Document ID: SEC-2022-0652-0001
Agency: sec
Document Type: Proposed Rule
Title: Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities
Posted Date: 2022-05-11T04:00Z

[Federal Register Volume 87, Number 91 (Wednesday, May 11, 2022)]
[Proposed Rules]
[Pages 28872-29016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07850]

[[Page 28871]]

Vol. 87

Wednesday,

No. 91

May 11, 2022

Part II

Securities and Exchange Commission

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17 CFR Parts 201, 232, 240, et al.

Rules Relating to Security-Based Swap Execution and Registration and 
Regulation of Security-Based Swap Execution Facilities; Proposed Rule

  Federal Register / Vol. 87 , No. 91 / Wednesday, May 11, 2022 / 
Proposed Rules  

[[Page 28872]]

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SECURITIES AND EXCHANGE COMMISSION

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

[Release No. 34-94615; File No. S7-14-22]
RIN 3235-AK93

Rules Relating to Security-Based Swap Execution and Registration 
and Regulation of Security-Based Swap Execution Facilities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; withdrawal of proposed rules.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is proposing a set of rules (``Regulation SE'') 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 proposed as part of Regulation SE would implement part 
of the Dodd-Frank Act, which is intended to mitigate conflicts of 
interest at SBSEFs and national securities exchanges that trade SBS 
(``SBS exchanges''). Other rules being proposed as part of Regulation 
SE would 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 proposing to amend 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 also is proposing a new rule that, 
while affirming that an SBSEF would be a broker under the SEA, would 
exempt a registered SBSEF from certain broker requirements. Finally, 
the Commission is proposing 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. The Commission also 
is withdrawing all previously proposed rules regarding these subjects.

DATES: Comments should be received on or before June 10, 2022. As of 
May 11, 2022, the SEC is withdrawing or partially withdrawing the 
following previously proposed rules (see SUPPLEMENTARY INFORMATION for 
details): SEA Release No. 63825 (76 FR 10948, published on February 28, 
2011); SEA Release No. 63107 (75 FR 65581, published on October 26, 
2010); and SEA Release No. 69490 (78 FR 30968, published on May 23, 
2013).

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File No. S7-14-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-14-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing 
and printing in the Commission's Public Reference Room, 100 F Street 
NE, Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's public reference room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
the Commission does not redact or edit personal identifying information 
from comment submissions. You should submit only information that you 
wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at 
(202) 551-5602; David Liu, Special Counsel, at (312) 353-6265; Leah 
Mesfin, Special Counsel, at (202) 551-5655; Michou Nguyen, Special 
Counsel, at (202) 551-7768; Geoffrey Pemble, Special Counsel, at (202) 
551-5628; or Mark Sater, Counsel, at (202) 551-4729; all of whom are in 
the Division of Trading and Markets, Securities and Exchange 
Commission, 100 F Street, NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR 
242.800 through 242.835 to create a regime for the registration and 
regulation of SBSEFs and address other issues relating to SBS execution 
generally. Regulation SE would consist of 17 CFR 242.800 through 
242.835 (proposed Rules 800 through 835). Key rules within Regulation 
SE would include Rule 803, which would establish a process for SBSEF 
registration; Rules 804 to 810, which would establish procedures for 
rule and product filings by SBSEFs; Rule 815, which would establish 
permissible execution methods for SBS that are subject to the SEA's 
trade execution requirement; Rule 816, which would set 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 would implement the 14 Core Principles for SBSEFs set forth in 
section 3D(d) of the SEA; Rules 832 to 833, which would address cross-
border matters; and Rule 834, which would impose 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 
proposing 17 CFR 249.2001 (Form SBSEF), which is the form that an 
entity would use to register with the Commission as an SBSEF; 17 CFR 
249.2002 (a submission cover sheet), which would be required to 
accompany filings with the Commission made by SBSEFs for rule and rule 
amendments and for product listings; 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; amendments to 17 CFR 240.3a1-1 (Rule 3a1-1 
under the SEA) 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; 17 CFR 240.15a-12 (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; to sunset an existing exemption from the 
requirement to register as a clearing agency for an entity performing 
the functions of an SBSEF but that is not yet registered as such; and 
certain new rules and amendments to 17 CFR part 201

[[Page 28873]]

(the Commission's Rules of Practice) to allow persons who are aggrieved 
by certain actions by an SBSEF to apply for review by the Commission.
    The Commission also is withdrawing all previously proposed rules, 
rule amendments, and interpretations regarding these subjects in view 
of the length of time that has passed since they were issued and 
significant changes to the swap and SBS markets that have taken place 
during that time.

Table of Contents

I. Background
II. Relation to the SEF Market
III. Approach to the Commission's Proposed Requirements Relating to 
Security-Based Swap Execution
IV. Introductory Provisions of Regulation SE
    A. Rule 800--Scope
    B. Rule 801--Applicable Provisions
    C. Rule 802--Definitions
V. Registration of SBSEFs
    A. Rule 803--Requirements and Procedures for Registration
    B. Form SBSEF
    C. Abbreviated Registration Procedures for CFTC-Registered SEFs
VI. 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
VII. Miscellaneous Requirements
    A. Rule 811--Information Relating to SBSEF Compliance
    1. Harmonization With Sec.  37.5
    2. Harmonization With Sec.  1.60
    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 SBSEF
    E. Rule 815--Methods of Execution for Required and Permitted 
Transactions
    F. Rule 816--Trade Execution Requirement and Exemptions 
Therefrom
    1. Process for an SBSEF To Make an SBS Product Available To 
Trade
    2. Exemptions From Trade Execution Requirement
    G. Rule 817--Trade Execution Compliance Schedule
VIII. Implementation of Core Principles
    A. Rule 818--Core Principle 1--Compliance With Core Principles
    B. Rule 819--Core Principle 2--Compliance With Rules
    1. Rules Modelled on Subpart C of Part 37
    2. Provisions of Rule 819 Adapted From Other SEF Requirements
    a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board 
Members, Committee Members, and Consultants
    b. Rule 819(i)--Service on SBSEF Governing Boards or Committees 
by Persons With Disciplinary Histories
    c. Rule 819(j)--Notification of Final Disciplinary Action 
Involving Financial Harm to a Customer
    d. Rule 819(k)--Designation of Agent for Non-U.S. Member
    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
    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
IX. Cross-Border Rules
    A. Rule 832--Cross-Border Mandatory Trade Execution
    B. Rule 833--Cross-Border Exemptions
    1. Exemptions for Foreign SBS Trading Venues
    2. Exemptions Relating to the Trade Execution Requirement
X. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and 
Governance of SBSEFs and SBS Exchanges
XI. Rule 835--Notice to Commission by SBSEF of Final Disciplinary 
Action, Denial or Conditioning of Membership, or Denial or 
Limitation of Access
XII. Amendments to Existing Rule 3a1-1 Under the SEA--Exemptions 
From the Definition of ``Exchange''
XIII. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain 
Broker Requirements
XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition 
of ``Clearing Agency'' for Unregistered SBSEFs
XV. Electronic Filings Under Regulation SE
XVI. 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
    I. Request for Comment
XVII. Conclusion
XVIII. Compliance Schedule
XIX. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Available Data From the SBS Market
    2. SBS Market Activity and Participants
    a. SBS Entities
    b. Other SBS Market Participants
    c. SBS Market Participant Domiciles
    3. Distribution of Rransaction Size
    4. Other Markets and Regulatory Frameworks
    5. Number of Entities That Likely Will Register as SBSEFs
    6. SBS Trading on Platforms
    7. Global Regulatory Efforts
    8. Trading Models
    C. Benefits, Costs, and Reasonable Alternatives
    1. Overarching Benefits of the Proposal
    2. Benefits Associated With Specific Proposed Rules
    3. Costs
    a. Registration Requirements for SBSEFs and Form SBSEF
    b. Ongoing Compliance With Other Requirements That Are Similar 
to the Remainder of Part 37
    c. Rule and Product Filing Processes for SBSEFs
    d. Proposed Rules 809, 811, 819, 826, 833, 834, and 835
    e. Assessment Costs
    f. Structured Data Costs
    4. Reasonable Alternatives
    D. Effects on Efficiency, Competition, and Capital Formation
    1. Competition
    2. Capital Formation
    3. Efficiency
    E. Request for Comment
XX. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    1. Registration Requirements and Form SBSEF
    2. Requirements for SBSEFs To Establish Rules
    3. Reporting Requirements for SBSEFs
    4. Recordkeeping Required Under Regulation SE
    5. Timely Publication of Trading Information Requirement for 
SBSEFs
    6. Rule Filing and Product Filing Processes for SBSEFs
    7. Requirements Relating to the CCO
    8. Surveillance Systems Requirements for SBSEFs
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Overview
    2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules
    a. Registration requirements for SBSEFs and Form SBSEF
    b. Ongoing Compliance With Other Requirements That Are Similar 
to the Remainder of Part 37
    3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules
    a. Rule and Product Filing Processes for SBSEFs
    b. Burdens Related to Rules Modelled After Other Part 40 Rules
    i. Rule 802

[[Page 28874]]

    ii. Rule 809
    4. Aggregate Burdens for Rules Modelled After CFTC Rules Other 
Than Parts 37 and 40
    a. Rule 811(d)
    b. Rule 819(h)
    c. Rule 819(i)
    d. Rule 819(j)
    e. Rule 819(k)
    f. Rule 826(f)
    g. Rule 834
    5. Miscellaneous Burdens
    a. Rule 833
    b. Rule 835
    6. Total Paperwork Burden Under Proposed Regulation SE
    E. Collection of Information Is Mandatory
    F. Responses to Collection of Information Will Not Be 
Confidential
    G. Retention Period of Recordkeeping Requirements
    H. Request for Comment
XXI. Regulatory Flexibility Certification
    A. SBSEFs
    B. Persons Requesting an Exemption Order Pursuant to Rule 833
    C. SBS Exchanges
    D. Certification
XXII. Consideration of Impact on Economy
    Statutory Authority

I. Background

    Section 3D of the SEA,\1\ enacted as part of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act''),\2\ provides for the registration and regulation of SBSEFs. 
Section 3D(a)(1) 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.\3\ Section 3D(f) 
requires the Commission to prescribe rules governing the regulation of 
SBSEFs.
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    \1\ 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'').
    \2\ Public Law 111-203, H.R. 4173, section 763(c).
    \3\ See infra section VIII (listing the Core Principles).
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    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''). In October 2010, the Commission published for 
comment proposed Regulation MC to implement section 765.\4\
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    \4\ 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 
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC 
Proposal'').
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    In February 2011, the Commission published for comment: (1) 
Proposed Regulation SBSEF that would govern the registration and 
regulation of SBSEFs, including rules to implement the 14 Core 
Principles and rules requiring SBSEFs to submit filings with the 
Commission to list SBS and to establish or amend rules; (2) proposed 
Form SBSEF for an entity to register with the Commission as an SBSEF; 
(3) a proposed interpretation of the definition of ``security-based 
swap execution facility''; and (4) proposed exemptions for registered 
SBSEFs relating to their status also as ``exchanges'' and ``brokers.'' 
\5\ On May 23, 2013, the Commission issued a proposing release to 
address various cross-border aspects of its proposed Title VII rules 
\6\--which included a proposed rule on the application of Title VII's 
``trade execution requirement'' \7\ to cross-border SBS transactions 
and a proposed interpretation of when the SBSEF registration 
requirements would apply to a foreign venue that trades SBS (a 
``foreign SBS trading venue'') \8\--and reopened the comment period for 
various proposed rulemaking releases and policy statements under Title 
VII, including the 2011 SBSEF Proposal.\9\
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    \5\ Registration and Regulation of Security-Based Swap Execution 
Facilities, SEA Release No. 63825 (February 2, 2011), 76 FR 10948 
(February 28, 2011) (``2011 SBSEF Proposal'').
    \6\ Cross-Border Security-Based Swap Activities; Re-Proposal of 
Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants, SEA Release No. 69490 (May 1, 2013), 78 FR 30968 
(May 23, 2013) (``Cross-Border Proposing Release'').
    \7\ The ``trade execution requirement'' as used with respect to 
SBS refers to a provision mandated by Title VII and set forth in 
section 3C(h) of the SEA that requires a transaction involving an 
SBS that is subject to the clearing requirement of section 3C to be 
executed on a national securities exchange, a registered SBSEF, or 
an SBSEF that is exempt from registration under section 3D(e) of the 
SEA. See infra note 106 and accompanying text. A similar provision 
regarding swaps is set forth in section 2(h)(8) of the CEA.
    \8\ See id., 78 FR at 31053-58 (discussing potential exemptions 
for foreign SBS trading venues) and 31081-85 (discussing a proposed 
rule to address the application of the trade execution requirement 
to cross-border SBS transactions).
    \9\ Reopening of Comment Periods for Certain Proposed Rulemaking 
Releases and Policy Statements applicable to Security-Based Swaps, 
SEA Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013) 
(``Reopening of Comment Periods Release'').
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    In view of the passage of time since these earlier proposals were 
issued and the significant market and regulatory developments affecting 
swaps and SBS over those years, the Commission is issuing this new 
proposal relating to the registration and regulation of SBSEFs and to 
SBS execution generally. Accordingly, the Regulation MC Proposal, the 
2011 SBSEF Proposal, and the elements of the Cross-Border Proposing 
Release relating to the trade execution requirement and the 
registration status of foreign SBS trading venues are withdrawn. The 
proposed rules discussed below supersede all previous Commission 
proposals on these subjects.\10\
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    \10\ The Commission notes, however, that Rule 834 of proposed 
Regulation SE would implement section 765 only with respect to 
SBSEFs and SBS exchanges.
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II. Relation to the SEF Market

    The economic baseline for establishing a registration and 
regulatory regime for SBSEFs and SBS execution generally has changed 
considerably since the Commission issued the 2011 SBSEF Proposal. In 
June 2013, the Commodity Futures Trading Commission (``CFTC'') adopted 
rules (in 17 CFR chapter I) under Title VII of the Dodd-Frank Act for 
swap execution facilities (``SEFs'').\11\ The swap market has grown and 
matured within the framework established by the CFTC's rules. In 2018, 
the CFTC proposed to make fundamental changes to the SEF regulatory 
structure.\12\ However, according to the CFTC, ``[s]everal commenters 
expressed concern over the magnitude of changes'' in the proposal.\13\ 
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.''\14\ Accordingly, the CFTC 
withdrew the unadopted portions of its 2018 proposal.\15\ Currently, 
the CFTC has no proposals outstanding to further amend its SEF rules.
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    \11\ 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'' and, together with the 
2013 CFTC Final SEF Rules Release, the ``2013 CFTC SEF Rules'').
    \12\ See CFTC, Swap Execution Facilities and Trade Execution 
Requirement, 83 FR 61946 (November 30, 2018) (``2018 SEF 
Proposal'').
    \13\ CFTC, Swap Execution Facilities and Trade Execution 
Requirement--Proposed rule; partial withdrawal, 86 FR 9304, 9304 
(February 12, 2021).
    \14\ Id.
    \15\ See id., 86 FR at 9304-05.
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    Because of the close relationship between the swap and SBS markets, 
an analysis of swap trading on CFTC-registered SEFs offers insights 
into the potential development of SBS trading on SEC-registered 
SBSEFs.\16\ Currently,

[[Page 28875]]

there are 20 non-dormant entities registered with the CFTC as SEFs.\17\ 
In 2021, volume in index credit default swaps (``CDS'') traded on CFTC-
registered SEFs was distributed as follows: One SEF had the largest 
share of index CDS volume (in notional amount) at $8 trillion (69%); 
one SEF had the second largest share at $2.1 trillion (18%); and the 
remaining 13% of volume was shared among five other SEFs.\18\ As 
discussed in section XIX below, only a small fraction of SBS trading 
occurs on platforms currently. Further, some trading occurs on 
platforms that do not include CFTC-registered SEFs.
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    \16\ The Commission bases its preliminary analysis on trading of 
credit derivatives. Other swap asset classes that trade on SEFs, 
such as interest rate swaps (``IRS'') and foreign exchange swaps, 
have no analogs in the SBS market. While there are parallels between 
the equity swap and equity SBS markets, equity swap trading on SEFs 
appears to be minimal.
    \17\ See CFTC, Trading Organizations--Swap Execution Facilities 
(SEF), https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (accessed on January 25, 
2022).
    \18\ See infra note 376 and accompanying text.
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    Based on research from publicly available sources as well as 
discussions with CFTC-registered SEFs, the Commission understands that 
the SBS market--both on organized platforms that are potential SBSEF 
registrants and on a purely over-the-counter (``OTC'') basis--is a 
small fraction of the overall swap market.\19\ Furthermore, the single-
name CDS market, which falls under SEC jurisdiction, is smaller than 
the index CDS market, which falls under CFTC jurisdiction.\20\ Because 
the swap markets are larger than the SBS markets, the opportunities for 
revenue capture from swap execution are much larger than from SBS 
execution. In view of the SBS market's size relative to the swap 
market, the Commission is sensitive to the economic impact that its 
final rules for SBSEFs could have.
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    \19\ See infra note 371 and accompanying text.
    \20\ See id.
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    The entities that are most likely to register with the Commission 
as SBSEFs are those already registered with the CFTC as SEFs.\21\ These 
entities have made substantial investments in systems, policies, and 
procedures to comply with and adapt to the regulatory system developed 
by the CFTC. To the extent that the Commission harmonizes its SBSEF 
rules with the CFTC's SEF rules, dually registered entities could 
utilize their existing systems, policies, and procedures to comply with 
the Commission's SBSEF rules, and SEF market participants would face no 
or only incremental changes to trade SBS as well as swaps on those 
facilities, and to comply with the Commission's rules regarding SBS 
trading. To the extent that the Commission establishes 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. As indicated below, the Commission seeks comment on such costs 
and burdens in light of the CFTC's SEF rules.\22\ Accordingly, as 
discussed below, the Commission is proposing to take 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 swap market necessitate differences between the Commission's rules 
and the CFTC's, or where the Commission preliminarily believes that 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. Throughout this release, 
the Commission will seek comment on the accuracy of these assumptions. 
In particular, the Commission seeks comment on the following:
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    \21\ See infra section XIX(B)(5).
    \22\ Consider the following example: Sec.  37.1306(a) of the 
CFTC's rules (17 CFR 37.1306(a)), which is among the rules that 
implements CEA Core Principle 13 (Financial resources), requires a 
SEF to submit a financial report to the CFTC every quarter (i.e., 
every three months). To implement the corresponding Core Principle 
under the SEA, the Commission could require an SBSEF to file only 
three financial reports per year, rather than four. All things being 
equal, filing three reports per year is less burdensome than filing 
four. But all things are not equal, because of the CFTC's rules. In 
this case, requiring new ``off cycle'' reporting by a dually 
registered SEF/SBSEF would likely be more burdensome than allowing 
the dually registered entity to make the same four filings, on the 
same cycle, with both the SEC and CFTC. As discussed later in this 
release, the Commission is proposing a rule closely modelled on 
Sec.  37.1306(a) that would require the same type of financial 
report as the CFTC rule, and for that report to be filed quarterly. 
See proposed Rule 829(g).
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    1. How many CFTC-registered SEFs do you believe will seek to 
register with the Commission as SBSEFs? Please explain.
    2. Are there any entities that will seek to register with the 
Commission as SBSEFs but not register with the CFTC as SEFs? If so, 
please explain and estimate how many.
    3. For SEFs that will likely seek registration with the Commission 
as SBSEFs, please estimate the size of their swaps business versus the 
anticipated size of their SBS business, using any metric(s) that you 
believe would be illustrative (e.g., number of products listed, trade 
count, aggregate notional size traded, number of counterparties trading 
swaps versus SBS, etc.).
    4. Please provide any information or market data that you believe 
would be illustrative regarding current SBS trading activity on 
entities that are not likely to register with the Commission as SBSEFs, 
and thus would have to cease SBS trading upon the compliance date of 
the Commission's SBSEF rules. Do you believe that this activity would 
migrate to registered SBSEFs or would it migrate instead to the 
bilateral OTC market?
    5. What types of products do you anticipate could be listed by 
registered SBSEFs (e.g., CDS on individual corporate bonds, CDS on 
individual sovereign bonds, CDS on individual securitized bonds, swaps 
on securities options, swaps on narrow-based securities indexes, total 
return swaps on individual cash equities or crypto/digital asset 
securities, etc.)?
    In the remainder of this release, the Commission describes its 
proposed registration and regulation regime for SBSEFs and SBS 
execution generally, and seeks comment on all aspects of its proposal. 
You are invited in particular to provide data and analysis regarding 
the economic and Paperwork Reduction Act (``PRA'') implications of this 
proposal. For example, the Commission seeks comment on the following:
    6. If, in a particular area, the Commission were to harmonize 
closely with a CFTC rule, to what extent would this reduce, or perhaps 
eliminate entirely, any incremental costs or burdens on dually 
registered SEF/SBSEFs and their members?
    7. Should the Commission impose any different or additive 
requirements? For example, are there any statutory or market 
differences that would create benefits from different or additive 
requirements? If the Commission imposes different or additive 
requirements, what would be the impact on dually registered SEF/SBSEFs 
and their members?
    8. Are there provisions of the CFTC's rules the Commission should 
not incorporate, even if the Commission were to opt for harmonization 
with the CFTC's rules in other areas? In other words, are there areas 
where not harmonizing with a CFTC rule would reduce burdens on SBSEFs 
and/or their members? If so, please explain, with particular regard to 
the economic impacts and/or PRA burdens.
    9. Do you believe that the Commission should adopt different or 
additive requirements for SBSEFs, even if there is no analog to such 
provisions in the CFTC's SEF rules? If so, please explain, with 
particular regards to the economic impacts and/or PRA burdens. For 
example, do you believe that the SEC-specific provision would impose 
additional costs or burdens on SBSEFs

[[Page 28876]]

and/or their members that are nevertheless appropriate in view of new 
and additional benefits? Or do you believe that an SEC-specific 
provision would be appropriate because it would relieve costs or 
burdens that are imposed on the swap business by a CFTC rule that is 
unnecessary or inappropriate in the SBS market?
    10. If the Commission ultimately adopts SBSEF rules that are 
closely harmonized with the CFTC's SEF rules, do you believe this could 
result in ambiguities or potential conflicts between the SEC's SBSEF 
rules and the other SEC rules (pertaining, for example, to exchanges or 
alternative trading systems)? If so, please indicate where this might 
occur and suggest ways that the Commission could reduce these 
ambiguities or potential conflicts.

III. Approach to the Commission's Proposed Requirements Relating to 
Security-Based Swap Execution

    Most of the rules proposed in this release are designed to 
implement provisions of section 3D of the SEA,\23\ which is nearly 
identical to section 5h of the CEA.\24\ As described in detail 
throughout this release, when the Commission is proposing a rule to 
implement a provision of section 3D of the SEA, that rule generally 
will harmonize as closely as practicable with the analogous CFTC rule, 
unless a reason exists to do otherwise.\25\ Indeed, many of the rules 
proposed herein are adapted from the CFTC rules, with only minor 
changes to reflect differences in the Commission's statutory authority 
(e.g., using the term ``security-based swap'' instead of ``swap,'' 
cross-referencing provisions of the SEA rather than the CEA, etc.). The 
Commission seeks to minimize occasions where differences in the wording 
between an SEC and a CFTC rule leads affected persons to believe that 
there is a difference in policy outcome, where no difference in outcome 
is intended.
---------------------------------------------------------------------------

    \23\ 15 U.S.C 78c-4.
    \24\ 7 U.S.C. 7b-3.
    \25\ Other rules, however, are designed to address certain 
issues relating to SBSEFs that are specific to the SEA. These 
include proposed amendments to existing Rule 3a1-1 under the SEA, 
proposed new Rule 15a-12, and various proposed amendments to the 
Commission's Rules of Practice.
---------------------------------------------------------------------------

    In cases where the Commission preliminarily believes that a reason 
exists for a proposed SEC rule to differ from an analogous CFTC rule, 
that reason is described and alternate rule language is proposed and 
explained. Here too, the Commission might be in general agreement with 
the policy behind the CFTC's rule, but it might not be practicable to 
closely track the CFTC rule language, for reasons that are specific to 
each instance and which will be discussed herein.
    In proposing these rules, the Commission acknowledges that, in the 
abstract, there are a variety of ways of implementing a Core Principle 
or other policy goal where the benefits could justify the costs. 
Indeed, the Commission's 2011 SBSEF Proposal includes many such 
alternate ways that differ from the CFTC's current rules. But the 
CFTC's rules for SEF--and swap execution more generally--have 
significantly reshaped the swap market, and indirectly the SBS market. 
The fundamental principles of the CFTC's regulatory regime for SEFs and 
swap execution generally have established the existing environment, and 
any rules proposed by the SEC to implement the regulatory regime for 
SBSEFs and SBS execution more generally must be considered against the 
CFTC's regulatory regime. SEFs and swap market participants have 
invested significant resources in systems, policies, and procedures to 
comply with the CFTC's SEF rules. The Commission believes that the 
CFTC's rules are reasonably designed to implement section 5h of the 
CEA, which is nearly identical to section 3D of the SEA, and have been 
effective in practice in facilitating fair, transparent, and 
competitive trading on SEFs. By proposing similar rules for SEC-
registered SBSEFs, the Commission seeks to obtain comparable regulatory 
benefits as the CFTC while minimizing costs imposed on SEF/SBSEFs and 
their members to the greatest extent practicable.
    The Commission recognizes that an entity might elect to register as 
an SBSEF with the SEC but not as a SEF with the CFTC. In such case, an 
SEC-only registrant would not have any familiarity with the CFTC's 
rules and would not have made any investments in systems, policies, and 
procedures to comply with them. Nevertheless, because the Commission 
preliminarily believes 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, such dual registrants would benefit from harmonized 
rules. Furthermore, if the Commission adopts these rules substantially 
as proposed, it likely would be unnecessary to establish and apply one 
set of rules for dual registrants and a different set for SEC-only 
SBSEFs.
    Proposed Regulation SE follows the basic structure of part 37 of 
the CFTC's rules (17 CFR part 37). In the CFTC's rules, subpart A of 
part 37 (General Provisions) consists of Sec. Sec.  37.1 to 37.12. 
Subparts B to P of part 37 implement the 15 Core Principles for SEFs 
set forth in the CEA and consist of Sec. Sec.  37.100 et seq. to 
37.1500 et seq. Proposed Rules 800 to 817 of Regulation SE are modelled 
on the ``General Provisions'' in subpart A, while proposed Rules 818 to 
831 would implement the 14 Core Principles for SBSEFs set forth in the 
SEA. Proposed Rules 832 to 833 address cross-border matters that have 
no direct counterpart in the CFTC's rules applicable to SEFs. Proposed 
Rule 834 is designed to implement section 765 of the Dodd-Frank Act, 
which requires the Commission to adopt rules addressing conflicts of 
interest involving SBSEFs and SBS exchanges, as well as to harmonize 
with certain of the CFTC's governance rules. Proposed Rule 835 is 
designed to facilitate reviews of final disciplinary actions, denials 
or conditioning of membership, and denials or limitations of access by 
SBSEFs. In addition, the Commission is proposing a new subpart V to 
part 249 of the Commission's rules,\26\ entitled ``Forms for use by 
security-based swap execution facilities,'' that would include proposed 
Sec.  249.2001, setting forth Form SBSEF and its instructions, which 
would be used to register with the Commission as an SBSEF; and proposed 
Sec.  249.2002, setting forth the submission cover sheet (with 
instructions) that would be required to accompany filings with the 
Commission made by SBSEFs for rule and rule amendments, product 
listings, and determinations to make an SBS available to trade.
---------------------------------------------------------------------------

    \26\ Part 249 is entitled ``Forms, Securities Exchange Act of 
1934.''
---------------------------------------------------------------------------

    Many parts of proposed Rules 800 to 817 are very similar in 
substance to Sec. Sec.  37.1 to 37.12. Other parts of proposed Rules 
800 to 817 are derived from CFTC rules that are referenced in subpart A 
of part 37 but located outside of part 37. For example, Sec.  37.4 is a 
short rule entitled ``Procedures for listing products and implementing 
rules.'' Section 37.4 does not itself lay out the specific filing 
procedures for new products and new rules, but directs a SEF, after it 
has registered with the CFTC, to make such filings pursuant to part 40 
(Provisions common to registered entities \27\). Key rules in part 40 
include 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

[[Page 28877]]

approval), and 40.6 (Self-certification of rules).
---------------------------------------------------------------------------

    \27\ ``Registered entity'' is defined under the CEA to include a 
SEF. See 7 U.S.C 1a(40).
---------------------------------------------------------------------------

    To promote oversight of the SBS market and to assess that SBSEFs 
continue to operate in a manner consistent with the SEA, the Commission 
preliminarily believes that it would be appropriate to establish 
procedures whereby SBSEFs would submit filings to the Commission to 
list SBS products and to establish new rules, and that it would be 
appropriate to harmonize with the procedures that the CFTC applies to 
SEFs. These procedures are well articulated and well understood by 
SEFs, and appear to provide an effective process for establishing new 
rules and listing products. Therefore, the Commission is proposing 
Rules 804, 805, 806, and 807 that are closely modelled on relevant 
provisions of Sec. Sec.  40.2, 40.3, 40.5, and 40.6, respectively. To 
implement such rules for SBSEFs and the SBS market, the Commission 
identifies only those parts of the CFTC rules that are most germane to 
the SBS market and adapts the wording accordingly.\28\ In the detailed 
discussions of each of these proposed rules, the Commission seeks 
comment on whether its proposed rule is appropriately tailored for the 
SBS market, particularly for dually registered SEF/SBSEFs that would be 
complying with substantially similar filing procedures under CFTC 
rules, or whether the proposed rule incorporates a part of the CFTC 
rule that is not relevant to the SBS market or should have incorporated 
additional or different language that is more relevant.
---------------------------------------------------------------------------

    \28\ Various provisions of part 40 apply to entities other than 
SEFs or relate to trading of products other than swaps. See, e.g., 
Sec.  40.4 (Amendments to terms or conditions of enumerated 
agricultural products); Sec.  40.11 (Review of event contracts based 
upon certain excluded commodities).
---------------------------------------------------------------------------

    Regulation SE includes proposed rules modelled on CFTC rules found 
in Parts 16, 36, 37, 40, 45, and elsewhere. In some cases, these 
disparate CFTC rules from outside part 37 that the Commission is 
proposing to adapt into Regulation SE use different terms than in part 
37 for what appears to be the same concept. To promote uniformity 
within Regulation SE, the Commission is proposing certain definitions 
for use throughout the regulation--in a dedicated definitions rule, 
proposed Rule 802--that will sometimes require the replacement of a 
term used in the CFTC version of a rule with a different, newly defined 
term in the proposed SEC version.\29\ Any such changes in defined terms 
are noted below. Proposed Rule 802 also includes terms derived from the 
SEA and certain SEC rules thereunder.
---------------------------------------------------------------------------

    \29\ For example, certain CFTC rules that the Commission is 
proposing to adapt into Regulation SE utilize the term ``board of 
directors,'' while other CFTC rules use the term ``governing 
board.'' The Commission is proposing to use the term ``governing 
board'' throughout Regulation SE and to define that term in proposed 
Rule 802 as the board of directors of an SBSEF, or for an SBSEF 
whose organizational structure does not include a board of 
directors, a body performing a function similar to a board of 
directors. This definition is closely modelled on the definition of 
``board of directors'' found in Sec.  37.1501(a) of the CFTC's 
rules.
---------------------------------------------------------------------------

    Part 37 of the CFTC's rules includes an appendix B, which sets out 
guidance and acceptable practices for demonstrating compliance with 
several of the rules that implement the Core Principles for SEFs. These 
provisions are, by their terms, non-binding.\30\ The Commission 
preliminarily believes that all of the provisions of Regulation SE 
should be enforceable. Therefore, the Commission is proposing to adapt 
some of the guidance and acceptable practices found in appendix B as 
proposed rule text in Regulation SE. As a result, some of the rules 
proposed in Regulation SE are a blend of the CFTC rule text with 
language adapted from the guidance and/or acceptable practices. 
Instances where this occurs in a particular rule will be noted below. 
The Commission requests comment on its overall approach to 
incorporating relevant portions of the part 37 guidance and acceptable 
practices into Regulation SE, as well as comment on how they are 
adapted in specific rules.
---------------------------------------------------------------------------

    \30\ See appendix B to part 37, introductory paragraph (1) 
(``The guidance for the core principle is illustrative only of the 
types of matters a swap execution facility may address, as 
applicable, and is not intended to be used as a mandatory 
checklist'').
---------------------------------------------------------------------------

    In various places in the CFTC's SEF rules, the CFTC has delegated 
to its staff authority to perform various functions relating to SEFs on 
the CFTC's behalf. The Commission has not adapted any of these 
provisions into proposed Regulation SE and is not proposing any 
delegation-of-authority rules. The Commission may address delegations 
of its authority in the adopting release for Regulation SE.
    Finally, in developing this proposal, the Commission has consulted 
and coordinated with the CFTC and the prudential regulators,\31\ in 
accordance with the consultation mandate of the Dodd-Frank Act.\32\ The 
Commission also has consulted and coordinated with foreign regulatory 
authorities through Commission staff participation in numerous 
bilateral and multilateral discussions with foreign regulatory 
authorities addressing the regulation of OTC derivatives markets.\33\ 
Through these multilateral and bilateral discussions and the Commission 
staff's participation in various international task forces and working 
groups, the Commission has gathered information about foreign 
regulatory reform efforts and their effect on and relationship with the 
U.S. regulatory regime. The Commission has taken and will continue to 
take these discussions into consideration in developing rules, forms, 
and interpretations for implementing Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \31\ 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).
    \32\ 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.''
    \33\ The Commission participates in a number of international 
bodies working on OTC derivatives reforms. For example, the 
Commission is a member of the International Organization of 
Securities Commissions (``IOSCO'') and the Commission staff 
participates on IOSCO's Committee on Derivatives. In addition, the 
Commission is a member of the Regulatory Oversight Committee, which 
serves as the international standard-setter for data elements and 
identifiers used in the reporting of OTC derivatives transactions.
---------------------------------------------------------------------------

IV. Introductory Provisions of Regulation SE

A. Rule 800--Scope

    Proposed Rule 800 is based on Sec.  37.1 of the CFTC's rules, which 
provides that part 37 applies to every SEF that is registered or 
applying to become registered as a SEF under section 5h of the CEA. 
Section 37.1 further provides that the rule does not affect the 
eligibility of SEFs to operate under the provisions of part 38 or 49 of 
the CFTC's rules.
    Proposed Rule 800 would provide that the provisions of Regulation 
SE would apply to every SBSEF that is registered or is applying to 
become registered as an SBSEF under section 3D of the SEA.

