, private funds, 
sovereign entities, and industrial companies. The Commission observes 
that most users of CDS that are not SBS dealers do not engage in 
trading directly, but trade through banks, investment advisers, or 
other types of firms, which are collectively referred to as transacting 
agents, consistent with DTCC-TIW terminology.\823\ Based on an analysis 
of DTCC-TIW data, there were 2,397 transacting agents that engaged 
directly in trading between November 2006 and September 2022.\824\
---------------------------------------------------------------------------

    \823\ Transacting agents participate directly in the single-name 
CDS market, without relying on an intermediary, on behalf of their 
principals. For example, a university endowment may hold a position 
in a single-name CDS that is established by an investment adviser 
that transacts on the endowment's behalf. In this case, the 
university endowment is a principal that uses the investment adviser 
as its transacting agent.
    \824\ These 2,397 transacting agents, which are presented in 
more detail in Table 3 below, include all DTCC-defined ``firms'' 
shown in DTCC-TIW as transaction counterparties that report at least 
one transaction to DTCC-TIW as of Sep. 2022. The staff in the 
Division of Economic and Risk Analysis classified these transacting 
agents by matching names, automatically or manually, to third-party 
databases. See, e.g., ANE Adopting Release, 81 FR 8602, at n.43. 
Manual classification was based in part on searches of the EDGAR and 
Bloomberg databases, the SEC's Investment Adviser Public Disclosure 
database (available at https://adviserinfo.sec.gov/), and a firm's 
public website or the public website of the account represented by a 
firm. The staff also matched names using International Swaps and 
Derivatives Association (ISDA) protocol adherence letters available 
on the ISDA website. See ISDA, Small Bang Protocol List of Adhering 
Parties, available at https://www.isda.org/traditional-protocol/small-bang-protocol/adhering-parties/; ISDA, Small Bang Protocol 
List of Adhering Parties, https://www.isda.org/traditional-protocol/big-bang-protocol/adhering-parties/.
---------------------------------------------------------------------------

    As shown in Table 3 below, approximately 79% of these transacting 
agents were identified as investment advisers, of which approximately 
40% (about 32% of all transacting agents) were registered as investment 
advisers under the Investment Advisers Act.\825\ Although investment 
advisers were the vast majority of transacting agents, the transactions 
they executed account for only 15% of all single-name CDS trading 
activity reported to DTCC-TIW, measured by number of transaction-sides 
(each transaction has two transaction sides, i.e., two transaction 
counterparties). The vast majority of transactions (81.3%) measured by 
number of transaction-sides were executed by ISDA-recognized SBS 
dealers.
---------------------------------------------------------------------------

    \825\ See 15 U.S.C. 80b-1 through 80b-21. The staff in the 
Division of Economic and Risk Analysis determined whether an entity 
is an SEC registered investment adviser using the Investment Adviser 
Public Disclosure website. See supra note 824.

[[Page 87242]]

 Table 3--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                       Nov. 2006 Through Sep. 2022, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                                    Transaction
                       Transacting agents                             Number          Percent          share
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Investment Advisers.............................................           1,891            78.9            15.0
--SEC registered................................................             762            31.8            10.0
Banks (non-ISDA-recognized SBS dealers).........................             279            11.6             3.3
Pension Funds...................................................              31             1.3             0.1
Insurance Companies.............................................              49             2.0             0.2
ISDA-Recognized SBS Dealers \a\.................................              17             0.7            81.3
Other \b\.......................................................             130             5.4             0.2
                                                                 -----------------------------------------------
    Total.......................................................           2,397           100.0             100
----------------------------------------------------------------------------------------------------------------
\a\ For the purpose of this analysis, the ISDA-recognized SBS dealers are those identified by ISDA as belonging
  to the G14 or G16 dealer group during the period. See, e.g., ISDA, 2010 ISDA Operations Benchmarking Survey
  (2010), available at https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.
\b\ This category excludes clearing counterparties (CCPs). Same-day cleared trades are recorded in the DTCC
  dataset as two clearing legs, each between a CCP (ICE Clear Credit, ICE Clear Europe, and LCH.Clearnet) and
  the original counterparty in the underlying trade. As these are not price-forming trades, the counts in the
  last column of the table are adjusted to reflect the original counterparties, excluding a CCP. Though original
  counterparties cannot be paired up to same-day cleared trades, to adjust for same-day clearing each leg
  against the CCP is counted as one half of a transaction and the notional amount of the trade is halved as
  well.

    Principal holders of CDS risk exposure are represented by 
``accounts'' in DTCC-TIW.\826\ The staff's analysis of these accounts 
in DTCC-TIW shows that the 2,397 transacting agents classified in Table 
3 represent 16,061 principal risk holders. Table 4 below classifies 
these principal risk holders by their counterparty type and whether 
they are represented by a registered or unregistered investment 
adviser.\827\ For instance, banks in Table 3 allocated transactions 
across 375 accounts, of which 35 were represented by investment 
advisers. In the remaining instances, banks traded for their own 
accounts. Meanwhile, ISDA-recognized SBS dealers in Table 3 allocated 
transactions across 104 accounts. Private funds are the largest type of 
account holders that the Commission was able to classify.\828\
---------------------------------------------------------------------------

    \826\ ``Accounts'' as defined in the DTCC-TIW context are not 
equivalent to ``accounts'' in the definition of ``U.S. person'' in 
SEA Rule 3a71-3(a)(4)(i)(C). They also do not necessarily represent 
separate legal persons. One entity or legal person might have 
multiple accounts. For example, a bank may have one DTCC-TIW account 
for its U.S. headquarters and one DTCC-TIW account for one of its 
foreign branches.
    \827\ Unregistered investment advisers include all investment 
advisers not registered under the Investment Advisers Act and might 
include investment advisers registered with a state or a foreign 
authority, as well as investment advisers that are exempt reporting 
advisers under section 203(l) or 203(m) of the Investment Advisers 
Act.
    \828\ Most of the funds that could not be classified appear to 
be private funds. For the purposes of this discussion, ``private 
fund'' encompasses various unregistered investment vehicles, 
including hedge funds, private equity funds, and venture capital 
funds. There remain over almost 7,000 DTCC-TIW accounts unclassified 
by type. Although unclassified, Commission staff manually reviewed 
each account to verify that it was not likely to be a special entity 
under SEA Rule 15Fh-2(d) and instead was likely to be an entity such 
as a corporation, an insurance company, or a bank.

      Table 4--The Number and Percentage of Account Holders--by Type--Who Participate in the SBS Market Through a Registered Investment Adviser, an
                          Unregistered Investment Adviser, or Directly as a Transacting Agent, From Nov. 2006 Through Sep. 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Represented by a          Represented by an         Participant is a
                                                                              registered investment    unregistered investment    transacting agent \a\
                   Account holders by type                        Number             adviser                   adviser         -------------------------
                                                                           ----------------------------------------------------
                                                                                          (percent)                 (percent)                 (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds................................................        4,816        2,486           52        2,271           47           59            1
DFA Special Entities.........................................        1,631        1,565           96           44            3           22            1
Registered Investment Companies..............................        1,454        1,367           94           83            6            4            0
Banks (non-ISDA-recognized SBS dealers)......................          375           26            7            9            2          340           91
Insurance Companies..........................................          356          219           62           49           14           88           25
ISDA-Recognized SBS Dealers..................................          104            0            0            0            0          104          100
Foreign Sovereigns...........................................           98           71           72            7            7           20           20
Non-Financial Corporations...................................          129           96           74           10            8           23           18
Finance Companies............................................           62           46           74            0            0           16           26
Other/Unclassified...........................................        7,036        4,262           61        2,477           35          297            4
--------------------------------------------------------------------------------------------------------------------------------------------------------
All..........................................................       16,061       10,138           63        4,950           31          973            6
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This column reflects the number of participants who are also trading for their own accounts.

    As depicted in Figure 1 below, domiciles of new accounts 
participating in the single-name CDS market have shifted over time. It 
is unclear whether these shifts represent changes in the types of 
participants active in this market, changes in reporting, or changes in 
transaction volumes in CDS referencing particular underliers. For 
example, the percentage of new entrants that are foreign accounts 
increased from 24.4% in the first quarter of 2008 to approximately 53% 
in the third quarter of 2022, which might reflect an increase in 
participation by foreign account holders in the single-name CDS market, 
though the total number of new entrants that are foreign accounts 
decreased from

[[Page 87243]]

112 in the first quarter of 2008 to 62 in the third quarter of 
2022.\829\ Additionally, the percentage of the subset of new entrants 
that are foreign accounts managed by U.S. persons increased from 4.6% 
in the first quarter of 2008 to 5.2% in the third quarter of 2022, and 
the absolute number changed from 21 to 6, which also might reflect more 
specifically the flexibility with which market participants can 
restructure their market participation in response to regulatory 
intervention, competitive pressures, and other incentives.\830\ At the 
same time, apparent changes in the percentage of new accounts with 
foreign domiciles might also reflect improvements in reporting by 
market participants to DTCC-TIW, an increase in the percentage of 
transactions between U.S. and non-U.S. counterparties, and/or increased 
transactions in single-name CDS on U.S. reference entities by foreign 
persons.\831\
---------------------------------------------------------------------------

    \829\ These estimates were calculated by Commission staff using 
DTCC-TIW data.
    \830\ See Charles Levinson, U.S. banks moved billions in trades 
beyond the CFTC's reach, Reuters (Aug. 21, 2015) (retrieved from 
Factiva database). The estimates of 21 and 6 were calculated by 
Commission staff using DTCC-TIW data.
    \831\ See supra note 820 (discussing the single-name CDS 
transactions that are in the DTCC-TIW data).
[GRAPHIC] [TIFF OMITTED] TR15DE23.000

    Figure 2 below describes the percentage of global, notional 
transaction volume in North American corporate single-name CDS reported 
to DTCC-TIW between January 2011 and September 2022, separated by 
whether transactions are between two ISDA-recognized SBS dealers 
(``interdealer transactions'') or whether a transaction has at least 
one non-SBS dealer counterparty. Figure 2 also shows that the portion 
of the notional volume of North American corporate single-name CDS 
represented by interdealer transactions has remained fairly constant 
through 2015, before falling from approximately 68% in 2015 to under 
40% in 2022. This change corresponds to the availability of clearing to 
non-SBS dealers. Interdealer transactions continue to represent a 
significant fraction of trading activity, even as notional volume has 
declined over the past 12 years,\832\ from just

[[Page 87244]]

under $2 trillion in 2011 to less than $500 billion in 2022.
---------------------------------------------------------------------------

    \832\ The start of this decline predates the enactment of the 
Dodd-Frank Act and the proposal of rules thereunder.
[GRAPHIC] [TIFF OMITTED] TR15DE23.001

    The high level of interdealer trading activity reflects the central 
position of a small number of SBS dealers, each of which intermediates 
trades with many hundreds of counterparties. While the Commission is 
unable to quantify the current level of trading costs for single-name 
CDS, these SBS dealers appear to enjoy market power as a result of 
their small number and the large proportion of order flow that they 
intermediate.
    As shown in Figure 3 below, half of the trading activity in North 
American corporate single-name CDS was between counterparties domiciled 
in the United States and counterparties domiciled abroad. Using the 
self-reported registered office location of the DTCC-TIW accounts as a 
proxy for domicile, the Commission estimates that only 13% of the 
global transaction volume by notional volume between January 2008 and 
September 2022 was between two U.S.-domiciled counterparties, compared 
to 50% entered into between one U.S.-domiciled counterparty and a 
foreign-domiciled counterparty, and 37% entered into between two 
foreign-domiciled counterparties.\833\
---------------------------------------------------------------------------

    \833\ For purposes of this discussion, the Commission has 
assumed that the registered office location reflects the place of 
domicile for the fund or account, but this domicile does not 
necessarily correspond to the location of an entity's sales or 
trading desk. See ANE Adopting Release, 81 FR at 8607 n.83.
---------------------------------------------------------------------------

    If the Commission instead considers the number of cross-border 
transactions from the perspective of the domicile of the corporate 
group (e.g., by classifying a foreign bank branch or foreign subsidiary 
of a U.S. entity as domiciled in the United States), the percentages 
shift significantly. Under this approach, the fraction of transactions 
entered into between two U.S.-domiciled counterparties increases to 36% 
and remains at 50% for transactions entered into between a U.S.-
domiciled counterparty and a foreign-domiciled counterparty.\834\ By 
contrast, the proportion of activity between two foreign-domiciled 
counterparties drops from 37% to 14%. This change in

[[Page 87245]]

respective shares based on different classifications suggests that the 
activity of foreign subsidiaries of U.S. firms and foreign branches of 
U.S. banks accounts for a higher percentage of SBS activity than U.S. 
subsidiaries of foreign firms and U.S. branches of foreign banks. It 
also demonstrates that financial groups based in the United States are 
involved in an overwhelming majority (approximately 86%) of all 
reported transactions in North American corporate single-name CDS.
---------------------------------------------------------------------------

    \834\ These estimates do not indicate the fraction of North 
American corporate single-name CDS transactions that would be 
subject to the trade execution requirement, if it were in force for 
such transactions. In particular, if the trade execution requirement 
were in force for North American corporate single-name CDS, a 
foreign subsidiary of a U.S. entity transacting in such CDS would 
only be subject to the trade execution requirement if the U.S. 
parent provides a guarantee to the foreign subsidiary.
---------------------------------------------------------------------------

    Financial groups based in the United States are also involved in a 
majority of interdealer transactions in North American corporate 
single-name CDS. Of the transactions on North American corporate 
single-name CDS between two ISDA-recognized SBS dealers and their 
branches or affiliates over the 12-month period from October 2021 to 
September 2022, 80.7% of transaction notional volume involved at least 
one account of an entity with a U.S. parent.\835\ In addition, a 
majority of North American corporate single-name CDS transactions occur 
in the interdealer market or between SBS dealers and foreign non-SBS 
dealers, with the remaining portion of the market consisting of 
transactions between SBS dealers and U.S.-person non-SBS dealers. 
Specifically, 86% of North American corporate single-name CDS 
transactions involved either two ISDA-recognized SBS dealers or an 
ISDA-recognized SBS dealer and a foreign non-SBS dealer. Approximately 
14% of such transactions involved an ISDA-recognized SBS dealer and a 
U.S.-person non-SBS dealer.
---------------------------------------------------------------------------

    \835\ Since the Commission is unable to pair up the same-day 
cleared trades, this 80.7% estimate is based on bilateral trades 
that were not same-day cleared in the 12-month period from Oct. 2021 
to Sept. 2022.
[GRAPHIC] [TIFF OMITTED] TR15DE23.002

3. Other Markets and Regulatory Frameworks
    The numerous financial markets are integrated, often attracting the 
same market participants that trade across corporate bond, swap, and 
SBS markets, among others.\836\ This is notwithstanding the fact that 
the SBS market is a small fraction of the swap market \837\ and the 
single-name CDS market, which falls under SEC jurisdiction, is slightly 
smaller than the index CDS market, which falls under CFTC 
jurisdiction.\838\ For example, persons who register as SBS dealers and 
major SBS participants are likely also to be engaged in swap activity. 
In part, this overlap reflects the relationship between single-name CDS 
contracts, which are SBS, and index CDS contracts, which may be swaps 
or SBS. A single-name CDS contract covers default events for a single 
reference entity or reference security. Index CDS contracts and related 
products make payouts contingent on the default of index components and 
allow participants in these instruments to gain exposure to the credit 
risk of the basket of reference entities that comprise the index, which 
is a function of the credit risk of the index components. A default 
event for a reference entity that is an

[[Page 87246]]

index component will result in payoffs on both single-name CDS written 
on the reference entity and index CDS written on indices that contain 
the reference entity. Because of this relationship between the payoffs 
of single-name CDS and index CDS products, the prices of these products 
depend upon one another,\839\ creating hedging opportunities across 
these markets.
---------------------------------------------------------------------------

    \836\ See Rule 194 Proposing Release, 80 FR at 51711.
    \837\ See ISDA-SIFMA Letter, supra note 18, at 2 (agreeing with 
the Commission's statement in the Proposing Release that the SBS 
market is a small fraction of the swap market).
    \838\ As of Nov. 25, 2022, the SBS market had a gross notional 
amount outstanding of approximately $8.5 trillion (see supra section 
I and section XVII.B.2, Table 1), while the swap market (comprising, 
for purposes of this discussion, swaps in the interest rate, credit, 
and foreign-exchange asset classes) had a gross notional amount 
outstanding of approximately $352 trillion. See supra section I. The 
gross notional amount outstanding in single-name CDS (both corporate 
and sovereign) was approximately $4.3 trillion (see supra section 
XVII.B.2, Table 1), while the gross notional amount outstanding in 
index CDS (including index CDS tranches) was approximately $4.5 
trillion. Data on gross notional amount outstanding in index CDS is 
from CFTC Swaps Report, available at https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27, 
2023).
    \839\ ``Correlation'' typically refers to linear relationships 
between variables; ``dependence'' captures a broader set of 
relationships that may be more appropriate for certain swaps and 
SBS. See, e.g., George Casella & Roger L. Berger, Statistical 
Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active 
in one market are likely to be active in the other. Commission staff 
analysis of approximately 3,829 DTCC-TIW accounts that participated in 
the market for single-name CDS in the 12-month period from October 2021 
to September 2022 revealed that approximately 2,836 of those accounts, 
or 74%, also participated in the market for index CDS. Of the accounts 
that participated in both markets, data regarding transactions in these 
12 months suggest that, conditional on an account transacting in 
notional volume of index CDS in the top third of accounts, the 
probability of the same account landing in the top third of accounts in 
terms of single-name CDS notional volume is approximately 53%; by 
contrast, the probability of the same account landing in the bottom 
third of accounts in terms of single-name CDS notional volume is only 
12%. As a result of cross-market participation, informational 
efficiency, pricing, and liquidity may spill over across markets.\840\
---------------------------------------------------------------------------

    \840\ See Business Conduct Standards Release, supra note 101, 81 
FR at 30108; Christopher L. Culp, Andria van der Merwe, & Bettina J. 
Starkle, Single-name Credit Default Swaps: A Review of the Empirical 
Academic Literature 71-85 (ISDA Study, Sept. 2016), available at 
https://www.isda.org/a/KSiDE/single-name-cdsliterature-review-culp-van-der-merwe-staerkleisda.pdf; Patrick Augustin, Marti G. 
Subrahmanyam, Dragon Y. Tang, & Sarah Q. Wang, Credit Default Swaps: 
Past, Present, and Future, 8 Ann. Rev. Fin. Econ. 175 (2016).
---------------------------------------------------------------------------

    Of the 51 registered SBS dealers, 44 are dually registered with the 
CFTC as swap dealers and are therefore subject to CFTC requirements for 
entities registered with the CFTC as swap dealers. Further, of the 51 
registered SBS dealers, 30 have a prudential regulator.
4. Number of Entities That Likely Will Register as SBSEFs
    Entities that will seek to register with the Commission as SBSEFs 
are likely to be SEFs that are active in the index CDS market. Three 
commenters are generally supportive of this belief, stating that the 
entities most likely to register as SBSEFs are those that are already 
registered with the CFTC as SEFs.\841\ No commenters express 
disagreement with this belief. Currently, 24 SEFs are registered with 
the CFTC.\842\ Of these SEFs, seven list index CDS for trading.\843\ If 
these SEFs were to list single-name CDS or other SBS for trading, they 
would be required to register as SBSEFs with the Commission. In 2022, 
index CDS volume on U.S. SEFs was distributed as follows: one SEF had 
the largest share of index CDS volume (in notional amount) at $10.6 
trillion (68%); one SEF had the second largest share at $3.4 trillion 
(22%); and the remaining 10% of volume was shared among four other 
SEFs.\844\ The number of SBSEF registrants most likely falls between 
two and seven, but there is uncertainty around the upper end of this 
estimate. The likely number of SBSEF registrants is five.
---------------------------------------------------------------------------

    \841\ See ICE Letter, supra note 18, at 1-2; ICI Letter, supra 
note 18, at 1; Tradeweb Letter, supra note 18, at 1-2.
    \842\ See CFTC, Swap Execution Facilities (registered) 
(retrieved June 28, 2023), available at https://www.cftc.gov/IndustryOversight/IndustryFilings/SwapExecutionFacilities?Status=Registered&Date_From=&Date_To=&Show_All=0.
    \843\ For purposes of this discussion, options on index CDS and 
index CDS tranches are included as part of index CDS. For SEFs that 
list index CDS for trading, see BGC Derivative Markets, L.P. 
Contract Specifications (Oct. 31, 2022), available at http://www.bgcsef.com/wp-content/uploads/2022/11/BGC-SEF-Contract-Specifications_10-31-22.pdf; Bloomberg SEF LLC Rulebook (Dec. 5, 
2022), available at https://assets.bbhub.io/professional/sites/10/BSEF-Effective-Rulebook.pdf; GFI Swaps Exchange: Products & Contract 
Specifications, GFI Group, available at http://www.gfigroup.com/markets/gfi-sef/products/; ICE Swap Trade, LLC, Swap Execution 
Facility Rulebook Version: 2.42 (effective May 8, 2023), available 
at https://www.theice.com/publicdocs/swap_trade/Rulebook.pdf; TW SEF 
LLC, Swap Execution Facility Rules (effective Jan. 6, 2023), 
available at https://www.tradeweb.com/48ceb9/globalassets/our-businesses/market-regulation/sef-rulebook-jan-2023/tw-sef-rulebook-1.6.23.pdf; Tradition SEF, Appendix B to Tradition SEF Rulebook: 
Credit Product Listing, available at https://www.traditionsef.com/assets/regulatory/Rulebook-Appendix-B-TSEF-Rulebook-6-02-2023.pdf; 
tpSEF Inc., tpSEF Inc. Rulebook Appendix B: tpSEF Inc. Swap 
Specifications (effective Mar. 7, 2023), available at https://www.tullettprebon.com/swap_execution_facility/documents/tpSEF%20-%20Rulebook%20-%20Appendix%20B%20-%20Swap%20Specifications.pdf?2023411.
    \844\ Index CDS volume traded on SEFs is from Futures Industry 
Association's SEF Tracker. See SEF Tracker Historical Volume, FIA, 
available at https://www.fia.org/monthly-volume.
---------------------------------------------------------------------------

5. SBS Trading on Platforms
    By analyzing SBS transactions reported to registered SBSDRs,\845\ 
the Commission has estimated the extent of SBS trading on platforms. Of 
the new transactions in credit SBS executed between November 8, 2021, 
and December 2, 2022, 14,163 were executed on platforms (2% of all new 
transactions in credit SBS). During the same period, 329 new 
transactions in equity SBS were executed on platforms (less than 0.01% 
of all new transactions in equity SBS), while one new transaction in 
interest rate SBS was executed on a platform (0.01% of all new 
transactions in interest rate SBS). These observations suggest that the 
vast majority of SBS trading continues to be conducted bilaterally in 
the OTC market.
---------------------------------------------------------------------------

    \845\ The estimates presented in this section differ from those 
presented in the Proposing Release, supra note 1, 87 FR at 28946, 
because of a number of reasons. First, staff from the Division of 
Economic and Risk Analysis derived the estimates presented herein 
using reports of SBS transactions executed between Nov. 8, 2021, and 
Dec. 2, 2022, whereas in the Proposing Release, the staff used 
reports of SBS transactions executed between Nov. 8, 2021, and Feb. 
28, 2022. Second, the staff implemented additional filters to the 
reports of SBS transactions to (1) more accurately identify and 
exclude from the analysis those SBS transactions that arise from the 
allocation of an executed bunched order; (2) exclude potentially 
erroneous reports (e.g., SBS transactions with extremely large or 
small notional amount or SBS transactions with improperly sequenced 
timestamps); (3) identify the current version of a given report; and 
(4) exclude duplicate reports.
---------------------------------------------------------------------------

    The Commission identified 18 platforms on which new SBS 
transactions were executed between November 8, 2021, and December 2, 
2022. Of these 18 platforms, 14 are foreign SBS trading venues and four 
are U.S. SBS trading venues. Of the four U.S. SBS trading venues, two 
are CFTC-registered SEFs and two are affiliated with CFTC-registered 
SEFs. Of the new transactions in credit SBS executed between November 
8, 2021, and December 2, 2022, 710 were executed on non-U.S. platforms 
and involved at least one counterparty that is a U.S. person or a non-
U.S. person whose performance under the SBS is guaranteed by a U.S. 
person (0.1% of all new transactions in credit SBS). During the same 
period, 241 new transactions in equity SBS were executed on a non-U.S. 
platform and involved at least one counterparty that is a U.S. person 
or a non-U.S. person whose performance under the SBS is guaranteed by a 
U.S. person (less than 0.01% of all new transactions in equity SBS 
transactions).\846\
---------------------------------------------------------------------------

    \846\ The one new transaction in interest rate SBS, discussed 
earlier in this section, was executed on a U.S. platform.
---------------------------------------------------------------------------

    One commenter states that only a minority of SEFs currently offer 
trading in SBS and SEFs that do offer trading in SBS estimate that they 
have approximately 50 or fewer trades per day in SBS.\847\ As discussed 
earlier, the Commission identified two CFTC-registered SEFs on which 
new SBS

[[Page 87247]]

transactions were executed between November 8, 2021, and December 2, 
2022. During this period, one CFTC-registered SEF had on average 2.4 
new SBS transactions executed per day, while the other CFTC-registered 
SEF had on average 2.8 new SBS transactions executed per day. These 
estimates are broadly consistent with the commenter's estimate.
---------------------------------------------------------------------------

    \847\ See ISDA-SIFMA Letter, supra note 18, at 2.
---------------------------------------------------------------------------

6. Global Regulatory Efforts
    In 2009, the G20 leaders--whose membership includes the United 
States, 18 other countries, and the European Union--addressed global 
improvements in the OTC derivatives market. They expressed their view 
on a variety of issues relating to OTC derivatives contracts.\848\ In 
subsequent summits, the G20 leaders have returned to OTC derivatives 
regulatory reform and reaffirmed their goal of completing such 
reform.\849\
---------------------------------------------------------------------------

    \848\ See G20, Leaders' Statement: The Pittsburgh Summit (Sept. 
24-25, 2009) at para. 13.
    \849\ See, e.g., G20, Osaka Summit Declaration (June 28-29, 
2019) at para. 19; Rome Summit Declaration (Oct. 30-31, 2021) at 
para. 40.
---------------------------------------------------------------------------

    Foreign legislative and regulatory efforts have generally focused 
on five areas: (1) moving standardized OTC derivatives onto organized 
trading platforms; (2) requiring central clearing of OTC derivatives; 
(3) requiring post-trade reporting of transaction data to trade 
repositories; (4) establishing or enhancing capital requirements for 
non-centrally cleared OTC derivatives transactions; and (5) 
establishing or enhancing margin and other risk mitigation requirements 
for non-centrally cleared OTC derivatives transactions. The rules being 
adopted in this release concern the registration and regulation of 
SBSEFs, a type of organized trading platform.
    As of the end of 2022, platform trading requirements were in force 
in 12 foreign jurisdictions while seven jurisdictions were in the 
process of proposing legislation or rules to implement platform trading 
requirements.\850\ Eight foreign jurisdictions have made determinations 
with respect to the specific OTC derivatives that are required to be 
traded on platforms.\851\
---------------------------------------------------------------------------

    \850\ Apart from the 12 foreign jurisdictions, the United States 
is considered to have platform trading requirements in place based 
on the CFTC's implementation of platform trading requirements. See 
FSB, OTC Derivatives Market Reforms: Implementation Progress in 2022 
Tables 1 & K (Nov. 7, 2022), available at https://www.fsb.org/wp-content/uploads/P071122.pdf (describing progress made towards 
implementing platform trading requirements in 2022) and FSB, OTC 
Derivatives Market Reforms: 2019 Progress Report on Implementation 
Table A (Oct. 15, 2019), available at https://www.fsb.org/2019/10/otc-derivatives-market-reforms-2019-progress-report-on-implementation/ (discussing the CFTC's implementation of platform 
trading requirements).
    \851\ These jurisdictions are China (bond forwards; certain 
currency forwards, options, and swaps); the European Union (certain 
index CDS and certain IRS denominated in Euro); India (certain 
overnight index swaps); Indonesia (equity and commodity derivative 
products); Japan (selected Yen-denominated IRS); Mexico (certain 
Peso-denominated IRS); Singapore (certain IRS denominated in Euro, 
U.S. dollar, and British pound); and United Kingdom (certain index 
CDS and certain IRS denominated in Euro and certain IRS denominated 
in British pound). See FSB, 2019 Progress Report (Table R); FSB, 
Implementation Progress in 2022 (footnote 12), supra note 850, and 
Financial Conduct Authority, Register of derivatives subject to the 
trading obligation under article 28 of UK MiFIR (July 24, 2023), 
available at https://register.fca.org.uk/servlet/servlet.FileDownload?file=0150X000006gbbG. In its 2022 report, see 
supra note 850, the FSB noted no change in status in the 
implementation of platform trading requirements since its 2019 
report.
---------------------------------------------------------------------------

7. Trading Models
    Unlike the markets for cash equity securities and listed options, 
the market for SBS currently is characterized by bilateral negotiation 
in the OTC swap market; is largely decentralized; has many non-
standardized instruments; and has many SBS that are not centrally 
cleared. The lack of uniform rules concerning the trading of SBS and 
the one-to-one nature of trade negotiation in SBS has resulted in 
different models for the trading of these securities, ranging from 
bilateral negotiations carried out over the telephone, to RFQ systems 
(e.g., single-dealer and multi-dealer RFQ platforms), request-for-
stream protocol, and limit order books outside the United States, as 
more fully described below. The use of electronic media to execute 
transactions in SBS varies greatly across trading models, with some 
models being highly electronic whereas others rely almost exclusively 
on non-electronic means such as the telephone. The reasons for use of, 
or lack of use of, electronic media vary from such factors as user 
preference to limitations in the existing infrastructure of certain 
trading platforms. The description below of the ways in which SBS may 
be traded is based in part on discussions with market participants and 
incorporates comments received on the Proposing Release.
    The Commission uses the term ``bilateral negotiation'' to refer to 
the model whereby one party uses the telephone, email, or other 
communications to contact directly a potential counterparty to 
negotiate an SBS transaction. Once the terms are agreed, the SBS 
transaction is executed and the terms are memorialized.\852\ In a 
bilateral negotiation, there might be no pre-trade or post-trade 
transparency available to the market because only the two parties to 
the transaction are aware of the terms of the negotiation and the final 
terms of the agreement. Further, no terms of the proposed transaction 
are firm until the transaction is executed. However, reputational costs 
generally serve as a deterrent to either party's failing to honor any 
quoted terms. Dealer-to-customer bilateral negotiation currently is 
used for all SBS asset classes, and particularly for trading in less 
liquid SBS, in situations where the parties prefer a privately 
negotiated transaction, such as for a large notional transaction, or in 
other circumstances in which it is not cost-effective for a party to 
the trade to use one of the execution methods described below.
---------------------------------------------------------------------------

    \852\ See, e.g., Trade Acknowledgement and Verification Adopting 
Release, supra note 802, 81 FR at 39809.
---------------------------------------------------------------------------

    One commenter elaborates on this model of trading, focusing 
specifically on dealer-to-client trading in the SBS market.\853\ 
According to this commenter, at the moment, dealer-to-client trading in 
security-based swaps is largely opaque and fragmented, with most 
executions arising out of one-to-one private negotiations. When 
engaging with clients, liquidity providers typically provide 
``indicative'' quotes (as opposed to firm binding quotes), inviting 
interested clients to follow-up bilaterally in order to obtain an 
executable price for a specific instrument.\854\ Given that these 
executable prices are often only then honored at that exact moment in 
time, clients are unable to effectively put liquidity providers in 
competition and have little to no pre-trade transparency regarding 
other available prices in the market.\855\ Instead clients face the 
choice of either accepting the first executable price received or 
starting over with a new one-to-one negotiation, where pricing could 
move against the client as its trading interest is sequentially 
disclosed to additional market participant.\856\ The commenter states 
that this opaque and fragmented execution process impairs client access 
to best execution by denying clients the ability to effectively compare 
and evaluate the quality of prices.\857\
---------------------------------------------------------------------------

    \853\ See Citadel Letter, supra note 18, at 8.
    \854\ Id.
    \855\ Id.
    \856\ Id.
    \857\ Id.
---------------------------------------------------------------------------

    Another model for the trading of SBS is the RFQ system. An RFQ 
system typically allows market participants to obtain quotes for a 
particular SBS by simultaneously sending messages to one or more 
potential respondents (SBS

[[Page 87248]]

dealers).\858\ The initiating participant is typically required to 
provide information related to the request in a message, which may 
include the name of the initiating participant, SBS identifier, side, 
and size. SBS dealers that observe the initiating participant's request 
have the option to respond to the request with a price quote.\859\ 
These respondents are often, though not always, pre-selected. The 
initiating participant can then select among the respondents by either 
accepting one of multiple responses or rejecting all responses, usually 
within a ``good for'' time period. After the initiating participant and 
a respondent agree on the terms of the trade, the trade will then 
proceed to post-trade processing.
---------------------------------------------------------------------------

    \858\ See Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang 
Zhu, Swap Trading After Dodd-Frank: Evidence from Index CDS, 137 J. 
Financial Economics 857 (2020) (finding that, in the index CDS 
market, an initiating participant is more likely to send RFQs to its 
relationship dealers, i.e., its clearing members or dealers with 
whom it has traded more actively in the recent past).
    \859\ See id. (finding that, in the index CDS market, a dealer's 
response rate to an RFQ declines with the number of dealers included 
in the RFQ).
---------------------------------------------------------------------------

    RFQ systems provide a certain degree of pre-trade transparency in 
that the initiating participant can observe the quotes it receives (if 
any) in response to its RFQ. The number of quotes received depends, in 
part, on the number of respondents that are invited to participate in 
the RFQ. As the Commission discussed elsewhere, several factors may 
influence the number of respondents that are invited to participate in 
an RFQ.\860\ First, the RFQ system itself may limit the total number of 
respondents that can be selected for a single RFQ, typically to five 
counterparties. This limitation may encourage SBS dealers to respond to 
RFQs, since it reduces the number of other SBS dealers they would 
compete with in any give request session. Second, the initiating 
participant may have an incentive to limit the degree of information 
leakage. If the trade the initiating participant is seeking to complete 
with the help of the RFQ is not completely filled in that one session, 
and other participants know this, quotes the initiating participant 
receives elsewhere may be affected, including in subsequent RFQ 
sessions. Third, respondents and initiators both have an incentive to 
limit price impact because of the expense it will add to the offsetting 
trade that must follow. Specifically, an SBS dealer who takes a 
position to fill a customer order through an RFQ will often 
subsequently offset that position in the interdealer market. If a large 
number of SBS dealers are invited to participate in an RFQ, this would 
lead to widespread knowledge that the SBS dealer with the winning bid 
will now try to offset that position, which could impact the prices 
available to that dealer in the interdealer market.
---------------------------------------------------------------------------

    \860\ See Amendments to Exchange Act Rule 3b-16 Regarding the 
Definition of ``Exchange''; Regulation ATS for ATSs That Trade U.S. 
Government Securities, NMS Stocks, and Other Securities; Regulation 
SCI for ATSs That Trade U.S. Treasury Securities and Agency 
Securities SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 
18, 2022) (``ATS-G Proposal''), section VIII.B.1.a therein.
---------------------------------------------------------------------------

    Two commenters describe the ``request-for-stream'' trading 
protocol, which allows liquidity providers to stream firm prices on 
trading platforms such as those run by SEFs.\861\ These firm prices are 
not required to be communicated to clients sending an RFQ on these 
trading platforms.
---------------------------------------------------------------------------

    \861\ See Citadel Letter, supra note 18, at 13; MFA Letter, 
supra note 18, at 8. See also supra section V.E.1(b)(iii). See also 
Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu, Swap Trading 
After Dodd-Frank: Evidence from Index CDS, 137 J. Financial 
Economics 857 (2020) (documenting that this trading protocol--also 
referred to as ``request for streaming''--is one of the trading 
protocols used in the trading of index CDS on SEFs).
---------------------------------------------------------------------------

    A fourth model for the trading of SBS is a limit order book system 
or similar system, which the Commission understands is not yet in 
operation for the trading of SBS in the United States.\862\ Today, 
securities and futures exchanges in the United States display a limit 
order book in which firm bids and offers are posted for all 
participants to see, with the identity of the parties withheld until a 
transaction occurs.\863\ Bids and offers are then matched based on 
price-time priority or other established parameters and trades are 
executed accordingly. The quotes on a limit order book system are firm. 
In general, a limit order book system also provides greater pre-trade 
transparency than the models described above, because participants can 
view bids and offers before placing their bids and offers. However, 
broadly communicating trading interest, particularly about a large 
trade, might increase hedging costs, and thus costs to investors, as 
reflected in the prices from the SBS dealers. The system can also 
provide post-trade transparency, to the extent that participants can 
see the terms of executed transactions.
---------------------------------------------------------------------------

    \862\ With respect to swaps traded on CFTC-registered SEFs, CFTC 
regulation Sec.  37.9(a) provides that Required Transactions that 
are not block trades must generally be executed via an order book or 
RFQ system. CFTC regulations Sec. Sec.  37.9(d) and (e) contain 
exceptions to the Sec.  37.9(a) execution requirements for certain 
package transactions and error trades, respectively. See supra 
section V.E.
    \863\ Under CFTC rules applicable to the swaps markets, Sec.  
37.9(f) prohibits the practice of post-trade name give-up for swaps 
that are executed, pre-arranged, or pre-negotiated anonymously on or 
pursuant to the rules of a SEF and intended to be cleared, subject 
to an exception related to certain package transactions. See supra 
section V.E (discussing Rule 815).
---------------------------------------------------------------------------

    The models described above represent broadly the types of trading 
of SBS in the OTC market today. These examples may not represent every 
method in existence today, but the discussion above is intended to give 
an overview of the models without providing the nuances of each 
particular type.

C. Benefits and Costs

    The Commission's consideration of the benefits and costs of the 
adopted rules and amendments takes into account the connection between 
the trade execution requirement and the mandatory clearing requirement 
mandated by Congress. Specifically, the Dodd-Frank Act amended the SEA 
to require, among other things, the following with respect to SBS 
transactions: (1) transactions in SBS must be cleared through a 
clearing agency if they are required to be cleared; \864\ and (2) if 
the SBS is subject to the clearing requirement, the transaction must be 
executed on an exchange or on an SBSEF registered under section 3D of 
the SEA or an SBSEF exempt from registration under section 3D(e) of the 
SEA, unless no SBSEF or exchange makes such SBS available for trading 
or the SBS is subject to the clearing exception in section 3C(g) of the 
SEA.\865\ The benefits and costs associated with the trade execution 
requirement will not materialize unless and until the Commission makes 
mandatory clearing determinations, i.e., determining what SBS 
transactions must be cleared by a clearing agency.
---------------------------------------------------------------------------

    \864\ See Public Law 111-203, 763(a) (adding section 3C(a)(1) of 
the SEA).
    \865\ See id. See also Public Law 111-203, 761(a) (adding 
section 3(a)(77) of the SEA to define the term ``security-based swap 
execution facility'').
---------------------------------------------------------------------------

    The general approach to finalizing requirements relating to SBS 
execution could mitigate costs associated with the adopted rules and 
amendments. As discussed in section I, the Commission's approach is to 
harmonize as closely as practicable with analogous CFTC rules for SEFs, 
unless a reason exists to do otherwise in a particular area. Based on 
the Commission's belief that SBSEF registrants likely would be 
registered SEFs that have established systems and policies and 
procedures to comply with CFTC rules, the Commission's general approach 
potentially will result in compliance costs for registered SBSEFs that 
are lower than compliance costs that would have resulted had the 
Commission chosen not to harmonize its approach as closely as 
practicable

[[Page 87249]]

with analogous CFTC rules for SEFs.\866\ Several commenters state that 
the Commission's general approach would mitigate costs for registered 
SBSEFs and SBS market participants.\867\
---------------------------------------------------------------------------

    \866\ In section XVIII infra, for purposes of the PRA, the 
Commission estimates burdens applicable to a stand-alone SBSEF. 
However, the Commission anticipates that most if not all SBSEFs will 
be dually registered with the CFTC as SEFs, and thus will already be 
complying with relevant CFTC rules that have analogs to rules 
contained within Regulation SE. Therefore, the Commission's burden 
estimates may be larger for stand-alone SBSEF than may exist in 
practice, considering the effect of overlapping CFTC rules.
    \867\ See Bloomberg Letter, supra note 18, at 2, 10, 18; ICE 
Letter, supra note 18, at 2; ISDA-SIFMA Letter, supra note 18, at 2; 
SIFMA AMG Letter, supra note 18, at 5; Tradeweb Letter, supra note 
18, at 1-2.
---------------------------------------------------------------------------

    In assessing the economic impact of the adopted rules and 
amendments, the Commission considers the broader costs and benefits 
associated with the application of the adopted rules and amendments, 
including the costs and benefits of applying the substantive Title VII 
requirements to the trading of SBS.\868\ The Commission's analysis also 
considers ``assessment'' costs--i.e., those that arise from current and 
future market participants expending resources to assess how they will 
be affected by Regulation SE, and could incur expenses in making this 
assessment even if they ultimately are not subject to rules for which 
they made an assessment.
---------------------------------------------------------------------------

    \868\ In certain prior Title VII releases, the Commission had 
referred to such costs and benefits as programmatic costs and 
benefits. See, e.g., Regulation SBSR Adopting Release I, supra note 
140.
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to 
quantify. These benefits and costs would depend on how potential SBSEFs 
and their prospective members respond to the adopted rules and 
amendments. If potential SBSEFs perceive the costs associated with 
operating registered SBSEFs to be high, such that few or no entities 
come forward to register as SBSEFs, there could be no triggering of the 
trade execution requirement, which depends on MAT determinations made 
by registered SBSEFs (or exchanges). Under this scenario, the future 
state of the SBS market likely will not differ from the current 
baseline and the potential costs and benefits discussed below will not 
materialize. An alternative scenario is that prospective SBSEFs 
perceive the costs associated with operating registered SBSEFs to be 
high but nevertheless register as SBSEFs because they expect to be able 
to pass on such costs to their members to help maintain the commercial 
viability of operating a registered SBSEF. MAT determinations by 
registered SBSEFs will move trading of the products covered by the 
determinations onto SBSEFs, which can generate benefits and costs 
associated with increased pre-trade transparency, in addition to 
benefits and costs associated with the operation of regulated markets. 
A third possibility is that entities come forward to register as SBSEFs 
because they perceive the associated costs of operating SBSEFs to be 
low in light of the close harmonization of Regulation SE with analogous 
CFTC SEF rules. If these registered SBSEFs do not make MAT 
determinations and thus do not trigger the trade execution requirement, 
the benefits and costs associated with increased pre-trade transparency 
likely will not arise. If SBSEF trading is limited because of an 
absence of MAT determinations, the benefits and costs associated with 
the operation of regulated markets potentially will be limited as well. 
A fourth possibility is that entities do come forward to register as 
SBSEFs because they perceive the associated costs of operating SBSEFs 
to be low and these registered SBSEFs make MAT determinations and 
trigger the trade execution requirement. Under this scenario, the 
benefits and costs associated with increased pre-trade transparency and 
regulated markets likely will arise. The Commission does not have the 
data to determine which of the above possibilities will prevail 
following the adoption of the rules and amendments considered herein.
    The Commission has attempted to quantify economic effects where 
possible, but much of the discussion of economic effects is necessarily 
qualitative.
1. Overarching Benefits of the Rules and Amendments
    Broadly, the Commission anticipates that the new rules and 
amendments may bring several overarching benefits to the SBS market.
    Improved Transparency. The final rules would enable the Commission 
to obtain information about SBSEFs, thereby facilitating the 
Commission's oversight of these entities.\869\
---------------------------------------------------------------------------

    \869\ For example, Rule 826, among other things, requires an 
SBSEF to maintain records of its business activities (including a 
complete audit trail) for a period of five years and report to the 
Commission such information as the Commission determines to be 
necessary or appropriate for performing the duties of the Commission 
under the SEA. See infra this section for a discussion of how 
Regulation SE would provide the means for the Commission to gain 
better insight into and oversight of SBSEFs and the SBS market.
---------------------------------------------------------------------------

    In addition, the requirements relating to pre-trade transparency 
would increase pre-trade transparency in the market for SBS.\870\ 
Increased pre-trade price transparency should allow an increased number 
of market participants to better see the trading interest of other 
market participants prior to trading, which should lead to increased 
price competition among market participants.\871\ The requirements with 
respect to pre-trade price transparency should lead to more efficient 
pricing in the SBS market.\872\
---------------------------------------------------------------------------

    \870\ Rules 803(a)(2) and (3) require an SBSEF to offer, at a 
minimum, an order book for SBS trading, subject to certain 
exceptions related to package transactions. Rule 815(a) requires SBS 
transactions subject to the trade execution requirement to be 
executed using either an order book or via an RFQ-to-3 system. Rule 
816 sets forth the process by which an SBSEF would subject an SBS to 
the trade execution requirement. Rule 817 informs market 
participants of the date on which the trade execution requirement 
for a particular SBS commences. Rule 832 describes those cross-
border SBS transactions that would be subject to the trade execution 
requirement.
    \871\ See, e.g., Ananth Madhavan, Market Microstructure: A 
Practitioner's Guide, 58 Fin. Analysts J., at 38 (2002) 
(nondisclosure of pre-trade price information benefits dealers by 
reducing price competition).
    \872\ See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An 
Analysis of Pre-trade Transparency at the NYSE, 60 J. Fin. 783 
(2005) (greater pre-trade price transparency leads to more efficient 
pricing).
---------------------------------------------------------------------------

    Evidence from the swap market suggests that an increase in pre-
trade transparency is associated with improved liquidity and reduced 
transaction costs.\873\ The Commission is not aware of any difference 
between the swap market and the SBS market that would cause the 
empirical findings regarding the impact of pre-trade price transparency 
on liquidity and transaction costs not to carry over into the SBS 
market, when implemented. The Commission is mindful that, under certain 
circumstances, pre-trade price transparency could also discourage the 
provision of liquidity by some market participants.\874\ However, 
having two

[[Page 87250]]

execution methods for Required Transactions (limit order book and RFQ-
to-3) would provide market participants with flexibility in the degree 
of pre-trade transparency they wish to employ. Using RFQ-to-3, a market 
participant could choose to reveal its trading interest to no more than 
three market participants; using a limit order book, the market 
participant would reveal its trading interest to all other market 
participants that have access to the same limit order book, which may 
exceed three market participants. The flexibility in the degree of pre-
trade transparency should diminish potential concerns associated with 
the exposure of pre-trade trading interest.
---------------------------------------------------------------------------

    \873\ See Evangelos Benos, Richard Payne, and Michalis Vasios, 
Centralized Trading, Transparency, and Interest Rate Swap Market 
Liquidity: Evidence from the Implementation of the Dodd-Frank Act, 
55 J. Fin. and Quantitative Analysis 159 (2020) (finding, among 
other things, that imposition of the CFTC's trade execution 
requirement improved the liquidity of IRS that were subject to the 
requirement, and that the liquidity improvement was associated with 
more intense competition between swap dealers); Y.C. Loon and 
Zhaodong (Ken) Zhong, Does Dodd-Frank Affect OTC Transaction Costs 
and Liquidity? Evidence from Real-Time CDS Trade Reports, 119 J. 
Fin. Econ. 645 (2016) (finding that index CDS transactions executed 
on SEFs have lower transaction costs and improved liquidity than 
index CDS transactions executed bilaterally).
    \874\ See, e.g., Ananth Madhavan, et al., Should Securities 
Markets Be Transparent?, 8 J. Fin. Markets 265 (2005) (finding that 
an increase in pre-trade price transparency leads to lower liquidity 
and higher execution costs, because limit-order traders are 
reluctant to submit orders given that their orders essentially 
represent free options to other traders).
---------------------------------------------------------------------------

    Two commenters agree that the proposal would increase transparency 
in the SBS market.\875\ One of these commenters believes that the 
introduction of multilateral trading protocols would increase pre-trade 
transparency and competition, which should improve liquidity 
conditions, reduce transaction costs, and facilitate execution quality 
analysis, as clients will be able to put liquidity providers in direct 
competition.\876\
---------------------------------------------------------------------------

    \875\ See Bloomberg Letter, supra note 18, at 1; Citadel Letter, 
supra note 18, at 8.
    \876\ See Citadel Letter, supra note 18, at 8.
---------------------------------------------------------------------------

    One commenter believes that proposed Rule 819(c) would help ensure 
that investment advisers to regulated funds will be able to participate 
on SBSEFs, accessing the pricing and other market information that may 
be available on SBSEF, which would increase transparency in the 
derivatives market.\877\ The Commission agrees that Rule 819(c), by 
requiring an SBSEF to provide any ECP with impartial access to its 
market(s) and market services, would help ensure that ECPs, including 
investment advisers, are able to access pricing and other market 
information on SBSEFs thereby increasing transparency in the SBS 
market.
---------------------------------------------------------------------------

    \877\ See ICI Letter, supra note 18, at 11 n.6.
---------------------------------------------------------------------------

    Improved oversight of trading. Regulation SE requires, among other 
things, that SBSEFs maintain an audit trail and automated trade 
surveillance system; conduct real-time market monitoring; establish and 
enforce rules for information collection; and comply with reporting and 
recordkeeping requirements.\878\ These requirements are designed to 
provide an SBSEF with sufficient information to oversee trading on its 
market, including detecting and deterring abusive trading practices. 
Additionally, an SBSEF shall permit trading only in SBS that are not 
readily susceptible to manipulation \879\ and adopt rules that are 
reasonably designed to allow the SBSEF to intervene as necessary to 
maintain markets with fair and orderly trading and to prevent or 
address manipulation or disruptive trading practices.\880\
---------------------------------------------------------------------------

    \878\ See Rules 819, 821, 822, and 826.
    \879\ See Rule 820.
    \880\ See Rule 824(b)(1).
---------------------------------------------------------------------------

    This framework could enhance investor protection and increase 
confidence in a well-regulated market among SBS market participants, 
which could in turn make them more willing to increase their 
participation or entice new participants. An increase in participation 
in the SBS market would, all else being equal, benefit the SBS market 
as a whole. Further, to the extent that market participants utilize SBS 
to better manage their risk with respect to a position in underlying 
securities or assets, their participation in the SBS market could 
impact their willingness to participate in the underlying asset 
markets. Thus, Regulation SE could benefit the securities markets 
overall by encouraging a more efficient, and potentially higher, level 
of capital investment.
    Improved access and competition. Currently, the SBS market is 
dominated by a small group of SBS dealers.\881\ A mandatory clearing 
determination by the Commission, followed by a MAT determination by one 
or more SBSEFs or exchanges, should help foster greater competition in 
the trading of SBS by promoting greater order interaction and 
increasing access to and participation on SBSEFs. The final rules 
provide a framework for allowing a number of trading venues to register 
as SBSEFs and thus more effectively compete for business in SBS. 
Furthermore, Rule 827 is designed to promote competition generally by 
prohibiting an SBSEF from adopting any rules or taking any actions that 
unreasonably restrain trade or imposing any material anticompetitive 
burden on trading or clearing.
---------------------------------------------------------------------------

    \881\ See supra section XVII.B.2.
---------------------------------------------------------------------------

    Rule 819(c), among other things, requires an SBSEF to provide any 
ECP with impartial access to its market(s) and market services. Rule 
819(c)(4), Rule 819(g)(14), along with the new rules and amendments to 
the Commission's Rules of Practice allow persons who are aggrieved by a 
final disciplinary action, a final action with respect to a denial or 
conditioning of membership, or a final action with respect to a denial 
or limitation of access by an SBSEF to file an application for review 
by the Commission in a timely manner.\882\ These rules and amendments 
are designed to improve access to, foster confidence in, and provide 
for the oversight of SBSEF functions by creating a procedure for making 
appeals to the Commission.
---------------------------------------------------------------------------

    \882\ See Rules 819(c)(4) and 819(g)(14); Rules 442 and 443; 
amendments to Rules 101, 202, 210, 401, 450, and 460. Rule 442(b), 
among other things, clarifies that the 30-day period for filing an 
application for review will not be extended absent a showing of 
extraordinary circumstances, which is intended to encourage parties 
to act timely in seeking review.
---------------------------------------------------------------------------

    Taken together, these rules and amendments should foster greater 
access to SBSEFs by SBS market participants, which in turn could 
promote greater participation by liquidity providers on SBSEFs. 
Increased participation on SBSEFs could increase competition in 
liquidity provision and lower trading costs, which may lead to 
increased participation in the SBS market. One commenter agrees that 
Rule 819(c), in particular, would increase competition in the SBS 
market. The commenter further states that the rule would increase 
liquidity, efficiency, and fairness in the SBS market.\883\ The 
Commission agrees that Rule 819(c), together with the other rules 
described earlier, could increase competition in the SBS market, 
specifically competition in liquidity provision as discussed above. To 
the extent that increased competition in liquidity provision lowers 
bid-offer spreads and transaction costs, liquidity and efficiency in 
the SBS market would increase. Rule 819(c), by requiring an SBSEF to 
provide any ECP with impartial access to its market(s) and market 
services, would help ensure that all ECPs will receive the same 
treatment with respect to access to the SBSEF's market(s) and market 
services and thus help to increase fairness in the SBS market.
---------------------------------------------------------------------------

    \883\ See ICI Letter, supra note 18, at 2.
---------------------------------------------------------------------------

    Two commenters believe that Proposed Rule 815(f), which is designed 
to prohibit post-trade name give up for an SBS that is executed 
anonymously on an SBSEF and intended to be cleared, would increase 
participation on SBSEFs and in turn increase competition, liquidity, 
and efficiency.\884\ One of these commenters also believes the proposed 
rule would increase fairness in the SBS markets.\885\
---------------------------------------------------------------------------

    \884\ See id.; SIFMA AMG Letter, supra note 18, at 11.
    \885\ See ICI Letter, supra note 18, at 2.
---------------------------------------------------------------------------

    Rules 815(f) and 815(g) could generate such beneficial effects. The 
practice of post-trade name give-up increases the risk of information 
leakage and can

[[Page 87251]]

deter participation by liquidity seekers on SBSEFs. By prohibiting such 
a practice for an SBS that is executed anonymously on an SBSEF and 
intended to be cleared, Rule 815(f) would reduce the risk of 
information leakage and encourage more liquidity seekers to participate 
on SBSEFs. Further, by helping to protect the anonymity of market 
participants, Rule 815(f) could encourage a more diverse set of market 
participants to transact in anonymous order books.
    Rule 815(g) specifies that SBSEFs shall establish and enforce rules 
that provide that a security-based swap that is intended to be cleared 
at the time of the transaction, but is not accepted for clearing at a 
registered clearing agency, shall be void ab initio. The rule would 
ensure that a trade that is rejected for clearing would not become a 
bilateral transaction, in which case the counterparties would have to 
divulge their identities. As such, the rule would reduce the risk of 
information leakage and protect the anonymity of market participants 
for SBS that is executed anonymously and intended to be cleared, but is 
nonetheless rejected for clearing. This in turn could increase 
participation on SBSEFs by liquidity seekers and those wishing to 
transact in anonymous order books, similar to Rule 815(f).
    Increased participation by liquidity seekers on SBSEFs could in 
turn increase participation by liquidity providers and promote 
competition in liquidity provision. Greater participation in anonymous 
order books also could promote competition in liquidity provision if 
erstwhile liquidity seekers choose to provide liquidity in competition 
with SBS dealers in these order books. To the extent that increased 
competition in liquidity provision lowers bid-offer spreads and 
transaction costs, liquidity and efficiency in the SBS market would 
increase.
    By helping to protect the anonymity of those that transact in 
anonymous order books, the rule would deprive SBS dealers of a means of 
deterring access to and participation in such order books by buy-side 
market participants.\886\ Thus, Rule 815(g) could help promote a level 
playing field by ensuring that both buy-side market participants and 
dealers can participate in these order books.
---------------------------------------------------------------------------

    \886\ See Citadel Letter, supra note 18, at 11 (stating that 
PTNGU, by revealing counterparty identities, can be used as a 
policing mechanism by dealers to deter buy-side access and 
participation).
---------------------------------------------------------------------------

    Regulation SE would promote competition among entities that act as 
third-party service providers to SBSEFs. Rule 819(c) would, among other 
things, require an SBSEF to provide any independent software vendor 
with impartial access to its market(s) and market services. The rule 
would provide a level playing field to software vendors with respect to 
access to SBSEFs and promote competition among these vendors as they 
vie for an SBSEF's business. Rule 819(e) would permit an SBSEF to 
contract with a registered futures association, a DCM, a national 
securities exchange, a national securities association, or another 
SBSEF for the provision of services to assist in complying with the SEA 
and Commission rules thereunder, as approved by the Commission. By 
permitting an SBSEF to choose from a range of regulatory services 
providers, Rule 819(e) could promote competition among regulatory 
services providers. To the extent that increased competition among 
independent software vendors and regulatory services providers 
incentivizes them to offer cheaper, higher quality services to SBSEFs 
thereby lowering their costs, market participants that are SBSEF 
members could benefit to the extent the SBSEFs pass on the cost savings 
in the form of lower fees to their members. Lower fees for SBSEF 
members would help reduce the overall costs of trading on SBSEFs and 
increase the efficiency of SBS trading.
    Improved Commission oversight. One of the goals of the Dodd-Frank 
Act is to increase regulatory oversight of SBS trading relative to the 
existing OTC SBS market.\887\ Regulation SE would provide the means for 
the Commission to gain better insight into and oversight of SBSEFs and 
the SBS market by, among other things, allowing the Commission to 
review new rules, rule amendments, and product listings by SBSEFs \888\ 
and to obtain other relevant information from SBSEFs.\889\
---------------------------------------------------------------------------