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 Sec.  1.60 and part 9, 
and including any related definitions and cross-referenced

[[Page 28878]]

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.

C. Rule 802--Definitions

    Proposed Rule 802 would set forth definitions of terms that are 
used in multiple rules in proposed Regulation SE. The majority of such 
terms are adapted from a CFTC rule. Other terms are taken from section 
3 of the SEA \34\ or from a Commission rule under the SEA. Where 
appropriate, the definition is discussed below in the context of the 
proposed rule where it is used.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78c.
---------------------------------------------------------------------------

    In particular, paragraph (w) of proposed Rule 802 which 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 would 
be exempt from the definition of ``security-based swap execution 
facility.'' This provision would codify a series of exemptions granted 
by the Commission to SBS clearing agencies that operate ``forced 
trading'' sessions.\37\ As part of the clearing and risk management 
process, an SBS clearing agency must establish an end-of-day valuation 
for any SBS in which any of its members has a cleared position and will 
calculate margin based on that variation. Certain SBS clearing agencies 
utilize a valuation mechanism whereby they require clearing members to 
submit indicative quotes for those SBS products, and can require them 
to trade as a way to promote accurate quote submissions. The precise 
means by which the clearing agency matches quotes from different 
clearing members could cause the clearing agency to fall within the SEA 
definition of ``exchange.'' The Commission previously has 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.'' \38\ The Commission 
is now proposing to codify this exemption with respect to the both 
exchange and SBSEF registration.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78c(a)(77).
    \36\ 15 U.S.C. 78q-1.
    \37\ 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 (March 6, 
2009), 74 FR 10791, 10796 (March 12, 2009) (providing, inter alia, 
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 (December 14, 2009), 74 FR 67258, 67262 (December 18, 2009) 
(providing, inter alia, 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'').
    \38\ See id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors, to exempt a registered clearing agency from 
the definition of ``security-based swap execution facility'' that 
utilizes a forced trading functionality for SBS. Such an entity would 
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 those governing the forced trading 
session--would have to be submitted to the Commission pursuant to 
section 19 of the SEA. The Commission preliminarily believes, 
therefore, that codification of the exemption from the definitions of 
``exchange'' and ``security-based swap execution facility'' would 
preserve the status quo and eliminate a largely duplicative and 
unnecessary set of regulatory requirements. This exemption would cover 
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.
    The Commission seeks comment on the following:
    11. Do you believe that any definitions in proposed Rule 802 should 
be revised or clarified? If so, please indicate which one(s) and 
provide any suggested revisions or clarifications.
    12. Are there any terms used in proposed Regulation SE that are not 
defined in proposed Rule 802 but which you believe should be defined? 
If so, which term(s) and how would you define them?
    13. Do you agree with the proposed definition of ``security-based 
swap execution facility''? In particular, do you believe that 
registered clearing agencies that operate forced trading sessions for 
SBS should be exempted from the definition of ``security-based swap 
execution facility'' entirely? Or do you believe instead that such 
entities should fall within the definition of ``security-based swap 
execution facility'' but be exempted from some or all registration and 
regulatory requirements that otherwise would apply to SBSEFs? Why?

V. Registration of SBSEFs

    Section 3D(a)(1) of the SEA \39\ provides that no person may 
operate a facility for the trading or processing of SBS \40\ 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 \41\ 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'').\42\ The 
Temporary SBSEF Exemptions will expire on the

[[Page 28879]]

compliance date for the Commission's final SBSEF rules.\43\
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    \39\ 15 U.S.C. 78c-4(a)(1).
    \40\ 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.
    \41\ 15 U.S.C. 78mm(a)(1).
    \42\ 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 
exchange registration and other 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 sections 5 and 6 of the SEA. But because the 
Commission has not yet adopted final rules relating to SBSEFs, such 
entities cannot yet register with the Commission as SBSEFs. The 
Temporary SBSEF Exemptions allow 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.
    \43\ See June 2011 Exemptive Order, 76 FR at 36293, 36306; July 
2011 Exemptive Order, 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 (the ``Broker Exemptions''). The Broker 
Exemptions generally expired on October 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 
compliance date for the Commission's final SBSEF rules). See SEA 
Release No. 87005 (September 19, 2019), 84 FR 68550, 68602 (December 
16, 2019).
---------------------------------------------------------------------------

A. Rule 803--Requirements and Procedures for Registration

    Rule 803 of Regulation SE is closely modelled on Sec.  37.3 of the 
CFTC's rules and would set forth a process for registration with the 
Commission as an SBSEF.
    Section 37.3(a)(1) provides 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 swaps with more than 
one other market participant on the system or platform shall register 
the facility as a swap execution facility under this part or as a 
designated contract market (``DCM'') under part 38 of this chapter. 
Paragraph (a)(1) of proposed Rule 803 would track the language of Sec.  
37.3(a)(1) closely, except that a person meeting these criteria would 
be directed to register the facility under relevant provisions of the 
SEA rather than the CEA (i.e., to register as an SBSEF under proposed 
Rule 803 or as a national securities exchange pursuant to section 6 of 
the SEA).
    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'' \44\ and thus would not need to register as an SBSEF under 
proposed Rule 803. Furthermore, as discussed below,\45\ a person that 
registers as an SBSEF under proposed Rule 803 and provides a market 
place for no securities other than SBS would be exempt from the 
definition of ``exchange'' \46\ and would not need to register as such 
pursuant to section 6 of the SEA. The SEA definitions of ``exchange'' 
and ``security-based swap execution facility'' overlap substantially. 
The Commission preliminarily believes that it is appropriate to subject 
a trading venue for SBS to only one regulatory regime. Thus, under 
proposed Regulation SE, if a trading venue for SBS elects to register 
as a national securities exchange, it would not fall within the 
statutory definition of ``security-based swap execution facility'' and 
would not have to register as an SBSEF.\47\ If a trading venue for SBS 
elects to register as an SBSEF under proposed Rule 803 and provides a 
market place for no securities other than SBS, it would not--pursuant 
to a proposed amendment to Rule 3a1-1--fall within the statutory 
definition of ``exchange'' and would not have to register as an 
exchange.
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    \44\ See section 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77) 
(defining ``security-based swap execution facility'' 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, 
through any means of interstate commerce, including any trading 
facility that . . . is not a national securities exchange'' 
(emphasis added).
    \45\ See infra section XII (discussing proposed paragraph (a)(4) 
of SEA Rule 3a1-1).
    \46\ 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'').
    \47\ However, a national securities exchange could elect to 
operate an SBSEF and separately register that SBSEF with the 
Commission. See section 3D(c) of the SEA, 15 U.S.C. 78c-4(c); 
proposed Rule 814.
---------------------------------------------------------------------------

    Section 37.3(a)(2) of the CFTC's rules sets out the minimum trading 
functionality that must be offered by a SEF. A SEF must, at a minimum, 
offer an ``order book.'' Section 37.3(a)(3) defines ``order book'' to 
mean an electronic trading facility, as that term is defined in section 
1a(16) of the CEA; a trading facility, as that term is defined in 
section 1a(51) of the CEA; 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.
    Paragraph (a)(2) of proposed Rule 803, like Sec.  37.3(a)(2), would 
require an SBSEF, at a minimum, to offer an order book. The Commission 
is proposing, like Sec.  37.3(a)(3), to define ``order book'' 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. 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 is proposing instead to adapt 
the CEA definitions of those terms directly into Rule 802.\48\ The 
Commission preliminarily believes that it should harmonize as closely 
as possible with the CFTC on foundational terms such as ``trading 
facility,'' ``electronic trading facility,'' and ``order book'' because 
the CFTC's reliance on these terms over several years has created 
understanding of what type of functionality a SEF must offer. The 
Commission seeks to avoid a scenario where differences with the CFTC 
regarding these key definitions results in an entity's functionality 
being allowed under one agency's regime but disallowed under the 
other's.
---------------------------------------------------------------------------

    \48\ See proposed Rule 802.
---------------------------------------------------------------------------

    Under Sec.  37.3(a)(4), a SEF is not required to provide an order 
book for certain package transactions, although the SEF must provide an 
order book for a Required Transaction \49\ when such Required 
Transaction is not executed as part of a package transaction. Paragraph 
(a)(3) of proposed Rule 803 is closely modelled on Sec.  37.3(a)(4) and 
would provide a narrow exception 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 that both are and are not subject to the 
trade execution requirement.
---------------------------------------------------------------------------

    \49\ As discussed below in section VII(E), the Commission is 
proposing to incorporate into Regulation SE the concepts of 
``Required Transaction'' and ``Permitted Transaction'' in a manner 
closely modelled 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.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Rule 803 is closely modelled 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:
    (i) File electronically a complete Form SBSEF or any successor 
forms, and all information and documentation described in such forms 
with the Commission using the EDGAR system as an Interactive Data File 
in accordance with Rule 405 of Regulation S-T; and
    (ii) 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

[[Page 28880]]

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.\50\ Paragraph (b)(2) also would provide that, as set forth in 
proposed Rule 808, certain information provided in an application shall 
be made publicly available.
---------------------------------------------------------------------------

    \50\ Section 37.3(b)(2), like many other provisions in the 
CFTC's SEF rules, states that a request for confidential treatment 
for parts of a required filing shall be made pursuant to Sec.  145.9 
of the CFTC's rules, which contains the CFTC's substantive 
requirements for requests for confidential treatment. Rather than 
adapting Sec.  145.9 into proposed Regulation SE, the Commission 
instead is proposing that confidential treatment requests arising 
from SBSEF matters would be made and adjudicated pursuant to SEA 
Rule 24b-2, 17 CFR 240.24b-2. The Commission preliminarily believes 
that 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 all other 
persons who request confidential treatment from the Commission under 
the SEA.
---------------------------------------------------------------------------

    Paragraph (b)(3) of proposed Rule 803 would address amendments to 
the SBSEF registration application. Like Sec.  37.3(b)(3), proposed 
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 
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 modelled 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 such 
notification until the application is resubmitted in completed form. In 
such 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 own 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, modelled 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 proposed Rule 803(b)(6)(ii), it would be 
required to specify the grounds for the denial.
    Paragraph (c) of Sec.  37.3, which allows the CFTC to grant SEFs 
temporary registration under certain conditions, was adopted with a 
sunset provision that generally terminated the applicability of the 
paragraph two years after it became effective in August 2013.\51\ 
Because this provision is now obsolete, the Commission is not proposing 
an equivalent provision in Regulation SE.
---------------------------------------------------------------------------

    \51\ See Sec.  37.3(c)(5). Notwithstanding the general sunset 
provision, SEFs that applied for temporary registration before the 
termination date were permitted to continue operating if they had 
not yet been either granted or denied full registration by that 
date. See id.
---------------------------------------------------------------------------

    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 proposed 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.
---------------------------------------------------------------------------

    \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 proposed definition is modelled 
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 modelled 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), modelled 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 such change.
    Paragraph (d)(3) of proposed Rule 803, like Sec.  37.3(e)(3), would 
require an SBSEF's request for transfer of registration to include the 
following:
     The underlying agreement that governs the corporate 
change;
     A description of the corporate change, including the 
reason for the change and its impact on the SBSEF, including its 
governance and operations, and its impact on the rights and obligations 
of members; \53\
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    \53\ Here, and at several other places in Sec.  37.3(e)(3), the 
CFTC uses the term ``market participants'' rather than ``members.'' 
However, there are other places in the CFTC's rules that are being 
adapted by the Commission into proposed Regulation SE that use the 
term ``member'' synonymously with ``market participant.'' When the 
context suggests that a rule is addressing participants of a 
particular SBSEF market, rather than market participants in the 
abstract, the Commission is proposing to use the term ``member'' 
throughout Regulation SE.
---------------------------------------------------------------------------

     A discussion of the transferee's ability to comply with 
the SEA, including the core principles applicable to SBSEFs and the 
Commission's rules thereunder;
     The governing documents of the transferee, including, but 
not limited to, articles of incorporation and bylaws;
     The transferee's rules marked to show changes from the 
current rules of the SBSEF;
     A representation by the transferee that it:
    [cir] Will be the surviving entity and successor-in-interest to the 
transferor SBSEF and will retain and assume, without limitation, all of 
the assets and liabilities of the transferor;
    [cir] Will assume responsibility for complying with all applicable

[[Page 28881]]

provisions of the SEA and the Commission's rules thereunder;
    [cir] Will assume, maintain, and enforce all rules implementing and 
complying with the core principles applicable to SBSEFs, 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 proposed Rules 806 or 807;
    [cir] Will comply with all regulatory responsibilities \54\ except 
if otherwise indicated in the request, and will maintain and enforce 
all regulatory programs; and
---------------------------------------------------------------------------

    \54\ The equivalent provision in Sec.  37.3(e)(3)(vi)(D) 
requires a representation from the transferee that it ``[w]ill 
comply with all self-regulatory responsibilities except if otherwise 
indicated in the request, and will maintain and enforce all self-
regulatory programs'' (emphasis added). SBSEFs are not SROs under 
the SEA and therefore do not have self-regulatory responsibilities 
or self-regulatory programs.
---------------------------------------------------------------------------

    [cir] 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.
     A representation by the transferee that upon the transfer:
    [cir] It will assume responsibility for and maintain compliance 
with core principles for all SBS previously made available for trading 
through the transferor, whether by certification or approval; and
    [cir] None of the proposed rule changes will affect the rights and 
obligations of any member.
    Paragraph (d)(4) of proposed Rule 803, modelled 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.\55\ 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 the 
Commission based upon actions, activities, or events occurring during 
the time that the application was pending with the Commission.
---------------------------------------------------------------------------

    \55\ 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 proposed Regulation SE. See infra section XV.
---------------------------------------------------------------------------

    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. Section 37.3(g) 
provides that a registration may be vacated under section 7 of the CEA. 
Since the Commission does not operate under the CEA, the Commission is 
proposing to adapt relevant language from section 7 of the CEA directly 
into proposed Rule 803(f). Thus, proposed Rule 803(f) would continue as 
follows, with language taken from section 7 italicized and language 
taken from Sec.  37.3(g) in regular text: ``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.''
    The Commission seeks comment on the following:
    14. Do you believe in general that the Commission should closely 
harmonize the rules for SBSEF registration with the CFTC's rules for 
SEF registration? Why or why not?
    15. In particular, do you agree with the language that the 
Commission is proposing to adapt from Sec.  37.3 (Requirements and 
procedures for registration) into Rule 803? If not, what language would 
you delete or revise, and why?
    16. Do you believe that the Commission should harmonize the 
application procedures and timeframes in proposed Rule 803 with Sec.  
37.3 of the CFTC's rules? Why or why not? Are there aspects of Sec.  
37.3 that you believe are not necessary or appropriate to incorporate 
into Rule 803? If so, please describe. Are there different or 
additional requirements that the Commission should include in Rule 803 
that are not included in Sec.  37.3? If so, please describe.
    17. Do you believe that any provisions of Sec.  37.3(c) relating to 
temporary registration are still relevant and should be adapted into 
Rule 803? If so, which provisions and why?
    18. Do you believe in general that proposed Rule 803 should include 
provisions relating to vacation of an SBSEF registration? If so, do you 
agree with the specific language adapted by the Commission from section 
7 of the CEA and Sec.  37.3(g) into proposed Rule 803(f)? If not, how 
would you revise that language?

B. Form SBSEF

    As new Sec.  249.2001, the Commission is proposing Form SBSEF, the 
application form for an entity to register with the Commission as an 
SBSEF. The proposed form would also be used for submitting any updates, 
corrections, or supplemental information to a pending application for 
registration. Proposed Form SBSEF is closely modelled on the CFTC's 
Form SEF for entities that seek to register with the CFTC as SEFs, with 
only minor changes to remove the concept of post-registration 
amendments, as the proposed rule would not require any amendments to 
Form SBSEF post-registration. The exhibits being proposed along with 
Form SBSEF are very similar to the exhibits in Form SEF. Like 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 and 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 proposed 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

[[Page 28882]]

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 proposed Rule 806 or 807 or 
as may be required by other rules in Regulation SE.
    The CFTC's process for registering SEFs appears well understood by 
the industry and well designed for being adapted to the SBS market. 
Therefore, the Commission is using the CFTC's process as a basis for 
its own process for registering SBSEFs. Assuming that most if not all 
SBSEFs will be dually registered as SEFs, the Commission preliminarily 
believes that it is not necessary to require the same registrant to 
provide relevant information in one manner to the Commission if the 
CFTC requires it in a different manner.
    The Commission seeks comment on the following:
    19. Are there parts of Form SEF that you believe are not necessary 
or appropriate to incorporate into Form SBSEF? If so, please describe.
    20. Are there different or additional requirements that the 
Commission should include in Form SBSEF that are not included in Form 
SEF? If so, please describe. What would be the benefits and costs of 
requiring that information in Form SBSEF that is not required by the 
CFTC in Form SEF?

C. Abbreviated Registration Procedures for CFTC-Registered SEFs

    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 seeks 
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 imposing only marginal costs on dually-
registered SEF/SBSEFs and their members. If the Commission ultimately 
adopts SBSEF rules that are closely harmonized with those of the CFTC, 
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. The Commission 
preliminarily believes that whether an entity is registered as a SEF 
and in good standing with the CFTC is relevant when considering its 
application to register as an SBSEF, and that an abbreviated 
registration for CFTC-registered SEFs is appropriate. Furthermore, the 
Commission is preliminarily 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 \56\ to relax 
or eliminate entirely certain of the registration requirements for 
entities that are already registered as SEFs with the CFTC.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    21. Do you believe in general that the Commission should utilize 
its authority under section 36(a)(1) of the SEA to establish an 
abbreviated procedure for entities wishing to register as SBSEFs that 
are already registered with the CFTC as SEFs? Why or why not?
    22. If so, what registration requirements should the Commission 
relax or eliminate entirely for entities seeking dual registration?

VI. Rule and Product Filings by SBSEFs

    Unlike section 19(b) of the SEA,\57\ 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 \58\ does not set out an equivalent 
process for SBSEFs. 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, with the 
intent to make its market more attractive to participants. The 
Commission preliminarily believes, therefore, that some review process 
is necessary to assess whether such changes to an SBSEF's rules and 
product offerings are consistent with section 3D of the SEA and the 
Commission's rules thereunder. The Commission preliminarily believes 
that the CFTC's filing procedures are an appropriate model on which to 
base its 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.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b).
    \58\ 15 U.S.C. 78c-4.
---------------------------------------------------------------------------

    Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs 
may establish or amend rules and list products. In short, 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,\59\ the Commission is proposing to establish similar filing 
processes for registered SBSEFs in proposed Rules 804 to 810 of 
Regulation SE.
---------------------------------------------------------------------------

    \59\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, 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).
---------------------------------------------------------------------------

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

    Proposed Rule 804 is modelled on Sec.  40.2 of the CFTC's rules and 
would set forth procedures by which an SBSEF may list a product via 
certification.
    Sec.  40.2(a) specifies the filing requirements for DCMs and SEFs 
to certify a product for listing. Paragraph (a) of proposed Rule 804 
would adapt these requirements for SBSEFs, with one exception, as 
explained in the next paragraph. 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 ten business days preceding the product's listing. 
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.\60\ The Commission preliminarily believes 
that a ten-business-day review period for self-certified SBS products 
before they can be listed strikes a reasonable balance between allowing 
SBSEFs to bring new products to market quickly while affording the 
Commission staff a

[[Page 28883]]

reasonable period in which to assess them prior to listing. The 
Commission is concerned that one business day would not provide the SEC 
staff sufficient time to review a new product, especially a novel or 
complex product that might be difficult to analyze. As discussed below, 
the Commission is proposing that it could stay a product for reasons 
similar to those in the CFTC's stay provision. If a product does 
warrant a stay, the Commission also would need sufficient time to go 
through the administrative steps of formally issuing the stay. The 
proposed ten-business-day review period for self-certified products 
accords with the CFTC's ten-business-day review period for self-
certified rules,\61\ which the Commission is proposing to replicate in 
Rule 807(a)(3).\62\
---------------------------------------------------------------------------

    \60\ 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).
    \61\ 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 ten business days prior to the registered 
entity's implementation of the rule or rule amendment).
    \62\ See infra section VI(D).
---------------------------------------------------------------------------

    Paragraph (a)(3) of proposed Rule 804 would require a self-
certification to include:
    (1) A copy of the submission cover sheet; \63\
---------------------------------------------------------------------------

    \63\ The Commission is proposing, in new Sec.  249.2002, a 
submission cover sheet (with instructions) that is closely modelled 
on the CFTC's submission cover sheet.
---------------------------------------------------------------------------

    (2) A copy of the product's rules, including all rules related to 
its terms and conditions;
    (3) The intended listing date;
    (4) A certification by the SBSEF that the product to be listed 
complies with the SEA and the Commission's rules thereunder;
    (5) A concise explanation and analysis of the product and its 
compliance with applicable provisions of the SEA, 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;
    (6) 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; \64\ and
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    \64\ Under proposed Rule 804(a)(3)(vi), 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 by the Commission 
pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

    (7) A request for confidential treatment, if appropriate, as 
permitted pursuant to SEA Rule 24b-2.\65\
---------------------------------------------------------------------------

    \65\ 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 Sec.  145.9. The Commission is 
proposing instead to direct filers to make any request for 
confidential treatment pursuant to existing SEA Rule 24b-2. See 
supra note 50.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Rule 804, modelled 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.
    Section 40.2(c) 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 is proposing, in Rule 804(c), a provision 
that would allow the Commission to stay the certification of a new 
product in the same manner that proposed Rule 807(c)--which, as 
described below, is itself based on Sec.  40.6(c) of the CFTC rules--
would allow the Commission to stay the self-certifications of a new 
rule or rule amendment.\66\
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    \66\ The Commission also is not proposing to adapt--either in 
Rule 807 or here in Rule 804--Sec.  40.6(c)(4), which relates to 
rules already implemented and permits the CFTC to stay the 
effectiveness of such rules during the pendency of proceedings for 
filing a false certification or of a petition to alter or amend the 
rule pursuant to section 8a(7) of the CEA.
---------------------------------------------------------------------------

    Thus, 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. Under paragraph (c)(1), the 
Commission would have an additional 90 days from the date of the 
notification to conduct the review. Paragraph (c)(2) would require the 
Commission to provide a 30-day comment period during that 90 days, 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.
    Paragraph (d) of Sec.  40.2 provides that a DCM or SEF may submit a 
class certification of swaps based on an ``excluded commodity,'' \67\ 
subject to certain conditions. The proposed rules do not provide for 
class certification of any SBS although, as noted below, the Commission 
seeks commenters' views on whether the concept of class certification 
would be appropriate for SBSEFs.
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    \67\ See section 1a(19) of the CEA, 7 U.S.C. 1a(19) (defining 
``excluded commodity'').
---------------------------------------------------------------------------

    The Commission preliminarily believes that proposed Regulation SE 
should allow SBSEFs to introduce new SBS products to their market 
places as speedily as practicable while affording the Commission an 
effective mechanism to assess their consistency with section 3D of the 
SEA. The Commission preliminarily believes that the CFTC's self-
certification procedures are well articulated and well understood by 
SEFs, and that harmonizing with these procedures for new product 
filings by SBSEF would yield comparable regulatory benefits while 
minimizing burdens on SBSEFs. At the same time, the Commission 
preliminarily believes that, for the reasons noted above, a ten-
business-day pre-listing review period is more appropriate than a one-
business-day review period for self-certified SBS products.
    The Commission seeks comment on the following:
    23. Do you believe in general that Regulation SE should include a 
rule that allows SBSEFs to list products for trading by certification? 
Why or why not?

[[Page 28884]]

    24. In particular, should the Commission establish a procedure for 
listing SBS products for trading by certification by harmonizing 
closely with Sec.  40.2 of the CFTC's rules? Why or why not?
    25. Do you agree with the ten-business-day pre-listing review 
period for self-certified products in proposed Rule 804(a)(2) instead 
of the CFTC's one-business-day review period? Why or why not? What 
economic harm might an SBSEF and/or its members suffer if the 
Commission ultimately adopted a review period other than one business 
day? If you believe that the Commission should adopt a review period of 
greater than one day (but other than ten), please explain.
    26. Do you believe that the Commission should adapt the concept of 
class certification from Sec.  40.2(d) into proposed Rule 804? Why or 
why not? If so, how do you believe a ``class'' should be defined for 
purposes of listing SBS products on an SBSEF? Should there be any 
conditions for class certification? If so, what conditions and why?
    27. Are there any provisions of proposed Rule 804 that the 
Commission has adapted from Sec.  40.2 that you believe would be 
inappropriate, or would not create any benefit, in a Commission rule to 
establish procedures for SBSEFs to list SBS products for trading by 
certification? If so, please identify any such provision, explain why 
it would be inappropriate or unnecessary for SBSEFs, and what economic 
benefit that you believe would result from omitting it from the 
Commission's final rule.
    28. Do you believe that proposed Rule 804(c), relating to stays of 
product certifications, mirroring the Commission's proposed provisions 
relating to stays of self-certifications of new rules, is appropriate 
and workable? Why or why not? If not, what alternatives, if any, should 
be considered to enable the Commission to stay product certifications 
that it believes pose issues with respect to consistency with the SEA?

B. Rule 805--Voluntary Submission of New Products for Commission Review 
and Approval

    Proposed Rule 805 is closely modelled 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.
    Section 40.3(a) provides that a SEF or DCM may request the CFTC to 
approve a new or dormant product prior to listing it for trading, and 
sets out the filing requirements. Paragraph (a) of proposed Rule 805 
would adapt these requirements for SBSEFs. 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 also would 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.\68\ The submission also would have to 
describe any agreements or contracts entered into with other parties 
that enable the SBSEF to carry out its responsibilities.
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    \68\ 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, modelled 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 
regarding portions of its application.\69\ 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.\70\
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    \69\ 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 50.
    \70\ 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 
by the Commission pursuant to SEA Rule 24b-2.
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    Paragraph (a) of proposed Rule 805 would omit two provisions in 
Sec.  40.3(a). First, Sec.  40.3(a)(6) requires the submitting entity 
to include the certifications required in Sec.  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 is not adapting 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.
    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, modelled 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 proposed 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) also would 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, modelled 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) also 
would 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, at any time during its review, may 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

[[Page 28885]]

the Commission's rules thereunder, including the form or content 
requirements of proposed 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 such 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, such 
notification would be presumptive evidence that the entity may not 
truthfully certify under proposed Rule 804 that the same, or 
substantially the same, product does not violate the SEA or the 
Commission's rules thereunder.
    The Commission preliminarily believes that it is reasonable and 
appropriate to supplement the product certification procedures in 
proposed Rule 804 by also including in Regulation SE, as proposed Rule 
805, procedures for voluntary submission of new products for Commission 
review and approval. The Commission preliminarily believes that 
providing this approval process, as the CFTC does, can be valuable to 
an SBSEF seeking the Commission's concurrence that a new product is in 
compliance with the SEA prior to listing it. The Commission 
preliminarily believes that 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.\71\
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    \71\ 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 the Commission preliminarily believes 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, such dual 
registrants would benefit from harmonized procedures. Furthermore, 
if the Commission ultimately adopts these procedures substantially 
as proposed, it likely would be unnecessary to establish and apply 
one set of procedures for dual registrants and a different set for 
SEC-only SBSEFs.
---------------------------------------------------------------------------

    The Commission requests comment on the following:
    29. Do you believe in general that Regulation SE should include a 
rule setting forth procedures for an SBSEF to voluntarily submit new 
SBS products for Commission review and approval? Why or why not?
    30. In particular, should the Commission adopt procedures for 
voluntary submission of new SBS products for Commission review and 
approval by harmonizing closely with Sec.  40.3 of the CFTC's rules? 
Why or why not?
    31. Are there any provisions of Sec.  40.3 that are adapted into 
proposed Rule 805 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

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

    Proposed Rule 806 is closely modelled 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.
    Section 40.5(a) provides that a registered entity, including a SEF, 
may request that the CFTC approve a new rule, rule amendment, or 
dormant rule and sets out the filing requirements. Paragraph (a) of 
proposed Rule 805 would adapt these requirements for SBSEFs. 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 also would have 
to include a copy of the submission cover sheet and 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 thereof, and cite the rules of the SBSEF that authorize the 
adoption of the proposed rule. The SBSEF also 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.
    Moreover, the SBSEF would be required to 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 SBSEF, the 
pertinent text of any such rule would have to be set forth and the 
anticipated effect described. The SBSEF also would 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 request confidential treatment for portions of its 
submission, as permitted by SEA Rule 24b-2. Finally, the SBSEF would 
have 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.\72\
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    \72\ 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, modelled 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 proposed Rule 806(a) and the SBSEF does not amend 
the proposed rule or supplemented 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) also would 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, modelled 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

[[Page 28886]]

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) also would 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 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 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 proposed 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 preliminarily believes that Regulation SE should 
afford the Commission a means for assessing whether SBSEF rules and 
rule amendments are consistent with section 3D of the SEA, and that it 
is appropriate to achieve this aim by aligning closely with the CFTC's 
process for voluntary rule-approval submission in Sec.  40.5. 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. As with the 
process for seeking Commission approval of new products, the Commission 
preliminarily believes that providing a process for voluntarily seeking 
Commission approval of rules, rule amendments, and dormant rules--as 
the CFTC does--can be valuable to an SBSEF seeking the Commission's 
concurrence that the rule change is consistent with the SEA prior to 
implementing it. Moreover, for dually registered SEF/SBSEFs, it is 
likely that certain rules will apply to member behavior generally--and 
not to one product market (e.g., swaps or SBS) exclusively--and so will 
have to be filed with both the SEC and CFTC. Closely harmonizing the 
SEC's filing procedures with Sec.  40.5 would allow dually registered 
entities to submit the same (or substantially the same) filing to both 
agencies for review and approval. The Commission preliminarily believes 
that 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.
    The Commission seeks comment on the following:
    32. Do you believe in general that Regulation SE should include a 
rule establishing procedures for an SBSEF to voluntarily submit rules 
and rule amendments for Commission review and approval? Why or why not?
    33. In particular, should the Commission adopt procedures for 
voluntary submission of rules and rule amendments for Commission review 
and approval by harmonizing closely with Sec.  40.5 of the CFTC's 
rules? Why or why not?
    34. Are there any provisions of Sec.  40.5 that are adapted into 
proposed Rule 806 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

D. Rule 807--Self-Certification of Rules

    Proposed Rule 807 is closely modelled 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, modelled 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. Rule 807(a) also would 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 this Rule 807, but that in the interim had become 
a dormant rule (i.e., unimplemented for 12 consecutive calendar 
months).\73\
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    \73\ 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 proposed 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 
be required only to meet the conditions of paragraphs (a)(1), 
(a)(2), and (a)(6) of proposed Rule 807. The introductory language 
being proposed by the Commission in paragraph (a) of proposed Rule 
807 generally tracks 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 are not relevant to SBSEFs.
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    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.\74\ 
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 ten business days before the SBSEF's implementation of the rule 
or rule amendment. Paragraph (a)(4) would

[[Page 28887]]

provide that the SBSEF may not implement the rule or rule amendment if 
the Commission has stayed it pursuant to proposed Rule 807(c), 
discussed below.
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    \74\ 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.
---------------------------------------------------------------------------

    Section 40.6(a)(5) sets forth an additional condition that the rule 
or rule amendment is not a rule or rule amendment of a DCM that 
materially changes a term or condition of a contract for future 
delivery of an agricultural commodity enumerated in section 1a(4) of 
the CEA or an option on such a contract or commodity in a delivery 
month having open interest. Because this provision applies to DCMs that 
trade contracts for future delivery of agricultural commodities, it is 
not germane to the SBS markets; therefore, the Commission is not 
adapting this condition into proposed Rule 807.
    Section 40.6(a)(6) sets out procedures for emergency rule 
certifications, which the Commission is proposing to adapt into 
paragraph (a)(5) of Rule 807. Paragraph (a)(5)(i) would require a new 
rule or rule amendment that establishes standards for responding to an 
emergency \75\ 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 proposed Rules 807(b) and (c), described below.
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    \75\ 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 proposing a definition of 
``emergency'' in proposed Rule 802 that is adapted from Sec.  
40.1(h).
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    Paragraph (a)(6) of proposed Rule 807, modelled 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 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) also would permit the SBSEF to request 
confidential treatment for portions of its submission.\76\
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    \76\ 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 50.
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    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, modelled on Sec.  40.6(b), 
would give the Commission ten 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 proposed Rule 807(c).
    Paragraph (c)(1) of proposed Rule 807, modelled 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) would 
afford the Commission an additional 90 days from the date of the 
notification to conduct the review.
    Paragraph (c)(2) of proposed Rule 807, modelled 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, modelled 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.
    Section 40.6(c)(4), relating to rules or rule amendments already 
implemented by a SEF (as opposed to rules or rule amendments that are 
the subject of a new submission) provides: ``The Commission may stay 
the effectiveness of an implemented rule during the pendency of 
Commission proceedings for filing a false certification or during the 
pendency of a petition to alter or amend the rule pursuant to section 
8a(7) of the Act. The decision to stay the effectiveness of a rule in 
such circumstances shall not be delegable to any employee of the 
Commission.'' As previously noted,\77\ the SEA does not provide the 
Commission explicit authority to alter or amend the terms and 
conditions of an SBS like the authority granted to the CFTC with 
respect to swaps, and does not contemplate proceedings for a false 
certification. Hence the Commission is not proposing a provision 
corresponding to Sec.  40.6(c)(4).\78\
---------------------------------------------------------------------------

    \77\ See supra note 66 and accompanying text.
    \78\ See id.
---------------------------------------------------------------------------

    Section 40.6(d) of the CFTC's rules allows a registered entity to 
place certain rules or rule amendments into effect even without a self-
certification, if certain enumerated conditions are met. Certain types 
of these rules or rule amendments must be disclosed on a

[[Page 28888]]

``Weekly Notification of Rule Amendments,'' pursuant to Sec.  
40.6(d)(1) and (2), while others can be put into effect without any 
notification to the CFTC at all, pursuant to Sec.  40.6(d)(3). 
Paragraph (d) of proposed Rule 807, modelled 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 modelled 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 Notice 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;
     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 proposed Rule 807, the following 
types of rules could be put into effect by an SBSEF without self-
certification and without having to be disclosed on the Weekly Notice 
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.
    Paragraphs (d)(2) and (3) of proposed Rule 807, which enumerate the 
types of rule and rule amendments that an SBSEF could put into effect 
without a self-certification, are adapted from the types of rules 
enumerated in Sec.  40.6(d)(2) and (3). However, the Commission is not 
adapting into proposed Rules 807(d)(2) and (d)(3) the other types of 
rules enumerated in Sec.  40.6(d)(2) and (3).\79\
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    \79\ These rules pertain to products that are only distantly 
related, if at all, to the types of products that are likely to 
trade on SBSEFs. See Sec.  40.6(d)(2)(ii) (delivery standards set by 
third parties); Sec.  40.6(d)(2)(iii) (index products); Sec.  
40.6(d)(2)(iv) (option contract terms); Sec.  40.6(d)(2)(viii) 
(delivery facilities and delivery service providers); Sec.  
40.6(d)(3)(ii)(F) (securities indexes); Sec.  40.6(d)(3)(ii)(G) 
(option contract term).
---------------------------------------------------------------------------

    The Commission preliminarily believes that Regulation SE should 
afford the Commission a mechanism to assess new SBSEF rules and rule 
amendments for consistency with section 3D of the SEA, and to permit 
SBSEFs to submit new rules and rule amendments using a self-
certification process closely aligned with the 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 so will have to be filed with both the SEC and CFTC. 
Closely harmonizing the SEC's filing procedures with the CFTC's would 
allow dually registered entities to submit the same (or substantially 
the same) filing to both agencies for review. The Commission 
preliminarily believes that 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.
    The Commission requests comment on the following:
    35. Do you believe in general that Regulation SE should include a 
rule establishing procedures for an SBSEF to establish rules via self-
certification? Why or why not?
    36. In particular, should the Commission adopt procedures for self-
certification of rules by harmonizing closely with Sec.  40.6 of the 
CFTC's rules? Why or why not?
    37. Are there any provisions of Sec.  40.6 that are adapted into 
proposed Rule 807 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.
    38. Do you disagree with the specific language that the Commission 
is proposing? If so, what revisions to the language would you suggest?
    39. Do you agree with the proposed list of the types of rules and 
rule amendments that the Commission would allow an SBSEF to make 
effective without a self-certification? Are there any types that you 
believe should be added to that list? If so, which types and why? Are 
there any types that you believe should be removed from that list? If 
so, which types and why?

E. Submission Cover Sheet and Instructions

    As new Sec.  249.2002, the Commission is proposing a submission 
cover sheet and instructions that an SBSEF would be required to use in 
conjunction with

[[Page 28889]]

filings submitted pursuant to proposed Rules 804 through 807, 809, and 
816. These are modelled on the cover sheet and instructions used by 
SEFs in conjunction with their analogous filings with the CFTC.\80\
---------------------------------------------------------------------------

    \80\ 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.
---------------------------------------------------------------------------

    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 also would 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 would 
include 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.\81\ Finally, the cover sheet would include a check 
box by which an SBSEF could indicate that it was requesting 
confidential treatment of materials in the submission.
---------------------------------------------------------------------------

    \81\ Proposed Rule 809 would provide 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 VI(G).
---------------------------------------------------------------------------

    The cover sheet would divide the rules 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 MAT (``made-available-
to-trade''); \82\ or if the filing concerned the delisting of an SBS 
with no open interest.\83\ 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.
---------------------------------------------------------------------------

    \82\ See infra section VII(F).
    \83\ See supra note 73.
---------------------------------------------------------------------------

    Paragraph (a) of the submission cover sheet instructions would 
provide that a properly completed submission cover sheet must accompany 
all rule and product submissions submitted electronically to the 
Commission by an SBSEF, using the EDGAR system and must be provided as 
an Interactive Data File in accordance with Rule 405 of Regulation S-T. 
Per paragraph (a), a properly completed submission cover sheet would 
include all of the following:
    1. The name and platform ID of the SBSEF.\84\
---------------------------------------------------------------------------

    \84\ ``Platform ID'' is a term utilized in Regulation SBSR, 17 
CFR 242.900 et seq., and means the unique identification code 
(``UIC'') 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 SDR 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 (February 11, 
2015), 80 FR 14564, 14631-32 (March 19, 2015) (``Regulation SBSR 
Adopting Release I''). Therefore, LEIs issued through the GLEIS are 
currently the only allowable platform IDs that may be used by 
registered SBSEFs.
---------------------------------------------------------------------------

    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.
    5. 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 
will state that the narrative should describe the substance of the 
submission with enough specificity to characterize all material aspects 
of the filing.
    Paragraph (b) of the proposed submission cover sheet instructions 
would state 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 would not obviate the SBSEF's 
responsibility to comply with applicable filing requirements.
    Paragraph (c) of the proposed submission cover sheet would state 
that checking the box marked ``confidential treatment requested'' would 
not obviate the submitter's responsibility to comply with all 
applicable requirements for requesting confidential treatment under SEA 
Rule 24b-2 and would not substitute for notice or full compliance with 
such requirements.
    The Commission contemplates establishing a system for electronic 
completion of the cover sheet and attachment of the submissions 
required by proposed Rules 804, 805, 806, 807, and 809, and will advise 
affected persons regarding its use by public announcement in advance of 
the effective date of these rules.
    The Commission seeks comment on the following:
    40. Do you agree in general that the submission cover sheet and 
instructions for SBSEF filings should be harmonized with the CFTC's? 
Why or why not?
    41. Do you agree with the specific language proposed in the cover 
sheet and instructions? If not, how should the language be revised? Is 
there any information not included in the proposed cover sheet and 
instructions that you believe should be included?
    42. Do you agree with the requirement for an SBSEF to report its 
platform ID on the cover sheet? Should the disclosure of standard 
identifiers such as the LEI, the Financial Instrument Global Identifier 
(``FIGI''), and the Unique Product Identifier (``UPI'') be included in 
an SBSEF's other reporting obligations under the proposed rules?
    43. Are any of the instructions in the submission cover sheet 
unclear? If so, what matters do you believe require clarification?

F. Rule 808--Availability of Public Information

    Section 40.8 of the CFTC's rules is entitled ``Availability of 
public information.'' Sec.  40.8(a) provides that any part of an 
application to register as a SEF (among other CFTC-registered entities) 
that is not covered by a request for confidential treatment will be 
made publicly available. Section 40.8(a) also sets out the sections of 
an application to register as a SEF that shall be made publicly 
available. Section 40.8(c) \85\ provides that rule and new product 
filings by a SEF, whether made under the self-certification procedures 
or pursuant to CFTC review and approval, will be treated as public 
information unless accompanied by a request for confidential treatment. 
Section 40.8(c) includes procedures for such requests for confidential 
treatment. Section 40.8(d) provides that CFTC staff will not consider 
confidential treatment requests for information that is required to be 
made public under the CEA, and that the terms and conditions of a 
product

[[Page 28890]]

submitted to the CFTC shall be made publicly available at the time of 
submission.
---------------------------------------------------------------------------

    \85\ Section 40.8(b) has no text and is marked ``reserved.''
---------------------------------------------------------------------------

    Proposed Rule 808 is closely modelled on Sec.  40.8. 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 is proposing to list the specific corresponding exhibits 
in proposed Rule 808 that would be made publicly available. Therefore, 
paragraph (a) of proposed Rule 808 would provide that the Commission 
shall make publicly available on its website the following parts of an 
application to register as an SBSEF, unless confidential treatment is 
obtained pursuant to SEA Rule 24b-2: the transmittal letter and first 
page of the application cover sheet; Exhibit C; Exhibit G; Exhibit L; 
and Exhibit M.
    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,\86\ an SBSEF's filing of new products pursuant to the self-
certification procedures of proposed Rule 804, new products for 
Commission review and approval pursuant to proposed Rule 805, new rules 
and rule amendments for Commission review and approval pursuant to 
proposed Rule 806, and new rules and rule amendments pursuant to the 
self-certification procedures of proposed 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 proposed 
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.
---------------------------------------------------------------------------

    \86\ 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).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it would be appropriate 
to include in proposed Regulation SE a rule similar to Sec.  40.8 that 
would clarify how SBSEFs may request confidential treatment for their 
filings, and what information contained in those filings would be 
publicly available by the Commission. The Commission preliminarily 
believes that the items enumerated in proposed Rule 808 are not of the 
type that typically would constitute confidential information.
    The Commission requests comment on the following:
    44. Do you believe in general that Regulation SE should include a 
rule modelled on Sec.  40.8? Why or why not?
    45. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  40.8 into proposed Rule 808? If not, 
how would you revise that language?
    46. Are there any provisions of Sec.  40.8 that are adapted into 
proposed Rule 808 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.
    47. Do you prefer the Commission's proposed approach of listing 
specific exhibits or the CFTC's approach of providing in the rule only 
a general description of items required to be made public? If the 
former, are there any additional exhibits that you believe should be 
enumerated in Rule 808 that should be made publicly available? If so, 
which exhibits and why?

G. Rule 809--Staying of Certification and Tolling of Review Period 
Pending Jurisdictional Determination

    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, which is entitled ``Determining Status of Novel 
Derivative Products.'' Section 718 of the Dodd-Frank Act sets forth a 
mechanism for addressing a situation where 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., it is 
unclear whether the product 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 the 
judicial review of any such determination. 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.
    Proposed Rule 809 is loosely modelled on Sec.  40.12, but modified 
to focus on the products and jurisdictional problems that are more 
likely to be relevant to SBSEFs. An SBSEF might seek to list a product 
where it is unclear whether the product is a swap or an SBS. While 
section 718 of the Dodd-Frank Act addresses situations where it is 
unclear if a product is a security or a future, the SEC and the CFTC 
have adopted separate rules--SEA Rule 3a68-2 and Sec.  1.8, 
respectively--governing requests for interpretation regarding a product 
that might be an SBS, a swap, or a mixed swap. Accordingly, the 
Commission believes that it would be appropriate for proposed Rule 809 
to reflect the process set forth in SEA Rule 3a68-2. Nonetheless, the 
objective of proposed Rule 809 would be 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.
    Paragraph (a) of proposed Rule 809, modelled on Sec.  40.12(b), 
would provide that a product certification made by an SBSEF pursuant to 
proposed Rule 804 shall be stayed, or the review period for a product 
that has been submitted for Commission approval by an SBSEF pursuant to 
proposed 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 \87\ by the SBSEF, the SEC, 
or the CFTC. Paragraph (b) is modelled 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 modelled 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.
---------------------------------------------------------------------------

    \87\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate for 
Regulation SE to include a mechanism for the staying or tolling of a 
filing by an SBSEF where it is unclear whether the product is a swap or 
an SBS--should an SBSEF ever seek to list such a product. Although 
proposed Rule 809 would deviate from Sec.  40.12 in that it would apply 
where it is unclear whether a product is swap or an SBS, rather than 
where it is unclear whether

[[Page 28891]]

the product is a security or a future, the Commission preliminarily 
believes that modifying the scope of proposed Rule 809, in relation to 
Sec.  40.12, would appropriately address the jurisdictional questions 
that are more likely to arise from a product listed by an SBSEF.
    The Commission seeks comment on the following:
    48. Do you believe in general that Regulation SE should include a 
rule setting out a procedure for staying a product certification or 
tolling a product review period if a request for a joint interpretation 
regarding the classification of the product is made pursuant to SEA 
Rule 3a68-2? Why or why not?
    49. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  40.12 into proposed Rule 809? If not, 
how would you revise that language?
    50. Do you agree that Rule 809 should apply to a product that might 
be an SBS or a swap, rather than to a product that might be a security 
or a future? Why or why not?
    51. Are there any provisions of Sec.  40.12 that are adapted into 
proposed Rule 809 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

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

    Part 37 directs SEFs to submit product filings via self-
certification or for CFTC review and approval, using Sec.  40.2 or 
Sec.  40.3, respectively. However, these sections cannot be utilized by 
an entity that has submitted an application for SEF registration but 
has not yet been registered, or by a dormant SEF that has submitted an 
application to reinstate its registration. Under Sec.  37.4, either 
entity may submit a swap's terms and conditions before being registered 
or having its registration reinstated, and the CFTC will consider the 
swap listing request as part of the application for registration or 
reinstatement, respectively.
    Proposed Rule 810 is closely modelled on Sec.  37.4. Paragraph (a) 
of proposed Rule 810 is closely modelled on Sec.  37.4(a) and 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. Paragraph (b) is closely modelled on 
Sec.  37.4(b) and would provide that any SBS terms and conditions or 
rules submitted as part of an application for registration shall be 
considered for approval by the Commission at the time the Commission 
issues the SBSEF's order of registration. Paragraph (c) is closely 
modelled on Sec.  37.4(c) and would provide that, after the Commission 
issues the order of registration, the SBSEF shall submit an SBS's terms 
and conditions, including amendments to such terms and conditions, new 
rules, or rule amendments pursuant to the procedures in proposed Rules 
804 to 807. Paragraph (d) is closely modelled on Sec.  37.4(d), would 
provide that any SBS terms and conditions or rules submitted as part of 
an application to reinstate the registration of a dormant SBSEF shall 
be considered for approval by the Commission at the time the Commission 
approves the reinstatement of registration of the dormant SBSEF.
    The Commission preliminarily believes that it is appropriate for 
Regulation SE to include provisions that address new products submitted 
as part of an SBSEF registration by an entity that has not yet been 
registered, or by a dormant SBSEF seeking reinstatement of its 
registration, and that these provisions should align with the CFTC's 
provisions as closely as possible.
    The Commission seeks comment on the following:
    52. Do you believe in general that Regulation SE should include a 
rule setting out how dormant SBSEFs and applicants for SBSEF 
registration can submit new products? Why or why not?
    53. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  37.4 into proposed Rule 810? If not, 
how would you revise that language?
    54. Are there any provisions of Sec.  37.4 that are adapted into 
proposed Rule 810 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

VII. Miscellaneous Requirements

    Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous 
requirements on SEFs. The Commission seeks to impose similar 
requirements on SBSEFs in proposed 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 modelled on Sec.  
37.5, which is entitled ``Information regarding swap execution facility 
compliance.'' Section 37.5 provides that the CFTC may request various 
types of information from a SEF, and that the SEF must supply the 
information to the CFTC in a form and manner specified by the CFTC. 
Paragraph (a) of Sec.  37.5 requires a SEF, at the CFTC's request, to 
provide information related to its business as a SEF. Paragraph (b) 
states that a SEF may be required to provide 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 CEA. Paragraph (c) sets out procedures for a SEF 
to notify the CFTC of any transfer of 50% or more of the equity 
interest in the SEF.
    Proposed Rules 811(a) to (c) are closely modelled on Sec.  37.5. 
Paragraph (a) of proposed Rule 811 is closely modelled 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 modelled 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 modelled 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 notification, request supporting documentation of the 
transaction. Paragraph (c)(2) is closely modelled 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

[[Page 28892]]

event later than the open of business ten business days following the 
date upon which the SBSEF enters into a firm obligation to transfer the 
equity interest. Paragraph (c)(3) is closely modelled on Sec.  
37.5(c)(3), 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 
proposed Rule 806 or 807.
    Paragraph (c)(4) of proposed Rule 811 is closely modelled 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 preliminarily believes that it is appropriate for 
Regulation SE to include provisions requiring an SBSEF to provide the 
Commission with the information described above. Information about its 
business as an SBSEF and transfers of 50% of its equity would promote 
understanding of its operations and ownership, which should facilitate 
oversight of the SBSEF; therefore, the Commission preliminarily 
believes that it should, similar to the CFTC, clarify that it may 
request such information from an SBSEF. In addition, 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. By modelling 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 requests comment on the following:
    55. Do you believe in general that Regulation SE should include a 
rule that would require an SBSEF to provide the Commission with 
information about its business or its compliance with the SEA, as well 
as information regarding transfers of 50% or more of its equity 
interest? Why or why not?
    56. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  37.5 into proposed Rule 811? If not, 
how would you revise that language?
    57. Are there any provisions of Sec.  37.5 that are adapted into 
proposed Rule 811 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.
2. Harmonization With Sec.  1.60
    Paragraph (d) of proposed Rule 811 is not modelled 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 requires another type of information relevant to 
the regulatory oversight of a SEF, the Commission is proposing to adapt 
this provision into Rule 811.
    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 proposed Rule 
811 would adapt paragraphs (a), (c), and (e) of Sec.  1.60 to apply to 
SBSEFs.\88\
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    \88\ 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 
proposed Rule 811(d).
---------------------------------------------------------------------------

    Paragraph (d)(1) of proposed Rule 811 is closely modelled 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 its property 
or assets is subject. Paragraph (d)(2) is closely modelled 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 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 modelled 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 ten 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.\89\
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    \89\ Section 1.60(e) requires relevant documents to be ``mailed 
via first-class or submitted by other more expeditious means.''
---------------------------------------------------------------------------

    Paragraph (d)(4) of proposed Rule 811 is closely modelled 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 preliminarily believes that, to properly oversee an 
SBSEF, the Commission needs to be aware of any pending legal 
proceedings involving the SBSEF or any officer, director, or other 
official of the SBSEF from conduct in such person's capacity as an 
official of the SBSEF. The Commission preliminarily believes, 
furthermore, that Sec.  1.60 provides an established and well 
understood mechanism for obtaining this information, and therefore is 
using Sec.  1.60 as the model for proposed Rule 811(d).
    The Commission seeks comment on the following:
    58. Do you believe in general that Regulation SE should include a 
rule that would require an SBSEF to provide the Commission with 
information about its pending legal proceedings? Why or why not?
    59. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  1.60 into proposed Rule 811? If not, 
how would you revise that language?
    60. Are there any provisions of Sec.  1.60 that are adapted into 
proposed Rule 811 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

[[Page 28893]]

B. Rule 812--Enforceability

    Section 37.6(a) of the CFTC's rules provides that a transaction 
entered into on or pursuant to the rules of a SEF shall not be void, 
voidable, subject to rescission, otherwise invalidated, or rendered 
unenforceable as a result of a violation by the SEF of the Core 
Principles or the part 37 rules thereunder. Section 37.6(a) also 
provides generally that such a transaction would not be void or 
voidable as a result of a CFTC or other proceeding to alter or 
supplement a rule, term, or trading rule or procedure. Section 37.6(b) 
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 and serve as a confirmation of the 
transaction. 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.
    Proposed Rule 812 generally is modelled on Sec.  37.6, but omits 
certain of its detailed provisions. Paragraph (a) of proposed Rule 812, 
which is based on Sec.  37.6(a)(1), 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.\90\ 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).
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    \90\ The Commission is not adapting into proposed 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 66 and accompanying text.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Rule 812 is modelled on the first 
sentence of Sec.  37.6(b) and 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. The 
Commission preliminarily believes that it would be appropriate to 
require an SBSEF to inform counterparties as soon as technologically 
practicable after they have effected a trade on or pursuant the rules 
of the SBSEF, and to provide them with a written record of the terms to 
which they have agreed. The Commission also preliminarily believes that 
it would be appropriate to require that this written record legally 
supersede any previous agreement regarding the terms that were agreed 
to on the SBSEF. The Commission recognizes, however, that there may be 
other terms of an uncleared SBS transaction that are specified in one 
or more agreements previously negotiated between the counterparty pair 
(relating, e.g., to credit support). Because agreements between 
counterparty pairs likely are not known or easily obtained by an SBSEF, 
the Commission is not including a requirement that the SBSEF provide a 
written record of any such terms.\91\
---------------------------------------------------------------------------

    \91\ 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, 78 FR at 33491, n. 
195. The CFTC staff has provided no-action relief 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 (March 24, 2017) (issued by the CFTC's Division of Market 
Oversight). In so doing, the CFTC staff indicated that it was 
continuing to assess confirmation requirements, including 
establishing a permanent solution to the issues raised. Given these 
circumstances, the Commission preliminarily believes that 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.
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    61. Do you believe in general that Regulation SE should include a 
rule regarding enforceability of contracts entered into on an SBSEF 
that is modelled on Sec.  37.6? Why or why not?
    62. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  37.6 into proposed Rule 812? If not, 
how would you revise that language?
    63. Are there any provisions of Sec.  37.6 that the Commission is 
proposing to adapt into Rule 812 that you believe would be 
inappropriate, or fail to create any benefit, in a Commission rule 
applicable to SBSEFs? If so, please identify any such provision, 
explain why it would be inappropriate or unnecessary for SBSEFs, and 
what economic benefit that you believe would result from omitting it 
from the Commission's final rule.
    64. Do you believe that any of the provisions of Sec.  37.6 for 
which the Commission has not proposed an analog warrant inclusion? If 
so, which one(s) and why?
    65. Rule 15Fi-2(f)(1) under the SEA \92\ provides SBS dealers and 
major SBS participants with an exception from the trade acknowledgment 
and verification requirements for SBS transactions ``executed on [an 
SBSEF] or national securities exchange, provided that the rules, 
procedures or processes of the [SBSEF] or national securities exchange 
provide for the acknowledgment and verification of all terms of the 
security-based swap transaction no later than the time required by 
[Rule 15Fi-2(b) and (d)(2)]'' (emphasis added). Proposed Rule 812(b) 
would require an SBSEF to provide a written record only of the terms of 
the transaction that are agreed to on the SBSEF. As a result, if the 
Commission were to adopt Rule 812(b) substantially as proposed, the 
exception in Rule 15Fi-2(f)(1) would not be available where the 
counterparty pair has agreed to other terms of the SBS transaction away 
from the SBSEF. Do you agree with this result? If not, how would an 
SBSEF be able to provide a record of all terms of an SBS transaction 
effected on or pursuant to the rules of the SBSEF when there are one or 
more pre-existing agreements between the counterparty pair where the 
counterparties agree to additional terms?
---------------------------------------------------------------------------

    \92\ 17 CFR 240.15Fi-2(f)(1).
---------------------------------------------------------------------------

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

    Section 37.7 of the CFTC's rules provides that a SEF 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. The 
SEF may use data or information for business or marketing purposes if 
the person consents, but the SEF may not condition access to the SEF on 
the person's providing such consent. Finally, Sec.  37.7 provides that 
a SEF, where necessary for regulatory purposes, may share such data or 
information with another SEF or a DCM.
    Proposed Rule 813 is modelled on Sec.  37.7. Persons who trade on 
an SBSEF may have to provide proprietary data or

[[Page 28894]]

personal information to the SBSEF from time to time to allow the SBSEF 
to carry out its regulatory obligations. The Commission preliminarily 
believes, in general, that an SBSEF using that information for business 
or marketing purposes would be a misappropriation, because the SBSEF's 
powers to compel production of that information by its members is for 
regulatory purposes, not for the benefit of the SBSEF's business 
interests. While a member of the SBSEF could consent to the SBSEF using 
this information for business or marketing purposes, the Commission 
preliminarily believes that access to the SBSEF should not be 
conditioned on such consent being given. The Commission preliminarily 
believes that Sec.  37.7 is well understood by market participants and 
well designed for adaptation to the SBS market to deter such 
misappropriation. Therefore, the Commission preliminarily believes that 
close harmonization with Sec.  37.7 is appropriate.
    The Commission seeks comment on the following:
    66. Do you believe in general that Regulation SE should include a 
rule that prohibits an SBSEF from using 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? Why or why not?
    67. In particular, do you agree with the specific language proposed 
by the Commission to adapt Sec.  37.7 into proposed Rule 813? If not, 
how would you revise that language?
    68. Are there any provisions of Sec.  37.7 that are adapted into 
proposed Rule 813 that you believe would be inappropriate, or would not 
create any benefit, in a Commission rule applying to SBSEFs? If so, 
please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.

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

    Section 37.8 of the CFTC's rules applies to a board of trade that 
operates both a DCM and a SEF. Paragraph (a) of Sec.  37.8 requires the 
board of trade to separately register the DCM and the SEF with the CFTC 
under the respective rules for each type of market. Paragraph (b) 
requires a board of trade that operates both types of market and that 
uses the same electronic trade execution system for executing and 
trading swaps on both markets to clearly identify to market 
participants whether an execution of a swap took place on the DCM or on 
the SEF.
    Proposed Rule 814 is modelled 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 thereunder. Paragraph (b), although adapted generally from Sec.  
37.8(b), draws its specific language from section 3D(c) of the SEA.\93\ 
Section 3D(c) contemplates that a single entity may operate both a 
national securities exchange and an SBSEF, and 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. Proposed Rule 814(b) copies section 3D(c) of the SEA verbatim.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78c-4(c).
---------------------------------------------------------------------------

    The Commission preliminarily believes that 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.
    The Commission seeks comment on the following:
    69. Do you believe in general that Regulation SE should include a 
rule that clarifies the registration status of an entity that operates 
both an exchange and an SBSEF? Why or why not?
    70. In particular, do you agree with the specific language proposed 
by the Commission in Rule 814? If not, how would you revise that 
language?
    71. Do you believe that more detailed rules are necessary to 
address the extent to which an entity should keep separate its exchange 
and its SBSEF or, conversely, areas where overlapping functionality or 
personnel should expressly be allowed? If so, please discuss.

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

    A key goal of the Dodd-Frank Act is to bring trading of swaps and 
SBS onto regulated markets, as reflected in the statutory requirements 
for mandatory clearing and mandatory trade execution of certain swap 
and SBS products.\94\ If the relevant agency makes a mandatory clearing 
determination regarding a product, the product becomes subject to 
mandatory trade execution if at least one DCM/exchange or SEF/SBSEF 
makes the product ``available to trade.'' 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.'' \95\ Exchange trading also enhances 
market efficiency by allowing multiple market participants the 
opportunity to compete for individual transactions on price, in 
contrast to the bilateral, dealer-driven market that prevailed before 
the Dodd-Frank Act.\96\ The Dodd-Frank Act does not require, however, 
that all products be subject to mandatory clearing and/or mandatory 
trade execution, and does not impose any execution requirements for 
transactions in such products. Section 37.9 of the CFTC's rules 
addresses these issues using the concepts of ``Required Transaction'' 
and ``Permitted Transaction.'' The Commission is proposing Rule 815 of 
Regulation SE to adapt Sec.  37.9 for SBSEFs.
---------------------------------------------------------------------------

    \94\ See 7 U.S.C. 2(h)(1)(A) (mandatory clearing for swaps) and 
2(h)(8) (mandatory trade execution for swaps); 15 U.S.C. 78c-3(a)(1) 
(mandatory clearing for SBS) and 78c-3(h) (mandatory trade execution 
for SBS). The heads of the Group of Twenty countries (``G20'') have 
also emphasized the importance of exchange-trading of OTC 
derivatives, noting in 2009 that ``[a]ll standardized OTC derivative 
contracts should be traded on exchanges or electronic trading 
platforms, where appropriate, and cleared through central 
counterparties by end-2012 at the latest.'' See G20, Leaders' 
Statement: The Pittsburgh Summit (September 24-25, 2009) at p. 9.
    \95\ S. Rep. No. 111-176, at 34 (2010). See also Mark Jickling & 
Kathleen Ann Ruane, ``The Dodd-Frank Wall Street Reform and Consumer 
Protection Act: Title VII, Derivatives,'' Cong. Research Serv., 
R41398, at 7 (August 30, 2010) (explaining that the goal of the 
trade execution requirement is to promote pre-trade price 
transparency).
    \96\ See id. at 34 (quoting Stanford University Professor Darrel 
Duffie: ``The relative opaqueness of the OTC market implies that 
bid/ask spreads are in many cases not being set as competitively as 
they would be on exchanges. This entails a loss in market 
efficiency''). See also id. (quoting International Risk Analytics 
co-founder Christopher Whalen: ``The absence of an exchange trading 
mandate provides `supra normal returns paid to the dealers in the 
closed OTC derivatives market [and] are effectively a tax on other 
market participants, especially investors who trade on open, public 
exchanges'').
---------------------------------------------------------------------------

    Section 37.9(a) defines a ``Required Transaction'' as any 
transaction involving a swap that is subject to the trade execution 
requirement in section 2(h)(8) of the CEA, subject to certain 
exceptions. Section 37.9(c) defines a ``Permitted Transaction'' as the 
obverse of a Required Transaction: Any transaction involving a swap 
that is not subject to the CEA's trade execution requirement. Section 
37.9(c) provides that a SEF may offer any method of execution for a 
Permitted Transaction.