    \887\ See Public Law 111-203, Preamble.
    \888\ See Rules 804, 805, 806, and 807.
    \889\ See Rule 811.
---------------------------------------------------------------------------

    Additionally, Rule 826(b) requires every SBSEF to keep full, 
complete, and systematic records of all activities relating to its 
business with respect to SBS. In addition, Rule 819(f) requires an 
SBSEF to capture and retain a full audit trail of activity on its 
facility. The records required to be kept by an SBSEF would help the 
Commission to determine whether an SBSEF is operating in compliance 
with the SEA and the Commission's rules thereunder. The audit trail 
data required to be captured and retained would facilitate the ability 
of the SBSEF and the Commission to carry out their respective 
obligations under the SEA, by facilitating the detection of abusive or 
manipulative trading activity, allowing reconstructions of activity on 
the SBSEF, and generally understanding the causes of both specific 
trading events and general market activity.
    Furthermore, Rule 835 requires an SBSEF to provide the Commission 
notice of a final disciplinary action, a final action with respect to a 
denial or conditioning of membership, or a final action with respect to 
a denial or limitation of access, which facilitates the Commission's 
review of the SBSEF's disciplinary process and exercise of its 
regulatory powers, providing the Commission an additional tool to carry 
out its oversight responsibilities. Rule 813 provides for Commission 
oversight of SBSEFs in their use of information collected for 
regulatory purposes and is designed to deter the misappropriation or 
misuse of such information. Rule 824(c) requires an SBSEF to, among 
other things, promptly notify the Commission of its exercise of 
emergency authority and provide information related to the use of that 
authority. The registration requirements and related Form SBSEF, and 
the CCO's annual compliance report, which are further discussed below, 
would also help the Commission with its oversight responsibilities.
    Improved automation. To comply with Regulation SE's requirements 
relating to recordkeeping and surveillance, an SBSEF potentially would 
need to invest in and develop automated technology systems to store, 
monitor, and communicate a variety of trading data, including orders, 
RFQs, RFQ responses, and quotations.\890\ The final rules should 
promote increased automation in the SBS market, although CFTC-
registered SEFs that plan to register as SBSEFs are already deploying 
automated systems that could be supplemented to support an SBS 
business. In addition, the automation and systems development 
associated with the regulation of SBSEFs could provide SBS market 
participants with new platforms and tools to execute and process 
transactions in SBS more rapidly and at a lower expense per 
transaction. Such increased efficiency could enable members of the 
SBSEF to handle increased volumes of SBS with greater efficiency and 
timeliness.
---------------------------------------------------------------------------

    \890\ See Rules 819(d)(4) and 826.
---------------------------------------------------------------------------

2. Benefits Associated With Specific Rules
    In addition to the broad benefits that the Commission anticipates 
as a result of the rules and amendments adopted in

[[Page 87252]]

this release, individual rules could bring particular benefits to the 
SBS market.\891\ These include the following:
---------------------------------------------------------------------------

    \891\ Unless otherwise stated, quantified benefits in this 
section are adjusted for CPI inflation using data published by the 
Bureau of Labor Statistics. See CPI Inflation Calculator, U.S. 
Bureau of Labor Statistics, available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

    Registration requirements and Form SBSEF. SBSEF registration is 
required under the Dodd-Frank Act.\892\ Rule 818(a) incorporates the 
requirement under the Dodd-Frank Act that an SBSEF, in order to be 
registered and maintain registration, must comply with the Core 
Principles in section 3D(d) of the SEA and the Commission's rules 
thereunder. The registration process described in Rule 803 implements 
this statutory requirement and assists the Commission in overseeing and 
regulating the SBS market. The information to be provided on Form SBSEF 
is designed to enable the Commission to assess whether an applicant has 
the capacity and the means to perform the duties of an SBSEF and to 
comply with the Core Principles and other requirements imposed on 
SBSEFs. Rule 803 is closely modelled on analogous CFTC registration 
requirements for SEFs. The choice to align the Commission's 
registration requirements for SBSEFs with the CFTC's requirements for 
SEFs is designed to achieve the abovementioned benefits while imposing 
only marginal costs on SBSEF registrants, who likely are SEFs. Finally, 
Rule 814(a) helps provide regulatory certainty for an entity that 
operates both an exchange and an SBSEF by clarifying that such an 
entity is required to separately register the two facilities pursuant 
to section 6 of the SEA and Rule 803, respectively.
---------------------------------------------------------------------------

    \892\ See SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1).
---------------------------------------------------------------------------

    Exemptions (Rule 833, Rule 816(e), amendments to Rule 3a1-1, and 
Rule 15a-12). Rule 833 is designed to preserve access to foreign 
markets by ``covered persons'' (as defined in Rule 832). As discussed 
in section XVII.B.2, an analysis of SBS transaction data indicates that 
certain trades executed on foreign SBS trading venues involve at least 
one counterparty that is a covered person. Absent the rule, these 
trading venues might elect to avoid having members that are covered 
persons if those venues do not wish to register with the Commission in 
some capacity (such as an exchange or SBSEF). In addition, covered 
persons will not be permitted to execute SBS that are subject to the 
trade execution requirement on these venues if the venues do not 
register with the Commission in some capacity (such as an exchange or 
SBSEF) or obtain an appropriate exemption. This would limit access to 
foreign SBS trading venues by covered persons, potentially making it 
harder for them to locate counterparties and obtain liquidity for SBS 
that trade on those venues. This in turn could increase their trading 
costs because they might spend more time and effort to locate 
counterparties or because they have less bargaining power relative to 
the remaining pool of potential counterparties with which they could 
trade. To the extent that a foreign SBS trading venue can obtain a Rule 
833(a) exemption, it could continue to provide members that are covered 
persons with access to and liquidity on its market. Furthermore, a Rule 
833(b) exemption would allow covered persons to continue accessing 
foreign SBS trading venues to execute SBS that are subject to the SEA's 
trade execution requirement.
    Currently, all trading venues that trade SBS--whether domestic or 
foreign--are exempt from having to register as a national securities 
exchange or SBSEF on account of the SBS trading business. This 
exemption expires when the Commission's rules for registering and 
regulating SBSEFs come into force.\893\ Thus, removal of the existing 
exemption restores the status quo ante, where the SEA itself, as 
amended by the Dodd-Frank Act, requires entities meeting the definition 
of ``security-based swap execution facility'' or ``exchange'' and 
falling within the territorial jurisdiction of the SEA to register with 
the Commission. By offering foreign SBS trading venues the possibility 
of an exemption from the definitions of ``security-based swap execution 
facility'' and ``exchange'' as well as from section 3D(a)(1) of the 
SEA, Rule 833(a) allows foreign SBS trading venues to operate in 
conditions similar to the current baseline (if the Commission 
ultimately grants an exemption under Rule 833(a)).
---------------------------------------------------------------------------

    \893\ See supra section III.
---------------------------------------------------------------------------

    Paragraph (a)(4) of Rule 3a1-1 provides that an entity that has 
registered with the Commission as an SBSEF and provides a market place 
for no securities other than SBS will not fall within the definition of 
``exchange'' and thus will not be subject to the requirement in section 
5 of the SEA to register as a national securities exchange (or obtain a 
low-volume exemption). The benefit of the amendment is to clarify to 
prospective SBSEF applicants that, if they register with the Commission 
as SBSEFs, they will not face duplicative registration and regulatory 
requirements as exchanges. In addition, paragraph (a)(5) of Rule 3a1-1 
codifies a series of exemptions that the Commission has granted over 
several years to SBS clearing agencies that operate ``forced trading'' 
sessions to support end-of-day valuations of SBS. Because the amendment 
is intended to codify existing exemptions, any associated economic 
effects would be minimal.
    New Rule 15a-12 is designed to minimize overlapping compliance 
burdens for SBSEFs, which are also brokers under the SEA, that restrict 
their activity to engaging in the business of operating an SBSEF (and 
no other broker activities). Absent the rule, such SBSEFs (defined as 
``SBSEF-Bs'' for purposes of Rule 15a-12) will need to register as 
SBSEFs and be subject to the SBSEF regulatory regime, in addition to 
registering as brokers and being subject to the broker regulatory 
regime. Rule 15a-12 allows an SBSEF-B to satisfy the requirement to 
register as a broker by registering as an SBSEF under Rule 803 and 
exempts an SBSEF-B from SIPA and other broker requirements, except for 
sections 15(b)(4), 15(b)(6), and 17(b) of the SEA. As a result of the 
rule, SBSEF-Bs could avoid incurring duplicative and unnecessary 
compliance burdens. Each SBSEF-B could save an estimated $345,826 in 
initial broker registration costs \894\ and $62,878 in annual ongoing 
costs of meeting broker registration requirements.\895\ In deriving 
these estimates, the Commission assumes that the activities an SBSEF-B 
performs to register and maintain registration as a broker do not 
overlap with those that it performs to register and maintain 
registration as an SBSEF-B. If there is an overlap in such activities, 
the estimated cost savings could be smaller. Each SBSEF-B could save an 
estimated $821 in ongoing costs associated with satisfying broker 
minimum capital

[[Page 87253]]

requirements.\896\ The estimated aggregate initial and annual ongoing 
savings are $1,729,130 and $318,495, respectively.\897\
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    \894\ The Commission previously estimated that an entity would 
incur costs of $301,400 to register as a broker-dealer and become a 
member of a national securities association. See Cross-Border 
Amendments Adopting Release, 85 FR at 6312. Adjusted for inflation 
through Dec. 2022, these costs are $345,826.
    \895\ The Commission previously estimated that an entity would 
incur ongoing annual costs of $54,800 to maintain broker-dealer 
registration and membership of a national securities association. 
See Cross-Border Amendments Adopting Release, 85 FR 6312. Adjusted 
for inflation through Dec. 2022, these costs are $62,878. 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 would likely be higher.
    \896\ Absent the rule, an SBSEF-B would comply with the minimum 
net capital requirement of $5,000 for a registered broker-dealer 
because it would not receive, owe, or hold customer funds or 
securities; carry customer accounts; and engage in certain other 
activities. See Rule 15c3-1(a)(2)(vi) under the SEA, 17 CFR 
240.15c3-1(a)(2)(vi). The Commission estimates the cost of capital 
using the annual stock returns on a value-weighted portfolio of 
financial stocks from 1988 to 2022 (see Kenneth French, 48 Industry 
Portfolios, available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on 
May 18, 2023). These returns were averaged to arrive at an estimate 
of 16.41%. The cost of capital = 16.41% x $5,000 = $820.50 or 
approximately $821.
    \897\ The Commission estimates the number of SBSEF-Bs as the 
number of entities that likely will register as SBSEFs. See supra 
section XVII.B.4. Aggregate initial savings = $345,826 x 5 (number 
of SBSEF-Bs) = $1,729,130. Aggregate annual ongoing savings = 
($62,878 + $821) x 5 (number of SBSEFs) = $318,495.
---------------------------------------------------------------------------

    Rule and product filings. Rules 806 and 807 set forth alternative 
filing processes for a new rule or rule amendment of a registered 
SBSEF, and Rules 804 and 805 set forth alternative filing processes for 
an SBSEF to file an SBS product that it wishes to list. Rule 810 would 
address new product filings by an entity that has applied for SBSEF 
registration but has not yet been registered, or by a dormant SBSEF 
seeking reinstatement of its registration. The self-certification 
processes of Rules 804 and 807 require SBSEFs to include a 
certification that the product, rule, or rule amendment, as the case 
may be, complies with the SEA and Commission rules thereunder.\898\ The 
information to be provided by the SBSEF under Rules 804, 805, and 810 
will further the ability of the Commission to obtain information 
regarding SBS that an SBSEF intends to list on its market. The rules 
will assist the Commission in overseeing and regulating the trading of 
SBS and to help ensure that SBSEFs operate in compliance with the SEA.
---------------------------------------------------------------------------

    \898\ See Rules 804(a)(3)(iv) and 807(a)(6)(iv).
---------------------------------------------------------------------------

    In addition, Rule 806(a)(5), which requires an SBSEF to explain the 
anticipated benefits and potential anticompetitive effects on market 
participants of a proposed new rule or rule amendment, potentially 
could help foster a competitive SBS market because it could prompt 
SBSEFs to consider the positive as well as negative aspects of their 
proposed rules or rule amendments with respect to competition. Rule 808 
is designed to facilitate the public's ability to obtain information 
from SBSEF applications as well as rule and product filings. Rule 
808(a) specifies the parts of an SBSEF application that the Commission 
shall make publicly available unless confidential treatment is obtained 
pursuant to SEA Rule 24b-2. Rule 808(b) provides that the Commission 
shall make an SBSEF's rule and product filings publicly available 
unless confidential treatment is obtained pursuant to SEA Rule 24b-2. 
Rule 808(c) provides that the terms and conditions of a product 
submitted to the Commission pursuant to any of Rules 804 through 807 
shall be made publicly available at the time of submission unless 
confidential treatment is obtained pursuant to SEA Rule 24b-2.
    Rule 809 provides a mechanism for the staying of a product 
certification or the tolling of a review period for a filing by an 
SBSEF relating to a product while the appropriate jurisdictional 
classification of that product is determined. The rule is designed to 
provide regulatory certainty for SBSEFs and market participants who may 
be interested in trading products whose classification as an SBS 
subject to SEC jurisdiction or a swap subject to CFTC jurisdiction is 
unclear. In particular, Rule 809 would help ensure that determinations 
regarding whether the SEC or CFTC appropriately has jurisdiction over a 
product are made before the product is traded.
    The Commission's election to model Rules 804 through 810 closely on 
analogous rules in part 40 of the CFTC's rules that apply to SEFs (and 
other registered entities) is designed to promote efficiency. Utilizing 
the same processes for rule and product filings, with which dually 
registered SEF/SBSEFs are familiar, would impose only minimal burdens 
on such entities while obtaining the similar regulatory benefits as the 
CFTC rules. In some cases, where a new rule or rule amendment affects 
both the swap and SBS business of a dually registered entity, the same 
or a very similar filing could be made to each of the CFTC and SEC, in 
lieu of having to make different filings to support the same rule 
change.
    Chief Compliance Officer. Rule 831, among other things, requires 
the CCO of an SBSEF to submit an annual compliance report to the 
Commission. The report will assist the Commission in carrying out its 
oversight of the SBSEFs and the SBS market by providing the Commission 
with information about the compliance activities of SBSEFs. 
Furthermore, by requiring an SBSEF to designate an individual as the 
CCO and making the CCO responsible for ensuring compliance with the SEA 
and the Commission's rules thereunder, Rule 831 would promote 
regulatory compliance on SBSEFs and the SBS market generally.\899\ This 
in turn would further the goal of moving SBS trading away from opaque 
and unregulated OTC markets and onto transparent and regulated markets 
by promoting effective regulation of the latter.
---------------------------------------------------------------------------

    \899\ The SBSEF remains responsible for establishing and 
administering required policies and procedures. See supra section 
VI.N.
---------------------------------------------------------------------------

    Conflicts of Interest. Rule 831, among other things, requires the 
CCO to resolve material conflicts of interest that may arise in 
consultation with the governing board or the senior officers of the 
SBSEF.\900\ Rule 828(a) requires an SBSEF to establish and enforce 
rules to minimize conflicts of interest in its decision-making process 
and establish a process for resolving the conflicts of interest. Rule 
828(b) would require an SBSEF to comply with the requirements of Rule 
834, which is designed to implement section 765 of the Dodd-Frank Act 
with respect to SBSEFs and SBS exchanges. Rule 834, among other things, 
imposes a 20% cap on the voting interest held by an individual member 
of an SBSEF or SBS exchange, mitigates conflicts of interest in the 
disciplinary process of an SBSEF or SBS exchange, sets forth certain 
minimum requirements for the composition of the governing board of an 
SBSEF or SBS exchange, sets forth reporting requirements related to 
governing board elections, and addresses the avoidance of conflicts of 
interest in the execution of regulatory functions by an SBSEF or SBS 
exchange.\901\
---------------------------------------------------------------------------

    \900\ See Rules 831(a)(2)(iii) and (h)(2).
    \901\ See Rules 834(b) to (g).
---------------------------------------------------------------------------

    The rules would mitigate conflicts of interest between an SBSEF or 
SBS exchange and its members as discussed in section VIII. Relative to 
the bilateral OTC SBS market, SBSEFs and SBS exchanges promote 
competition between liquidity providers, potentially forcing them to 
lower their prices for supplying liquidity (e.g., narrowing bid-ask 
spread) and reducing their profits from liquidity provision. However, 
if SBS dealers or major SBS participants were able to restrict access 
to such venues by, for example, exercising their voting interest in an 
SBSEF or SBS exchange, they could stifle competition in SBSEFs and SBS 
exchanges and preserve their profits from liquidity provision. 
Regulation SE, by mitigating such conflicts of interest could help 
ensure access to SBSEFs and SBS exchanges and in turn increase 
competition in liquidity provision and lower transaction costs. Rules 
834(e), (f), and (g) also may promote good governance at SBSEFs and SBS 
exchanges. To the extent that improved

[[Page 87254]]

governance result in more effective oversight by SBSEFs and SBS 
exchanges of their markets, market participants may benefit. These 
benefits could be limited to the extent that prospective SBSEFs and SBS 
exchanges already have rules in place that comply with the rules.
    Structured Data Requirements. Rule 825(c)(3) requires an SBSEF to 
publish a Daily Market Data Report on its website without charge or 
usage restrictions and in a downloadable and machine-readable format 
using the most recent version of the associated XML schema and PDF 
renderer as published on the Commission's website.\902\ Requiring the 
Daily Market Data Report to be provided in a structured, machine-
readable data language (using a Commission-created XML schema) will 
facilitate the use of the price, trading volume, and other trading data 
on the report by end users such as SBS market participants and market 
observers. By including a structured data requirement, the information 
in the report will be made available in a consistent and openly 
accessible manner that will allow for automatic processing by software 
applications, thus enabling search capabilities and statistical and 
comparative analyses across SBSEFs and date ranges.\903\ This will 
ensure that SBS market participants and market observers seeking to use 
the data will not have to spend time manually collecting and entering 
the data into a format that allows for analysis.
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    \902\ See Rule 825(c)(3).
    \903\ In addition, the associated PDF renderer will provide 
users with a human-readable document for those who prefer to review 
manually individual reports, while still providing a uniform 
presentation.
---------------------------------------------------------------------------

    One commenter stated that using custom XML rather than Inline XBRL 
``would essentially require re-creating what XBRL already offers'' and 
that the use of custom XML ``would result in added costs for all 
stakeholders, reduced efficiencies in adapting to changes, and the 
inability to commingle datasets.'' \904\ The Daily Market Data Report, 
which includes the trade count, the total notional amount traded, and 
the opening and closing price, is well-suited for custom XML as the 
information would easily fit within a table and the use of custom XML 
would make the file size of the document smaller than would be the case 
with Inline XBRL, which helps to reduce operating system overhead. 
Posting the Daily Market Data Report would not impose significant costs 
to prospective and actual SBSEFs due to the limited extent and 
complexity of the required data points to be reported, and because 
SBSEFs are already required to use structured data to fulfill their 
reporting requirements under Regulation SBSR \905\ and therefore would 
have relevant systems in place to structure and publicly disseminate 
other SBS trading information.\906\ While the use of custom XML will 
make it more difficult for data users to aggregate and compare the data 
points on the Daily Market Data Report with data points in other Inline 
XBRL datasets in an efficient manner, the streamlined schema and 
reduced file size justify that drawback.
---------------------------------------------------------------------------

    \904\ See XBRL US Letter, supra note 718, at 2.
    \905\ See 17 CFR 242.907(a)(2) (requiring information to be 
submitted to SDRs in an ``open-source structured data format that is 
widely used by participants'').
    \906\ See infra section XVII.C.3 for a discussion of the 
specific content of the Daily Market Data Report and how it differs 
from the SBS transaction reports disseminated under Regulation SBSR.
---------------------------------------------------------------------------

    Regulation SE requires SBSEFs to file disclosures required under 
various provisions in the EDGAR system using structured (machine-
readable) data languages.\907\ Requiring a centralized filing location 
and a machine-readable data language for these disclosures will 
facilitate access, retrieval, analysis, and comparison of the disclosed 
information across different SBSEFs and time periods by the Commission 
and the public, thus potentially augmenting the informational benefits 
of the various disclosure requirements discussed herein. Also, because 
EDGAR provides basic technical validation capabilities, the use of 
EDGAR could reduce the incidence of technical errors (e.g., letters 
instead of numbers in a field requiring only numbers) and thereby 
improve the quality of the structured disclosures.
---------------------------------------------------------------------------

    \907\ This includes the documents required under: Rule 
803(b)(1)(i) and (3) (filings of, and amendments to, specified 
exhibits in a Form SBSEF application); Rules 803(e) and 803(f) 
(requests to withdraw or vacate an application for registration); 
Rule 829(g)(6) (submission to the Commission of reports related to 
financial resources and related documentation); and Rule 831(j)(2) 
(submission to the Commission of the annual compliance report of the 
SBSEF's CCO). See supra section XIII.A.
---------------------------------------------------------------------------

    The structured data requirements under Regulation SE will 
facilitate access to the structured information in the filings, 
enabling Commission staff to perform more efficient retrieval, 
aggregation, and comparison across different SBSEFs and time periods, 
as compared to an unstructured PDF, HTML, or ASCII format requirement. 
The functionality enabled by a machine-readable data requirement will 
allow staff to better utilize the structured information in Regulation 
SE filings to ensure compliance with the SEA and rules and regulations 
thereunder applicable to SBSEFs (e.g., by enabling efficient staff 
identification of material changes to compliance policies or material 
non-compliance matters to gauge the soundness of SBSEF compliance 
programs), thus ultimately furthering the Commission's mission of 
maintaining fair, orderly, and efficient markets.
    In a change from the proposal, Regulation SE will require some of 
the structured disclosures to be filed in custom XML rather than Inline 
XBRL.\908\ Because both custom XML and Inline XBRL are structured data 
languages that result in machine-readable disclosures, the 
aforementioned benefits would apply in both cases. Inline XBRL 
specifically provides the ability to tag detailed facts within 
narrative text blocks, and is thus well-suited to accommodate many 
disclosures required under proposed Regulation SE, several of which 
require extended narrative discussions (e.g., the chief compliance 
officer's report required under Rule 831).\909\ In addition, certain 
required disclosures consist of financial information (e.g., the 
financial statements of the SBSEF required under Exhibit I to Form 
SBSEF), and Inline XBRL is designed specifically for the accurate 
capture and communication of financial information, among other uses. A 
benefit specific to custom XML disclosures is that EDGAR can create 
fillable web forms allowing SBSEFs, at their option, to input their 
disclosures manually and have EDGAR convert them into the specific 
custom XML data language, removing the need for SBSEFs to structure the 
disclosures in the custom XML data language themselves. This added 
flexibility may ease compliance burdens for any SBSEFs that choose to 
use the fillable web form.
---------------------------------------------------------------------------

    \908\ The custom XML requirements apply to information required 
under Rules 803(e) and (f) regarding withdrawal or vacation 
applications; the Form SBSEF Cover Sheet; and Exhibits A, B, G, M, 
N, and T to Form SBSEF. The Inline XBRL requirements apply to 
information required under Rules 829 and 831 regarding financial 
resources reports and CCO compliance reports, respectively; and 
Exhibits C through F, H through L, and P through S to Form SBSEF. 
See supra section XIII.A. See also supra notes 724-726 and 
accompanying text (discussing the final rule text revisions that 
implement the reduced scope of Inline XBRL requirements for Form 
SBSEF).
    \909\ See Rule 831.
---------------------------------------------------------------------------

    One commenter noted that an Inline XBRL requirement for the 
proposed disclosures would allow financial identification and textual 
data in both a human- and machine-readable format consistently in a 
fashion that would allow Form SBSEF data to be commingled with other 
SEC-reported datasets.\910\ While we generally agree that Inline XBRL 
provides such benefits

[[Page 87255]]

related to data use, the greater compliance flexibility afforded by 
custom XML merits using custom XML for the specified disclosures.
---------------------------------------------------------------------------

    \910\ See XBRL US Letter, supra note 718, at 2.
---------------------------------------------------------------------------

    In another change from the proposal, where Regulation SE requires 
copies of existing documents (e.g., copies of manuals, contracts, 
organizational documents) to be attached to filings, those copies will 
be filed as unstructured PDF attachments.\911\ The absence of 
structuring requirements for these documents will further reduce 
compliance burdens on SBSEFs, and although the content of those copies 
will not be machine-readable, we do not believe the informational 
benefits associated with having such documents in structured form would 
be significant enough to merit requiring SBSEFs to retroactively 
structure such existing documents. In addition, filings related to new 
SBSEF rules and products under Rules 804 through 807 and 816 will be 
filed as unstructured documents through the EFFS system rather than 
through EDGAR. As noted by one commenter, the absence of structuring 
requirements for these filings will similarly reduce compliance burdens 
on SBSEFs.\912\
---------------------------------------------------------------------------

    \911\ This includes attached copies of existing documents 
required under Exhibits A, G, I, M, N, and O to Form SBSEF. See 
supra section XIII.A. See also supra notes 724-726 and accompanying 
text (discussing the final rule text revisions that implement the 
reduced scope of Inline XBRL requirements for Form SBSEF).
    \912\ See Bloomberg Letter, supra note 18, at 20. See also supra 
notes 730-733 (discussing the final rule text revisions that 
implement the requirement for SBSEFs to file rule and product 
filings in unstructured format using the EFFS system).
---------------------------------------------------------------------------

3. Costs
    Although Regulation SE would benefit the SBS market, the Commission 
recognizes that Regulation SE also would entail certain costs.\913\ 
Some costs are difficult to precisely quantify and are discussed below. 
The Commission is mindful that any rules it may adopt with respect to 
SBSEFs under the Dodd-Frank Act may impact the incentives of market 
participants with respect to where and how they trade SBS. If the rules 
adopted by the Commission are, or are perceived to be, too costly for 
trading venues to comply with, fewer entities than expected may seek to 
register as SBSEFs, which would not further the goal of moving a 
greater percentage of SBS trading from opaque and unregulated OTC 
markets to transparent and regulated trading venues. In addition, if 
the rules for trading on an SBSEF are perceived as too burdensome by 
market participants, SBS trading may continue in the OTC market absent 
a mandatory clearing determination and a triggering of the mandatory 
trade execution requirement, thus frustrating the goals of the Dodd-
Frank Act.\914\ Even if the trade execution requirement is triggered 
for an SBS, market participants that wish to avoid being subject to the 
requirement may do so by strategically choosing the location of the 
desk executing a trade in that SBS.\915\ At the same time, if the rules 
relating to SBSEFs are too lenient, they may have little or no impact 
on the market structure and surveillance of the SBS market relative to 
the status quo, which could result in the loss of many of the benefits 
discussed above and fail to achieve the goals of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \913\ Unless otherwise stated, quantified costs in this section 
are adjusted for CPI inflation using data published by the Bureau of 
Labor Statistics. See CPI Inflation Calculator, U.S. Bureau of Labor 
Statistics, available at https://www.bls.gov/data/inflation_calculator.htm.
    \914\ See supra section XVII.C (noting that the benefits and 
costs associated with the trade execution requirement would not 
materialize unless and until the Commission makes a mandatory 
clearing determination).
    \915\ See Citadel Letter, supra note 18, at 16.
---------------------------------------------------------------------------

    In addition, SBS traded on SBSEFs may be perceived to be subject to 
increased costs, monetary and otherwise. For example, the requirements 
related to pre-trade transparency could cause market participants to 
reveal valuable economic information regarding their trading interest 
more broadly than they may believe would be economically prudent and 
could discourage participation in the SBS market. An additional impact 
of pre-trade transparency is perceived costs associated with front-
running, if customers or SBS dealers are required to show their trading 
interest before a trade is executed. These potential costs of pre-trade 
transparency may change market participants' trading strategies, which 
could result in them working more orders or finding ways to attempt to 
hide their interest.\916\ These potential costs would likely vary based 
on the notional size of the SBS transaction and, in particular, would 
likely be greater for market participants engaging in SBS trades of a 
larger notional size.\917\ If market participants view Regulation SE as 
too burdensome with respect to pre-trade transparency, SBS dealers may 
be less willing to supply liquidity for SBS that trade on SBSEFs or 
exchanges, thus adversely affecting liquidity and competition. However, 
such effects could be mitigated by Rules 815(d)(2) and Rules 815(d)(3) 
that provide an exception for certain package transactions that allows 
for flexible methods of execution for what would be otherwise Required 
Transactions.\918\
---------------------------------------------------------------------------

    \916\ See, e.g., Ananth Madhavan, Market Microstructure: A 
Survey, J. of Fin. Markets, Vol. 3 (2000).
    \917\ The potential costs associated with SBS trades of a larger 
notional size could be affected by a definition of ``block trade'' 
that includes a block trade threshold that market participants could 
rely on for the exception from the Required Transaction requirement 
in Rule 815(a)(2). As discussed in section V.E.1(c)(i), supra, a 
block-trade exception for SBSs subject to the trade-execution 
requirement, provided that ``block trade'' is appropriately defined 
for those SBSs, can help ensure that large trades are not 
significantly more difficult and costly to execute because of the 
risks posed by information leakage and the potential for adverse 
price movement, which could significantly impair liquidity in the 
markets for those SBSs.
    \918\ See Rule 815(d)(2) and Rule 815(d)(3). Neither an SBS that 
is intended to be cleared (even if it is not required to be cleared) 
nor a swap subject to a CFTC trade execution requirement would 
create an exception from required methods of execution for a 
Required Transaction that is part of the same package.
---------------------------------------------------------------------------

    On the other hand, if the requirements with respect to pre-trade 
transparency bring about only a marginal increase in pre-trade 
transparency, the result could be that there would be no substantive 
change from the status quo, including no benefits of alleviating 
informational asymmetries, increasing price competition, and supplying 
better executions beyond the changes in response to the other 
requirements of the Dodd-Frank Act. This actual impact would depend on 
the degree of pre-trade transparency required and the characteristics 
of the trading market. The rules are intended to provide for greater 
pre-trade transparency than currently exists without requiring pre-
trade transparency in a manner that would cause participants to avoid 
providing liquidity on SBSEFs.
    There would be transaction costs, such as fees and connectivity 
costs, that trading counterparties would incur in executing or trading 
SBS subject to the trade execution requirement on SBSEFs. Likewise, 
although unregulated trading venues exist in today's OTC derivatives 
market, the Commission does not have information regarding what, if 
any, fees and connectivity costs are associated with transacting on 
these unregulated trading venues. In the Proposing Release, the 
Commission invited comment on the likely fees and costs associated with 
transacting on SBSEFs as well as fees and costs associated with 
transacting on unregulated trading venues that exist in today's OTC 
derivatives market. Commenters did not provide estimates of likely fees 
and costs associated with transacting on SBSEFs or fees and costs 
associated with transacting on unregulated trading venues.
    As discussed in section XVII.B, prospective SBSEF registrants are 
likely

[[Page 87256]]

to be CFTC-registered SEFs that are active in the index CDS market. 
Because the final rules are harmonized as closely as practicable with 
analogous CFTC rules for SEFs, unless a reason exists to do otherwise 
in a particular area, much of the systems, policies, and procedures 
that are used to support SEF trading also could be used to support 
SBSEF trading. The prospective SBSEF registrants likely would incur 
marginal costs associated with listing SBS products on their venues 
\919\ and making limited changes to their systems, policies, and 
procedures to comply with SEC rules that differ slightly from analogous 
CFTC rules. The Commission estimates the one-time costs associated with 
such changes to systems, policies, and procedures would range between 
$26,393 and $1,583,550 per SBSEF and between $131,965 and $7,917,750 in 
the aggregate, depending on the changes needed. These cost ranges 
reflect significant uncertainties about the extent of changes that 
different registrants might need. The annual ongoing costs of 
maintaining the technology (e.g., ensuring any necessary technological 
updates and improvements are made) and applying the technology to 
ongoing compliance requirements are estimated to be in the range of 
$1,055,700 to $2,111,400 per SBSEF and in the range of $5,278,500 to 
$10,557,000 in the aggregate.\920\
---------------------------------------------------------------------------

    \919\ See infra section XVII.C.3(c) (discussing the costs that 
these entities might incur to list SBS products).
    \920\ In the Proposing Release, the Commission estimated that 
the one-time costs associated with changes to systems, policies, and 
procedures would range between $25,000 and $1.5 million per SBSEF, 
depending on the changes needed. The Commission estimated the annual 
ongoing costs to be between $1 million and $2 million. See Proposing 
Release, supra note 1, 87 FR at 28953. Adjusting for inflation in 
2022, the Commission now estimates that the one-time costs 
associated with changes to systems, policies, and procedures would 
range between $25,000 x 1.0557 (CPI inflation adjustment for 2022) = 
$26,392.50 or approximately $26,393 and $1.5 million x 1.0557 (CPI 
inflation adjustment for 2022) = $1,583,550 per SBSEF, depending on 
the changes needed. In the aggregate, the one-time costs associated 
with changes to systems, policies, and procedures would range 
between $26,393 x 5 SBSEFs = $131,965 and $1,583,550 x 5 SBSEFs = 
$7,917,750, depending on the changes needed. Adjusting for inflation 
in 2022, the Commission now estimates the annual ongoing costs per 
SBSEF to be between $1 million x 1.0557 (CPI inflation adjustment 
for 2022) = $1,055,700 and $2 million x 1.0557 (CPI inflation 
adjustment for 2022) = $2,111,400. In the aggregate, the annual 
ongoing costs would be between $1,055,700 x 5 SBSEFs = $5,278,500 
and $2,111,400 x 5 SBSEFs = $10,557,000. One commenter states that 
any potential differences between SEC rules and analogous CFTC rules 
would require SBSEF registrants to devote resources toward assessing 
the potential gaps and consequences of regulatory divergence. See 
Bloomberg Letter, supra note 18, at 10. Such costs would be part of 
the one-time costs associated with changes to systems, policies, and 
procedures. It is possible that SBSEF registrants might incur 
additional costs toward assessing the potential gaps and 
consequences of regulatory divergence. In that case, the one-time 
costs associated with changes to systems, policies, and procedures 
could be higher than the Commission's estimates.
---------------------------------------------------------------------------

    Several commenters agree that the Commission's general approach to 
finalizing requirements relating to SBS execution would mitigate costs 
for registered SBSEFs.\921\
---------------------------------------------------------------------------

    \921\ See supra section XVII.C and note 867.
---------------------------------------------------------------------------

    One commenter is concerned that Rule 816 as proposed would permit 
SBSEFs to make an SBS available to trade even absent objective evidence 
of a sufficiently liquid trading market.\922\ According to the 
commenter, requiring SBS with insufficient liquidity to be traded via 
an order book or an RFQ system would raise a significant risk of 
revealing investment advisers' sensitive portfolio management 
strategies.\923\ Such information leakage could lead to front-running 
of funds' trades and to other abusive trading practices that would 
negatively affect the pricing of SBS and of other related instruments, 
resulting in higher investment costs for investment advisers' clients, 
including funds and their investors.\924\ The Commission agrees that an 
inappropriate MAT determination such as the one described by the 
commenter could result in higher investment costs for investment 
advisers' clients by increasing the risk of information leakage, front-
running, and other abusive trading practices. Regulation SE as adopted 
would address concerns related to inappropriate MAT determinations. As 
discussed in section V.F.2, the Commission will have the opportunity to 
review all SBSEF MAT determinations, whether they are self-certified or 
voluntarily filed for Commission approval, to consider whether those 
determinations are adequately supported by evidence and consistent with 
the SEA and the rules thereunder, including the six factors to be 
considered for MAT determinations under Rule 816(b).\925\ In the 
absence of such evidence, the Commission can decline to approve or can 
stay and then object to a MAT petition, which will ultimately allow the 
Commission to prevent an inappropriate MAT determination from taking 
effect.
---------------------------------------------------------------------------

    \922\ See ICI Letter, supra note 18, at 5.
    \923\ See id. at 6.
    \924\ Id.
    \925\ These six factors are: (1) whether there are ready and 
willing buyers and sellers; (2) the frequency or size of 
transactions; (3) the trading volume; (4) the number and types of 
market participants; (5) the bid/ask spread; or (6) the usual number 
of resting firm or indicative bids and offers. See Rule 816(b).
---------------------------------------------------------------------------

    One commenter states that requiring a fund to disclose its trading 
interest in an SBS of a large notional size to multiple participants--
via an order book or an RFQ system--would enable opportunistic market 
participants to piece together information about the fund's holdings or 
investment strategy and lead to front-running of those potential 
trades.\926\ The Commission agrees that requiring a fund to disclose 
its trading interest in an SBS of a large notional size to multiple 
participants via an order book or an RFQ system could impose costs 
associated with information leakage and front-running. However, these 
costs have to be considered in light of the benefits of increased pre-
trade transparency: increased price competition, increased price 
efficiency, improved liquidity, and reduced transaction costs.\927\ By 
adopting two execution methods for Required Transactions (limit order 
book and RFQ-to-3), market participants have flexibility in the degree 
of pre-trade transparency they wish to employ, which should diminish 
potential concerns associated with the exposure of pre-trade trading 
interest. Further, a market participant that wishes to engage in 
Permitted Transactions of a large notional size can choose any method 
of execution that is offered by an SBSEF and is not restricted to using 
a limit order book or RFQ-to-3. For these transactions, any costs 
associated with information leakage and front-running likely would not 
be different from those costs that would prevail under the baseline.
---------------------------------------------------------------------------

    \926\ See ICI Letter, supra note 18, at 11.
    \927\ See supra section XVII.C.1 (discussing the benefits of 
increased pre-trade transparency).
---------------------------------------------------------------------------

    One commenter states that Proposed Rule 834 would have the effect 
of prohibiting certain SBSEF participants from having common ownership 
and control as the SBSEF. The commenter is concerned that the proposed 
rule would prevent prospective SBSEFs that are CFTC-registered SEFs 
from onboarding their affiliated introducing brokers because doing so 
would exceed the ownership and voting caps set forth in Proposed Rule 
834(b).\928\ Another commenter is concerned that the rule's 20% 
ownership cap would limit access to capital and act as barriers to 
entry for SBSEF and SBS exchanges.\929\ Observing that the CFTC did not 
adopt rules analogous to Proposed Rule 834, the commenters suggest that 
the proposed rule, if adopted, would be a fundamental departure from 
the CFTC's rules, minimizing many of the other

[[Page 87257]]

benefits of a harmonized regime, and thwart efforts to smoothly 
implement Regulation SE.\930\ One commenter further states that some 
CFTC registered SEFs, which are prospective SBSEFs, might have to 
review their ownership and governance structure and, possibly, amend 
their organization.\931\
---------------------------------------------------------------------------

    \928\ See WMBAA Letter, supra note 18, at 2.
    \929\ See SIFMA AMG Letter, supra note 18, at 12.
    \930\ See id.; WMBAA Letter, supra note 18, at 3.
    \931\ See WMBAA Letter, supra note 18, at 3.
---------------------------------------------------------------------------

    In response to these concerns, the Commission is adopting Rule 
834(b)(3), which provides an exemption from the ownership and voting 
caps for an SBSEFs that has mitigated the potential conflict of 
interest with respect to compliance with the rules of the SBSEF by 
entering into an agreement with a registered futures association or a 
national securities association for the provision of regulatory 
services that encompass, at a minimum, real-time monitoring under Rule 
819(d)(5) and investigations and investigation reports under Rule 
819(d)(6). This exemption should address concerns regarding certain 
SBSEF participants not being able to have common ownership and control 
as the SBSEF (provided these appropriate conditions are met); the 
onboarding of affiliated introducing brokers by certain prospective 
SBSEFs; access to capital and entry barriers; and potential disruption 
or delays to the implementation of Regulation SE.
    With respect to the Daily Market Data Report required by Proposed 
Rule 825, one commenter states that the Daily Market Data Report would 
require inappropriate and detrimental disclosures that would undermine 
the Commission's goal of fostering a competitive and efficient market 
for SBS trading. This commenter states that there are significant 
differences in the information required to be reported under the SEC 
and CFTC regimes. The commenter states that Proposed Rule 825(c)(1) 
increases the burden on SBSEFs compared to SEFs by requiring additional 
information regarding sale and offer prices, as well as qualitative 
descriptions of certain data that are reported.\932\
---------------------------------------------------------------------------

    \932\ See MFA Letter, supra note 18, at 13.
---------------------------------------------------------------------------

    This commenter further states that the Commission's proposal does 
not address why the CFTC's approach would not be acceptable in the 
context of SBSEFs and does not justify the increased operational costs 
to SBSEFs (which will ultimately be passed on to members). The 
commenter also states that the Commission has not considered the costs 
and potential for duplicative requirements in the context of Regulation 
SBSR reporting requirements. The commenter concludes that, in sum, the 
Daily Market Data Report is overly granular and duplicative, is 
unnecessary for transparency purposes, and could negatively impact the 
market and market participants. The commenter states that the 
Commission should therefore remove the Daily Market Data Report in 
favor of harmonizing with the analogous CFTC rules and that, if the 
Commission does not eliminate the Daily Market Data Report requirement 
altogether, it should adopt additional masking protections for trades, 
specifically with respect to block trades. Failure to do so, the 
commenter states, would cause inappropriate and detrimental disclosures 
and would ``negate the benefits that the rule purports to achieve by 
exempting block trades from clearing [sic] requirements.'' \933\
---------------------------------------------------------------------------

    \933\ See id. Regulation SE does not address any exemption from 
clearing requirements.
---------------------------------------------------------------------------

    As discussed in Section IV.H, many of the reporting requirements of 
the Daily Market Data Report under Proposed Rule 825 are closely 
aligned with the data required to be disclosed on a daily basis by SEFs 
under Sec.  16.01 of the CFTC's rule. Further, the Commission is 
modifying Proposed Rule 825 to resolve the two differences between the 
proposed Daily Market Data Report and the existing CFTC reporting 
scheme under Sec.  16.01: (1) that the Daily Market Data Report would 
include the number of block trades executed; \934\ and (2) that the 
Daily Market Data Report would be posted on the SBSEF's website no 
later than the beginning of trading on the next business day,\935\ 
while the information required by Sec.  16.01 must be made public no 
later than the next business day.\936\
---------------------------------------------------------------------------

    \934\ See Proposed Rule 825(c)(1)(iii).
    \935\ See Proposed Rule 825(c)(4).
    \936\ See 17 CFR 16.01(e). The Commission views the requirement 
to keep each Daily Market Data Report on an SBSEF's website for one 
year, see Proposed Rule 825(c)(5), as a small additional burden for 
an SBSEF and does not view it as a significant departure from 
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

    Rule 825(c)(1), as adopted, does not require the disclosure of the 
number of block trades.\937\ Further, Rule 825(c)(4), as adopted, 
requires the publication of the Daily Market Data Report ``as soon as 
reasonably practicable on the next business day after the day to which 
the information pertains, but in no event later than 7 a.m. on the next 
business day.'' With these modifications, the data called for by Rule 
825(c)(1) is consistent with the required daily disclosures for SEFs. 
These modifications should help address concerns regarding increased 
burden on SBSEFs compared to SEFs, increased operational costs to 
SBSEFs, the Daily Market Data Report being overly granular, and 
negative impact on the market and market participants. The fact that 
Rule 825(c)(1), as adopted, does not require the disclosure of the 
number of block trades would obviate the need to adopt masking 
protections for block trades and address the commenter's concern about 
inappropriate and detrimental disclosures that would adversely affect 
competition and efficiency in the SBS market. To the extent that the 
disclosure of the number of block trades prompts market prices to move 
against the dealers that facilitated such block trades thereby raising 
their hedging costs, dealers could raise the price of liquidity 
provision (e.g., by widening the bid-ask spread) charged to market 
participants, increase transaction costs, and reduce the efficiency of 
SBS trading. To the extent that the cost of transacting block trades 
increases, market participants may choose to exit the SBS market and 
trade alternative securities. This in turn could reduce participation 
and competition in the SBS market. Rule 825(c)(1), by not requiring the 
disclosure of the number of block trades, should mitigate these 
potential adverse effects on competition and efficiency in the SBS 
market.
---------------------------------------------------------------------------

    \937\ The Commission is also, pursuant to its determination not 
to adopt a definition of ``block trade'' at this time, deleting the 
words ``including block trades but'' from the text of paragraph 
(c)(i) and (ii) of Rule 825, and is adding the words ``after such 
time as the Commission adopts a definition of `block trade' '' to 
paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of 
Proposed Rule 825) which will have no effect on the requirement as 
compared to the proposed rule. See supra section VI.H.
---------------------------------------------------------------------------

    With respect to the concern that the Daily Market Data Report is 
duplicative of Regulation SBSR and unnecessary for transparency 
purposes, the former performs a function that is different from the 
reporting and public dissemination of SBS transactions required by 
Regulation SBSR.\938\ The Daily Market Data Report would consolidate 
trading information by venue and provide useful summary information 
about SBS trading on an SBSEF for all market participants without 
requiring them to incur costs to collect, process, and aggregate 
information from individual reports of SBS transactions that are 
executed on an SBSEF and publicly disseminated pursuant to Regulation 
SBSR. In addition, the Daily Market Data Report provides information 
regarding trading on an SBSEF that is not available in the SBS 
transaction reports that are publicly disseminated pursuant to 
Regulation SBSR. Among other things, the Daily Market Data Report would 
provide the

[[Page 87258]]

opening and closing price; the price that is used for settlement 
purposes, if different from the closing price; the lowest price of a 
sale or offer, whichever is lower; the highest price of a sale or bid, 
whichever is higher; the method used by the SBSEF in determining 
nominal prices and settlement prices; and a description of the manner 
in which discretion is used to determine the opening and/or closing 
ranges or the settlement prices.\939\ Further, because the transaction 
reports for credit SBS are permitted to be capped at a notional volume 
of $5 million,\940\ market participants would be unable to glean the 
information provided by the Daily Market Data Report--which would 
publish daily total notional volumes based on uncapped transaction 
amounts--from the individual reports of SBS transactions under 
Regulation SBSR. Thus, the Daily Market Data Report would provide 
market participants, at little to no cost, with information about 
pricing and trading volume for SBS on SBSEFs that goes beyond the 
information that could be obtained from SBS transaction reports that 
are publicly disseminated pursuant to Regulation SBSR.
---------------------------------------------------------------------------

    \938\ See 17 CFR 242.900 et seq.
    \939\ See Rules 825(c)(1)(iv) through (vi) and 825(c)(2).
    \940\ See 2019 Cross-Border Adopting Release, supra note 218, 85 
FR at 6347 (providing no-action relief with respect to Rule 902 of 
Regulation SBSR, 17 CFR 242.902, for reports of credit SBS 
transaction disseminated with a capped size of $5 million).
---------------------------------------------------------------------------

    Several commenters are concerned that Proposed Rule 832(b)(3), 
which would apply the trade execution requirement to ANE transactions, 
could create complexities,\941\ prompt market participants and 
platforms to develop costly infrastructure to avoid engaging in ANE 
transactions,\942\ confuse market participants and platforms and reduce 
market participation.\943\ One commenter asks the Commission to be 
mindful of whether CFTC-registered SEFs would be forced to change their 
rules in order comply with the new proposed SBSEF rules.\944\ With 
respect to the concern that CFTC-registered SEFs might be forced to 
change their rules because of the Commission's ANE approach for SBSEFs, 
foreign trading venues that have already received exemptive relief from 
the CFTC for swaps trading where robust regulatory regimes may exist 
with requirements comparable to those applicable to SBS transactions in 
the United States might seek and obtain exemptive relief under Rule 
833(b). If exempted under Rule 833(b), trading of SBS on such foreign 
trading venues would not require CFTC-registered SEFs to change their 
rules.\945\ Similarly, for SBS transactions that the Commission exempts 
from the trade execution requirement based on an application submitted 
under Rule 833(b), the concerns expressed by commenters regarding 
complexities and costs would no longer be applicable. The effect of 
such exemptions would likely result in SBS transactions in foreign 
jurisdictions with what may be considered robust regulatory regimes to 
be exempt from the Commission's trade execution requirement and, in 
practice, have similar treatment of transactions on applicable foreign 
trading venues as the CFTC. This should address concerns about 
confusion among market participants and platforms in foreign 
jurisdictions; the regulatory certainty provided by the exemptions 
should help to mitigate any adverse effects on market participation and 
obviate the need to develop costly infrastructure to avoid engaging in 
ANE transactions.
---------------------------------------------------------------------------

    \941\ See SIFMA AMG Letter, supra note 18, at 11.
    \942\ See ISDA-SIFMA Letter, supra note 18, at 12.
    \943\ See Tradeweb Letter, supra note 18, at 4-5.
    \944\ See SIFMA AMG Letter, supra note 18, at 11.
    \945\ See supra notes 624-627 and accompanying text.
---------------------------------------------------------------------------

    Several commenters are concerned that many foreign SBS trading 
venues would not be able to obtain a Rule 833(b) exemption because they 
believe the rule would require foreign jurisdictions to require RFQ-to-
3 and order book methods of execution, while hardly any foreign 
jurisdictions have identical requirements, with some jurisdictions not 
requiring SBS to be traded on an organized trading venue.\946\ These 
commenters believe that the inability of foreign trading venues to 
obtain a Rule 833(b) exemption would result in various negative 
consequences: increased costs; disruption and fragmentation of the SBS 
markets; reduced liquidity and participation in the SBS markets; 
impaired risk transfer, risk management, and price formation; and 
increased systemic risk.\947\
---------------------------------------------------------------------------

    \946\ See supra note 599; Bloomberg Letter, supra note 18, at 6, 
19; ICE Letter, supra note 18, at 4; ISDA-SIFMA Letter, supra note 
18, at 14; Tradeweb Letter, supra note 18, at 6.
    \947\ See supra note 602-607 and accompanying text.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns raised by commenters, 
which appear to emanate from commenters' interpretation--and 
misunderstanding--of what would be required in order to receive a Rule 
833(b) exemption. Specifically, several commenters interpret the rule 
and the Commission's discussion of the rule in the Proposing Release to 
mean that a foreign SBS trading venue must have RFQ-to-3 and an order 
book for Required Transactions in order for transactions on that venue 
to qualify for a Rule 833(b) exemption.\948\ As discussed in Section 
VII.B, the proposed rule would not require foreign SBS trading venues 
to have RFQ-to-3 and an order book in order for the Commission to 
consider their SBS executions for an exemption under Rule 833(b). 
Neither the text of Rule 833(b) nor the Commission's description of 
Rule 833(b) states that a limit order book or an RFQ-to-3 system is 
required to receive a Rule 833(b) exemption.\949\ There may be foreign 
SBS trading venues--many of which have already received exemptive 
relief from the CFTC for swaps trading \950\--that may be appropriate 
candidates for exemptive relief, that are subject to what may be 
considered robust regulatory regimes for SBS trading. With respect to 
such foreign SBS trading venues, the Commission encourages market 
participants to submit a request for exemptive relief under final Rule 
833(b) if they seek to be exempt from the Commission's trade execution 
requirement for their SBS transactions. This discussion should address 
concerns about the potential unavailability of a Rule 833(b) exemption 
to SBS foreign trading venues and the negative consequences that could 
arise if SBS foreign trading venues are unable to obtain a Rule 833(b) 
exemption.
---------------------------------------------------------------------------

    \948\ See supra notes 597-599 and accompanying text.
    \949\ In the Proposing Release, the Commission stated its 
preliminary belief that ``the use of single-dealer platforms to 
discharge any mandatory trading execution requirement'' would not 
meet the proposed rule's requirements. See Proposing Release, supra 
note 1, 87 FR at 28925.
    \950\ See supra note 626.
---------------------------------------------------------------------------

    We detail below cost estimates for specifics parts of the adopted 
rules. Many of these cost estimates are based on the PRA estimates of 
costs and burdens from section XVIII.\951\
---------------------------------------------------------------------------

    \951\ In section XVIII infra, for purposes of the PRA, the 
Commission estimates burdens applicable to a stand-alone SBSEF. 
However, most if not all SBSEFs will be dually registered with the 
CFTC as SEFs and thus will already be complying with relevant CFTC 
rules that have analogs to rules in Regulation SE. Therefore, the 
Commission's burden estimates are greater for stand-alone SBSEFs 
than may actually take place for those already registered with the 
CFTCs because of the effect of the CFTC's corresponding rules.
---------------------------------------------------------------------------

(a) Registration Requirements for SBSEFs and Form SBSEF
    The registration provisions would impose costs on entities that 
seek registration as SBSEFs. The Commission estimates that initial 
filings on Form SBSEF by prospective SBSEFs seeking to register with 
the Commission

[[Page 87259]]

pursuant to Rule 803 would result in aggregate initial costs of 
$100,300 for prospective SBSEFs.\952\
---------------------------------------------------------------------------

    \952\ $100,300 = 1,475 burden hours x $68/hour blended hourly 
rate. The $68/hour blended hourly rate is the $59/hour blended 
hourly rate computed by the CFTC and adjusted for CPI inflation 
through Dec. 2022. The CFTC used the blended hourly wage to estimate 
PRA costs associated with part 37. See infra section XVIII.D.2(a); 
OMB, Supporting Statement for New and Revised Information 
Collections: Core Principles and Other Requirements for Swap 
Execution Facilities, OMB Control Number 3038-0074, Attachment A 
(July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf.
---------------------------------------------------------------------------

(b) Ongoing Compliance With Other Requirements That Are Similar to the 
Remainder of Part 37
    As discussed in section XVIII.D.2.b, the Commission estimates the 
aggregate annual paperwork burden for SBSEFs to comply with all of the 
SBSEF rules that have analogs in part 37 to be 1935 hours.\953\ These 
burdens are estimated to impose aggregate ongoing annual costs of 
$131,580 on SBSEFs.\954\
---------------------------------------------------------------------------

    \953\ See infra section XVIII.D.2(b). This estimate excludes the 
paperwork burdens associated with registration requirements for 
SBSEFs and Form SBSEF and provisions of certain rules to be 
discussed subsequently.
    \954\ $131,580 = 1,935 burden hours x $68/hour blended hourly 
rate. See supra note 952 (derivation of the $68/hour blended hourly 
rate).
---------------------------------------------------------------------------

(c) Rule and Product Filing Processes for SBSEFs
    The Commission estimates that the aggregate ongoing annual costs 
incurred by all SBSEFs to prepare and submit rule and product filings 
under Rules 804, 805, 806, and 807 (including the cover sheet) would be 
$33,000.\955\
---------------------------------------------------------------------------

    \955\ $33,000 = 300 hours x $110/hour blended hourly rate. The 
$110/hour blended hourly rate is the $96.26/hour blended hourly rate 
computed by the CFTC and adjusted for CPI inflation through Dec. 
2022. The CFTC used the blended hourly rate to estimate PRA costs 
associated with part 40. See infra section XVIII.D.3(a); OMB, 
Supporting Statement for Information Collection Renewal: OMB Control 
Number 3038-0093, Attachment A (July 10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf. The platform ID 
requirement on the submission cover sheet would not impose burdens 
for obtaining a platform ID, because an SBSEF (whether registered or 
exempt) is already required under Rule 903(a) of Regulation SBSR to 
obtain an LEI to identify itself as its platform ID. See supra 
section IV.E and n.140.
---------------------------------------------------------------------------

(d) Rules 809, 811, 819, 826, 829, 833, 834, and 835
    The Commission estimates the aggregate ongoing annual costs 
incurred by SBSEFs to comply with Rule 809 would be $604.\956\
---------------------------------------------------------------------------

    \956\ $604 = 1.25 hours x $483/hour national hourly rate for an 
attorney. The per-hour figure for an attorney is from SIFMA's 
Management and Professional Earnings in the Securities Industry--
2013, as modified by Commission staff to adjust for inflation 
(through Dec. 2022) 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 infra section XVIII.D.3(b)(ii); 
Supporting Statement for the Paperwork Reduction Act New Information 
Collection Submission for Rule 3a68-2 (Interpretation of Swaps, 
Security-Based Swaps, and Mixed Swaps) and Rule 3a68-4(c) (Process 
for Determining Regulatory Treatment for Mixed Swaps), OMB Control 
Number 3235-0685, Supporting Statement A (Dec. 23, 2021), available 
at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
---------------------------------------------------------------------------

    The Commission estimates the aggregate ongoing annual costs 
incurred by SBSEFs to comply with requests for documents or information 
pursuant to Rule 811(d) would be $88.\957\
---------------------------------------------------------------------------

    \957\ $88 = 1.25 hour x $70/hour hourly rate for a financial 
manager. The $70/hour hourly rate is the $65/hour hourly rate 
computed by the CFTC and adjusted for CPI inflation through Dec. 
2022. The CFTC used the hourly rate to estimate PRA costs associated 
with part 1.6. See infra section XVIII.D.4(a); OMB, Supporting 
Statement for New and Revised Information Collections: OMB Control 
Number 3038-0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

    The Commission estimates the aggregate ongoing annual costs 
incurred by SBSEFs to comply with Rule 819(i) would be $27,142.\958\
---------------------------------------------------------------------------

    \958\ $27,142 = 399.15 hours x $68/hour blended hourly rate. The 
burdens associated with this rule are not different from burdens 
associated with rules that have part 37 analogs. Thus, it would be 
appropriate to apply the $68/hour blended hourly rate to estimate 
the paperwork related costs associated with this rule. See infra 
section XVIII.D.4(c). See also supra note 952 (derivation of the 
$68/hour blended hourly rate).
---------------------------------------------------------------------------

    The Commission estimates the aggregate ongoing annual costs 
incurred by SBSEFs to comply with Rule 819(j) would be $1,208.\959\
---------------------------------------------------------------------------

    \959\ $1,208 = 2.5 hours x $483/hour national hourly rate for an 
attorney. See infra section XVIII.D.4. See also supra note 956 
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    The Commission estimates the aggregate ongoing annual costs 
incurred by SBSEFs to update information required by Rule 826(f) would 
be $162.\960\ The Commission estimates that interested parties would 
incur aggregate one-time costs of $115,920 in the first year and 
$77,280 in each subsequent year to submit exemption requests under one 
or both paragraphs of Rule 833.\961\
---------------------------------------------------------------------------

    \960\ $162 = 2 hours x $81/hour national hourly rate for a 
compliance clerk. See infra section XVIII.D.4(f). The per-hour 
figure for a compliance clerk is from SIFMA's Office Salaries in the 
Securities Industry--2013, as modified by Commission staff to adjust 
for inflation (through Dec. 2022) 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.
    \961\ First year costs: $115,920 = 240 hours x $483/hour 
national hourly rate for an attorney. Costs in each subsequent year: 
$77,280 = 160 hours x $483/hour national hourly rate for an 
attorney. See infra section XVIII.D.5(a). See also supra note 956 
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    The Commission estimates that SBSEFs and SBS exchanges would incur 
aggregate one-time costs of $50,880 associated with drafting and 
implementing rules to comply with Rules 834(b) and (c).\962\
---------------------------------------------------------------------------

    \962\ $50,880 = 120 hours x $424/hour national hourly rate for a 
compliance attorney. The estimate of 120 burden hours is based on 
the Commission's estimate that five SBSEFs and three SBS exchanges 
will incur paperwork burdens associated with Rules 834(b) and (c). 
See infra section XVIII.D.4(g). The per-hour figure for a compliance 
attorney is from SIFMA's Management and Professional Earnings in the 
Securities Industry--2013, as modified by Commission staff to adjust 
for inflation (through Dec. 2022) 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 Commission estimates that SBSEFs and SBS exchanges would incur 
aggregate ongoing annual costs of $680 to comply with Rules 834(d), 
834(e), and 834(f).\963\
---------------------------------------------------------------------------

    \963\ $680 = 10 hours x $68/hour blended hourly rate. Further, 
the costs incurred by SBSEFs = 5 (number of SBSEFs) x 1.25 hours per 
SBSEF x $68/hour blended hourly rate = $425. The burdens associated 
with this rule are not different from burdens associated with rules 
that have part 37 analogs. Thus, it is appropriate to apply the $68/
hour blended hourly rate to estimate the paperwork related costs 
associated with this rule. See infra section XVIII.D.4(g). See also 
supra note 952 (derivation of the $68/hour blended hourly rate).
---------------------------------------------------------------------------

    The Commission estimates that SBSEFs and SBS exchanges would incur 
aggregate one-time costs of $1,088 to comply with Rule 834(g).\964\
---------------------------------------------------------------------------

    \964\ $1,088 = 16 hours x $68/hour blended hourly rate. The 
burdens associated with this rule are not different from burdens 
associated with rules that have part 37 analogs. Thus, it is 
appropriate to apply the $68/hour blended hourly rate to estimate 
the paperwork related costs associated with this rule. See infra 
section XVIII.D.4(g). See also supra note 952 (derivation of the 
$68/hour blended hourly rate).
---------------------------------------------------------------------------

    The Commission estimates that SBSEFs would incur aggregate ongoing 
annual costs of $21,735 to comply with Rule 835.\965\
---------------------------------------------------------------------------

    \965\ $21,735 = 45 hours x $483/hour national hourly rate for an 
attorney. See infra section XVIII.D.5(b). See also supra note 956 
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    SBSEFs likely would incur costs to comply with the financial 
resources requirement of Rule 829(b). Assuming that SBSEFs satisfy this 
requirement by holding financial resources in the form of their own 
capital pursuant to Rule 829(c)(1), the Commission estimates that 
SBSEFs would incur an aggregate annual cost of capital of $35,436.\966\

[[Page 87260]]

SBSEFs could lower this cost if their capital consists of financial 
assets that generate a return that would serve to offset the cost of 
capital. However, this cost mitigation is potentially limited by Rule 
829(d), which would require an SBSEF to include among the financial 
resources it holds a certain amount of unencumbered, liquid financial 
assets (i.e., cash and/or highly liquid securities),\967\ that tend to 
generate little or no return.
---------------------------------------------------------------------------

    \966\ The Commission estimates the financial resources that 
SBSEFs would need to hold pursuant to Rule 829(b) as their projected 
operating costs. See Rule 829(b). Further, the Commission estimates 
SBSEFs' projected operating costs as the sum of the aggregate 
ongoing annual costs incurred by SBSEFs to comply with Regulation 
SE. Thus, SBSEFs' estimated projected operating costs = $131,580 
(ongoing compliance with other requirements that are similar to the 
remainder of part 37) + $33,000 (rule and product filing processes 
by SBSEFs) + $604 (Rule 809) + $88 (Rule 811(d)) + $27,142 (Rule 
819(i)) + $1,208 (Rule 819(j)) + $162 (Rule 826(f)) + $425 (Rules 
834(d), (e), and (f)) + $21,735 (Rule 835) = $215,943. Thus, the 
Commission estimates that SBSEFs would hold $215,943 in the form of 
their own capital to comply with Rule 829(b). The Commission 
estimates SBSEFs' cost of capital to be 16.41%. See supra note 896 
(describing how the cost of capital is estimated). SBSEFs' aggregate 
annual cost of capital = $215,943 x 16.41% = $35,436. The Commission 
acknowledges that there is uncertainty associated with this 
estimate. The estimate does not account for the fact that SBSEFs may 
use reasonable discretion in determining the methodologies used to 
calculate projected operating costs and wind down costs, pursuant to 
Rule 829(e). Depending on how SBSEFs exercise this reasonable 
discretion, the resulting methodologies could yield projected 
operating costs and in turn, required financial resources, that may 
be higher or lower than the Commission's estimate.
    \967\ The CFTC's experience overseeing SEFs would appear to 
support the belief that SBSEFs would hold unencumbered, liquid 
financial assets rather than obtain a line of credit to comply with 
Rule 829(d). In a previous rulemaking, the CFTC noted that most SEFs 
satisfy the liquidity requirement of Sec.  37.1303 (the analog of 
Rule 829(d)) through maintaining liquid assets rather than obtaining 
a line of credit. See CFTC, Swap Execution Facilities, 86 FR 9224, 
9242 n.247 (Feb. 11, 2021) (``2021 SEF Amendments Adopting 
Release'').
---------------------------------------------------------------------------

(e) Assessment Costs
    The Commission estimates that 86 entities likely would incur 
assessment costs as a result of Rule 832, based on a staff analysis of 
counterparties to U.S. single-name CDS for the 12-month period from 
October 2021 to September 2022. Such costs would be related primarily 
to the identification of the counterparty status and origination 
location of the transaction to determine whether the trade execution 
requirement would apply. Market participants would request 
representations from their transaction counterparties to determine the 
U.S.-person status of their counterparties. In addition, if the 
transaction is guaranteed by a U.S. person, the guarantee would be part 
of the trading documentation and, therefore, the existence of the 
guarantee would be a readily ascertainable fact. Similarly, market 
participants would be able to rely on their counterparties' 
representations as to whether a transaction is arranged, negotiated, or 
executed by a person within the United States. Therefore, the 
assessment costs associated with Rule 832 should be limited to the 
costs of establishing a compliance policy and procedure of requesting 
and collecting representations from trading counterparties and 
maintaining the collected representations as part of the market 
participants' recordkeeping procedures. Such assessment costs would be 
approximately $19,320 per entity.\968\ Requesting and collecting 
representations would be part of the standardized transaction process 
reflected in the policies and procedures regarding SBS transactions and 
trading practices and should not result in separate assessment costs.
---------------------------------------------------------------------------

    \968\ $19,320 = 40 hours x $483/hour national hourly rate for an 
attorney. This estimate is based on an estimated 40 hours of in-
house legal or compliance staff's time to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representations may be 
built into a form of standardized trading documentation. See supra 
note 956 (derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    The Commission also considers the likelihood that market 
participants could implement systems to keep track of counterparty 
status for purposes of future trading of SBS that are similar to, if 
not the same as, the systems implemented by market participants for 
purposes of assessing SBS dealer or major SBS participant status. 
Implementation of such a system would involve one-time programming 
costs of $15,758 per entity.\969\ Therefore, the Commission estimates 
the total one-time costs per entity associated with Rule 832 could be 
$35,078 and the aggregate one-time costs could be $3,016,708.\970\ To 
the extent that market participants have incurred costs relating to 
similar or the same assessments with respect to counterparty status and 
transaction location for other Title VII requirements, their assessment 
costs with respect to Rule 832 may be less.
---------------------------------------------------------------------------

    \969\ This is based on an estimate of the time required for a 
programmer analyst to modify the software to track the covered 
person status of a counterparty, including consultation with 
internal personnel, and an estimate of the time such personnel would 
require to ensure that these modifications conformed to the 
definition of ``covered person'' (as defined in Rule 832). $15,758 = 
(2 hours x $424/hour national hourly rate for a compliance attorney) 
+ (4 hours x $360/hour national hourly rate for a compliance 
manager) + (40 hours x $280/hour national hourly rate for a 
programmer analyst) + (4 hours x $266/hour national hourly rate for 
a senior internal auditor) + (2 hours x $603/hour rate for a Chief 
Financial Officer). The per-hour figures for compliance attorney, 
compliance manager, programmer analyst, and senior internal auditor 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry--2013, as modified by Commission staff to adjust 
for inflation (through Dec. 2022) 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 hourly rate for a Chief 
Financial Officer is the $473 hourly rate for the same position used 
in the Cross-Border Adopting Release (see 78 FR 31140 n.1425) and 
adjusted for inflation through Dec. 2022.
    \970\ Total one-time costs per entity = $19,320 (compliance 
policy and procedure) + $15,758 (systems) = $35,078. Aggregate one-
time costs = 86 entities x $35,078 = $3,016,708.
---------------------------------------------------------------------------

(f) Structured Data and Electronic Filing Costs
    As mentioned previously, the Commission will require many of the 
disclosures required under Regulation SE to be provided via EDGAR in a 
structured data language. SBSEFs will likely incur limited costs to 
comply with the proposed requirement in Rule 825(c)(3) to publish Daily 
Market Data Reports using the most recent versions of the associated 
XML schema and PDF renderer as published on the Commission's website. 
Because SBSEFs are required to use structured data to fulfill their 
reporting requirements under Regulation SBSR, the compliance cost 
associated with the Rule 825(c)(3) requirement will be limited to the 
cost prospective SBSEF registrants will incur to update their systems 
to incorporate the Commission's XML schema for Daily Market Data 
Reports.\971\ Such costs are included among the costs for prospective 
SBSEF registrants in making limited changes to their systems, policies, 
and procedures to comply with proposed SEC rules that differ slightly 
from analogous CFTC rules, as discussed in further detail above.\972\
---------------------------------------------------------------------------

    \971\ See 17 CFR 242.907(a)(2) (requiring information to be 
submitted to SDRs in an ``open-source structured data format that is 
widely used by participants'').
    \972\ See supra note 920 and accompanying text.
---------------------------------------------------------------------------

    With respect to the Inline XBRL requirements for various 
disclosures required under Regulation SE, SBSEFs will incur initial 
Inline XBRL implementation costs (such as the cost of training in-house 
staff to prepare filings in Inline XBRL, and the cost to license Inline 
XBRL filing preparation software from vendors) and ongoing Inline XBRL 
compliance burdens that will result from the tagging requirements, 
because prospective SBSEF registrants are not currently subject to 
Inline XBRL requirements. The custom XML requirements under Regulation 
SE will not impose these costs on SBSEFs, because SBSEFs will have the 
option of complying with those requirements by completing a fillable 
web form rather than structuring the disclosures in custom XML 
themselves. Also, as discussed in greater detail below, the Inline XBRL 
implementation costs could be mitigated to some extent, because six of 
the seven SEFs that list index CDS for trading (i.e., the pool of 
likely SBSEF applicants) have parent or affiliate entities that make 
filings in Inline XBRL, which raises the

[[Page 87261]]

possibility that some (if not most) SBSEFs might be able to take 
advantage of the knowledge of Inline XBRL possessed by their parent or 
affiliate entities.
    Further, the compliance costs associated with the structured data 
requirements, as adjusted for inflation, will likely decrease over 
time. SBSEFs will likely comply with structuring requirements more 
efficiently after gaining experience over repeated filings, though such 
an effect will likely be diminished for affected entities that already 
have experience structuring similar data in other documents. Third-
party vendors of structured data compliance software or services may 
decrease the prices of their products over time; the XBRL compliance 
costs reported in the 2018 AICPA survey of smaller operating companies 
reflect such a trend, as they represented a 45% decline in average cost 
and a 69% decline in median cost from 2014.\973\
---------------------------------------------------------------------------

    \973\ AICPA, XBRL Costs for Small Companies Have Declined 45% 
since 2014 (2018), available at https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/xbrl-costs-for-small-companies.pdf. This 
survey was limited to operating companies, and was conducted before 
the transition from XBRL to Inline XBRL and the implementation of 
cover page tagging requirements for periodic reports.
---------------------------------------------------------------------------

    In addition to costs associated with structured data requirements, 
because prospective SBSEF registrants are not currently subject to 
EDGAR requirements, hey will incur a one-time compliance burden of 
submitting a Form ID as required by Rule 10(b) of Regulation S-T.\974\ 
The aforementioned costs are included among the costs for prospective 
SBSEF registrants in making limited changes to their systems, policies, 
and procedures to comply with proposed SEC rules that differ slightly 
from analogous CFTC rules, as discussed in further detail above.\975\
---------------------------------------------------------------------------

    \974\ See 17 CFR 232.10(b).
    \975\ See supra note 920 and accompanying text.
---------------------------------------------------------------------------

    As noted above, we are requiring SBSEFs to submit rule and product 
filings in unstructured format using EFFS, rather than structuring the 
filings and submitting them via EDGAR.\976\ As a result of this change 
from the proposal, SBSEFs will not incur the compliance costs 
associated with applying Inline XBRL tags to their rule and product 
filings. We agree with one commenter who noted that an Inline XBRL 
requirement would cause SBSEFs to incur related compliance costs, 
although we do not agree that such costs would be so substantial as to 
serve as a potential market entry deterrent, or would create an unlevel 
playing field whereby national securities exchanges would have a 
competitive advantage over SBSEFs due to these discrepant costs. 
Rather, we are requiring rule and product filings to be filed through 
EFFS in unstructured format, because we believe the alleviation of 
compliance burdens resulting from the absence of a structuring 
requirement merits the lesser volume of machine-readable data, 
especially in light of the significant volume of structured SBSEF data 
available pursuant to other Regulation SE provisions.
---------------------------------------------------------------------------

    \976\ See supra section XVII.C.2.
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

    The new rules and amendments would likely affect competition, 
capital formation, and efficiency in various ways discussed below.
1. Competition
    As discussed earlier, currently, the SBS market is dominated by a 
small group of SBS dealers.\977\ A mandatory clearing determination by 
the Commission, followed by a MAT determination by one or more SBSEFs, 
should help foster greater competition in the trading of SBS by 
promoting greater order interaction and increasing participation on 
SBSEFs. The final rules provide a framework for allowing a number of 
trading venues to register as SBSEFs and thus more effectively compete 
for business in SBS. Furthermore, Rule 827 is designed to promote 
competition generally by prohibiting an SBSEF from adopting any rules 
or taking any actions that unreasonably restrain trade or impose any 
material anticompetitive burden on trading or clearing. Additionally, 
rules that improve access to SBSEFs by market participants (e.g., Rule 
819(c)) could increase participation and competition in liquidity 
provision in the SBS market.\978\ Rules that improve regulatory 
oversight, market integrity, and market predictability on SBSEFs and 
rules that reduce the risk of trading disruption on SBSEFs likely would 
increase market participants' confidence in the soundness of 
SBSEFs.\979\ To the extent that greater confidence in the soundness of 
SBSEFs increases participation by liquidity providers on SBSEFs, 
competition in liquidity provision could increase. To the extent that 
increased competition in liquidity provision reduces the price of 
liquidity provision (e.g., bid-ask spread), market participants could 
benefit in terms of lower transaction costs.
---------------------------------------------------------------------------

    \977\ See supra section XVII.B.2.
    \978\ See supra sections XVII.C.1 (discussing improved access 
and competition as an overarching benefit of the rules and 
amendments) and XVII.C.2 (discussing how rules that mitigate 
conflicts of interest between an SBSEF or SBS exchange and its 
members could help ensure access to SBSEFs and SBS exchanges and in 
turn increase competition in liquidity provision and lower 
transaction costs).
    \979\ See infra section XVII.D.2.
---------------------------------------------------------------------------

    Rules 815(f) and 815(g), by reducing the risk of information 
leakage and protecting market participants' anonymity for an SBS that 
is anonymously executed on an SBSEF and intended to be cleared, could 
increase participation on SBSEFs. This in turn could increase 
competition in liquidity provision, liquidity, and efficiency in the 
SBS market.\980\
---------------------------------------------------------------------------

    \980\ See supra section XVII.C.1 (discussing improved access and 
competition as an overarching benefit).
---------------------------------------------------------------------------

    Rule 806(a)(5), which requires an SBSEF to explain the anticipated 
benefits and potential anticompetitive effects on market participants 
of a proposed new rule or rule amendment, potentially could help foster 
a competitive SBS market because it could prompt SBSEFs to consider the 
positive as well as negative aspects of their proposed rules or rule 
amendments with respect to competition.\981\
---------------------------------------------------------------------------

    \981\ See supra section XVII.C.2 (discussing benefits associated 
with rule and product filings).
---------------------------------------------------------------------------

    As discussed earlier, Rules 819(c) and 819(e) would promote 
competition among entities that act as third-party service providers to 
SBSEFs. To the extent that increased competition among third-party 
service providers incentivizes them to offer cheaper, higher quality 
services to SBSEFs thereby lowering their costs, market participants 
that are SBSEF members could benefit if the SBSEFs pass on the cost 
savings in the form of lower fees to their members.\982\ Lower fees for 
SBSEF members would help reduce the overall costs of trading on SBSEFs 
and increase the efficiency of SBS trading.
---------------------------------------------------------------------------

    \982\ See supra section XVII.C.1 (discussing improved access and 
competition as an overarching benefit).
---------------------------------------------------------------------------

2. Capital Formation
    Regulation SE could promote capital formation by helping to improve 
regulatory oversight, market integrity, and market predictability. 
Regulation SE requires, among other things, that SBSEFs maintain an 
audit trail and automated trade surveillance system; conduct real-time 
market monitoring; establish and enforce rules for information 
collection; and comply with reporting and recordkeeping requirements. 
These requirements are designed to provide an SBSEF with sufficient 
information to oversee trading on its market, including detecting and

[[Page 87262]]

deterring abusive trading practices.\983\ The audit trail and 
recordkeeping and reporting requirements, by providing the Commission 
access to information about SBSEFs, will increase the Commission's 
ability to assess risks in the SBS market and to oversee the market, 
which all else being equal should reduce the amount of risky or abusive 
behavior in the SBS market.\984\ Further, Rule 831, the requirements 
relating to the CCO, would promote regulatory compliance on SBSEFs and 
the SBS market generally.\985\ In addition, Regulation SE provides for 
various safeguards to help promote market integrity, including Rule 
819(c) relating to impartial access to the SBSEF \986\ and Rule 830 
relating to systems safeguards. Rule 812(a) would help to improve 
predictability in the market by providing that a transaction entered 
into on or pursuant to the rules of an SBSEF shall not be void, 
voidable, subject to rescission, otherwise invalidated, or rendered 
unenforceable as a result of a violation by the SBSEF of the provisions 
of section 3D of the SEA or the Commission's rules thereunder. Any 
resulting increase in regulatory oversight, market integrity, and 
market predictability likely would increase market participants' 
confidence in the soundness of SBSEFs, which in turn could spill over 
into increased confidence in the soundness of the SBS market more 
broadly. Such increased confidence could lead to the greater use of 
SBS, particularly those traded on SBSEFs, by corporate entities to 
hedge their business risks and investors to hedge their portfolio risks 
with respect to positions in underlying securities. To the extent that 
corporate entities can improve their hedging efficiency with SBS, they 
may divert resources from precautionary savings into productive assets, 
thereby promoting capital formation. To the extent that investors can 
improve their hedging efficiency with SBS, they may be more willing to 
invest in the underlying securities, which should facilitate capital 
raising and formation by issuers. Therefore, the adopted rules would 
help encourage capital formation.
---------------------------------------------------------------------------

    \983\ See Rules 819, 821, 822, 826 and supra section XVII.C.1 
(discussing improved oversight of trading by SBSEFs as an 
overarching benefit of the rules and amendments).
    \984\ See supra section XVII.C.1 (discussing improved Commission 
oversight as an overarching benefit of the rules and amendments).
    \985\ See supra section XVII.C.2 (discussing the benefits 
associated with Rule 831).
    \986\ See supra note 978.
---------------------------------------------------------------------------

    Also, by reducing the risk of trading disruptions on SBSEFs, Rules 
829 and 830 could increase market participants' confidence in the 
soundness of SBSEFs, which in turn could lead to the greater use of SBS 
traded on SBSEFs thereby promoting capital formation as discussed 
above.
3. Efficiency
    The general approach of harmonizing as closely as practicable with 
analogous CFTC rules for SEFs, unless a reason exists to do otherwise 
in a particular area, likely will generate cost efficiencies and 
reduced burdens for SBSEF registrants that likely would be registered 
SEFs that have established systems and policies and procedures to 
comply with CFTC rules.\987\ Further, increased competition among 
third-party service providers, as a result of Rules 819(c) and 819(e), 
could lower SBSEFs' costs and bring about greater efficiency in their 
operation and SBS trading.\988\
---------------------------------------------------------------------------

    \987\ For example, the Commission's election to model Rules 804 
through 810 closely on analogous rules in part 40 of the CFTC's 
rules that apply to SEFs (and other registered entities) would 
impose minimal burdens on dually registered SEF/SBSEFs while 
obtaining similar regulatory benefits as the CFTC rules. In some 
cases, where a new rule or rule amendment affects both the swap and 
SBS business of a dually registered entity, the same or a very 
similar filing could be made to each of the CFTC and SEC, in lieu of 
having to make different filings to support the same rule change. 
See supra section XVII.C.2 (discussing the benefits associated with 
rule and product filings).
    \988\ See supra section XVII.D.1.
---------------------------------------------------------------------------

    The automation and systems development associated with the 
regulation of SBSEFs could provide SBS market participants with new 
platforms and tools to execute and process transactions in SBS more 
rapidly and at a lower expense per transaction. Such increased 
efficiency could enable members of the SBSEF to handle increased 
volumes of SBS with greater efficiency and timeliness.\989\
---------------------------------------------------------------------------

    \989\ See supra section XVII.C.1 (discussing improved automation 
as an overarching benefit of the rules and amendments).
---------------------------------------------------------------------------

    The requirements with respect to pre-trade price transparency could 
lead to more efficient pricing in the SBS market. The rules are 
designed to increase pre-trade price transparency for SBS, which should 
aid market participants in evaluating current market prices for SBS, 
thereby furthering more efficient price discovery. Increased pre-trade 
price transparency, coupled with increased competition in liquidity 
provision as discussed above,\990\ could decrease the spread in quoted 
prices and lead to higher efficiency in the trading of SBS.
---------------------------------------------------------------------------

    \990\ See supra section XVII.D.1.
---------------------------------------------------------------------------

    The Commission recognizes the possibility that pre-trade price 
transparency could cause market participants to reveal more information 
about trading interest than they believe would be economically 
desirable. If market participants consider that pre-trade price 
transparency requirements are too burdensome and choose not to 
participate in the market, market efficiency could be reduced insofar 
as these market participants forgo any potential economic benefits that 
may have resulted from transacting in the SBS market. However, several 
factors mitigate such concerns. First, pursuant to Rule 815(c)(2), an 
SBSEF may offer any execution method for Permitted Transactions. Thus, 
a market participant engaging in a Permitted Transaction may choose to 
use an execution method that reveals the desired, or at least 
preferred, amount of information about trading interest. Second, 
pursuant to Rule 815(a)(2), an SBSEF will be required to offer two 
execution methods for Required Transactions (limit order book and RFQ-
to-3). Thus, market participants have flexibility in the degree of pre-
trade transparency they wish to employ, which should attenuate 
potential concerns associated with revealing too much information about 
trading interest.\991\ Rules 829 and 830 may reduce the risk of trading 
disruptions on SBSEFs that may otherwise prevent market participants 
from impounding information into SBS prices through market activity 
(e.g., order submission), and thus could improve the price efficiency 
in the SBS market.
---------------------------------------------------------------------------

    \991\ See supra section XVII.C.1 (discussing the different 
degrees of pre-trade transparency associated with limit order book 
and RFQ-to-3).
---------------------------------------------------------------------------

E. Reasonable Alternatives

    The Commission considered a number of alternatives when finalizing 
the rules and amendments in this release.
1. Abbreviated Registration Procedures for CFTC-Registered SEFs
    Several commenters suggest that the Commission provide abbreviated 
registration procedures for CFTC-registered SEFs either by using the 
Commission's exemptive authority to provide a streamlined registration 
process for such applicants \992\ or by permitting such applicants to 
register utilizing their current documentation filed pursuant to the 
requirements of Form SEF with an accompanying addendum reflecting only 
those changes necessary to fulfill the specific requirements of 
proposed Regulation

[[Page 87263]]

SE, in lieu of filing a new Form SBSEF.\993\ Some of these commenters 
believe that a streamlined registration process would ease the burden 
of new requirements imposed on potential dual-registrants, be more 
efficient, lower registration costs, encourage the entry of market 
participants, and expedite the establishment and operation of 
SBSEFs.\994\ The Commission acknowledges that the alternative could 
potentially have such beneficial effects. However, the adopted approach 
is preferable to the alternative. As a general matter, the SBSEF 
registration process is intended for all applicants. While entities 
that will seek to register as SBSEFs are likely to be CFTC-registered 
SEFs,\995\ the registration process should nevertheless address the 
possibility that some applicants might not be CFTC-registered SEFs. 
Requiring all applicants to follow the same registration process will 
provide a level playing field for all applicants by avoiding conferring 
a competitive advantage on applicants that are CFTC-registered SEFs. 
This in turn may encourage the entry of additional market participants. 
As discussed in section III.A.2., the adopted approach supports 
consistency in the review by the Commission and its staff of 
applications for registration of SBSEFs and avoids introducing bias or 
prejudice into the Commission's review. Such consistency could in turn 
increase the efficiency of the review process and help expedite the 
establishment and operation of SBSEFs.
---------------------------------------------------------------------------

    \992\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg 
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE 
Letter, supra note 18, at 5.
    \993\ See ICE Letter, supra note 18, at 5.
    \994\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg 
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3.
    \995\ See supra section XVII.B.4.
---------------------------------------------------------------------------

2. Shorten Review Period for Self-Certified Product Listing
    In connection with the ten-business-day review period under 
Proposed Rule 804(a)(2), two commenters recommend a shorter review 
period of one business day to harmonize with the CFTC's approach.\996\ 
Alternatively, one of the commenters suggests a two-business-day review 
period.\997\ According to these commenters, a shorter review period 
will allow market operators to meet participants' demands to transact 
on regulated platforms in a reasonable period of time; accommodate 
participants' needs to hedge risk in a timely manner; and increase the 
competitive benefit and innovation incentive to SBSEFs to develop new 
products by making it less attractive for other SBSEFs to list ``look 
alike'' products. In finalizing Rule 804(a)(2), the Commission has 
considered the trade-off between the benefits of a shorter review 
period as described by the commenters and the benefits of having 
sufficient time to review a new product filing and to issue a stay if 
warranted. The ten-business-day review period set forth in final Rule 
804(a)(2) strikes an appropriate balance between these sets of 
benefits. To the extent that the ten-business-day review period limits 
market operators' ability to meet participants' demands to transact on 
regulated platforms in a reasonable period of time, that limitation is 
appropriate in light of the benefits of having sufficient time to 
review a new product filing and to issue a stay if warranted. While a 
shorter review period may accommodate market participants' need to 
hedge risk in a timely manner, these market participants also could 
hedge their risk during the ten-business-day review period, albeit in 
the OTC SBS market. The Commission does not believe the additional 
hedging benefit, if any, associated with a shorter review period is 
sufficient to justify adopting this alternative. Rule 804 may not 
necessarily limit the competitive benefit and innovation incentive to 
SBSEFs to develop new products. SBSEFs that wish to list ``look alike'' 
products also will face a ten-business-day review period if they list 
such products pursuant to Rule 804.\998\ Thus, such SBSEFs will lag 
behind the SBSEF that first lists a given SBS, which could capture a 
significant portion, if not most, of the revenues associated with the 
trading of that product. Even if the 10-day review period were to 
reduce the first-to-market competitive advantage of an SBSEF that first 
lists a given SBS, the extent of such an advantage may vary 
considerably based on other factors in the SBSEF market. Ultimately, 
the need for the Commission to have sufficient time to review a new 
product before it is listed and thereby help ensure it meets regulatory 
requirements aimed to protect investors and support fair and efficient 
markets justifies this potential competitive effect. Accordingly, the 
adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

    \996\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra 
note 18, at 2.
    \997\ See WMBAA Letter, supra note 18, at 4.
    \998\ In this context, SBSEFs that wish to list products 
expeditiously likely will not choose to list them pursuant to Rule 
805, which requires a 45-day review period that could be extended 
for an additional 45 days. See Rules 805(c) and (d).
---------------------------------------------------------------------------

3. Incorporate CFTC's Impartial Access Requirement Guidance
    Several commenters urge the Commission to incorporate the CFTC's 
impartial access requirement guidance with respect to access to SBSEFs 
into the text of Rule 819. According to these commenters, such an 
alternative would provide market participants with guidance and clarity 
regarding how Proposed Rule 819(c) will be interpreted and applied in 
practice. The commenters believe that the alternative would increase 
competition, transparency, and liquidity in the SBS markets; lower 
transaction costs through increased competition; and result in greater 
market-led innovation in the SBS markets.\999\ The Commission 
acknowledges that the alternative could have beneficial effects on 
competition, transaction costs, transparency, liquidity, and innovation 
as the commenters asserts. However, the alternative raises several 
concerns. First, if, in the future, the CFTC's impartial access 
requirement guidance were to be modified, the regulatory regime for 
SEFs might differ from that for SBSEFs. This in turn could limit 
harmonization with the CFTC's regulatory regime and potentially 
increase compliance burdens for market participants if they have to 
comply with different requirements for SEFs and SBSEFs.
---------------------------------------------------------------------------

    \999\ See Bloomberg Letter, supra note 18, at 3, 16; Citadel 
Letter, supra note 18, at 6-7; MFA Letter, supra note 18, at 2, 9-
11; SIFMA AMG Letter, supra note 18, at 4.
---------------------------------------------------------------------------

    Second, as discussed in section VI.B.3 above, efforts to undermine 
the principle of impartial access may take myriad forms over time. It 
is preferable to emphasize the principle of impartial access in the 
rule text as an affirmative requirement with which to comply. The 
adopted approach would incentivize SBSEFs to constantly review their 
practices to ensure compliance with the principle of impartial access. 
The Commission also considered the alternative of incorporating into 
the text of Rule 819 a non-exclusive list of the means that may violate 
the principle of impartial access. This alternative would raise the 
same concerns discussed above.
    The adopted approach may nevertheless generate the beneficial 
effects suggested by the commenters. Rule 819(c) is broad enough to 
permit market participants to use the same practices that they are 
using pursuant to the CFTC guidance. Consistent with the Commission's 
belief that prospective SBSEF registrants are likely to be CFTC-
registered SEFs that are active in the index CDS market,\1000\ 
prospective SBSEF registrants likely will use the systems, policies, 
and procedures that were created to comply with the CFTC

[[Page 87264]]

guidance to comply with Rule 819(c) in order to limit their compliance 
burdens. The Commission is adopting Rule 815(g), which specifies that 
SBSEFs shall establish and enforce rules that provide that a security-
based swap that is intended to be cleared at the time of the 
transaction, but is not accepted for clearing at a registered clearing 
agency, shall be void ab initio. This rule would obviate the need for 
breakage agreements for SBS that are intended to be cleared, one of the 
items prohibited by the CFTC's guidance.\1001\ As discussed in section 
XVII.C, Regulation SE may bring several benefits to the SBS market 
including, among other things, increased competition,\1002\ 
transparency, and liquidity; reduced transaction costs; \1003\ and 
market innovation in the form of new platforms and tools to execute and 
process SBS transactions more efficiently.\1004\ In light of the above, 
the adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

    \1000\ See supra section XVII.B.
    \1001\ See Division of Clearing and Risk, Division of Market 
Oversight and Division of Swap Dealer and Intermediary Oversight 
Guidance on Application of Certain Commission Regulations to Swap 
Execution Facilities, CFTC (Nov. 14, 2013), n.3, available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
    \1002\ See supra sections XVII.C.1 (discussing improved access 
and competition as an overarching benefit of the rules and 
amendments) and XVII.D.1 (discussing how the new rules and 
amendments would likely affect competition).
    \1003\ See supra section XVII.C.1 (discussing improved 
transparency, increased liquidity, and reduced transaction costs as 
overarching benefits of the rules and amendments).
    \1004\ See supra section XVII.C.1 (discussing improved 
automation as an overarching benefit of the rules and amendments).
---------------------------------------------------------------------------

4. Harmonize With CFTC's STP Requirements
    In connection with Proposed Rule 823, several commenters recommend 
that the Commission harmonize with CFTC's STP requirements by 
establishing STP standards, incorporating relevant CFTC guidance, and 
prohibiting breakage agreements for SBS that are intended to be 
cleared.\1005\ The commenters suggest the alternative could reduce 
market, credit, and operational risks; facilitate hedging activity; 
avoid complexity and costs; increase competition; promote trading on 
SBSEFs and electronic trading; and increase transparency, liquidity, 
and fairness in the SBS markets.\1006\ The Commission acknowledges that 
the alternative could have beneficial effects as suggested by the 
commenters. However, the alternative raises several concerns. First, 
if, in the future, the CFTC's staff guidance were to be modified, the 
regulatory regime for SEFs might differ from that for SBSEFs. This in 
turn could limit harmonization with the CFTC's regulatory regime and 
potentially increase compliance burdens for market participants if they 
have to comply with different requirements for SEFs and SBSEFs. Second, 
the timeframes for a clearinghouse to accept or reject a trade for 
clearing set forth in the CFTC staff guidance could become outdated 
with advances in technology.\1007\ If that were to occur, changing 
those timeframes would be more difficult if they were included as part 
of Regulation SE, or even as Commission guidance included as part of 
this release. Any delays in changing those timeframes could mean that 
market participants would not be able to benefit from any reductions in 
market, credit, and operational risks associated with the technological 
advances that render obsolete the timeframes set forth in the CFTC 
staff guidance.
---------------------------------------------------------------------------

    \1005\ See Citadel Letter, supra note 18, at 6; MFA Letter, 
supra note 18, at 11-12; SIFMA AMG Letter, supra note 18, at 9.
    \1006\ See Citadel Letter, supra note 18, at 5; MFA Letter, 
supra note 18, at 12; SIFMA AMG Letter, supra note 18, at 9.
    \1007\ CFTC staff guidance on STP states that ``[derivatives 
clearing organizations] clearing swaps that are executed 
competitively on or subject to the rules of a . . . SEF and are 
accepting or rejecting trades within 10 seconds after submission are 
compliant with the timing standard of Regulation 39.12(b)(7).'' See 
CFTC 2013 STP Guidance, supra note 273.
---------------------------------------------------------------------------

    The adopted approach may nevertheless generate the beneficial 
effects suggested by the commenters. As discussed in section VI.F.3, 
Rule 823(c) is broad enough to permit market participants to use the 
same practices that they are using pursuant to the CFTC guidance. 
Consistent with the Commission's belief that prospective SBSEF 
registrants are likely to be CFTC-registered SEFs that are active in 
the index CDS market,\1008\ prospective SBSEF registrants likely will 
use the systems, policies, and procedures that were created to comply 
with the CFTC guidance to comply with Rule 823(c) in order to limit 
their compliance burdens. Further, to comply with the impartial access 
requirements of Rule 819(c), registered SBSEFs would, among other 
things, avoid acts that purposefully delay clearing submission in order 
to favor certain market participants over others. Lastly, the 
Commission is adopting Rule 815(g), which specifies that SBSEFs shall 
establish and enforce rules that provide that a security-based swap 
that is intended to be cleared at the time of the transaction, but is 
not accepted for clearing at a registered clearing agency, shall be 
void ab initio. This rule would obviate the need for breakage 
agreements for SBS that are intended to be cleared. Accordingly, the 
adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

    \1008\ See supra section XVII.B.
---------------------------------------------------------------------------

5. No Block Trade Exception
    In finalizing Regulation SE, the Commission considered the 
alternative of not adopting a block trade exception from the Required 
Transaction requirement in Rule 815(a)(2) for credit SBS. This 
alternative could extend the benefits of increased pre-trade 
transparency \1009\ to SBS transactions of a larger notional size. 
However, this alternative would deviate from the CFTC's approach to 
block trades and thus reduce harmonization with the CFTC regime for 
swaps. In addition, as one commenter expressed, under this alternative, 
market participants would have difficulty executing, or would be unable 
to execute, large bona fide trades, since they would be required to do 
so only through the order book. This would increase the cost of trading 
and hedging, the commenter says, which could reduce participation in 
certain markets, resulting in less liquidity and increased 
volatility.\1010\ This commenter asserts that exempting block trades 
from order book and RFQ execution requirements is critical to the 
functioning of the SBS markets, particularly to execute large trades 
without affecting price.\1011\ Another commenter states that the 
proposed exception for block trades would provide flexibility for 
market participants executing SBS transactions of a significantly large 
size and mitigate the risks of information leakage and impairment of 
market liquidity.\1012\ Another commenter agrees with the Proposing 
Release's assessment that the block exception to the required methods 
of execution balances the promotion of price competition and all-to-all 
trading against the potential costs to the market participants who wish 
to trade large orders, the importance of which they note is more acute 
in the SBS market, which is a smaller and less liquid market than the 
swap market.\1013\
---------------------------------------------------------------------------

    \1009\ See supra section XVII.C.1 (discussing that increased 
pre-trade transparency could increase price competition and price 
efficiency; improve liquidity; reduce transaction costs; and 
facilitate execution quality analysis).
    \1010\ See MFA Letter, supra note 18, at 5-6.
    \1011\ Id.
    \1012\ See ICI Letter, supra note 18, at 10.
    \1013\ See Bloomberg Letter, supra note 18, at 14.
---------------------------------------------------------------------------

    The Commission agrees with commenters that a block-trade exception 
is appropriate for credit SBS, not only to maintain harmonization with 
the CFTC regime for swaps but also to

[[Page 87265]]

facilitate trading of credit SBS. This approach, which is consistent 
with the approach of the CFTC for swaps, will be especially important 
in the smaller, less liquid credit SBS markets if and when a clearing 
determination has been made for one or more SBS. A block-trade 
exception for credit SBSs subject to the trade-execution requirement, 
provided that ``block trade'' is appropriately defined for those SBSs, 
can help ensure that large trades are not significantly more difficult 
and costly to execute because of the risks posed by information leakage 
and the potential for adverse price movement, which could significantly 
impair liquidity in the markets for those SBSs.
    Accordingly, the adopted approach is preferable to the alternative.
6. Adopting Proposed Block Trade Definition Now
    In finalizing Regulation SE, the Commission considered the 
alternative of adopting the proposed definition of ``block trade'' 
under Rule 802. For the third prong of the ``block trade'' definition, 
the Commission proposed that the SBS be based on a single credit 
instrument (or issuer of credit instruments) or a narrow-based index of 
credit instruments (or issuers of credit instruments) having a notional 
size of $5 million or greater.\1014\
---------------------------------------------------------------------------

    \1014\ See Proposing Release, supra note 1, 87 FR at 28896.
---------------------------------------------------------------------------

    As discussed earlier,\1015\ a number of commenters raise concerns 
that the proposed $5 million block-trade threshold for all credit SBSs 
would not be sufficiently tailored to the unique and varying trading 
and risk characteristics of the full range of credit SBS, creating the 
potential for the adverse market risks that commenters point out may 
arise from having a one-size-fits-all block threshold.
---------------------------------------------------------------------------

    \1015\ See supra section V.E.1(c)(ii) and Citadel Letter, supra 
note 18, at 9; ICI Letter, supra note 18, at 10-12; MFA Letter, 
supra note 18, at 5-8; SIFMA AMG Letter, supra note 18, at 10; ISDA-
SIFMA Letter, supra note 18, at 7-9.
---------------------------------------------------------------------------

    As discussed above, the Commission acknowledges these commenters' 
concerns. Further, unless and until the Commission has made a mandatory 
clearing determination regarding an SBS, it is not necessary to define 
a block-trade threshold for SBS, and it would be appropriate for the 
Commission to identify a block-trade threshold in the future after 
considering credit SBS transaction data and credit SBS markets at that 
time. In addition, the Commission agrees with commenters that 
additional consideration of credit SBS transaction data would help the 
Commission determine the appropriate block-trade threshold for credit 
SBS products, including whether different thresholds should apply to 
different types or groups of SBS. The Commission also agrees with 
commenters that the credit SBS markets are likely to evolve over time 
and that analysis of market data continues to be an important aspect of 
setting appropriate thresholds for both block trades and credit SBS 
public trade reporting.\1016\
---------------------------------------------------------------------------

    \1016\ See supra note 219.
---------------------------------------------------------------------------

    Therefore, as discussed above, the Commission is not adopting the 
proposed definition of ``block trade'' under Proposed Rule 802, or any 
other block-trade threshold. Instead, Rule 802 will include a note that 
a definition of ``block trade'' has not yet been adopted. This would 
allow the Commission to identify a block-trade threshold in the future 
after considering credit SBS transaction data and the evolution of the 
credit SBS markets. In light of the above, the adopted approach is 
preferable to the alternative.
7. Block Trade Definition for Equity SBS
    In finalizing Regulation SE, the Commission considered the 
alternative of adopting a definition of ``block trade'' applicable to 
equity SBS. One commenter suggests that the alternative would 
facilitate timely and efficient executions of equity SBS thereby 
supporting risk management activities, encourage the use of equity SBS 
for legitimate business purposes, including hedging, and facilitate 
capital formation.\1017\ Another commenter argues that the alternative 
would avoid information leakage regarding a market participant's 
investment strategies.\1018\
---------------------------------------------------------------------------

    \1017\ See MFA Letter, supra note 18, at 6-7.
    \1018\ See ICI Letter, supra note 18, at 12-13.
---------------------------------------------------------------------------

    The Commission acknowledges that the alternative could have 
beneficial effects as suggested by the commenters. However, as 
discussed in section V.E.1(c)(iii), an inappropriate block trade 
threshold for equity SBSs could create incentives for market 
participants to trade equity SBS over cash equities, listed equity 
options, and equity swaps. The Commission is concerned, in particular, 
that a shift in trading activity away from cash equities and listed 
equity options towards equity SBS could generate several adverse 
effects. First, such a shift in trading activity could reduce 
participation in the cash equities and listed equity options markets, 
including participation by liquidity providers. Reduced participation 
by liquidity providers could reduce competition in liquidity provision 
in these markets, which in turn could increase trading costs and 
decrease liquidity. Trading in these markets could become less 
efficient because of increased trading costs and decreased liquidity. 
Second, to the extent that trading becomes more costly in the cash 
equities and listed equity options markets, trading in these markets 
could be reduced, which could impede the incorporation of new 
information into the prices of cash equities and listed equity options 
through trading. This in turn could reduce price efficiency in the cash 
equities and listed equity options markets. Third, decreased liquidity 
in the cash equities market could raise the cost of capital for cash 
equities,\1019\ which in turn could discourage firms from issuing cash 
equity securities to finance investment projects and reduce capital 
formation.
---------------------------------------------------------------------------

    \1019\ See, e.g., Viral V. Acharya and Lasse Heje Pedersen, 
Asset Pricing With Liquidity Risk, 77 J. Fin. Econ. 375 (2005) and 
Yakov Amihud, Illiquidity and Stock Returns: Cross-Section and Time-
Series Effects, 5 J. Fin. Markets 31 (2002) (suggesting that the 
expected return of a stock, or cash equity security, increases as 
its liquidity decreases. To the extent that a cash equity security's 
expected return measures the cost of capital associated with cash 
equity financing, the cited research suggests that when a cash 
equity security's liquidity decreases, its cost of capital may 
increase.).
---------------------------------------------------------------------------

    The adopted approach may nevertheless generate the beneficial 
effects suggested by the commenters. Regulation SE would increase pre-
trade price transparency and competition in liquidity provision, which 
could decrease the spread in quoted prices and lead to higher 
efficiency in the trading of SBS.\1020\ In addition, the automation and 
systems development associated with the regulation of SBSEFs could 
provide SBS market participants with new platforms and tools to execute 
and process transactions in SBS more rapidly and at a lower expense per 
transaction. Such increased efficiency could enable members of the 
SBSEF to handle increased volumes of SBS with greater efficiency and 
timeliness.\1021\ Further, increased competition among third-party 
service providers, as a result of Rules 819(c) and 819(e), could lower 
SBSEFs' costs and bring about greater efficiency in their operation and 
SBS trading.\1022\
---------------------------------------------------------------------------

    \1020\ See supra section XVII.D.3.
    \1021\ Id.
    \1022\ Id.
---------------------------------------------------------------------------

    As discussed in section XVII.D.2, Regulation SE could improve 
regulatory oversight, market integrity, and market predictability, 
which could lead to the greater use of SBS (including equity SBS) and 
promote capital formation.

[[Page 87266]]

Also, by reducing the risk of trading disruptions on SBSEFs, Rules 829 
and 830 could increase market participants' confidence in the soundness 
of SBSEFs, which in turn could lead to the greater use of SBS traded on 
SBSEFs thereby promoting capital formation.\1023\
---------------------------------------------------------------------------

    \1023\ See supra section XVII.D.2.
---------------------------------------------------------------------------

    Regulation SE would address concerns about information leakage in 
various ways. First, pursuant to Rule 815(c)(2), an SBSEF may offer any 
execution method for Permitted Transactions. Thus, a market participant 
engaging in a Permitted Transaction (e.g., a large trade in equity SBS) 
may choose to use an execution method that reveals the desired, or at 
least preferred, amount of information about trading interest. Second, 
pursuant to Rule 815(a)(2), an SBSEF will be required to offer two 
execution methods for Required Transactions (limit order book and RFQ-
to-3). Thus, market participants have flexibility in the degree of pre-
trade transparency they wish to employ, which should attenuate 
potential concerns associated with revealing too much information about 
trading interest.\1024\
---------------------------------------------------------------------------

    \1024\ See supra sections XVII.D.3 and XVII.C.1 (discussing the 
different degrees of pre-trade transparency associated with limit 
order book and RFQ-to-3).
---------------------------------------------------------------------------

    In addition, until the Commission has made a clearing determination 
with respect to equity SBS, equity SBS will be able to trade OTC, just 
as their underlying cash equities can trade OTC. Moreover, before 
making a clearing determination for an equity SBS--which would create 
the circumstances in which equity SBS might be MAT and therefore 
subject to the trade-execution requirement--the Commission would have 
the opportunity to solicit and consider additional public comment on 
the effect of such a determination, including comment with respect to 
the concerns commenters have raised to date regarding, among other 
things, timely and efficient executions, hedging, and capital 
formation.
    In light of the above, the adopted approach is preferable to the 
alternative.
8. Alternatives to Rule 833
    In finalizing Rule 833, the Commission considered alternative 
approaches suggested by commenters. Four commenters suggest that the 
Commission grant automatic exemptions for foreign trading venues that 
are currently exempt under the CFTC's rules.\1025\ One commenter 
suggests the Commission grant an exemption from the trade execution 
requirement if the SBS transaction at issue is subject to mandatory 
trading in another jurisdiction.\1026\
---------------------------------------------------------------------------

    \1025\ See Bloomberg Letter, supra note 18, at 7, 18; ICE 
Letter, supra note 18, at 5; ISDA-SIFMA Letter, supra note 18, at 
15; Tradeweb Letter, supra note 18, at 6.
    \1026\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    With respect to these alternatives, the Commission is concerned 
that granting automatic exemptions would not afford the Commission the 
opportunity to appropriately consider the relevant facts and 
circumstances in support of a finding that an exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors. Further, to the extent that there are certain CFTC exempt 
foreign trading venues that do not intend to offer trading in SBS, it 
is unclear how the Commission's granting of an automatic exemption to 
these venues would benefit market participants that wish to trade SBS 
on regulated platforms. In light of the above, the adopted approach is 
preferable to these alternatives.
9. Alternatives From Proposal
    The Commission also considered certain alternatives discussed in 
the Proposing Release: (1) not harmonizing Regulation SE with analogous 
CFTC rules; (2) harmonizing the third prong of the definition of 
``block trade'' with the third prong of the CFTC definition of ``block 
trade''; (3) requiring SBSEFs to submit the information in the Daily 
Market Data Report directly to the Commission; (4) requiring an 
exemption order under Rule 833(a) to apply to a foreign trading venue 
only if it traded SBS and no other types of securities; (5) applying 
the revocation provisions of Rule 3a1-1(b) to SBSEFs and clearing 
agencies that are covered by paragraphs (a)(4) and (a)(5), respectively 
of Rule 3a1-1; and (6) not exempting SBSEF-Bs from section 17(a) of the 
SEA.\1027\ With respect to the alternative of not harmonizing 
Regulation SE with analogous CFTC rules, commenters generally agreed 
with the Commission's approach vis-[agrave]-vis this alternative. The 
Commission did not receive comments addressing the other alternatives 
and continues to believe that its approach with respect to these 
alternatives is appropriate, and believes the rules as adopted are 
preferable to these alternatives.
---------------------------------------------------------------------------

    \1027\ See Proposing Release, supra note 1, 87 FR at 28956-57.
---------------------------------------------------------------------------

10. Structured Disclosure Alternative
    The Commission also considered the alternative of requiring, as 
proposed, Inline XBRL for all SBSEF filings other than Daily Market 
Data Reports under Rule 825. However, limiting the scope of Inline XBRL 
requirements under Regulation SE will ease compliance burdens for 
SBSEFs while maintaining a significant level of machine-readability for 
SBSEF data available to market participants and public data users as 
well as Commission staff. Some of the disclosures proposed with Inline 
XBRL structuring will still be structured in the final rule, but with a 
custom XML requirement rather than an Inline XBRL requirement. This 
will allow SBSEFs to, at their option, input those disclosures into 
fillable web forms rather than structure the disclosures in the custom 
XML data language themselves, thereby providing greater flexibility to 
SBSEFs and potentially easing compliance burdens. For copies of 
existing documents attached to Form SBSEF, and for rule and product 
filings that were proposed with an Inline XBRL requirement will instead 
be filed in unstructured formats. Given the reduced compliance burdens 
on SBSEFs resulting from a more limited scope of Inline XBRL 
requirements, the adopted rules are preferable to the 
alternative.\1028\
---------------------------------------------------------------------------

    \1028\ See supra section XVII.C.3(f).
---------------------------------------------------------------------------

XVIII. Paperwork Reduction Act

    Certain provisions of the rules in Regulation SE contain new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\1029\ The Commission 
published a notice requesting comment on these collections \1030\ and 
submitted the proposed collection 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 title of the new collection of information 
is Regulation SE, and OMB Control Number 3235-0793 has been assigned. 
As adopted, Regulation SE creates a regime for the registration and 
regulation of SBSEFs and addresses other issues relating to SBS 
execution.
---------------------------------------------------------------------------

    \1029\ 44 U.S.C. 3501 et seq.
    \1030\ See Proposing Release, 87 FR at 28958-69.
---------------------------------------------------------------------------

    In addition, the Commission is amending Rule 3a1-1 under the SEA to 
exempt a registered SBSEF from the statutory definition of 
``exchange.'' Furthermore, the Commission is adopting new Rule 15a-12 
under the SEA that, while affirming that an SBSEF would also be a 
broker under the SEA, would exempt a registered SBSEF from certain 
broker requirements under the SEA.
    Regulation SE includes rules regarding the registration of a 
prospective SBSEF on Form SBSEF, the

[[Page 87267]]

filing of new or amended rules or new products with the Commission, and 
rules implementing the Core Principles for SBSEFs under section 3D(d) 
of the SEA.\1031\ 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.
---------------------------------------------------------------------------

    \1031\ 15 U.S.C. 78c-4(d). As adopted, Regulation SE contains 36 
separately designated rules (800 to 835, inclusive), which (if 
adopted) would be located in 17 CFR 242; a Form SBSEF (with 
instructions); and a submission cover sheet (with instructions). If 
adopted, the form and the submission cover sheet would be located in 
17 CFR 249.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The rules and rule amendments contained in Regulation SE include a 
collection of information within the meaning of the PRA for SBSEFs that 
are required to comply with Regulation SE and file a Form SBSEF with 
the Commission for registration as an SBSEF and, among other things, 
submit certain filings to the Commission pursuant to Rules 804-807 with 
respect to new products and proposed rule changes. In addition, Rule 
833 includes a collection of information within the meaning of the PRA 
for persons that wish to seek an exemption order under that rule, and 
Rule 834 includes a collection of information within the meaning of the 
PRA for SBS exchanges (in addition to SBSEFs). The Commission generally 
is adopting Regulation SE as proposed, except for certain sections that 
have been modified in response to comments received. The modified Rules 
that have associated paperwork burdens are Rules 804, 815, 819, 825, 
and 834. Each of these modifications and their impact on the paperwork 
burden are described in more detail below.
    Many of the rules that constitute Regulation SE are modeled after 
analogous CFTC rules, with only minor edits to reflect differences 
between the statutory regimes of the two agencies. Entities that are 
most likely to register with the Commission as SBSEFs are those already 
registered with the CFTC as SEFs. Such entities have made substantial 
investments in systems, policies, and procedures to comply with and 
adapt to the regulatory system developed by the CFTC. Harmonization 
will allow these dually registered entities to utilize their existing 
systems, policies, and procedures to comply with the Commission's SBSEF 
rules, and SEF members would likely face only marginal additional 
burdens to trade SBS as well as swaps on those SEF/SBSEFs. In light of 
these factors, the Commission has based many of its paperwork burden 
estimates on CFTC burden estimates calculated for analogous CFTC rules.
    The CFTC estimated PRA burdens by aggregating the burdens produced 
by a group of related rules, as explained more fully in section XX(D) 
below. In most cases, the Commission has modeled its methodology, 
assumptions, and calculations on those used by the CFTC with respect to 
its SEF regulations, while making adjustments that reflect differences 
between the scale of the market for swaps relative to the market for 
SBS--for example, the estimated number of SBSEFs, number of SBS market 
participants, and number of SBS transactions--as necessary. The 
Commission received no comments on its proposed PRA methodology, 
assumptions, calculations, and estimates, and such an approach 
continues to be appropriate. As noted above, almost all of the burden 
estimates are based on CFTC estimates that have been approved by OMB. 
The CFTC estimates that serve as the basis for the Commission's 
estimates have not changed since the Proposing Release has been 
published, with the exception of one estimate for Rule 811(d). 
Consequently, the Commission continues to estimate the burdens as those 
set forth in the Proposing Release, except for one adjustment to match 
a subsequent adjustment in the CFTC estimate relevant to Rule 811(d). 
As explained in more detail below, for rules that have been modified 
that contain associated paperwork burdens, the modifications do not 
result in any change in paperwork burden.
    The following is a summary of the rules contained in Regulation 
SE.\1032\ The paperwork burdens associated with each rule in Regulation 
SE are discussed in section XX(D) below.
---------------------------------------------------------------------------

    \1032\ See supra section II.A (discussing Rule 800); section 
II.B (discussing Rule 801); section II.C (discussing Rule 802); 
section III.A (discussing the registration provisions contained in 
Rule 803); section III.B (discussing Form SBSEF); section IV.A 
(discussing Rule 804); section IV.B (discussing Rule 805); section 
IV.C (discussing Rule 806); section IV.D (discussing Rule 807); 
section IV.GIV.F (discussing Rule 808); section IV.G (discussing 
Rule 809); section IV.H (discussing Rule 810); section V.A 
(discussing Rule 811); section V.B (discussing Rule 812); section 
V.C (discussing Rule 813); section V.D (discussing Rule 814); 
section V.E (discussing Rule 815); section V.F (discussing Rule 
816); section V.G (discussing Rule 817); section VI.A (discussing 
Rule 818); section VI.B (discussing Rule 819); section VI.C 
(discussing Rule 820); section VI.D (discussing Rule 821); section 
VI.E (discussing Rule 822); section VI.F (discussing Rule 823); 
section VI.G (discussing Rule 824); section VI.H (discussing Rule 
825); section VI.I (discussing Rule 826); section VI.J (discussing 
Rule 827); section VI.K (discussing Rule 828); section VI.L 
(discussing Rule 829); section VI.M (discussing Rule 830); section 
VI.N (discussing Rule 831); section VII.A (discussing Rule 832); 
section VII.B (discussing Rule 833); section VIII (discussing Rule 
834); section IX (discussing the notice required by Rule 835); 
section X (discussing amendments to Rule 3a1-1); section XI 
(discussing proposed Rule 15a-12); section XIV (discussing new rules 
and amendments to the Commission's Rules of Practice).