[[Page 28895]]

In addition, Sec.  37.9(a) provides that a Required Transaction that is 
not a block trade must generally be executed by a SEF using an order 
book \97\ or a request-for-quote (``RFQ'') system.\98\
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    \97\ Section 37.9(a)(2)(i)(A) defines ``order book'' by cross-
referencing to Sec.  37.3(a)(3) for a definition of ``order book,'' 
which in turn relies on cross-references to other provisions of the 
CEA for the embedded terms ``trading facility'' and ``electronic 
trading facility.''
    \98\ Section 37.9(a)(3) defines ``request for quote 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. Sec.  
37.9(a)(3) further provides that, to meet the definition, the three 
market participants shall not be affiliates or controlled by the 
requester, and shall not be affiliates of or controlled by each 
other.
---------------------------------------------------------------------------

    Under Sec.  37.9(a)(3), a SEF that offers an RFQ system in 
connection with a Required Transaction must, at the same time that the 
requester receives the first responsive bid or offer, communicate to 
the requester any firm bid or offer pertaining to the same instrument 
resting on any of the SEF's order books. In addition, the SEF must 
provide the requester with the ability to execute against such firm 
resting bids or offers along with any responsive orders. Finally, the 
SEF must 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.
    Section 37.9(b) establishes a time-delay requirement for a Required 
Transaction on an order book. Under the rule, a SEF must require that a 
broker or dealer who seeks to either execute against its customer's 
order or to execute two of its customers' orders against each other 
through the SEF'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 the second customer, is submitted for execution.\99\
---------------------------------------------------------------------------

    \99\ Section 37.9(b) permits a SEF to adjust the time-delay 
requirement to something other than 15 seconds, based on a swap's 
liquidity or other product-specific considerations. However, any 
such adjustment must still be for a sufficient length so that an 
order is exposed to the market and other market participants have a 
meaningful opportunity to execute against it.
---------------------------------------------------------------------------

    Paragraphs (a) through (c) of proposed Rule 815 are modelled on 
paragraphs (a) through (c) of Sec.  37.9. Proposed Rule 815(a)(1), 
based on Sec.  37.9(a)(1), would define ``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.'' Proposed 
Rule 815(a)(2), based on Sec.  37.9(a)(2), would specify execution 
methods for Required Transactions. Proposed Rule 815(a)(3), based on 
Sec.  37.9(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 specify other requirements for an 
RFQ system to be recognized as such under the rule. The three market 
participants could not be affiliates of or controlled by the requester 
and shall not be affiliates of or controlled by each other. Also, an 
SBSEF that offers an RFQ system in connection with a Required 
Transaction would be required, at the same time that the requester 
receives the first responsive bid or offer, to communicate to the 
requester any firm bid or offer pertaining to the same SBS resting on 
any of the SBSEF's order books. In addition, the SBSEF would be 
required to provide the requester with the ability to execute against 
such firm resting bids or offers along with any responsive orders. 
Finally, the SBSEF would be required to 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.
    Paragraph (b) of proposed Rule 815 is modelled on Sec.  37.9(b) and 
would provide for a time delay requirement for Required Transactions on 
an order book. Section 37.9(b) recognizes that there are situations 
where a broker or dealer might seek to trade against a customer order 
(a ``facilitation cross'') or cross two customer orders (a ``customer 
cross'') where the product being traded is subject to mandatory trade 
execution. Under Sec.  37.9(b), the broker or dealer must expose 
customer orders on the SEF order book for a required minimum period 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) closely follows the order-handling requirements of Sec.  
37.9(b) for facilitation and customer crosses that are Required 
Transactions.
    The Commission preliminarily believes that the CFTC's rules 
relating to Required Transactions are reasonably designed to promote 
price competition in products that are subject to the trade execution 
requirement. The Commission recognizes that, when considering rules for 
SBS that are subject to mandatory clearing and mandatory trade 
execution, additional or different criteria could plausibly achieve the 
goal of promoting price competition. It is debatable, for example, 
whether slightly different standards--such as RFQ-to-4 or RFQ-to-2 in 
lieu of RFQ-to-3, or a 30-second book-exposure requirement instead of 
15 seconds--might promote these ends more effectively. However, the 
Commission's determination to propose rules that are closely modelled 
on those in Sec.  37.9 reflects the baseline established by the CFTC 
rules. Most if not all SBSEFs will be dually registered with the CFTC 
as SEFs, and most if not all market participants in the SBS market will 
likely be participants in the swap market. The Commission appreciates 
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 SBS but different protocols--ones that have been 
understood and utilized for many years--applied to Required 
Transactions for swap transactions.
    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.\100\ The CFTC 
implements this provision by excepting block trades from the required 
execution methods in Sec.  37.9(a)(2). That rule cross-references Sec.  
43.2, which defines the term ``block trade'' for purposes of public 
dissemination of swap transactions.
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78c-4(d)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it should adopt an 
approach to block trades in Regulation SE that closely aligns with the 
approach taken by the CFTC. The purpose of having a block 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 a SEF/SBSEF 
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,

[[Page 28896]]

provided that it is executed pursuant to the SEF's rules and 
procedures.
    Proposed Rule 815(a)(2) would exclude block trades from the 
required execution methods using language closely modelled on Sec.  
37.9(a)(2). The Commission also preliminary believes that it should 
align the definition of ``block trade'' in proposed Regulation SE as 
closely as possible to the CFTC's definition. Therefore, the proposed 
definition--located in proposed Rule 802 of Regulation SE--is based on 
the four-pronged definition found in Sec.  43.2(a), but with one 
modification. The third prong of the 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.'' 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. SBS are not within the CFTC's 
jurisdiction, so the CFTC has never considered what an appropriate 
minimum block size threshold would be for any SBS asset class. In this 
respect, there is no threshold for the SEC to harmonize with, so the 
Commission is proposing to establish a threshold tailored specifically 
for the SBS market.
    For the third prong of the ``block trade'' definition, the 
Commission is proposing that the SBS is 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. The Commission previously employed a $5 
million block threshold for credit SBS as a condition to one prong of 
its no-action statement regarding Regulation SBSR.\101\ In imposing 
that condition, the Commission noted that the Financial Industry 
Regulatory Authority (``FINRA'') applies a $5 million cap when 
disseminating transaction reports of economically similar cash debt 
securities.\102\
---------------------------------------------------------------------------

    \101\ See SEA Release No. 87780 (December 18, 2019), 85 FR 6270, 
6347 (February 4, 2020) (``ANE Adopting Release and No-Action 
Statement'') (stating, in relevant part, that there would not be a 
basis for a Commission enforcement action if ``a registered SDR does 
not disseminate an SBS transaction in a manner consistent with Rule 
902 [of Regulation SBSR] but instead disseminates (or does not 
disseminate), the SBS transaction in a manner consistent with part 
43 of the CFTC's swap reporting rules in force at the time of the 
transaction, provided that for an SBS based on a single credit 
instrument or a narrow-based index of credit instruments having a 
notional size of $5 million or greater, the registered SDR that 
receives the report of the SBS transaction does not utilize any 
capping or bucketing convention under part 43 of the CFTC's swap 
reporting rules but instead disseminates a capped size of $5 million 
(e.g., `$5MM+' or similar) in lieu of the true notional size'').
    \102\ See id. at n. 768 (citing FINRA Regulatory Notice 12-39, 
available at https://www.finra.org/rules-guidance/notices/12-39).
---------------------------------------------------------------------------

    The proposed definition of ``block trade'' in Rule 802 does not 
include any equity SBS. In this regard, the Commission's approach 
follows the CFTC's; appendix F to the CFTC's part 43 does not include a 
block threshold for any type of equity swap. Accordingly, no equity 
swap may qualify for the exception to required means of execution for 
block trades provided in Sec.  37.9(a)(2), and no equity SBS could 
qualify for the exception to required means of execution for block 
trades in proposed Rule 815(a)(2).
    Paragraphs (d) and (e) of Sec.  37.9 provide additional exceptions 
that allow for flexible methods of execution for what would otherwise 
be Required Transactions. The Commission would include similar 
exceptions in proposed Rules 815(d) and (e).
    Paragraph (d) of Sec.  37.9 allows for flexible methods of 
execution for package transactions that meet certain enumerated 
criteria. Sec.  37.9(d)(1) defines ``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. Section 37.9(d)(2) provides 
that a Required Transaction that is executed as a component of a 
package transaction that includes a component swap that is subject 
exclusively to the CFTC's jurisdiction, but is not subject to mandatory 
clearing, may be executed on a SEF using any method of execution as if 
it were a Permitted Transaction. Section 37.9(d)(3) provides that a 
Required Transaction that is executed as a component of a package 
transaction that includes a component that is not a swap may be 
executed on a SEF using any method of execution as if it were a 
Permitted Transaction. Section 37.9(d)(3) further states 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-swap components are U.S. Treasury securities; a Required 
Transaction that is executed as a component of a package transaction in 
which all other non-swap 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-swap 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.
    Proposed Rule 815(d) is closely modelled on Sec.  37.9(d) and is 
designed to balance the goal of promoting transparency in the 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.\103\ 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. The Commission preliminarily 
believes that the CFTC has struck an appropriate balance between these 
competing policy goals in Sec.  37.9(d), and is therefore proposing to 
align its own rule closely with the CFTC's. The Commission recognizes, 
however, that the kinds of packages described in Sec.  37.9(d)(3) might 
be used only in the swap market and might not be utilized in the SBS 
market. The Commission seeks comment on that matter below.
---------------------------------------------------------------------------

    \103\ 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.
---------------------------------------------------------------------------

    Section 37.9(e) sets out procedures for resolution of operational 
and clerical error trades, which could be for swaps that otherwise 
would be subject to required means of execution. Section 37.9(e)(1) 
defines the terms ``correcting trade,'' ``error trade,'' and 
``offsetting trade'' that are used in the rule. Section 37.9(e)(2) 
requires a SEF 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. As 
their names suggest, these types of trades are necessary to reverse 
errors. They are not conducted for the purpose of competitive price 
discovery and thus

[[Page 28897]]

the pre-trade transparency goals for SEF/SBSEF trading are not 
implicated.
    Proposed Rule 815(e) is modelled on Sec.  37.9(e), although 
definitions of the terms ``correcting trade,'' ``error trade,'' and 
``offsetting trade'' would be included in proposed Rule 802 rather than 
in proposed Rule 815(e).\104\ A fair and orderly market needs rules to 
address error trades when they occur, and such rules should be fair, 
transparent, and consistent. The market might need to make correcting 
trades or offsetting trades to reverse the effect of the original error 
trade. The CFTC's rules for addressing error trades are well 
articulated and well understood by the market, so the Commission 
preliminarily believes that they 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.
---------------------------------------------------------------------------

    \104\ 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; defining ``error trade'' as any trade executed on 
or subject to the rules of an SBSEF that contains an operational or 
clerical error; and 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 proposed definitions are 
modelled on the definitions of the same terms in Sec.  37.9(e)(1).
---------------------------------------------------------------------------

    Section 37.9(f) addresses counterparty anonymity and is widely 
referred to as the prohibition on ``post-trade name give-up.'' Section 
37.9(f) generally prohibits any person, directly or indirectly 
(including through a third-party service provider), from disclosing the 
identity of a counterparty to a swap that is executed anonymously on a 
SEF and intended to be cleared, and requires the SEF to establish and 
maintain rules to that effect. Section 37.9(f) provides that ``executed 
anonymously'' as used in the rule includes a swap that is pre-arranged 
or pre-negotiated anonymously, including by a SEF participant. Finally, 
Sec.  37.9(f) provides that, where a package transaction includes a 
component swap that is not intended to be cleared, disclosing the 
identity of a counterparty would not violate Sec.  37.9.
    Proposed Rule 815(f) is modelled on Sec.  37.9(f). The Commission 
preliminarily agrees with the CFTC that prohibiting post-trade name 
give-up is reasonably necessary to facilitate and promote trading on 
SEFs.\105\ The practice of requiring disclosure of one counterparty's 
name to the other counterparty (i.e., ``name give-up'') increases the 
risk of information leakage and can deter participation by liquidity 
seekers on SEFs and SBSEFs. The Commission preliminarily believes, like 
the CFTC, that prohibiting post-trade name give-up will 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. Therefore, the Commission preliminarily that it 
should incorporate the same prohibition into Regulation SE.
---------------------------------------------------------------------------

    \105\ CFTC, Post Trade Name Give-Up on Swap Execution 
Facilities, 85 FR 44693, 44695 (July 24, 2020).
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    72. Do you believe in general that the CFTC's concepts of 
``Required Transactions'' and ``Permitted Transactions'' should be 
incorporated into proposed Regulation SE? Why or why not?
    73. In particular, do you believe that the execution methods set 
forth in Sec.  37.9 for Required Transactions are appropriate for 
SBSEFs and the SBS market? Why or why not? Do you observe differences 
between swap and SBS products that warrant different or additional 
criteria for Required Transactions on SBSEFs? If so, please describe 
those differences, and suggest and justify any different execution 
methods for Required Transactions in SBS that you believe appropriate.
    74. Do you believe that proposed Rule 815 should harmonize with the 
CFTC rule for handling facilitation and customer crosses in products 
subject to the trade execution requirement? Why or why not? If not, 
please suggest and justify any different order-handling requirements 
that you believe appropriate.
    75. Do you agree in general with excepting block trades from the 
required methods of execution? Why or why not?
    76. Do you agree in general with the Commission's proposed approach 
of adapting the CFTC definition of ``block trade'' from Sec.  43.2 for 
SBSEFs? Why or why not?
    77. Do you agree in particular with the $5 million prong of the 
SEC's proposed definition of ``block trade''? Why or why not? Do you 
believe that a threshold other than $5 million would be appropriate? If 
so, what numerical threshold and why? Do you believe that there should 
be different thresholds for different asset classes (or sub-asset 
classes)? If so, please discuss.
    78. Do you believe in general that the Commission, like the CFTC in 
Sec.  37.9(d), should allow for flexible means of execution for an SBS 
subject to the trade execution requirement when it is part of a package 
trade? Why or why not?
    79. If so, do you believe that the exceptions to required methods 
of execution for package transactions set forth in proposed Rule 815(d) 
are appropriate? Why or why not? Are there aspects of the CFTC's 
criteria that are not relevant for the SBS market and should be 
omitted? If so, which provision(s) and why? Are there different types 
of packages that involve SBS that are not prevalent in the swap market 
that should be incorporated into the SEC's exceptions? If so, please 
describe these packages and suggest an appropriate way to characterize 
them in Rule 815(d).
    80. Do you agree with how the Commission is proposing to harmonize 
with the Sec.  37.9(d)(3)'s ``exceptions to the exception'' for package 
trades in proposed Rule 815(d)(3)? Why or why not? Are the kinds of 
packages described in Sec.  37.9(d)(3) unique to the swap market? If 
there are other types of package transactions involving SBS that you 
believe should be subject to required means of execution despite 
allowing other types of packages to use flexible means of execution, 
please describe these types of packages and explain why you believe 
they should nevertheless be subject to required means of execution.
    81. Do you believe in general that the Commission, like the CFTC in 
Sec.  37.9(e), should allow for flexible means of execution for 
products that otherwise would be subject to the trade execution 
requirement when an SBSEF is performing a correcting, error, or 
offsetting trade? Why or why not?
    82. If so, do you believe that the SEC's proposed definitions for 
these terms, which are closely modelled on the CFTC's definitions, are 
appropriate? Why or why not? If not, what alternative definition(s) 
would you suggest, and why?
    83. Do you agree in general that the SEC rules for SBSEFs, like the 
CFTC rules for SEFs, should prohibit post-trade name give-up? Why or 
why not? If so, do you agree with the manner in which the Commission is 
proposing to implement it (i.e., close harmonization with Sec.  
37.9(f))? Why or why not?

[[Page 28898]]

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

    Section 3C of the SEA \106\ 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 exchange or SBSEF makes the SBS available 
to trade or if 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.'' Proposed Rule 816 of Regulation SE would establish 
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. Proposed Rule 816 
also would include three proposed exemptions from the trade execution 
requirement.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------

1. Process for an SBSEF To Make an SBS Product Available To Trade
    Paragraphs (a) through (d) of proposed Rule 816 are modelled on 
Sec.  37.10 of the CFTC's rules and would establish a process whereby 
an SBS product is ``made available to trade'' (``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 MAT 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 
proposed Rule 816 to trigger the trade execution requirement, similar 
to the MAT process of Sec.  37.10.
    Paragraph (a)(1) of proposed Rule 816, like Sec.  37.10(a)(1), 
would provide that an SBSEF that makes an SBS available to trade in 
accordance with paragraph (b) of this section, must submit to the 
Commission its determination with respect to such SBS as a rule, 
pursuant to the procedures under proposed Rule 806 or 807. Paragraph 
(a)(2), modelled on Sec.  37.10(a)(2), would provide 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.
    Paragraph (b) of proposed Rule 816 would set out the factors that 
an SBSEF must consider when making a MAT determination for an SBS 
product. Proposed Rule 816(b) would incorporate the same six factors 
enumerated in Sec.  37.10(b): (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.
    Paragraph (c) of proposed Rule 816, modelled on Sec.  37.10(c), 
would provide that, upon a determination that an SBS is MAT on an SBSEF 
or SBS exchange,\107\ all other SBSEFs and SBS exchanges shall comply 
with the requirements of section 3C(h) of the SEA in listing or 
offering such SBS for trading. Paragraph (d) of proposed Rule 816, like 
Sec.  37.10(d), would provide that the Commission may issue a 
determination that an SBS is no longer MAT upon determining that no 
SBSEF or SBS exchange lists such SBS for trading.
---------------------------------------------------------------------------

    \107\ 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 Commission is not proposing 
to establish a new procedure for SBS exchanges to list or MAT SBS 
products.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate for 
Regulation SE to establish a mechanism whereby an SBSEF can MAT an SBS 
product, and that this mechanism should align with the CFTC's as 
closely as possible. The CFTC's procedures are well articulated and 
well understood by SEFs, so the Commission preliminarily believes that 
closely harmonizing with these procedures would yield comparable 
regulatory benefits while minimizing burdens on SBSEFs. In particular, 
the Commission preliminarily believes that the criteria for MAT 
consideration are equally applicable to the SEF and SBSEF markets, and 
thus the Commission is not proposing any different or additional 
criteria that would have to be considered by an SBSEF when it wishes to 
MAT an SBS product.
    The Commission seeks comment on the following:
    84. Do you believe in general that Regulation SE should establish a 
process whereby an SBSEF can MAT an SBS product that harmonizes closely 
with Sec.  37.10? Why or why not?
    85. In particular, do you object to any of the specific language 
choices made to adapt Sec.  37.10 into proposed Rules 816(a) to (d)? If 
so, what alternative language would you suggest?
    86. Are there any provisions of Sec.  37.10 that are adapted into 
proposed Rules 816(a) to (d) that you believe would be inappropriate, 
or would not create any benefit, in a Commission rule applying to 
SBSEFs? If so, please identify any such provision, explain why it would 
be inappropriate or unnecessary for SBSEFs, and what economic benefit 
that you believe would result from omitting it from the Commission's 
final rule.
2. Exemptions From Trade Execution Requirement
    Paragraph (e) of proposed Rule 816 has no analog in Sec.  37.10, 
but instead is adapted from Sec.  36.1, 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. The 
Commission preliminarily believes that it should borrow from the CFTC's 
experience and incorporate the same exemptions into Regulation SE.
    Paragraph (e)(1) of proposed Rule 816, modelled on Sec.  36.1(a), 
would provide that an SBS 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 SEA. In addition, 
paragraph (e)(1), like Sec.  36.1(a), would provide that, for purposes 
of paragraph (e), a package transaction would consist 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.
    For the same reasons identified by the CFTC,\108\ the Commission, 
pursuant to section 36(a)(1) of the SEA,\109\ preliminarily believes 
that it is necessary or appropriate in the public interest, and is 
consistent with the

[[Page 28899]]

protection of investors, to exempt SBS from the trade execution 
requirement in section 3C(h) of the SEA if the criteria in proposed 
Rule 816(e)(1) are met.
---------------------------------------------------------------------------

    \108\ See CFTC, Swap Execution Facility Requirements, 85 FR 
82313, 82320 (December 18, 2020).
    \109\ 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------

    Section 36.1(b) provides that section 2(h)(8) of the CEA does not 
apply to a swap transaction that qualifies for the exception under 
section 2(h)(7) of the CEA or an exception or exemption under part 50 
of the CFTC's rules, and for which the associated requirements are 
met.\110\ The Commission is proposing to adapt Sec.  36.1(b) as 
paragraph (e)(2) of proposed Rule 816, to provide that section 3C(h) of 
the SEA does not apply to an SBS transaction that qualifies for an 
exception \111\ 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.\112\ Unlike the CFTC, the 
Commission does not have a specific rule to cite to regarding 
exemptions from the clearing requirement, so proposed Rule 816(e)(2) 
would refer only generally to such exemptions.
---------------------------------------------------------------------------

    \110\ By its terms, section 2(h)(8) of the CEA provides that the 
trade execution requirement does not apply to swaps that are 
excepted from the clearing requirement pursuant to section 2(h)(7) 
of the CEA. However, when adopting Sec.  36.1(b), the CFTC noted 
that it also has adopted exemptions from the clearing requirement 
pursuant to other statutory authority (i.e., its exemptive authority 
under CEA section 4(c)). See CFTC, Exemptions From Swap Trade 
Execution Requirement, 86 FR 8993, 8995 (February 11, 2021) (``CFTC 
Swap Trade Execution Exemptions Release'') (discussing exemptions 
relating to cooperatives and inter-affiliate swaps).
    \111\ The Commission notes that section 3C(g) of the SEA is 
entitled ``Exceptions,'' not ``Exemptions.''
    \112\ 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.
---------------------------------------------------------------------------

    When adopting Sec.  36.1(b), the CFTC found that exempting swaps 
that qualified for an exemption from or exception to the clearing 
requirement was consistent with its authority under section 4(c) of the 
CEA.\113\ The CFTC also noted Congress's intent to link the clearing 
requirement with the trade execution requirement, so that a swap that 
was exempted or excepted from the former also should be exempted from 
the latter.\114\ For the same reasons identified by the CFTC, the 
Commission, pursuant to section 36(a)(1) of the SEA, preliminarily 
believes that it is necessary or appropriate in the public interest, 
and is consistent with the protection of investors, to exempt an SBS 
from the trade execution requirement in section 3C(h) of the SEA if the 
SBS qualifies for an exception under section 3C(g) of the SEA, or 
benefits from any exemption from the clearing requirement that is 
granted by the Commission, for which the associated requirements are 
met.
---------------------------------------------------------------------------

    \113\ See CFTC, Swap Trade Execution Exemptions Release, 86 FR 
at 8996.
    \114\ See id.
---------------------------------------------------------------------------

    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. The Commission is proposing to adapt Sec.  
36.1(c) as paragraph (e)(3) of proposed Rule 816 to provide 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.'' Since the Commission does not have an equivalent to 
Sec.  50.52 to reference, the Commission is proposing instead to define 
the term ``eligible affiliate counterparties'' directly in proposed 
Rule 816(e)(3).
    Counterparties would be ``eligible affiliate counterparties'' for 
purposes of proposed 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 or 
International Financial Reporting Standards, 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 Generally Accepted Accounting Principles or International 
Financial Reporting Standards, and such consolidated financial 
statements include the financial results of both of the counterparties. 
In addition, for purposes of proposed 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. These 
definitions closely are modelled on the equivalent definitions used in 
Sec.  50.52, which are incorporated into Sec.  36.1(c).
    When adopting Sec.  36.1(c), the CFTC noted that it was codifying 
previously issued no-action relief.\115\ The CFTC also stated that 
these transactions are not intended to be arm's-length, market-facing, 
or competitively executed under any circumstance, irrespective of the 
type of swap involved. Therefore, these transactions would not 
contribute to the price discovery process if executed on a SEF or 
DCM.\116\ The CFTC recognized the efficiency benefits associated with 
entering into inter-affiliate swaps via internal processes and 
acknowledged that applying the trade execution requirement to such 
transactions could inhibit affiliated counterparties from efficiently 
executing these types of transactions for risk management, operational, 
and accounting purposes.\117\ The CFTC concluded, therefore, that--as 
with the exemptions set forth in Sec.  36.1(a) and (b)--granting an 
exemption from the trade execution requirement for swap transactions 
that are executed between counterparties that have eligible affiliate 
counterparty status was consistent with its exemptive authority under 
the CEA, regardless of whether the swap is submitted to clearing.\118\ 
For the same reasons identified by the CFTC, the Commission, pursuant 
to section 36(a)(1) of the SEA, preliminarily believes that it is 
appropriate to exempt from the trade execution requirement an SBS that 
is executed between counterparties that qualify as eligible affiliate 
counterparties, even if the counterparties clear the SBS transaction. 
The Commission also preliminarily believes that it is appropriate in 
the public interest to adapt into proposed Rule 816 the definition of 
``eligible affiliate counterparties'' used in the CFTC's rules because 
this term is generally well understood by market participants. 
Furthermore, the Commission preliminarily believes that market 
participants should be permitted to apply the same standard for 
determining whether an inter-affiliate swap or SBS will be exempt from 
the trade execution requirement.
---------------------------------------------------------------------------

    \115\ See id. at 8997.
    \116\ See id.
    \117\ See id.
    \118\ See id. at 8998.
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    87. Do you believe in general that Regulation SE should incorporate 
similar exemptions from the trade

[[Page 28900]]

execution requirement that the CFTC provides in Sec.  36.1? Why or why 
not?
    88. In particular, do you object to any of the specific language 
choices made to adapt Sec.  36.1 into proposed Rule 816(e)? If so, what 
alternative language would you suggest?
    89. Do you believe that the exemption in proposed Rule 816(e)(1) is 
even necessary? In other words, do market participants engage in 
package transactions involving SBS and new issuance bonds of the type 
described in Sec.  36.1(a), or do these types of packages involve only 
IRS and thus would not be applicable to the SBS market?
    90. Are there any other provisions of Sec.  36.1 that are adapted 
into proposed Rule 816(e) that you believe would be inappropriate, or 
would not create any benefit, in a Commission rule applying to SBSEFs? 
If so, please identify any such provision, explain why it would be 
inappropriate or unnecessary for SBSEFs, and what economic benefit that 
you believe would result from omitting it from the Commission's final 
rule.
    91. Are there any types of SBS that you believe should be exempt 
from the trade execution requirement that have no analog in the swap 
market and thus are not reflected in the CFTC's list of exemptions to 
the CEA trade execution requirement in Sec.  36.1? If so, please 
describe and justify any potential exemptions that you believe should 
be added to proposed Rule 816(e).

G. Rule 817--Trade Execution Compliance Schedule

    Proposed Rule 817 is modelled 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. Section 37.12(a) provides that a swap becomes subject to the 
trade execution requirement upon the later of the applicable deadline 
established under the compliance schedule provided under Sec.  50.25(b) 
or 30 days after the available-to-trade determination submission or 
certification for that swap is, respectively, deemed approved under 
Sec.  40.5 or deemed certified under Sec.  40.6.
    The Commission does not have a close equivalent to Sec.  50.25(b). 
However, Rule 3Ca-1 under the SEA \119\ 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. Accordingly, paragraph (a) of proposed Rule 817 
would provide 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.
---------------------------------------------------------------------------

    \119\ 17 CFR 240.3Ca-1.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Rule 817, modelled on Sec.  37.12(b), 
would provide that a counterparty may voluntarily comply with the trade 
execution requirement sooner than required by paragraph (a).
    The Commission seeks comment on the following:
    92. Do you believe in general that Regulation SE should include a 
trade execution compliance schedule similar to that in Sec.  37.12? Why 
or why not?
    93. In particular, do you agree with the language that the 
Commission is proposing to adapt from Sec.  37.12 into Rule 817? If 
not, what alternative language would you suggest, and why?

VIII. Implementation of Core Principles

    Section 3D(d) of the SEA \120\ 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.\121\
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78c-4(d).
    \121\ 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 No.         SEA No.
------------------------------------------------------------------------
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
------------------------------------------------------------------------

    The Commission preliminarily believes generally that it would 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 an SEC-proposed rule, the 
Commission will note and discuss the proposed difference and seek 
comment. The Commission also will note when there is not, or at least 
not intended to be, a difference between the SEC rule and the analogous 
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.''

[[Page 28901]]

Where the CFTC includes guidance and/or accepted practices pertaining 
to a Core Principle for SEFs, the Commission will explain how (if at 
all) the Commission proposes to incorporate the substance of these 
statements into Regulation SE.

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

    Core Principle 1 \122\ requires an SBSEF, to be registered and 
maintain registration as an SBSEF, 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. CEA Core Principle 1 \123\ is substantively 
identical.
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    \122\ Section 3D(d)(1) of the SEA, 15 U.S.C. 78c-4(d)(1).
    \123\ 7 U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 1 for SEFs in subpart B of part 
37. Section 37.100 repeats the statutory text of SEF Core Principle 1. 
There are no other rules in subpart B. Proposed Rule 818 also would 
repeat the statutory text of the Core Principle.
    The Commission seeks comment on the following:
    94. Do you agree with how the Commission is proposing to implement 
SEA Core Principle 1? Why or why not?

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

    Core Principle 2 \124\ 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. 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 facility, including block trades. Core 
Principle 2 for SEFs \125\ 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.\126\
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    \124\ Section 3D(d)(2) of the SEA, 15 U.S.C. 78c-4(d)(2).
    \125\ 7 U.S.C. 7b-3(f)(2).
    \126\ See 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

1. Rules Modelled on Subpart C of Part 37
    The CFTC implemented Core Principle 2 for SEFs in subpart C of part 
37. Section 37.200 of subpart C repeats the statutory text of CEA Core 
Principle 2, including the paragraph not present in SEA Core Principle 
2 pertaining to swaps subject to the mandatory clearing requirement. 
Section 37.201 requires a SEF to establish rules governing the 
operation of the facility, including, but not limited to, rules 
specifying trading procedures to be followed by members and market 
participants when entering and executing orders traded or posted on the 
SEF. Section 37.201 also requires a SEF to establish and impartially 
enforce compliance with the SEF's rules, including, but not limited to 
the terms and conditions of any swaps traded or processed on or through 
the SEF, access to the SEF, trade practice rules, audit trail 
requirements, disciplinary rules, and mandatory trading requirements.
    Section 37.202 imposes access requirements on SEFs. Section 
37.202(a) requires a SEF to provide any eligible contract participant 
(``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. Furthermore, the SEF must 
have criteria governing access that are impartial, transparent, and 
applied in a fair and nondiscriminatory manner; procedures whereby ECPs 
provide the SEF with written or electronic confirmation of their status 
as ECPs before obtaining access; and comparable fee structures for ECPs 
and independent software vendors receiving comparable access to, or 
services from, the SEF. Section 37.202(b) requires a SEF, before 
granting any ECP access to its facilities, to require that the ECP 
consent to its jurisdiction. Section 37.202(c) requires the SEF to 
establish and impartially enforce rules governing any decision to 
allow, deny, suspend, or permanently bar access to the SEF, including 
when such decisions are made as part of a disciplinary or emergency 
action taken by the SEF.
    Section 37.203 requires a SEF 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. 
Section 37.203 includes lengthy and detailed provisions relating to 
that goal. Section 37.203(a) requires a SEF to prohibit, among other 
things, front-running, wash trading, pre-arranged trading (except for 
block trades), fraudulent trading, money passes, and any other trading 
practices that the SEF deems to be abusive. Section 37.203(b) requires 
the SEF to have arrangements and resources to collect information and 
documents on both a routine and non-routine basis, including the 
authority to examine books and records kept by the SEF's members. 
Section 37.203(c) requires the SEF to have 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. Section 37.203(d) requires the SEF to maintain 
an automated trade surveillance system capable of detecting potential 
trade practice violations, and imposes certain performance requirements 
on that system. Section 37.203(e) requires the SEF to conduct real-time 
market monitoring of all trading activity to identify any market or 
system anomalies, and to have the authority to adjust trade prices or 
cancel trades when necessary to mitigate market disrupting events 
caused by system malfunctions. Section 37.203(f) requires the SEF to 
establish and maintain procedures that require its compliance staff to 
conduct investigations of possible rule violations and imposes various 
requirements relating to those investigations.
    Section 37.204 allows a SEF to contract with a regulatory services 
provider to assist in complying with the supervisory functions noted 
above. Section 37.204 also imposes requirements on the SEF's 
relationship with the regulatory services provider and provides that 
the SEF must retain exclusive authority in all substantive decisions 
made by its regulatory service provider, including decisions involving 
the cancellation of trades, the issuance of disciplinary charges 
against members or market participants, and denials of access.
    Section 37.205 requires a SEF to 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 swap execution facility.

[[Page 28902]]

Section 37.205 includes lengthy and detailed provisions relating to the 
elements of an acceptable audit trail program, requirements for the 
transaction history database, electronic analysis capability, and safe 
storage capability. Furthermore, Sec.  37.205 requires a SEF to enforce 
its audit trail and recordkeeping requirements through at least annual 
reviews of all members to verify their compliance, and to establish a 
program for effective enforcement of its audit trail and recordkeeping 
requirements. An effective program must identify members subject to the 
SEF's recordkeeping rules that have failed to maintain high levels of 
compliance with such requirements, and impose meaningful sanctions when 
deficiencies are found.
    Section 37.206 requires a SEF to 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 or 
market participants that violate the SEF's rules. Accordingly, Sec.  
37.206 requires the SEF to establish disciplinary panels and procedures 
for disciplinary hearings that meet certain enumerated requirements, 
and provides that disciplinary sanctions imposed by the SEF shall be 
commensurate with the violations committed and shall be clearly 
sufficient to deter recidivism or similar violations by other market 
participants.
    Appendix B to part 37 includes detailed guidance to facilitate 
compliance with the rules that implement CEA Core Principle 2. The 
guidance addresses, for example, the use of warning letters by SEF 
compliance staff, potential conflicts of interest of the SEF's 
enforcement staff, the serving of notices of charges, a respondent's 
right to representation, providing sufficient time to answer a charge, 
consequences of a respondent admitting to or failing to deny a charge, 
right to a hearing, settlement offers, right of appeal and appeal 
procedures, final decisions, summary fines for violations of rules 
relating to the failure to timely submit accurate records required for 
clearing or verifying each day's transactions, and emergency 
disciplinary actions.
    Proposed Rule 819 would implement Core Principle 2 and is adapted 
from subpart C of part 37. Paragraph (a) of proposed Rule 819, like 
Sec.  37.200, would repeat the statutory text of Core Principle 2. 
Paragraph (b) is closely modelled on Sec.  37.201 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.
    Paragraph (c) of proposed Rule 819 is closely modelled on Sec.  
37.202 and would require an SBSEF 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 also would be required, among other 
things, to establish comparable fee structures for ECPs and independent 
software vendors receiving comparable access to, or services from the 
SBSEF, and 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.
    Paragraph (d) of proposed Rule 819 is closely modelled 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.\127\ 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 also would be required 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 modelled on Sec.  37.203(f), again using the same structure and rule 
text. Like Sec.  37.203(f), proposed Rule 819(d)(6) would address 
investigations and investigation reports and includes provisions 
relating to procedures, timeliness, when a reasonable basis does or 
does not exist for finding a violation, and warning letters.\128\
---------------------------------------------------------------------------

    \127\ To promote uniformity throughout proposed Regulation SE, 
the Commission believes that it is appropriate to denote all persons 
who have a right to participate in an SBSEF's market as ``members.'' 
Section 37.203(a) provides that a SEF shall prohibit abusive trading 
practices on its markets by members and market participants. The 
equivalent provision in proposed Rule 819(d) would provide that an 
SBSEF shall prohibit abusive trading practices on its markets by 
members (without reference to ``market participants'').
    \128\ Proposed Rule 819(d)(6)(v) would provide 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. The first provision is derived from the CFTC's 
guidance pertaining to CEA Core Principle 2 for SEFs; the second 
provision is from the text of Sec.  37.203(f)(5).
---------------------------------------------------------------------------

    Paragraph (e) of proposed Rule 819 is modelled 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. Proposed Rule 819(e)(1) makes a slight 
modification to Sec.  37.204(a)'s list of entities that can serve as a 
regulatory service provider.\129\
---------------------------------------------------------------------------

    \129\ Under Sec.  37.204(a), a regulatory services provider for 
a SEF can be a registered futures association, FINRA, or ``another 
registered entity.'' ``Registered entity'' is a term of art in the 
CEA that does not exist in the SEA. Therefore, the Commission is 
proposing instead that a regulatory services provider for an SBSEF 
can be a registered futures association (under section 17 of the 
CEA), a national securities exchange, a national securities 
association (which would include FINRA), or another SBSEF.
---------------------------------------------------------------------------

    Paragraph (f) of proposed Rule 819 is modelled on Sec.  37.205, 
using the same paragraph structure and rule text. Paragraph (f) would 
require an SBSEF to capture and retain all audit trail data necessary 
to detect, investigate, and prevent customer and market abuses and 
impose 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.
    Paragraph (g) of proposed Rule 819 is based on Sec.  37.206 and 
would generally track all of its rule text, but includes additional 
language derived from the

[[Page 28903]]

appendix B guidance that is interwoven throughout. In converting the 
guidance to proposed rule text, the Commission preliminarily believes 
that grouping conceptually related items together would yield 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 \130\ not include 
members or other persons whose interests conflict with their 
enforcement duties.
---------------------------------------------------------------------------

    \130\ In this bullet and the next bullet, the word used in the 
corresponding CFTC guidance was ``should'' but the Commission is 
proposing the word ``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 proposed Rule 819 is modelled 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 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 of the makeup of members of SBSEF 
major disciplinary committees and hearing panels, the Commission is 
proposing instead to require the disciplinary panels established under 
proposed Rule 819(g)(2) to meet the composition requirements of 
proposed Rule 834(d), which would apply to each major disciplinary 
committee and hearing panel of an SBSEF.\131\
---------------------------------------------------------------------------

    \131\ 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 X.
---------------------------------------------------------------------------

    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 
security-based swap execution facility. 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 
modelled 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 is proposing 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. 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 \132\ 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.
---------------------------------------------------------------------------

    \132\ 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 
is proposing to use the word ``shall'' in such instances instead.
---------------------------------------------------------------------------

    Paragraph (g)(9)(vii) of proposed Rule 819 is modelled 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 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.\133\ In all other 
instances, a summary record of a hearing is permitted.
---------------------------------------------------------------------------

    \133\ See infra section XVI(E) (discussing proposed Rule 442, 
which would establish the right to appeal to the Commission certain 
actions taken by an SBSEF, and setting out certain procedural 
matters relating to any such appeal).
---------------------------------------------------------------------------

    Paragraph (g)(10) of proposed Rule 819 is modelled 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 would have to include six 
enumerated elements, all of which are closely modelled on those in 
Sec.  37.206(d).
    Paragraph (g)(11) of proposed Rule 819 would address emergency 
disciplinary actions and is drawn from the appendix B guidance. It 
would provide that an SBSEF may impose a sanction, including 
suspension, or take other summary action against a person

[[Page 28904]]

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) seeks to balance the need to allow an SBSEF to take summary 
action against the need to afford due process to respondents.\134\
---------------------------------------------------------------------------

    \134\ 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 provides that, if the rules of the SBSEF permit 
appeals,\135\ the SBSEF shall establish an appellate panel that is 
authorized to hear appeals. The composition of the panel would have to 
be consistent with proposed Rule 834(d) \136\ 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.
---------------------------------------------------------------------------

    \135\ Neither Sec.  37.206 or 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 is adhering to 
this permissive approach in this proposal but seeks comment on 
whether the final rules should require an SBSEF to create an appeals 
procedure.
    \136\ See supra note 131.
---------------------------------------------------------------------------

    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 be required to take into account the 
respondent's disciplinary history. In the event of demonstrated 
customer harm, any disciplinary sanction would also be required 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 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 preliminarily believes that combining text from 
Sec.  37.206 with the associated guidance from appendix B provides a 
logical set of procedures for addressing Core Principle 2 (Compliance 
with Rules), from requirements relating to enforcement staff generally 
(proposed Rule 819(g)(1)); to the composition of disciplinary panels 
and notices of charges (proposed Rules 819(g)(1) and (g)(2)); to rights 
to representation (proposed Rule 819(g)(4)), answer to charges and 
admission or failure to deny charges (proposed Rules 819(g)(5) and 
(g)(6)), denial of charges and right to a hearing (proposed Rule 
819(g)(7)), settlement offers (proposed Rule 819(g)(8)); and, finally, 
hearings (proposed Rule 819(g)(9)), decisions (proposed Rule 
819(g)(10)), emergency disciplinary actions (proposed Rule 819(g)(11)), 
right to appeal (proposed Rule 819(g)(12)), and disciplinary sanctions 
(proposed Rule 819(g)(13)).
    The Commission recognizes that a set of rules that govern 
compliance and enforcement matters for SBSEFs could, in the abstract, 
differ in a number of details from the rules adopted by the CFTC in 
subpart C of part 37 and still plausibly satisfy the requirements of 
Core Principle 2. However, in light of the baseline set by the CFTC's 
rules, the Commission is concerned that implementing rules for SBSEFs 
having major or even minor differences with the rules applicable to 
SEFs could increase compliance costs and cause confusion for dually 
registered SEF/SBSEFs and market participants. This would particularly 
be the case if a potential violation involved a rule that was not 
specific to the swap or SBS market, but rather involved member conduct 
generally. No regulatory purpose would be served if the SEF/SBSEF had 
to pursue one cause of action against a member pursuant to a CFTC rule 
and a slightly different cause of action pursuant to an SEC rule, for 
the same underlying facts.
    The Commission seeks comment on the following:
    95. Do you agree generally with the manner in which the Commission 
is proposing to implement Core Principle 2? Why or why not?
    96. In particular, do you agree with the proposed access 
requirements in Rule 819(c)? Why or why not? Do you see differences 
between the swap and SBS markets that warrant different requirements 
for access to a SEF than to an SBSEF? If so, please describe.
    97. Do you see differences between the swap and SBS markets that 
warrant different audit trail requirements or trade surveillance 
capability for SBSEFs than for SEFs? If so, please describe.
    98. Do you believe that SBSEFs, like SEFs, should be able to 
utilize regulatory service providers? What entities currently serve as 
regulatory service providers for SEFs? Do you believe that the types of 
regulatory service providers that could be utilized by SBSEFs under 
proposed Rule 819(e)(1) are appropriate? If not, what other regulatory 
service providers should be permitted?
    99. Do you agree with how the Commission is proposing to implement 
requirements for disciplinary procedures and sanctions in proposed Rule 
819(g)? Why or why not?
    100. In particular, do you agree with the manner in which the 
Commission is proposing to incorporate significant portions of the 
appendix B guidance into proposed Rule 819(g)? Why or why not? Are 
there provisions from the guidance that the Commission is proposing to 
incorporate that you believe should be revised or omitted entirely? If 
so, please describe. Are there provisions from the guidance that the 
Commission has not proposed to incorporate but that you believe should 
be incorporated? If so, please describe.
    101. Do existing SEFs treat the appendix B guidance as if it were 
mandatory? By converting the non-binding guidance applicable to SEFs 
into formal rules that would apply to SBSEFs, would dually registered 
entities be compelled to deviate from their present practices? If so, 
please describe.
    102. Do you believe that proposed Rule 819(g)(12) should be revised 
to require an SBSEF to permit appeals of enforcement decisions to an 
appellate panel established by the SBSEF, despite the fact that neither 
subpart C of part 37 nor the CFTC's associated guidance requires 
appeals? Why or why not?
2. Provisions of Rule 819 Adapted From Other SEF Requirements
    Proposed Rule 819 includes four paragraphs--(h), (i), (j), and 
(k)--that are not derived from subpart C of part 37,

[[Page 28905]]

which directly implements CEA Core Principle 2, or from the associated 
guidance in appendix B to part 37. Instead, these four paragraphs are 
modelled on requirements for SEFs located in other parts of the CFTC's 
rules. Because these requirements fall under the general heading of 
``Compliance with Rules,'' the Commission is proposing them as part of 
Rule 819, which implements SEA Core Principle 2.
a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board 
Members, Committee Members, and Consultants
    Paragraph (h) of proposed Rule 819 generally would 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 modelled 
on Sec.  1.59 of the CFTC's rules, which requires an SRO (which term, 
under Sec.  1.3 of the CFTC regulations, includes a SEF) 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.
    In particular, Sec.  1.59(b)(1)(i) requires an SRO to maintain in 
effect rules that, at a minimum, prohibit employees of the SRO from 
trading, directly or indirectly, in:
     Any ``commodity interest'' \137\ traded on or cleared by 
the employing contract market, SEF, or clearing organization;
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    \137\ See Sec.  1.59(a)(8) (defining ``commodity interest'' to 
mean ``any commodity futures, commodity option or swap contract 
traded on or subject to the rules of a contract market, a swap 
execution facility or linked exchange, or cleared by a derivatives 
clearing organization, or cash commodities traded on or subject to 
the rules of a board of trade which has been designated as a 
contract market'').
---------------------------------------------------------------------------

     Any ``related commodity interest''; \138\
---------------------------------------------------------------------------

    \138\ See Sec.  1.59(a)(9) (defining ``related commodity 
interest'' to mean ``any commodity interest which is traded on or 
subject to the rules of a contract market, swap execution facility, 
linked exchange, or other board of trade, exchange, or market, or 
cleared by a derivatives clearing organization, other than the self-
regulatory organization by which a person is employed, and with 
respect to which: (i) such employing self-regulatory organization 
has recognized or established intermarket spread margins or other 
special margin treatment between that other commodity interest and a 
commodity interest which is traded on or subject to the rules of the 
employing self-regulatory organization; or (ii) such other self-
regulatory organization has recognized or established intermarket 
spread margins or other special margin treatment with another 
commodity interest as to which the person has access to material, 
nonpublic information'').
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     A commodity interest traded on a contract market or SEF or 
cleared by a DCO other than the employing SRO if the employee has 
access to material, non-public information concerning such commodity 
interest;
     A commodity interest traded on or cleared by a ``linked 
exchange'' if the employee has access to material, non-public 
information concerning such commodity interest.
    The Commission is proposing to adapt Sec.  1.59(b)(1) into 
Regulation SE in a simplified way. The Commission preliminarily 
believes that, in the SBS market, the policy goals of the rule can be 
achieved without the complexities of the CFTC definitions of 
``commodity interest'' and ``related commodity interest.'' 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 (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 Commission preliminarily believes that 
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. 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), modelled on Sec.  1.59(b)(1)(ii), would 
prohibit an SBSEF employee from disclosing to any other person any 
material non-public information which such employee obtains as a result 
of their employment at the SBSEF, and where such 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 
government acting in their official capacity.
    Paragraph (h)(3) of Rule 819, modelled 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. The first and the fourth carve-outs 
listed above are comparable to those listed in Sec.  1.59(b)(2). The 
Commission is proposing 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 Commission is proposing to depart from the CFTC definition of 
``pooled investment vehicle'' \139\ to adapt it for the SBS and 
securities markets. Proposed Rule (h)(1)(ii) would define ``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

[[Page 28906]]

the XYZ security does not exceed 10% of the fund's holdings. The 
proposed 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.
---------------------------------------------------------------------------

    \139\ 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, the Commission notes that, 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) still would 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 modelled 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),\140\ 
would address prohibited conduct not just of employees of an SBSEF, but 
also of governing board members, committee members, and consultants of 
the SBSEF. Paragraph (h)(4)(i)(A) is modelled 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 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. Paragraph (h)(4)(i)(B), modelled 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 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. Paragraph 
(h)(4)(ii), modelled on Sec.  1.59(d)(2), would provide that 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 paragraph (h)(4) of this section from an employee, governing board 
member, committee member, or consultant.
---------------------------------------------------------------------------

    \140\ Section 1.59(c) applies only to national futures 
associations and is not considered here.
---------------------------------------------------------------------------

    The Commission preliminarily believes that persons who have 
professional duties with an SBSEF should not trade on material non-
public information derived from the SBSEF or improperly disclose that 
information to third parties, and therefore that harmonizing with the 
comparable CFTC rule as closely as practicable, taking into account the 
difference in products subject to the respective jurisdictions of the 
SEC and CFTC, is an appropriate means of furthering that policy goal. 
If the Commission adopts Rule 819(h) in substantially the same form as 
proposed herein, dually registered SEF/SBSEFs would be able to utilize 
the same rules and procedures for complying with Rule 819(h) as they do 
for Sec.  1.59. The Commission recognizes that the scope of assets 
under restriction would differ in Rule 819(h) than in Sec.  1.59, as 
reflected in the SEC's use of the term ``covered interest'' rather than 
``commodity interest'' in the analogous CFTC provisions, as well as the 
significant differences in the potential exemptions from the trading 
restriction (including in the ``pooled investment vehicle'' 
definition). Nevertheless, SBS are different from swaps, so the 
material non-public information that can be obtained from observing 
order submission and SBS trading on an SBSEF is different from the 
material non-public information that can be obtained from observing 
order submission and swap trading on a SEF. The Commission 
preliminarily believes, therefore, that it is appropriate for Rule 
819(h) to utilize a definition of ``covered interest'' to denote the 
scope of the trading restrictions in the proposed rule--and a 
definition of ``pooled investment vehicle'' to denote the scope of one 
of the potential exemptions from those restrictions--that is customized 
for the SBS and securities markets.
    The Commission seeks comment on the following:
    103. Do you believe in general that the Commission should 
incorporate into Regulation SE a rule that restricts how persons with 
official duties at an SBSEF may utilize information that they obtain in 
the course of their official duties? Why or why not?
    104. Do you agree with the specific language proposed by the 
Commission to adapt Sec.  1.59 into proposed Rule 819(h)? If not, how 
would you revise the proposed rule?
    105. In particular, do you agree with the Commission's proposed 
definition of ``covered interest''? Why or why not? Do you believe that 
the term ``covered interest'' should be expanded to include securities 
underlying an index swap and other securities issued by an issuer whose 
securities underlie an index swap that trade on a dually registered 
SEF/SBSEF? Why or why not?
    106. Do you agree with the proposed potential exemptions from the 
trading restrictions in proposed Rule 819(h)(3)? For example, do you 
believe in general that an SBSEF should be permitted to allow its 
employees, governing board members, committee members, and consultants 
to hold covered interests through pooled investment vehicles? Why or 
why not?
    107. Do you agree with the Commission's proposed definition of 
``pooled investment vehicle''? Why or why not? Do you agree with the 
Commission's proposed requirement that no covered interest may 
constitute more than 10% of the pooled investment vehicle? Why or why 
not? If you believe another threshold would be more appropriate, please 
justify that threshold.
    108. Are there additional provisions of Sec.  1.59 that the 
Commission has omitted but which you believe should be incorporated 
into Regulation SE? If so, which provisions and why?
b. Rule 819(i)--Service on SBSEF Governing 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 impose certain other duties on the SBSEF 
associated with that fundamental requirement. Proposed Rule 819(i) is 
modelled on Sec.  1.63 of the CFTC's rules, which imposes similar 
requirements in connection with SROs (which term, under the CEA, 
includes SEFs).
    Section 1.63(b) requires each SRO to maintain in effect rules that 
render a person ineligible to serve on its disciplinary committees, 
arbitration panels, oversight panels, or governing board \141\ who 
meets any of six enumerated criteria. These criteria generally relate 
to a disciplinary offense having been committed by that person within 
the past three years. While

[[Page 28907]]

Sec.  1.63(b) requires the SRO to implement rules imposing a bar, Sec.  
1.63(c) in addition imposes a bar on such persons directly, stating 
that no person may serve on a disciplinary committee, arbitration 
panel, oversight panel or governing board of an SRO if such person is 
subject to any of the conditions listed in Sec.  1.63(b). Section 
1.63(d) requires an SRO to maintain, keep current, and provide to the 
CFTC and the public a list of the rule violations which constitute 
disciplinary offenses that would trigger the bar in Sec.  1.63. Section 
1.63(e) requires an SRO to submit to the CFTC, 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 Sec.  1.63 during the 
prior year.
---------------------------------------------------------------------------

    \141\ Section 1.63 uses the term ``governing board'' throughout. 
Certain other CFTC rules that the Commission is proposing to adapt 
into Regulation SE use ``board of directors'' to denote the same 
concept. As noted above, the Commission is proposing to utilize the 
term ``governing board'' throughout Regulation SE, even when the 
parallel CFTC rule on which an SEC rule is based uses ``board of 
directors.'' See supra note 29.
---------------------------------------------------------------------------

    Paragraph (i) of proposed Rule 819 is closely modelled on Sec.  
1.63. Paragraph (i)(1), like Sec.  1.63(b), would require an SBSEF to 
maintain rules \142\ that render a person ineligible to serve on its 
disciplinary committees,\143\ arbitration panels, oversight 
panels,\144\ or governing boards who falls into any of six enumerated 
criteria, all of which are modelled closely on the criteria in Sec.  
1.63(b).\145\ Paragraph (i)(2), modelled 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 who 
meets any of the six criteria enumerated in proposed Rule 819(i)(1). 
Paragraph (i)(3), modelled on Sec.  1.63(d), would require an SBSEF to 
submit to the Commission a schedule listing the rule violations which 
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), modelled on Sec.  1.63(f), would provide that, 
whenever an SBSEF finds by final decision that a person has committed a 
disciplinary offense and such finding makes such 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.
---------------------------------------------------------------------------

    \142\ Section 1.63(b), in relevant part, requires a SEF to 
maintain rules that have been submitted to the Commission pursuant 
to section 5c(c) of the CEA and part 40 of the CFTC's rules. As 
noted above, the Commission is proposing 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 which have been submitted to 
the Commission pursuant to Rules 806 or 807.
    \143\ 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 
is modelling its proposed 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 proposed Rule 802, since the term is 
used by multiple rules in Regulation SE.
    \144\ 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 
is modelling its proposed 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 proposed Rule 802, since the 
term is used by multiple rules in Regulation SE.
    \145\ 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 is proposing 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.
---------------------------------------------------------------------------

    Paragraph (i)(6) of proposed Rule 819(i) would define the terms 
``arbitration panel,'' ``disciplinary offense,'' and ``final decision'' 
which are used in proposed Rule 819(i).\146\ These definitions are 
closely modelled on those provided in Sec.  1.63(a).\147\
---------------------------------------------------------------------------

    \146\ 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. Proposed 
Rule 819(i)(6)(ii) would define ``disciplinary offense'' as: Any 
violation of the rules of an SBSEF, except a violation resulting in 
fines aggregating to less than $5,000 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.
    \147\ Since these terms are used only in proposed Rule 819(i) 
and not elsewhere in Regulation SE, the Commission is defining them 
in proposed Rule 819(i) and not the omnibus definitions rule in 
Regulation SE (Rule 802).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to bar 
persons with inappropriate disciplinary histories from serving on the 
disciplinary committees, arbitration panels, oversight panels, or 
governing board of an SBSEF, and that closely modelling a rule in 
Regulation SE on Sec.  1.63 would be an appropriate means of furthering 
that policy goal. The requirements of Sec.  1.63 should be well 
understood by SEFs, who have been complying with them for several 
years, and incorporating similar requirements into Regulation SE should 
impose few if any additional costs on dually registered SEF/SBSEFs. The 
Commission preliminarily believes, in particular, that establishing 
criteria for the bar that are as similar as possible to the CFTC's 
criteria would avoid a situation where a person is ineligible under one 
agency's rules to serve on a disciplinary committee, arbitration panel, 
oversight panel, or the governing board, but would be eligible under 
the other agency's rules.
    The Commission seeks comment on the following:
    109. Do you believe in general that Regulation SE should include a 
rule that prohibits persons having an inappropriate disciplinary 
history from serving on the disciplinary committees, arbitration 
panels, oversight panels, or governing board of an SBSEF? Why or why 
not?
    110. In particular, do you agree with the specific language 
proposed by the Commission to adapt Sec.  1.63 into proposed Rule 
819(i)? If not, how would you revise the rule?

[[Page 28908]]

    111. Are there additional provisions of Sec.  1.63 that the 
Commission has not adapted into proposed Rule 819(i) but which you 
believe should be incorporated? If so, which provisions and why?
    112. Proposed Rule 819(i)(1)(iv) would require an SBSEF to have 
rules that render a person ineligible to serve on its disciplinary 
committees, arbitration panels, oversight panels, or governing board if 
that person is subject to an agreement with the Commission, an SBSEF, 
or an SRO not to apply for registration with the Commission or 
membership in any SRO. Should similar agreements with any other types 
of entities be included in the ineligibility provision of proposed Rule 
819(i)(1)(iv)? For example, should registered futures associations such 
as the NFA be included in this list? Why or why not?
c. 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. Section 1.67(b) provides, in relevant part, 
that upon any final disciplinary action \148\ in which a contract 
market or SEF finds that a member has committed a rule violation that 
involved a transaction for a customer,\149\ whether executed or not, 
and that resulted in harm to the customer, the contract market or SEF 
must promptly provide notice of the disciplinary action to the futures 
commission merchant or other registrant. The futures commission 
merchant or other registrant that receives the notice must promptly 
provide written notice of the disciplinary action to the customer as 
disclosed on its books and records. Such written notice must include 
the principal facts of the disciplinary action and a statement that the 
contract market or SEF 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.
---------------------------------------------------------------------------

    \148\ See Sec.  1.67(a) (defining ``final disciplinary action'' 
as any decision by or settlement with a contract market or swap 
execution facility in a disciplinary matter which cannot be further 
appealed at the contract market or 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).
    \149\ See Sec.  1.3 (defining ``customer'' as any person who 
uses a futures commission merchant, introducing broker, commodity 
trading advisor, or commodity pool operator as an agent in 
connection with trading in any commodity interest; Provided, 
however, an owner or holder of a proprietary account as defined in 
this section shall not be deemed to be a customer within the meaning 
of section 4d of the CEA, the regulations that implement sections 4d 
and 4f of the CEA and Sec.  1.35, and such an owner or holder of 
such a proprietary account shall otherwise be deemed to be a 
customer within the meaning of the CEA and Sec. Sec.  1.37 and 1.46 
and all other sections of these rules, regulations, and orders which 
do not implement sections 4d and 4f of the CEA).
---------------------------------------------------------------------------

    Paragraph (j)(1) of proposed Rule 819 is designed to replicate for 
SBSEFs the fundamental duty of Sec.  1.67 and would provide 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 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.\150\ 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.
---------------------------------------------------------------------------

    \150\ 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 is proposing 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 proposed definition for ``final 
disciplinary action'' is closely modelled on the CFTC's definition in 
Sec.  1.67(a).\151\ The proposed definition of ``customer'' is only 
loosely modelled on the definition of ``customer'' provided in Sec.  
1.3, which includes complexities deriving from the CEA that the 
Commission does not believe are necessary or appropriate to adapt into 
a rule that applies to SBSEFs.\152\ The Commission is proposing to 
define ``customer'' in proposed Rule 819(j)(3)(i) as a person that 
utilizes an agent in connection with trading on an SBSEF.
---------------------------------------------------------------------------

    \151\ See proposed Rule 819(j)(3)(ii) (defining ``final 
disciplinary action'' as any decision by or settlement with an SBSEF 
in a disciplinary matter which 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).
    \152\ The Commission notes, finally, that the definitions of 
``customer'' and ``final disciplinary action'' would apply only 
within proposed Rule 819(j), so they are not included in the omnibus 
definitions rule for proposed Regulation SE (Rule 802).
---------------------------------------------------------------------------

    The Commission preliminarily believes that, if an SBSEF member 
commits a rule violation that involved a transaction for the customer 
and financial harm to the customer results, the customer should be 
apprised of that fact. The Commission preliminarily believes, 
therefore, that closely modelling a rule in Regulation SE on Sec.  1.67 
would be an appropriate means of furthering that policy goal. The 
requirements of Sec.  1.67 should be well understood by SEFs, who have 
been complying with them for several years, and incorporating similar 
requirements into Regulation SE should impose lower compliance costs on 
dually registered SEF/SBSEFs.
    The Commission seeks comment on the following:
    113. Do you believe in general that Regulation SE should include a 
rule designed to provide a customer of an SBSEF member notice if the 
member commits a violation of an SBSEF rule that results in harm to the 
customer? Why or why not?
    114. In particular, do you agree with the specific language 
proposed by the Commission to adapt Sec.  1.67 into proposed Rule 
819(j)? If not, how would you revise that language?
    115. Do you agree with the proposed definition of ``customer'' in 
proposed Rule 819(j)? If not, how would you revise it?
d. 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 process, which could 
be an agent of its own choosing or, by default, the SBSEF. Proposed 
Rule 819(k) is modelled on Sec.  15.05(i) of the CFTC's rules, which 
concerns the designation of agents for foreign persons participating on 
``reporting markets,'' a category in the CFTC's rules that includes 
SEFs.\153\ With respect to SEFs, Sec.  15.05(i) provides that a SEF 
that permits a foreign trader to effect contracts, agreements, or 
transactions on the SEF shall be deemed to be the agent of the foreign 
trader with respect to any such contracts, agreements, or transactions 
executed by the foreign trader. Sec.  15.05(i) further provides that 
service or delivery of any communication issued by or on behalf

[[Page 28909]]

of the CFTC to the SEF shall constitute valid and effective service 
upon the foreign trader, and that a SEF that has been served with, or 
to which there has been delivered, a communication issued by or on 
behalf of the CFTC to a foreign trader shall transmit the communication 
promptly and in a manner which is reasonable under the circumstances, 
or in a manner specified by the CFTC in the communication, to the 
foreign trader.
---------------------------------------------------------------------------

    \153\ 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 (i)(1) of Sec.  15.05 provides, with respect to SEFs, 
that it shall be unlawful for a SEF to permit a foreign trader to 
effect contracts on the SEF unless the SEF has informed the foreign 
trader of the requirements of Sec.  15.05. Paragraph (i)(2) of Sec.  
15.05 permits a foreign trader to appoint its own agent for service of 
process if it provides a copy of the agency agreement to the SEF, and 
the SEF files the agreement with the CFTC. Paragraph (i)(3) of Sec.  
15.05 provides that the foreign trader would have to notify the CFTC 
immediately if that agreement is no longer in effect.
    Paragraph (k)(1) of proposed Rule 819 is modelled 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'' \154\ 
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 shall 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 modelled 
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 proposed Rule 819(k).
---------------------------------------------------------------------------

    \154\ ``Non-U.S. member'' would be a defined term in proposed 
Rule 819(k) that does not appear in Sec.  15.05 of the CFTC's rules 
but which, the Commission preliminarily believes, 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 thus is proposing to 
define ``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 modelled 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, modelled 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.
    The Commission preliminarily believes that, 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 preliminarily believes that the CFTC has adequately 
addressed these concerns with Sec.  15.05(i), and therefore that 
proposed Rule 819 should include provisions adapted from Sec.  15.05(i) 
for application to SBSEFs. If the Commission ultimately adopts Rule 
819(k) in the same or similar form as it is proposed, non-U.S. members 
of dually registered SEF/SBSEFs that trade both swaps and SBS should 
already be in compliance with these requirements.
    The Commission seeks comment on the following:
    116. Do you believe in general that Regulation SE should include a 
provision making an SBSEF the default agent for service of process for 
its non-U.S. members? Why or why not?
    117. Do you agree with the specific language proposed by the 
Commission to adapt Sec.  15.05(i) into proposed Rule 819(k)? If not, 
how would you revise the rule?
    118. Are there additional provisions of Sec.  15.05 that the 
Commission has omitted but which you believe should be incorporated 
into proposed Rule 819(k)? If so, which provisions and why?
    119. Do you anticipate that SBSEFs will have any non-U.S. members? 
Do you believe that proposed Rule 819(k) will even be necessary?
    120. Do you agree with the proposed definition of ``non-U.S. 
member'' in Rule 802? If not, how would you revise it?

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

    Core Principle 3 \155\ 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.\156\
---------------------------------------------------------------------------

    \155\ Section 3D(d)(3) of the SEA, 15 U.S.C. 78c-4(d)(3).
    \156\ See section 5h(f)(3) of the CEA, 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 3 in subpart D of part 37. 
Section 37.300 of subpart D repeats the statutory text of CEA Core 
Principle 3. Sec.  37.301 provides that, for a SEF to demonstrate its 
compliance with the core principle, it must, at the time it submits a 
new swap contract pursuant to part 40, provide the applicable 
information as set forth in appendix C to part 38 (Demonstration of 
Compliance That a Contract is not Readily Susceptible to 
Manipulation).\157\ Section 37.301 also states that a SEF may refer to 
the guidance provided in appendix B of part 37, which provides in 
relevant part that, when identifying a reference price, a SEF should 
either calculate its own reference price using suitable and well-
established acceptable methods or carefully select a reliable third-
party index.
---------------------------------------------------------------------------

    \157\ Appendix C to part 38 provides, inter alia, that careful 
consideration should be given to the potential for manipulation or 
distortion of the cash settlement price of a swap, as well as the 
reliability of that price as an indicator of cash market values. 
Appropriate consideration also should be given to the commercial 
acceptability, public availability, and timeliness of the price 
series that is used to calculate the cash settlement price. 
Documentation demonstrating that the settlement price index is a 
reliable indicator of market values and conditions and is highly 
regarded by industry/market agents should be provided. Such 
documentation may take on various forms, including carefully 
documented interviews with principal market trading agents, pricing 
experts, marketing agents, etc. Appropriate consideration also 
should be given to the commercial acceptability, public 
availability, and timeliness of the price series that is used to 
calculate the cash flows of the swap.
---------------------------------------------------------------------------

    Proposed Rule 820 would implement Core Principle 3. Although, like 
Sec.  37.300, proposed Rule 820 repeats the statutory text of the Core 
Principle, the Commission preliminarily believes that it is not 
necessary or appropriate to harmonize with the CFTC guidance

[[Page 28910]]

referenced in Sec.  37.301, as this guidance was developed for products 
other than SBS.
    The Commission seeks comment on the following:
    121. Do you agree with how the Commission is proposing to implement 
Core Principle 3? Why or why not? If not, what other rules would you 
suggest?