------------------------------------------------------------------------
                                                            Paperwork
      Rule No. and title           Overview of rule     burden  created?
------------------------------------------------------------------------
800--Scope....................  States that the         No.
                                 provisions of this
                                 section shall apply
                                 to every SBSEF that
                                 is registered or is
                                 applying to become
                                 registered as an
                                 SBSEF under section
                                 3D of the SEA.
801--Applicable provisions....  Requires an SBSEF to    No.
                                 comply with all
                                 applicable Commission
                                 rules, including any
                                 related definitions
                                 and cross-referenced
                                 sections.
802--Definitions..............  Definitions...........  No.
803--Requirements and           Sets out a process for  Yes.
 procedures for registration.    registering with the
                                 Commission as an
                                 SBSEF, including the
                                 submission of Form
                                 SBSEF.
804--Listing products for       Procedures by which an  Yes.\a\
 trading by certification.       SBSEF, via self-
                                 certification, may
                                 list a product for
                                 trading.
805--Voluntary submission of    Procedures for          Yes.
 new products for Commission     voluntary submission
 review and approval.            of new products for
                                 Commission review and
                                 approval.
806--Voluntary submission of    Procedures for          Yes.
 rules for Commission review     voluntary submission
 and approval.                   of new rules or rule
                                 amendments for
                                 Commission review and
                                 approval.

[[Page 87268]]

 
807--Self-certification of      Procedures by which an  Yes.
 rules.                          SBSEF can implement a
                                 new rule or rule
                                 amendment via self-
                                 certification.
808--Availability of public     Sets out the            No.
 information.                    information that will
                                 be made public with
                                 respect to
                                 applications to
                                 become an SBSEF as
                                 well as filings
                                 relating to rules and
                                 products.
809--Staying of certification   Provides for a stay of  Yes.
 and tolling of review period    a product
 pending jurisdictional          certification or
 determination.                  tolling of a review
                                 period for a product
                                 where it is unclear
                                 whether the product
                                 should be classified
                                 as an SBS under the
                                 jurisdiction of the
                                 SEC or a swap under
                                 the jurisdiction of
                                 the CFTC pending the
                                 issuance of a joint
                                 interpretation by the
                                 SEC and CFTC
                                 clarifying which
                                 agency has
                                 jurisdiction over the
                                 product.
810--Product filings by SBSEFs  Provides that an        Yes.
 that are not yet registered     applicant for
 and by dormant SBSEFs.          registration as an
                                 SBSEF may submit for
                                 Commission review and
                                 approval an SBS's
                                 terms and conditions
                                 or rules prior to
                                 listing the product
                                 as part of its
                                 application for
                                 registration.
811--Information relating to    Provides that an SBSEF  Yes.
 SBSEF compliance.               shall submit
                                 information to the
                                 Commission that the
                                 Commission requests,
                                 including
                                 demonstrations that
                                 the SBSEF is in
                                 compliance with one
                                 or more Core
                                 Principles,
                                 notification of a
                                 transfer 50% or more
                                 of the equity
                                 interest in the
                                 SBSEF, and
                                 information about
                                 pending legal
                                 proceedings.
812--Enforceability...........  Provides that a         Yes.
                                 transaction entered
                                 into on or pursuant
                                 to the rules of an
                                 SBSEF shall not be
                                 void, voidable,
                                 subject to
                                 rescission, otherwise
                                 invalidated, or
                                 rendered
                                 unenforceable because
                                 of a violation by the
                                 SBSEF of section 3D
                                 of the SEA or the
                                 Commission's rules
                                 thereunder; also
                                 requires an SBSEF to
                                 provide each
                                 counterparty to a
                                 transaction on the
                                 SBSEF with a written
                                 record of all the
                                 terms of the
                                 transaction that were
                                 agreed to on the
                                 SBSEF.
813--Prohibited use of data     Provides that an SBSEF  No.
 collected for regulatory        shall not use for
 purposes.                       business or marketing
                                 purposes any
                                 proprietary data or
                                 personal information
                                 that it collects or
                                 receives, from or on
                                 behalf of any person,
                                 for the purpose of
                                 fulfilling its
                                 regulatory
                                 obligations, without
                                 such person's
                                 consent; also
                                 requires the SBSEF
                                 not to condition
                                 access to its markets
                                 on such consent and
                                 provide that the
                                 SBSEF may, where
                                 necessary for
                                 regulatory purposes,
                                 share such data or
                                 information with
                                 other registered
                                 SBSEFs or exchanges.
814--Entity operating both a    Provides that an        No.
 national securities exchange    entity that intends
 and SBSEF.                      to operate both a
                                 national securities
                                 exchange and an SBSEF
                                 shall separately
                                 register the two
                                 facilities pursuant
                                 to section 6 of the
                                 SEA and Rule 803,
                                 respectively; also
                                 provides that a
                                 national securities
                                 exchange shall, to
                                 the extent that the
                                 exchange also
                                 operates an SBSEF and
                                 uses the same
                                 electronic trade
                                 execution system,
                                 identify whether
                                 electronic trading of
                                 SBS is taking place
                                 on or through the
                                 national securities
                                 exchange or the SBSEF.
815--Methods of execution for   Provides that a         Yes.
 Required and Permitted          Required Transaction
 Transactions.                   must be executed on
                                 an SBSEF through an
                                 order book or RFQ
                                 system, whereas a
                                 Permitted Transaction
                                 can be executed in
                                 any manner; also
                                 requires an SBSEF to
                                 maintain rules and
                                 procedures that
                                 facilitate the
                                 resolution of error
                                 trades and that an
                                 SBSEF shall not
                                 generally disclose
                                 the identity of a
                                 counterparty to an
                                 SBS that is executed
                                 anonymously and
                                 intended to be
                                 cleared.
816--Trade execution            Sets out a process and  Yes.
 requirement and exemptions      standards for an
 therefrom.                      SBSEF to MAT an SBS;
                                 also establishes
                                 certain exemptions
                                 from the trade
                                 execution requirement.
817--Trade execution            Provides that an SBS    No.
 compliance schedule.            transaction shall be
                                 required to be
                                 executed on an SBS
                                 exchange or SBSEF
                                 upon the later of a
                                 determination by the
                                 Commission that the
                                 SBS is required to be
                                 cleared and 30 days
                                 after a MAT
                                 determination
                                 submission or
                                 certification for
                                 that SBS is approved
                                 or certified,
                                 respectively.
818--Core Principle 1           Requires a registered   Yes.
 (Compliance with Core           SBSEF to comply with
 Principles).                    the SEA's Core
                                 Principles for SBSEFs.

[[Page 87269]]

 
819--Core Principle 2           Requires a registered   Yes.
 (Compliance with rules).        SBSEF to establish,
                                 comply with, and
                                 enforce its own
                                 rules--including
                                 rules regarding
                                 market access; rules
                                 governing trading,
                                 trade processing, and
                                 participation that
                                 will deter abuses;
                                 rules governing the
                                 operation of the
                                 SBSEF; and rules to
                                 capture and retain an
                                 audit trail--and have
                                 the capacity to
                                 detect, investigate,
                                 and enforce those
                                 rules; also requires
                                 an SBSEF to establish
                                 rules that generally
                                 prohibit employees
                                 from trading any
                                 covered interest or
                                 disclosing any
                                 material, non-public
                                 information obtained
                                 as a result of their
                                 employment by the
                                 SBSEF; also requires
                                 an SBSEF to maintain
                                 in effect rules that
                                 render a person
                                 ineligible to serve
                                 on the SBSEF's
                                 disciplinary
                                 committees,
                                 arbitration panels,
                                 oversight panels, or
                                 governing board who
                                 has been found to
                                 have committed
                                 enumerated offenses.
820--Core Principle 3 (SBS not  Requires an SBSEF to    Yes.
 readily susceptible to          permit trading only
 manipulation).                  in SBS that are not
                                 readily susceptible
                                 to manipulation.
821--Core Principle 4           Requires an SBSEF to    Yes.
 (Monitoring of trading and      establish and enforce
 trade processing).              rules detailing
                                 trading and trade
                                 processing
                                 procedures, and to
                                 monitor trading and
                                 market activity to
                                 prevent manipulation,
                                 price distortion, and
                                 delivery or
                                 settlement
                                 disruptions; also
                                 requires an SBSEF to
                                 demonstrate that it
                                 has access to
                                 sufficient
                                 information to assess
                                 whether trading on
                                 its market or in the
                                 underlying assets or
                                 indexes is being used
                                 to affect prices on
                                 its market.
822--Core Principle 5 (Ability  Requires an SBSEF to    Yes.
 to obtain information).         establish and enforce
                                 rules that would
                                 allow it to obtain
                                 any information
                                 necessary to comply
                                 with section 3D of
                                 the SEA and to
                                 provide that
                                 information to the
                                 Commission on request.
823--Core Principle 6           Requires an SBSEF to    Yes.
 (Financial integrity of         establish and enforce
 transactions).                  rules for ensuring
                                 the financial
                                 integrity of SBS on
                                 its facility,
                                 including the
                                 clearance and
                                 settlement of the
                                 SBS; also requires
                                 that SBS that are
                                 required to be
                                 cleared shall be
                                 cleared by a
                                 registered clearing
                                 agency (or a clearing
                                 agency that has
                                 obtained an exemption
                                 from clearing agency
                                 registration to
                                 provide central
                                 counterparty services
                                 for SBS), that the
                                 SBSEF provide for
                                 minimum financial
                                 standards for its
                                 members, and that the
                                 SBSEF monitor its
                                 members for
                                 compliance with those
                                 standards.
824--Core Principle 7           Requires an SBSEF to    Yes.
 (Emergency authority).          adopt rules to
                                 provide for the
                                 exercise of emergency
                                 authority, in order
                                 for the SBSEF to
                                 maintain fair and
                                 orderly trading and
                                 prevent or address
                                 manipulation or
                                 disruptive trading
                                 practices.
825--Core Principle 8 (Timely   Requires an SBSEF to    Yes.
 publication of trading          make public timely
 information).                   information on price,
                                 trading volume, and
                                 other trading data on
                                 SBS transactions, as
                                 required by
                                 Regulation SBSR, and
                                 to publish on its
                                 website a Daily
                                 Market Data Report.
826--Core Principle 9           Sets forth              Yes.
 (Recordkeeping and reporting).  recordkeeping and
                                 reporting obligations
                                 for SBSEFs and
                                 requires an SBSEF to
                                 maintain, for a
                                 period of five years
                                 and in a form and
                                 manner acceptable to
                                 the Commission,
                                 records of all
                                 activities relating
                                 to the business of
                                 the facility,
                                 including a complete
                                 audit trail,.
827--Core Principle 10          Provides that, unless   No.
 (Antitrust considerations).     necessary or
                                 appropriate to
                                 achieve the purposes
                                 of the SEA, an SBSEF
                                 shall not adopt any
                                 rules or take any
                                 actions that result
                                 in any unreasonable
                                 restraint of trade or
                                 impose any material
                                 anticompetitive
                                 burden on trading or
                                 clearing.
828--Core Principle 11          Requires an SBSEF to    Yes.
 (Conflicts of interest).        establish and enforce
                                 rules to minimize
                                 conflicts of interest
                                 in its decision-
                                 making process and to
                                 establish a process
                                 for resolving such
                                 conflicts.
829--Core Principle 12          Requires an SBSEF to    Yes.
 (Financial resources).          have adequate
                                 financial,
                                 operational, and
                                 managerial resources
                                 to discharge its
                                 responsibilities;
                                 would also set forth
                                 the standards used to
                                 calculate the
                                 adequacy of such
                                 resources and require
                                 certain reports to
                                 the Commission.

[[Page 87270]]

 
830--Core Principle 13 (System  Requires an SBSEF to    Yes.
 safeguards).                    establish and
                                 maintain a program of
                                 automated systems and
                                 risk analysis to
                                 identify and minimize
                                 sources of
                                 operational risk,
                                 through the
                                 development of
                                 appropriate controls
                                 and procedures; would
                                 also require an SBSEF
                                 to establish and
                                 maintain emergency
                                 procedures, backup
                                 facilities, and a
                                 plan for disaster
                                 recovery; conduct
                                 periodic tests to
                                 verify those
                                 resources are
                                 sufficient; and
                                 notify the Commission
                                 promptly of any cyber
                                 incidents and
                                 material planned
                                 changes to the
                                 SBSEF's systems
                                 safeguards.
831--Core Principle 14          Requires an SBSEF to    Yes.
 (Designation of CCO).           designate a CCO and
                                 set forth regulatory
                                 and reporting
                                 obligations for the
                                 CCO.
832--Cross-border mandatory     Explains when the       No.
 trade execution.                SEA's trade execution
                                 requirement applies
                                 to a cross-border SBS
                                 transaction.
833--Cross-border exemptions..  Provides for a process  Yes.
                                 by which the
                                 Commission, upon
                                 making the requisite
                                 findings, could grant
                                 exemptions from the
                                 SEA definitions of
                                 ``exchange,''
                                 ``security-based swap
                                 execution facility,''
                                 and ``broker'' and
                                 exempt cross-border
                                 SBS from the SEA's
                                 trade execution
                                 requirement.
834--Mitigation of conflicts    Provides that each      Yes.
 of interest of SBSEFs and SBS   SBSEF and SBS
 exchanges.                      exchange must create
                                 and maintain rules to
                                 mitigate conflicts of
                                 interest between
                                 SBSEFs and SBS
                                 exchanges and their
                                 members, including by
                                 prohibiting members
                                 from owning 20% or
                                 more of the voting
                                 securities of an
                                 SBSEF or SBS exchange
                                 (with certain
                                 exceptions), and from
                                 exercising
                                 disproportionate
                                 influence in
                                 disciplinary
                                 proceedings; would
                                 also require each
                                 SBSEF and SBS
                                 exchange to submit to
                                 the Commission after
                                 every governing board
                                 election a list of
                                 each governing
                                 board's members, the
                                 groups they
                                 represent, and how
                                 the composition of
                                 the board complies
                                 with the requirements
                                 of Rule 834.
835--Notice to Commission by    Provides that, if an    Yes.
 SBSEF of final disciplinary     SBSEF issues a final
 action or denial or             disciplinary action
 limitation of access.           against a member,
                                 denies or conditions
                                 membership, or denies
                                 or limits access of a
                                 person to any
                                 services offered by
                                 the SBSEF, the SBSEF
                                 shall file a notice
                                 of such action with
                                 the Commission within
                                 30 days and serve a
                                 copy on the affected
                                 person.
3a1-1--proposed amendments....  Exempts from the SEA    No.
                                 definition of
                                 ``exchange'' a
                                 registered SBSEF that
                                 provides a market
                                 place for no
                                 securities other than
                                 SBS, and an entity
                                 that has registered
                                 with the Commission
                                 as a clearing agency
                                 and limits its
                                 exchange functions to
                                 operation of a
                                 trading session that
                                 is designed to
                                 further the accuracy
                                 of end-of-day
                                 valuations.
15a-12--Exemption for certain   Exempts a registered    No.
 SBSEFs from certain broker      SBSEF from certain
 requirements.                   broker requirements
                                 while affirming that
                                 an SBSEF is a broker
                                 under the SEA.
Rules and amendments to the     New rules and           No **.
 Commission's Rules of           amendments to the
 Practice.                       Rules of Practice to
                                 allow persons who are
                                 aggrieved by a final
                                 disciplinary action,
                                 a denial or
                                 conditioning of
                                 membership, or a
                                 denial or limitation
                                 of access by an SBSEF
                                 to seek an
                                 application for
                                 review by the
                                 Commission.
Amendments to Delegations of    Amendments to           No **.
 Authority in Rules 30-3 and     Commission's rules
 30-14.                          delegating authority
                                 to the Division
                                 Director and to the
                                 General Counsel in
                                 order to delegate
                                 authority to take
                                 actions necessary to
                                 carry out the rules
                                 under Regulation SE
                                 and to facilitate the
                                 operation of the
                                 regulatory structure
                                 created in Regulation
                                 SE.
------------------------------------------------------------------------
** The Commission finds, in accordance with section 553(b)(3)(A) of the
  Administrative Procedure Act (``APA''), 5 U.S.C. 553(b)(3)(A), that
  the revisions to the Commission's Rules of Practice, as well as the
  amendments to the Commission's delegations of authority to the
  Director of Trading and Markets pursuant to 17 CFR 200.30-3 and to the
  General Counsel pursuant to 17 CFR 200.30-14, relate solely to agency
  organization, procedure, or practice. They are therefore not subject
  to the provisions of the APA requiring notice, opportunity for public
  comment, and publication. To the extent that these rules relate to
  agency information collections during the conduct of administrative
  proceedings, they are exempt from review under the PRA.
  Notwithstanding this finding, the Commission published certain
  proposed changes to the Commission's Rules of Practice for notice and
  comment in the Proposing Release but received no specific comments
  pertaining to them. See supra section XIV.

B. Proposed Use of Information

1. Registration Requirements and Form SBSEF
    Regulation SE imposes various requirements relating to SBSEF 
registration, which are set forth in Rule 803.\1033\
---------------------------------------------------------------------------

    \1033\ See, e.g., Proposed Rule 803(b)(1) (requiring an entity 
that wishes to register with the Commission as an SBSEF to submit a 
Form SBSEF).
---------------------------------------------------------------------------

    The information collected pursuant to these adopted rules will 
enhance the ability of the Commission to determine whether to approve 
the registration of an entity as an SBSEF; to monitor and oversee 
SBSEFs; to determine whether

[[Page 87271]]

SBSEFs initially comply, and continue to operate in compliance, with 
the SEA, including the Core Principles applicable to SBSEFs; to carry 
out its statutorily mandated oversight functions; and to maintain 
accurate and updated information regarding SBSEFs. Because the 
registration information will be publicly available, except to the 
extent that a request for confidential treatment is granted, it could 
also be useful to an SBSEF's members, other market participants, other 
regulators, and the public generally.
2. Requirements for SBSEFs To Establish Rules
    Various provisions of Regulation SE require SBSEFs to establish 
certain rules, policies, and procedures to comply with applicable 
requirements of the SEA and the Commission's rules thereunder.\1034\ 
The rules also will help an SBSEF's members to understand and comply 
with the rules of the SBSEF.
---------------------------------------------------------------------------

    \1034\ See, e.g., Proposed Rule 819(a)(2) (requiring an SBSEF to 
establish and enforce trading, trade processing, and participation 
rules).
---------------------------------------------------------------------------

3. Reporting Requirements for SBSEFs
    Various provisions of Regulation SE require SBSEFs and certain 
other persons to submit reports or provide specified information.\1035\ 
This information will generally be used by the Commission in its 
oversight of SBSEFs and the SBS markets; certain of the information to 
be collected could be used by market participants to confirm their SBS 
transactions.
---------------------------------------------------------------------------

    \1035\ See, e.g., Proposed Rule 829 (requiring an SBSEF, 
quarterly or upon Commission request, to provide the Commission a 
report that includes the amount of financial resources necessary to 
meet the requirements of Rule 829).
---------------------------------------------------------------------------

4. Recordkeeping Required Under Regulation SE
    Regulation SE requires an SBSEF to keep specified records.\1036\ 
The audit trail information required to be maintained under Regulation 
SE will aid the SBSEF in detecting and deterring fraudulent and 
manipulative acts with respect to trading on its market, as well as 
help the SBSEF to fulfill the statutory requirement in Core Principle 4 
that an SBSEF monitor trading in SBS, including through comprehensive 
and accurate trade reconstructions. In addition, Commission access to 
these records will provide a valuable tool to help the Commission carry 
out its oversight responsibility over SBSEFs and the SBS markets in 
general.
---------------------------------------------------------------------------

    \1036\ See Proposed Rule 826 (requiring an SBSEF to maintain 
records of all activities relating to the business of the facility, 
including a complete audit trail, and to report information to the 
Commission upon request).
---------------------------------------------------------------------------

5. Timely Publication of Trading Information Requirement for SBSEFs
    Regulation SE imposes certain publication burdens on SBSEFs in Rule 
825.\1037\
---------------------------------------------------------------------------

    \1037\ See Proposed Rule 825 (requiring an SBSEF to make 
publicly available a ``Daily Market Data Report'').
---------------------------------------------------------------------------

    The requirement contained in Rule 825 that an SBSEF have the 
capacity to electronically capture, transmit, and disseminate 
information on price, trading volume, and other trading data on all SBS 
executed on or through the SBSEF will assist the SBSEF in carrying out 
its regulatory responsibilities under the SEA and enable the SBSEF to 
comply with reasonable requests to provide information to others. 
Furthermore, Rule 825 requires an SBSEF to publish a Daily Market Data 
Report that is designed to provide market observers with a daily 
snapshot of market activity on the SBSEF.
6. Rule Filing and Product Filing Processes for SBSEFs
    Regulation SE establishes various filing requirements applicable to 
SBSEFs. Rules 804 and 805 provide mechanisms for an SBSEF to submit 
filings for new products that it seeks to list either through a self-
certification process or by voluntarily requesting Commission approval, 
respectively. Rules 806 and 807 require an SBSEF to submit new rule or 
rule amendments either through a self-certification process or by 
voluntarily requesting Commission approval, respectively.
    Rule 808 addresses the public availability of certain information 
in an application to register as an SBSEF and SBSEF filings made under 
the self-certification procedures or pursuant to Commission review and 
approval. Rule 809 establishes procedures for addressing a situation 
where an SBSEF wishes to list a product and it is unclear whether that 
product is an SBS or swap (i.e., whether it properly falls under the 
jurisdiction of the SEC or the CFTC). Rule 810 provides that an 
applicant for registration as an SBSEF may submit for Commission review 
and approval an SBS's terms and conditions or rules prior to listing 
the product as part of its application for registration.
    The information collected under Rules 804 and 805 will help the 
Commission assess whether an SBS listed by an SBSEF complies with 
relevant provisions of the SEA. In addition, this information will 
assist the Commission in overseeing the SBSEF's compliance with its 
regulatory obligations generally and to learn about developments in the 
SBS product market. Rules 804 and 805 also provide a mechanism whereby 
market participants, other SBSEFs, other regulators, and the public 
generally could learn what products an SBSEF intends to list and to 
obtain information regarding such products.
    The information collected under Rules 806 and 807 will help the 
Commission assess whether a new rule or rule amendment of an SBSEF 
complies with relevant provisions of the SEA and assist the Commission 
in overseeing the SBSEF's compliance with its regulatory obligations 
generally. Rules 806 and 807 also provide a mechanism whereby an 
SBSEF's members (and prospective members) could learn what new rules or 
rule amendments the SBSEF intends to apply in its market.
    The information collected under Rules 809 and 810 will help the 
Commission assess an SBSEF's compliance with relevant provisions of the 
SEA and assist the Commission in overseeing the SBSEF's compliance with 
its regulatory obligations. This information also will be useful to the 
SBSEF's members, because they would be subject to such new or amended 
rules or products and thus would have an interest in learning about 
those rules or products. Other market participants, other SBSEFs, and 
other regulators, as well as the public generally, may find information 
about proposed new or amended rules or products useful.
7. Requirements Relating to the CCO
    Regulation SE includes Rule 831 that would set out requirements 
relating to an SBSEF's CCO.
    The information that will be collected under Rule 831 will help 
ensure compliance by SBSEFs with relevant provisions of the SEA and 
assist the Commission in overseeing SBSEFs generally. The Commission 
could use the annual compliance report to help it evaluate whether an 
SBSEF is carrying out its statutorily mandated regulatory obligations 
and, among other things, to discern the scope of any denials of access 
or refusals to grant access by the SBSEF and to obtain information on 
the status of the SBSEF's regulatory compliance program. The SBSEF's 
fourth-quarter financial report will provide the Commission with 
important information on the financial health of the SBSEF.

[[Page 87272]]

8. Surveillance Systems Requirements for SBSEFs
    The rules that require an SBSEF to maintain surveillance systems 
and to monitor trading \1038\ are designed to promote compliance by an 
SBSEF with its obligations under the SEA to oversee trading on its 
market, and to prevent manipulation and other unlawful activity or 
disruption of its market.
---------------------------------------------------------------------------

    \1038\ See, e.g., Proposed Rule 819(d)(3) (requiring an SBSEF to 
establish and maintain sufficient compliance staff and resources to 
ensure that it can conduct effective audit trail reviews, trade 
practice surveillance, market surveillance, and real-time market 
monitoring).
---------------------------------------------------------------------------

C. Respondents

    The respondents subject to the collection of information burdens 
associated with Regulation SE are: (1) SBSEFs (and entities wishing to 
register with the Commission as SBSEFs); (2) in the case of Rule 833, 
persons that seek an exemption order under that rule; and (3) in the 
case of Rule 834, SBS exchanges.
    Currently there are no registered SBSEFs. Based on the number of 
SEFs registered with the CFTC that trade index CDS (the closest analog 
to single-name CDS, which is likely to be the product most frequently 
traded on SEC-registered SBSEFs), as well as general industry 
information, the Commission preliminarily estimated that five entities 
will seek to register as SBSEFs and thus become subject to the 
collection of information requirements of these rules.\1039\ The 
Commission did not receive comments about its estimate of the number of 
SBSEF registrants, and its initial estimate continues to be reasonable.
---------------------------------------------------------------------------

    \1039\ See Proposing Release, supra note 1, 87 FR at 28963.
---------------------------------------------------------------------------

    The Commission preliminarily estimated that three persons would 
request exemption orders under one or both paragraphs of Rule 
833.\1040\ The CFTC has granted three exemptions similar to those 
contemplated by Rule 833,\1041\ which suggests that the number of 
jurisdictions having organized trading venues for swap and SBS products 
that overlap with products traded on similar venues in the United 
States is not large. The Commission did not receive comments about its 
estimate of the number of persons requesting exemption orders under 
Rule 833, and its initial estimate continues to be reasonable.
---------------------------------------------------------------------------

    \1040\ Id. The Commission anticipates that such persons could 
include foreign SBS trading venues, foreign authorities that license 
and regulate those trading venues, or covered persons (as defined in 
Rule 832) who are members of such trading venues.
    \1041\ See also supra note 626 (discussing a CFTC staff no-
action letter addressing certain UK swap trading facilities).
---------------------------------------------------------------------------

    The Commission preliminarily estimated that three entities will 
operate as SBS exchanges.\1042\ These are likely to be existing 
national securities exchanges that, in the future, seek to list SBS and 
thereby become SBS exchanges. The Commission did not receive comments 
about its estimate of the number of SBS exchanges, and its initial 
estimate continues to be reasonable.
---------------------------------------------------------------------------

    \1042\ See Proposing Release, supra note 1, 87 FR at 28963.
---------------------------------------------------------------------------

    The Commission considered whether any provision of proposed 
Regulation SE would impose any burdens (as defined in the PRA) on SBSEF 
members but received no comments on this point and continues to 
estimate that the provisions of Regulation SE would not impose PRA 
burdens on SBSEF members.

D. Total Annual Reporting and Recordkeeping Burden

1. Overview
    The CFTC, based on its experience in developing rules for SEFs and 
regulating the SEF market, has over the years developed, refined, and 
received approval from OMB for paperwork burden hours estimates, both 
for SEF rules directly as well as for ancillary rules on which various 
rules in Regulation SE are modeled.\1043\ Those estimates are presented 
in the form of aggregate totals for compliance with:
---------------------------------------------------------------------------

    \1043\ See Core Principles and Other Requirements for Swap 
Execution Facilities (May 17, 2013), 78 FR 33476, 33548-49 (June 4, 
2013) (Final Rule PRA for CFTC part 37); Swap Execution Facility 
Requirements (Nov. 27, 2020), 85 FR 82313, 82324 (Dec. 18, 2020) 
(Final Rule PRA for 17 CFR 36.1); Core Principles and Other 
Requirements for Swap Execution Facilities: OMB Control Number 3038-
0074 Supporting Statements (last updated July 26, 2021), available 
at https://omb.report/omb/3038-0074 (PRA Supporting Statements for 
CFTC Core Principles for SEFs, 17 CFR 36.1); Provisions Common to 
Registered Entities (July 19, 2011), 76 FR 44776, 44789-90 (July 27, 
2011) (Final Rule PRA for CFTC part 40); part 40, Provisions Common 
to Registered Entities: OMB Control Number 3038-0093 Supporting 
Statements (last updated Feb. 4, 2021), available at https://omb.report/omb/3038-0093 (PRA Supporting Statements for CFTC part 
40, 17 CFR 36.1); Notification of Pending Legal Proceedings: OMB 
Control Number 3038-0033 Supporting Statements (last updated Oct. 
29, 2021), available at https://omb.report/omb/3038-0033 (PRA 
Supporting Statements for 17 CFR 1.60(a), (c), and (e)); Adaptation 
of Regulations To Incorporate Swaps (Oct. 16, 2012), 77 FR 66288, 
66306-08 (Nov. 2, 2012) (Final Rule PRA for 17 CFR 1.59 and 
1.37(c)); Recordkeeping (May 23, 2017), 82 FR 24479, 24485 (May 30, 
2017) (Final Rule PRA for 17 CFR 1.31); Adaptation of Regulations to 
Incorporate Swaps-Exclusion of Utility Operations-Related Swaps with 
Utility Special Entities from De Minimis Threshold: OMB Control 
Number 3038-0090 Supporting Statements (last updated July 1, 2020), 
available at https://omb.report/omb/3038-0090 (PRA Supporting 
Statements for 17 CFR 1.31, 1.37(c), 1.59, and 1.67); Service on 
Self-Regulatory Organization Governing Boards or Committees by 
Persons with Disciplinary Histories (Feb. 27, 1990), 55 FR 7884, 
7890 (Mar. 6, 1990) (Final Rule PRA for 17 CFR 1.63); Final Rule and 
Rule Amendments Concerning Composition of Various Self-Regulatory 
Organization Governing Boards and Major Disciplinary Committees 
(June 29, 1993), 58 FR 37644, 37653 (July 13, 1993) (Final Rule PRA 
forSec.  1.64); Voting by Interested Members of Self-Regulatory 
Organization Governing Boards and Committees (Dec. 23, 1998), 64 FR 
16, 22 (Jan. 4, 1999) (Final Rule PRA for 17 CFR 1.69); Rules 
Pertaining to Contract Markets and Their Members: OMB Control Number 
3038-0022 Supporting Statements (last updated Dec. 21, 2010), 
available at https://omb.report/omb/3038-0022 (PRA Supporting 
Statements for 17 CFR 1.63, 1.64, and 1.69); Swap Data Recordkeeping 
and Reporting Requirements (Dec. 20, 2011), 77 FR 2136, 2171-76 
(Jan. 13, 2012) (Final Rule PRA for 17 CFR 45.2); Swap Data 
Recordkeeping and Reporting Requirements: OMB Control Number 3038-
0096 Supporting Statements (last updated Mar. 16, 2021), available 
at https://omb.report/omb/3038-0096 (PRA Supporting Statements for 
17 CFR 45.2); Repeal of the Exempt Commercial Market and Exempt 
Board of Trade Exemptions (Sept. 28, 2015), 80 FR 59575, 59576 (Oct. 
2, 2015) (Final Rule PRA for 17 CFR 15.05).
---------------------------------------------------------------------------

     Part 37 of the CFTC regulations regarding initial 
registration requirements applicable to SEFs;
     Part 37 regarding other requirements applicable to SEFs, 
including the statutory Core Principles;
     Part 40 of the CFTC regulations regarding requirements 
applicable to SEFs (and other CFTC-registered entities); and
     17 CFR 1.60(a), 1.60(c), 1.60(e), 36.1, 1.59, 1.63, 1.67, 
15.05, 1.37(c), 1.64, and 1.69 regarding requirements applicable to 
SEFs (and other CFTC-registered entities).
    The rules applicable to SBSEFs are, with limited exceptions 
discussed above, substantively similar to those applicable to SEFs. 
Therefore, the Commission is basing its estimates for the paperwork 
burdens for SBSEFs on the CFTC's paperwork burden calculations for 
analogous rules that apply to SEFs, which have been approved by 
OMB.\1044\ However, in certain cases, the paperwork burdens estimated 
by the CFTC are scaled down for SBSEFs to account for the likelihood 
that there will be fewer SBSEFs than SEFs and that the SBS business of 
dually registered SEF/SBSEFs is likely to be smaller than the swap 
business.
---------------------------------------------------------------------------

    \1044\ Rule 835, which requires SBSEFs to file with the 
Commission notices of final disciplinary actions and denials and 
limitations of access, is not based on a CFTC rule but rather on an 
existing Commission rule that imposes a similar filing requirement 
on SROs. Therefore, the Commission is utilizing the burden estimates 
in its rulemaking for SROs to estimate the burdens of this rule for 
SBSEFs.
---------------------------------------------------------------------------

    Although there are minor differences between the CFTC rules and the 
Commission rules being adopted, the Commission does not need to

[[Page 87273]]

substantially deviate from the CFTC's estimates of aggregated burden 
hours for compliance (beyond scaling back the CFTC's estimates to 
account for the smaller number of SBSEFs, and the smaller size of the 
SBS market relative to the swaps market). These minor differences 
between the CFTC's existing rules for SEFs and the Commission's rules 
for SBSEFs are prompted, in some cases, by minor differences between 
the statutory provisions that apply to SEFs under the CEA and the 
statutory provisions that apply to SBSEFs under the SEA, and, in other 
cases, by differences between the swaps market and SBS market. In 
either case, however, the Commission anticipates that the burdens on 
SBSEFs would be substantially similar to the burdens set out in the 
CFTC estimates, which serve as the basis for the Commission's 
estimates.\1045\ Furthermore, basing the burden estimates for SBSEFs on 
the CFTC's estimates for SEFs would be more accurate than using burden 
hours estimates for any other entity that the Commission currently 
regulates (e.g., national securities exchanges) because SBSEFs share 
many more similarities with SEFs than they do with any other SEC-
registered entities.
---------------------------------------------------------------------------

    \1045\ When the CFTC adopted the SEF rules in 2013, the CFTC 
took a similar approach to burden hours estimation. The CFTC relied 
on the aggregate burden hours for three types of entities that it 
regulated (DCMs, derivatives transaction execution facilities, and 
certain exempt commercial markets) and applied those burden hours to 
SEFs unadjusted, even though there are differences between the 
regulations that govern SEFs and those that govern the other 
entities. The CFTC noted that those entities, like SEFs, were 
subject to certain statutory Core Principles and rules thereunder, 
and that, despite variations in the applicable regulations, it was 
still appropriate to use the average aggregate burden number for 
those entities as the estimate for SEFs without adjustment. See 
CFTC, Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR at 33548-51.
---------------------------------------------------------------------------

    The Commission anticipates that most if not all entities that seek 
to register with the Commission as SBSEFs will also register, or will 
already be registered, with the CFTC as SEFs. With a few exceptions, 
the rules being adopted by the Commission are adapted from existing 
rules of the CFTC. With these rules, the Commission intends to obtain 
comparable regulatory benefits as the CFTC rules while imposing only 
marginal additional burdens on SEF/SBSEFs. However, for purposes of its 
PRA analysis, the Commission will estimate the burdens as if a 
respondent were subject only to the Commission's rules.\1046\
---------------------------------------------------------------------------

    \1046\ However, there may be instances in which a rule would 
require an SBSEF to generate the same paperwork that is already 
being created pursuant to a CFTC rule. In such cases, compliance 
with the existing CFTC requirement would satisfy the SEC 
requirement, and in reality there would be few or de minimis burdens 
imposed on dually registered SEF/SBSEFs.
---------------------------------------------------------------------------

    The burden hours discussed below represent annual/ongoing burdens, 
with three exceptions that represent initial, one-time burdens: 
registration burdens for SBSEFs under Rule 803, exemption requests 
regarding foreign SBS trading venues under Rule 833, and certain rules 
under Rules 834(b) and (c).
    The Commission requested comments on its entire proposed approach 
to estimating burden hours and received no comment.\1047\ The 
Commission continues to estimate the burdens at the levels set forth in 
the Proposing Release. Therefore, for any provision that the Commission 
is adopting as proposed, it is not changing its preliminary estimate, 
except in one instance to account for an update in an estimate by the 
CFTC that the Commission is using to base its burden estimates.\1048\ 
For any provision that the Commission is modifying from the proposal, 
as discussed in more detail below, the Commission estimates that the 
modification would result in no change in the burden estimate compared 
to the proposal.
---------------------------------------------------------------------------

    \1047\ See Proposing Release, supra note 1, 87 FR at 28969.
    \1048\ As discussed below, the Commission has revised its burden 
estimate for Rule 811(d) due to a corresponding revision by the CFTC 
of its analogous rule.
---------------------------------------------------------------------------

2. Aggregate Burdens for Rules Modeled After CFTC Part 37 Rules
(a) Registration Requirements for SBSEFs and Form SBSEF
    A submission by an entity wishing to register with the Commission 
as an SBSEF would be required to be made on Form SBSEF, pursuant to 
Rule 803, on a one-time basis. The Commission estimates that five 
entities initially would seek to register with the Commission as 
SBSEFs. The Commission estimates the burdens of Rule 803 and Form SBSEF 
to be per respondent and aggregate of 295 and 1,475 hours, 
respectively. These entities would incur initial, one-time burdens, 
because once an entity is registered as an SBSEF, its registration 
obligations are complete. The Commission's estimate regarding the 
initial burden that an entity would incur to file a Form SBSEF is 
informed by the estimates made by the CFTC for the completion of Form 
SEF and compliance with Sec.  37.3 of the CFTC regulations (which 
governs registration of SEFs). Form SBSEF requests almost exactly the 
same information as required by Form SEF, and Rule 803 is substantially 
similar to Sec.  37.3. The CFTC has estimated that the initial 
compliance burden associated with its registration requirements in 
Sec.  37.3 and Form SEF to be 295 hours per SEF applicant.\1049\ For 
purposes of calculating burden hours, the CFTC considered the entire 
SEF application process to constitute a single information collection; 
the Commission is utilizing the same approach for SBSEFs. SBSEFs would 
likely prepare Form SBSEF internally.
---------------------------------------------------------------------------

    \1049\ See OMB, Supporting Statement for New and Revised 
Information Collections: Core Principles and Other Requirements for 
Swap Execution Facilities, OMB Control Number 3038-0074, Attachment 
A (July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf.
---------------------------------------------------------------------------

(b) Ongoing Compliance With Other Requirements That Are Similar to the 
Remainder of Part 37
    The Commission estimates the aggregate ongoing annual hour burden 
for compliance with all of the SBSEF rules that have analogs in part 37 
to be 1,935 hours.\1050\ The CFTC has estimated that the compliance 
burden for all of the sections of part 37 combined, other than the 
initial burden of 295 hours per SEF for registration-related compliance 
discussed above, to be an ongoing annual burden of 387 hours per 
SEF.\1051\ With the exception of Sec.  37.600, which implements a CEA 
Core Principle for SEFs relating to position limits that is not present 
in the SEA, every other section of part 37 has an analog in proposed 
Regulation SE that is substantively similar.\1052\ Therefore, the 
aggregate CFTC estimate of 387 hours per SEF per year serves as a 
reasonable estimate for the annual hourly burden on each SBSEF.
---------------------------------------------------------------------------

    \1050\ 1,935 hours = 387 hours (annual burden per respondent) x 
5 (number of respondents).
    \1051\ See OMB, Supporting Statement for New and Revised 
Information Collections, OMB Control Number 3038-0074, at 8 
(estimating that on a net basis the total burden hours imposed on 
each SEF will be 387 hours).
    \1052\ As discussed previously, the Commission proposed to 
incorporate portions of the CFTC guidance into certain rules in 
Regulation SE. The Commission is now adopting those portions of the 
CFTC guidance as proposed into the rules of Regulation SE. The CFTC 
guidance clarifies portions of its rules by suggesting means for 
compliance and does not fundamentally alter those rules. When the 
CFTC adopted this guidance into its regulations, it did not alter 
its burden hours estimate. See, e.g., 2021 SEF Amendments Adopting 
Release. Therefore, no adjustments to the CFTC estimates, on which 
the Commission is basing its own estimates, would be appropriate 
despite adapting that guidance into the Commission's rules.
---------------------------------------------------------------------------

    As noted above, the Commission is adopting Rule 815 and 819 as 
proposed, except that it is: (1) removing the proposed definition of a 
``Block Trade'', a term used in Rule 815, from Rule 802 and reserving 
that definition; (2) modifying Rule 815(d)(2) and (d)(3) to

[[Page 87274]]

narrow the scope of the package-transaction exception to the method of 
execution requirements of Rule 815; (3) adding section (g) to Rule 815 
to specify that a security-based swap that is intended to be cleared at 
the time of the transaction, but is not accepted for clearing at a 
registered clearing agency, shall be void ab initio; (4) amending Rule 
819(e) to permit SBSEFs to contract with DCMs for the provision of 
services to assist in complying with the SEA and Commission rules 
thereunder, as approved by the Commission; (5) adding sections (c)(4) 
and (g)(14) to Rule 819 to address Commission review of: (i) denial or 
limitation of access to any service or denial or conditioning of 
membership by an SBSEF and (ii) disciplinary sanctions imposed by an SB 
SEF; and (6) removing certain mentions of block trades in various 
places throughout Rule 819 because as mentioned above, a definition of 
that term has not been adopted. Although these changes may have a 
practical impact on respondents' SBS trading activity, the Commission 
estimates that they do not increase or decrease the burden hours for 
compliance with the Core Principles that are similar to the remainder 
of part 37. The changes simply: (1) make modifications to accommodate 
reserving the definition for a block trade; (2) narrow the scope of an 
exception relating to package-transactions; (3) automatically declare 
trades intended to be cleared but not accepted for clearing to be void 
ab initio; (4) permit SBSEFs to contract with DCMs for certain 
services; and (5) address Commission review of certain actions taken by 
SBSEFs. None of these changes requires additional record-keeping or 
reporting burdens (or results in a decrease in record-keeping and 
reporting obligations). Therefore, the Commission estimates that the 
per-respondent or aggregate totals of 387 hours and 1,935 hours, 
respectively.
    In addition, the Commission is modifying Rule 825 to make changes 
to what type of information is required to be submitted in and timing 
of publication of the daily market data report and to remove certain 
mentions of block trades because that term will not be defined in 
Regulation SE at this time. Rule 825 will not require the disclosure of 
the number of block trades and will require publication of the report 
as soon as reasonably practicable on the next business day but no later 
than 7 a.m. (rather than before the beginning of trading) and several 
mentions of block trades in Rule 825(c) have been removed. Not 
requiring the disclosure of the number of block trades will have a 
negligible impact on the reporting burden of preparing the daily market 
data report. Rule 825 requires the report to contain numerous items. 
The Commission estimates that eliminating block trades from one of the 
required items (trade count) will reduce the hours burden for compiling 
the report by a negligible amount. Similarly, changing the timing of 
the publication of the report will have no impact on burden hours. The 
Commission estimates that it will not require a greater or fewer number 
of hours to compile the report as a result of the change in timing for 
publication as it is the same report that is being compiled. Therefore, 
the Commission continues to estimate a per-respondent and aggregate 
totals of 387 hours and 1,935 hours, respectively.
    As discussed in more detail below, certain SBSEF rules being 
adopted in Regulation SE are derived from other parts of the CFTC's 
rules (e.g., part 40) and the burdens for those rules will be based on 
the appropriate burden hours of the corresponding CFTC part. For 
reference, the following table lists all sections of part 37 and the 
corresponding SBSEF rule. Please see above for more detailed 
descriptions of a particular SBSEF rule.

------------------------------------------------------------------------
                                                        Analogous SBSEF
                                                          Rule # (387
                                                       aggregate burden
                                                        hours per SBSEF
                                                      not including Rule
    CFTC part 37 section (387                         803 (registration)
 aggregate burden hours per SEF          Topic         and certain other
    not including Sec.   37.3                          rules not modeled
         (registration)                                on part 37 rules
                                                          (discussed
                                                       separately in the
                                                           following
                                                           sections)
------------------------------------------------------------------------
37.1............................  Scope.............  800.
37.2............................  Applicable          801.
                                   provisions.
37.4............................  Procedures for      810.
                                   listing products.
37.5............................  Compliance........  811.
37.6............................  Enforceability....  812.
37.7............................  Prohibited use of   813.
                                   data.
37.8............................  Entities operating  814.
                                   as SEFs and DCMs.
37.9............................  Methods of          815.
                                   execution.
37.10...........................  Process to make     816.
                                   swaps available
                                   for trade.
37.11...........................  Reserved section..  not applicable.
37.12...........................  Trade execution     817.
                                   compliance
                                   schedule.
37.100..........................  CP 1 (compliance    818 (CP1).
                                   with Core
                                   Principles).
37.200 through 37.206...........  CP 2 (compliance    819 (CP2).
                                   with rules).
37.300 through 37.301...........  CP 3                820 (CP3).
                                   (manipulation).
37.400 through 37.408...........  CP 4 (monitoring    821 (CP4).
                                   of trading and
                                   trade processing).
37.500 through 37.504...........  CP 5 (ability to    822 (CP5).
                                   obtain
                                   information).
37.600 through 37.601...........  CP 6 (position      no equivalent
                                   limits).            requirement in
                                                       the SEA; CP
                                                       numbering
                                                       diverges after
                                                       this point.
37.700 through 37.703...........  CP 7 (financial     823 (CP6).
                                   integrity of
                                   transactions).
37.800 through 37.801...........  CP 8 (emergency     824 (CP7).
                                   authority).
37.900 through 37.901...........  CP 9 (publication   825 (CP 8).
                                   of trading
                                   information).
37.1000 through 37.1001.........  CP 10               826 (CP 9).
                                   (recordkeeping
                                   and reporting).
37.1100 through 37.1101.........  CP 11 (anti-trust)  827 (CP10).
37.1200.........................  CP 12 (conflicts    828 (CP 11).
                                   of interest).
37.1300 through 37.1307.........  CP 13 (financial    829 (CP 12).
                                   resources).
37.1400 through 37.1401.........  CP 14 (system       830 (CP 13).
                                   safeguards).
37.1500 through 1501............  CP 15 (CCO).......  831 (CP 14).
Appendix A (Form SEF)...........  Form SEF..........  Form SBSEF \a\.
Appendix B......................  Guidance relating   guidance
                                   to Core             incorporated
                                   Principles.         throughout rules
                                                       818 through 831.
------------------------------------------------------------------------
\a\ The burdens of registering using Form SBSEF are discussed in the
  previous section.

[[Page 87275]]

3. Aggregate Burdens for Rules Modeled on CFTC Part 40 Rules
    A number of rules contained in Regulation SE are modeled on rules 
in part 40 of the CFTC's rules, including Sec. Sec.  40.2 (Listing 
products for trading by certification), 40.3 (Voluntary submission of 
new products for Commission review and approval), 40.5 (Voluntary 
submission of rules for Commission review and approval), and 40.6 
(Self-certification of rules). The Commission is adopting Rules 804, 
805, 806, and 807--which are closely modeled on Sec. Sec.  40.2, 40.3, 
40.5, and 40.6, respectively--in order to harmonize with the procedures 
that the CFTC applies to SEFs with respect to establishing new rules 
and listing products. In addition, Rule 808 is modeled after Sec.  40.8 
and provides that certain information in a Form SBSEF application or a 
rule or product filing would be made publicly available, unless 
confidential treatment is obtained pursuant to Rule 24b-2. Rule 809 is 
loosely modeled after Sec.  40.12 and sets forth a mechanism for a 
tolling of the period for consideration of a product pending the 
issuance by the SEC and the CFTC of joint interpretation clarifying 
which agency has jurisdiction over the product.
(a) Rule and Product Filing Processes for SBSEFs
    Rules 804 and 805 require an SBSEF to submit filings for new 
products that it seeks to list. Under Rules 806 and 807, an SBSEF is 
required to submit rule filings for new rules or rule amendments, 
including changes to a product's terms or conditions. The Commission's 
estimate regarding the burdens that an SBSEF would incur to comply with 
the rule and product filing processes in Rules 804, 805, 806, and 807 
is informed by the estimates made by the CFTC for compliance with 
Sec. Sec.  40.2, 40.3, 40.5, and 40.6, the burden hours for which have 
been approved by OMB.\1053\ The Commission is estimating a total of 
five SBSEF respondents. The Commission estimates that the aggregate 
ongoing annual hourly burden for all SBSEFs to prepare and submit rule 
and product filings under Rules 804, 805, 806, and 807 (including the 
cover sheet \1054\) would be 300 hours.
---------------------------------------------------------------------------

    \1053\ See 75 FR 67282 (Nov. 2, 2010) (CFTC proposal to amend 17 
CFR 40.2 through 40.5); OMB, Supporting Statement for Information 
Collection Renewal: OMB Control Number 3038-0093, Attachment A (July 
10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf (noting the estimated average number of hours to 
burden hours report is 2 hours, and the number of annual responses 
from each entity is 100).
    \1054\ Each of the filings that is required by Rules 804 through 
807 would have to include a submission cover sheet that is modeled 
on the cover sheet and instructions used by SEFs in conjunction with 
analogous filings with the CFTC, with the submitting entity checking 
the appropriate box to indicate which type of the filing it is 
making. Any burden hours attributable to a respondent completing 
this cover sheet, which is an integral part of the filing, are not 
estimated separately from the paperwork burden of the substantive 
filing. Instead, they are contained within the aggregate burden 
hours estimate for rule and product filings pursuant to Rules 804 
through 807, which are based upon the CFTC's estimates. See supra 
note 1053.
---------------------------------------------------------------------------

    Based on the CFTC's experience with SEFs, the Commission estimates 
that on average an SBSEF would incur an ongoing annual burden of 2 
hours of work per rule or product filing. Although the CFTC estimated 
an average of 100 responses per year per respondent,\1055\ an estimate 
of 30 responses is appropriate given the more limited scope of the SBS 
market, as opposed to the swaps market. This would result in a total 
estimated ongoing annual burden of 60 hours per respondent \1056\ and 
300 hours for all the respondents annually.\1057\
---------------------------------------------------------------------------

    \1055\ See supra note 1053.
    \1056\ 60 hours = 30 (number of responses per year per 
respondent) x 2 hours (burden per response).
    \1057\ 300 hours = 60 hours (annual burden per respondent 
pursuant to Rules 804, 805, 806, and 807) x 5 (number of 
respondents).
---------------------------------------------------------------------------

    As noted above, the Commission is stating in this release that, 
where a respondent is seeking to list a new category of product of 
which there would be multiple specific products based on different 
underlying securities, separate submissions under Rule 804 with respect 
to each underlying security would not be required, but the submission 
made would have to address why each of the included underlying 
securities meets the relevant standards required by Regulation SE. 
``Blanket'' certifications--e.g., a single submission for all equity 
total return security-based swaps to be listed--would not meet the 
requirements of Rule 804. This flexibility does not result in any 
increase or decrease in estimated burden hours. Any time savings from 
the ability to combine submissions under Rule 804 is likely to be 
substantially, if not fully, offset by the burden of drafting the 
explanation of why each of the included underlying securities meets the 
relevant standards required by Regulation SE. Therefore, the changes do 
not increase or decrease the burden hours for compliance with the rules 
pertaining to new product filings under Rules 804 and 805. Indeed, as 
described above, the per-respondent estimate for the requirements 
related to the rule and product filing processes of 60 hours was an 
estimate informed by the CFTC's similar provisions and was meant to 
encompass the combined burdens that an SBSEF would incur to comply with 
the rule and product filing processes in Rules 804, 805, 806, and 807. 
Therefore, the Commission continues to estimate the per-respondent and 
aggregate totals to be 60 hours and 300 hours, respectively.
(b) Burdens Related to Rules Modeled After Other Part 40 Rules
(i) Rule 802
    Certain definitions contained in Rule 802 are modeled after 
provisions of part 40. These definitions do not result in any paperwork 
burden.
(ii) Rule 809
    Rule 809 is loosely modeled on Sec.  40.12 of the CFTC's rules and 
would apply when an SBSEF wishes to list a product and it is unclear 
whether the product should be classified as an SBS subject to the 
jurisdiction of the SEC or a swap subject to the jurisdiction of the 
CFTC. Rule 809 provides that a product certification made by an SBSEF 
pursuant to Rule 804 shall be stayed, or the review period for a 
product that has been submitted for Commission approval by an SBSEF 
pursuant to Rule 805 shall be tolled, upon a request, made pursuant to 
Rule 3a68-2 under the SEA \1058\ by the SBSEF, the SEC, or the CFTC, 
for a joint interpretation of whether the product is a swap, SBS, or 
mixed swap.
---------------------------------------------------------------------------

    \1058\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

    Rule 809 itself does not include a process for determining whether 
the SEC or CFTC has jurisdiction over a product. Rule 809 would enable 
the SEC to stay or toll the product filing while the SEC and CFTC 
consider a joint interpretation under existing SEA Rule 3a68-2, the 
burden hours of which have already been approved by OMB.\1059\ The only 
burden imposed on an SBSEF under Rule 809 would be checking a box on 
the submission cover sheet when the SBSEF intends to request a joint 
interpretation from the Commission and the CFTC pursuant to SEA Rule 
3a68-2.\1060\ The Commission estimates that

[[Page 87276]]

each such request would impose a burden of 0.25 hours. Furthermore, the 
Commission estimates that each SBSEF would make one such request per 
year.\1061\ Accordingly, the aggregate ongoing annual burden for all 
SBSEFs to comply with Rule 809 would be 1.25 hours.\1062\ This work, 
should it be required, is likely to be conducted internally.
---------------------------------------------------------------------------

    \1059\ OMB recently approved an extension without change of the 
collection for Rule 3a68-2. See Supporting Statement for the 
Paperwork Reduction Act New Information Collection Submission for 
Rule 3a68-2 (Interpretation of Swaps, Security-Based Swaps, and 
Mixed Swaps) and Rule 3a68-4(c) (Process for Determining Regulatory 
Treatment for Mixed Swaps), OMB Control Number 3235-0685, Supporting 
Statement A (Dec. 23, 2021), available at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
    \1060\ See supra section IV.E.
    \1061\ The establishment of a registration regime and listing 
procedures for SBSEFs could affect the distribution, but likely not 
the total number, of requests for joint interpretations under Rule 
3a68-2 of the SEA. SBS products may be developed in the bilateral 
market before they are listed on SBSEFs, and there are incentives to 
resolving jurisdictional issues before they can develop traction in 
the market. Accordingly, requests for a joint interpretation under 
Rule 3a68-2 could occur before such products are listed by an SBSEF, 
and such requests are already considered in the approved PRA burden 
estimates for Rule 3a68-2.
    \1062\ 1.25 hours = 1 (number of responses per year per 
respondent) x 0.25 hours (burden per response) x 5 (number of 
respondents).
---------------------------------------------------------------------------

4. Aggregate Burdens for Rules Modeled After CFTC Rules Other Than 
Parts 37 and 40
    Adopted rules similar to rules of the CFTC other than part 37 and 
part 40 are Rules 811(d), 816(e), 819(h), 819(i), 819(j), 819(k), 
826(f), and 834. These rules generate various categories of burdens for 
SBSEFs or market participants.
(a) Rule 811(d)
    Section 1.60 of the CFTC's rules requires a SEF to provide the CFTC 
with copies of any legal proceeding to which it is a party, or to which 
its property or assets is subject.
    Paragraph (d) of Rule 811 adapts paragraphs (a), (c), and (e) of 
Sec.  1.60 to apply to SBSEFs. Paragraph (d)(1) requires an SBSEF to 
provide the Commission a copy of the complaint, any dispositive or 
partially dispositive decision, any notice of appeal filed concerning 
such decision, and such further documents as the Commission may 
thereafter request filed in any material legal proceeding to which the 
SBSEF is a party or to which its property or assets are subject. 
Paragraph (d)(2) requires an SBSEF to provide notices of similar 
actions against any officer, director, or other official of the SBSEF 
from conduct in such person's capacity as an official of the SBSEF 
alleging violations of certain enumerated actions.
    The Commission estimates that an SBSEF would provide the 
information required by Rule 811(d) once per year, and that each 
submission would take 0.25 hours. Thus, the Commission estimates that 
the aggregate ongoing annual burden for all SBSEFs to comply with 
requests for documents or information pursuant to Rule 811(d) would be 
1.25 hours.\1063\ The Commission is basing its estimate on the CFTC 
estimate included in its submission to OMB for Sec.  1.60 of the CFTC's 
rules, for which the CFTC estimated that each of the 97 entities to 
which the rule applies makes, on average, one submission of documents 
to the Commission per year. The CFTC further estimated that the time 
required to prepare one submission is approximately 0.25 hour, totaling 
24.25 hours (97 x 0.25) annually.\1064\
---------------------------------------------------------------------------

    \1063\ 1 (number of responses per year per respondent) x 0.25 
hours (burden per response) x 5 (number of respondents) = 1.25 hour.
    \1064\ See OMB, Supporting Statement for New and Revised 
Information Collections: OMB Control Number 3038-0033 (Oct. 29, 
2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

    For PRA purposes, it is reasonable to apply the CFTC's approach to 
Rule 811(d).\1065\ This work, should it be required, is likely to be 
conducted internally.
---------------------------------------------------------------------------

    \1065\ In its preliminary estimates, the Commission based its 
burden hour calculations upon CFTC 2018 submission to OMB. The 
Commission is now updating the numbers to reflect numbers from the 
2021 submission to OMB. The result is the per response burden has 
increased from .2 hours to .25 hours. See OMB, Supporting Statement 
for New and Revised Information Collections: OMB Control Number 
3038-0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

(b) Rule 819(h)
    Paragraph (h) of Rule 819 generally prohibits persons who are 
employees of an SBSEF, or who otherwise might have access to 
confidential information because of their role with the SBSEF, from 
improperly utilizing that information. Rule 819(h) is modeled on Sec.  
1.59 of the CFTC's rules. The Commission does not estimate that this 
rule would result in a paperwork burden.
(c) Rule 819(i)
    Paragraph (i) of Rule 819 bars persons with specified disciplinary 
histories from serving on the governing board or committees of an SBSEF 
and impose certain other duties on the SBSEF associated with that 
fundamental requirement. Rule 819(i) is modeled on Sec.  1.63 of the 
CFTC's rules.
    The Commission estimates that an SBSEF would provide the 
information required by Rule 819(i) once per year, and that each 
submission would take 79.83 hours. Thus, the Commission estimates that 
the aggregate ongoing annual burden for all SBSEFs to comply with Rule 
819(i) would be 399.15 hours.\1066\ The Commission is basing this 
estimate on the estimate the CFTC included in its submission to OMB for 
its adoption of Sec.  1.63, where the CFTC estimated that each 
respondent would make, on average, one such submission to the CFTC per 
year. The CFTC further estimated that the time required to prepare one 
submission is approximately 79.83 hours.\1067\
---------------------------------------------------------------------------

    \1066\ 1 (number of responses per year per respondent) x 79.83 
hours (burden per response) x 5 (number of respondents) = 399.15 
hours.
    \1067\ See CFTC, Service on Self-Regulatory Organization 
Governing Boards or Committees by Persons with Disciplinary 
Histories (Feb. 27, 1990), 55 FR 7884, 7890 (Mar. 6, 1990) (final 
rule PRA for Sec.  1.63).
---------------------------------------------------------------------------

    For PRA purposes, it is reasonable to apply the CFTC's approach to 
Rule 819(i), and this work is likely to be conducted internally.
(d) Rule 819(j)
    Paragraph (j) of Rule 819 is modeled on Sec.  1.67 of the CFTC's 
rules. Rule 819(j)(1) provides that, upon any final disciplinary action 
in which an SBSEF finds that a member has committed a rule violation 
that involved a transaction for a customer, whether executed or not, 
and that resulted in financial harm to the customer, the SBSEF must 
promptly provide written notice of the disciplinary action to the 
member.
    The Commission estimates that an SBSEF would need 0.5 hours to 
prepare a notice and provide it to a member. This estimate is based on 
a previous Commission estimate for the time that it would take to 
prepare and submit a simple notice.\1068\ The Commission estimates that 
these notices would occur once per year at each SBSEF, resulting in an 
aggregate ongoing annual burden to comply with Rule 819(j) of 2.5 
hours.\1069\ This work, should it be required, is likely to be 
conducted internally.
---------------------------------------------------------------------------

    \1068\ Rule 819(j) does not address any of the requirements or 
process concerning taking final disciplinary actions; it merely 
requires that a notice be provided. A provision of Regulation SCI, 
Rule 1000(b)(4)(i), also requires providing a simple notice and the 
Commission estimated that it would take 0.5 hours to prepare and 
such a notice. See Regulation Systems Compliance and Integrity; 
Final Rule, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72251, 
72381 (Dec. 5, 2014).
    \1069\ 2.5 hours (0.5 hours of in-house counsel time) x (1 
responses per year) x (5 respondents). The once per year estimate is 
based on a previous CFTC estimate included in its submission to OMB 
for Sec.  1.67 along with other rules.
---------------------------------------------------------------------------

(e) Rule 819(k)
    Paragraph (k) of Rule 819 requires non-U.S. persons who trade on an 
SBSEF to have an agent for service process, which could be an agent of 
its own choosing or, by default, the SBSEF.