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

    Core Principle 4 \158\ 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 \159\ is substantively 
identical.
---------------------------------------------------------------------------

    \158\ Section 3D(d)(4) of the SEA, 15 U.S.C. 78c-4(d)(4).
    \159\ Section 5h(f)(4) of the CEA, 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 4 in subpart E of part 37. 
Section 37.401 of subpart E provides that a SEF must collect and 
evaluate data on its market participants' market activity; demonstrate 
an effective program for conducting real-time monitoring to detect and 
resolve abnormalities; demonstrate the ability to comprehensively and 
accurately reconstruct daily trading; and demonstrate that it has 
access to sufficient information to assess whether trading in the swaps 
on its market, in the index or instruments used as a reference price, 
or other underlying instruments is being used to affect prices on its 
market. Sections 37.402 and 37.403 impose additional requirements for 
physical-delivery swaps and cash-settled swaps, respectively. Section 
37.404(a) requires a SEF to demonstrate that it has access to 
sufficient information to assess whether trading in swaps listed on its 
market, in the index or instrument used as a reference price, or in the 
underlying commodity for its listed swaps is being used to affect 
prices on its market. Section 37.404(b) requires a SEF to have rules 
that require its market participants to keep records of their trading, 
including records of their activity in the index or instrument used as 
a reference price, the underlying commodity, and related derivatives 
markets, and make such records available, upon request, to the SEF or, 
if applicable, to its regulatory service provider, and the CFTC. 
Section 37.405 requires a SEF to 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 SEF. 
Section 37.406 requires a SEF to have the ability to reconstruct all 
trading on its facility, and requires that all audit-trail data and 
reconstructions shall be made available to the CFTC in a form, manner, 
and time that is acceptable to the CFTC. Section 37.407 requires a SEF 
to comply with subpart E of part 37 through a dedicated regulatory 
department or by contracting with a regulatory services provider. 
Section 37.408 provides that SEFs may refer to the guidance in appendix 
B to part 37 to demonstrate compliance with subpart E of part 37.\160\
---------------------------------------------------------------------------

    \160\ The guidance pertaining to Core Principle 4 has 
subsections entitled ``general requirements,'' ``physical-delivery 
swaps,'' ``cash-settled swaps,'' ``ability to obtain information,'' 
and ``risk controls for trading.''
---------------------------------------------------------------------------

    Proposed Rule 821 would implement Core Principle 4 and is closely 
modelled on the rules in subpart E of part 37. The Commission 
preliminarily believes that the CFTC has implemented Core Principle 4 
for SEFs in an appropriate way, and that closely harmonizing with the 
CFTC rule would yield comparable regulatory benefits while imposing 
only marginal additional costs. The Commission does not observe any 
differences between the swap and SBS markets sufficient to warrant a 
different approach to how a SEF/SBSEF should monitor trading and trade 
processing.
    As noted above, the Commission preliminarily believes, in 
attempting to harmonize with the CFTC's regulatory regime for SEFs, 
that it would be preferable to adapt the CFTC's guidance and acceptable 
practices from appendix B to part 37 into formal rules, where 
appropriate. Although the Commission considered proposing a stand-alone 
rule that adapts the guidance pertaining to Core Principle 4, the 
Commission is proposing instead to weave concepts--and, in some cases, 
specific language--from the guidance together with the CFTC's original 
rule text, as the guidance itself follows the structure of the rule. 
The Commission illustrates its approach in the following proposed 
rules, where the analogous CFTC rule language is in plain text and 
language adapted from the guidance is italicized:
     Proposed Rule 821(b)(3): An SBSEF shall: ``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.''
     Proposed Rule 821(d)(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.''
     Proposed Rule 821(d)(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.''
     Proposed Rule 821(e)(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

[[Page 28911]]

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.''
     Proposed Rule 821(e)(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.''
     Proposed Rule 821(f): ``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.''
    The Commission also is proposing a stand-alone provision derived 
from the appendix B guidance as Rule 821(b)(5), which would provide 
than an SBSEF must 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.
    Finally, in several instances in subpart E of part 37, the CFTC 
uses the term ``commodity'' with respect to the swap underlier. In 
proposed Rule 821, the Commission is proposing instead to use the more 
generic term ``asset'' to refer to the underlier.
    The Commission seeks comment on the following:
    122. Do you agree in general with the Commission's approach to 
implementing Core Principle 4? Why or why not? In particular, do agree 
with how the Commission is proposing to adapt the CFTC guidance on Core 
Principle 4 by converting appropriate parts of it into a formal rule? 
Why or why not?
    123. In particular, is there any language that the Commission is 
proposing to adapt from subpart E of part 37 into proposed Rule 821 
that you believe is not appropriate? If so, how would you revise it?
    124. Are there any aspects of proposed Rule 821 that derive from 
the guidance that you believe are inappropriate for the Commission to 
incorporate into its own rules, or that you believe the Commission is 
proposing to incorporate inappropriately? If so, please discuss.
    125. Are there any aspects of the CFTC's guidance that you believe 
should also be incorporated into the SEC rule but are not present in 
proposed Rule 821? If so, please describe.

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

    Core Principle 5 \161\ 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 \162\ is 
substantively identical.
---------------------------------------------------------------------------

    \161\ Section 3D(d)(5) of the SEA, 15 U.S.C. 78c-4(d)(5).
    \162\ Section 5h(f)(5) of the CEA, 7 U.S.C. 7b-3(f)(5).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 5 in subpart F of part 37. 
Section 37.500 of subpart F repeats the statutory text of Core 
Principle 5. Section 37.501 requires a SEF to establish and enforce 
rules that will allow the SEF 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 the rule, including the capacity to carry out 
international information-sharing agreements as the Commission may 
require. Section 37.502 requires a SEF to have rules that allow it to 
collect information on a routine basis, allow for the collection of 
non-routine data from its market participants, and allow for its 
examination of books and records kept by the market participants on its 
facility. Section 37.503 requires a SEF to provide information in its 
possession to the CFTC upon request, in a form and manner that the CFTC 
approves. Section 37.504 requires a SEF to share information with other 
regulatory organizations, data repositories, and third-party data 
reporting services as required by the CFTC or as otherwise necessary 
and appropriate to fulfill its self-regulatory and reporting 
responsibilities. Section 37.504 further provides that appropriate 
information-sharing agreements can be established with such entities or 
the CFTC can act in conjunction with the SEF to carry out such 
information sharing.
    Proposed Rule 822 would implement Core Principle 5 and is 
substantively identical to subpart F of part 37. Paragraph (a) of 
proposed Rule 822 repeats the statutory text of Core Principle 5. 
Paragraph (b), modelled 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.\163\ 
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.
---------------------------------------------------------------------------

    \163\ While Sec.  37.502 of subpart F uses the term ``market 
participant,'' proposed Rule 822 substitutes 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 53.

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

[[Page 28912]]

    The Commission preliminarily believes that closely harmonizing with 
the CFTC's rules associated with CEA Core Principle 5 would 
appropriately implement SEA Core Principle 5. By harmonizing with the 
CFTC's approach, a SEF/SBSEF could have the same information-collection 
rules and information-sharing agreements. The Commission could thus 
obtain comparable regulatory benefits while imposing few if any 
additional costs on SEF/SBSEFs.
    The Commission seeks comment on the following:
    126. Do you agree generally with how the Commission is proposing to 
implement Core Principle 5? Why or why not?
    127. In particular, do you believe that closely harmonizing with 
subpart F of the CFTC's rules is appropriate? Why or why not? If not, 
please identify any provision(s) in the CFTC rules that you believe 
should not be adapted for SBSEFs and explain your reasoning.

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

    SEA Core Principle 6 \164\ requires 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.\165\ CEA Core Principle 7 for SEFs \166\ is substantively 
identical to SEA Core Principle 6.
---------------------------------------------------------------------------

    \164\ Section 3D(d)(6) of the SEA, 15 U.S.C. 78c-4(d)(6).
    \165\ 15 U.S.C. 78c-3(a)(1). See supra note 94 and accompanying 
text (discussing mandatory clearing provisions).
    \166\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 7 in subpart H of part 37. 
Section 37.700 of subpart H repeats the statutory text of Core 
Principle 7. Section 37.701 provides that transactions executed on or 
through the SEF that are required to be cleared or are voluntarily 
cleared by the counterparties shall be cleared through a registered or 
exempt DCO. Section 37.702 requires a SEF to provide for the financial 
integrity of its transactions by establishing minimum financial 
standards for its members, which shall at a minimum require members to 
be ECPs. Section 37.702 further requires a SEF to provide for the 
financial integrity of its transactions by ensuring that the SEF, for 
transactions cleared by a DCO, has the capacity to route transactions 
to the DCO in a manner acceptable to the DCO; and by coordinating with 
each DCO to which it submits transactions for clearing in the 
development of rules and procedures to facilitate prompt and efficient 
transaction processing. Section 37.703 requires a SEF to monitor its 
members to ensure that they continue to qualify as ECPs.
    Proposed Rule 823 would implement SEA Core Principle 6 and is 
substantively identical to subpart H of part 37. Paragraph (a) of 
proposed Rule 823 repeats the statutory text of the Core Principle. 
Paragraph (b), like Sec.  37.701, would require that transactions 
executed on or through the 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 
\167\ or a clearing agency that has obtained an exemption from clearing 
agency registration to provide central counterparty services for SBS. 
Paragraph (c), like Sec.  37.702, would require an SBSEF to provide for 
the financial integrity of its transactions by establishing minimum 
financial standards for its members, which shall, at a minimum, require 
that each member qualify as an ECP. In addition, for transactions 
cleared by a registered clearing agency, an SBSEF must provide for the 
financial integrity of its transactions by ensuring that it has the 
capacity to route transactions to the registered clearing agency in a 
manner acceptable to the clearing agency for purposes of clearing, 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. 
Finally, paragraph (d), like Sec.  37.703, would require that an SBSEF 
monitor its members to ensure that they continue to qualify as ECPs.
---------------------------------------------------------------------------

    \167\ While subpart H of part 37 uses the term ``derivatives 
clearing organization,'' proposed Rule 823 substitutes the term 
``registered clearing agency'' in these places, the analogous term 
under the SEA.
---------------------------------------------------------------------------

    The Commission preliminarily believes that closely harmonizing with 
the CFTC's rules associated with CEA Core Principle 7 would 
appropriately implement SEA Core Principle 6. By harmonizing with the 
CFTC's approach, a SEF/SBSEF could have the same financial standards 
and requirements for its members, and develop the same processes for 
submitting swaps and SBS for clearing, thus promoting efficiency among 
its respective SEF and SBSEF operations. The Commission could thus 
obtain comparable regulatory benefits while imposing few if any 
additional costs on SEF/SBSEFs.
    The Commission seeks comment on the following:
    128. Do you agree generally with how the Commission is proposing to 
implement Core Principle 6? Why or why not?
    129. In particular, do you believe that closely harmonizing with 
subpart H of the CFTC's rules is appropriate? Why or why not? If not, 
please identify any provision(s) in the CFTC rules that you believe 
should not be adapted for SBSEFs and explain your reasoning.
    130. Are there any differences in the SBS market relative to the 
swap market that warrant imposing different or additive requirements 
with respect to the rules for implementing SEA Core Principle 6? If so, 
please explain.

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

    SEA Core Principle 7 \168\ 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 \169\ is substantively identical.
---------------------------------------------------------------------------

    \168\ Section 3D(d)(7) of the SEA, 15 U.S.C. 78c-4(d)(7).
    \169\ Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8).
---------------------------------------------------------------------------

    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].'' Paragraph (a)(1) of that guidance 
states that a SEF should have rules that authorize it to take certain 
actions in the event of an emergency. Furthermore, a SEF should have 
the authority 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 SEF's market or as part of a coordinated, cross-
market intervention. A SEF should 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 SEF are made in good faith to protect the 
integrity of the markets. However, the SEF should also have rules that 
allow it to take market actions as may be directed by the CFTC. 
Additionally, in situations where a swap is traded on

[[Page 28913]]

more than one platform, emergency action to liquidate or transfer open 
interest shall be as directed, or agreed to, by the CFTC or its staff. 
The SEF's rules should include procedures and guidelines for decision-
making and implementation of emergency intervention that avoid 
conflicts of interest, and include alternate lines of communication and 
approval procedures to address emergencies associated with real time 
events. To address perceived market threats, the SEF should have rules 
that allow it to take emergency actions, including imposing or 
modifying position limits, imposing or modifying price limits, imposing 
or modifying intraday market restrictions, imposing special margin 
requirements, ordering the liquidation or transfer of open positions in 
any contract, ordering the fixing of a settlement price, extending or 
shortening the expiration date or the trading hours, suspending or 
curtailing trading in any contract, transferring customer contracts and 
the margin, or altering any contract's settlement terms or conditions, 
or, if applicable, providing for the carrying out of such actions 
through its agreements with its third-party provider of clearing or 
regulatory services.
    Paragraph (a)(2) of the guidance provides that a SEF should 
promptly notify the CFTC 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 SEF 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. Furthermore, information on 
all regulatory actions carried out pursuant to a SEF's emergency 
authority should be included in a timely submission of a certified rule 
pursuant to part 40.
    Proposed Rule 824 would implement SEA Core Principle 7 and is 
closely modelled 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 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 preliminarily believes that adapting the CFTC's 
guidance associated with CEA Core Principle 8 into proposed Rule 824 
would appropriately implement SEA Core Principle 7. In particular, the 
Commission preliminarily agrees with the CFTC's principles-based 
approach to emergency situations, requiring SEF/SBSEFs to establish 
rules ex ante that generally would facilitate emergency actions but 
providing flexibility and independence with regard to specific actions 
that might be necessary. The Commission also preliminarily believes, as 
reflected in proposed Rule 824(c), that an SBSEF that exercises its 
emergency authority should be required to promptly notify the 
Commission of such exercise and to explain the basis for its actions. 
By harmonizing with the CFTC's approach, the Commission's intent is 
that, in many or even all instances, the SEF/SBSEF could file the same 
information regarding the situation to both agencies, rather than 
having to prepare one submission for the SEC and a different submission 
for the CFTC.
    The Commission seeks comment on the following:
    131. Do you agree generally with the Commission's approach to 
implementing SEA Core Principle 7? Why or why not?
    132. In particular, do you agree with how the Commission is 
proposing to adapt the guidance from appendix B to part 37 regarding 
CEA Core Principle 8? Is there language adapted from the guidance into 
proposed Rule 824 that you believe should be omitted or revised? If so, 
please describe.

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

    SEA Core Principle 8 \170\ 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 \171\ is substantively identical to SEA Core Principle 
8.
---------------------------------------------------------------------------

    \170\ Section 3D(d)(8) of the SEA, 15 U.S.C. 78c-4(d)(8).
    \171\ Section 5h(f)(9) of the CEA, 7 U.S.C. 7b-3(f)(9).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 9 in subpart J of part 37. 
Section 37.900 of subpart J repeats the statutory language of the Core 
Principle. Sec.  37.901 provides that, with respect to swaps traded on 
or through a SEF, the

[[Page 28914]]

SEF shall report specified swap data as provided in parts 43 and 45 of 
the CFTC's rules. Section 37.901 also requires the SEF to comply with 
part 16 of the CFTC's rules, which requires a ``reporting market'' 
(which term includes a SEF) to provide certain reports to the CFTC 
regarding trading activity on the SEF and to make certain of that 
information publicly available without charge.
    Proposed Rule 825 would implement SEA Core Principle 8 and is 
closely modelled on subpart J of part 37. Paragraph (a) of proposed 
Rule 825, like Sec.  37.900, repeats 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.\172\
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    \172\ 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.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that it would be 
appropriate to incorporate requirements for SBSEFs that are modelled on 
the requirements for SEFs in the CFTC's part 16. Unlike part 16, 
however, the Commission is not proposing to require SBSEFs to submit 
any information directly to the Commission.\173\ Rather, the Commission 
is proposing in paragraph (c) of Rule 825 to require only the 
publication, on an SBSEF's website, of a ``Daily Market Data Report.'' 
The data fields that the Commission is proposing to require for the 
Daily Market Data Report approximate, although they are not the same 
as, those required by part 16. The Commission preliminarily believes 
that the differences in the product markets (i.e., SBS vs. swaps and 
futures products) necessitate certain adaptations in the data fields so 
as to render the reports published by SBSEFs meaningful to SBS market 
participants and market observers.
---------------------------------------------------------------------------

    \173\ Contra Sec.  16.00(a) (requiring a reporting market to 
submit clearing member reports to the CFTC for each business day).
---------------------------------------------------------------------------

    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 
\174\);
---------------------------------------------------------------------------

    \174\ 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. This proposed requirement is similar to 
existing Commission requirements for broker-dealer reports on order 
routing and execution \175\ and is designed to allow the Daily Market 
Data Report to be automatically recognized and processed by a variety 
of software applications, thus making it immediately available for 
users to search, aggregate, compare, and analyze.\176\ This should 
enable SBS market participants and other market observers to obtain 
timely and consistent information on price, trading volume, and other 
SBSEF trading data in a manner that would facilitate search 
capabilities, and statistical and comparative analyses across SBSEFs 
and date ranges. In addition, requiring SBSEFs to use a PDF renderer as 
specified by the Commission would provide a corresponding human-
readable version of the machine-readable data, allowing end users 
without access to analytical software to read the disclosed 
information.
---------------------------------------------------------------------------

    \175\ See 17 CFR 242.606.
    \176\ XML (eXtensible Markup Language) is an open standard that 
defines, or ``tags,'' data using standard definitions. The tags 
establish a consistent structure of identity and context, which 
allows for automatic recognition and processing by software 
applications.
---------------------------------------------------------------------------

    Paragraph (c)(3)(ii) of proposed Rule 825 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 proposed 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.\177\ The Commission preliminarily believes that proposed Rule 
825(c)(3) could be subverted if an SBSEF could, for example, require 
that users--as a condition to viewing or downloading the Daily Market 
Data Report--waive any of the protections afforded under proposed Rule 
825(c)(3).
---------------------------------------------------------------------------

    \177\ 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.
---------------------------------------------------------------------------

    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. The approach taken in proposed Rule 825(c)(3) is 
similar to the approach taken by the Commission in Regulation SBSR, 
which uses the term ``widely

[[Page 28915]]

accessible'' \178\ to prohibit registered SDRs from charging fees for 
or imposing usage restrictions on the SBS transaction data that they 
are required to publicly disseminate under Regulation SBSR.\179\ When 
adopting the definition of ``widely accessible,'' the Commission noted 
that a registered SDR has a monopoly position over the SBS transaction 
information that it publicly disseminates and stated that ``there would 
be no other source from which the user could freely obtain this 
transaction information.'' \180\ The Commission preliminarily believes 
that a registered SBSEF is similarly situated, because it is the sole 
source of information about SBS trading activity on its market. The 
Commission also stated that the prohibition on usage restrictions 
encompasses an SDR-imposed restriction on bulk redistribution by third 
parties of the regulatorily mandated transaction data that the 
registered SDR publicly disseminates.\181\ For the same reasons, the 
proposed prohibition against an SBSEF imposing any usage restrictions 
on its Daily Market Data Report necessarily would encompass a 
prohibition on bulk redistribution of the Daily Market Data Report or 
any information contained therein. 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.
---------------------------------------------------------------------------

    \178\ See Rule 900(tt) of Regulation SBSR, 17 CFR 242.900(tt) 
(defining ``widely accessible'').
    \179\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, SEA Release No. 78321 (July 14, 
2016), 81 FR 53546, 53586-89 (August 12, 2016) (``Regulation SBSR 
Adopting Release II'').
    \180\ Id. at 53587.
    \181\ Id. (stating that: ``The Commission continues to believe 
that allowing unencumbered redistribution best serves the policy 
goals of wide availability of the data and minimization of 
information asymmetries in the [SBS] market. Because the Commission 
is prohibiting registered SDRs from imposing a restriction on bulk 
redistribution, third parties . . . will be able to take in the full 
data set and scrub, reconfigure, aggregate, analyze, repurpose, or 
otherwise add value to those data, and potentially sell that value-
added product to others'').
---------------------------------------------------------------------------

    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. Proposed Rule 825(c)(4) is designed 
to require an SBSEF to provide its market data in a timely fashion so 
that it can be assessed and utilized by the next business day. 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. Proposed Rule 825(c)(5) is designed to allow market 
observers to consult a reasonable number of previous reports on the 
SBSEF's website; the reports would be of less utility if an SBSEF could 
take down reports shortly after they are posted.
    The Commission seeks comment on the following:
    133. Do you agree in general with the Commission's approach for 
implementing SEA Core Principle 8? Why or why not?
    134. Do you agree with the adaptions that the Commission is 
proposing to the CFTC's part 16 for inclusion in proposed Rule 825(c)? 
In particular, do you concur with the Commission's proposal to require 
only the Daily Market Data Report (to be published on the SBSEF's 
website) and not to require any daily reports to the Commission? Why or 
why not? If not, what market data do you believe should be reported 
directly to the Commission, and why?
    135. Do you agree with the fields proposed by the Commission for 
the Daily Market Data Report in paragraphs (c)(1) and (2) of proposed 
Rule 825? If not, which fields do you believe are not appropriate, and 
why?
    136. Do you believe that any of the fields should be defined 
differently or more precisely? If so, please explain.
    137. Do you believe that the Commission should require additional 
fields? If so, what fields and why?
    138. Do you agree with the proposed requirement in Rule 825(c)(3) 
that the Daily Market Data Report should be available free of charge 
and without usage restrictions or encumbrances? Why or why not? Are 
there any clarifications that you would recommend to help promote free 
and unencumbered access to and use of the Daily Market Data Report and 
any information contained therein? If so, please discuss.
    139. Do you agree with the proposed requirement that the Daily 
Market Data Report should be made available 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? 
Why or why not? Is there some other format that the Commission should 
require? If so, what format and why?
    140. Do you agree with the proposed requirement in Rule 825(c)(4) 
that an SBSEF must 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? Why or why not? 
What is the current practice for the approximate time of day at which 
CFTC reporting markets make available their daily market data?
    141. Do you agree with the proposed requirement in Rule 825(c)(5) 
that an SBSEF 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? Why or why 
not? Do you believe that a longer or shorter period would be 
appropriate? If so, please explain.

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

    SEA Core Principle 9 \182\ 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.\183\ CEA Core Principle 10 for SEFs, although it includes 
an additional clause not present in the equivalent SEA Core Principle 
9,\184\ is substantively identical.
---------------------------------------------------------------------------

    \182\ Section 3D(d)(9) of the SEA, 15 U.S.C. 78c-4(d)(9).
    \183\ As discussed below in this section, the Commission is 
proposing 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 CFT 
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.
    \184\ 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).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 10 for SEFs in subpart K of 
part 37. Section 37.1000 of subpart K repeats the statutory language of 
the Core Principle. Section 37.1001 requires a SEF to maintain records 
of all

[[Page 28916]]

activities relating to the business of the facility, in a form and 
manner acceptable to the CFTC, for a period of at least five years, and 
that a SEF shall maintain such records, including a complete audit 
trail for all swaps executed on or subject to the rules of the SEF, 
investigatory files, and disciplinary files. Section 37.1001 does not 
itself set forth detailed record retention requirements. Instead, Sec.  
37.1001 directs SEFs to maintain the required records in accordance 
with Sec.  1.31 and part 45 of the CFTC's rules.
    Section 1.31 imposes on ``records entities'' (which term includes 
SEFs) various requirements relating to record retention and production. 
Section 1.31(a) sets out definitions of terms used throughout Sec.  
1.31. Section 1.31(b) sets out the duration of retention for different 
types of records. In particular, a records entity must keep regulatory 
records of any swap from the date that the regulatory record was 
created until at least five years after the termination, maturity, 
expiration, transfer, assignment, or novation of such swap. Section 
1.31(c) sets out the required form and manner of retention. Section 
1.31(d) provides that a records entity must, at its own expense, 
produce or make regulatory records accessible for inspection to CFTC 
staff or to the U.S. Department of Justice, and includes other details 
regarding production requests.
    Section 45.2 imposes various recordkeeping, retention, and 
retrieval requirements applicable to SEFs (among others) to support 
trade reporting. Section 45.2(a), among other things, requires a SEF to 
keep all records required by part 37. Section 45.2(c) sets out a record 
retention requirement.\185\ Section 45.2(d) imposes requirements on the 
form of retention. Sec.  45.2(e) imposes requirements on record 
retrievability. Section 45.2(h) \186\ imposes requirements for record 
inspection; in particular, all records required to be kept by Sec.  
45.2 shall be open to inspection upon request by any representative of 
the CFTC, the U.S. Department of Justice, the SEC, or by any 
representative of a prudential regulatory as authorized by the CFTC.
---------------------------------------------------------------------------

    \185\ See 7 CFR 45.2(c) (``All records required to be kept 
pursuant to this section shall be retained with respect to each swap 
throughout the life of the swap and for a period of at least five 
years following the final termination of the swap''). Section 
45.2(b) imposes duties on certain swap counterparties and is not 
germane to SEFs; therefore, the Commission is not considering 
adapting it into proposed Rule 826.
    \186\ Section 45.2(f) and (g) are marked as ``reserved.''
---------------------------------------------------------------------------

    To implement SEA Core Principle 9, the Commission is proposing Rule 
826, which would roughly approximate Sec. Sec.  1.31 and 45.2 while 
also drawing on concepts from the books and records requirements 
applicable to brokers, SEC-registered SROs, and other SEC-registered 
entities.\187\
---------------------------------------------------------------------------

    \187\ See infra section XIII (discussing in the context of 
proposed new 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 repeats the statutory text of 
the Core Principle. Paragraph (b) would require an SBSEF to keep full, 
complete, and systematic records,\188\ 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 proposed 
Rule 819(f) and all other records that an SBSEF is required to create 
or obtain under Regulation SE.
---------------------------------------------------------------------------

    \188\ 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 is including a definition of ``records'' in proposed 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 proposed five-year retention 
requirements are consistent with section 3D(d) of the SEA \189\ and are 
modelled 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.\190\
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    \189\ 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).
    \190\ 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 Act and the 
Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF, 
upon request of any representative of the Commission, to promptly \191\ 
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) also 
would include provisions modelled 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, including, without limitation:
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    \191\ In this context, ``prompt'' or ``promptly'' means making 
reasonable efforts to produce records that are requested by the 
staff during an examination without delay. The Commission believes 
that, in many cases, an SBSEF could, and therefore would be required 
to, furnish records immediately or within a few hours of a request. 
An SBSEF should produce records within 24 hours unless there are 
unusual circumstances.
---------------------------------------------------------------------------

    (A) Systems that maintain the security, signature, and data as 
necessary to ensure the authenticity of the information contained in 
electronic records and to monitor compliance with the SEA and the 
Commission's rules thereunder;
    (B) Systems that ensure that the SBSEF is able to produce 
electronic records in accordance with Rule 826, and ensure the 
availability of such electronic records in the event of an emergency or 
other disruption of the SBSEF'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.
    Sections 1.31 and 43.2 include provisions that govern inspection 
and production of records. While the Commission believes that its rules 
for SBSEFs also should address those topics, the Commission does not 
believe that adapting a CFTC rule would be the most appropriate way to 
do so. Paragraph (e) of proposed Rule 826 would provide instead that, 
because a registered SBSEF is also a registered broker, all records 
required to be kept by an SBSEF pursuant to Rule 826 would

[[Page 28917]]

be subject to examination by any representative of the Commission 
pursuant to section 17(b) of the SEA. As noted above, section 17(b) 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 does not seek to limit or expand that authority using the 
Commission's powers over SBSEFs in section 3D of the SEA.
    Proposed Rule 826 includes a paragraph (f) that is not modelled on 
any provision of Sec.  1.31 or 43.2, but rather on Sec.  1.37(c) of the 
CFTC's rules, which provides: ``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 modelled closely on Sec.  1.37(c), except that 
it uses the term ``non-U.S. member'' rather than ``foreign trader.'' 
\192\
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    \192\ 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 Commission is proposing to use the term ``member'' 
throughout Regulation SE and would define ``member'' in Rule 802. 
The term ``non-U.S. member,'' also found in proposed Rule 802, would 
be defined as ``a member of a security-based swap execution facility 
that is not a U.S. person.''
---------------------------------------------------------------------------

    The recordkeeping and reporting requirements proposed in Rule 826 
are designed to be generally consistent with the requirements 
applicable to SEFs and with the Commission's requirements under section 
17(a) of the SEA. The Commission preliminarily believes that proposed 
Rule 826 would therefore achieve similar regulatory benefits as the 
CFTC rules applicable to SEFs while imposing only marginal costs, since 
dually registered SEF/SBSEFs are familiar with the CFTC requirements 
and have invested in systems, policies, and procedures to comply with 
them. The Commission intends that the same systems, policies, and 
procedures could be used to comply with parallel SEC requirements.
    The Commission seeks comment on the following:
    142. Do you agree in general with the Commission's approach to 
implementing SEA Core Principle 9? Why or why not?
    143. Do you believe that the Commission should subject registered 
SBSEFs to section 17(a) of the SEA and the Commission's rules 
thereunder? Why or why not? If not, are there nevertheless specific 
provisions of the Commission's rules under section 17(a) that you 
believe should nevertheless be incorporated into Rule 826 using the 
Commission's statutory authority over SBSEFs in section 3D of the SEA? 
If so, which provision(s) and why?
    144. Are there any provisions of proposed Rule 826 that are 
significantly different from, or even in conflict with, any 
recordkeeping requirements imposed on SEFs by any CFTC rule? If so, 
please discuss and suggest how you would resolve any such conflict.
    145. Are there any provisions of Sec.  1.31 or Sec.  45.2 that the 
Commission has not proposed to incorporate into proposed Rule 826 that 
you believe should be applied to SBSEFs? If so, which provision(s) and 
why?
    146. Are there any recordkeeping provisions elsewhere in the CFTC 
rules that the Commission has not proposed to incorporate into proposed 
Rule 826 that you believe should be applied to SBSEFs? If so, which 
provision(s) and why?
    147. Do you believe that the Commission should adapt Sec.  1.37 
into proposed Rule 826(f)? Why or why not? Do you believe that the 
Commission's proposed term ``non-U.S. member'' used in Rule 826(f) is 
an appropriate substitute for ``foreign trader'' used in Sec.  1.37? 
Why or why not?

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

    SEA Core Principle 10 \193\ 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 \194\ is substantively 
identical.
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    \193\ Section 3D(d)(10) of the SEA, 15 U.S.C. 78c-4(d)(10).
    \194\ Section 5h(f)(11) of the CEA, 7 U.S.C. 7b-3(f)(11).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 11 in subpart L of part 37. 
Section 37.1100 of subpart L repeats the statutory text of Core 
Principle 11. Section 37.1101 provides that a SEF ``may refer'' to the 
guidance in appendix B to part 37 to demonstrate compliance with Core 
Principle 11. The guidance states that an entity seeking registration 
as a SEF may request that the CFTC consider, under the provisions of 
section 15(b) of the CEA,\195\ any of the entity's rules--including 
trading protocols or policies, and including both operational rules and 
the terms or conditions of products listed for trading--at the time of 
registration or thereafter. The guidance further states that the CFTC 
intends to apply CEA section 15(b) to its consideration of issues under 
CEA Core Principle 11 in a manner consistent with that previously 
applied to contract markets.
---------------------------------------------------------------------------

    \195\ 7 U.S.C. 19(b) (providing that the CFTC shall take into 
consideration the public interest to be protected by the antitrust 
laws and endeavor to take the least anticompetitive means of 
achieving the objectives of this chapter of the CEA, as well as the 
policies and purposes of this chapter of the CEA, in issuing any 
order or adopting any CFTC rule or regulation (including any 
exemption), or in requiring or approving any bylaw, rule, or 
regulation of a contract market or registered futures association).
---------------------------------------------------------------------------

    Proposed Rule 827 would implement SEA Core Principle 10 and, like 
Sec.  37.1100, reiterates the statutory text of the Core Principle. The 
Commission is not adapting the guidance from appendix B pertaining to 
CEA Core Principle 11 into a proposed rule.\196\
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    \196\ The guidance in appendix B of part 37 pertaining to CEA 
Core Principle 10 for SEFs states: ``An entity seeking registration 
as a [SEF] may request that the [CFTC] consider under the provisions 
of section 15(b) of the [CEA], any of the entity's rules, including 
trading protocols or policies, and including both operational rules 
and the terms or conditions of products listed for trading, at the 
time of registration or thereafter. The [CFTC] intends to apply 
section 15(b) of the [CEA] to its consideration of issues under this 
core principle in a manner consistent with that previously applied 
to contract markets.'' Section 15(b) of the CEA, 7 U.S.C. 19(b) 
states: ``The [CFTC] shall take into consideration the public 
interest to be protected by the antitrust laws and endeavor to take 
the least anticompetitive means of achieving the objectives of this 
chapter, as well as the policies and purposes of this chapter, in 
issuing any order or adopting any [CFTC] rule or regulation 
(including any exemption under section 6(c) or 6c(b) of this title), 
or in requiring or approving any bylaw, rule, or regulation of a 
contract market or registered futures association established 
pursuant to section 21 of this title.'' The Commission does not 
believe that it is 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). 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.
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    The Commission seeks comment on the following:
    148. Do you agree with how the Commission is proposing to implement 
SEA Core Principle 10? Why or why not?