[[Page 87277]]

Rule 819(k) is modeled on provisions of Sec.  15.05 of the CFTC's rules 
that apply to SEFs. The Commission does not estimate that this rule 
would result in a paperwork burden.
(f) Rule 826(f)
    Rule 826(f) is modeled on Sec.  1.37(c) and requires an SBSEF to 
keep a record in permanent form, which shall show the true name, 
address, and principal occupation or business of any non-U.S. member 
that executes transactions on the SBSEF and must, upon request, provide 
to the Commission information regarding the name of any person 
guaranteeing such transactions or exercising any control over the 
trading of such non-U.S. member.
    The Commission estimates that each SBSEF would need to update 
information required by Rule 826(f) once per year and that each 
submission would take 0.4 hours. Thus, the Commission estimates that 
the aggregate ongoing annual burden for all SBSEFs to comply with 
requests for documents or information pursuant to Rule 826(f) would be 
2 hours.\1070\ The Commission is basing its estimate on the estimate 
included by the CFTC in its submission to OMB regarding Sec.  1.37(c), 
where the CFTC estimated that it would take a SEF 0.4 hours to prepare 
each record in accordance with Sec.  1.37(c).
---------------------------------------------------------------------------

    \1070\ 1 (number of responses per year per respondent) x 0.40 
hours (burden per response) x 5 (number of respondents) = 2 hours.
---------------------------------------------------------------------------

    For PRA purposes, it is reasonable to apply the CFTC's approach to 
Rule 826(f). This work, should it be required, is likely to be 
conducted internally.
(g) Rule 834
    Rule 834 of Regulation SE implements section 765 of the Dodd-Frank 
Act with respect to SBSEFs and SBS exchanges and, in addition, adapt 
certain CFTC rules that are designed to mitigate conflicts of interest 
at SEFs (and other CFTC-registered entities). Rule 834 provides that 
each SBSEF and SBS exchange must create and maintain rules to mitigate 
conflicts of interest between SBSEFs and SBS exchanges and their 
members, including by prohibiting members from owning 20% or more of 
the voting rights of an SBSEF or SBS exchange and from exercising 
disproportionate influence in disciplinary proceedings. Rule 834 also 
requires each SBSEF and SBS exchange to submit to the Commission after 
every governing board election a list of each governing board's 
members, the groups they represent, and how the composition of the 
board complies with the requirements of Rule 834. Establishing such 
rules and submitting such lists to the Commission would result in a 
paperwork burden for SBSEFs and SBS exchanges.
    The Commission estimates that Rules 834(b) and (c) together would 
have an initial, one-time paperwork burden of 15 hours per entity 
associated with drafting and implementing any such rules, for an 
aggregate one-time paperwork burden of 120 hours.\1071\ Rules 834(b) 
and (c) are substantially similar to Proposed Rule 702(c) of Regulation 
MC.\1072\ In its PRA analysis for Proposed Rule 702(c), the Commission 
estimated that there would be a one-time paperwork burden of 15 hours 
per entity associated with drafting and implementation of any such 
rules by each SBSEF or SBS exchange.\1073\ While the Commission is 
modifying Rule 834(b) to provide an exception to the 20% restriction 
mentioned above to SBSEFs that have entered into an agreement with a 
registered futures association or a national securities association for 
the provision of certain specified regulatory services, the Commission 
does not estimate that this exception would result in a change in 
burden hours for compliance with Rule 834(b). The modification does not 
affect the information collection under this rule, as it does not 
involve any record keeping, reporting, or third-party disclosure 
obligations. Therefore, the Commission is not altering its estimate of 
15 hours per entity for Rule 834(b).\1074\
---------------------------------------------------------------------------

    \1071\ 1 (number of responses per respondent) x 15 hours (burden 
per response) x 8 (5 SBSEFs + 3 SBS exchanges) = 120 hours. Rule 
834(a) contains defined terms and would not result in a paperwork 
burden.
    \1072\ Regulation MC Proposal, supra note 21, 75 FR at 65916.
    \1073\ Id.
    \1074\ See supra section VIII.B for discussion of the 20% 
restriction.
---------------------------------------------------------------------------

    Additionally, the Commission estimates that Rule 834(d), Rule 
834(e), and Rule 834(f), combined, would result in an aggregate ongoing 
annual paperwork burden of 10 hours.\1075\ Rules 834(d), (e), and (f) 
are substantially similar to Proposed Rule 702(h) in Regulation MC in 
2010 \1076\ and CFTC Sec.  1.64(c)(4), CFTC Sec.  1.64(b), and CFTC 
Sec.  1.64(d), respectively. The Commission is basing its estimate on 
the CFTC's estimate that Rules 1.41(d),\1077\ 1.63, 1.64, and 1.67 
would result in an average annual paperwork burden of 1.25 hours per 
response that was included in its submission to OMB.\1078\
---------------------------------------------------------------------------

    \1075\ 10 hours = 1 (number of responses per respondent) x 1.25 
hours (burden per response) x 8 (number of SBSEF + SBS exchange 
respondents).
    \1076\ Regulation MC Proposal, supra note 21, 75 FR at 65932.
    \1077\ While Sec.  1.41(d) created an exemption from the 
requirements of section 5a(a)(12)(A) of the CEA for contract market 
rules not related to terms and conditions, the CFTC did not break 
out the portion of the burden hours for which this amendment is 
responsible. Therefore, to be conservative, the Commission is 
including it in its estimate for the burden hours of Rules 834(d), 
(e), and (f).
    \1078\ See 58 FR 37644, 37653.
---------------------------------------------------------------------------

    The Commission estimates that Rule 834(g) would have an aggregate 
ongoing annual burden of 16 hours.\1079\ Rule 834(g) is substantially 
similar to Sec.  1.69 of the CFTC's rules, and the Commission is basing 
its estimate on the CFTC's estimate for Sec.  1.69 of 2 hours per 
response that was included in its submission to OMB.\1080\
---------------------------------------------------------------------------

    \1079\ 16 hours = 1 (number of responses per respondent) x 2 
hours (burden per response) x 8 (number of SBSEF + SBS exchange 
respondents).
    \1080\ See 64 FR at 16, 22.
---------------------------------------------------------------------------

    The Commission does not estimate that Rule 834(h) would result in a 
paperwork burden not already included in the above estimates. Rule 
834(h) incorporates into a single rule the requirements for an SBSEF to 
file rules to comply with Rule 834. As it has already described the 
paperwork burdens of Rules 834(b) through (g), the Commission does not 
estimate that Rule 834(h) would result in a separate paperwork burden 
not already included above. Thus, the total aggregate ongoing annual 
burden is estimated at 26 hours.\1081\
---------------------------------------------------------------------------

    \1081\ 26 hours = 10 hours (from the second sentence of Rules 
834(d), 834(e), and 834(f)) + 16 hours (from Rule 834(g)) + 0 hours 
(from Rule 834(h).
---------------------------------------------------------------------------

5. Miscellaneous Burdens
(a) Rule 833
    Rule 833 describes how exemptions could be obtained for foreign SBS 
trading venues from the SEA definitions of ``exchange,'' ``security-
based swap execution facility,'' and ``broker'' and how SBS executed on 
a foreign trading venue could become exempt from the SEA's trade 
execution requirement. Based on the CFTC's experience in the SEF 
market,\1082\ the Commission estimates that there would be three 
requests for an exemption order under either or both paragraphs (a) and 
(b) of Rule 833 in the first year and two requests in each subsequent 
year; and that each submission would require an initial, one-time 
burden of 80 hours. Once an exemption has been granted to an applicant, 
no further action would be required. The Commission estimates the 
burden to submit an exemption request under one or both paragraphs of 
Rule 833 would be 240 hours in the first

[[Page 87278]]

year \1083\ and 160 hours in each subsequent year.\1084\
---------------------------------------------------------------------------

    \1082\ See supra text accompanying note 1041.
    \1083\ 240 hours (80 hours of in-house counsel time) x (3 
respondents).
    \1084\ 160 hours (80 hours of in-house counsel time) x (2 
respondents). This estimate is informed by Rule 908(c) of the 
Commission's Regulation SBSR, which sets forth the requirements 
surrounding requests under which regulatory reporting and public 
dissemination of SBS transactions can be satisfied by complying with 
the rules of a foreign jurisdiction rather than the parallel rules 
applicable in the United States. The materials necessary to support 
such a request under Rule 908(c) are broadly similar to the 
materials necessary to support a request for an exemption order 
under one or both paragraphs of Rule 833. The Commission estimated 
that the burden of a request under Rule 908(c) would be 80 hours of 
in-house counsel time; therefore, the Commission estimates that 
burden for submitting documents and information in support of a 
request for an exemption order under Rule 833 would be the same.
---------------------------------------------------------------------------

(b) Rule 835
    Rule 835 provides that, if an SBSEF issues a final disciplinary 
action against a member, takes final action with respect to a denial or 
conditioning membership, or takes final action with respect to a denial 
or limitation of access of a person to any services offered by the 
SBSEF, the SBSEF shall file a notice of such action with the Commission 
within 30 days and serve a copy on the affected person.
    The Commission estimates that it would take 0.5 hours to prepare 
this notice and provide it to the Commission and the affected person. 
This estimate is based on a previous Commission estimate for the time 
that it would take to prepare and submit a simple notice.\1085\ The 
Commission estimates that it would take an additional 0.25 hours to 
create and serve a copy of that notice on the affected person. The 
Commission estimates that these notices would occur once per month at 
each SBSEF, resulting in an aggregate annual burden to comply with Rule 
835 of 45 hours.\1086\ This work, should it be required, is likely to 
be conducted internally.
---------------------------------------------------------------------------

    \1085\ A provision of Regulation SCI, Rule 1000(b)(4)(i), also 
requires providing a simple notice and the Commission estimated that 
it would take 0.5 hours to prepare and such a notice. See Regulation 
Systems Compliance and Integrity; Final Rule, SEA Release No. 73639 
(Nov. 19, 2014), 79 FR 72251, 72381 (Dec. 5, 2014).
    \1086\ 45 hours (0.75 hours of in-house counsel time) x (12 
responses per year) x (5 respondents).
---------------------------------------------------------------------------

6. Total Paperwork Burden Under Proposed Regulation SE
    Based on the foregoing, the Commission estimates that the total 
one-time burden for all SBSEFs, persons that seek an exemption order 
under Rule 833, and SBS exchanges combined pursuant to the requirements 
under Regulation SE is equal to 1,995 hours. The Commission estimates 
that annual ongoing burden for all SBSEFs, persons that seek an 
exemption order under Rule 833, and SBS exchanges combined pursuant to 
the requirements under Regulation SE is equal to 2,712.15 hours.

                                        Summary of Aggregate Burden Hours
----------------------------------------------------------------------------------------------------------------
                                       Burden hours
          Rule or provision                 per         One-time or ongoing      Respondents      Total hours
                                        respondent
----------------------------------------------------------------------------------------------------------------
Registration (Rule 803, Form SBSEF).             295  One-Time...............               5              1,475
Rules modeled on CFTC part 37 (other             387  Ongoing................               5              1,935
 than registration).
Rule and product filing processes                 60  Ongoing................               5                300
 (Rules 804 through 807).
809.................................            0.25  Ongoing................               5               1.25
811(d)..............................            0.25  Ongoing................               5               1.25
819(i)..............................           79.83  Ongoing................               5             399.15
819(j)..............................             0.5  Ongoing................               5                2.5
826(f)..............................             0.4  Ongoing................               5                  2
833.................................              80  One-Time...............     \a\ 3 and 2        240 and 160
834(b) through (c)..................              15  One-Time...............               8                120
834(d) through (g)..................            3.25  Ongoing................               8                 26
835.................................               9  Ongoing................               5                 45
----------------------------------------------------------------------------------------------------------------
\a\ Three respondents in the first year and then two each subsequent year.

E. Collection of Information is Mandatory

    The collections of information imposed on SBSEFs throughout 
Regulation SE is mandatory for registered SBSEFs. The collection of 
information with respect to Rule 833 is mandatory for persons that seek 
an exemption order under Rule 833. The collection of information with 
respect to Rule 834 is mandatory for SBS exchanges.

F. Responses to Collection of Information Will Not Be Confidential

    The collection of information required under Regulation SE would 
generally not be kept confidential, unless confidential treatment is 
requested and granted by the Commission pursuant to Rule 24b-2 under 
the SEA.

G. Retention Period of Recordkeeping Requirements

    Although recordkeeping and retention requirements have not yet been 
established for SBSEFs, the Commission is authorized to adopt such 
rules under section 3D of the SEA. Rule 826 under Regulation SE 
implements section 3D(d)(9) of the SEA to require an SBSEF to maintain 
records, for a minimum of five years, of all activities relating to the 
business of the SBSEF, including a complete audit trail.

XIX. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') \1087\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\1088\ as amended by the RFA, generally requires the Commission to 
undertake a final regulatory flexibility analysis of rules it is 
adopting, unless the Commission certifies that the rules would not have 
a significant impact on a substantial number of ``small entities.'' 
\1089\ Section 605(b) of the RFA states that this requirement shall not 
apply to any proposed rule or proposed rule amendment which, if 
adopted,

[[Page 87279]]

would not have a significant economic impact on a substantial number of 
small entities.\1090\ In the Proposing Release, the Commission 
certified, pursuant to section 605(b) of the RFA, that that the 
proposed rules, form, and cover sheet under Regulation SE and the 
related rules and rule amendments, if adopted, would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.\1091\ The Commission solicited but did not 
receive any comments on the certification as it related to the entities 
impacted by Regulation SE. The Commission's analysis of the existing 
information relating to entities subject to Regulation SE, for purposes 
of the RFA, is discussed below.
---------------------------------------------------------------------------

    \1087\ 5 U.S.C. 601 et seq.
    \1088\ 5 U.S.C. 603(a).
    \1089\ Although section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
rulemaking, are set forth in Rule 0-10 under the SEA, 17 CFR 240.0-
10. See SEA Release No. 18452 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 
1982) (File No. AS-305).
    \1090\ See 5 U.S.C. 605(b).
    \1091\ See Proposing Release, supra note 1, 87 FR at 28969-70.
---------------------------------------------------------------------------

A. SBSEFs

    Most of Regulation SE, and the related rules and rule amendments, 
apply to registered SBSEFs (or entities that are seeking to register 
with the Commission as SBSEFs). In the Dodd-Frank Act, Congress defined 
SBSEFs as a new type of trading venue for SBS and mandated the 
registration of these entities. Based on its understanding of the 
market, and review of and consultation with industry sources, the 
Commission estimates that five entities will seek to register as SBSEFs 
and thus would be subject to Regulation SE and the related rules and 
rule amendments.
    For purposes of Commission rulemaking in connection with the FRFA, 
a small entity includes: (1) when used with reference to an ``issuer'' 
or a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; \1092\ 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 
SEA,\1093\ 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 business 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.\1094\ Under the standards adopted 
by the Small Business Administration (``SBA''), entities in financial 
investments and related activities \1095\ are considered small entities 
if they have $41.5 million or less in annual receipts.
---------------------------------------------------------------------------

    \1092\ See 17 CFR 240.0-10(a).
    \1093\ 17 CFR 240.17a-5(d).
    \1094\ See 17 CFR 240.0-10(c).
    \1095\ These entities would include firms involved in investment 
banking and securities dealing; securities brokerage; commodity 
contracts dealing; commodity contracts brokerage; securities and 
commodity exchanges; portfolio management; investment advice; trust, 
fiduciary and custody activities; miscellaneous intermediation; and 
miscellaneous financial investment activities. See SBA's Table of 
Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------

    Most, if not all, SBSEFs would be large business entities or 
subsidiaries of large business entities, and that every SBSEF (or its 
parent entity) would have assets in excess of $5 million (or in the 
case of a broker-dealer, total capital of less than $500,000) and 
annual receipts in excess of $41,500,000. Therefore, for purposes of 
the RFA none of the potential SBSEFs would be considered small 
entities.

B. Persons Requesting an Exemption Order Pursuant to Rule 833

    Rule 833 describes how foreign SBS trading venues could become 
exempt from the SEA definitions of ``exchange,'' ``security-based swap 
execution facility,'' and ``broker'' and how SBS executed on a foreign 
trading venue could become exempt from the SEA's trade execution 
requirement. Based on the fact that the CFTC has granted similar 
exemptions with respect to three foreign jurisdictions,\1096\ the 
Commission estimates that there would be three requests under one or 
both paragraphs of Rule 833 in the first year and two in each 
subsequent year. These requests would likely be submitted by foreign 
SBS trading venues, foreign authorities that license and regulate those 
trading venues, or covered persons (as defined in Rule 832) who are 
members of such trading venues.
---------------------------------------------------------------------------

    \1096\ See supra text accompanying note 1041.
---------------------------------------------------------------------------

    Based on the Commission's existing information about the SBS 
market, the Commission estimates that for purposes of the FRFA no 
person likely to request an exemption order pursuant to Rule 833 would 
be considered a small entity. The Commission estimates that most, if 
not all, of the persons requesting exemptions would be large business 
entities or subsidiaries of large business entities, and on its own, or 
through its parent entity, would have assets in excess of $5 million 
(or in the case of a broker-dealer, total capital of less than 
$500,000) and annual receipts in excess of $41,500,000. Therefore, the 
Commission estimates that for purposes of the RFA they would not be 
considered small entities.

C. SBS Exchanges

    Certain rules under Regulation SE apply to SBS exchanges. 
Currently, there are no SBS exchanges. However, the Commission 
estimates that there could be up to three entities that would be 
considered SBS exchanges and would thus be subject to certain 
requirements of Regulation SE.
    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes, when used with reference to an exchange, an 
exchange that has been exempted from the reporting requirements of Rule 
601 of Regulation NMS \1097\ and is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization.\1098\ Under the standards adopted by the SBA, entities 
involved in financial investments and related activities \1099\ are 
considered small entities if they have $41.5 million or less in annual 
receipts.
---------------------------------------------------------------------------

    \1097\ 17 CFR 242.601.
    \1098\ See 17 CFR 240.0-10(e).
    \1099\ These entities would include firms involved in investment 
banking and securities dealing, securities brokerage, commodity 
contracts dealing, commodity contracts brokerage, securities and 
commodity exchanges, miscellaneous intermediation, portfolio 
management, investment advice, trust, fiduciary and custody 
activities, and miscellaneous financial investment activities. See 
SBA's Table of Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------

    Based on these definitions and the Commission's existing 
information about national securities exchanges, for purposes of the 
RFA the entities likely to be considered SBS exchanges would not be 
considered small entities. Under the standard requiring exemption from 
the reporting requirements of Rule 601 under the SEA, none of the 
exchanges subject to Regulation SE is a ``small entity'' for the 
purposes of the RFA. In addition, the Commission estimates that any SBS 
exchange would have annual receipts in excess of $41,500,000. 
Therefore, for purposes of the RFA, no potential SBS exchange would be 
considered small entities.

D. Certification

    For the foregoing reasons, the Commission certifies, pursuant to 
section 605(b) of Title 5 of the U.S. Code, that the rules, form, and 
cover sheet under Regulation SE and the related rules and rule 
amendments will not have a significant economic impact on a substantial 
number of small entities.

XX. 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

[[Page 87280]]

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,\1100\ the Office of 
Information and Regulatory Affairs has designated these rules as not a 
``major rule'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \1100\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    Pursuant to the SEA (particularly sections 3(b), 3C, 3D, and 36 
thereof, 15 U.S.C. 78c, 78c-3, 78c-4, and 78mm, respectively) and the 
Dodd-Frank Act (particularly section 765 thereof, 15 U.S.C. 8343), the 
Commission is amending Sec. Sec.  201.101, 201.202, 201.210, 201.401, 
201.450, 201.460, 232.405, and 240.3a1-1 of chapter II of title 17 of 
the Code of Federal Regulations and is adopting new Sec. Sec.  201.442, 
201.443, 240.15a-12, and 242.800 through 242.835, as set forth below.

List of Subjects

17 CFR Part 200

    Organization; Conduct and Ethics; and Information and Requests.

17 CFR Part 201

    Administrative practice and procedure.

17 CFR Part 232

    Administrative practice and procedure, Confidential business 
information, Incorporation by reference, Reporting and recordkeeping 
requirements, Securities.

17 CFR Part 240

    Brokers, Dealers, Registration, Securities.

17 CFR 242 and 249

    Brokers, Security-based swap execution facilities, Reporting and 
recordkeeping requirements.

    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 200--ORGANIZATION; CONDUCT AND ETHICS; INFORMATION AND 
REQUESTS

0
1. The authority citation for part 200 continues to read as follows:

    Authority:  5 U.S.C. 552, 552a, 552b, and 557; 11 U.S.C. 901 and 
1109(a); 15 U.S.C. 77c, 77e, 77f, 77g, 77h, 77j, 77o, 77q, 77s, 77u, 
77z-3, 77ggg(a), 77hhh, 77sss, 77uuu, 78b, 78c(b), 78d, 78d-1, 78d-
2, 78e, 78f, 78g, 78h, 78i, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 
78q, 78q-1, 78w, 78t-1, 78u, 78w, 78ll(d), 78mm, 78eee, 80a-8, 80a-
20, 80a-24, 80a-29, 80a-37, 80a-41, 80a-44(a), 80a-44(b), 80b-3, 
80b-4, 80b-5, 80b-9, 80b-10(a), 80b-11, 7202, and 7211 et seq.; 29 
U.S.C. 794; 44 U.S.C. 3506 and 3507; Reorganization Plan No. 10 of 
1950 (15 U.S.C. 78d); sec. 8G, Pub. L. 95-452, 92 Stat. 1101 (5 
U.S.C. App.); sec. 913, Pub. L. 111-203, 124 Stat. 1376, 1827; sec. 
3(a), Pub. L. 114-185, 130 Stat. 538; E.O. 11222, 30 FR 6469, 3 CFR, 
1964-1965 Comp., p. 36; E.O. 12356, 47 FR 14874, 3 CFR, 1982 Comp., 
p. 166; E.O. 12600, 52 FR 23781, 3 CFR, 1987 Comp., p. 235; 
Information Security Oversight Office Directive No. 1, 47 FR 27836; 
and 5 CFR 735.104 and 5 CFR parts 2634 and 2635, unless otherwise 
noted.

Subpart A--Organization and Program Management

0
2. Amend Sec.  200.30-3 by adding paragraphs (a)(95) through (102) to 
read as follows:

Sec.  200.30-3  Delegation of authority to Director of Division of 
Trading and Markets.

* * * * *
    (a) * * *
    (95) Pursuant to Sec. Sec.  242.803 and 242.808(a) and (b) of this 
chapter (Rules 803 and 808(a) and (b)):
    (i) To publish notice on the Commission's website of a completed 
application (``Form SBSEF''), to register as a security-based swap 
execution facility;
    (ii) To make available on the Commission's website certain 
specified parts of a Form SBSEF;
    (iii) To notify the applicant that its application is incomplete 
and will not be deemed to have been submitted for purposes of the 
Commission's review;
    (iv) To request from the applicant any additional information and 
documentation necessary to review an application;
    (v) To notify the applicant that its application is materially 
incomplete and to specify the deficiencies in the application, for 
purposes of staying the 180-day period for Commission review of the 
Form SBSEF; and
    (vi) Upon receipt of a request submitted in good form by a 
security-based swap execution facility for vacation of its 
registration, to issue an order vacating the security-based swap 
execution facility's registration and to send a copy of the request and 
its order to all other security-based swap execution facilities, 
national securities exchanges that trade security-based swaps, and 
registered clearing agencies that clear security-based swaps.
    (96) Pursuant to Sec. Sec.  242.804(c)(1) and (2) and 242.808(b) of 
this chapter:
    (i) To make publicly available on the Commission's website a 
security-based swap execution facility's filing of new products 
pursuant to the self-certification procedures of Sec.  242.804 of this 
chapter;
    (ii) To stay for a period of up to 90 days the effectiveness of a 
security-based swap execution facility's self-certification of a new 
product;
    (iii) To publish notice on the Commission's website of a 30-day 
period for public comment; and
    (iv) To withdraw the stay or notify the security-based swap 
execution facility that the Commission objects to the proposed 
certification.
    (97) Pursuant to Sec. Sec.  242.805(b) through (e) and 242.808(b) 
of this chapter:
    (i) To make publicly available on the Commission's website a 
security-based swap execution facility's filing of new products for 
Commission review and approval pursuant to Sec.  242.805 of this 
chapter (Rule 805);
    (ii) To notify the submitting security-based swap execution 
facility that a submission for a new product does not comply with 
paragraph (a) of Sec.  242.805 of this chapter (Rule 805);
    (iii) To extend by an additional 45 days the period for 
consideration of a new product voluntarily submitted by a security-
based swap execution facility to the Commission for approval, if the 
product raises novel or complex issues that require additional time to 
analyze, and to notify the security-based swap execution facility of 
the extension within the initial 45-day review period and briefly 
describe the nature of the specific issue(s) for which additional time 
for review is required;
    (iv) To extend the period for consideration of a new product 
voluntarily submitted by a security-based swap execution facility to 
the Commission for approval by such longer period as to which the 
security-based swap execution facility agrees in writing;
    (v) To approve a proposed new product and provide notice of the 
approval to the security-based swap execution facility;
    (vi) To notify the security-based swap execution facility that the 
Commission will not, or is unable to, approve the product, and to 
specify the nature of the issues raised and the specific provision of 
the Act or the Commission's rules thereunder, including the form or 
content requirements Sec.  242.805(a) of this chapter, that the product 
violates, appears to violate, or potentially violates but which cannot 
be ascertained from the submission.
    (98) Pursuant to Sec. Sec.  242.806(b) through (e) and 242.808(b) 
of this chapter:
    (i) To make publicly available on the Commission's website a 
security-based

[[Page 87281]]

swap execution facility's filing of new rules and rule amendments for 
Commission review and approval pursuant to Sec.  242.806(a) of this 
chapter;
    (ii) To notify the submitting security-based swap execution 
facility that a submission for a new rule or rule amendment does not 
comply with Sec.  242.806(a) of this chapter;
    (iii) To extend by an additional 45 days the period for 
consideration of a new rule or rule amendment voluntarily submitted by 
a security-based swap execution facility to the Commission, if the 
proposed rule or rule amendment raises novel or complex issues that 
require additional time to review or is of major economic significance, 
the submission is incomplete, or the requester does not respond 
completely to the Commission questions in a timely manner, and to 
notify the security-based swap execution facility of the extension 
within the initial 45-day review period and briefly describe the nature 
of the specific issue(s) for which additional time for review is 
required;
    (iv) To extend the period for consideration of a new rule amendment 
voluntarily submitted by a security-based swap execution facility to 
the Commission for approval by such longer period as to which the 
security-based swap execution facility agrees in writing;
    (v) To approve a proposed rule or rule amendment and provide notice 
of the approval to the security-based swap execution facility;
    (vi) To notify a security-based swap execution facility that the 
Commission will not, or is unable to, approve the new rule or rule 
amendment and to specify the nature of the issues raised and the 
specific provision of the Act or the Commission's rules thereunder, 
including the form or content requirements of this section, with which 
the new rule or rule amendment is inconsistent or appears to be 
inconsistent with the Act or the Commission's rules thereunder, 
including the form or content requirements of Rule 806, with which the 
new rule or rule amendment is inconsistent or appears to be 
inconsistent; and
    (vii) To approve a proposed rule or a rule amendment, including 
changes to terms and conditions of a product, on an expedited basis 
under such conditions as shall be specified in the written 
notification.
    (99) Pursuant to Sec. Sec.  242.807(c) and 242.808(b) of this 
chapter:
    (i) To make publicly available on the Commission's website a 
security-based swap execution facility's filing of new rules and rule 
amendments pursuant to the self-certification procedures of Sec.  
242.807 of this chapter;
    (ii) To stay for a period of up to 90 days the effectiveness of a 
security-based swap execution facility's self-certification of a new 
rule or rule amendment;
    (iii) To publish notice on the Commission's website of a 30-day 
period for public comment; and
    (iv) To withdraw the stay or notify the security-based swap 
execution facility that the Commission objects to the proposed 
certification.
    (100) Pursuant to Sec. Sec.  242.809 of this chapter, to provide 
written notice to a security-based swap execution facility of a stay or 
tolling pending issuance of a joint interpretation upon request for a 
joint interpretation of whether a proposed product is a swap, security-
based swap, or mixed swap made pursuant to Sec.  240.3a68-2 of this 
chapter by the security-based swap execution facility, the Commission, 
or the Commodity Futures Trading Commission.
    (101) Pursuant to Sec.  242.811 of this chapter:
    (i) To request pursuant Sec.  242.811(a) of this chapter that a 
security-based swap execution facility file with the Commission 
information related to its business as a security-based swap execution 
facility, and to specify the form, manner, and timeframe for the filing 
by the security-based swap execution facility;
    (ii) To request pursuant to Sec.  242.811(b) of this chapter that a 
security-based swap execution facility file with the Commission a 
written demonstration, containing supporting data, information, and 
documents, that it is in compliance with one or more Core Principles or 
with its other obligations under the Act or the Commission's rules 
thereunder, to specify the Core Principles and other obligations under 
the Act or the Commission's rules that the security-based swap 
execution facility's filing must address, and to specify the form, 
manner, and timeframe for the security-based swap execution facility's 
filing;
    (iii) To specify, pursuant to Sec.  242.811(c)(2) of this chapter, 
the form and manner of the notification required pursuant to Sec.  
242.811(c)(1) of this chapter by a security-based swap execution 
facility of any transaction involving the direct or indirect transfer 
of 50 percent or more of the equity interest in the security-based swap 
execution facility, and to request supporting documentation of the 
transaction;
    (iv) To specify the form and manner of the certification required 
pursuant to Sec.  242.811(c)(4) of this chapter; and
    (v) To specify the form and manner of the submission by a security-
based swap execution facility of documents filed in any material legal 
proceeding to which the security-based swap execution facility is a 
party or its property or assets is subject, as specified in Sec.  
242.811(d)(1) of this chapter, or in any material legal proceeding 
instituted against any officer, director, or other official of the 
security-based swap execution facility from conduct in such person's 
capacity as an official of the security-based swap execution facility, 
as specified in Sec.  242.811(d)(2) of this chapter, and to request 
further documents.
    (102) Pursuant to Sec.  242.822 of this chapter (Rule 822), to 
require that a security-based swap execution provide information in its 
possession to the Commission and to specify the form and manner of that 
provision, and to require a security-based swap execution facility to 
share information with other regulation organizations, data 
repositories, and third-party data reporting services as necessary and 
appropriate to fulfill the security-based swap execution facility's 
regulatory and reporting responsibilities.
* * * * *

0
3. Amend Sec.  200.30-14 by revising paragraphs (h)(4), (h)(5), (h)(7), 
and (h)(8) to read as follows:

Sec.  200.30-14  Delegation of authority to the General Counsel.

* * * * *
    (h) * * *
    (4) With respect to proceedings conducted under sections 19(d), 
(e), and (f) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), 
(e), and (f), Title I of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 
7211-7219, and Sec.  201.442 of this chapter (Rule 442 of the 
Commission's Rules of Practice) to determine that an application for 
review under any of those sections has been abandoned, under the 
provisions of'Sec.  201.420, Sec.  201.440, or Sec.  201.442 of this 
chapter (Rule 420, Rule 440, or Rule 442 of the Commission's Rules of 
Practice), or otherwise, and accordingly to issue an order dismissing 
the application.
    (5) With respect to proceedings conducted pursuant to the 
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., the Investment 
Company Act of 1940, 15 U.S.C. 80a-1 et seq., the Investment Advisers 
Act of 1940, 15 U.S.C. 80b-1 et seq., the provisions of Sec.  
201.102(e) or Sec.  201.442 of this chapter (Rule 102(e) or Rule 442 of 
the Commission's Rules of Practice), and

[[Page 87282]]

Title I of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, to 
determine applications to stay Commission orders pending appeal of 
those orders to the federal courts and to determine application to 
vacate such stays.
* * * * *
    (7) In connection with Commission review of actions taken by self-
regulatory organizations pursuant to sections 19(d), (e), and (f) of 
the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), (e), and (f), by 
the Public Company Accounting Oversight Board pursuant to Title I of 
the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, or by a security-
based swap execution facility pursuant to Sec.  201.442 of this chapter 
(Rule 442 of the Commission's Rules of Practice) to grant or deny 
requests for oral argument in accordance with the provisions of Sec.  
201.451 of this chapter (Rule 451 of the Commission's Rules of 
Practice).
    (8) In connection with Commission review of actions taken by the 
Public Company Accounting Oversight Board pursuant to Title I of the 
Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, or by a security-based 
swap execution facility pursuant to Sec.  201.442 of this chapter (Rule 
442 of the Commission's Rules of Practice), to determine whether to 
lift the automatic stay of a disciplinary sanction.
* * * * *

PART 201--RULES OF PRACTICE

0
4. The general authority citation for part 201 continues to read as 
follows:

    Authority:  15 U.S.C. 77s, 77sss, 78w, 78x, 80a-37, and 80b-11; 
5 U.S.C. 504(c)(1).
* * * * *

Subpart D--Rules of Practice

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

    Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 77sss, 
78c(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
6. Amend Sec.  201.101 by adding paragraph (a)(9)(ix) to read as 
follows:

Sec.  201.101  Definitions.

    (a) * * *
    (9) * * *
    (ix) By the filing, pursuant to Sec.  201.442, of an application 
for review of a determination of a security-based swap execution 
facility;
* * * * *

0
7. Amend Sec.  201.202 by revising paragraph (a) to read as follows:

Sec.  201.202  Specification of procedures by parties in certain 
proceedings.

    (a) Motion to specify procedures. In any proceeding other than an 
enforcement or disciplinary proceeding, a proceeding to review a 
determination by a self-regulatory organization pursuant to Sec. Sec.  
201.420 and 201.421, a proceeding to review a determination of the 
Board pursuant to Sec. Sec.  201.440 and 201.441, or a proceeding to 
review a determination by a security-based swap execution facility 
pursuant to Sec. Sec.  201.442 and 201.443, a party may, at any time up 
to 20 days prior to the start of a hearing, make a motion to specify 
the procedures necessary or appropriate for the proceeding with 
particular reference to:
    (1) Whether there should be an initial decision by a hearing 
officer;
    (2) Whether any interested division of the Commission may assist in 
the preparation of the Commission's decision; and
    (3) Whether there should be a 30-day waiting period between the 
issuance of the Commission's order and the date it is to become 
effective.
* * * * *

0
8. Amend Sec.  201.210 by revising the paragraph (a) heading, (a)(1), 
paragraph (b) heading, (b)(1), and paragraph (c) introductory text to 
read as follows:

Sec.  201.210  Parties, limited participants and amici curiae.

    (a) Parties in an enforcement or disciplinary proceeding, a 
proceeding to review a self- regulatory organization determination, a 
proceeding to review a Board determination, or a proceeding to review a 
determination by a security-based swap execution facility. (1) 
Generally. No person shall be granted leave to become a party or a non-
party participant on a limited basis in an enforcement or disciplinary 
proceeding, a proceeding to review a determination by a self- 
regulatory organization pursuant to Sec. Sec.  201.420 and 201.421, a 
proceeding to review a determination by the Board pursuant to 
Sec. Sec.  201.440 and 201.441, or a proceeding to review a 
determination by a security-based swap execution facility pursuant to 
Sec. Sec.  201.442 and 201.443, except as authorized by paragraph (c) 
of this section.
* * * * *
    (b) Intervention as party. (1) Generally. In any proceeding, other 
than an enforcement proceeding, a disciplinary proceeding, a proceeding 
to review a self-regulatory determination, a proceeding to review a 
Board determination, or a proceeding to review a security-based swap 
execution facility determination, any person may seek leave to 
intervene as a party by filing a motion setting forth the person's 
interest in the proceeding. No person, however, shall be admitted as a 
party to a proceeding by intervention unless it is determined that 
leave to participate pursuant to paragraph (c) of this section would be 
inadequate for the protection of the person's interests. In a 
proceeding under the Investment Company Act of 1940, any representative 
of interested security holders, or any other person whose participation 
in the proceeding may be in the public interest or for the protection 
of investors, may be admitted as a party upon the filing of a written 
motion setting forth the person's interest in the proceeding.
* * * * *
    (c) Leave to participate on a limited basis. In any proceeding, 
other than an enforcement proceeding, a disciplinary proceeding, a 
proceeding to review a self-regulatory determination, a proceeding to 
review a Board determination, or a proceeding to review a security-
based swap execution facility determination, any person may seek leave 
to participate on a limited basis as a non-party participant as any 
matter affecting the person's interests:
* * * * *

0
9. Amend Sec.  201.401 by adding paragraph (f) to read as follows:

Sec.  201.401  Consideration of stays.

* * * * *
    (f) Lifting of stay of action by a security-based swap execution 
facility. (1) Availability. Any person aggrieved by a stay of action by 
a security-based swap execution facility entered in accordance with 
Sec.  201.442(c) may make a motion to lift the stay. The Commission 
may, at any time, on its own motion determine whether to lift the 
automatic stay.
    (2) Summary action. The Commission may lift a stay summarily, 
without notice and opportunity for hearing.
    (3) Expedited consideration. The Commission may expedite 
consideration of a motion to lift a stay of action by a security-based 
swap execution facility, consistent with the Commission's other 
responsibilities. Where consideration is expedited, persons opposing 
the lifting of the stay may file a statement in opposition within two 
days of service of the motion requesting lifting of the stay unless the 
Commission, by written order, shall specify a different period.

0
10. Add Sec.  201.442 to read as follows:

[[Page 87283]]

Sec.  201.442  Appeal of determination by security-based swap execution 
facility.

    (a) Application for review; when available. An application for 
review by the Commission may be filed by any person who is aggrieved by 
a determination of a security-based swap execution facility with 
respect to any:
    (1) Final disciplinary action, as defined in Sec.  240.835(b)(1) of 
this chapter;
    (2) Final action with respect to a denial or conditioning of 
membership, as defined in Sec.  240.835(b)(2) of this chapter; or
    (3) Final action with respect to a denial or limitation of access 
to any service offered by the security-based swap execution facility, 
as defined in Sec.  240.835(b)(2) of this chapter.
    (b) Procedure. An aggrieved person may file an application for 
review with the Commission pursuant to Sec.  201.151 within 30 days 
after the notice filed with the Commission pursuant to Sec.  242.835 of 
this chapter by the security-based swap execution facility of the 
determination is received by the aggrieved person. The Commission will 
not extend this 30-day period, absent a showing of extraordinary 
circumstances. This section is the exclusive remedy for seeking an 
extension of the 30-day period. The aggrieved person shall serve the 
application on the security-based swap execution facility at the same 
time. The application shall identify the determination complained of, 
set forth in summary form a statement of alleged errors in the action 
and supporting reasons therefor, and state an address where the 
applicant can be served. The application should not exceed two pages in 
length. If the applicant will be represented by a representative, the 
application shall be accompanied by the notice of appearance required 
by Sec.  201.102(d). Any exception to an action not supported in an 
opening brief that complies with Sec.  201.450(b) may, at the 
discretion of the Commission, be deemed to have been waived by the 
applicant.
    (c) Stay of determination. Filing an application for review with 
the Commission pursuant to paragraph (b) of this section operates as a 
stay of the security-based swap execution facility's determination, 
unless the Commission otherwise orders either pursuant to a motion 
filed in accordance with Sec.  201.401(f) or upon its own motion.
    (d) Certification of the record; service of the index. Within 14 
days after receipt of an application for review, the security-based 
swap execution facility shall certify and file electronically in the 
form and manner specified by the Office of the Secretary one unredacted 
copy of the record upon which it took the complained-of action.
    (1) The security-based swap execution facility shall file 
electronically with the Commission one copy of an index of such record 
in the form and manner specified by the Commission and shall serve one 
copy of the index on each party. If such index contains any sensitive 
personal information, as defined in paragraph (d)(2) of this section, 
the security-based swap execution facility also shall file 
electronically with the Commission one redacted copy of such index, 
subject to the requirements of paragraph (d)(2) of this section.
    (2) Sensitive personal information includes a Social Security 
number, taxpayer identification number, financial account number, 
credit card or debit card number, passport number, driver's license 
number, State-issued identification number, home address (other than 
city and State), telephone number, date of birth (other than year), 
names and initials of minor children, as well as any unnecessary health 
information identifiable by individual, such as an individual's medical 
records. Sensitive personal information shall not be included in, and 
must be redacted or omitted from, all filings.
    (i) Exceptions. The following information may be included and is 
not required to be redacted from filings:
    (A) The last four digits of a financial account number, credit card 
or debit card number, passport number, driver's license number, and 
State-issued identification number;
    (B) Home addresses and telephone numbers of parties and persons 
filing documents with the Commission; and
    (C) Business telephone numbers.
    (ii) [Reserved]
    (e) Certification. Any filing made pursuant to this section, other 
than the record upon which the action complained of was taken, must 
include a certification that any information described in paragraph 
(d)(2) of this section has been omitted or redacted from the filing.

0
11. Add Sec.  201.443 to read as follows:

Sec.  201.443  Commission consideration of security-based swap 
execution facility determinations.

    (a) Commission review other than pursuant to an application for 
review. The Commission may, on its own initiative, order review of any 
determination by a security-based swap execution facility that could be 
subject to an application for review pursuant to Sec.  201.442(a) 
within 40 days after the security-based swap execution facility 
provided notice to the Commission thereof.
    (b) Supplemental briefing. The Commission may at any time before 
issuing its decision raise or consider any matter that it deems 
material, whether or not raised by the parties. The Commission will 
give notice to the parties and an opportunity for supplemental briefing 
with respect to issues not briefed by the parties where the Commission 
believes that such briefing could significantly aid the decisional 
process.

0
12. Amend Sec.  201.450, by:
0
a. Redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs 
(a)(2)(v) and (a)(2)(vi); and
0
b. Adding new paragraph (a)(2)(iv).
    The addition reads as follows:

Sec.  201.450  Briefs filed with the Commission.

    (a) * * *
    (2) * * *
    (iv) Receipt by the Commission of an index to the record of a 
determination by a security-based swap execution facility filed 
pursuant to Sec.  201.442(d).
* * * * *

0
13. Amend Sec.  201.460 by adding paragraph (a)(4) to read as follows:

Sec.  201.460  Record before the Commission.

* * * * *
    (a) * * *
    (4) In a proceeding for final decision before the Commission 
reviewing a determination of a security-based swap execution facility, 
the record shall consist of:
    (i) The record certified pursuant to Sec.  201.442(d) by the 
security-based swap execution facility;
    (ii) Any application for review; and
    (iii) Any submissions, moving papers, and briefs filed on appeal or 
review.
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
14. The general authority citation for part 232 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-10, 80b-11, 7201 
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
15. Amend Sec.  232.405 by:
0
a. Revising the introductory text, paragraphs (a)(2), (a)(3)(i) 
introductory text, (a)(3)(ii), (a)(4), and (b)(5) introductory text;
0
b. Adding paragraph (b)(5)(ii); and
0
c. Revising Note 1 to Sec.  232.405.

[[Page 87284]]

    The revisions and addition read as follows:

Sec.  232.405  Interactive Data File submissions.

    This section applies to electronic filers that submit Interactive 
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) 
of Regulation S-K), General Instruction F of Sec.  249.311 (Form 11-K), 
paragraph (101) of Part II--Information Not Required to be Delivered to 
Offerees or Purchasers of Form F-10 (Sec.  239.40 of this chapter), 
Sec.  240.13a-21 of this chapter (Rule 13a-21 under the Exchange Act), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), Sec.  
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange 
Act), Note D.5 of Sec.  240.14a-101 of this chapter (Rule 14a-101 under 
the Exchange Act), Item 1 of Sec.  240.14c-101 of this chapter (Rule 
14c-101 under the Exchange Act), General Instruction I of Sec.  249.333 
of this chapter (Form F-SR), General Instruction C.3.(g) of Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter), General Instruction I 
of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), General 
Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a and 274.11b of this 
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b 
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6 
(Sec. Sec.  239.17c and 274.11d of this chapter), General Instruction 
2.(l) of Form N-8B-2 (Sec.  274.12 of this chapter), General 
Instruction 5 of Form S-6 (Sec.  239.16 of this chapter), General 
Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter), Sec. Sec.  242.829 and 831 of this chapter (Rules 829 and 831 
of Regulation SE), and the Registration Instructions to Form SBSEF 
(Sec.  249.1701 of this chapter) specify when electronic filers are 
required or permitted to submit an Interactive Data File (Sec.  
232.11), as further described in note 1 to this section. This section 
imposes content, format, and submission requirements for an Interactive 
Data File, but does not change the substantive content requirements for 
the financial and other disclosures in the Related Official Filing 
(Sec.  232.11).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Sec.  
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), 
Instruction F of Form 11-K (Sec.  249.311 of this chapter), paragraph 
(101) of Part II--Information Not Required to be Delivered to Offerees 
or Purchasers of Form F-10 (Sec.  239.40 of this chapter), Sec.  
240.13a-21 of this chapter (Rule 13a-21 under the Exchange Act), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), Sec.  
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange 
Act), Note D.5 of Sec.  240.14a-101 of this chapter (Rule 14a-101 under 
the Exchange Act), Item 1 of Sec.  240.14c-101 of this chapter (Rule 
14c-101 under the Exchange Act), General Instruction I to Form F-SR 
(Sec.  249.333 of this chapter), General Instruction C.3.(g) of Form N-
1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
General Instruction 2.(l) of Form N-8B-2 (Sec.  274.12 of this 
chapter), General Instruction 5 of Form S-6 (Sec.  239.16 of this 
chapter), General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 
274.128 of this chapter), Sec. Sec.  242.829 and 242.831 of this 
chapter (Rules 829 and 831 of Regulation SE), and the Registration 
Instructions to Form SBSEF (Sec.  249.1701 of this chapter), as 
applicable;
* * * * *
    (3) * * *
    (i) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account as defined in section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, or is subject to Sec. Sec.  
242.800 through 242.835 (Regulation SE), and is not within one of the 
categories specified in paragraph (f)(1)(i) of this section, as partly 
embedded into a filing with the remainder simultaneously submitted as 
an exhibit to:
* * * * *
    (ii) If the electronic filer is a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account (as defined in section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, or is subject to Sec. Sec.  
242.800 through 242.835 (Regulation SE), and is not within one of the 
categories specified in paragraph (f)(1)(ii) of this section, as partly 
embedded into a filing with the remainder simultaneously submitted as 
an exhibit to a filing that contains the disclosure this section 
requires to be tagged; and
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, Item 601(b)(101) of Sec.  229.601(b)(101) of this chapter 
(Regulation S-K), General Instruction F of Form 11-K (Sec.  249.311 of 
this chapter), paragraph (101) of Part II--Information Not Required to 
be Delivered to Offerees or Purchasers of Form F-10 (Sec.  239.40 of 
this chapter), Sec.  240.13a-21 of this chapter (Rule 13a-21 under the 
Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form 
20-F (Sec.  249.220f of this chapter), paragraph B.(15) of the General 
Instructions to Form 40-F (Sec.  249.240f of this chapter), paragraph 
C.(6) of the General Instructions to Form 6-K (Sec.  249.306 of this 
chapter), Sec.  240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under 
the Exchange Act), Note D.5 of Sec.  240.14a-101 of this chapter (Rule 
14a-101 under the Exchange Act), Item 1 of Sec.  240.14c-101 of this 
chapter (Rule 14c-101 under the Exchange Act), General Instruction I to 
Form F-SR (Sec.  249.333 of this chapter), General Instruction C.3.(g) 
of Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
Instruction 2.(l) of Form N-8B-2 (Sec.  274.12 of this chapter); 
General Instruction 5 of Form S-6 (Sec.  239.16 of this chapter); 
General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 
of this chapter), Sec. Sec.  242.829 and 831 of this chapter

[[Page 87285]]

(Rules 829 and 831 of Regulation SE), and the Registration Instructions 
to Form SBSEF (Sec.  249.1701 of this chapter), as applicable.
    (b) * * *
    (5) If the electronic filer is a clearing agency that provides a 
central matching service, or is subject to Sec. Sec.  242.800 through 
242.835 (Regulation SE), an Interactive Data File must consist only of 
a complete set of information for all corresponding data in the Related 
Official Filing, no more and no less, as follows:
* * * * *
    (ii) For electronic filers subject to Regulation SE, the content of 
documents required to be filed electronically under Sec. Sec.  242.829 
and 242.831 of this chapter (Rules 829 and 831 of Regulation SE); and 
the Registration Instructions to Sec.  249.1701 of this chapter (Form 
SBSEF), as applicable.
* * * * *

    Note 1 to Sec.  232.405: Section 229.601(b)(101) of this chapter 
(Item 601(b)(101) of Regulation S-K) specifies the circumstances 
under which an Interactive Data File must be submitted and the 
circumstances under which it is permitted to be submitted, with 
respect to Sec.  239.11 of this chapter (Form S-1), Sec.  239.13 of 
this chapter (Form S-3), Sec.  239.25 of this chapter (Form S-4), 
Sec.  239.18 of this chapter (Form S-11), Sec.  239.31 of this 
chapter (Form F-1), Sec.  239.33 of this chapter (Form F-3), Sec.  
239.34 of this chapter (Form F-4), Sec.  249.310 of this chapter 
(Form 10-K), Sec.  249.308a of this chapter (Form 10-Q), and Sec.  
249.308 of this chapter (Form 8-K). General Instruction F of Sec.  
249.311 of this chapter (Form 11-K) specifies the circumstances 
under which an Interactive Data File must be submitted, and the 
circumstances under which it is permitted to be submitted, with 
respect to Form 11-K. Paragraph (101) of Part II--Information not 
Required to be Delivered to Offerees or Purchasers of Sec.  239.40 
of this chapter (Form F-10) specifies the circumstances under which 
an Interactive Data File must be submitted and the circumstances 
under which it is permitted to be submitted, with respect to Form F-
10. Paragraph 101 of the Instructions as to Exhibits of Sec.  
249.220f of this chapter (Form 20-F) specifies the circumstances 
under which an Interactive Data File must be submitted and the 
circumstances under which it is permitted to be submitted, with 
respect to Form 20-F. Paragraph B.(15) of the General Instructions 
to Sec.  249.240f of this chapter (Form 40-F) and Paragraph C.(6) of 
the General Instructions to Sec.  249.306 of this chapter (Form 6-K) 
specify the circumstances under which an Interactive Data File must 
be submitted and the circumstances under which it is permitted to be 
submitted, with respect to Sec.  249.240f of this chapter (Form 40-
F) and Sec.  249.306 of this chapter (Form 6-K). Section 240.17Ad-
27(d) of this chapter (Rule 17Ad-27(d) under the Exchange Act) 
specifies the circumstances under which an Interactive Data File 
must be submitted with respect the reports required under Rule 17Ad-
27. Note D.5 of Sec.  240.14a-101 of this chapter (Schedule 14A) and 
Item 1 of Sec.  240.14c-101 of this chapter (Schedule 14C) specify 
the circumstances under which an Interactive Data File must be 
submitted with respect to Schedules 14A and 14C. Section 240.13a-21 
of this chapter (Rule 13a-21 under the Exchange Act) and General 
Instruction I to Sec.  249.333 of this chapter (Form F-SR) specify 
the circumstances under which an Interactive Data File must be 
submitted, with respect to Form F-SR. Sec. Sec.  242.829 and 242.831 
of this chapter (Rules 829 and 831 of Regulation SE) and the 
Registration Instructions to Sec.  249.1701 of this chapter (Form 
SBSEF), as applicable, specify the circumstances under which an 
Interactive Data File must be submitted with respect to filings made 
under Regulation SE.

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

0
16. 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, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
17. Amend Sec.  240.3a1-1 by:
0
a. Removing the word ``or'' from the end of paragraph (a)(2);
0
b. Removing the period from the end of paragraph (a)(3) and adding a 
semicolon in its place;
0
c. Adding paragraphs (a)(4) and (5); and
0
d. Revising paragraph (b) introductory text.
    The additions and revisions read as follows:

Sec.  240.3a1-1  Exemption from the definition of ``Exchange'' under 
section 3(a)(1) of the Act.

* * * * *
    (a) * * *
    (4) Has registered with the Commission as a security-based swap 
execution facility pursuant Sec.  242.803 of this chapter and provides 
a market place or facilities for no securities other than security-
based swaps; or
    (5) Has registered with the Commission as a clearing agency 
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its 
exchange functions to operation of a trading session that is designed 
to further the accuracy of end-of-day valuations of security-based 
swaps.
    (b) Notwithstanding paragraphs (a)(1) through (3) of this section, 
an organization, association, or group of persons shall not be exempt 
under this section from the definition of ``exchange,'' if:
* * * * *

0
18. Add Sec.  240.15a-12 to read as follows:

Sec.  240.15a-12  Exemption for certain security-based swap execution 
facilities from certain broker requirements.

    (a) For purposes of this section, an SBSEF-B means a security-based 
swap execution facility that does not engage in any securities activity 
other than facilitating the trading of security-based swaps on or 
through the security-based swap execution facility.
    (b) An SBSEF-B that registers with the Commission pursuant to Sec.  
242.803 of this chapter shall be deemed also to have registered with 
the Commission pursuant to sections 15(a) and (b) of the Act (15 U.S.C. 
78o(a)(1) and (b)).
    (c) Except as provided in paragraph (d) of this section, an SBSEF-B 
shall be exempt from any provision of the Act or the Commission's rules 
thereunder applicable to brokers that, by its terms, requires, 
prohibits, restricts, limits, conditions, or affects the activities of 
a broker, unless such provision specifies that it applies to a 
security-based swap execution facility.
    (d) Notwithstanding paragraph (c) of this section, the following 
provisions of the Act and the Commission's rules thereunder shall apply 
to an SBSEF-B:
    (1) Section 15(b)(4) of the Act (15 U.S.C. 78o(b)(4));
    (2) Section 15(b)(6) of the Act (15 U.S.C. 78o(b)(6)); and
    (3) Section 17(b) of the Act (15 U.S.C. 78q(b)).
    (e) An SBSEF-B shall be exempt from the Securities Investor 
Protection Act.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, SE, AND SBSR, AND 
CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
19. The authority citation for part 242 is revised to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4, 
78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 
78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-
29, 80a-37, and 8343.

0
20. The heading for part 242 is revised to read as set forth above.

0
21. Add Sec. Sec.  242.800 through 242.835 to read as follows:

[[Page 87286]]

Regulation SE--Registration and Regulation of Security-Based Swap 
Execution Facilities

Sec.
* * * * *
242.800 Scope.
242.801 Applicable provisions.
242.802 Definitions.
242.803 Requirements and procedures for registration.
242.804 Listing products for trading by certification.
242.805 Voluntary submission of new products for Commission review 
and approval.
242.806 Voluntary submission of rules for Commission review and 
approval.
242.807 Self-certification of rules.
242.808 Availability of public information.
242.809 Stay of certification and tolling of review period pending 
jurisdictional determination.
242.810 Product filings by security-based swap execution facilities 
that are not yet registered and by dormant security-based swap 
execution facilities.
242.811 Information relating to security-based swap execution 
facility compliance.
242.812 Enforceability.
242.813 Prohibited use of data collected for regulation purposes.
242.814 Entity operating both a national securities exchange and 
security-based swap execution facility.
242.815 Methods of execution for Required and Permitted 
Transactions.
242.816 Trade execution requirement and exemptions therefrom.
242.817 Trade execution compliance schedule.
242.818 Core Principle 1--Compliance with core principles.
242.819 Core Principle 2--Compliance with rules.
242.820 Core Principle 3--Security-based swaps not readily 
susceptible to manipulation.
242.821 Core Principle 4--Monitoring of trading and trade 
processing.
242.822 Core Principle 5--Ability to obtain information.
242.823 Core Principle 6--Financial integrity of transactions.
242.824 Core Principle 7--Emergency authority.
242.825 Core Principle 8--Timely publication of trading information.
242.826 Core Principle 9--Recordkeeping and reporting.
242.827 Core Principle 10--Antitrust considerations.
242.828 Core Principle 11--Conflicts of interest.
242.829 Core Principle 12--Financial resources.
242.830 Core Principle 13--System safeguards.
242.831 Core Principle 14--Designation of chief compliance officers.
242.832 Application of the trade execution requirement to cross-
border security-based swap transactions.
242.833 Cross-border exemptions.
242.834 Mitigation of conflicts of interest of security-based swap 
execution facilities and certain exchanges.
242.835 Notice to Commission by security-based swap execution 
facility of final disciplinary action or denial or limitation of 
access.

Sec.  242.800  Scope.

    The provisions of Sec. Sec.  242.800 through 242.835 shall apply to 
every security-based swap execution facility that is registered or is 
applying to become registered as a security-based swap execution 
facility under section 3D of the Securities Exchange Act (``Act'').

Sec.  242.801  Applicable provisions.

    A security-based swap execution facility shall comply with the 
requirements of Sec. Sec.  242.800 through 242.835 and all other 
applicable Commission rules, including any related definitions and 
cross- referenced sections.

Sec.  242.802  Definitions.

    The following terms, and any other terms defined within Sec. Sec.  
242.800 through 242.835, are defined as follows solely for purposes of 
Sec. Sec.  242.800 through 242.835:
    Business day means the intraday period of time starting at 8:15 
a.m. and ending at 4:45 p.m. eastern standard time or eastern daylight 
saving time, whichever is currently in effect in Washington, DC, on all 
days except Saturdays, Sundays, and Federal holidays in Washington, DC.
    Committee member means a member, or functional equivalent thereof, 
of any committee of a security-based swap execution facility.
    Correcting trade means a trade executed and submitted for clearing 
to a registered clearing agency with the same terms and conditions as 
an error trade other than any corrections to any operational or 
clerical error and the time of execution.
    Disciplinary committee means any person or committee of persons, or 
any subcommittee thereof, that is authorized by a security-based swap 
execution facility or SBS exchange to issue disciplinary charges, to 
conduct disciplinary proceedings, to settle disciplinary charges, to 
impose disciplinary sanctions, or to hear appeals thereof in cases 
involving any violation of the rules of the security-based swap 
execution facility or SBS exchange, except those cases where the person 
or committee is authorized summarily to impose minor penalties for 
violating rules regarding decorum, attire, the timely submission of 
accurate records for clearing or verifying each day's transactions, or 
other similar activities.
    Dormant product means:
    (1) Any security-based swap listed on security-based swap execution 
facility that has no open interest and in which no trading has occurred 
for a period of 12 complete calendar months following a certification 
to, or approval by, the Commission; provided, however, that no 
security-based swap initially and originally certified to, or approved 
by, the Commission within the preceding 36 complete calendar months 
shall be considered to be a dormant product;
    (2) Any security-based swap of a dormant security-based swap 
execution facility; or
    (3) Any security-based swap not otherwise a dormant product that a 
security-based swap execution facility self-declares through 
certification to be a dormant product.
    Dormant rule means:
    (1) Any rule of a security-based swap execution facility which 
remains unimplemented for 12 consecutive calendar months following a 
certification with, or an approval by, the Commission; or
    (2) Any rule or rule amendment of a dormant security-based swap 
execution facility.
    Dormant security-based swap execution facility means a security-
based swap execution facility on which no trading has occurred for the 
previous 12 consecutive calendar months; provided, however, that no 
security-based swap execution facility shall be considered to be a 
dormant security-based swap execution facility if its initial and 
original Commission order of registration was issued within the 
preceding 36 consecutive calendar months.
    Electronic trading facility means a trading facility that operates 
by means of an electronic or telecommunications network and maintains 
an automated audit trail of bids, offers, and the matching orders or 
the execution of transactions on the facility.
    Emergency means any occurrence or circumstance that, in the opinion 
of the governing board of a security-based swap execution facility, or 
a person or persons duly authorized to issue such an opinion on behalf 
of the governing board of the security-based swap execution facility 
under circumstances and pursuant to procedures that are specified by 
rule, requires immediate action and threatens or may threaten such 
things as the fair and orderly trading in, or the liquidation of or 
delivery pursuant to, any security-based swaps, including:

[[Page 87287]]

    (1) Any manipulative or attempted manipulative activity;
    (2) Any actual, attempted, or threatened corner, squeeze, 
congestion, or undue concentration of positions;
    (3) Any circumstances which may materially affect the performance 
of security-based swaps or transactions, including failure of the 
payment system or the bankruptcy or insolvency of any market 
participant;
    (4) Any action taken by any governmental body, or any other 
security-based swap execution facility, market, or facility which may 
have a direct impact on trading or clearing and settlement; and
    (5) Any other circumstance which may have a severe, adverse effect 
upon the functioning of the security-based swap execution facility.
    Employee means any person hired or otherwise employed on a salaried 
or contract basis by a security-based swap execution facility, but does 
not include:
    (1) Any governing board member compensated by the security-based 
swap execution facility solely for governing board activities; or
    (2) Any committee member compensated by a security-based swap 
execution facility solely for committee activities; or
    (3) Any consultant hired by a security-based swap execution 
facility.
    Error trade means any trade executed on or subject to the rules of 
a security-based swap execution facility that contains an operational 
or clerical error.
    Governing board means the board of directors of a security-based 
swap execution facility, or for a security-based swap execution 
facility whose organizational structure does not include a board of 
directors, a body performing a function similar to a board of 
directors.
    Governing board member means a member, or functional equivalent 
thereof, of the governing board of a security-based swap execution 
facility.
    Member, with respect to a national securities exchange, has the 
same meaning as in section 3(a)(3) of the Act. Member, with respect to 
a security-based swap execution facility, means an individual, 
association, partnership, corporation, or trust owning or holding a 
membership in, admitted to membership representation on, or having 
trading privileges on the security-based swap execution facility.
    Non-U.S. member means a member of a security-based swap execution 
facility that is not a U.S. person.
    Offsetting trade means a trade executed and submitted for clearing 
to a registered clearing agency with terms and conditions that 
economically reverse an error trade that was accepted for clearing.
    Order book means an electronic trading facility, a trading 
facility, or a trading system or platform in which all market 
participants in the trading system or platform have the ability to 
enter multiple bids and offers, observe or receive bids and offers 
entered by other market participants, and transact on such bids and 
offers.
    Oversight panel means any panel, or any subcommittee thereof, 
authorized by a security-based swap execution facility or security-
based swap exchange (``SBS exchange'') to recommend or establish 
policies or procedures with respect to the surveillance, compliance, 
rule enforcement, or disciplinary responsibilities of the security-
based swap execution facility or SBS exchange.
    Records has the meaning as in section 3(a)(37) of the Act (15 
U.S.C. 78c(a)(37)).
    Rule means any constitutional provision, article of incorporation, 
bylaw, rule, regulation, resolution, interpretation, stated policy, 
advisory, terms and conditions, trading protocol, agreement, or 
instrument corresponding thereto, including those that authorize a 
response or establish standards for responding to a specific emergency, 
and any amendment or addition thereto or repeal thereof, made or issued 
by a security-based swap execution facility or by the governing board 
thereof or any committee thereof, in whatever form adopted.
    SBS exchange means a national securities exchange that posts or 
makes available for trading security-based swaps.
    Security-based swap execution facility has the same meaning as in 
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) but does not include 
an entity that is registered with the Commission as a clearing agency 
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its 
security-based swap execution facility functions to operation of a 
trading session that is designed to further the accuracy of end-of-day 
valuations.
    Senior officer means the chief executive officer or other 
equivalent officer of a security-based swap execution facility.
    Terms and conditions means any definition of the trading unit or 
the specific asset underlying a security-based swap, description of the 
payments to be exchanged under a security-based swap, specification of 
cash settlement or delivery standards and procedures, and establishment 
of buyers' and sellers' rights and obligations under the security-based 
swap. Terms and conditions of a security-based swap include provisions 
relating to the following:
    (1) Identification of the major group, category, type, or class in 
which the security-based swap falls (such as a credit or equity 
security-based swap) and of any further sub-group, category, type, or 
class that further describes the security-based swap;
    (2) Notional amounts, quantity standards, or other unit size 
characteristics;
    (3) Any applicable premiums or discounts for delivery of a non-par 
product;
    (4) Trading hours and the listing of security-based swaps;
    (5) Pricing basis for establishing the payment obligations under, 
and mark-to-market value of, the security-based swap including, as 
applicable, the accrual start dates, termination, or maturity dates, 
and, for each leg of the security-based swap, the initial cash flow 
components, spreads, and points, and the relevant indexes, prices, 
rates, coupons, or other price reference measures;
    (6) Any price limits, trading halts, or circuit breaker provisions, 
and procedures for the establishment of daily settlement prices;
    (7) Payment and reset frequency, day count conventions, business 
calendars, and accrual features;
    (8) If physical delivery applies, delivery standards and 
procedures, including fees related to delivery or the delivery process, 
alternatives to delivery, and applicable penalties or sanctions for 
failure to perform;
    (9) If cash-settled, the definition, composition, calculation, and 
revision of the cash settlement price, and the settlement currency;
    (10) Payment or collection of option premiums or margins;
    (11) Option exercise price, if it is constant, and method for 
calculating the exercise price, if it is variable;
    (12) Threshold prices for an option, the existence of which is 
contingent upon those prices;
    (13) Any restrictions or requirements for exercising an option; and
    (14) Life cycle events.
    Trading facility. (1) In general. The term trading facility means a 
person or group of persons that constitutes, maintains, or provides a 
physical or electronic facility or system in which multiple 
participants have the ability to execute or trade agreements, 
contracts, or transactions:
    (i) By accepting bids or offers made by other participants that are 
open to multiple participants in the facility or system; or

[[Page 87288]]

    (ii) Through the interaction of multiple bids or multiple offers 
within a system with a pre- determined non-discretionary automated 
trade matching and execution algorithm.
    (2) Exclusions. (i) The term trading facility does not include:
    (A) A person or group of persons solely because the person or group 
of persons constitutes, maintains, or provides an electronic facility 
or system that enables participants to negotiate the terms of and enter 
into bilateral transactions as a result of communications exchanged by 
the parties and not from interaction of multiple bids and multiple 
offers within a predetermined, nondiscretionary automated trade 
matching and execution algorithm;
    (B) A government securities dealer or government securities broker, 
to the extent that the dealer or broker executes or trades agreements, 
contracts, or transactions in government securities, or assists persons 
in communicating about, negotiating, entering into, executing, or 
trading an agreement, contract, or transaction in government securities 
(as the terms government securities dealer, government securities 
broker, and government securities are defined in section 3(a) of the 
Act); or
    (C) A facility on which bids and offers, and acceptances of bids 
and offers effected on the facility, are not binding.
    (ii) Any person, group of persons, dealer, broker, or facility 
described in paragraphs (2)(i)(A) through (C) of this definition of 
trading facility is excluded from the meaning of the term ``trading 
facility'' without any prior specific approval, certification, or other 
action by the Commission.
    (3) Special rule. A person or group of persons that would not 
otherwise constitute a trading facility shall not be considered to be a 
trading facility solely as a result of the submission to a registered 
clearing agency of transactions executed on or through the person or 
group of persons.
    U.S. person has the same meaning as in Sec.  240.3a71-3(a)(4) of 
this chapter.
    Note 1 to Sec.  242.802. The Commission has not yet adopted a 
definition of ``block trade.''

Sec.  242.803  Requirements and procedures for registration.

    (a) Requirements for registration. (1) Any person operating a 
facility that offers a trading system or platform in which more than 
one market participant has the ability to execute or trade security-
based swaps with more than one other market participant on the system 
or platform shall register the facility as a security-based swap 
execution facility under this section or as a national securities 
exchange pursuant to section 6 of the Act.
    (2) A security-based swap execution facility shall, at a minimum, 
offer an order book.
    (3) A security-based swap execution facility is not required to 
provide an order book under this section for transactions defined in 
Sec.  242.815(d)(2), (3), and (4) except that a security-based swap 
execution facility must provide an order book under this section for 
Required Transactions that are components of transactions defined in 
Sec.  242.815(d)(2), (3), and (4) when such Required Transactions are 
not executed as components of transactions defined in Sec.  
242.815(d)(2), (3), and (4).
    (b) Procedures for full registration. (1) Request to register. An 
entity requesting registration as a security-based swap execution 
facility shall:
    (i) File electronically a complete Form SBSEF (referenced in Sec.  
249.1701), or any successor forms, and all information and 
documentation described in such forms with the Commission using the 
EDGAR system and, for the information specified in the Registration 
Instructions to Form SBSEF, as an Interactive Data File in accordance 
with Sec.  232.405 of this chapter; and
    (ii) Provide to the Commission, upon the Commission's request, any 
additional information and documentation necessary to review an 
application.
    (2) Request for confidential treatment. (i) An applicant requesting 
registration as a security-based swap execution facility shall identify 
with particularity any information in the application that will be 
subject to a request for confidential treatment pursuant to Sec.  
240.24b-2 of this chapter.
    (ii) As set forth in Sec.  242.808, certain information provided in 
an application shall be made publicly available.
    (3) Amendment of application prior to full registration. An 
applicant amending a pending application for registration as a 
security-based swap execution facility or requesting an amendment to an 
order of registration shall file an amended application electronically 
with the Commission using the EDGAR system and, for the information 
specified in the Registration Instructions to Form SBSEF, as an 
Interactive Data File in accordance with Sec.  232.405 of this chapter.
    (4) Effect of incomplete application. If an application is 
incomplete pursuant to paragraph (b)(1) of this section, the Commission 
shall notify the applicant that its application will not be deemed to 
have been submitted for purposes of the Commission's review.
    (5) Commission review period. The Commission shall approve or deny 
an application for registration as a security-based swap execution 
facility within 180 days of the filing of the application. If the 
Commission notifies the person that its application is materially 
incomplete and specifies the deficiencies in the application, the 
running of the 180-day period shall be stayed from the time of such 
notification until the application is resubmitted in completed form, 
provided that the Commission shall have not less than 60 days to 
approve or deny the application from the time the application is 
resubmitted in completed form.
    (6) Commission determination. (i) The Commission shall issue an 
order granting registration upon a Commission determination, in its own 
discretion, that the applicant has demonstrated compliance with the Act 
and the Commission's rules applicable to security-based swap execution 
facilities. If deemed appropriate, the Commission may issue an order 
granting registration subject to conditions.
    (ii) The Commission may issue an order denying registration upon a 
Commission determination, in its own discretion, that the applicant has 
not demonstrated compliance with the Act and the Commission's rules 
applicable to security-based swap execution facilities. If the 
Commission denies an application, it shall specify the grounds for the 
denial.
    (c) Reinstatement of dormant registration. A dormant security-based 
swap execution facility may reinstate its registration under the 
procedures of paragraph (b) of this section. The applicant may rely 
upon previously submitted materials if such materials accurately 
describe the dormant security-based swap execution facility's 
conditions at the time that it applies for reinstatement of its 
registration.
    (d) Request for transfer of registration. (1) A security-based swap 
execution facility seeking to transfer its registration from its 
current legal entity to a new legal entity as a result of a corporate 
change shall file a request for approval to transfer such registration 
with the Commission in the form and manner specified by the Commission.
    (2) A request for transfer of registration shall be filed no later 
than three months prior to the anticipated corporate change; or in the 
event that the security-based swap execution facility could not have 
known of the anticipated change three months prior

[[Page 87289]]

to the anticipated change, as soon as it knows of such change.
    (3) The request for transfer of registration shall include the 
following:
    (i) The underlying agreement that governs the corporate change;
    (ii) A description of the corporate change, including the reason 
for the change and its impact on the security-based swap execution 
facility, including its governance and operations, and its impact on 
the rights and obligations of members;
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to security-based swap 
execution facilities and the Commission's rules thereunder;
    (iv) The governing documents of the transferee, including, but not 
limited to, articles of incorporation and bylaws;
    (v) The transferee's rules marked to show changes from the current 
rules of the security-based swap execution facility;
    (vi) A representation by the transferee that it:
    (A) Will be the surviving entity and successor-in-interest to the 
transferor security-based swap execution facility and will retain and 
assume, without limitation, all of the assets and liabilities of the 
transferor;
    (B) Will assume responsibility for complying with all applicable 
provisions of the Act and the Commission's rules thereunder;
    (C) Will assume, maintain, and enforce all rules implementing and 
complying with the core principles applicable to security-based swap 
execution facilities, including the adoption of the transferor's 
rulebook, as amended in the request, and that any such amendments will 
be submitted to the Commission pursuant to Sec.  242.806 or Sec.  
242.807;
    (D) Will comply with all regulatory responsibilities except if 
otherwise indicated in the request, and will maintain and enforce all 
regulatory programs; and
    (E) Will notify members of all changes to the transferor's rulebook 
prior to the transfer and will further notify members of the concurrent 
transfer of the registration to the transferee upon Commission approval 
and issuance of an order permitting this transfer.
    (vii) A representation by the transferee that upon the transfer:
    (A) It will assume responsibility for and maintain compliance with 
core principles for all security-based swaps previously made available 
for trading through the transferor, whether by certification or 
approval; and
    (B) None of the proposed rule changes will affect the rights and 
obligations of any member.
    (4) Upon review of a request for transfer of registration, the 
Commission, as soon as practicable, shall issue an order either 
approving or denying the request.
    (e) Request for withdrawal of application for registration. An 
applicant for registration as a security-based swap execution facility 
may withdraw its application submitted pursuant to paragraph (b) of 
this section by filing a withdrawal request electronically with the 
Commission using the EDGAR system. Withdrawal of an application for 
registration shall not affect any action taken or to be taken by the 
Commission based upon actions, activities, or events occurring during 
the time that the application was pending with the Commission.
    (f) Request for vacation of registration. A security-based swap 
execution facility may request that its registration be vacated by 
filing a vacation request electronically with the Commission using the 
EDGAR system at least 90 days prior to the date that the vacation is 
requested to take effect. Upon receipt of such request, the Commission 
shall promptly order the vacation to be effective upon the date named 
in the request and send a copy of the request and its order to all 
other security-based swap execution facilities, SBS exchanges, and 
registered clearing agencies that clear security-based swaps. Vacation 
of registration shall not affect any action taken or to be taken by the 
Commission based upon actions, activities, or events occurring during 
the time that the security-based swap execution facility was registered 
by the Commission. From and after the date upon which the vacation 
became effective the said security-based swap execution facility can 
thereafter be registered again by applying to the Commission in the 
manner provided in paragraph (b) of this section for an original 
application.

Sec.  242.804  Listing products for trading by certification.

    (a) General. A security-based swap execution facility must comply 
with the submission requirements of this section prior to listing a 
product for trading that has not been approved under Sec.  242.805 or 
that remains a dormant product subsequent to being submitted under this 
section or approved under Sec.  242.805. A submission shall comply with 
the following conditions:
    (1) The security-based swap execution facility has filed its 
submission electronically with the Commission using the EFFS system;
    (2) The Commission has received the submission by the open of 
business on the business day that is 10 business days preceding the 
product's listing; and
    (3) The submission includes:
    (i) A copy of the submission cover sheet in accordance with the 
instructions therein;
    (ii) A copy of the product's rules, including all rules related to 
its terms and conditions;
    (iii) The intended listing date;
    (iv) A certification by the security-based swap execution facility 
that the product to be listed complies with the Act and the 
Commission's rules thereunder;
    (v) A concise explanation and analysis of the product and its 
compliance with applicable provisions of the Act, including core 
principles, and the Commission's rules thereunder. This explanation and 
analysis shall either be accompanied by the documentation relied upon 
to establish the basis for compliance with applicable law, or 
incorporate information contained in such documentation, with 
appropriate citations to data sources;
    (vi) A certification that the security-based swap execution 
facility posted a notice of pending product certification with the 
Commission and a copy of the submission, concurrent with the filing of 
a submission with the Commission, on the security-based swap execution 
facility's website. Information that the security-based swap execution 
facility seeks to keep confidential may be redacted from the documents 
published on the security-based swap execution's website but must be 
republished consistent with any determination made pursuant to Sec.  
240.24b-2 of this chapter; and
    (vii) A request for confidential treatment, if appropriate, as 
permitted under Sec.  240.24b-2 of this chapter.
    (b) Additional information. If requested by Commission staff, a 
security-based swap execution facility shall provide any additional 
evidence, information, or data that demonstrates that the security-
based swap meets, initially or on a continuing basis, the requirements 
of the Act or the Commission's rules or policies thereunder.
    (c) Stay of certification of product. (1) General. The Commission 
may stay the certification of a product submitted pursuant to paragraph 
(a) of this section by issuing a notification informing the security-
based swap execution facility that the Commission is staying the 
certification of the product on the

[[Page 87290]]

grounds that the product presents novel or complex issues that require 
additional time to analyze, the product is accompanied by an inadequate 
explanation, or the product is potentially inconsistent with the Act or 
the Commission's rules thereunder. The Commission will have an 
additional 90 days from the date of the notification to conduct the 
review.
    (2) Public comment. The Commission shall provide a 30-day comment 
period within the 90-day period in which the stay is in effect, as 
described in paragraph (c)(1) of this section. The Commission shall 
publish a notice of the 30-day comment period on the Commission's 
website. Comments from the public shall be submitted as specified in 
that notice.
    (3) Expiration of a stay of certification of product. A product 
subject to a stay pursuant to this paragraph shall become effective, 
pursuant to the certification, at the expiration of the 90-day review 
period described in paragraph (c)(1) of this section, unless the 
Commission withdraws the stay prior to that time, or the Commission 
notifies the security-based swap execution facility during the 90-day 
time period that it objects to the proposed certification on the 
grounds that the product is inconsistent with the Act or the 
Commission's rules.

Sec.  242.805  Voluntary submission of new products for Commission 
review and approval.

    (a) Request for approval. A security-based swap execution facility 
may request that the Commission approve a new or dormant product prior 
to listing the product for trading, or if a product was initially 
submitted under Sec.  242.804, subsequent to listing the product for 
trading. A submission requesting approval shall:
    (1) Be filed electronically with the Commission using the EFFS 
system;
    (2) Include a copy of the submission cover sheet in accordance with 
the instructions therein;
    (3) Include a copy of the rules that set forth the security-based 
swap's terms and conditions;
    (4) Include an explanation and analysis of the product and its 
compliance with applicable provisions of the Act, including the core 
principles and the Commission's rules thereunder. This explanation and 
analysis shall either be accompanied by the documentation relied upon 
to establish the basis for compliance with the applicable law, or 
incorporate information contained in such documentation, with 
appropriate citations to data sources;
    (5) Describe any agreements or contracts entered into with other 
parties that enable the security-based swap execution facility to carry 
out its responsibilities;
    (6) Include, if appropriate, a request for confidential treatment 
as permitted under Sec.  240.24b-2 of this chapter;
    (7) Certify that the security-based swap execution facility posted 
a notice of its request for Commission approval of the new product and 
a copy of the submission, concurrent with the filing of a submission 
with the Commission, on the security-based swap execution facility's 
website. Information that the security-based swap execution facility 
seeks to keep confidential may be redacted from the documents published 
on the security-based swap execution facility's website but must be 
republished consistent with any determination made pursuant to Sec.  
240.24b-2 of this chapter; and
    (8) Include, if requested by Commission staff, additional evidence, 
information, or data demonstrating that the security-based swap meets, 
initially or on a continuing basis, the requirements of the Act, or 
other requirement for registration under the Act, or the Commission's 
rules or policies thereunder. The security-based swap execution 
facility shall submit the requested information by the open of business 
on the date that is two business days from the date of request by 
Commission staff, or at the conclusion of such extended period agreed 
to by Commission staff after timely receipt of a written request from 
the security-based swap execution facility.
    (b) Standard for review and approval. The Commission shall approve 
a new product unless the terms and conditions of the product violate 
the Act or the Commission's rules thereunder.
    (c) Forty-five-day review. A product submitted for Commission 
approval under this paragraph shall be deemed approved by the 
Commission 45 days after receipt by the Commission, or at the 
conclusion of an extended period as provided under paragraph (d) of 
this section, unless notified otherwise within the applicable period, 
if:
    (1) The submission complies with the requirements of paragraph (a) 
of this section; and
    (2) The submitting security-based swap execution facility does not 
amend the terms or conditions of the product or supplement the request 
for approval, except as requested by the Commission or for correction 
of typographical errors, renumbering, or other non-substantive 
revisions, during that period. Any voluntary, substantive amendment by 
the security-based swap execution facility will be treated as a new 
submission under this section.
    (d) Extension of time. The Commission may extend the 45-day review 
period in paragraph (c) of this section for:
    (1) An additional 45 days, if the product raises novel or complex 
issues that require additional time to analyze, in which case the 
Commission shall notify the security-based swap execution facility 
within the initial 45-day review period and shall briefly describe the 
nature of the specific issue(s) for which additional time for review is 
required; or
    (2) Any extended review period to which the security-based swap 
execution facility agrees in writing.
    (e) Notice of non-approval. The Commission, at any time during its 
review under this section, may notify the security-based swap execution 
facility that it will not, or is unable to, approve the product. This 
notification will briefly specify the nature of the issues raised and 
the specific provision of the Act or the Commission's rules thereunder, 
including the form or content requirements of paragraph (a) of this 
section, that the product violates, appears to violate, or potentially 
violates but which cannot be ascertained from the submission.
    (f) Effect of non-approval. (1) Notification to a security-based 
swap execution facility under paragraph (e) of this section of the 
Commission's determination not to approve a product does not prejudice 
the security-based swap execution facility from subsequently submitting 
a revised version of the product for Commission approval, or from 
submitting the product as initially proposed pursuant to a supplemented 
submission.
    (2) Notification to a security-based swap execution facility under 
paragraph (e) of this section of the Commission's refusal to approve a 
product shall be presumptive evidence that the security-based swap 
execution facility may not truthfully certify under Sec.  242.804 that 
the same, or substantially the same, product does not violate the Act 
or the Commission's rules thereunder.

Sec.  242.806  Voluntary submission of rules for Commission review and 
approval.

    (a) Request for approval of rules. A security-based swap execution 
facility may request that the Commission approve a new rule, rule 
amendment, or dormant rule prior to implementation of the rule, or if 
the request was initially submitted under Sec.  242.806 or Sec.  
242.807, subsequent to implementation of the rule. A request for 
approval shall:

[[Page 87291]]

    (1) Be filed electronically with the Commission using the EFFS 
system;
    (2) Include a copy of the submission cover sheet in accordance with 
the instructions therein;
    (3) Set forth the text of the rule or rule amendment (in the case 
of a rule amendment, deletions and additions must be indicated);
    (4) Describe the proposed effective date of the rule or rule 
amendment and any action taken or anticipated to be taken to adopt the 
proposed rule by the security-based swap execution facility or by its 
governing board or by any committee thereof, and cite the rules of the 
security-based swap execution facility that authorize the adoption of 
the proposed rule;
    (5) Provide an explanation and analysis of the operation, purpose, 
and effect of the proposed rule or rule amendment and its compliance 
with applicable provisions of the Act, including the core principles 
relating to security-based swap execution facilities and the 
Commission's rules thereunder and, as applicable, a description of the 
anticipated benefits to market participants or others, any potential 
anticompetitive effects on market participants or others, and how the 
rule fits into the security-based swap execution facility's framework 
of regulation;
    (6) Certify that the security-based swap execution facility posted 
a notice of the pending rule with the Commission and a copy of the 
submission, concurrent with the filing of a submission with the 
Commission, on the security-based swap execution facility's website. 
Information that the security-based swap execution facility seeks to 
keep confidential may be redacted from the documents published on the 
security-based swap execution facility's website but must be 
republished consistent with any determination made pursuant to Sec.  
240.24b-2 of this chapter;
    (7) Provide additional information which may be beneficial to the 
Commission in analyzing the new rule or rule amendment. If a proposed 
rule affects, directly or indirectly, the application of any other rule 
of the security-based swap execution facility, the pertinent text of 
any such rule must be set forth and the anticipated effect described;
    (8) Provide a brief explanation of any substantive opposing views 
expressed to the security-based swap execution facility by governing 
board or committee members, members of the security-based swap 
execution facility, or market participants that were not incorporated 
into the rule, or a statement that no such opposing views were 
expressed; and
    (9) As appropriate, include a request for confidential treatment as 
permitted under Sec.  240.24b-2 of this chapter.
    (b) Standard for review and approval. The Commission shall approve 
a new rule or rule amendment unless the rule or rule amendment is 
inconsistent with the Act or the Commission's rules thereunder.
    (c) Forty-five-day review. A rule or rule amendment submitted for 
Commission approval under paragraph (a) of this section shall be deemed 
approved by the Commission 45 days after receipt by the Commission, or 
at the conclusion of such extended period as provided under paragraph 
(d) of this section, unless the security-based swap execution facility 
is notified otherwise within the applicable period, if:
    (1) The submission complies with the requirements of paragraph (a) 
of this section;
    (2) The security-based swap execution facility does not amend the 
proposed rule or supplement the submission, except as requested by the 
Commission, during the pendency of the review period, other than for 
correction of typographical errors, renumbering, or other non- 
substantive revisions. Any amendment or supplementation not requested 
by the Commission will be treated as the submission of a new filing 
under this section.
    (d) Extension of time for review. The Commission may further extend 
the review period in paragraph (c) of this section for:
    (1) An additional 45 days, if the proposed rule or rule amendment 
raises novel or complex issues that require additional time for review 
or is of major economic significance, the submission is incomplete, or 
the requestor does not respond completely to Commission questions in a 
timely manner, in which case the Commission shall notify the submitting 
security-based swap execution facility within the initial 45-day review 
period and shall briefly describe the nature of the specific issues for 
which additional time for review shall be required; or
    (2) Any period, beyond the additional 45 days provided in paragraph 
(d)(1) of this section, to which the security-based swap execution 
facility agrees in writing.
    (e) Notice of non-approval. Any time during its review under this 
section, the Commission may notify the security-based swap execution 
facility that it will not, or is unable to, approve the new rule or 
rule amendment. This notification will briefly specify the nature of 
the issues raised and the specific provision of the Act or the 
Commission's rules thereunder, including the form or content 
requirements of this section, with which the new rule or rule amendment 
is inconsistent or appears to be inconsistent with the Act or the 
Commission's rules thereunder.
    (f) Effect of non-approval. (1) Notification to a security-based 
swap execution facility under paragraph (e) of this section does not 
prevent the security-based swap execution facility from subsequently 
submitting a revised version of the proposed rule or rule amendment for 
Commission review and approval or from submitting the new rule or rule 
amendment as initially proposed in a supplemented submission. The 
revised submission will be reviewed without prejudice.
    (2) Notification to a security-based swap execution facility under 
paragraph (e) of this section of the Commission's determination not to 
approve a proposed rule or rule amendment shall be presumptive evidence 
that the security-based swap execution facility may not truthfully 
certify the same, or substantially the same, proposed rule or rule 
amendment under Sec.  242.807(a).
    (g) Expedited approval. Notwithstanding the provisions of paragraph 
(c) of this section, changes to a proposed rule or a rule amendment, 
including changes to terms and conditions of a product that are 
consistent with the Act and the Commission's rules thereunder, may be 
approved by the Commission at such time and under such conditions as 
the Commission shall specify in the written notification; provided, 
however, that the Commission may, at any time, alter or revoke the 
applicability of such a notice to any particular product or rule 
amendment.

Sec.  242.807  Self-certification of rules.

    (a) Required certification. A security-based swap execution 
facility shall comply with the following conditions prior to 
implementing any rule--other than a rule delisting or withdrawing the 
certification of a product with no open interest and submitted in 
compliance with paragraphs (a)(1), (2), and (6) of this section--that 
has not obtained Commission approval under Sec.  242.806, or that 
remains a dormant rule subsequent to being submitted under this section 
or approved under Sec.  242.806.
    (1) The security-based swap execution facility has filed its 
submission electronically with the Commission using the EFFS system.
    (2) The security-based swap execution facility has provided a 
certification that

[[Page 87292]]

it posted a notice of pending certification with the Commission and a 
copy of the submission, concurrent with the filing of a submission with 
the Commission, on the security-based swap execution facility's 
website. Information that the security-based swap execution facility 
seeks to keep confidential may be redacted from the documents published 
on the security-based swap execution facility's website, but it must be 
republished consistent with any determination made pursuant to Sec.  
240.24b-2 of this chapter.
    (3) The Commission has received the submission not later than the 
open of business on the business day that is 10 business days prior to 
the security-based swap execution facility's implementation of the rule 
or rule amendment.
    (4) The Commission has not stayed the submission pursuant to Sec.  
242.807(c).
    (5) A new rule or rule amendment that establishes standards for 
responding to an emergency shall be submitted pursuant to Sec.  
242.807(a). A rule or rule amendment implemented under procedures of 
the governing board to respond to an emergency shall, if practicable, 
be filed with the Commission prior to implementation or, if not 
practicable, be filed with the Commission at the earliest possible time 
after implementation, but in no event more than 24 hours after 
implementation. Any such submission shall be subject to the 
certification and stay provisions of paragraphs (b) and (c) of this 
section.
    (6) The rule submission shall include:
    (i) A copy of the submission cover sheet in accordance with the 
instructions therein (in the case of a rule or rule amendment that 
responds to an emergency, ``Emergency Rule Certification'' should be 
noted in the description section of the submission cover sheet);
    (ii) The text of the rule (in the case of a rule amendment, 
deletions and additions must be indicated);
    (iii) The date of intended implementation;
    (iv) A certification by the security-based swap execution facility 
that the rule complies with the Act and the Commission's rules 
thereunder;
    (v) A concise explanation and analysis of the operation, purpose, 
and effect of the proposed rule or rule amendment and its compliance 
with applicable provisions of the Act, including core principles 
relating to security-based swap execution facilities and the 
Commission's rules thereunder;
    (vi) A brief explanation of any substantive opposing views 
expressed to the security-based swap execution facility by governing 
board or committee members, members of the security-based swap 
execution facility, or market participants, that were not incorporated 
into the rule, or a statement that no such opposing views were 
expressed; and
    (vii) As appropriate, a request for confidential treatment pursuant 
to the procedures provided in Sec.  240.24b-2 of this chapter.
    (7) The security-based swap execution facility shall provide, if 
requested by Commission staff, additional evidence, information, or 
data that may be beneficial to the Commission in conducting a due 
diligence assessment of the filing and the security-based swap 
execution facility's compliance with any of the requirements of the Act 
or the Commission's rules or policies thereunder.
    (b) Review by the Commission. The Commission shall have 10 business 
days to review the new rule or rule amendment before the new rule or 
rule amendment is deemed certified and can be made effective, unless 
the Commission notifies the security-based swap execution facility 
during the 10-business-day review period that it intends to issue a 
stay of the certification under paragraph (c) of this section.
    (c) Stay. (1) Stay of certification of new rule or rule amendment. 
The Commission may stay the certification of a new rule or rule 
amendment submitted pursuant to paragraph (a) of this section by 
issuing a notification informing the security-based swap execution 
facility that the Commission is staying the certification of the rule 
or rule amendment on the grounds that the rule or rule amendment 
presents novel or complex issues that require additional time to 
analyze, the rule or rule amendment is accompanied by an inadequate 
explanation, or the rule or rule amendment is potentially inconsistent 
with the Act or the Commission's rules thereunder. The Commission will 
have an additional 90 days from the date of the notification to conduct 
the review.
    (2) Public comment. The Commission shall provide a 30-day comment 
period within the 90-day period in which the stay is in effect, as 
described in paragraph (c)(1) of this section. The Commission shall 
publish a notice of the 30-day comment period on the Commission 
website. Comments from the public shall be submitted as specified in 
that notice.
    (3) Expiration of a stay of certification of new rule or rule 
amendment. A new rule or rule amendment subject to a stay pursuant to 
this paragraph shall become effective, pursuant to the certification, 
at the expiration of the 90-day review period described in paragraph 
(c)(1) of this section, unless the Commission withdraws the stay prior 
to that time, or the Commission notifies the security-based swap 
execution facility during the 90-day time period that it objects to the 
proposed certification on the grounds that the proposed rule or rule 
amendment is inconsistent with the Act or the Commission's rules 
thereunder.
    (d) Notification of rule amendments. Notwithstanding the rule 
certification requirement of paragraph (a) of this section, a security-
based swap execution facility may place the following rules or rule 
amendments into effect without certification to the Commission if the 
following conditions are met:
    (1) The security-based swap execution facility provides to the 
Commission at least weekly a summary notice of all rule amendments made 
effective pursuant to this paragraph during the preceding week. Such 
notice must be labeled ``Weekly Notification of Rule Amendments'' and 
need not be filed for weeks during which no such actions have been 
taken. One copy of each such submission shall be furnished 
electronically using the EFFS system; and
    (2) The rule governs:
    (i) Non-substantive revisions. Corrections of typographical errors, 
renumbering, periodic routine updates to identifying information about 
the security-based swap execution facility, and other such non-
substantive revisions of a product's terms and conditions that have no 
effect on the economic characteristics of the product;
    (ii) Fees. Fees or fee changes, other than fees or fee changes 
associated with market making or trading incentive programs, that:
    (A) Total $1.00 or more per contract, and
    (B) Are established by an independent third party or are unrelated 
to delivery, trading, clearing, or dispute resolution.
    (iii) Survey lists. Changes to lists of banks, brokers, dealers, or 
other entities that provide price or cash market information to an 
independent third party and that are incorporated by reference as 
product terms;
    (iv) Approved brands. Changes in lists of approved brands or 
markings pursuant to previously certified or Commission approved 
standards or criteria;
    (v) Trading months. The initial listing of trading months, which 
may qualify for implementation without notice pursuant to paragraph 
(d)(3)(ii)(F) of this section, within the currently established cycle 
of trading months; or

[[Page 87293]]

    (vi) Minimum tick. Reductions in the minimum price fluctuation (or 
``tick'').
    (3) Notification of rule amendments not required. Notwithstanding 
the rule certification requirements of paragraph (a) of this section, a 
security-based swap execution facility may place the following rules or 
rule amendments into effect without certification or notice to the 
Commission if the following conditions are met:
    (i) The security-based swap execution facility maintains 
documentation regarding all changes to rules; and
    (ii) The rule governs:
    (A) Transfer of membership or ownership. Procedures and forms for 
the purchase, sale, or transfer of membership or ownership, but not 
including qualifications for membership or ownership, any right or 
obligation of membership or ownership, or dues or assessments;
    (B) Administrative procedures. The organization and administrative 
procedures of a security-based swap execution facility's governing 
bodies such as a governing board, officers, and committees, but not 
voting requirements, governing board, or committee composition 
requirements or procedures, decision-making procedures, use or 
disclosure of material non-public information gained through the 
performance of official duties, or requirements relating to conflicts 
of interest;
    (C) Administration. The routine daily administration, direction, 
and control of employees, requirements relating to gratuity and similar 
funds, but not guaranty, reserves, or similar funds; declaration of 
holidays; and changes to facilities housing the market, trading floor, 
or trading area;
    (D) Standards of decorum. Standards of decorum or attire or similar 
provisions relating to admission to the floor, badges, or visitors, but 
not the establishment of penalties for violations of such rules;
    (E) Fees. Fees or fee changes, other than fees or fee changes 
associated with market making or trading incentive programs, that:
    (1) Are less than $1.00; or
    (2) Relate to matters such as dues, badges, telecommunication 
services, booth space, real-time quotations, historical information, 
publications, software licenses, or other matters that are 
administrative in nature; and
    (F) Trading months. The initial listing of trading months which are 
within the currently established cycle of trading months.

Sec.  242.808  Availability of public information.

    (a) The Commission shall make publicly available on its website the 
following parts of an application to register as a security-based swap 
execution facility, unless confidential treatment is obtained pursuant 
to Sec.  240.24b-2 of this chapter:
    (1) Transmittal letter and first page of the application cover 
sheet;
    (2) Exhibit C;
    (3) Exhibit G;
    (4) Exhibit L; and
    (5) Exhibit M.
    (b) The Commission shall make publicly available on its website, 
unless confidential treatment is obtained pursuant to Sec.  240.24b-2 
of this chapter, a security-based swap execution facility's filing of 
new products pursuant to the self-certification procedures of Sec.  
242.804, new products for Commission review and approval pursuant to 
Sec.  242.805, new rules and rule amendments for Commission review and 
approval pursuant to Sec.  242.806, and new rules and rule amendments 
pursuant to the self-certification procedures of Sec.  242.807.
    (c) The terms and conditions of a product submitted to the 
Commission pursuant to Sec.  242.804, 242.805, 242.806, or 242.807 
shall be made publicly available at the time of submission unless 
confidential treatment is obtained pursuant to Sec.  240.24b-2 of this 
chapter.

Sec.  242.809  Staying of certification and tolling of review period 
pending jurisdictional determination.

    (a) A product certification made by a security-based swap execution 
facility pursuant to Sec.  242.804 shall be stayed, or the review 
period for a product that has been submitted for Commission approval by 
a security-based swap execution facility pursuant to Sec.  242.805 
shall be tolled, upon request for a joint interpretation of whether the 
product is a swap, security-based swap, or mixed swap made pursuant to 
Sec.  240.3a68-2 of this chapter by the security-based swap execution 
facility, the Commission, or the Commodity Futures Trading Commission.
    (b) The Commission shall provide the security-based swap execution 
facility with a written notice of the stay or tolling pending issuance 
of a joint interpretation.
    (c) The stay shall be withdrawn, or the approval review period 
shall resume, if a joint interpretation finding that the Commission has 
jurisdiction over the product is issued.

Sec.  242.810  Product filings by security-based swap execution 
facilities that are not yet registered and by dormant security-based 
swap execution facilities.

    (a) An applicant for registration as a security-based swap 
execution facility may submit a security-based swap's terms and 
conditions prior to listing the product as part of its application for 
registration.
    (b) Any security-based swap terms and conditions or rules submitted 
as part of a security-based swap execution facility's application for 
registration shall be considered for approval by the Commission at the 
time the Commission issues the security-based swap execution facility's 
order of registration.
    (c) After the Commission issues the order of registration, the 
security-based swap execution facility shall submit a security-based 
swap's terms and conditions, including amendments to such terms and 
conditions, new rules, or rule amendments pursuant to the procedures in 
Sec. Sec.  242.804, 242.805, 242.806, and 242.807.
    (d) Any security-based swap terms and conditions or rules submitted 
as part of an application to reinstate the registration of a dormant 
security-based swap execution facility shall be considered for approval 
by the Commission at the time the Commission approves the reinstatement 
of registration of the dormant security-based swap execution facility.

Sec.  242.811  Information relating to security-based swap execution 
facility compliance.

    (a) Request for information. Upon the Commission's request, a 
security-based swap execution facility shall file with the Commission 
information related to its business as a security-based swap execution 
facility in the form and manner, and within the timeframe, specified by 
the Commission.
    (b) Demonstration of compliance. Upon the Commission's request, a 
security-based swap execution facility shall file with the Commission a 
written demonstration, containing supporting data, information, and 
documents, that it is in compliance with one or more core principles or 
with its other obligations under the Act or the Commission's rules 
thereunder, as the Commission specifies in its request. The security-
based swap execution facility shall file such written demonstration in 
the form and manner, and within the timeframe, specified by the 
Commission.
    (c) Equity interest transfer. (1) Equity interest transfer 
notification. A security-based swap execution facility shall file with 
the Commission a notification of any transaction involving the direct 
or

[[Page 87294]]

indirect transfer of 50 percent or more of the equity interest in the 
security-based swap execution facility. The Commission may, upon 
receiving such notification, request supporting documentation of the 
transaction.
    (2) Timing of notification. The equity interest transfer notice 
described in paragraph (c)(1) of this section shall be filed with the 
Commission in a form and manner specified by the Commission at the 
earliest possible time, but in no event later than the open of business 
10 business days following the date upon which the security-based swap 
execution facility enters into a firm obligation to transfer the equity 
interest.
    (3) Rule filing. Notwithstanding the foregoing, if any aspect of an 
equity interest transfer described in paragraph (c)(1) of this section 
requires a security-based swap execution facility to file a rule, the 
security-based swap execution facility shall comply with the applicable 
rule filing requirements of Sec.  242.806 or Sec.  242.807.
    (4) Certification. Upon an equity interest transfer described in 
paragraph (c)(1) of this section, the security-based swap execution 
facility shall file with the Commission, in a form and manner specified 
by the Commission, a certification that the security-based swap 
execution facility meets all of the requirements of section 3D of the 
Act and the Commission rules thereunder, no later than two business 
days following the date on which the equity interest of 50 percent or 
more was acquired.
    (d) Pending legal proceedings. (1) A security-based swap execution 
facility shall submit to the Commission a copy of the complaint, any 
dispositive or partially dispositive decision, any notice of appeal 
filed concerning such decision, and such further documents as the 
Commission may thereafter request filed in any material legal 
proceeding to which the security-based swap execution facility is a 
party or its property or assets is subject.
    (2) A security-based swap execution facility shall submit to the 
Commission a copy of the complaint, any dispositive or partially 
dispositive decision, any notice of appeal filed concerning such 
decision, and such further documents as the Commission may thereafter 
request filed in any material legal proceeding instituted against any 
officer, director, or other official of the security-based swap 
execution facility from conduct in such person's capacity as an 
official of the security-based swap execution facility and alleging 
violations of:
    (i) The Act or any rule, regulation, or order under the Act;
    (ii) The constitution, bylaws, or rules of the security-based swap 
execution facility; or
    (iii) The applicable provisions of State law relating to the duties 
of officers, directors, or other officials of business organizations.
    (3) All documents required by this paragraph (d) to be submitted to 
the Commission shall be submitted electronically in a form and manner 
specified by the Commission within 10 days after the initiation of the 
legal proceedings to which they relate, after the date of issuance, or 
after receipt by the security-based swap execution facility of the 
notice of appeal, as the case may be.
    (4) For purposes of this paragraph (d), a ``material legal 
proceeding'' includes but is not limited to actions involving alleged 
violations of the Act or the Commission rules thereunder. However, a 
legal proceeding is not ``material'' for the purposes of this rule if 
the proceeding is not in a Federal or State court or if the Commission 
is a party.

Sec.  242.812  Enforceability.

    (a) A transaction entered into on or pursuant to the rules of a 
security-based swap execution facility shall not be void, voidable, 
subject to rescission, otherwise invalidated, or rendered unenforceable 
as a result of a violation by the security-based swap execution 
facility of the provisions of section 3D of the Act or the Commission's 
rules thereunder.
    (b) A security-based swap execution facility shall, as soon as 
technologically practicable after the time of execution of a 
transaction entered into on or pursuant to the rules of the facility, 
provide a written record to each counterparty of all of the terms of 
the transaction that were agreed to on the facility, which shall 
legally supersede any previous agreement regarding such terms.

Sec.  242.813  Prohibited use of data collected for regulatory 
purposes.

    A security-based swap execution facility shall not use for business 
or marketing purposes any proprietary data or personal information it 
collects or receives, from or on behalf of any person, for the purpose 
of fulfilling its regulatory obligations; provided, however, that a 
security-based swap execution facility may use such data or information 
for business or marketing purposes if the person from whom it collects 
or receives such data or information clearly consents to the security-
based swap execution facility's use of such data or information in such 
manner. A security-based swap execution facility shall not condition 
access to its market(s) or market services on a person's consent to the 
security-based swap execution facility's use of proprietary data or 
personal information for business or marketing purposes. A security-
based swap execution facility, where necessary for regulatory purposes, 
may share such data or information with one or more security-based swap 
execution facilities or national securities exchanges registered with 
the Commission.

Sec.  242.814  Entity operating both a national securities exchange and 
security-based swap execution facility.

    (a) An entity that intends to operate both a national securities 
exchange and a security-based swap execution facility shall separately 
register the two facilities pursuant to section 6 of the Act and Sec.  
242.803, respectively.
    (b) A national securities exchange shall, to the extent that the 
exchange also operates a security-based swap execution facility and 
uses the same electronic trade execution system for listing and 
executing trades of security-based swaps on or through the exchange and 
the facility, identify whether electronic trading of such security-
based swaps is taking place on or through the national securities 
exchange or the security-based swap execution facility.

Sec.  242.815  Methods of execution for Required and Permitted 
Transactions.

    (a) Execution methods for Required Transactions. (1) Required 
Transaction means any transaction involving a security-based swap that 
is subject to the trade execution requirement in section 3C(h) of the 
Act.
    (2) Execution methods. (i) Each Required Transaction that is not a 
block trade shall be executed on a security-based swap execution 
facility in accordance with one of the following methods of execution, 
except as provided in paragraph (d) or (e) of this section:
    (A) An order book; or
    (B) A request-for-quote system that operates in conjunction with an 
order book.
    (ii) In providing either one of the execution methods set forth in 
paragraph (a)(2)(i)(A) or (B) of this section, a security-based swap 
execution facility may for purposes of execution and communication use 
any means of interstate commerce, including, but not limited to, the 
mail, internet, email, and telephone, provided that the chosen 
execution method satisfies the requirements for order books in Sec.  
242.802 of this chapter or in paragraph (a)(3) of this section for 
request-for-quote systems.

[[Page 87295]]

    (3) Request-for-quote system means a trading system or platform in 
which a market participant transmits a request for a quote to buy or 
sell a specific instrument to no less than three market participants in 
the trading system or platform, to which all such market participants 
may respond. The three market participants shall not be affiliates of 
or controlled by the requester and shall not be affiliates of or 
controlled by each other. A security-based swap execution facility that 
offers a request-for-quote system in connection with Required 
Transactions shall provide the following functionality:
    (i) At the same time that the requester receives the first 
responsive bid or offer, the security-based swap execution facility 
shall communicate to the requester any firm bid or offer pertaining to 
the same instrument resting on any of the security-based swap execution 
facility's order books;
    (ii) The security-based swap execution facility shall provide the 
requester with the ability to execute against such firm resting bids or 
offers along with any responsive orders; and
    (iii) The security-based swap execution facility shall ensure that 
its trading protocols provide each of its market participants with 
equal priority in receiving requests for quotes and in transmitting and 
displaying for execution responsive orders.
    (b) Time delay requirement for Required Transactions on an order 
book. (1) Time delay requirement. With regard to Required Transactions, 
a security-based swap execution facility shall require that a broker or 
dealer who seeks to either execute against its customer's order or 
execute two of its customers' orders against each other through the 
security-based swap execution facility's order book, following some 
form of pre-arrangement or pre-negotiation of such orders, be subject 
to at least a 15-second time delay between the entry of those two 
orders into the order book, such that one side of the potential 
transaction is disclosed and made available to other market 
participants before the second side of the potential transaction, 
whether for the broker's or dealer's own account or for a second 
customer, is submitted for execution.
    (2) Adjustment of time delay requirement. A security-based swap 
execution facility may adjust the time period of the 15-second time 
delay requirement described in paragraph (b)(1) of this section, based 
upon a security-based swap's liquidity or other product-specific 
considerations; however, the time delay shall be set for a sufficient 
period of time so that an order is exposed to the market and other 
market participants have a meaningful opportunity to execute against 
such order.
    (c) Execution methods for Permitted Transactions. (1) Permitted 
Transaction means any transaction not involving a security-based swap 
that is subject to the trade execution requirement in section 3C(h) of 
the Act.
    (2) Execution methods. A security-based swap execution facility may 
offer any method of execution for each Permitted Transaction.
    (d) Exceptions to required methods of execution for package 
transactions. (1) For purposes of this paragraph, a package transaction 
consists of two or more component transactions executed between two or 
more counterparties where:
    (i) At least one component transaction is a Required Transaction;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) A Required Transaction that is executed as a component of a 
package transaction that includes a component security-based swap that 
is subject exclusively to the Commission's jurisdiction, but is not 
subject to the clearing requirement under section 3C of the Act and is 
not intended to be cleared, may be executed on a security-based swap 
execution facility in accordance with paragraph (c)(2) of this section 
as if it were a Permitted Transaction;
    (3) A Required Transaction that is executed as a component of a 
package transaction that includes a component that is not a security-
based swap may be executed on a security-based swap execution facility 
in accordance with paragraph (c)(2) of this section as if it were a 
Permitted Transaction. This provision shall not apply to:
    (i) A Required Transaction that is executed as a component of a 
package transaction in which all other non-security-based swap 
components are U.S. Treasury securities;
    (ii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-security-based swap 
components are contracts for the purchase or sale of a commodity for 
future delivery;
    (iii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-security-based swap 
components are agency mortgage-backed securities;
    (iv) A Required Transaction that is executed as a component of a 
package transaction that includes a component transaction that is the 
issuance of a bond in a primary market; and
    (v) A Required Transaction that is executed as a component of a 
package transaction in which all other non-security-based swap 
components are swaps that are subject to a trade execution requirement 
under 17 CFR 37.9.
    (4) A Required Transaction that is executed as a component of a 
package transaction that includes a component security-based swap that 
is not exclusively subject to the Commission's jurisdiction may be 
executed on a security-based swap in accordance with paragraph (c)(2) 
of this section as if it were a Permitted Transaction.
    (e) Resolution of operational and clerical error trades. (1) A 
security-based swap execution facility shall maintain rules and 
procedures that facilitate the resolution of error trades. Such rules 
shall be fair, transparent, and consistent; allow for timely 
resolution; require members to provide prompt notice of an error 
trade--and, as applicable, offsetting and correcting trades--to the 
security-based swap execution facility; and permit members to:
    (i) Execute a correcting trade, in accordance with paragraph (c)(2) 
of this section, regardless of whether it is a Required or Permitted 
Transaction, for an error trade that has been rejected from clearing as 
soon as technologically practicable, but no later than one hour after a 
registered clearing agency provides notice of the rejection; or
    (ii) Execute an offsetting trade and a correcting trade, in 
accordance with paragraph (c)(2) of this section, regardless of whether 
it is a Required or Permitted Transaction, for an error trade that was 
accepted for clearing as soon as technologically practicable, but no 
later than three days after the error trade was accepted for clearing 
at a registered clearing agency.
    (2) If a correcting trade is rejected from clearing, then the 
security-based swap execution facility shall not allow the 
counterparties to execute another correcting trade.
    (f) Counterparty anonymity. (1) Except as otherwise required under 
the Act or the Commission's rules thereunder, a security-based swap 
execution facility shall not directly or indirectly, including through 
a third-party service provider, disclose the identity of a counterparty 
to a security-based swap that is executed

[[Page 87296]]

anonymously and intended to be cleared.
    (2) A security-based swap execution facility shall establish and 
enforce rules that prohibit any person from directly or indirectly, 
including through a third-party service provider, disclosing the 
identity of a counterparty to a security-based swap that is executed 
anonymously and intended to be cleared.
    (3) For purposes of paragraphs (f)(1) and (2) of this section, 
``executed anonymously'' shall include a security-based swap that is 
pre-arranged or pre-negotiated anonymously, including by a member of 
the security-based swap execution facility.
    (4) For a package transaction that includes a component transaction 
that is not a security-based swap intended to be cleared, disclosing 
the identity of a counterparty shall not violate paragraphs (f)(1) or 
(2) of this section. For purposes of this paragraph (f), a ``package 
transaction'' consists of two or more component transactions executed 
between two or more counterparties where:
    (i) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (ii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (g) Transactions not accepted for clearing. A security-based swap 
execution facility shall establish and enforce rules that provide that 
a security-based swap that is intended to be cleared at the time of the 
transaction, but is not accepted for clearing at a registered clearing 
agency, shall be void ab initio.