[[Page 28918]]

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

    SEA Core Principle 11 \197\ 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 \198\ is substantively identical.
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    \197\ Section 3D(d)(11) of the SEA, 15 U.S.C. 78c-4(d)(11).
    \198\ 7 U.S.C. 7b-3(f)(12).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 12 in subpart M of part 37. 
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.\199\
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    \199\ 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 (October 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 (January 6, 2011).
---------------------------------------------------------------------------

    Proposed Rule 828 would implement SEA Core Principle 11. Paragraph 
(a) of proposed Rule 828, like Sec.  37.1200, repeats the statutory 
text of the Core Principle. Paragraph (b) would direct an SBSEF to 
comply with the requirements of proposed Rule 834, which, as discussed 
below, would implement section 765 of the Dodd-Frank Act for both 
SBSEFs and SBS exchanges.\200\
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    \200\ See infra section X.
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    The Commission seeks comment on the following:
    149. Do you agree with how the Commission is proposing to implement 
SEA Core Principle 11 in Rule 828? Why or why not?
    150. The Commission is proposing to subject SBS exchanges and 
SBSEFs to the same conflicts-of-interest requirements, in Rule 834. 
Therefore, proposed Rule 828 cross-references proposed Rule 834 rather 
than enumerating conflicts-of-interest requirements for SBSEFs separate 
from those for SBS exchanges. Do you believe that this is an 
appropriate way to structure the proposed rules? Why or why not? Are 
there any conflicts-of-interest requirements that you believe should be 
applied to SBSEFs but not to SBS exchanges? If so, what requirement(s) 
and why?

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

    SEA Core Principle 12 \201\ has a paragraph (A) that requires an 
SBSEF to have adequate financial, operational, and managerial resources 
to discharge each responsibility of the SBSEF, as determined by the 
Commission. Paragraph (B) of SEA Core Principle 12 provides 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. CEA Core Principle 13 for 
SEFs \202\ is substantively identical with respect to paragraphs (A) 
and (B)(ii) of SEA Core Principle 12, but lacks an equivalent to 
paragraph (B)(i) of SEA Core Principle 12.
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    \201\ Section 3D(d)(12) of the SEA, 15 U.S.C. 78c-4(d)(12).
    \202\ Section 5h(f)(13) of the CEA, 7 U.S.C. 7b-3(f)(13).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 13 for SEFs in subpart N of 
part 37. Section 37.1300 of subpart N repeats the statutory text of CEA 
Core Principle 13. Section 37.1301 provides that financial resources 
shall be considered adequate if their value exceeds the total amount 
that would enable a SEF to cover its projected operating costs 
necessary for the SEF to comply with section 5h of the CEA and 
applicable CFTC regulations for a one-year period, calculated on a 
rolling basis. Section 37.1302 describes the types of financial 
resources that may satisfy the requirements of Sec.  37.1301. Section 
37.1303 provides that the financial resources allocated by the SEF 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 SEF's operations. If a SEF 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. 
Section 37.1304 requires a SEF, 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 this 
section. It further provides that the SEF shall have reasonable 
discretion in determining the methodology used to compute such amounts, 
provided that the CFTC may review the methodology and require changes 
as appropriate. Section 37.1305 provides that, no less than each fiscal 
quarter, a SEF must compute the current market value of each financial 
resource used to meet its obligations under Sec. Sec.  37.1301 and 
37.1303 and that reductions in value to reflect market and credit risk 
(``haircuts'') shall be applied as appropriate.
    Section 37.1306 addresses reporting to the CFTC. Paragraph (a) of 
Sec.  37.1306 provides that, each fiscal quarter, or at any time upon 
CFTC request, a SEF shall report the amount of financial resources 
necessary to meet the requirements of Sec. Sec.  37.1301 and 37.1303 
and the market value of each financial resource available, and provide 
the CFTC with financial statements, including the balance sheet, income 
statement, and statement of cash flows of the SEF, prepared in 
accordance with U.S. generally acceptable accounting principles 
(``GAAP''). Paragraph (a) further provides that the financial 
statements of a SEF that is not domiciled in the United States and is 
not otherwise required to prepare financial statements in accordance 
with U.S. GAAP may instead prepare its financial statements in 
accordance with either International Financial Reporting Standards 
issued by the International Accounting Standards Board or a comparable 
international standard as the CFTC may otherwise accept in its 
discretion. Paragraph (b) provides that the calculations required under 
paragraph (a) shall be made as of the last business day of the SEF's 
fiscal quarter. Paragraph (c) requires the SEF to provide the CFTC with 
sufficient documentation to explain its methodology for computing its 
financial requirements under Sec. Sec.  37.1301 and 37.1303. Further, 
paragraph (c) of Sec.  37.1306 requires that the documentation must 
allow the CFTC to reliably determine, without additional requests for 
information, that the SEF has made reasonable calculations pursuant to 
Sec.  37.1304. Paragraph (d) of Sec.  37.1306 provides that these 
reports and supporting documentation shall be filed within 40 calendar 
days of the end of the SEF's first three fiscal quarters, and within 90 
calendar days of the end of the SEF's fourth fiscal quarter, or at such 
later time as the CFTC may permit. Paragraph (e) requires a SEF to 
provide notice to the CFTC no later than 48 hours after it knows or 
reasonably should know that it no longer meets its

[[Page 28919]]

obligations under Sec. Sec.  37.1301 and 37.1303.
    Proposed Rule 829 would implement SEA Core Principle 12 and is 
based closely on subpart N of part 37.\203\ Because this Core Principle 
relates to the business operations of the trading venue, very few 
modifications are necessary to adapt the CFTC rule to apply to SBSEFs. 
Therefore, proposed Rule 829 is closely modelled on the rules in 
subpart N.
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    \203\ However, paragraph (a)(2)(i) of proposed Rule 829 would 
include the additional language in SEA Core Principle 12 that is not 
present in CEA Core Principle 13. As noted above, this language 
relates 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.
---------------------------------------------------------------------------

    However, one slight difference in the rule text stems from the 
Commission's global approach to adapting the CFTC's guidance and 
acceptable practices from appendix B to part 37 into formal rules, 
where appropriate. Although the Commission considered proposing a 
separate rule that adapts the guidance in appendix B pertaining to CEA 
Core Principle 13, the Commission is proposing instead to weave the 
concepts and some of the specific language from the CFTC guidance 
relating to financial resources into paragraph (e) of proposed Rule 
829, as the guidance relates only to that portion of the proposed rule. 
Proposed Rule 829(e) begins by incorporating the provisions of Sec.  
37.1304 regarding computation of costs to meet the financial resources 
requirement. Proposed Rule 829(e) then appends language based on the 
CFTC guidance 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) 
proration of expenses; and (iii) allocation of expenses among 
affiliates.
    Another non-substantive difference between proposed Rule 829 and 
subpart N of part 37 is the requirement in proposed Rule 829(g)(6) for 
an SBSEF to submit reports and documentation to the Commission using 
the EDGAR system as an Interactive Data File, in accordance with Rule 
405 of Regulation S-T. The Commission is proposing this requirement 
here and in other locations to implement the Inline XBRL and EDGAR 
electronic filing requirements for various documents that would have to 
be provided to the Commission under proposed Regulation SE.
    The Commission preliminarily believes that the CFTC has implemented 
its equivalent Core Principle in an appropriate way, and that closely 
harmonizing with the CFTC rule would provide comparable regulatory 
benefits while imposing only marginal additional costs. Given that most 
if not all entities that will seek to register with the SEC as SBSEFs 
are already registered with the CFTC as SEFs, these entities already 
have in place the processes and controls to designed to comply with 
subpart N. Furthermore, 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 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 defer to the 
CFTC's approach for ensuring that SEFs have adequate financial 
resources. 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 swap market that warrant imposing 
different or additive financial resource requirements on SBSEFs.
    The Commission seeks comment on the following:
    151. Do you agree in general with the Commission's approach to 
implementing SEA Core Principle 12? Why or why not?
    152. In particular, do you agree with how the Commission is 
proposing to adapt the language of subpart N of part 37 into proposed 
Rule 829? If not, how would you revise that language?
    153. How does the anticipated size of the SBS trading business on 
dually registered SEF/SBSEFs relative to the size of swap trading 
business affect your view of the financial resource requirements that 
the SEC should impose on dually registered entities? Do you agree that 
there would be only marginal additional costs imposed on dually 
registered entities to provide the same financial information at the 
same times to both the SEC and CFTC (pursuant to proposed Rule 829 and 
subpart N, respectively)? Why or why not?
    154. Are there provisions of subpart N that the SEC should not 
incorporate, even if you believe that the SEC should harmonize with the 
majority of subpart N? In other words, are there areas where omitting a 
subpart N provision would reduce burdens on SBSEFs and/or their members 
without lessening any regulatory benefits? If so, please explain, with 
particular regard to the economic impacts and/or PRA burdens.
    155. Should the Commission adopt different or additive financial 
resource requirements for SBSEFs, even if there are no analogous 
provisions in subpart N? If so, please explain, with particular regards 
to the economic impacts and/or PRA burdens. For example, do you believe 
that the SEC-specific provision would impose additional costs or 
burdens on SBSEFs and/or their members that are nevertheless 
appropriate in view of new and additional benefits? Or do you believe 
that the SEC-specific provision would be appropriate because it would 
relieve costs or burdens that are imposed on SEFs by subpart N that, in 
your view, are unnecessary or inappropriate for SBSEFs?
    156. Do you agree with how the Commission is proposing to adapt the 
CFTC guidance pertaining to its equivalent Core Principle by converting 
it into formal rule text? Why or why not? Would adapting the CFTC 
guidance into the Commission's rules necessitate any changes in how 
financial resources are calculated?

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

    Paragraph (A) of SEA Core Principle 13 \204\ 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 also must 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 \205\ is substantively identical to SEA Core Principle 13.
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    \204\ Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c-4(d)(13).
    \205\ Section 5h(f)(14) of the CEA, 7 U.S.C. 7b-3(f)(14).
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    Subpart O of part 37 is entitled ``System Safeguards'' and 
implements CEA Core Principle 14. Section 37.1400 of subpart O repeats 
the statutory text of the Core Principle. Sec.  37.1401 sets forth 
detailed requirements for a SEF to comply with the Core Principle.

[[Page 28920]]

Paragraph (a) of Sec.  37.1401 requires a SEF's program of risk 
analysis and oversight to address enterprise risk management and 
governance, information security, business continuity-disaster recovery 
planning and resources, capacity and performance planning, systems 
operations, systems development and quality assurance, and physical 
security and operational controls. Paragraph (b) provides that, in 
addressing the categories of risk analysis and oversight required under 
paragraph (a), a SEF shall follow generally accepted standards and best 
practices with respect to the development, operation, reliability, 
security, and capacity of automated systems. Paragraph (c) requires a 
SEF to maintain a business continuity-disaster recovery plan and 
business continuity-disaster recovery resources, emergency procedures, 
and backup facilities that satisfy several enumerated criteria. 
Paragraph (d) explains how a SEF that is not determined by the CFTC to 
be a critical financial market may satisfy its 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.
    Paragraph (e) of Sec.  37.1401 requires a SEF to notify the CFTC 
promptly of all electronic trading halts and material system 
malfunctions; cyber security incidents or targeted threats that 
actually or potentially jeopardize automated system operation, 
reliability, security, or capacity; and activations of SEF's business 
continuity-disaster recovery plan. Paragraph (f) requires the SEF to 
provide CFTC staff timely advance notice of all material planned 
changes to automated systems that may impact the reliability, security, 
or adequate scalable capacity of such systems; and planned changes to 
the SEF's program of risk analysis and oversight. Paragraph (g) sets 
forth recordkeeping requirements related to the SEF's system 
safeguards. Paragraph (h) requires the SEF to conduct testing and 
review of its automated systems and business continuity-disaster 
recovery capabilities and provides several definitions for terms used 
in paragraph (h). Paragraph (h) also requires the SEF to conduct 
``vulnerability testing,'' ``external penetration testing,'' ``internal 
penetration testing,'' ``controls testing,'' ``security incident 
response plan testing,'' and ``enterprise technology risk assessment'' 
subject to various enumerated criteria.
    Paragraph (i) of Sec.  37.1401 provides that the SEF, to the extent 
practicable, shall coordinate its business continuity-disaster recovery 
plan with those of the market participants 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 SEF's business continuity-disaster recovery plan. Paragraph (i) 
also requires the SEF to initiate and coordinate periodic, synchronized 
testing of its business continuity-disaster recovery plan with those of 
the market participants it depends upon to provide liquidity; and to 
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.
    Paragraph (j) of Sec.  37.1401 provides that part 40 of the CFTC's 
rules shall govern the obligations of those 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. Paragraph (k) sets forth criteria for the scope 
for all system safeguard testing and assessment required under the 
rule. Paragraph (l) requires that both the senior management and the 
board of directors of the SEF shall receive and review reports setting 
forth the results of the testing and assessment required by the rule. 
Paragraph (m) requires the SEF to identify and document the 
vulnerabilities and deficiencies in its systems revealed by testing and 
assessment, conduct and document an appropriate analysis of the risks 
presented by such vulnerabilities and deficiencies, and remediate in a 
timely manner given the nature and magnitude of the associated risk.
    Proposed Rule 830 is closely modelled on subpart O of part 37 of 
the CFTC's rules, except in one aspect. Subpart O includes language 
relating to ``critical financial markets,'' \206\ 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.\207\ A similar concept in 
the SEC's rules is ``SCI entity.'' \208\ When adopting Regulation SCI, 
the Commission considered whether it should apply Regulation SCI to 
SBSEFs, among other entities, and determined not to do so.\209\ Because 
SBSEFs are not SCI entities and the corresponding CFTC rule has not 
imposed additional requirements on critical financial markets, the 
Commission preliminarily believes that it is not necessary or 
appropriate to adapt into Rule 830 the language of subpart O applicable 
to critical financial markets.\210\
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    \206\ 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).
    \207\ The provisions in subpart O relating to ``critical 
financial markets'' reference Sec.  40.9 of the CFTC's rules, which 
is marked as ``Reserved.''
    \208\ See Rule 1000 of Regulation SCI (defining ``SCI entity''). 
In November 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 (November 19, 2014), 
79 FR 72252 (December 5, 2014).
    \209\ See id., 79 FR at 72363-64 (reviewing comments received 
regarding the potential application of Regulation SCI to SBSEFs, 
among others).
    \210\ The Commission also notes that, while subpart O frequently 
uses the term ``market participant,'' proposed Rule 830 substitutes 
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 53.
---------------------------------------------------------------------------

    The Commission preliminarily believes that subpart O is reasonably 
designed to promote SEF operational capability, and that the most 
appropriate way to implement SEA Core Principle 13 would be to closely 
harmonize with the CFTC's rules that implement the corresponding Core 
Principle. As with SEA Core Principle 12 (Financial resources), 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 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 swap market that warrant imposing 
different or additive operational capability requirements on SBSEFs.

[[Page 28921]]

    The Commission seeks comment on the following:
    157. Do you agree in general with how the Commission is proposing 
to implement SEA Core Principle 13 in proposed Rule 830? Why or why 
not?
    158. In particular, do you believe that close harmonization with 
subpart O of the CFTC's rules is appropriate? If not, is there another 
framework for system safeguards that would be more appropriate for 
SBSEFs? What would be the economic impact of the SEC adopting different 
or additive system safeguard requirements in the case of dually 
registered SEF/SBSEFs?
    159. As noted above,\211\ the Commission previously determined not 
to subject SBSEFs to Regulation SCI. Do you see any changes in the SBS 
market that should cause the Commission to revisit that decision?
---------------------------------------------------------------------------

    \211\ See supra note 209 and accompanying text.
---------------------------------------------------------------------------

    160. Do you believe it is appropriate to omit from Rule 830 the 
provisions of subpart O relating to critical financial markets? Why or 
why not?
    161. Are there provisions of subpart O that the SEC should not 
incorporate, even if the SEC opts to harmonize with most of subpart O? 
In other words, are there areas where omitting a subpart O provision 
would reduce burdens on SBSEFs and/or their members without lessening 
any regulatory benefits? If so, please explain, with particular regard 
to the economic impacts and/or PRA burdens.
    162. Should the Commission adopt different or additive system 
safeguard requirements for SBSEFs, even if there is no analog to such 
provisions in subpart O? If so, please explain, with particular regards 
to the economic impacts and/or PRA burdens. For example, do you believe 
that the SEC-specific provision would impose additional costs or 
burdens on SBSEFs and/or their market participants that are 
nevertheless appropriate in view of new and additional benefits? Or do 
you believe that the SEC-specific provision would be appropriate 
because it would relieve costs or burdens that are imposed on SEFs by 
subpart O that, in your view, are unnecessary or inappropriate for 
SBSEFs?

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

    SEA Core Principle 14 \212\ 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 
\213\ is substantively identical.
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    \212\ Section 3D(d)(14) of the SEA, 15 U.S.C. 78c-4(d)(14).
    \213\ Section 5h(f)(15) of the CEA, 7 U.S.C. 7b-3(f)(15).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 15 in subpart P of part 37. 
Section 37.1500 of subpart P repeats the statutory text of CEA Core 
Principle 15. Section 37.1501(a) sets forth definitions for the terms 
``board of directors'' and ``senior officer.'' Section 37.1501(b)(1) 
provides that the position of CCO shall carry with it the authority and 
resources to develop, in consultation with the board of directors or 
senior officer, and enforce the SEF's policies and procedures, and that 
the CCO shall have supervisory authority over all staff acting at the 
direction of the CCO. Section 37.1501(b)(2) through (4) include 
provisions relating to the qualifications of the CCO, appointment and 
removal of the CCO, and compensation of the CCO. Section 37.1501(b)(5) 
through (6) state that the CCO must meet with the SEF's board of 
directors or senior officer at least annually, and the CCO must provide 
any information regarding the SEF's self-regulatory program as 
requested by the board of directors or the senior officer.
    Section 37.1501(c) sets out the duties of the CCO, including 
overseeing and reviewing the SEF's compliance with the Core Principles; 
taking reasonable steps, in consultation with the board of directors or 
senior officer, to resolve any material conflicts of interest; 
establishing and administering written policies and procedures 
reasonably designed to prevent violations of the CEA and the rules of 
the CFTC; taking reasonable steps to ensure compliance with the CEA and 
CFTC rules; establishing procedures reasonably designed to handle, 
respond, remediate, retest, and resolve noncompliance issues identified 
by the CCO; establishing and administering a compliance manual and a 
written code of ethics for the SEF; supervising the self-regulatory 
program of the SEF 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; and supervising 
the effectiveness and sufficiency of any regulatory services provided 
to the SEF by a regulatory service provider.
    Section 37.1501(d) requires the CCO to prepare and sign an annual 
compliance report that covers the prior fiscal year. The report must 
contain, at a minimum: A description and self-assessment of the 
effectiveness of the SEF's written policies and procedures, code of 
ethics, and conflict of interest policies; 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; a description of the financial, managerial, and 
operational resources set aside for compliance with the CEA and 
applicable CFTC regulations; any material non-compliance matters 
identified and an explanation of the corresponding action taken to 
resolve them; and CCO certification that the annual compliance report 
is accurate and complete.
    Section 37.1501(e) requires the CCO to provide the annual 
compliance report to the SEF's board of directors or a senior officer 
for review before submitting it to the CFTC, and the board or the 
senior office may not require the CCO to make any changes to the 
report. Section 37.1501(e) further provides that the annual compliance 
report shall be submitted electronically to the CFTC not later than 90 
calendar days after the end of the SEF's fiscal year and concurrently 
with the fourth-quarter financial report pursuant to Sec.  37.1306. 
Section 37.1501(e) also addresses amendments to and requests for 
extensions for the annual compliance report.
    Section 37.1501(f) requires the SEF to maintain all records 
demonstrating compliance with the duties of the CCO and the preparation 
and submission of annual compliance report, consistent with Sec. Sec.  
37.1000 and 37.1001. Finally, appendix B to part 37 includes 
``acceptable practices'' regarding the qualifications of a CCO and the 
SEF's discretion in choosing one, as well as the need to be vigilant 
regarding conflicts of interest when appointing a CCO.
    Proposed Rule 831 would implement SEA Core Principle 14 and is 
closely modelled on subpart P of part 37, with two minor substantive 
exceptions.\214\

[[Page 28922]]

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 preliminarily believes 
that SBSEFs, like SEFs, should be subject to a rule setting out 
criteria for disqualification of the CCO. However, the SEC cannot 
cross-reference provisions of the CEA, since the CEA does not apply to 
SBSEFs. The Commission consulted Sections 8a(2) and 8a(3) of the 
CEA,\215\ but believes they are not easily adaptable into a rule 
applicable to SBSEFs and their CCOs. The Commission is proposing 
instead, in Rule 831(c)(2), that no individual that would be 
disqualified from serving on an SBSEF's governing board \216\ or 
committees pursuant to the criteria set forth in Sec.  242.819(i) may 
serve as the CCO. As noted above,\217\ the disqualification criteria in 
proposed Rule 819(i) are adapted from Sec.  1.63 of the CFTC's rules. 
Second, the Commission has adapted the acceptable practices pertaining 
to CEA Core Principle 15 into paragraph (c) of proposed Rule 831.\218\
---------------------------------------------------------------------------

    \214\ 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); supra note 55.
    \215\ 7 U.S.C. 12a(2) and 12a(3).
    \216\ The Commission notes that subpart P uses the term ``board 
of directors,'' while the Commission is proposing to use the term 
``governing board'' instead throughout proposed Regulation SE. See 
supra note 29.
    \217\ See supra section VIII(B)(2)(b).
    \218\ Proposed Rule 831(c) provides 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 has 
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 preliminarily believes that 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. 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 
compliance risks to a dually registered entity are likely to arise from 
the swap business rather than the SBS business, so it would be 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 swap market that warrant imposing 
different or additive CCO requirements on SBSEFs relating to the CCO.
    The Commission seeks comment on the following:
    163. Do you agree in general with how the Commission is proposing 
to implement SEA Core Principle 14? Why or why not?
    164. In particular, do you agree that close harmonization with 
subpart P is appropriate? Are there provisions of subpart P that the 
SEC should not incorporate, even if the SEC opts to harmonize with most 
of subpart P? In other words, are there areas where omitting a subpart 
P provision would reduce burdens on SBSEFs and/or their members without 
lessening any regulatory benefits? If so, please explain, with 
particular regard to the economic impacts and/or PRA burdens.
    165. Should the Commission adopt different or additive CCO 
requirements for SBSEFs, even if there is no analog to such provisions 
in subpart P? If so, please explain, with particular regards to the 
economic impacts and/or PRA burdens. For example, do you believe that 
the SEC-specific provision would impose additional costs or burdens on 
SBSEFs and/or their members that are nevertheless appropriate in view 
of new and additional benefits? Or do you believe that the SEC-specific 
provision would be appropriate because it would relieve costs or 
burdens that are imposed on SEFs by subpart P that, in your view, are 
unnecessary or inappropriate for SBSEFs?
    166. Do you agree with how the Commission is proposing to adapt the 
acceptable practices from appendix B relating to CEA Core Principle 15 
into proposed Rule 831(c)? Why or why not?
    167. Do you agree with proposed Rule 831(c)(2) using a cross-
reference to proposed Rule 819(i) to incorporate disqualification 
criteria for the CCO? Why or why not? If not, what alternate standard 
would you suggest for the disqualification criteria, and why?

IX. Cross-Border Rules

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

    As noted above,\219\ section 3C(h) of the SEA provides that an SBS 
that is subject to mandatory clearing can become subject to the trade 
execution requirement.\220\ The trade execution requirement, like other 
provisions of the SEA, is subject to jurisdictional constraints which 
are particularly germane in light of the global nature of the SBS 
market, where there is frequent interaction among counterparties 
domiciled in different jurisdictions. Proposed Rule 832 of Regulation 
SE is designed to address when the SEA's trade execution requirement 
applies to a cross-border SBS transaction.
---------------------------------------------------------------------------

    \219\ See supra note 106 and accompanying text.
    \220\ Even if an SBS is subject to mandatory clearing, it will 
not be subject to the trade execution requirement if no exchange or 
SBSEF makes the SBS available to trade or the SBS is subject to an 
exception from the clearing requirement under section 3C(g) of the 
SEA. In addition, as discussed above in section VII(F)(2), proposed 
Rule 816(e) would provide certain additional exemptions from the 
trade execution requirement.
---------------------------------------------------------------------------

    Paragraph (a) of proposed 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 
proposed Rule 832 would define the term ``covered person,'' with 
respect to a particular security-based swap, as any person that is a 
U.S. person; a non-U.S. person whose performance under an SBS is 
guaranteed by a U.S. person; or 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.\221\
---------------------------------------------------------------------------

    \221\ The proposed term ``covered person'' is designed to apply 
on a transaction-by-transaction basis. In other words, if a non-U.S. 
person were guaranteed by a U.S. person on a specific SBS or 
utilized U.S. personnel in connection with its dealing activities to 
arrange, negotiate, or execute a specific SBS, that person would be 
a covered person with respect to that SBS, but not necessarily with 
respect to other SBS. Because domicile is generally static, a person 
who is a U.S. person would be a covered person with respect to all 
of its SBS transactions.
---------------------------------------------------------------------------

    Thus, a particular SBS would fall within the jurisdictional reach 
of section 3C(h) of the SEA if at least one side had a connection to 
the United States of a type specified in paragraph (b)(1), (2), or (3) 
of proposed Rule 832. The trade execution requirement would not apply 
to an SBS transaction--even if the SBS were subject to mandatory 
clearing and MAT--if neither side had a connection to the United States 
of a type specified in proposed Rule 832.
    Proposed Rule 832 is consistent with the Commission's territorial 
approach to applying Title VII requirements in other contexts. The 
Commission previously has stated that Title VII requirements

[[Page 28923]]

``apply to all SBS transactions that exist in whole or in part within 
the United States, unless an exception applies.'' \222\ Relevant 
activity need not occur wholly within the United States or solely 
between U.S. persons in order for Title VII requirements to apply.\223\ 
For example, under Rule 908(a)(1) of Regulation SBSR,\224\ the Title 
VII requirements for regulatory reporting and public dissemination 
apply to an SBS transaction even if only one counterparty to the 
transaction is a U.S. person. As the Commission previously stated, 
``any security-based swap executed by a U.S. person exists at least in 
part within the United States.'' \225\ This is true even if a 
transaction is effected through the foreign branch of a U.S. person, 
because ``a foreign branch has no separate existence from the U.S. 
person itself.'' \226\
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    \222\ Regulation SBSR Adopting Release I, 80 FR at 14652 
(discussing cross-border application of Title VII requirements for 
regulatory reporting and public dissemination of SBS transactions).
    \223\ See SEA Release No. 72472 (June 25, 2014), 79 FR 47278, 
47286 (``Cross-Border Adopting Release'') (stating that applying 
Title VII only to persons incorporated, organized, or established 
within the United States or only to SBS activity occurring entirely 
within the United States would inappropriately exclude from 
regulation a majority of SBS activity that involves U.S. persons or 
otherwise involves conduct within the United States, even though 
such activity raises the types of concerns that the Commission 
believed Congress intended to address through Title VII).
    \224\ 17 CFR 242.908(a)(1).
    \225\ Regulation SBSR Adopting Release I, 80 FR at 14652.
    \226\ Id. See also Cross-Border Adopting Release, 79 FR at 47289 
(discussing the Commission's rationale for viewing a foreign branch 
of an SBS dealer as an integral part of the SBS dealer).
---------------------------------------------------------------------------

    The Commission also has found it consistent with the territorial 
approach to apply Title VII requirements 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.\227\ As the Commission stated when 
applying this criterion to Title VII reporting: ``A security-based swap 
with a U.S.-person indirect counterparty [i.e., guarantor] is 
economically equivalent to a security-based swap with a U.S.-person 
direct counterparty, and both kinds of security-based swaps exist, at 
least in part, within the United States . . . [T]he presence of a U.S. 
guarantor facilitates the activity of the non-U.S. person who is 
guaranteed and, as a result, the security-based swap activity of the 
non-U.S. person cannot reasonably be isolated from the U.S. person's 
activity in providing the guarantee.'' \228\
---------------------------------------------------------------------------

    \227\ See, e.g., Regulation SBSR Adopting Release I, 80 FR at 
14653. See also Cross-Border Adopting Release, 79 FR at 47290 (``the 
guarantee provided by a U.S. person poses risk to U.S. persons and 
potentially to the U.S. financial system, and both the non-U.S. 
person whose dealing activity is guaranteed and its counterparty 
rely on the creditworthiness of the U.S. guarantor when entering 
into a security-based swap transaction and for the duration of the 
security-based swap. The economic reality of this transaction, even 
though entered into by a non-U.S. person, is substantially 
identical, in relevant respects, to a transaction entered into 
directly by a U.S. person. Accordingly, in our view, it is 
consistent with both the statutory text and with the purposes of the 
statute to identify such transactions as occurring within the United 
States for purposes of Title VII'').
    \228\ Regulation SBSR Adopting Release I, 80 FR at 14653. In 
addition, section 30(c) of the SEA, 15 U.S.C. 78dd(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 the reasons described above, the 
Commission does not believe that applying the trade execution 
requirement to non-U.S. persons whose performance under an SBS is 
guaranteed by a U.S. person would cause the trade execution 
requirement to apply to persons that are ``transact[ing] a business 
in security-based swaps without the jurisdiction of the United 
States.'' The Commission nonetheless preliminarily believes that 
applying the trade execution requirement to such persons is also 
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. See Cross-Border Adopting 
Release, 79 FR at 47291-92 (interpreting the anti-evasion provisions 
of SEA section 30(c)). Without this rule, 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.
---------------------------------------------------------------------------

    Finally, the Commission also has found it consistent with the 
territorial approach to apply Title VII requirements where one 
counterparty 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 (``ANE'') the 
transaction. As the Commission previously stated when applying the ANE 
criterion to Title VII requirements for regulatory reporting and public 
dissemination: ``when a foreign dealing entity uses U.S. personnel to 
arrange, negotiate, or execute a transaction in a dealing capacity, 
that transaction occurs at least in part within the United States and 
is relevant to the U.S. security-based swap market.'' \229\ Declining 
to apply Title VII requirements to SBS transactions of foreign dealing 
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.'' \230\
---------------------------------------------------------------------------

    \229\ Regulation SBSR Adopting Release II, 81 FR at 53591. See 
also SEA Release No. 87780 (December 18, 2019), 85 FR 6270, 6271-76 
(February 4, 2020) (discussing other Title VII rules that 
incorporate ANE criteria and providing guidance on the meaning of 
the terms ``arranged'' and ``negotiated'' for purposes of these 
rules).
    \230\ Regulation SBSR Adopting Release II, 81 FR at 53591. The 
Commission does not believe that applying the trade execution 
requirement to persons that satisfy the ANE criterion would cause 
the trade execution requirement to apply to persons that are 
``transact[ing] a business in security-based swaps without the 
jurisdiction of the United States,'' within the meaning of section 
30(c) of the SEA. See supra note 228. The Commission also believes 
that 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.
---------------------------------------------------------------------------

    The Commission recognizes the difficulties that can arise when a 
binary requirement, such as the trade execution requirement, applies in 
two separate jurisdictions. In other words, if the counterparties to a 
cross-border SBS are subject to a trade execution requirement under the 
rules of each of their jurisdictions, the counterparties could violate 
the rules of one jurisdiction by executing the SBS in one jurisdiction 
but not the other, or in a manner that is consistent with the rules of 
one jurisdiction but potentially not of the other jurisdiction. The 
following section, regarding proposed Rule 833, will discuss conditions 
for allowing an SBS to trade on foreign venues not registered with the 
Commission, notwithstanding the SBS being subject to the SEA's trade 
execution requirement and proposed Rule 832.
    The Commission seeks comment on the following:
    168. Of the SBS products that, in your view, are plausible 
candidates for mandatory clearing and mandatory trade execution under 
the SEA, how frequently do these products trade on foreign SBS trading 
venues? Do you believe that the SBS market is sufficiently regionalized 
such that cross-border application of the trade execution requirement 
might not be a significant issue?
    169. Do you believe that the proposed text of Rule 832 is 
sufficiently clear? If not, what aspects do you believe require 
clarification?