Sec.  242.816  Trade execution requirement and exemptions therefrom.

    (a) General. (1) Required submission. A security-based swap 
execution facility that makes a security-based swap available to trade 
in accordance with paragraph (b) of this section, shall submit to the 
Commission its determination with respect to such security-based swap 
as a rule, pursuant to the procedures under Sec.  242.806 or Sec.  
242.807.
    (2) Listing requirement. A security-based swap execution facility 
that makes a security-based swap available to trade must demonstrate 
that it lists or offers that security-based swap for trading on its 
trading system or platform.
    (b) Factors to consider. To make a security-based swap available to 
trade for purposes of section 3C(h) of the Act, a security-based swap 
execution facility shall consider, as appropriate, the following 
factors with respect to such security-based swap:
    (1) Whether there are ready and willing buyers and sellers;
    (2) The frequency or size of transactions;
    (3) The trading volume;
    (4) The number and types of market participants;
    (5) The bid/ask spread; or
    (6) The usual number of resting firm or indicative bids and offers.
    (c) Applicability. Upon a determination that a security-based swap 
is available to trade on a security-based swap execution facility or 
national securities exchange, all other security-based swap execution 
facilities and SBS exchanges shall comply with the requirements of 
section 3C(h) of the Act in listing or offering such security-based 
swap for trading.
    (d) Removal. The Commission may issue a determination that a 
security-based swap is no longer available to trade upon determining 
that no security-based swap execution facility or SBS exchange lists 
such security-based swap for trading.
    (e) Exemptions to trade execution requirement. (1) A security-based 
swap transaction that is executed as a component of a package 
transaction that also includes a component transaction that is the 
issuance of a bond in a primary market is exempt from the trade 
execution requirement in section 3C(h) of the Act. For purposes of 
paragraph (e) of this section, a package transaction consists of two or 
more component transactions executed between two or more counterparties 
where:
    (i) At least one component transaction is subject to the trade 
execution requirement in section 3C(h) of the Act;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) Section 3C(h) of the Act does not apply to a security-based 
swap transaction that qualifies for an exception under section 3C(g) of 
the Act, or any exemption from the clearing requirement that is granted 
by the Commission, for which the associated requirements are met.
    (3)(i) Section 3C(h) of the Act does not apply to a security-based 
swap transaction that is executed between counterparties that qualify 
as ``eligible affiliate counterparties,'' as defined below.
    (ii) For purposes of this paragraph (e)(3), counterparties will be 
``eligible affiliate counterparties'' if:
    (A) One counterparty, directly or indirectly, holds a majority 
ownership interest in the other counterparty, and the counterparty that 
holds the majority interest in the other counterparty reports its 
financial statements on a consolidated basis under Generally Accepted 
Accounting Principles or International Financial Reporting Standards, 
and such consolidated financial statements include the financial 
results of the majority-owned counterparty; or
    (B) A third party, directly or indirectly, holds a majority 
ownership interest in both counterparties, and the third party reports 
its financial statements on a consolidated basis under Generally 
Accepted Accounting Principles or International Financial Reporting 
Standards, and such consolidated financial statements include the 
financial results of both of the counterparties.
    (iii) For purposes of this paragraph (e)(3), a counterparty or 
third party directly or indirectly holds a majority ownership interest 
if it directly or indirectly holds a majority of the equity securities 
of an entity, or the right to receive upon dissolution, or the 
contribution of, a majority of the capital of a partnership.

Sec.  242.817  Trade execution compliance schedule.

    (a) A security-based swap transaction shall be subject to the 
requirements of section 3C(h) of the Act upon the later of:
    (1) A determination by the Commission that the security-based swap 
is required to be cleared as set forth in section 3C(a) or any later 
compliance date that the Commission may establish as a term or 
condition of such determination or following a stay and review of such 
determination pursuant to section 3C(c) of the Act and Sec.  240.3Ca-1 
of this chapter thereunder; and
    (2) Thirty days after the available-to-trade determination 
submission or certification for that security-based swap is, 
respectively, deemed approved under Sec.  242.806 or deemed certified 
under Sec.  242.807.
    (b) Nothing in this section shall prohibit any counterparty from 
complying voluntarily with the requirements of section 3C(h) of the Act 
sooner than as provided in paragraph (a) of this section.

[[Page 87297]]

Sec.  242.818  Core Principle 1--Compliance with core principles.

    (a) In general. To be registered, and maintain registration, as a 
security-based swap execution facility, the security-based swap 
execution facility shall comply with the core principles described in 
section 3D of the Act, and any requirement that the Commission may 
impose by rule or regulation.
    (b) Reasonable discretion of security-based swap execution 
facility. Unless otherwise determined by the Commission, by rule or 
regulation, a security-based swap execution facility described in 
paragraph (a) of this section shall have reasonable discretion in 
establishing the manner in which it complies with the core principles 
described in section 3D of the Act.

Sec.  242.819  Core Principle 2--Compliance with rules.

    (a) General. A security-based swap execution facility shall:
    (1) Establish and enforce compliance with any rule established by 
such security-based swap execution facility, including the terms and 
conditions of the security-based swaps traded or processed on or 
through the facility, and any limitation on access to the facility;
    (2) Establish and enforce trading, trade processing, and 
participation rules that will deter abuses and have the capacity to 
detect, investigate, and enforce those rules, including means to 
provide market participants with impartial access to the market and to 
capture information that may be used in establishing whether rule 
violations have occurred; and
    (3) Establish rules governing the operation of the facility, 
including rules specifying trading procedures to be used in entering 
and executing orders traded or posted on the facility.
    (b) Operation of security-based swap execution facility and 
compliance with rules. (1) A security-based swap execution facility 
shall establish rules governing the operation of the security-based 
swap execution facility, including, but not limited to, rules 
specifying trading procedures to be followed by members when entering 
and executing orders traded or posted on the security-based swap 
execution facility.
    (2) A security-based swap execution facility shall establish and 
impartially enforce compliance with the rules of the security-based 
swap execution facility, including, but not limited to:
    (i) The terms and conditions of any security-based swaps traded or 
processed on or through the security-based swap execution facility;
    (ii) Access to the security-based swap execution facility;
    (iii) Trade practice rules;
    (iv) Audit trail requirements;
    (v) Disciplinary rules; and
    (vi) Mandatory trading requirements.
    (c) Access requirements. (1) Impartial access to markets and market 
services. A security-based swap execution facility shall provide any 
eligible contract participant and any independent software vendor with 
impartial access to its market(s) and market services, including any 
indicative quote screens or any similar pricing data displays, provided 
that the facility has:
    (i) Criteria governing such access that are impartial, transparent, 
and applied in a fair and non-discriminatory manner;
    (ii) Procedures whereby eligible contract participants provide the 
security-based swap execution facility with written or electronic 
confirmation of their status as eligible contract participants, as 
defined by the Act and Commission rules thereunder, prior to obtaining 
access; and
    (iii) Comparable fee structures for eligible contract participants 
and independent software vendors receiving comparable access to, or 
services from, the security-based swap execution facility.
    (2) Jurisdiction. Prior to granting any eligible contract 
participant access to its facilities, a security-based swap execution 
facility shall require that the eligible contract participant consent 
to its jurisdiction.
    (3) Limitations on access. A security-based swap execution facility 
shall establish and impartially enforce rules governing any decision to 
allow, deny, suspend, or permanently bar an eligible contract 
participant's access to the security-based swap execution facility, 
including when a decision is made as part of a disciplinary or 
emergency action taken by the security-based swap execution facility.
    (4) Commission review with respect to a denial or limitation of 
access to any service or a denial or conditioning of membership. (i) In 
general. An application for review by the Commission may be filed by 
any person who is aggrieved by a determination of a security-based swap 
execution facility with respect to any final action with respect to a 
denial or limitation of access to any service offered by the security-
based swap execution facility or any final action with respect to a 
denial or conditioning of membership, as defined in Sec.  242.835(b)(2) 
of this chapter (Rule 835(b)(2)), in accordance with Sec.  201.442 of 
this chapter (Rule of Practice 442).
    (ii) Standard to govern Commission review. In reviewing such a 
determination, if the Commission finds that the specific grounds on 
which such denial, limitation, or conditioning is based exist in fact, 
that such denial, limitation, or conditioning is in accordance with the 
rules of the security-based swap execution facility, and that such 
rules are, and were applied in a manner, consistent with the purposes 
of the Exchange Act, the Commission, by order, shall dismiss the 
proceeding. If the Commission does not make any such finding or if it 
finds that such denial, limitation, or conditioning imposes any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act, the Commission, by order, shall set aside 
the action of the security-based swap execution facility and require it 
to admit such person to membership or participation or grant such 
person access to services offered by the security-based swap execution 
facility.
    (d) Rule enforcement program. A security-based swap execution 
facility shall establish and enforce trading, trade processing, and 
participation rules that will deter abuses and it shall have the 
capacity to detect, investigate, and enforce those rules.
    (1) Abusive trading practices prohibited. A security-based swap 
execution facility shall prohibit abusive trading practices on its 
markets by members. A security-based swap execution facility that 
permits intermediation shall prohibit customer-related abuses 
including, but not limited to, trading ahead of customer orders, 
trading against customer orders, accommodation trading, and improper 
cross trading. Specific trading practices that shall be prohibited 
include front-running, wash trading, pre-arranged trading (except for 
transactions approved by or certified to the Commission pursuant Sec.  
242.806 or Sec.  242.807, respectively), fraudulent trading, money 
passes, and any other trading practices that a security-based swap 
execution facility deems to be abusive. A security-based swap execution 
facility shall also prohibit any other manipulative or disruptive 
trading practices prohibited by the Act or by the Commission pursuant 
to Commission regulation.
    (2) Capacity to detect and investigate rule violations. A security-
based swap execution facility shall have arrangements and resources for 
effective enforcement of its rules. Such arrangements shall include the 
authority to collect information and documents on both a routine and 
non-routine basis, including the authority to examine

[[Page 87298]]

books and records kept by the security-based swap execution facility's 
members and by persons under investigation. A security-based swap 
execution facility's arrangements and resources shall also facilitate 
the direct supervision of the market and the analysis of data collected 
to determine whether a rule violation has occurred.
    (3) Compliance staff and resources. A security-based swap execution 
facility shall establish and maintain sufficient compliance staff and 
resources to ensure that it can conduct effective audit trail reviews, 
trade practice surveillance, market surveillance, and real-time market 
monitoring. The security-based swap execution facility's compliance 
staff shall also be sufficient to address unusual market or trading 
events as they arise, and to conduct and complete investigations in a 
timely manner, as set forth in paragraph (d)(6) of this section.
    (4) Automated trade surveillance system. A security-based swap 
execution facility shall maintain an automated trade surveillance 
system capable of detecting potential trade practice violations. The 
automated trade surveillance system shall load and process daily orders 
and trades no later than 24 hours after the completion of the trading 
day. The automated trade surveillance system shall have the capability 
to detect and flag specific trade execution patterns and trade 
anomalies; compute, retain, and compare trading statistics; reconstruct 
the sequence of market activity; perform market analyses; and support 
system users to perform in-depth analyses and ad hoc queries of trade-
related data.
    (5) Real-time market monitoring. A security-based swap execution 
facility shall conduct real-time market monitoring of all trading 
activity on its system(s) or platform(s) to identify any market or 
system anomalies. A security-based swap execution facility shall have 
the authority to adjust trade prices or cancel trades when necessary to 
mitigate market disrupting events caused by malfunctions in its 
system(s) or platform(s) or errors in orders submitted by members. Any 
trade price adjustments or trade cancellations shall be transparent to 
the market and subject to standards that are clear, fair, and publicly 
available.
    (6) Investigations and investigation reports. (i) Procedures. A 
security-based swap execution facility shall establish and maintain 
procedures that require its compliance staff to conduct investigations 
of possible rule violations. An investigation shall be commenced upon 
the receipt of a request from Commission staff or upon the discovery or 
receipt of information by the security-based swap execution facility 
that indicates a reasonable basis for finding that a violation may have 
occurred or will occur.
    (ii) Timeliness. Each compliance staff investigation shall be 
completed in a timely manner. Absent mitigating factors, a timely 
manner is no later than 12 months after the date that an investigation 
is opened. Mitigating factors that may reasonably justify an 
investigation taking longer than 12 months to complete include the 
complexity of the investigation, the number of firms or individuals 
involved as potential wrongdoers, the number of potential violations to 
be investigated, and the volume of documents and data to be examined 
and analyzed by compliance staff.
    (iii) Investigation reports when a reasonable basis exists for 
finding a violation. Compliance staff shall submit a written 
investigation report for disciplinary action in every instance in which 
compliance staff determines from surveillance or from an investigation 
that a reasonable basis exists for finding a rule violation. The 
investigation report shall include the reason the investigation was 
initiated; a summary of the complaint, if any; the relevant facts; 
compliance staff's analysis and conclusions; and a recommendation as to 
whether disciplinary action should be pursued.
    (iv) Investigation reports when no reasonable basis exists for 
finding a violation. If after conducting an investigation, compliance 
staff determines that no reasonable basis exists for finding a rule 
violation, it shall prepare a written report including the reason the 
investigation was initiated; a summary of the complaint, if any; the 
relevant facts; and compliance staff's analysis and conclusions.
    (v) Warning letters. The rules of a security-based swap execution 
facility may authorize its compliance staff to issue a warning letter 
to a person or entity under investigation or to recommend that a 
disciplinary panel take such an action. No more than one warning letter 
may be issued to the same person or entity found to have committed the 
same rule violation within a rolling 12-month period.
    (e) Regulatory services provided by a third party. (1) Use of 
regulatory service provider permitted. A security-based swap execution 
facility may choose to contract with a registered futures association 
(under section 17 of the Commodity Exchange Act), a board of trade 
designated as a contract market (under section 5 of the Commodity 
Exchange Act), a national securities exchange, a national securities 
association, or another security-based swap execution facility (each a 
``regulatory service provider''), for the provision of services to 
assist in complying with the Act and Commission rules thereunder, as 
approved by the Commission. A security-based swap execution facility 
that chooses to contract with a regulatory service provider shall 
ensure that such provider has the capacity and resources necessary to 
provide timely and effective regulatory services, including adequate 
staff and automated surveillance systems. A security-based swap 
execution facility shall at all times remain responsible for the 
performance of any regulatory services received, for compliance with 
the security-based swap execution facility's obligations under the Act 
and Commission rules thereunder, and for the regulatory service 
provider's performance on its behalf.
    (2) Duty to supervise regulatory service provider. A security-based 
swap execution facility that elects to use the service of a regulatory 
service provider shall retain sufficient compliance staff to supervise 
the quality and effectiveness of the regulatory services provided on 
its behalf. Compliance staff of the security-based swap execution 
facility shall hold regular meetings with the regulatory service 
provider to discuss ongoing investigations, trading patterns, market 
participants, and any other matters of regulatory concern. A security-
based swap execution facility shall also conduct periodic reviews of 
the adequacy and effectiveness of services provided on its behalf. Such 
reviews shall be documented carefully and made available to the 
Commission upon request.
    (3) Regulatory decisions required from the security-based swap 
execution facility. A security-based swap execution facility that 
elects to use the service of a regulatory service provider shall retain 
exclusive authority in all substantive decisions made by its regulatory 
service provider, including, but not limited to, decisions involving 
the cancellation of trades, the issuance of disciplinary charges 
against members, and denials of access to the trading platform for 
disciplinary reasons. A security-based swap execution facility shall 
document any instances where its actions differ from those recommended 
by its regulatory service provider, including the reasons for the 
course of action recommended by the regulatory service provider and the 
reasons why the security-based swap execution facility chose a 
different course of action.

[[Page 87299]]

    (f) Audit trail. A security-based swap execution facility shall 
establish procedures to capture and retain information that may be used 
in establishing whether rule violations have occurred.
    (1) Audit trail required. A security-based swap execution facility 
shall capture and retain all audit trail data necessary to detect, 
investigate, and prevent customer and market abuses. Such data shall be 
sufficient to reconstruct all indications of interest, requests for 
quotes, orders, and trades within a reasonable period of time and to 
provide evidence of any violations of the rules of the security-based 
swap execution facility. An acceptable audit trail shall also permit 
the security-based swap execution facility to track a customer order 
from the time of receipt through execution on the security-based swap 
execution facility.
    (2) Elements of an acceptable audit trail program. (i) Original 
source documents. A security-based swap execution facility's audit 
trail shall include original source documents. Original source 
documents include unalterable, sequentially identified records on which 
trade execution information is originally recorded, whether recorded 
manually or electronically. Records for customer orders (whether 
filled, unfilled, or cancelled, each of which shall be retained or 
electronically captured) shall reflect the terms of the order, an 
account identifier that relates back to the account's owner(s), the 
time of order entry, and the time of trade execution. A security-based 
swap execution facility shall require that all orders, indications of 
interest, and requests for quotes be immediately captured in the audit 
trail.
    (ii) Transaction history database. A security-based swap execution 
facility's audit trail program shall include an electronic transaction 
history database. An adequate transaction history database shall 
include a history of all indications of interest, requests for quotes, 
orders, and trades entered into a security-based swap execution 
facility's trading system or platform, including all order 
modifications and cancellations. An adequate transaction history 
database shall also include:
    (A) All data that are input into the trade entry or matching system 
for the transaction to match and clear;
    (B) The customer type indicator code; and
    (C) Timing and sequencing data adequate to reconstruct trading.
    (iii) Electronic analysis capability. A security-based swap 
execution facility's audit trail program shall include electronic 
analysis capability with respect to all audit trail data in the 
transaction history database. Such electronic analysis capability shall 
ensure that the security-based swap execution facility has the ability 
to reconstruct indications of interest, requests for quotes, orders, 
and trades, and identify possible trading violations with respect to 
both customer and market abuse.
    (iv) Safe-storage capability. A security-based swap execution 
facility's audit trail program shall include the capability to safely 
store all audit trail data retained in its transaction history 
database. Such safe-storage capability shall include the capability to 
store all data in the database in a manner that protects it from 
unauthorized alteration, as well as from accidental erasure or other 
loss. Data shall be retained in accordance with the recordkeeping 
requirements of Sec.  242.826 (Core Principle 9).
    (3) Enforcement of audit trail requirements. (i) Annual audit trail 
and recordkeeping reviews. A security-based swap execution facility 
shall enforce its audit trail and recordkeeping requirements through at 
least annual reviews of all members and persons and firms subject to 
the security-based swap execution facility's recordkeeping rules to 
verify their compliance with the security-based swap execution 
facility's audit trail and recordkeeping requirements. Such reviews 
shall include, but are not limited to, reviews of randomly selected 
samples of front-end audit trail data for order routing systems; a 
review of the process by which user identifications are assigned and 
user identification records are maintained; a review of usage patterns 
associated with user identifications to monitor for violations of user 
identification rules; and reviews of account numbers and customer type 
indicator codes in trade records to test for accuracy and improper use.
    (ii) Enforcement program required. A security-based swap execution 
facility shall establish a program for effective enforcement of its 
audit trail and recordkeeping requirements. An effective program shall 
identify members, persons, and firms subject to the security-based swap 
execution facility's recordkeeping rules that have failed to maintain 
high levels of compliance with such requirements, and impose meaningful 
sanctions when deficiencies are found. Sanctions shall be sufficient to 
deter recidivist behavior. No more than one warning letter shall be 
issued to the same person or entity found to have committed the same 
violation of audit trail or recordkeeping requirements within a rolling 
12-month period.
    (g) Disciplinary procedures and sanctions. A security-based swap 
execution facility shall establish trading, trade processing, and 
participation rules that will deter abuses and have the capacity to 
enforce such rules through prompt and effective disciplinary action, 
including suspension or expulsion of members that violate the rules of 
the security-based swap execution facility.
    (1) Enforcement staff. (i) A security-based swap execution facility 
shall establish and maintain sufficient enforcement staff and resources 
to effectively and promptly prosecute possible rule violations within 
the disciplinary jurisdiction of the security-based swap execution 
facility.
    (ii) The enforcement staff of a security-based swap execution 
facility shall not include members or other persons whose interests 
conflict with their enforcement duties.
    (iii) A member of the enforcement staff shall not operate under the 
direction or control of any person or persons with trading privileges 
at the security-based swap execution facility.
    (iv) The enforcement staff of a security-based swap execution 
facility may operate as part of the security-based swap execution 
facility's compliance department.
    (2) Disciplinary panels. A security-based swap execution facility 
shall establish one or more disciplinary panels that are authorized to 
fulfill their obligations under the rules of this section. Disciplinary 
panels shall meet the composition requirements of Sec.  242.834(d), and 
shall not include any members of the security-based swap execution 
facility's compliance staff or any person involved in adjudicating any 
other stage of the same proceeding.
    (3) Notice of charges. If compliance staff authorized by a 
security-based swap execution facility or disciplinary panel thereof 
determines that a reasonable basis exists for finding a violation and 
adjudication is warranted, it shall direct that the person or entity 
alleged to have committed the violation be served with a notice of 
charges. A notice of charges shall adequately state the acts, conduct, 
or practices in which the respondent is alleged to have engaged; state 
the rule or rules alleged to have been violated (or about to be 
violated); advise the respondent that it is entitled, upon request, to 
a hearing on the charges; and prescribe the period within which a 
hearing on the charges may be requested. If the rules of the security-
based swap execution facility so provide, a notice may also advise:

[[Page 87300]]

    (i) That failure to request a hearing within the period prescribed 
in the notice, except for good cause, may be deemed a waiver of the 
right to a hearing; and
    (ii) That failure to answer or to deny expressly a charge may be 
deemed to be an admission of such charge.
    (4) Right to representation. Upon being served with a notice of 
charges, a respondent shall have the right to be represented by legal 
counsel or any other representative of its choosing in all succeeding 
stages of the disciplinary process, except by any member of the 
security-based swap execution facility's governing board or 
disciplinary panel, any employee of the security-based swap execution 
facility, or any person substantially related to the underlying 
investigations, such as a material witness or respondent.
    (5) Answer to charges. A respondent shall be given a reasonable 
period of time to file an answer to a notice of charges. The rules of a 
security-based swap execution facility governing the requirements and 
timeliness of a respondent's answer to a notice of charges shall be 
fair, equitable, and publicly available.
    (6) Admission or failure to deny charges. The rules of a security-
based swap execution facility may provide that, if a respondent admits 
or fails to deny any of the charges, a disciplinary panel may find that 
the violations alleged in the notice of charges for which the 
respondent admitted or failed to deny any of the charges have been 
committed. If the security-based swap execution facility's rules so 
provide, then:
    (i) The disciplinary panel may impose a sanction for each violation 
found to have been committed;
    (ii) The disciplinary panel shall promptly notify the respondent in 
writing of any sanction to be imposed and shall advise the respondent 
that the respondent may request a hearing on such sanction within the 
period of time, which shall be stated in the notice; and
    (iii) The rules of a security-based swap execution facility may 
provide that, if a respondent fails to request a hearing within the 
period of time stated in the notice, the respondent will be deemed to 
have accepted the sanction.
    (7) Denial of charges and right to hearing. Where a respondent has 
requested a hearing on a charge that is denied, or on a sanction set by 
the disciplinary panel, the respondent shall be given an opportunity 
for a hearing in accordance with the rules of the security-based swap 
execution facility.
    (8) Settlement offers. (i) The rules of a security-based swap 
execution facility may permit a respondent to submit a written offer of 
settlement at any time after an investigation report is completed. The 
disciplinary panel presiding over the matter may accept the offer of 
settlement, but may not alter the terms of a settlement offer unless 
the respondent agrees.
    (ii) The rules of a security-based swap execution facility may 
provide that, in its discretion, a disciplinary panel may permit the 
respondent to accept a sanction without either admitting or denying the 
rule violations upon which the sanction is based.
    (iii) If an offer of settlement is accepted, the panel accepting 
the offer shall issue a written decision specifying the rule violations 
it has reason to believe were committed, including the basis or reasons 
for the panel's conclusions, and any sanction to be imposed, which 
shall include full customer restitution where customer harm is 
demonstrated, except where the amount of restitution or to whom it 
should be provided cannot be reasonably determined. If an offer of 
settlement is accepted without the agreement of the enforcement staff, 
the decision shall adequately support the disciplinary panel's 
acceptance of the settlement. Where applicable, the decision shall also 
include a statement that the respondent has accepted the sanctions 
imposed without either admitting or denying the rule violations.
    (iv) The respondent may withdraw its offer of settlement at any 
time before final acceptance by a disciplinary panel. If an offer is 
withdrawn after submission, or is rejected by a disciplinary panel, the 
respondent shall not be deemed to have made any admissions by reason of 
the offer of settlement and shall not be otherwise prejudiced by having 
submitted the offer of settlement.
    (9) Hearings. A security-based swap execution facility shall adopt 
rules that provide for the following minimum requirements for any 
hearing:
    (i) The hearing shall be fair, shall be conducted before members of 
the disciplinary panel, and shall be promptly convened after reasonable 
notice to the respondent. A security-based swap execution facility need 
not apply the formal rules of evidence for a hearing; nevertheless, the 
procedures for the hearing may not be so informal as to deny a fair 
hearing;
    (ii) No member of the disciplinary panel for the hearing may have a 
financial, personal, or other direct interest in the matter under 
consideration;
    (iii) In advance of the hearing, the respondent shall be entitled 
to examine all books, documents, or other evidence in the possession or 
under the control of the security-based swap execution facility. The 
security-based swap execution facility may withhold documents that are 
privileged or constitute attorney work product; were prepared by an 
employee of the security-based swap execution facility but will not be 
offered in evidence in the disciplinary proceedings; may disclose a 
technique or guideline used in examinations, investigations, or 
enforcement proceedings; or disclose the identity of a confidential 
source;
    (iv) The security-based swap execution facility's enforcement and 
compliance staffs shall be parties to the hearing, and the enforcement 
staff shall present their case on those charges and sanctions that are 
the subject of the hearing;
    (v) The respondent shall be entitled to appear personally at the 
hearing, to cross-examine any persons appearing as witnesses at the 
hearing, to call witnesses, and to present such evidence as may be 
relevant to the charges;
    (vi) The security-based swap execution facility shall require 
persons within its jurisdiction who are called as witnesses to 
participate in the hearing and produce evidence. The security-based 
swap execution facility shall make reasonable efforts to secure the 
presence of all other persons called as witnesses whose testimony would 
be relevant. The rules of a security-based swap execution facility may 
provide that a sanction may be summarily imposed upon any person within 
its jurisdiction whose actions impede the progress of a hearing; and
    (vii) If the respondent has requested a hearing, a copy of the 
hearing shall be made and shall become a part of the record of the 
proceeding. The record shall not be required to be transcribed unless:
    (A) The transcript is requested by Commission staff or the 
respondent;
    (B) The decision is appealed pursuant to the rules of the security-
based swap execution facility; or
    (C) The decision is reviewed by the Commission pursuant to Sec.  
201.442 of this chapter. In all other instances, a summary record of a 
hearing is permitted.
    (10) Decisions. Promptly following a hearing conducted in 
accordance with the rules of the security-based swap execution 
facility, the disciplinary panel shall render a written decision based 
upon the weight of the evidence contained in the record of the 
proceeding and shall provide a copy to the respondent. The decision 
shall include:

[[Page 87301]]

    (i) The notice of charges or a summary of the charges;
    (ii) The answer, if any, or a summary of the answer;
    (iii) A summary of the evidence produced at the hearing or, where 
appropriate, incorporation by reference of the investigation report;
    (iv) A statement of findings and conclusions with respect to each 
charge and a complete explanation of the evidentiary and other basis 
for such findings and conclusions with respect to each charge;
    (v) An indication of each specific rule that the respondent was 
found to have violated; and
    (vi) A declaration of all sanctions imposed against the respondent, 
including the basis for such sanctions and the effective date of such 
sanctions.
    (11) Emergency disciplinary actions. (i) A security-based swap 
execution facility may impose a sanction, including suspension, or take 
other summary action against a person or entity subject to its 
jurisdiction upon a reasonable belief that such immediate action is 
necessary to protect the best interest of the market place.
    (ii) Any emergency disciplinary action shall be taken in accordance 
with a security-based swap execution facility's procedures that provide 
for the following:
    (A) If practicable, a respondent should be served with a notice 
before the action is taken, or otherwise at the earliest possible 
opportunity. The notice shall state the action, briefly state the 
reasons for the action, and state the effective time and date, and the 
duration of the action.
    (B) The respondent shall have the right to be represented by legal 
counsel or any other representative of its choosing in all proceedings 
subsequent to the emergency action taken. The respondent shall be given 
the opportunity for a hearing as soon as reasonably practicable and the 
hearing shall be conducted before the disciplinary panel pursuant to 
the rules of the security-based swap execution facility.
    (C) Promptly following the hearing, the security-based swap 
execution facility shall render a written decision based upon the 
weight of the evidence contained in the record of the proceeding and 
shall provide a copy to the respondent. The decision shall include a 
description of the summary action taken; the reasons for the summary 
action; a summary of the evidence produced at the hearing; a statement 
of findings and conclusions; a determination that the summary action 
should be affirmed, modified, or reversed; and a declaration of any 
action to be taken pursuant to the determination, and the effective 
date and duration of such action.
    (12) Right to appeal. The rules of a security-based swap execution 
facility may permit the parties to a proceeding to appeal promptly an 
adverse decision of a disciplinary panel in all or in certain classes 
of cases. Such rules may require a party's notice of appeal to be in 
writing and to specify the findings, conclusions, or sanctions to which 
objection are taken. If the rules of a security-based swap execution 
facility permit appeals, then both the respondent and the enforcement 
staff shall have the opportunity to appeal and:
    (i) The security-based swap execution facility shall establish an 
appellate panel that is authorized to hear appeals. The rules of the 
security-based swap execution facility may provide that the appellate 
panel may, on its own initiative, order review of a decision by a 
disciplinary panel within a reasonable period of time after the 
decision has been rendered;
    (ii) The composition of the appellate panel shall be consistent 
with Sec.  242.834(d) and shall not include any members of the 
security-based swap execution facility's compliance staff or any person 
involved in adjudicating any other stage of the same proceeding. The 
rules of a security-based swap execution facility shall provide for the 
appeal proceeding to be conducted before all of the members of the 
appellate panel or a panel thereof;
    (iii) Except for good cause shown, the appeal or review shall be 
conducted solely on the record before the disciplinary panel, the 
written exceptions filed by the parties, and the oral or written 
arguments of the parties; and
    (iv) Promptly following the appeal or review proceeding, the 
appellate panel shall issue a written decision and shall provide a copy 
to the respondent. The decision issued by the appellate panel shall 
adhere to all the requirements of paragraph (g)(10) of this section to 
the extent that a different conclusion is reached from that issued by 
the disciplinary panel.
    (13) Disciplinary sanctions. (i) In general. All disciplinary 
sanctions imposed by a security-based swap execution facility or its 
disciplinary panels shall be commensurate with the violations committed 
and shall be clearly sufficient to deter recidivism or similar 
violations by other members. All disciplinary sanctions, including 
sanctions imposed pursuant to an accepted settlement offer, shall take 
into account the respondent's disciplinary history. In the event of 
demonstrated customer harm, any disciplinary sanction shall also 
include full customer restitution, except where the amount of 
restitution or to whom it should be provided cannot be reasonably 
determined.
    (ii) Summary fines for violations of rules regarding timely 
submission of records. A security-based swap execution facility may 
adopt a summary fine schedule for violations of rules relating to the 
failure to timely submit accurate records required for clearing or 
verifying each day's transactions. A security-based swap execution 
facility may permit its compliance staff, or a designated panel of 
security-based swap execution facility officials, to summarily impose 
minor sanctions against persons within the security-based swap 
execution facility's jurisdiction for violating such rules. A security-
based swap execution facility's summary fine schedule may allow for 
warning letters to be issued for first-time violations or violators. If 
adopted, a summary fine schedule shall provide for progressively larger 
fines for recurring violations.
    (14) Commission review of a disciplinary sanction. (i) In general. 
An application for review by the Commission may be filed by any person 
who is aggrieved by a determination of a security-based swap facility 
with respect to any final disciplinary action, as defined in Sec.  
242.835(b)(1) of this chapter (Rule 835(b)(1)), in accordance with 
Sec.  201.442 of this chapter (Rule of Practice 442).
    (ii) Standard to govern Commission review. (A) In reviewing such a 
determination, if the Commission finds that such person has engaged in 
such acts or practices, or has omitted such acts, as the security-based 
swap execution facility has found him to have engaged in or omitted, 
that such acts or practices, or omissions to act, are in violation of 
the Exchange Act, the rules or regulations thereunder, or the rules of 
the security-based swap execution facility, and that such provisions 
are, and were applied in a manner, consistent with the purposes of 
Exchange Act, the Commission, by order, shall so declare and, as 
appropriate, affirm the sanction imposed by the security-based swap 
execution facility, modify the sanction in accordance with paragraph 
(C) of this subsection, or remand to the security-based swap execution 
facility for further proceedings; or
    (B) if the Commission does not make any such finding it shall, by 
order, set aside the sanction imposed by the security-based swap 
execution facility

[[Page 87302]]

and, if appropriate, remand to the security-based swap execution 
facility for further proceedings.
    (C) If the Commission, having due regard for the public interest 
and the protection of investors, finds that a sanction imposed by a 
security-based swap execution facility upon such person imposes any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act or is excessive or oppressive, the 
Commission may cancel, reduce, or require the remission of such 
sanction.
    (h) Activities of security-based swap execution facility's 
employees, governing board members, committee members, and consultants. 
(1) Definitions. The following definitions shall apply only in this 
paragraph (h):
    (i) Covered interest, with respect to a security-based swap 
execution facility, means:
    (A) A security-based swap that trades on the security-based swap 
execution facility;
    (B) A security of an issuer that has issued a security that 
underlies a security-based swap that is listed on that facility; or
    (C) A derivative based on a security that falls within paragraph 
(h)(1)(i)(B) of this section.
    (ii) Pooled investment vehicle means an investment company 
registered under the Investment Company Act of 1940 in which no covered 
interest constitutes more than 10 percent of the investment company's 
assets.
    (2) Required rules. A security-based swap execution facility must 
maintain in effect rules which have been submitted to the Commission 
pursuant to Sec.  242.806 or Sec.  242.807 that, at a minimum, prohibit 
an employee of the security-based swap execution facility from:
    (i) Trading, directly or indirectly, any covered interest; and
    (ii) Disclosing to any other person any material, non-public 
information which such employee obtains as a result of their employment 
at the security-based swap execution facility, where such employee has 
or should have a reasonable expectation that the information disclosed 
may assist another person in trading any covered interest; provided, 
however, that such rules shall not prohibit disclosures made in the 
course of an employee's duties, or disclosures made to another 
security-based swap execution facility, court of competent 
jurisdiction, or representative of any agency or department of the 
Federal or State government acting in their official capacity.
    (3) Possible exemptions. A security-based swap execution facility 
may adopt rules, which must be submitted to the Commission pursuant to 
Sec.  242.806 or Sec.  242.807, which set forth circumstances under 
which exemptions from the trading prohibition contained in paragraph 
(h)(2)(i) of this section may be granted; such exemptions are to be 
administered by the security-based swap execution facility on a case-
by-case basis. Specifically, such circumstances may include:
    (i) Participation by an employee in a pooled investment vehicle 
where the employee has no direct or indirect control with respect to 
transactions executed for or on behalf of such vehicle;
    (ii) Trading by an employee in a derivative based on a pooled 
investment vehicle that falls within paragraph (h)(3)(i) of this 
section;
    (iii) Trading by an employee in a derivative based on an index in 
which no covered interest constitutes more than 10 percent of the 
index; and
    (iv) Trading by an employee under circumstances enumerated by the 
security-based swap execution facility in rules which the security-
based swap execution facility determines are not contrary to applicable 
law, the public interest, or just and equitable principles of trade.
    (4) Prohibited conduct. (i) No employee, governing board member, 
committee member, or consultant of a security-based swap execution 
facility shall:
    (A) Trade for such person's own account, or for or on behalf of any 
other account, in any covered interest on the basis of any material, 
non-public information obtained through special access related to the 
performance of such person's official duties as an employee, governing 
board member, committee member, or consultant; or
    (B) Disclose for any purpose inconsistent with the performance of 
such person's official duties as an employee, governing board member, 
committee member, or consultant any material, non-public information 
obtained through special access related to the performance of such 
duties.
    (ii) No person shall trade for such person's own account, or for or 
on behalf of any other account, in any covered interest on the basis of 
any material, non-public information that such person knows was 
obtained in violation of this paragraph (h)(4) from an employee, 
governing board member, committee member, or consultant.
    (i) Service on security-based swap execution facility governing 
boards or committees by persons with disciplinary histories. (1) A 
security-based swap execution facility shall maintain in effect rules 
which have been submitted to the Commission pursuant to Sec.  242.806 
or Sec.  242.807 that render a person ineligible to serve on its 
disciplinary committees, arbitration panels, oversight panels, or 
governing board who:
    (i) Was found within the prior three years by a final decision of a 
security-based swap execution facility, a self-regulatory organization, 
an administrative law judge, a court of competent jurisdiction, or the 
Commission to have committed a disciplinary offense;
    (ii) Entered into a settlement agreement with a security-based swap 
execution facility, a court of competent jurisdiction, or the 
Commission within the prior three years in which any of the findings 
or, in the absence of such findings, any of the acts charged included a 
disciplinary offense;
    (iii) Currently is suspended from trading on any security-based 
swap execution facility, is suspended or expelled from membership with 
a self-regulatory organization, is serving any sentence of probation, 
or owes any portion of a fine imposed pursuant to:
    (A) A finding by a final decision of a security-based swap 
execution facility, a self-regulatory organization, an administrative 
law judge, a court of competent jurisdiction, or the Commission that 
such person committed a disciplinary offense; or
    (B) A settlement agreement with a security-based swap execution 
facility, a court of competent jurisdiction, or the Commission in which 
any of the findings or, in the absence of such findings, any of the 
acts charged included a disciplinary offense;
    (iv) Currently is subject to an agreement with the Commission, a 
security-based swap execution facility, or a self-regulatory 
organization not to apply for registration with the Commission or 
membership in any self-regulatory organization;
    (v) Currently is subject to or has had imposed on him or her within 
the prior three years a Commission registration revocation or 
suspension in any capacity for any reason, or has been convicted within 
the prior three years of any felony; or
    (vi) Currently is subject to a denial, suspension, or 
disqualification from serving on a disciplinary committee, arbitration 
panel, or governing board of any security-based swap execution facility 
or self-regulatory organization.
    (2) No person may serve on a disciplinary committee, arbitration 
panel, oversight panel or governing

[[Page 87303]]

board of a security-based swap execution facility if such person is 
subject to any of the conditions listed in paragraphs (i)(1)(i) through 
(vi) of this section.
    (3) A security-based swap execution facility shall submit to the 
Commission a schedule listing all those rule violations which 
constitute disciplinary offenses and, to the extent necessary to 
reflect revisions, shall submit an amended schedule within 30 days of 
the end of each calendar year. A security-based swap execution facility 
shall maintain and keep current the schedule required by this section, 
and post the schedule on the security-based swap execution facility's 
website so that it is in a public place designed to provide notice to 
members and otherwise ensure its availability to the general public.
    (4) A security-based swap execution facility shall submit to the 
Commission within 30 days of the end of each calendar year a certified 
list of any persons who have been removed from its disciplinary 
committees, arbitration panels, oversight panels, or governing board 
pursuant to the requirements of this section during the prior year.
    (5) Whenever a security-based swap execution facility finds by 
final decision that a person has committed a disciplinary offense and 
such finding makes such person ineligible to serve on that security-
based swap execution facility's disciplinary committees, arbitration 
panels, oversight panels, or governing board, the security-based swap 
execution facility shall inform the Commission of that finding and the 
length of the ineligibility in a form and manner specified by the 
Commission.
    (6) For purposes of this paragraph:
    (i) Arbitration panel means any person or panel empowered by a 
security-based swap execution facility to arbitrate disputes involving 
the security-based swap execution facility's members or their 
customers.
    (ii) Disciplinary offense means:
    (A) Any violation of the rules of a security-based swap execution 
facility, except a violation resulting in fines aggregating to less 
than $5,000 within a calendar year involving:
    (1) Decorum or attire;
    (2) Financial requirements; or
    (3) Reporting or recordkeeping;
    (B) Any rule violation which involves fraud, deceit, or conversion 
or results in a suspension or expulsion;
    (C) Any violation of the Act or the Commission's rules thereunder; 
or
    (D) Any failure to exercise supervisory responsibility when such 
failure is itself a violation of either the rules of the security-based 
swap execution facility, the Act, or the Commission's rules thereunder.
    (E) A disciplinary offense must arise out of a proceeding or action 
which is brought by a security-based swap execution facility, the 
Commission, any Federal or State agency, or other governmental body.
    (iii) Final decision means:
    (A) A decision of a security-based swap execution facility which 
cannot be further appealed within the security-based swap execution 
facility, is not subject to the stay of the Commission or a court of 
competent jurisdiction, and has not been reversed by the Commission or 
any court of competent jurisdiction; or
    (B) Any decision by an administrative law judge, a court of 
competent jurisdiction, or the Commission which has not been stayed or 
reversed.
    (j) Notification of final disciplinary action involving financial 
harm to a customer.
    (1) Upon any final disciplinary action in which a security-based 
swap execution facility finds that a member has committed a rule 
violation that involved a transaction for a customer, whether executed 
or not, and that resulted in financial harm to the customer:
    (i) The security-based swap execution facility shall promptly 
provide written notice of the disciplinary action to the member; and
    (ii) The security-based swap execution facility shall have 
established a rule pursuant to Sec.  242.806 or Sec.  242.807 that 
requires a member that receives such a notice to promptly provide 
written notice of the disciplinary action to the customer, as disclosed 
on the member's books and records.
    (2) A written notice required by paragraph (j)(1) of this section 
must include the principal facts of the disciplinary action and a 
statement that the security-based swap execution facility has found 
that the member has committed a rule violation that involved a 
transaction for the customer, whether executed or not, and that 
resulted in financial harm to the customer.
    (3) Solely for purposes of this paragraph (j):
    (i) Customer means a person that utilizes an agent in connection 
with trading on a security-based swap execution facility.
    (ii) Final disciplinary action means any decision by or settlement 
with a security-based swap execution facility in a disciplinary matter 
which cannot be further appealed at the security-based swap execution 
facility, is not subject to the stay of the Commission or a court of 
competent jurisdiction, and has not been reversed by the Commission or 
any court of competent jurisdiction.
    (k) Designation of agent for non-U.S. member. (1) A security-based 
swap execution facility that admits a non-U.S. person as a member shall 
be deemed to be the agent of the non-U.S. member with respect to any 
security-based swaps executed by the non-U.S. member. Service or 
delivery of any communication issued by or on behalf of the Commission 
to the security-based swap execution facility shall constitute valid 
and effective service upon the non-U.S. member. The security-based swap 
execution facility which has been served with, or to which there has 
been delivered, a communication issued by or on behalf of the 
Commission to a non-U.S. member shall transmit the communication 
promptly and in a manner which is reasonable under the circumstances, 
or in a manner specified by the Commission in the communication, to the 
non-U.S. member.
    (2) It shall be unlawful for a security-based swap execution 
facility to permit a non-U.S. member to execute security-based swaps on 
the facility unless the security-based swap execution facility prior 
thereto informs the non-U.S. member in writing of the requirements of 
this section.
    (3) The requirements of paragraphs (k)(1) and (2) of this section 
shall not apply if the non-U.S. member has duly executed and maintains 
in effect a written agency agreement in compliance with this paragraph 
with a person domiciled in the United States and has provided a copy of 
the agreement to the security-based swap execution facility prior to 
effecting any transaction on the security-based swap execution 
facility. This agreement must authorize the person domiciled in the 
United States to serve as the agent of the non-U.S. member for purposes 
of accepting delivery and service of all communications issued by or on 
behalf of the Commission to the non-U.S. member and must provide an 
address in the United States where the agent will accept delivery and 
service of communications from the Commission. This agreement must be 
filed with the Commission by the security-based swap execution facility 
prior to permitting the non-U.S. member to effect any transactions in 
security-based swaps. Such agreements shall be filed in a manner 
specified by the Commission.
    (4) A non-U.S. member shall notify the Commission immediately if 
the written agency agreement is terminated, revoked, or is otherwise no 
longer in effect. If the security-based swap execution facility knows 
or should

[[Page 87304]]

know that the agreement has expired, been terminated, or is no longer 
in effect, the security-based swap execution facility shall notify the 
Commission immediately.

Sec.  242.820  Core Principle 3--Security-based swaps not readily 
susceptible to manipulation.

    The security-based swap execution facility shall permit trading 
only in security-based swaps that are not readily susceptible to 
manipulation.

Sec.  242.821  Core Principle 4--Monitoring of trading and trade 
processing.

    (a) General. The security-based swap execution facility shall:
    (1) Establish and enforce rules or terms and conditions defining, 
or specifications detailing:
    (i) Trading procedures to be used in entering and executing orders 
traded on or through the facilities of the security-based swap 
execution facility; and
    (ii) Procedures for trade processing of security-based swaps on or 
through the facilities of the security-based swap execution facility; 
and
    (2) Monitor trading in security-based swaps to prevent 
manipulation, price distortion, and disruptions of the delivery or cash 
settlement process through surveillance, compliance, and disciplinary 
practices and procedures, including methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions.
    (b) Market oversight obligations. A security-based swap execution 
facility shall:
    (1) Collect and evaluate data on its members' market activity on an 
ongoing basis in order to detect and prevent manipulation, price 
distortions, and, where possible, disruptions of the physical-delivery 
or cash-settlement process;
    (2) Monitor and evaluate general market data in order to detect and 
prevent manipulative activity that would result in the failure of the 
market price to reflect the normal forces of supply and demand;
    (3) Demonstrate an effective program for conducting real-time 
monitoring of trading for the purpose of detecting and resolving 
abnormalities. A security-based swap execution facility shall employ 
automated alerts to detect abnormal price movements and unusual trading 
volumes in real time and instances or threats of manipulation, price 
distortion, and disruptions on at least a T + 1 basis. The T + 1 
detection and analysis should incorporate any additional data that 
becomes available on a T + 1 basis, including the trade reconstruction 
data;
    (4) Demonstrate the ability to comprehensively and accurately 
reconstruct daily trading activity for the purpose of detecting 
instances or threats of manipulation, price distortion, and 
disruptions; and
    (5) Have rules in place that allow it to intervene to prevent or 
reduce market disruptions. Once a threatened or actual disruption is 
detected, the security-based swap execution facility shall take steps 
to prevent the market disruption or reduce its severity.
    (c) Monitoring of physical-delivery security-based swaps. For 
physical-delivery security-based swaps, the security-based swap 
execution facility shall demonstrate that it:
    (1) Monitors a security-based swap's terms and conditions as they 
relate to the underlying asset market; and
    (2) Monitors the availability of the supply of the asset specified 
by the delivery requirements of the security-based swap.
    (d) Additional requirements for cash-settled security-based swaps. 
(1) For cash-settled security-based swaps, the security-based swap 
execution facility shall demonstrate that it monitors the pricing of 
the reference price used to determine cash flows or settlement.
    (2) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price is formulated 
and computed by the security-based swap execution facility, the 
security-based swap execution facility shall demonstrate that it 
monitors the continued appropriateness of its methodology for deriving 
that price and shall promptly amend any methodologies that result, or 
are likely to result, in manipulation, price distortions, or market 
disruptions, or impose new methodologies to resolve the threat of 
disruptions or distortions.
    (3) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price relies on a 
third-party index or instrument, including an index or instrument 
traded on another venue, the security-based swap execution facility 
shall demonstrate that it monitors for pricing abnormalities in the 
index or instrument used to calculate the reference price and shall 
conduct due diligence to ensure that the reference price is not 
susceptible to manipulation.
    (e) Ability to obtain information. (1) A security-based swap 
execution facility shall demonstrate that it has access to sufficient 
information to assess whether trading in security-based swaps listed on 
its market, in the index or instrument used as a reference price, or in 
the underlying asset for its listed security-based swaps is being used 
to affect prices on its market. The security-based swap execution 
facility shall demonstrate that it can obtain position and trading 
information directly from members that conduct substantial trading on 
its facility or through an information-sharing agreement with other 
venues or a third-party regulatory service provider. If the position 
and trading information is not available directly from its members but 
is available through information-sharing agreements with other trading 
venues or a third-party regulatory service provider, the security-based 
swap execution facility should cooperate in such information-sharing 
agreements.
    (2) A security-based swap execution facility shall have rules that 
require its members to keep records of their trading, including records 
of their activity in the underlying asset, and related derivatives 
markets, and make such records available, upon request, to the 
security-based swap execution facility or, if applicable, to its 
regulatory service provider and the Commission. The security-based swap 
execution facility may limit the application of this requirement to 
only those members that conduct substantial trading on its facility.
    (f) Risk controls for trading. A security-based swap execution 
facility shall establish and maintain risk control mechanisms to 
prevent and reduce the potential risk of market disruptions, including, 
but not limited to, market restrictions that pause or halt trading 
under market conditions prescribed by the security-based swap execution 
facility. Such risk control mechanisms shall be designed to avoid 
market disruptions without unduly interfering with that market's price 
discovery function. The security-based swap execution facility may 
choose from among controls that include: pre-trade limits on order 
size, price collars or bands around the current price, message 
throttles, daily price limits, and intraday position limits related to 
financial risk to the clearing member, or design other types of 
controls, as well as clear error-trade and order-cancellation policies. 
Within the specific array of controls that are selected, the security-
based swap execution facility shall set the parameters for those 
controls, so that the specific parameters are reasonably likely to 
serve the purpose of preventing market disruptions and price 
distortions.
    (g) Trade reconstruction. A security-based swap execution facility 
shall have the ability to comprehensively and accurately reconstruct 
all trading on its facility. All audit-trail data and reconstructions 
shall be made available

[[Page 87305]]

to the Commission in a form, manner, and time that is acceptable to the 
Commission.
    (h) Regulatory service provider. A security-based swap execution 
facility shall comply with the rules in this section through a 
dedicated regulatory department or by contracting with a regulatory 
service provider pursuant to Sec.  242.819(e).

Sec.  242.822  Core Principle 5--Ability to obtain information.

    (a) General. The security-based swap execution facility shall:
    (1) Establish and enforce rules that will allow the facility to 
obtain any necessary information to perform any of the functions 
described in section 3D of the Act;
    (2) Provide the information to the Commission on request; and
    (3) Have the capacity to carry out such international information-
sharing agreements as the Commission may require.
    (b) Establish and enforce rules. A security-based swap execution 
facility shall establish and enforce rules that will allow the 
security-based swap execution facility to have the ability and 
authority to obtain sufficient information to allow it to fully perform 
its operational, risk management, governance, and regulatory functions 
and any requirements under this section, including the capacity to 
carry out international information-sharing agreements as the 
Commission may require.
    (c) Collection of information. A security-based swap execution 
facility shall have rules that allow it to collect information on a 
routine basis, allow for the collection of non-routine data from its 
members, and allow for its examination of books and records kept by 
members on its facility.
    (d) Provide information to the Commission. A security-based swap 
execution facility shall provide information in its possession to the 
Commission upon request, in a form and manner specified by the 
Commission.
    (e) Information-sharing agreements. A security-based swap execution 
facility shall share information with other regulatory organizations, 
data repositories, and third-party data reporting services as required 
by the Commission or as otherwise necessary and appropriate to fulfill 
its regulatory and reporting responsibilities. Appropriate information-
sharing agreements can be established with such entities, or the 
Commission can act in conjunction with the security-based swap 
execution facility to carry out such information sharing.

Sec.  242.823  Core Principle 6--Financial integrity of transactions.

    (a) General. The security-based swap execution facility shall 
establish and enforce rules and procedures for ensuring the financial 
integrity of security-based swaps entered on or through the facilities 
of the security-based swap execution facility, including the clearance 
and settlement of security-based swaps pursuant to section 3C(a)(1) of 
the Act.
    (b) Required clearing. Transactions executed on or through the 
security-based swap execution facility that are required to be cleared 
under section 3C(a)(1) of the Act or are voluntarily cleared by the 
counterparties shall be cleared through a registered clearing agency or 
a clearing agency that has obtained an exemption from clearing agency 
registration to provide central counterparty services for security-
based swaps.
    (c) General financial integrity. A security-based swap execution 
facility shall provide for the financial integrity of its transactions:
    (1) By establishing minimum financial standards for its members, 
which shall, at a minimum, require that each member qualify as an 
eligible contract participant;
    (2) For transactions cleared by a registered clearing agency:
    (i) By ensuring that the security-based swap execution facility has 
the capacity to route transactions to the registered clearing agency in 
a manner acceptable to the clearing agency for purposes of clearing; 
and
    (ii) By coordinating with each registered clearing agency to which 
it submits transactions for clearing, in the development of rules and 
procedures to facilitate prompt and efficient transaction processing.
    (d) Monitoring for financial soundness. A security-based swap 
execution facility shall monitor its members to ensure that they 
continue to qualify as eligible contract participants.

Sec.  242.824  Core Principle 7--Emergency authority.

    (a) The security-based swap execution facility shall adopt rules to 
provide for the exercise of emergency authority, in consultation or 
cooperation with the Commission, as is necessary and appropriate, 
including the authority to liquidate or transfer open positions in any 
security-based swap or to suspend or curtail trading in a security-
based swap.
    (b) To comply with this core principle, a security-based swap 
execution facility shall adopt rules that are reasonably designed to:
    (1) Allow the security-based swap execution facility to intervene 
as necessary to maintain markets with fair and orderly trading and to 
prevent or address manipulation or disruptive trading practices, 
whether the need for intervention arises exclusively from the security-
based swap execution facility's market or as part of a coordinated, 
cross-market intervention;
    (2) Have the flexibility and independence to address market 
emergencies in an effective and timely manner consistent with the 
nature of the emergency, as long as all such actions taken by the 
security-based swap execution facility are made in good faith to 
protect the integrity of the markets;
    (3) Take market actions as may be directed by the Commission, 
including, in situations where a security-based swap is traded on more 
than one platform, emergency action to liquidate or transfer open 
interest as directed, or agreed to, by the Commission or the 
Commission's staff;
    (4) Include procedures and guidelines for decision-making and 
implementation of emergency intervention that avoid conflicts of 
interest;
    (5) Include alternate lines of communication and approval 
procedures to address emergencies associated with real-time events; and
    (6) Allow the security-based swap execution facility, to address 
perceived market threats, to impose or modify position limits, impose 
or modify price limits, impose or modify intraday market restrictions, 
impose special margin requirements, order the liquidation or transfer 
of open positions in any contract, order the fixing of a settlement 
price, extend or shorten the expiration date or the trading hours, 
suspend or curtail trading in any contract, transfer customer contracts 
and the margin, or alter any contract's settlement terms or conditions, 
or, if applicable, provide for the carrying out of such actions through 
its agreements with its third-party provider of clearing or regulatory 
services.
    (c) A security-based swap execution facility shall promptly notify 
the Commission of its exercise of emergency authority, explaining its 
decision-making process, the reasons for using its emergency authority, 
and how conflicts of interest were minimized, including the extent to 
which the security-based swap execution facility considered the effect 
of its emergency action on the underlying markets and on markets that 
are linked or referenced to the contracts traded on its facility, 
including similar

[[Page 87306]]

markets on other trading venues. Information on all regulatory actions 
carried out pursuant to a security-based swap execution facility's 
emergency authority shall be included in a timely submission of a 
certified rule pursuant to Sec.  242.807.

Sec.  242.825  Core Principle 8--Timely publication of trading 
information.

    (a)(1) The security-based swap execution facility shall make public 
timely information on price, trading volume, and other trading data on 
security-based swaps to the extent prescribed by the Commission.
    (2) The security-based swap execution facility shall be required to 
have the capacity to electronically capture and transmit and 
disseminate trade information with respect to transactions executed on 
or through the facility.
    (b) A security-based swap execution facility shall report security-
based swap transaction data as required by Sec. Sec.  242.900 through 
242.909 (Regulation SBSR).
    (c) A security-based swap execution facility shall make available a 
``Daily Market Data Report'' containing the information required in 
paragraphs (c)(1) and (2) of this section in a manner and timeframe 
required by this section.
    (1) Contents. The Daily Market Data Report of a security-based swap 
execution facility for a business day shall contain the following 
information for each tenor of each security-based swap traded on that 
security-based swap execution facility during that business day:
    (i) The trade count (excluding error trades, correcting trades, and 
offsetting trades);
    (ii) The total notional amount traded (excluding error trades, 
correcting trades, and offsetting trades);
    (iii) The total notional amount of block trades, after such time as 
the Commission adopts a definition of ``block trade'' in Sec.  242.802 
of this chapter (Rule 802);
    (iv) The opening and closing price;
    (v) The price that is used for settlement purposes, if different 
from the closing price; and
    (vi) The lowest price of a sale or offer, whichever is lower, and 
the highest price of a sale or bid, whichever is higher, that the 
security-based swap execution facility reasonably determines accurately 
reflects market conditions. Bids and offers vacated or withdrawn shall 
not be used in making this determination. A bid is vacated if followed 
by a higher bid or price and an offer is vacated if followed by a lower 
offer or price.
    (2) Additional information. A security-based swap execution 
facility must record the following information with respect to 
security-based swaps on that reporting market:
    (i) The method used by the security-based swap execution facility 
in determining nominal prices and settlement prices; and
    (ii) If discretion is used by the security-based swap execution 
facility in determining the opening and/or closing ranges or the 
settlement prices, an explanation that certain discretion may be 
employed by the security-based swap execution facility and a 
description of the manner in which that discretion may be employed. 
Discretionary authority must be noted explicitly in each case in which 
it is applied (for example, by use of an asterisk or footnote).
    (3) Form of publication. A security-based swap execution facility 
shall publicly post the Daily Market Data Report on its website:
    (i) In a downloadable and machine-readable format using the most 
recent versions of the associated XML schema and PDF renderer as 
published on the Commission's website;
    (ii) Without fees or other charges;
    (iii) Without any encumbrances on access or usage restrictions; and
    (iv) Without requiring a user to agree to any terms before being 
allowed to view or download the Daily Market Data Report, such as by 
waiving any requirements of this paragraph (c)(3). Any such waiver 
agreed to by a user shall be null and void.
    (4) Timing of publication. A security-based swap execution facility 
shall publish the Daily Market Data Report on its website as soon as 
reasonably practicable on the next business day after the day to which 
the information pertains, but in no event later than 7 a.m. on the next 
business day.
    (5) Duration. A security-based swap execution facility shall keep 
each Daily Market Data Report available on its website in the same 
location as all other Daily Market Data Reports for no less than one 
year after the date of first publication.

Sec.  242.826  Core Principle 9--Recordkeeping and reporting.

    (a) In general. (1) A security-based swap execution facility shall:
    (i) Maintain records of all activities relating to the business of 
the facility, including a complete audit trail, in a form and manner 
acceptable to the Commission for a period of five years; and
    (ii) Report to the Commission, in a form and manner acceptable to 
the Commission, such information as the Commission determines to be 
necessary or appropriate for the Commission to perform the duties of 
the Commission under the Act.
    (2) The Commission shall adopt data collection and reporting 
requirements for security-based swap execution facilities that are 
comparable to corresponding requirements for clearing agencies and 
security-based swap data repositories.
    (b) Required records. A security-based swap execution facility 
shall keep full, complete, and systematic records, together with all 
pertinent data and memoranda, of all activities relating to its 
business with respect to security-based swaps. Such records shall 
include, without limitation, the audit trail information required under 
Sec.  242.819(f) and all other records that a security-based swap 
execution facility is required to create or obtain under Sec. Sec.  
242.800 through 242.835 (Regulation SE).
    (c) Duration of retention. (1) A security-based swap execution 
facility shall keep records of any security-based swap from the date of 
execution until the termination, maturity, expiration, transfer, 
assignment, or novation date of the transaction, and for a period of 
not less than five years, the first two years in an easily accessible 
place, after such date.
    (2) A security-based swap execution facility shall keep each record 
other than the records described in paragraph (c)(1) of this section 
for a period of not less than five years, the first two years in an 
easily accessible place, from the date on which the record was created.
    (d) Record retention. (1) A security-based swap execution facility 
shall retain all records in a form and manner that ensures the 
authenticity and reliability of such records in accordance with the Act 
and the Commission's rules thereunder.
    (2) A security-based swap execution facility shall, upon request of 
any representative of the Commission, promptly furnish to the 
representative legible, true, complete, and current copies of any 
records required to be kept and preserved pursuant to this section.
    (3)(i) An electronic record shall be retained in a form and manner 
that allows for prompt production at the request of any representative 
of the Commission.
    (ii) A security-based swap execution facility maintaining 
electronic records shall establish appropriate systems and controls 
that ensure the authenticity and reliability of electronic records, 
including, without limitation:
    (A) Systems that maintain the security, signature, and data as 
necessary to ensure the authenticity of

[[Page 87307]]

the information contained in electronic records and to monitor 
compliance with the Act and the Commission's rules thereunder;
    (B) Systems that ensure that the security-based swap execution 
facility is able to produce electronic records in accordance with this 
section, and ensure the availability of such electronic records in the 
event of an emergency or other disruption of the security-based swap 
execution facility's electronic record retention systems; and
    (C) The creation and maintenance of an up-to-date inventory that 
identifies and describes each system that maintains information 
necessary for accessing or producing electronic records.
    (e) Record examination. All records required to be kept by a 
security-based swap execution facility pursuant to this section are 
subject to examination by any representative of the Commission pursuant 
to section 17(b) of the Act (15 U.S.C. 78q).
    (f) Records of non-U.S. members. A security-based swap execution 
facility shall keep a record in permanent form, which shall show the 
true name, address, and principal occupation or business of any non-
U.S. member that executes transactions on the facility. Upon request, 
the security-based swap execution facility shall provide to the 
Commission information regarding the name of any person guaranteeing 
such transactions or exercising any control over the trading of such 
non-U.S. member.

Sec.  242.827  Core Principle 10--Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of the Act, 
the security-based swap execution facility shall not:
    (a) Adopt any rules or take any actions that result in any 
unreasonable restraint of trade; or
    (b) Impose any material anticompetitive burden on trading or 
clearing.

Sec.  242.828  Core Principle 11--Conflicts of interest.

    (a) The security-based swap execution facility shall:
    (1) Establish and enforce rules to minimize conflicts of interest 
in its decision-making process; and
    (2) Establish a process for resolving the conflicts of interest.
    (b) A security-based swap execution facility shall comply with the 
requirements of Sec.  242.834.

Sec.  242.829  Core Principle 12--Financial resources.

    (a) In general. (1) The security-based swap execution facility 
shall have adequate financial, operational, and managerial resources to 
discharge each responsibility of the security-based swap execution 
facility, as determined by the Commission.
    (2) The financial resources of a security-based swap execution 
facility shall be considered to be adequate if the value of the 
financial resources:
    (i) Enables the organization to meet its financial obligations to 
its members notwithstanding a default by a member creating the largest 
financial exposure for that organization in extreme but plausible 
market conditions; and
    (ii) Exceeds the total amount that would enable the security-based 
swap execution facility to cover the operating costs of the security-
based swap execution facility for a one-year period, as calculated on a 
rolling basis.
    (b) General requirements. A security-based swap execution facility 
shall maintain financial resources on an ongoing basis that are 
adequate to enable it to comply with the core principles set forth in 
section 3D of the Act and any applicable Commission rules. Financial 
resources shall be considered adequate if their value exceeds the total 
amount that would enable the security-based swap execution facility to 
cover its projected operating costs necessary for the security-based 
swap execution facility to comply with section 3D of the Act and 
applicable Commission rules for a one-year period, as calculated on a 
rolling basis pursuant to paragraph (e) of this section.
    (c) Types of financial resources. Financial resources available to 
satisfy the requirements of this section may include:
    (1) The security-based swap execution facility's own capital, 
meaning its assets minus its liabilities calculated in accordance with 
generally accepted accounting principles in the United States; and
    (2) Any other financial resource deemed acceptable by the 
Commission.
    (d) Liquidity of financial resources. The financial resources 
allocated by a security-based swap execution facility to meet the 
ongoing requirements of paragraph (b) of this section shall include 
unencumbered, liquid financial assets (i.e., cash and/or highly liquid 
securities) equal to at least the greater of three months of projected 
operating costs, as calculated on a rolling basis, or the projected 
costs needed to wind down the security-based swap execution facility's 
operations, in each case as determined under paragraph (e) of this 
section. If a security-based swap execution facility lacks sufficient 
unencumbered, liquid financial assets to satisfy its obligations under 
this section, the security-based swap execution facility may satisfy 
this requirement by obtaining a committed line of credit or similar 
facility in an amount at least equal to such deficiency.
    (e) Computation of costs to meet financial resources requirement. 
(1) A security-based swap execution facility shall, each fiscal 
quarter, make a reasonable calculation of its projected operating costs 
and wind-down costs in order to determine its applicable obligations 
under this section. The security-based swap execution facility shall 
have reasonable discretion in determining the methodologies used to 
compute such amounts.
    (i) Calculation of projected operating costs. A security-based swap 
execution facility's calculation of its projected operating costs shall 
be deemed reasonable if it includes all expenses necessary for the 
security-based swap execution facility to comply with the core 
principles set forth in section 3D of the Act and any applicable 
Commission rules, and if the calculation is based on the security-based 
swap execution facility's current level of business and business model, 
taking into account any projected modification to its business model 
(e.g., the addition or subtraction of business lines or operations or 
other changes), and any projected increase or decrease in its level of 
business over the next 12 months. A security-based swap execution 
facility may exclude the following expenses (``excludable expenses'') 
from its projected operating cost calculations:
    (A) Costs attributable solely to sales, marketing, business 
development, product development, or recruitment and any related 
travel, entertainment, event, or conference costs;
    (B) Compensation and related taxes and benefits for personnel who 
are not necessary to ensure that the security-based swap execution 
facility is able to comply with the core principles set forth in 
section 3D of the Act and any applicable Commission rules;
    (C) Costs for acquiring and defending patents and trademarks for 
security-based swap execution facility products and related 
intellectual property;
    (D) Magazine, newspaper, and online periodical subscription fees;
    (E) Tax preparation and audit fees;
    (F) The variable commissions that a voice-based security-based swap 
execution facility may pay to its trading specialists, calculated as a 
percentage of transaction revenue generated by the

[[Page 87308]]

voice-based security-based swap execution facility; and
    (G) Any non-cash costs, including depreciation and amortization.
    (ii) Prorated expenses. A security-based swap execution facility's 
calculation of its projected operating costs shall be deemed reasonable 
if an expense is prorated and the security-based swap execution 
facility:
    (A) Maintains sufficient documentation that reasonably shows the 
extent to which an expense is partially attributable to an excludable 
expense;
    (B) Identifies any prorated expense in the financial reports that 
it submits to the Commission pursuant to paragraph (g) of this section; 
and
    (C) Sufficiently explains why it prorated any expense. Common 
allocation methodologies that may be used include actual use, 
headcount, or square footage. A security-based swap execution facility 
may provide documentation, such as copies of service agreements, other 
legal documents, firm policies, audit statements, or allocation 
methodologies to support its determination to prorate an expense.
    (iii) Expenses allocated among affiliates. A security-based swap 
execution facility's calculation of its projected operating costs shall 
be deemed reasonable if it prorates any shared expense that the 
security-based swap execution facility pays for, but only to the extent 
that such shared expense is attributable to an affiliate and for which 
the security-based swap execution facility is reimbursed. To prorate a 
shared expense, the security-based swap execution facility shall:
    (A) Maintain sufficient documentation that reasonably shows the 
extent to which the shared expense is attributable to and paid for by 
the security-based swap execution facility and/or affiliated entity. 
The security-based swap execution facility may provide documentation, 
such as copies of service agreements, other legal documents, firm 
policies, audit statements, or allocation methodologies, that 
reasonably shows how expenses are attributable to, and paid for by, the 
security-based swap execution facility and/or its affiliated entities 
to support its determination to prorate an expense;
    (B) Identify any shared expense in the financial reports that it 
submits to the Commission pursuant to paragraph (g) of this section; 
and
    (C) Sufficiently explain why it prorated the shared expense.
    (2) Notwithstanding any provision of paragraph (e)(1) of this 
section, the Commission may review the methodologies and require 
changes as appropriate.
    (f) Valuation of financial resources. No less than each fiscal 
quarter, a security-based swap execution facility shall compute the 
current market value of each financial resource used to meet its 
obligations under this section. Reductions in value to reflect market 
and credit risk (``haircuts'') shall be applied as appropriate.
    (g) Reporting to the Commission. (1) Each fiscal quarter, or at any 
time upon Commission request, a security-based swap execution facility 
shall provide a report to the Commission that includes:
    (i) The amount of financial resources necessary to meet the 
requirements of this section, computed in accordance with the 
requirements of paragraph (e) of this section, and the market value of 
each available financial resource, computed in accordance with the 
requirements of paragraph (f) of this section; and
    (ii) Financial statements, including the balance sheet, income 
statement, and statement of cash flows of the security-based swap 
execution facility.
    (A) The financial statements shall be prepared in accordance with 
generally accepted accounting principles in the United States, prepared 
in English, and denominated in U.S. dollars.
    (B) The financial statements of a security-based swap execution 
facility that is not domiciled in the United States, and is not 
otherwise required to prepare financial statements in accordance with 
generally accepted accounting principles in the United States, may 
satisfy the requirement in paragraph (g)(1)(ii)(A) of this section if 
such financial statements are prepared in accordance with either 
International Financial Reporting Standards issued by the International 
Accounting Standards Board, or a comparable international standard as 
the Commission may otherwise accept in its discretion.
    (2) The calculations required by this paragraph (g) shall be made 
as of the last business day of the security-based swap execution 
facility's applicable fiscal quarter.
    (3) With each report required under paragraph (g) of this section, 
the security-based swap execution facility shall also provide the 
Commission with sufficient documentation explaining the methodology 
used to compute its financial requirements under this section. Such 
documentation shall:
    (i) Allow the Commission to reliably determine, without additional 
requests for information, that the security-based swap execution 
facility has made reasonable calculations pursuant to paragraph (e) of 
this section; and
    (ii) Include, at a minimum:
    (A) A total list of all expenses, without any exclusion;
    (B) All expenses and the corresponding amounts, if any, that the 
security-based swap execution facility excluded or prorated when 
determining its operating costs, calculated on a rolling basis, 
required under this section, and the basis for any determination to 
exclude or prorate any such expenses;
    (C) Documentation demonstrating the existence of any committed line 
of credit or similar facility relied upon for the purpose of meeting 
the requirements of this section (e.g., copies of agreements 
establishing or amending a credit facility or similar facility); and
    (D) All costs that a security-based swap execution facility would 
incur to wind down its operations, the projected amount of time for any 
such wind-down period, and the basis of its determination for the 
estimation of its costs and timing.
    (4) The reports and supporting documentation required by this 
section shall be filed not later than 40 calendar days after the end of 
the security-based swap execution facility's first three fiscal 
quarters, and not later than 90 calendar days after the end of the 
security-based swap execution facility's fourth fiscal quarter, or at 
such later time as the Commission may permit, in its discretion, upon 
request by the security-based swap execution facility.
    (5) A security-based swap execution facility shall provide notice 
to the Commission no later than 48 hours after it knows or reasonably 
should know that it no longer meets its obligations under paragraphs 
(b) and (d) of this section.
    (6) A security-based swap execution facility shall provide the 
report and documentation required by this section to the Commission 
electronically using the EDGAR system as an Interactive Data File in 
accordance with Sec.  232.405 of this chapter.

Sec.  242.830  Core Principle 13--System safeguards.

    (a) In general. The security-based swap execution facility shall:
    (1) Establish and maintain a program of risk analysis and oversight 
to identify and minimize sources of operational risk, through the 
development of appropriate controls and procedures, and automated 
systems, that:
    (i) Are reliable and secure; and
    (ii) Have adequate scalable capacity;
    (2) Establish and maintain emergency procedures, backup facilities, 
and a plan for disaster recovery that allow for:
    (i) The timely recovery and resumption of operations; and

[[Page 87309]]

    (ii) The fulfillment of the responsibilities and obligations of the 
security-based swap execution facility; and
    (3) Periodically conduct tests to verify that the backup resources 
of the security-based swap execution facility are sufficient to ensure 
continued:
    (i) Order processing and trade matching;
    (ii) Price reporting;
    (iii) Market surveillance; and
    (iv) Maintenance of a comprehensive and accurate audit trail.
    (b) Requirements. (1) A security-based swap execution facility's 
program of risk analysis and oversight with respect to its operations 
and automated systems shall address each of the following categories of 
risk analysis and oversight:
    (i) Enterprise risk management and governance. This category 
includes, but is not limited to: Assessment, mitigation, and monitoring 
of security and technology risk; security and technology capital 
planning and investment; governing board and management oversight of 
technology and security; information technology audit and controls 
assessments; remediation of deficiencies; and any other elements of 
enterprise risk management and governance included in generally 
accepted best practices.
    (ii) Information security. This category includes, but is not 
limited to, controls relating to: Access to systems and data (including 
least privilege, separation of duties, account monitoring, and 
control); user and device identification and authentication; security 
awareness training; audit log maintenance, monitoring, and analysis; 
media protection; personnel security and screening; automated system 
and communications protection (including network port control, boundary 
defenses, and encryption); system and information integrity (including 
malware defenses and software integrity monitoring); vulnerability 
management; penetration testing; security incident response and 
management; and any other elements of information security included in 
generally accepted best practices.
    (iii) Business continuity-disaster recovery planning and resources. 
This category includes, but is not limited to: Regular, periodic 
testing and review of business continuity-disaster recovery 
capabilities; the controls and capabilities described in paragraphs 
(b)(3) and (10) of this section; and any other elements of business 
continuity-disaster recovery planning and resources included in 
generally accepted best practices.
    (iv) Capacity and performance planning. This category includes, but 
is not limited to: Controls for monitoring the security-based swap 
execution facility's systems to ensure adequate scalable capacity 
(including testing, monitoring, and analysis of current and projected 
future capacity and performance, and of possible capacity degradation 
due to planned automated system changes); and any other elements of 
capacity and performance planning included in generally accepted best 
practices.
    (v) Systems operations. This category includes, but is not limited 
to: System maintenance; configuration management (including baseline 
configuration, configuration change and patch management, least 
functionality, and inventory of authorized and unauthorized devices and 
software); event and problem response and management; and any other 
elements of system operations included in generally accepted best 
practices.
    (vi) Systems development and quality assurance. This category 
includes, but is not limited to: Requirements development; pre-
production and regression testing; change management procedures and 
approvals; outsourcing and vendor management; training in secure coding 
practices; and any other elements of systems development and quality 
assurance included in generally accepted best practices.
    (vii) Physical security and environmental controls. This category 
includes, but is not limited to: Physical access and monitoring; power, 
telecommunication, and environmental controls; fire protection; and any 
other elements of physical security and environmental controls included 
in generally accepted best practices.
    (2) In addressing the categories of risk analysis and oversight 
required under paragraph (b)(1) of this section, a security-based swap 
execution facility shall follow generally accepted standards and best 
practices with respect to the development, operation, reliability, 
security, and capacity of automated systems.
    (3) A security-based swap execution facility shall maintain a 
business continuity-disaster recovery plan and business continuity-
disaster recovery resources, emergency procedures, and back-up 
facilities sufficient to enable timely recovery and resumption of its 
operations and resumption of its ongoing fulfillment of its 
responsibilities and obligations as a security-based swap execution 
facility following any disruption of its operations. Such 
responsibilities and obligations include, without limitation: Order 
processing and trade matching; transmission of matched orders to a 
registered clearing agency for clearing, where appropriate; price 
reporting; market surveillance; and maintenance of a comprehensive 
audit trail. A security-based swap execution facility's business 
continuity-disaster recovery plan and resources generally should enable 
resumption of trading and clearing of security-based swaps executed on 
or pursuant to the rules of the security-based swap execution facility 
during the next business day following the disruption. A security-based 
swap execution facility shall update its business continuity-disaster 
recovery plan and emergency procedures at a frequency determined by an 
appropriate risk analysis, but at a minimum no less frequently than 
annually.
    (4) A security-based swap execution facility satisfies the 
requirement to be able to resume its operations and resume its ongoing 
fulfillment of its responsibilities and obligations during the next 
business day following any disruption of its operations by maintaining 
either:
    (i) Infrastructure and personnel resources of its own that are 
sufficient to ensure timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a security-based swap execution facility following any 
disruption of its operations; or
    (ii) Contractual arrangements with other security-based swap 
execution facilities or disaster recovery service providers, as 
appropriate, that are sufficient to ensure continued trading and 
clearing of security-based swaps executed on the security-based swap 
execution facility, and ongoing fulfillment of all of the security-
based swap execution facility's responsibilities and obligations with 
respect to such security-based swaps, in the event that a disruption 
renders the security-based swap execution facility temporarily or 
permanently unable to satisfy this requirement on its own behalf.
    (5) A security-based swap execution facility shall notify 
Commission staff promptly of all:
    (i) Electronic trading halts and material system malfunctions;
    (ii) Cyber-security incidents or targeted threats that actually or 
potentially jeopardize automated system operation, reliability, 
security, or capacity; and
    (iii) Activations of the security-based swap execution facility's 
business continuity-disaster recovery plan.

[[Page 87310]]

    (6) A security-based swap execution facility shall provide 
Commission staff timely advance notice of all material:
    (i) Planned changes to automated systems that may impact the 
reliability, security, or adequate scalable capacity of such systems; 
and
    (ii) Planned changes to the security-based swap execution 
facility's program of risk analysis and oversight.
    (7) As part of a security-based swap execution facility's 
obligation to produce books and records in accordance with Sec.  
242.826 (Core Principle 9), the security-based swap execution facility 
shall provide to the Commission the following system-safeguards-related 
books and records, promptly upon the request of any Commission 
representative:
    (i) Current copies of its business continuity-disaster recovery 
plans and other emergency procedures;
    (ii) All assessments of its operational risks or system safeguards-
related controls;
    (iii) All reports concerning system safeguards testing and 
assessment required by this chapter, whether performed by independent 
contractors or by employees of the security-based swap execution 
facility; and
    (iv) All other books and records requested by Commission staff in 
connection with Commission oversight of system safeguards pursuant to 
the Act or Commission rules, or in connection with Commission 
maintenance of a current profile of the security-based swap execution 
facility's automated systems.
    (v) Nothing in paragraph (b)(7) of this section shall be 
interpreted as reducing or limiting in any way a security-based swap 
execution facility's obligation to comply with Sec.  242.826 (Core 
Principle 9).
    (8) A security-based swap execution facility shall conduct regular, 
periodic, objective testing and review of its automated systems to 
ensure that they are reliable, secure, and have adequate scalable 
capacity. A security-based swap execution facility shall also conduct 
regular, periodic testing and review of its business continuity-
disaster recovery capabilities. Such testing and review shall include, 
without limitation, all of the types of testing set forth in this 
paragraph (b)(8).
    (i) Definitions. As used in this paragraph (b)(8):
    Controls means the safeguards or countermeasures employed by the 
security-based swap execution facility to protect the reliability, 
security, or capacity of its automated systems or the confidentiality, 
integrity, and availability of its data and information, and to enable 
the security-based swap execution facility to fulfill its statutory and 
regulatory responsibilities.
    Controls testing means assessment of the security-based swap 
execution facility's controls to determine whether such controls are 
implemented correctly, are operating as intended, and are enabling the 
security-based swap execution facility to meet the requirements of this 
section.
    Enterprise technology risk assessment means a written assessment 
that includes, but is not limited to, an analysis of threats and 
vulnerabilities in the context of mitigating controls. An enterprise 
technology risk assessment identifies, estimates, and prioritizes risks 
to security-based swap execution facility operations or assets, or to 
market participants, individuals, or other entities, resulting from 
impairment of the confidentiality, integrity, and availability of data 
and information or the reliability, security, or capacity of automated 
systems.
    External penetration testing means attempts to penetrate the 
security-based swap execution facility's automated systems from outside 
the systems' boundaries to identify and exploit vulnerabilities. 
Methods of conducting external penetration testing include, but are not 
limited to, methods for circumventing the security features of an 
automated system.
    Internal penetration testing means attempts to penetrate the 
security-based swap execution facility's automated systems from inside 
the systems' boundaries, to identify and exploit vulnerabilities. 
Methods of conducting internal penetration testing include, but are not 
limited to, methods for circumventing the security features of an 
automated system.
    Security incident means a cybersecurity or physical security event 
that actually jeopardizes or has a significant likelihood of 
jeopardizing automated system operation, reliability, security, or 
capacity, or the availability, confidentiality or integrity of data.
    Security incident response plan means a written plan documenting 
the security-based swap execution facility's policies, controls, 
procedures, and resources for identifying, responding to, mitigating, 
and recovering from security incidents, and the roles and 
responsibilities of its management, staff, and independent contractors 
in responding to security incidents. A security incident response plan 
may be a separate document or a business continuity-disaster recovery 
plan section or appendix dedicated to security incident response.
    Security incident response plan testing means testing of a 
security-based swap execution facility's security incident response 
plan to determine the plan's effectiveness, identify its potential 
weaknesses or deficiencies, enable regular plan updating and 
improvement, and maintain organizational preparedness and resiliency 
with respect to security incidents. Methods of conducting security 
incident response plan testing may include, but are not limited to, 
checklist completion, walk-through or table-top exercises, simulations, 
and comprehensive exercises.
    Vulnerability testing means testing of a security-based swap 
execution facility's automated systems to determine what information 
may be discoverable through a reconnaissance analysis of those systems 
and what vulnerabilities may be present on those systems.
    (ii) Vulnerability testing. A security-based swap execution 
facility shall conduct vulnerability testing of a scope sufficient to 
satisfy the requirements set forth in paragraph (b)(10) of this 
section.
    (A) A security-based swap execution facility shall conduct such 
vulnerability testing at a frequency determined by an appropriate risk 
analysis.
    (B) Such vulnerability testing shall include automated 
vulnerability scanning, which shall follow generally accepted best 
practices.
    (C) A security-based swap execution facility shall conduct 
vulnerability testing by engaging independent contractors or by using 
employees of the security-based swap execution facility who are not 
responsible for development or operation of the systems or capabilities 
being tested.
    (iii) External penetration testing. A security-based swap execution 
facility shall conduct external penetration testing of a scope 
sufficient to satisfy the requirements set forth in paragraph (b)(10) 
of this section.
    (A) A security-based swap execution facility shall conduct such 
external penetration testing at a frequency determined by an 
appropriate risk analysis.
    (B) A security-based swap execution facility shall conduct external 
penetration testing by engaging independent contractors or by using 
employees of the security-based swap execution facility who are not 
responsible for development or operation of the systems or capabilities 
being tested.
    (iv) Internal penetration testing. A security-based swap execution 
facility shall conduct internal penetration testing of a scope 
sufficient to satisfy the

[[Page 87311]]

requirements set forth in paragraph (b)(10) of this section.
    (A) A security-based swap execution facility shall conduct such 
internal penetration testing at a frequency determined by an 
appropriate risk analysis.
    (B) A security-based swap execution facility shall conduct internal 
penetration testing by engaging independent contractors, or by using 
employees of the security-based swap execution facility who are not 
responsible for development or operation of the systems or capabilities 
being tested.
    (v) Controls testing. A security-based swap execution facility 
shall conduct controls testing of a scope sufficient to satisfy the 
requirements set forth in paragraph (b)(10) of this section.
    (A) A security-based swap execution facility shall conduct controls 
testing, which includes testing of each control included in its program 
of risk analysis and oversight, at a frequency determined by an 
appropriate risk analysis. Such testing may be conducted on a rolling 
basis.
    (B) A security-based swap execution facility shall conduct controls 
testing by engaging independent contractors or by using employees of 
the security-based swap execution facility who are not responsible for 
development or operation of the systems or capabilities being tested.
    (vi) Security incident response plan testing. A security-based swap 
execution facility shall conduct security incident response plan 
testing sufficient to satisfy the requirements set forth in paragraph 
(b)(10) of this section.
    (A) A security-based swap execution facility shall conduct such 
security incident response plan testing at a frequency determined by an 
appropriate risk analysis.
    (B) A security-based swap execution facility's security incident 
response plan shall include, without limitation, the security-based 
swap execution facility's definition and classification of security 
incidents, its policies and procedures for reporting security incidents 
and for internal and external communication and information sharing 
regarding security incidents, and the hand-off and escalation points in 
its security incident response process.
    (C) A security-based swap execution facility may coordinate its 
security incident response plan testing with other testing required by 
this section or with testing of its other business continuity-disaster 
recovery and crisis management plans.
    (D) A security-based swap execution facility may conduct security 
incident response plan testing by engaging independent contractors or 
by using employees of the security-based swap execution facility.
    (vii) Enterprise technology risk assessment. A security-based swap 
execution facility shall conduct enterprise technology risk assessment 
of a scope sufficient to satisfy the requirements set forth in 
paragraph (b)(10) of this section.
    (A) A security-based swap execution facility shall conduct 
enterprise technology risk assessment at a frequency determined by an 
appropriate risk analysis. A security-based swap execution facility 
that has conducted an enterprise technology risk assessment that 
complies with this section may conduct subsequent assessments by 
updating the previous assessment.
    (B) A security-based swap execution facility may conduct enterprise 
technology risk assessments by using independent contractors or 
employees of the security-based swap execution facility who are not 
responsible for development or operation of the systems or capabilities 
being assessed.
    (9) To the extent practicable, a security-based swap execution 
facility shall:
    (i) Coordinate its business continuity-disaster recovery plan with 
those of its members that it depends upon to provide liquidity, in a 
manner adequate to enable effective resumption of activity in its 
markets following a disruption causing activation of the security-based 
swap execution facility's business continuity-disaster recovery plan;
    (ii) Initiate and coordinate periodic, synchronized testing of its 
business continuity- disaster recovery plan with those of members that 
it depends upon to provide liquidity; and
    (iii) Ensure that its business continuity-disaster recovery plan 
takes into account the business continuity-disaster recovery plans of 
its telecommunications, power, water, and other essential service 
providers.
    (10) The scope for all system safeguards testing and assessment 
required by this section shall be broad enough to include the testing 
of automated systems and controls that the security-based swap 
execution facility's required program of risk analysis and oversight 
and its current cybersecurity threat analysis indicate is necessary to 
identify risks and vulnerabilities that could enable an intruder or 
unauthorized user or insider to:
    (i) Interfere with the security-based swap execution facility's 
operations or with fulfillment of its statutory and regulatory 
responsibilities;
    (ii) Impair or degrade the reliability, security, or adequate 
scalable capacity of the security-based swap execution facility's 
automated systems;
    (iii) Add to, delete, modify, exfiltrate, or compromise the 
integrity of any data related to the security-based swap execution 
facility's regulated activities; or
    (iv) Undertake any other unauthorized action affecting the 
security-based swap execution facility's regulated activities or the 
hardware or software used in connection with those activities.
    (11) Both the senior management and the governing board of a 
security-based swap execution facility shall receive and review reports 
setting forth the results of the testing and assessment required by 
this section. A security-based swap execution facility shall establish 
and follow appropriate procedures for the remediation of issues 
identified through such review, as provided in paragraph (b)(12) of 
this section, and for evaluation of the effectiveness of testing and 
assessment protocols.
    (12) A security-based swap execution facility shall identify and 
document the vulnerabilities and deficiencies in its systems revealed 
by the testing and assessment required by this section. The security-
based swap execution facility shall conduct and document an appropriate 
analysis of the risks presented by such vulnerabilities and 
deficiencies, to determine and document whether to remediate or accept 
the associated risk. When the security-based swap execution facility 
determines to remediate a vulnerability or deficiency, it must 
remediate in a timely manner given the nature and magnitude of the 
associated risk.

Sec.  242.831  Core Principle 14--Designation of chief compliance 
officer.

    (a)(1) In general. Each security-based swap execution facility 
shall designate an individual to serve as a chief compliance officer.
    (2) Duties. The chief compliance officer shall:
    (i) Report directly to the board or to the senior officer of the 
facility;
    (ii) Review compliance with the core principles in this subsection;
    (iii) In consultation with the board of the facility, a body 
performing a function similar to that of a board, or the senior officer 
of the facility, resolve any conflicts of interest that may arise;
    (iv) Be responsible for establishing and administering the policies 
and procedures required to be established pursuant to this section;
    (v) Ensure compliance with the Act and the rules and regulations 
issued

[[Page 87312]]

under the Act, including rules prescribed by the Commission pursuant to 
section 3D of the Act;
    (vi) Establish procedures for the remediation of noncompliance 
issues found during compliance office reviews, look backs, internal or 
external audit findings, self-reported errors, or through validated 
complaints; and
    (vii) Establish and follow appropriate procedures for the handling, 
management response, remediation, retesting, and closing of 
noncompliance issues.
    (3) Annual reports. (i) In general. In accordance with rules 
prescribed by the Commission, the chief compliance officer shall 
annually prepare and sign a report that contains a description of:
    (A) The compliance of the security-based swap execution facility 
with the Act; and
    (B) The policies and procedures, including the code of ethics and 
conflict of interest policies, of the security-based swap execution 
facility.
    (ii) [Reserved]
    (4) Requirements. The chief compliance officer shall:
    (i) Submit each report described in paragraph (a)(3) of this 
section with the appropriate financial report of the security-based 
swap execution facility that is required to be submitted to the 
Commission pursuant to this section; and
    (ii) Include in the report a certification that, under penalty of 
law, the report is accurate and complete.
    (b) Authority of chief compliance officer. (1) The position of 
chief compliance officer shall carry with it the authority and 
resources to develop, in consultation with the governing board or 
senior officer, the policies and procedures of the security-based swap 
execution facility and enforce such policies and procedures to fulfill 
the duties set forth for chief compliance officers in the Act and the 
Commission's rules thereunder.
    (2) The chief compliance officer shall have supervisory authority 
over all staff acting at the direction of the chief compliance officer.
    (c) Qualifications of chief compliance officer. (1) The individual 
designated to serve as chief compliance officer shall have the 
background and skills appropriate for fulfilling the responsibilities 
of the position.
    (2) No individual that would be disqualified from serving on a 
security-based swap execution facility's governing board or committees 
pursuant to the criteria set forth in Sec.  242.819(i) may serve as a 
chief compliance officer.
    (3) In determining whether the background and skills of a potential 
chief compliance officer are appropriate for fulfilling the 
responsibilities of the role of the chief compliance officer, a 
security-based swap execution facility has the discretion to base its 
determination on the totality of the qualifications of the potential 
chief compliance officer, including, but not limited to, compliance 
experience, related career experience, training, potential conflicts of 
interest, and any other relevant factors to the position.
    (d) Appointment and removal of chief compliance officer. (1) Only 
the governing board or the senior officer may appoint or remove the 
chief compliance officer.
    (2) The security-based swap execution facility shall notify the 
Commission within two business days of the appointment or removal, 
whether interim or permanent, of a chief compliance officer.
    (e) Compensation of the chief compliance officer. The governing 
board or the senior officer shall approve the compensation of the chief 
compliance officer.
    (f) Annual meeting with the chief compliance officer. The chief 
compliance officer shall meet with the governing board or senior 
officer of the security-based swap execution facility at least 
annually.
    (g) Information requested of the chief compliance officer. The 
chief compliance officer shall provide any information regarding the 
regulatory program of the security-based swap execution facility as 
requested by the governing board or the senior officer.
    (h) Duties of chief compliance officer. The duties of the chief 
compliance officer shall include, but are not limited to, the 
following:
    (1) Overseeing and reviewing compliance of the security-based swap 
execution facility with section 3D of the Act and the Commission rules 
thereunder;
    (2) Taking reasonable steps, in consultation with the governing 
board or the senior officer of the security-based swap execution 
facility, to resolve any material conflicts of interest that may arise, 
including, but not limited to:
    (i) Conflicts between business considerations and compliance 
requirements;
    (ii) Conflicts between business considerations and the requirement 
that the security-based swap execution facility provide fair, open, and 
impartial access as set forth in Sec.  242.819(c); and
    (iii) Conflicts between a security-based swap execution facility's 
management and members of the governing board;
    (3) Establishing and administering written policies and procedures 
reasonably designed to prevent violations of the Act and the rules of 
the Commission;
    (4) Taking reasonable steps to ensure compliance with the Act and 
the rules of the Commission;
    (5) Establishing procedures reasonably designed to handle, respond, 
remediate, retest, and resolve noncompliance issues identified by the 
chief compliance officer through any means, including any compliance 
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
    (6) Establishing and administering a compliance manual designed to 
promote compliance with the applicable laws, rules, and regulations and 
a written code of ethics for the security-based swap execution facility 
designed to prevent ethical violations and to promote honesty and 
ethical conduct by personnel of the security-based swap execution 
facility;
    (7) Supervising the regulatory program of the security-based swap 
execution facility with respect to trade practice surveillance; market 
surveillance; real-time market monitoring; compliance with audit trail 
requirements; enforcement and disciplinary proceedings; audits, 
examinations, and other regulatory responsibilities (including taking 
reasonable steps to ensure compliance with, if applicable, financial 
integrity, financial reporting, sales practice, recordkeeping, and 
other requirements); and
    (8) Supervising the effectiveness and sufficiency of any regulatory 
services provided to the security-based swap execution facility by a 
regulatory service provider in accordance with Sec.  242.819(e).
    (i) Preparation of annual compliance report. The chief compliance 
officer shall, not less than annually, prepare and sign an annual 
compliance report that covers the prior fiscal year. The report shall, 
at a minimum, contain:
    (1) A description and self-assessment of the effectiveness of the 
written policies and procedures of the security-based swap execution 
facility, including the code of ethics and conflict of interest 
policies, to reasonably ensure compliance with the Act and applicable 
Commission rules;
    (2) Any material changes made to compliance policies and procedures 
during the coverage period for the report and any areas of improvement 
or recommended changes to the compliance program;

[[Page 87313]]

    (3) A description of the financial, managerial, and operational 
resources set aside for compliance with the Act and applicable 
Commission rules;
    (4) Any material non-compliance matters identified and an 
explanation of the corresponding action taken to resolve such non-
compliance matters; and
    (5) A certification by the chief compliance officer that, to the 
best of their knowledge and reasonable belief, and under penalty of 
law, the annual compliance report is accurate and complete in all 
material respects.
    (j) Submission of annual compliance report and related matters. (1) 
Furnishing the annual compliance report prior to submission to the 
Commission. Prior to submission to the Commission, the chief compliance 
officer shall provide the annual compliance report for review to the 
governing board or, in the absence of a governing board, to the senior 
officer. Members of the governing board and the senior officer shall 
not require the chief compliance officer to make any changes to the 
report.
    (2) Submission of annual compliance report to the Commission. The 
annual compliance report shall be submitted electronically to the 
Commission using the EDGAR system as an Interactive Data File in 
accordance with Sec.  232.405 of this chapter not later than 90 
calendar days after the end of the security-based swap execution 
facility's fiscal year. The security-based swap execution facility 
shall concurrently file the annual compliance report with the fourth-
quarter financial report pursuant to Sec.  242.829(g).
    (3) Amendments to annual compliance report. (i) Promptly upon 
discovery of any material error or omission made in a previously filed 
annual compliance report, the chief compliance officer shall file an 
amendment with the Commission to correct the material error or 
omission. The chief compliance officer shall submit the amended annual 
compliance report to the governing board, or in the absence of a 
governing board, to the senior officer, pursuant to paragraph (j)(1) of 
this section.
    (ii) An amendment shall contain the certification required under 
paragraph (i)(5) of this section.
    (4) Request for extension. A security-based swap execution facility 
may request an extension of time to file its annual compliance report 
from the Commission. Reasonable and valid requests for extensions of 
the filing deadline may be granted at the discretion of the Commission.
    (k) Recordkeeping. A security-based swap execution facility shall 
maintain all records demonstrating compliance with the duties of the 
chief compliance officer and the preparation and submission of annual 
compliance reports consistent with Sec.  242.826 (Core Principle 9).

Sec.  242.832  Application of the trade execution requirement to cross-
border security-based swap transactions.

    (a) The trade execution requirement set forth in section 3C(h) of 
the Act shall not apply in connection with a security-based swap unless 
at least one counterparty to the security-based swap is a ``covered 
person'' as defined in paragraph (b) of this section.
    (b) A ``covered person'' means, with respect to a particular 
security-based swap, any person that is:
    (1) A U.S. person;
    (2) A non-U.S. person whose performance under a security-based swap 
is guaranteed by a U.S. person; or
    (3) A non-U.S. person who, in connection with its security-based 
swap dealing activity, uses U.S. personnel located in a U.S. branch or 
office, or personnel of an agent of such non-U.S. person located in a 
U.S. branch or office, to arrange, negotiate, or execute a transaction.

Sec.  242.833  Cross-border exemptions.

    (a) Exemptions for foreign trading venues for security-based swaps. 
An application for an order for exemptive relief under section 36(a)(1) 
of the Act (15 U.S.C. 78mm(a)(1)) relating to the registration status 
under the Act of a foreign trading venue for security-based swaps that 
has one or more members who are covered persons, as defined in Sec.  
242.832, with respect to security-based swaps transacted on that venue 
may state that the application also is submitted pursuant to this 
paragraph (a). In such case, the Commission will consider the 
submission as an application to exempt the foreign trading venue, with 
respect to its providing a market place for security-based swaps, from:
    (1) The definition of ``exchange'' in section 3(a)(1) of the Act 
(15 U.S.C. 78c(a)(1));
    (2) The definition of ``security-based swap execution facility'' in 
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77));
    (3) The definition of ``broker'' in section 3(a)(4) of the Act (15 
U.S.C. 78c(a)(4)); and
    (4) Section 3D(a)(1) of the Act (15 U.S.C. 78c-4(a)(1)).
    (b) Exemptions relating to the trade execution requirement. (1) An 
application for an order for exemptive relief under section 36(a)(1) of 
the Act (15 U.S.C. 78mm(a)(1)) relating to the application of the trade 
execution requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h)) 
to security-based swaps executed on a foreign trading venue, may state 
that the application also is submitted pursuant to this paragraph (b).
    (2) When considering an application under section 36 of the Act (15 
U.S.C. 78mm) and this paragraph (b), the Commission may consider:
    (i) The extent to which the security-based swaps traded in the 
foreign jurisdiction covered by the request are subject to a trade 
execution requirement comparable to that in section 3C(h) of the Act 
(15 U.S.C. 78c-3(h)) and the Commission's rules thereunder;
    (ii) The extent to which trading venues in the foreign jurisdiction 
covered by the request are subject to regulation and supervision 
comparable to that under the Act, including section 3D of the Act (15 
U.S.C. 78c-4), and the Commission's rules thereunder;
    (iii) Whether the foreign trading venue or venues where covered 
persons, as defined in Sec.  242.832, intend to trade security-based 
swaps have received an exemption order contemplated by paragraph (a) of 
this section; and
    (iv) Any other factor that the Commission believes is relevant for 
assessing whether the exemption is in the public interest and 
consistent with the protection of investors.

Sec.  242.834  Mitigation of conflicts of interest of security-based 
swap execution facilities and certain exchanges.

    (a) Definitions. For purposes of this section:
    Family relationship of a person means the person's spouse, former 
spouse, parent, stepparent, child, stepchild, sibling, stepbrother, 
stepsister, grandparent, grandchild, uncle, aunt, nephew, niece, or in-
law.
    Major disciplinary committee means a committee of persons who are 
authorized by a security-based swap execution facility to conduct 
disciplinary hearings, to settle disciplinary charges, to impose 
disciplinary sanctions, or to hear appeals thereof in cases involving 
any violation of the rules of the security-based swap execution 
facility except those which:
    (i) Are related to decorum or attire, financial requirements, or 
reporting or recordkeeping; and
    (ii) Do not involve fraud, deceit, or conversion.
    Member's affiliated firm is a firm in which the member is a 
principal or an employee.

[[Page 87314]]

    Named party in interest means a person or entity that is identified 
by name as a subject of any matter being considered by a governing 
board, disciplinary committee, or oversight panel.
    Significant action includes any of the following types of actions 
or rule changes by a security-based swap execution facility or SBS 
exchange that can be implemented without the Commission's prior 
approval:
    (i) Any actions or rule changes which address an emergency; and
    (ii) Any changes in margin levels that are designed to respond to 
extraordinary market conditions such as an actual or attempted corner, 
squeeze, congestion, or undue concentration of positions, or that 
otherwise are likely to have a substantial effect on prices in any 
contract traded or cleared at such security-based swap execution 
facility or SBS exchange; but does not include any rule not submitted 
for prior Commission approval because such rule is unrelated to the 
terms and conditions of any security-based swap traded at such 
security-based swap execution facility or SBS exchange.
    (b) Ownership and voting limitations. Each security-based swap 
execution facility and SBS exchange shall not permit any of its 
members, either alone or together with any officer, principal, or 
employee of the member, to:
    (1) Own, directly or indirectly, 20 percent or more of any class of 
voting securities or of other voting interest in the security-based 
swap execution facility or SBS exchange; or
    (2) Directly or indirectly vote, cause the voting of, or give any 
consent or proxy with respect to the voting of, any interest that 
exceeds 20 percent of the voting power of any class of securities or of 
other ownership interest in the security-based swap execution facility 
or SBS exchange.
    (3) The ownership and voting limitations in paragraphs (b)(1) and 
(2) of this section shall not apply to an SBSEF that has, pursuant to 
Sec.  242.819(e), entered into an agreement with a registered futures 
association or a national securities association for the provision of 
regulatory services that encompass, at a minimum, real-time market 
monitoring under Sec.  242.819(d)(5) and investigations and 
investigation reports under Sec.  242.819(d)(6).
    (c) Enforcement of limitations. The rules of each security-based 
swap execution facility and SBS exchange must be reasonably designed, 
and have an effective mechanism, to:
    (1) Deny effect to the portion of any voting interest held by a 
member in excess of the limitations in paragraph (b) of this section;
    (2) Compel a member who possesses a voting interest in excess of 
the limitations in paragraph (b) of this section to divest enough of 
that voting interest to come within those limitations; and
    (3) Obtain information relating to its ownership and voting 
interests owned or controlled, directly or indirectly, by its members.
    (d) Disciplinary committees and hearing panels. Each security-based 
swap execution facility and SBS exchange shall ensure that its 
disciplinary processes preclude any member, or group or class of its 
members, from dominating or exercising disproportionate influence on 
the disciplinary process. Each major disciplinary committee or hearing 
panel thereof shall include sufficient different groups or classes of 
its members so as to ensure fairness and to prevent special treatment 
or preference for any person or member in the conduct of the 
responsibilities of the committee or panel.
    (e) Governing board composition. Each security-based swap execution 
facility and SBS exchange shall ensure that:
    (1) Twenty percent or more of the persons who are eligible to vote 
routinely on matters being considered by the governing board (excluding 
those members who are eligible to vote only in the case of a tie vote 
by the governing board) are:
    (i) Knowledgeable of security-based swap trading or financial 
regulation, or otherwise capable of contributing to governing board 
deliberations;
    (ii) Not members of the security-based swap execution facility or 
SBS exchange;
    (iii) Not salaried employees of the security-based swap execution 
facility or SBS exchange;
    (iv) Not primarily performing services for the security-based swap 
execution facility or SBS exchange in a capacity other than as a member 
of the governing board; and
    (v) Not officers, principals, or employees of a firm which holds a 
membership at the security-based swap execution facility or SBS 
exchange, either in its own name or through an employee on behalf of 
the firm; and
    (2) The membership of the governing board includes a diversity of 
groups or classes of its members. The security-based swap execution 
facility or SBS exchange must be able to demonstrate that the board 
membership fairly represents the diversity of interests at such 
security-based swap execution facility or SBS exchange and is otherwise 
consistent with the composition requirements of this section.
    (f) Providing information about the board to the Commission. Each 
security-based swap execution facility and SBS exchange shall submit to 
the Commission, within 30 days after each governing board election, a 
list of the governing board's members, the groups or classes of its 
members that they represent, and how the composition of the governing 
board otherwise meets the requirements of this section.
    (g) Voting by interested members of governing boards and various 
committees of security-based swap execution facilities and SBS 
exchanges. (1) Rules required. Each security-based swap execution 
facility and SBS exchange shall maintain in effect rules to address the 
avoidance of conflicts of interest in the execution of its regulatory 
functions. Such rules must provide for the following:
    (i) Relationship with named party in interest. (A) Nature of 
relationship. A member of a governing board, disciplinary committee, or 
oversight panel of a security-based swap execution facility or SBS 
exchange must abstain from such body's deliberations and voting on any 
matter involving a named party in interest where such member:
    (1) Is a named party in interest;
    (2) Is an employer, employee, or fellow employee of a named party 
in interest;
    (3) Has any other significant, ongoing business relationship with a 
named party in interest, not including relationships limited to 
executing security-based swaps opposite of each other or to clearing 
security-based swaps through the same clearing member; or
    (4) Has a family relationship with a named party in interest.
    (B) Disclosure of relationship. Prior to the consideration of any 
matter involving a named party in interest, each member of a governing 
board, disciplinary committee, or oversight panel of a security-based 
swap execution facility or SBS exchange must disclose to the 
appropriate staff of the security-based swap execution facility or SBS 
exchange whether they have one of the relationships listed in paragraph 
(g)(1)(i)(A) of this section with a named party in interest.
    (C) Procedure for determination. Each security-based swap execution 
facility and SBS exchange must establish procedures for determining 
whether any member of its governing board, disciplinary committees, or 
oversight

[[Page 87315]]

committees is subject to a conflicts restriction in any matter 
involving a named party in interest. Taking into consideration the 
exigency of the committee action, such determinations should be based 
upon:
    (1) Information provided by the member pursuant to paragraph 
(g)(1)(i)(B) of this section; and
    (2) Any other source of information that is held by and reasonably 
available to the security-based swap execution facility or SBS 
exchange.
    (ii) Financial interest in a significant action. (A) Nature of 
interest. A member of the governing board, disciplinary committee, or 
oversight panel of a security-based swap execution facility or SBS 
exchange must abstain from such body's deliberations and voting on any 
significant action if the member knowingly has a direct and substantial 
financial interest in the result of the vote based upon either exchange 
or non-exchange positions that could reasonably be expected to be 
affected by the action.
    (B) Disclosure of interest. Prior to the consideration of any 
significant action, each member of a governing board, disciplinary 
committee, or oversight panel of a security-based swap execution 
facility or SBS exchange must disclose to the appropriate staff of the 
security-based swap execution facility or SBS exchange the position 
information referred to in paragraph (g)(1)(ii)(C) of this section that 
is known to them. This requirement does not apply to members who choose 
to abstain from deliberations and voting on the subject significant 
action.
    (C) Procedure for determination. Each security-based swap execution 
facility and SBS exchange must establish procedures for determining 
whether any member of its governing board, disciplinary committees, or 
oversight committees is subject to a conflicts restriction under this 
section in any significant action. Such determination must include a 
review of any positions, whether maintained at that security-based swap 
execution facility, SBS exchange, or elsewhere, held in the member's 
personal accounts or the proprietary accounts of the member's 
affiliated firm that the security-based swap execution facility or SBS 
exchange reasonably expects could be affected by the significant 
action.
    (D) Bases for determination. Taking into consideration the exigency 
of the significant action, such determinations should be based upon:
    (1) Information provided by the member with respect to positions 
pursuant to paragraph (f)(2)(ii)(B) of this section; and
    (2) Any other source of information that is held by and reasonably 
available to the security-based swap execution facility or SBS 
exchange.
    (iii) Participation in deliberations. (A) Under the rules required 
by this section, a governing board, disciplinary committee, or 
oversight panel of a security-based swap execution facility or SBS 
exchange may permit a member to participate in deliberations prior to a 
vote on a significant action for which they otherwise would be required 
to abstain, pursuant to paragraph (g)(1)(ii) of this section, if such 
participation would be consistent with the public interest and the 
member recuses from voting on such action.
    (B) In making a determination as to whether to permit a member to 
participate in deliberations on a significant action for which they 
otherwise would be required to abstain, the deliberating body shall 
consider the following factors:
    (1) Whether the member's participation in deliberations is 
necessary for the deliberating body to achieve a quorum in the matter; 
and
    (2) Whether the member has unique or special expertise, knowledge, 
or experience in the matter under consideration.
    (C) Prior to any determination pursuant to paragraph (g)(1)(iii)(A) 
of this section, the deliberating body must fully consider the position 
information which is the basis for the member's direct and substantial 
financial interest in the result of a vote on a significant action 
pursuant to paragraph (g)(1)(ii) of this section.
    (iv) Documentation of determination. The governing boards, 
disciplinary committees, and oversight panels of each security-based 
swap execution facility and SBS exchange must reflect in their minutes 
or otherwise document that the conflicts determination procedures 
required by this section have been followed. Such records also must 
include:
    (A) The names of all members who attended the meeting in person or 
who otherwise were present by electronic means;
    (B) The name of any members who voluntarily recused themselves or 
were required to abstain from deliberations and/or voting on a matter 
and the reason for the recusal or abstention, if stated; and
    (C) Information on the position information that was reviewed for 
each member.
    (h) Rules required. (1) A security-based swap execution facility 
shall maintain in effect rules to comply with this section that have 
been submitted to the Commission pursuant to Sec.  242.806 or Sec.  
242.807.
    (2) An SBS exchange shall maintain in effect rules to comply with 
this section that have been submitted to the Commission pursuant to 
Sec.  240.19b-4 of this chapter.

Sec.  242.835  Notice to Commission by security-based swap execution 
facility of final disciplinary action or denial or limitation of 
access.

    (a) If a security-based swap execution facility issues a final 
disciplinary action against a member, or takes final action with 
respect to a denial or conditioning membership, or takes final action 
with respect to a denial or limitation of access of a person to any 
services offered by the security-based swap execution facility, the 
security-based swap execution facility shall file a notice of such 
action with the Commission within 30 days and serve a copy on the 
affected person.
    (b) For purposes of paragraph (a) of this section:
    (1) A disciplinary action shall not be considered ``final'' unless:
    (i) The affected person has exhausted their administrative remedies 
at the security-based swap execution facility; and
    (ii) The disciplinary action is not a summary action permitted 
under Sec.  242.819(g)(13)(ii).
    (2) A disposition of a matter with respect to a denial or 
conditioning of membership, or a denial or limitation of access shall 
not be considered ``final'' unless such person has exhausted their 
administrative remedies at the security-based swap execution facility 
with respect to such matter.
    (c) A notice required by paragraph (a) of this section shall 
provide the following information:
    (1) The name of the member and its last known address, as reflected 
in the security-based swap execution facility's records;
    (2) The name of the person, committee, or other organizational unit 
of the security-based swap execution facility that initiated the 
disciplinary action or access restriction;
    (3) In the case of a final disciplinary action:
    (i) A description of the acts or practices, or omissions to act, 
upon which the sanction is based, including, as appropriate, the 
specific rules that the security-based swap execution facility has 
found to have been violated;
    (ii) A statement describing the respondent's answer to the charges; 
and
    (iii) A statement of the sanction imposed and the reasons therefor;
    (4) In the case of a final action with respect to a denial or 
conditioning of

[[Page 87316]]

membership, or a denial or limitation of access:
    (i) The financial or operating difficulty of the member or 
prospective member (as the case may be) upon which the security-based 
swap execution facility determined that the member or prospective 
member could not be permitted to do, or continue to do, business with 
safety to investors, creditors, other members, or the security-based 
swap execution facility;
    (ii) The pertinent failure to meet qualification requirements or 
other prerequisites for membership or access and the basis upon which 
the security-based swap execution facility determined that the person 
concerned could not be permitted to have membership or access with 
safety to investors, creditors, other members, or the security-based 
swap execution facility; or
    (iii) The default of any delivery of funds or securities to a 
clearing agency by the member;
    (5) The effective date of the final disciplinary action, or final 
action with respect to a denial or conditioning of membership, or a 
denial or limitation of access; and
    (6) Any other information that the security-based swap execution 
facility may deem relevant.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
22. The general authority citation for part 249 continues to read in 
part as follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001, Pub. L. 
114-94, 129 Stat. 1312 (2015), and secs. 2 and 3, Pub. L. 116-222, 
134 Stat. 1063 (2020), unless otherwise noted.
* * * * *

0
23. Add subpart R to read as follows:

Subpart R--Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities

Sec.
249.1701 Form SBSEF.
249.1702 Security-Based Swap Execution Facility Cover Sheet.

Sec.  249.1701  Form SBSEF, for application for registration as a 
security-based swap execution facility or to amend such application or 
registration.

    This form shall be used for application for registration as a 
security-based swap execution facility, pursuant to section 3D of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c-4) and Sec.  242.803 of 
this chapter, or to amend such application or registration.

Sec.  249.1702  Submission cover sheet, for rule and product 
submissions.

    This submission cover sheet shall be used by registered security-
based swap execution facilities for making submissions pursuant to 
Sec. Sec.  242.804 through 242.807, 242.809, and 242.816).

0
24. Add Form SBSEF (referenced in Sec.  249.1701).

    Note:  Form SBSEF is attached as Appendix A to this document. 
Form SBSEF will not appear in the Code of Federal Regulations.

0
25. Add Security-Based Swap Execution Facility Submission Cover Sheet 
(referenced in Sec.  249.1702).

    Note:  Security-Based Swap Execution Facility Submission Cover 
Sheet is attached as Appendix B to this document. The Security-Based 
Swap Execution Facility Submission Cover Sheet will not appear in 
the Code of Federal Regulations.

    By the Commission.

    Dated: November 2, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix A--Form SBSEF

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[FR Doc. 2023-24587 Filed 12-14-23; 8:45 am]
BILLING CODE 8011-01-C