B. Rule 833--Cross-Border Exemptions

1. Exemptions for Foreign SBS Trading Venues
    As noted above in discussing proposed Rule 832, the swap and SBS 
markets are global in nature, and counterparties domiciled in different 
jurisdictions frequently trade with each

[[Page 28924]]

other.\231\ Proposed Rule 832 is designed to answer the question of 
when the trade execution requirement would apply to an individual 
cross-border SBS transaction. There might be instances where covered 
persons (as defined in proposed Rule 832) wish to be members of a 
foreign trading venue for SBS (a ``foreign SBS trading venue''). Having 
members who are covered persons, as defined in Rule 832, with respect 
to SBS transacted on that venue, whether or not the SBS that they trade 
are subject to the SEA's trade execution requirement, could require the 
foreign SBS trading venue to register with the Commission as a national 
securities exchange or SBSEF.\232\ In addition, because a foreign SBS 
trading venue would be facilitating the execution of SBS between 
persons, the foreign SBS trading venue also might be required to 
register with the Commission as a broker.\233\
---------------------------------------------------------------------------

    \231\ See supra section IX(A).
    \232\ 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).
    \233\ 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 XIII (discussing 
proposed new Rule 15a-12).
---------------------------------------------------------------------------

    A foreign SBS trading venue with members who are covered persons, 
as defined in Rule 832, with respect to SBS transacted on that venue 
and that wishes to avoid having to register in one or more of these 
capacities could request that the Commission grant it an exemption 
under section 36(a)(1) of the SEA \234\ by submitting an application 
pursuant to SEA Rule 0-12.\235\ Proposed Rule 833(a) would provide that 
such an application, relating to the status of the foreign SBS trading 
venue under the SEA, may state that the application also is submitted 
pursuant to Rule 833(a).\236\ In such case, 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; 
\237\ the definition of ``security-based swap execution facility'' in 
section 3(a)(77) of the SEA; \238\ the definition of ``broker'' in 
section 3(a)(4) of the SEA; \239\ and section 3D(a)(1) of the SEA.\240\ 
Because a foreign SBS trading venue that obtains an order under SEA 
section 36 and proposed Rule 833(a) \241\ 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 comply with other 
requirements applicable to such entities under the SEA or Commission 
rules thereunder.\242\
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    \234\ 15 U.S.C. 78mm(a)(1).
    \235\ 17 CFR 240.0-12 (setting forth procedures for filing 
applications for orders for exemptive relief under section 36 of the 
SEA).
    \236\ An application for an exemption under proposed Rule 833(a) 
could be submitted by a foreign SBS trading venue itself or another 
interested party. For example, a financial regulatory authority in a 
foreign jurisdiction could submit an application under proposed Rule 
833(a) on behalf of one or more SBS trading venues licensed and 
regulated in that jurisdiction.
    \237\ 15 U.S.C. 78c(a)(1).
    \238\ 15 U.S.C. 78c(a)(77).
    \239\ 15 U.S.C. 78c(a)(4).
    \240\ 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).
    \241\ 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 proposed Rule 833(a), the covered trading venue would 
no longer be an exchange, SBSEF, or broker (as defined by the SEA).
    \242\ 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 need other authority under the SEA.
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    Under section 5h(g) of the CEA,\243\ the CFTC may exempt, 
conditionally or unconditionally, a SEF from registration if the CFTC 
finds that the SEF is subject to comparable, comprehensive supervision 
and regulation on a consolidated basis by the SEC, a prudential 
regulator, or the appropriate governmental authorities in the home 
country of the facility. The CFTC has exercised this authority to grant 
exemptions from SEF registration to swap trading venues in the European 
Union, Japan, and Singapore.\244\
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    \243\ 7 U.S.C. 7b-3(g).
    \244\ See https://www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs (listing all exemption orders 
issued by the CFTC under section 5h(g) of the CEA and subsequent 
amendments to those orders).
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    Proposed Rule 833(a) would set forth how interested parties could 
make similar requests for exemptive relief with respect to foreign SBS 
trading venues. For example, Rule 833(a) lists four separate provisions 
of the SEA that the Commission believes generally would have to be 
addressed in an exemption request relating to a foreign SBS trading 
venue's status under the SEA. A foreign SBS trading venue that was 
exempted solely from section 3D(a)(1) of the SEA, for example, might 
still be subject to various requirements under the SEA by virtue of 
falling within one or more of the above-noted definitions.\245\ The 
exemptive framework set out in proposed Rule 833(a) is designed to 
avoid this result.
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    \245\ Furthermore, section 5 of the SEA generally prohibits any 
broker, dealer, or exchange from using U.S. jurisdictional means to 
effect or report a transaction in a security on an exchange, unless 
the exchange is registered as a national securities exchange or has 
received a low-volume exemption from registration as a national 
securities exchange. See 15 U.S.C. 78e. Absent an exemption from the 
definition of ``exchange,'' this provision would apply to a foreign 
SBS trading venue (and brokers and dealers who are members of that 
trading venue) to the extent that it uses U.S. jurisdictional means.
---------------------------------------------------------------------------

    As with applications for other exemptive relief under section 36 of 
the SEA, an applicant requesting a Rule 833(a) exemption would be 
required to submit a complete application pursuant to SEA Rule 0-12. To 
issue a Rule 833(a) exemption, like any other exemption issued pursuant 
to section 36, 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.\246\ As contemplated by 
section 36(a)(1), the Commission may subject a Rule 833(a) exemption to 
any conditions that it deems appropriate.
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    \246\ 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.
---------------------------------------------------------------------------

    Proposed 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.\247\ A foreign SBS trading venue covered by an 
exemption order under Rule 833(a) might offer trading in other types of 
securities; however, the exemption 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 an exchange or SBSEF. 
The exemption order would not address any registration obligations that 
might arise from any other type of exchange activity by the foreign 
trading venue.\248\
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    \247\ 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.
    \248\ The Commission considered the alternative of requiring 
that a Rule 833(a) exemption could apply to a foreign SBS trading 
venue only if it traded SBS and no other type of security. The 
Commission preliminarily believes, however, that this alternative is 
unnecessary. Other jurisdictions might have market structures where 
it is common to trade SBS and other types of securities on the same 
trading venue. The Commission preliminarily believes that it would 
be inequitable to disqualify such jurisdictions ex ante from 
qualifying for a Rule 833(a) exemption. Nevertheless, a foreign SBS 
trading venue that benefits from a Rule 833(a) exemption and that 
offers trading in both SBS and non-SBS securities would have to take 
appropriate steps to prevent covered persons from trading non-SBS 
securities on that trading venue, because the Rule 833(a) exemption 
would not cover the trading activity in non-SBS securities.

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[[Page 28925]]

    The Commission also emphasizes that a Rule 833(a) exemption would 
not have any impact on section 6(l) of the SEA,\249\ 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.
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    \249\ 15 U.S.C. 78f(l).
---------------------------------------------------------------------------

2. Exemptions Relating to the Trade Execution Requirement
    Proposed Rule 833(b) would 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.\250\ As a result, a covered person (as defined in proposed 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.
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    \250\ 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).
---------------------------------------------------------------------------

    A covered person seeking to execute such an SBS on a foreign SBS 
trading venue that does not fall within one of these categories could 
request that the Commission grant an exemption from this requirement 
under section 36(a)(1) of the SEA by submitting an application, as with 
Rule 833(a), pursuant to SEA Rule 0-12. Proposed Rule 833(b)(1) would 
provide that such an application, relating to the application of the 
trade execution requirement to SBS executed on a foreign SBS trading 
venue, may state that the application also is submitted pursuant to 
proposed Rule 833(b).\251\ Proposed Rule 833(b) is intended to clarify 
how interested parties could make requests for exemptive relief from 
the trade execution requirement for SBS traded on one or more foreign 
SBS trading venues.\252\
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    \251\ For the remainder of this discussion, an exemption under 
SEA section 36 and Rule 833(b) will be referred to simply as a 
``Rule 833(b) exemption.''
    \252\ An SBS can be subject to the SEA's trade execution 
requirement only if it first becomes subject to the clearing 
requirement in section 3C(h) of the SEA, 15 U.S.C. 78c-3(h). A Rule 
833(b) exemption would not have any impact on this clearing 
requirement, unless otherwise explicitly addressed in the exemption 
order.
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    To issue a Rule 833(b) exemption, like with any other section 36 
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. Furthermore, as contemplated by section 
36(a)(1), the Commission may subject a Rule 833(b) exemption to any 
conditions that it deems appropriate.
    Proposed 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 persons intend to trade SBS have received 
an exemption order contemplated by proposed 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.
    The first factor listed above is intended to highlight the 
Commission's preliminary belief that, to grant an exemption from the 
SEA's trade execution requirement to allow SBS subject to that 
requirement to trade in a foreign jurisdiction on one or more venues 
not registered with the Commission, there should be a comparable trade 
execution requirement in that jurisdiction. As part of any analysis 
regarding the comparability of the trade execution requirement, the 
Commission could consider not only whether the relevant SBS must be 
executed on a trading venue in the foreign jurisdiction, but also the 
permissible execution means for mandatory trade execution in the 
foreign jurisdiction. In general, the Commission preliminarily believes 
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 proposed 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).
    Under the second factor listed above, the Commission could consider 
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. The 
Commission preliminarily believes that the goals of Title VII regarding 
trade execution \253\ could be subverted if it were to allow covered 
persons to trade SBS subject to the SEA's trade execution requirement 
on foreign trading venues that are not subject to rules designed to 
foster comparable levels of pre- and post-trade transparency, access, 
and liquidity.
---------------------------------------------------------------------------

    \253\ See supra notes 94-96 and accompanying text.
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    The Commission also believes that it would be important to consider 
whether the foreign trading venue or venues where covered persons 
intend to trade SBS have received an exemption order contemplated by 
proposed Rule 833(a). The fact that covered persons are executing SBS 
on a foreign trading venue typically would require the venue to 
register with the Commission as a national securities exchange or 
SBSEF.\254\
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    \254\ A request for an exemption under proposed Rule 833(a) 
could be submitted at the same time--and by the same person(s)--as a 
request for an exemption under proposed Rule 833(b). For example, a 
financial regulatory authority in a foreign jurisdiction could 
combine a request for an exemption under proposed Rule 833(a) on 
behalf of one or more SBS trading venues licensed and regulated in 
that jurisdiction with a request for an exemption under proposed 
Rule 833(b) that would allow covered persons to trade on those 
venues SBS that would, absent an exemption, be subject to the SEA's 
trade execution requirement.
---------------------------------------------------------------------------

    Finally, the fourth factor listed above would emphasize that these

[[Page 28926]]

considerations are not exhaustive. The Commission may consider any 
other factor that it believes is relevant for assessing whether the 
Rule 833(b) exemption is in the public interest and consistent with the 
protection of investors.
    The Commission seeks comment on the following:
    170. Do you believe in general that the Commission should establish 
a rule for granting exemptions regarding a foreign SBS trading venue's 
status under the SEA and mandatory trade execution of cross-border SBS 
transactions? Why or why not?
    171. Do you disagree with any of the specific language proposed in 
Rule 833? If so, how would you revise it?
    172. Do you expect that there are foreign SBS trading venues that 
would seek an exemption under proposed Rule 833(a)? If so, how many?
    173. Do you agree with the factors that the Commission is proposing 
to consider for a Rule 833(b) exemption? Are there are any that you 
would eliminate or revise? If so, which ones and why? Are there any 
criteria that you believe should be added? If so, what and why?
    174. Are there any conditions or limitations that should be 
included in the rule? If so, what conditions or limitations would you 
suggest, and why?

X. 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 \255\ 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. 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.
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    \255\ 15 U.S.C. 8343.
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    In 2010, the Commission proposed Regulation MC to implement section 
765.\256\ In view of the significant amount of time that has elapsed 
and the significant evolution in the swap and SBS markets since the 
proposal of Regulation MC, the Commission hereby withdraws that 
proposal. The Commission is now proposing Rule 834 of Regulation SE to 
implement section 765 of the Dodd-Frank Act with respect to SBSEFs and 
SBS exchanges.
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    \256\ See 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 
(October 14, 2010), 75 FR 65882 (October 26, 2010).
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    The Commission, in accordance with section 765 of the Dodd-Frank 
Act, has reviewed the potential for conflicts of interest arising from 
an SBS dealer or major SBS participant having voting rights in an SBSEF 
or SBS exchange in which it is a member. The Commission preliminarily 
believes that, to satisfy the requirements of section 765, it is 
appropriate to impose a cap on the size of the voting rights that an 
individual member of an SBSEF or SBS exchange may own or direct. 
Accordingly, paragraph (b) of proposed Rule 834 would bar 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.
    The 20% cap in proposed Rule 834(b) attempts to balance competing 
policy interests. On the 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. The Commission considered 
proposing a cap in voting interest below 20%, but preliminarily 
believes that too low of a cap, even if imposed in the name of 
eliminating conflicts of interest, could have the unintended effect of 
retarding 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 of 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.
    The Commission preliminarily believes that capping a member's 
voting interest at 20% strikes a reasonable balance between these 
competing interests. It would allow a single member to make an 
investment in an SBSEF or SBS exchange significant enough to give it a 
20% voting interest, while reserving at least 80% to unrelated parties. 
The Commission preliminarily believes that the 20% cap would still 
afford an SBS dealer or major SBS participant that has made an 
investment in an SBSEF or SBS exchange a reasonable commercial means of 
monitoring and protecting that investment. But requiring 80% of the 
voting power to reside with unrelated parties would reduce the 
likelihood that the large member could tilt the playing

[[Page 28927]]

field in its favor. In proposing this 20% threshold in Rule 834, the 
Commission is informed by 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.\257\
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    \257\ See SEA Release No. 49718 (May 17, 2004), 69 FR 29611, 
29624 (May 24, 2004) (approving PCX limitation of trading permit 
holder ownership to 20% and stating that ``a member who trades 
securities through the facilities of an exchange can have an 
ownership interest in the exchange. However, a member's interest 
could become so large as to cast doubt on whether the exchange can 
fairly and objectively exercise its self-regulatory responsibilities 
with respect to that member. A member that also directly or 
indirectly controls an exchange might be tempted to exercise that 
controlling influence by directing the exchange to refrain from 
diligently surveilling the member's conduct or from punishing any 
conduct that violates the rules of the exchange or the Federal 
securities laws. An exchange also might be reluctant to surveil and 
enforce its rules zealously against a member that the exchange 
relies on as its largest source of capital''). See also, e.g., SEA 
Release No. 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019) 
(approving Long Term Stock Exchange's registration as a national 
securities exchange with a 20% limit on LTSE ownership by members); 
SEA Release No. 62716 (August 13, 2010), 75 FR 51295 (August 19, 
2010) (approving BATS-Y Exchange's registration as a national 
securities exchange with a 20% limit on exchange ownership by 
members); SEA Release No. 49067 (January 13, 2004), 69 FR 2761 
(January 20, 2004) (approving a voting collar on members that hold 
interests in BOX in excess of 20%); SEA Release No. 54399 (September 
1, 2006), 71 FR 53728 (September 12, 2006) (approving ISE's 
limitation of a member's ownership interest to 20%).
---------------------------------------------------------------------------

    Proposed Rule 834(b) would cover both direct and indirect voting 
interests. The 20% cap could be circumvented 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 child trading venue.
    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.
    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 or controlled, directly or indirectly, by its members.
    Under paragraph (c)(1) of proposed Rule 834, if a member of an 
SBSEF or SBS exchange managed to evade the 20% voting restriction 
(e.g., by disguising its voting interest through one or more shell 
companies), the SBSEF or SBS exchange would be required to deny the 
effect of any part of the vote in excess of the 20% restriction when 
the evasion is discovered. This could, in close cases, cause the SBSEF 
or SBS exchange to have to reverse the outcome of a vote because of the 
invalidation of the part of the vote in excess of the 20% threshold. In 
addition, the Commission preliminarily believes--as reflected in 
paragraph (c)(2) of proposed Rule 834--that an SBSEF or SBS exchange 
should, if it discovers that a member has managed to evade the 20% 
voting restriction, compel the member to divest enough of that voting 
interest to come within the 20% limit. Finally, the Commission 
preliminarily believes--as reflected in paragraph (c)(3) of proposed 
Rule 834--that an SBSEF or SBS exchange must have an effective means of 
obtaining information about the ownership and voting interests owned or 
controlled, directly or indirectly, by its members. Proposed Rule 
834(c)(3) is designed to promote compliance with proposed Rule 834(b) 
by requiring an SBSEF or SBS exchange to actively obtain information 
about the ownership and voting interests owned or controlled, directly 
or indirectly, by its members. The Commission preliminarily believes 
that ignorance of a member holding a voting interest in excess of the 
proposed 20% limitation should not excuse a violation of Rule 834(b). 
Furthermore, the information obtained by an SBSEF or SBS exchange under 
proposed Rule 834(c)(3) should assist with any remedial actions 
necessary under proposed Rules 834(c)(1) and (c)(2).
    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.'' Proposed Rule 834(d) recognizes that one way that 
a conflict of interest could manifest itself is in the disciplinary 
process. Therefore, the Commission is proposing, 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.\258\ Section 
1.64(c)(4) requires an SRO (which term, under the CEA, includes a SEF) 
to maintain in effect rules that ``each major disciplinary committee or 
hearing panel [of the SRO] include sufficient different membership 
interests so as to ensure fairness and to prevent special treatment or 
preference for any person in the conduct of a committee's or the 
panel's

[[Page 28928]]

responsibilities.'' Proposed Rule 834(d) reflects the Commission's 
preliminary 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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    \258\ Proposed Rule 834(a) 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 involved fraud, deceit, or 
conversion.
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    To further implement section 765 and promote good governance 
generally for SBSEFs and SBS exchanges, the Commission is proposing 
additional requirements in Rule 834 that are closely modelled on 
Sec. Sec.  1.64 and 1.69 of the CFTC's rules.
    Section 1.64(b) requires an SRO to maintain in effect standards and 
procedures that ensure that 20% or more of the regular voting members 
of the SRO's governing board are persons who are knowledgeable of 
futures trading or financial regulation or are otherwise capable of 
contributing to governing board deliberations. Section 1.64(b) also 
requires an SRO to maintain in effect standards and procedures that 
ensure that 20% or more of the regular voting members of the governing 
board are not: Members of the SRO; currently salaried employees of the 
SRO; primarily performing services for the SRO in a capacity other than 
as a member of the SRO's governing board; or officers, principals, or 
employees of a firm which holds a membership at the SRO either in its 
own name or through an employee on behalf of the firm.
    Paragraph (e) of proposed Rule 834 is closely modelled 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) which 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; \259\ 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.
---------------------------------------------------------------------------

    \259\ Proposed Rule 834(e)(1)(ii), read together with proposed 
Rule 834(b), would have the effect of allowing 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, modelled 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.\260\
---------------------------------------------------------------------------

    \260\ Section 1.64(b)(3) provides in relevant part that the 
governing board of an SRO must include ``a diversity of membership 
interests.'' Section 1.64(a)(4) provides a definition of 
``membership interest'' that lists six classes of members, each of 
which is considered a different membership interest. Many of these 
specifically enumerated classes--e.g., ``floor traders,'' ``floor 
brokers,'' ``futures commission merchants,'' ``producers, consumers, 
processors, distributors, and merchandisers of commodities traded on 
the particular contract market''--might not be relevant to SBSEFs 
and SBS exchanges. Rather than crafting its own definition of 
``membership interest,'' the Commission is opting for a principles-
based approach to incorporating Sec.  1.64(b)(3) into Rule 834, by 
proposing that an SBSEF or SBS exchange must be able to demonstrate 
that the board membership fairly represents the diversity of 
interests at such SBSEF or SBS exchange. See proposed Rule 
834(e)(2).
---------------------------------------------------------------------------

    The Commission is not adapting the detailed provisions of Sec.  
1.64(c) into proposed Rule 834. However, the key principle of Sec.  
1.64(c)--that each major disciplinary committee or hearing panel should 
include sufficient different membership interests so as to ensure 
fairness and to prevent special treatment or preference in the conduct 
of the committee's or panel's responsibilities, which is located in 
paragraph Sec.  1.64(c)--is being adapted into proposed Rule 834(d), as 
discussed above.
    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. This provision would 
provide the Commission information to help it assess an SBSEF's 
compliance with Rule 834.
    Paragraph (g) of proposed Rule 834 is modelled 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. Section 
1.69(b)(1)(i) requires an SRO to maintain in effect rules that require 
a member of its governing board, disciplinary committee, or oversight 
panel to abstain from such body's deliberations and voting on any 
matter involving a named party in interest, where such member: Is a 
named party in interest; is an employer, employee, or fellow employee 
of a named party in interest; is associated with a named party in 
interest through a ``broker association''; has any other significant, 
ongoing business relationship with a named party in interest; or has a 
family relationship \261\ with a named party in interest.
---------------------------------------------------------------------------

    \261\ See proposed Rule 834(a) (defining ``family relationship'' 
of a person to be person's spouse, former spouse, parent, step-
parent, child, step-child, sibling, step-brother, step-sister, 
grandparent, grandchild, uncle, aunt, nephew, niece, or in-law). The 
Commission's proposed definition is adapted from the CFTC's 
definition of ``family relationship'' in Sec.  1.69(a)(2).
---------------------------------------------------------------------------

    Section 1.69(b)(1)(ii) requires an SRO to maintain in effect rules 
that require each member of its governing board, disciplinary 
committee, or oversight panel to disclose to the appropriate SRO staff, 
before consideration of any matter involving a named party in interest, 
whether the member has one of the relationships listed in Sec.  
1.69(b)(1)(i) with a named party in interest. Section 1.69(b)(1)(iii) 
requires the SRO to establish procedures for determining whether a 
member of its governing board, disciplinary committees, or oversight 
committees is subject to a conflicts restriction in any matter 
involving a named party in interest.\262\
---------------------------------------------------------------------------

    \262\ Proposed Rule 834(a) would define ``named party in 
interest'' as 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.
---------------------------------------------------------------------------

    Section 1.69(b)(2)(i) requires a member of the SRO's governing 
board, disciplinary committee, or oversight committee to 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. Section 
1.69(b)(2)(ii) requires a member of the SRO's governing board, 
disciplinary committee, or oversight committee, before consideration of 
any significant action, to disclose to the appropriate SRO staff that 
position information, although this requirement does not apply to 
members who choose to abstain from deliberations and voting on the 
subject significant action. Section 1.69(b)(2)(iii) requires an SRO to 
establish procedures for determining whether any member of its 
governing

[[Page 28929]]

board, disciplinary committees, or oversight committees is subject to a 
conflicts restriction under Sec.  1.69 in any significant action. Such 
determination is required to include a review of various types of 
positions enumerated in the rule, including: ``Any other types of 
positions, whether maintained at that self-regulatory organization or 
elsewhere, held in the member's personal accounts or the proprietary 
accounts of the member's affiliated firm that the self-regulatory 
organization reasonably expects could be affected by the significant 
action.'' Section 1.69(b)(2)(iv) sets out the sources that the SRO 
should review in determining a member's positions, including a catch-
all provision in paragraph (b)(2)(iv)(C) for ``[a]ny other source of 
information that is held by and reasonably available to the self-
regulatory organization.''
    Section 1.69(b)(3)(i) provides that an SRO governing board, 
disciplinary committee, or oversight panel may permit a member to 
participate in deliberations prior to a vote on a significant action 
for which that member otherwise would be required to abstain, if such 
participation would be consistent with the public interest and the 
member recuses from voting on such action. Section 1.69(b)(3)(ii) 
requires the deliberating body, when determining whether to permit the 
exception contemplated in paragraph (b)(3)(i), to consider whether the 
member's participation in deliberations is necessary for the 
deliberating body to achieve a quorum in the matter; and whether the 
member has unique or special expertise, knowledge, or experience in the 
matter under consideration. Section 1.69(b)(3)(iii) requires the 
deliberating body also to consider, when determining whether to permit 
an exception to ``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.''
    Section 1.69(b)(4) requires an SRO's governing board, disciplinary 
committees, and oversight panels to reflect in their minutes or 
otherwise document that the conflicts determination procedures required 
under Sec.  1.69 have been followed. Such records also must include: 
The names of all members who attended the meeting in person or who 
otherwise were present by electronic means; the name of any member who 
voluntarily recused himself or herself or was required to abstain from 
deliberations and/or voting on a matter and the reason for the recusal 
or abstention, if stated; and information on the position information 
that was reviewed for each member.
    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. Paragraph (g)(1)(i)(A), 
however, would incorporate only four of the five prongs in Sec.  
1.69(b)(1)(i).\263\ Second, Sec.  1.69(b)(2)(iii) sets out five types 
of financial positions that could be held by a member of the governing 
board, disciplinary committee, or oversight panel that an SRO must 
review to ascertain if there is a conflicts restriction in a 
significant action. Proposed Rule 834(g)(1)(ii)(C) is a simplified 
version of Sec.  1.69(b)(2)(iii); it would not include the five prongs 
set forth in Sec.  1.69(b)(2)(iii), but rather would incorporate only 
the final, catch-all prong (``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 \264\ that the security-based swap execution facility 
or SBS exchange reasonably expects could be affected by the significant 
action'').\265\ 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 may not be as prevalent in the securities and SBS markets as 
the swaps markets. The Commission believes that 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 is proposing it as Rule 
834(g)(1)(ii)(C)(2).
---------------------------------------------------------------------------

    \263\ The Commission is not proposing 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.
    \264\ Proposed Rule 834(a) would define a ``member's affiliated 
firm'' as a firm in which the member is a principal or an employee.
    \265\ Proposed Rule 834(a) 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.
---------------------------------------------------------------------------

    Proposed Rule 834(h) would require each SBSEF and SBS exchange to 
maintain in effect various rules that would be required under proposed 
Rule 834. An SBSEF would be required to file such rules under proposed 
Rule 806 or 807 of Regulation SE; an SBS exchange would be required to 
file such rules under existing SEA Rule 19b-4.\266\ Proposed Rule 
834(h) is loosely modelled 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.
---------------------------------------------------------------------------

    \266\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Sec. Sec.  1.64 and 1.69 
are reasonably designed to promote good governance of trading venues 
and is therefore proposing to adapt them into Rule 834. These CFTC 
rules identify various instances of potential conflicts of interest 
that might involve a member of the governing board or an important 
committee of a SEF, and require proactive measures to address those 
conflicts. The Commission preliminarily believes that SBSEFs and SBS 
exchanges should have the same types of rules because the same types of 
conflicts that arise with SEFs could arise with SBS trading venues. 
Furthermore, various provisions of Sec. Sec.  1.64 and 1.69 would 
further the policy goals of section 765 of the Dodd-Frank Act. For 
example, proposed Rule 834(e)(1)(ii), modelled on Sec.  
1.64(b)(1)(ii)(A), would require that at least 20% of the regular 
voting members of the governing board of an SBSEF or SBS exchange not 
be members, and proposed Rule 834(e)(1)(v), which is modelled on Sec.  
1.64(b)(1)(ii)(D), would require that at least 20% of the regular 
voting members of the governing board not be persons affiliated with 
members. These requirements, by reserving at least 20% of the governing 
board's seats for persons not associated with any member of an SBSEF or 
SBS exchange, would reduce the possibility that a combination of 
members who are SBS dealers or major SBS participants could create a 
conflict of interest for the SBSEF or SBS exchange.
    In addition, proposed Rule 834(d), which incorporates language from 
Sec.  1.64(c), would require each major disciplinary committee or 
hearing panel thereof to 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. The Commission

[[Page 28930]]

preliminarily believes that it is appropriate to impose such a 
requirement on SBSEFs and SBS exchanges to further lessen the potential 
for members of an SBSEF or SBS exchange who are SBS dealers or major 
SBS participants from benefitting from a conflict of interest. 
Furthermore, proposed Rule 834(e), which is modelled on Sec.  1.64(d), 
would require an SBSEF or 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. Proposed Rule 834(e) is designed to 
reinforce the other requirements of the rule by causing each SBSEF and 
SBS exchange to actively consider how the composition of its governing 
board comports with Rule 834, and to make an accurate representation to 
the Commission regarding such compliance.
    The Commission preliminarily believes that Sec.  1.69 also includes 
provisions that would further the policy goals of section 765 and is, 
therefore, proposing to adapt them into Rule 834. Under proposed Rule 
834(b), an SBSEF or SBS exchange generally may not permit any member to 
hold 20% or more of the voting interest in that trading venue. Nothing 
in proposed Rule 834, however, would prohibit a member--including an 
SBS dealer or major SBS participant (or a person associated with such a 
member, such as a firm principal)--from serving on a governing board, 
disciplinary committee, or oversight panel of an SBSEF or SBS exchange. 
Section 1.69 is designed to address various types of conflicts of 
interest that might involve members of a governing board, disciplinary 
committee, or oversight panel. For example, Sec.  1.69 specifies when a 
member must abstain from the body's deliberations and voting because 
the member has a relationship to the named party in interest or because 
the member has ``a direct and substantial financial interest in the 
result of the vote.'' Furthermore, Sec.  1.69 requires a member to 
disclose its relationships to a named party in interest and provide 
position information to the SRO so that the SRO can assess whether the 
member has a conflict, and also requires the SRO to follow its own 
procedures for determining whether a conflict exists. Because these 
provisions further the goals of section 765--to mitigate conflicts of 
interest created by an SBS dealer or major SBS participant that holds 
an interest in an SBSEF or SBS exchange--and because they are 
reasonably designed to promote good governance more generally, the 
Commission is proposing to incorporate them into Rule 834.
    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, the Commission believes that adopting rules under 
section 765 is a necessary and appropriate first step to guard against 
conflicts of interest arising on SBSEFs and SBS exchanges.
    The Commission seeks comment on the following:
    175. In general, do you agree with how the Commission is proposing 
to implement section 765 of the Dodd-Frank Act? Why or why not?
    176. In particular, do you believe that the 20% ownership cap in 
proposed Rule 834(b) is appropriate? Why or why not? Do you believe 
that a different numerical threshold would be appropriate? If so, what 
numerical threshold and why?
    177. Do you believe that there are other means (such as ownership 
of non-voting equity, holding a sizeable amount of the debt issuance, 
etc.) by which an SBS dealer or major SBS participant could exercise an 
undue influence over an SBSEF or SBS exchange of which it is a member? 
If so, please discuss whether and how these other means should be 
incorporated into Rule 834.
    178. Do you believe that proposed Rule 834(b) is sufficiently clear 
about when a member would be deemed to have an indirect 20% voting 
interest in an SBSEF or SBS exchange? If not, please provide other 
scenarios where you believe the Commission should offer clarification.
    179. Do you agree in general with the Commission's proposal to 
adapt the major provisions of Sec.  1.64 into Rule 834? Why or why not?
    180. Are there provisions of Sec.  1.64 that the Commission has 
incorporated into proposed Rule 834 that you think inappropriate? If 
so, what provisions and why?
    181. Conversely, are there provisions of Sec.  1.64 that the 
Commission has not incorporated into proposed Rule 834 that you think 
should be incorporated? If so, what provisions and why? Specifically, 
do you believe that the Commission should incorporate a definition of 
``membership interest''--as the CFTC does in Sec.  1.64(a)(4)--to more 
precisely delineate the different interests that an SBSEF or SBS 
exchange should take into account?
    182. Do you agree in general with the Commission's proposal to 
incorporate the major provisions of Sec.  1.69 into Rule 834? Why or 
why not?
    183. Are there provisions of Sec.  1.69 that the Commission has 
incorporated into proposed Rule 834 that you think inappropriate? If 
so, what provisions and why?
    184. Do you believe generally that the same rules for mitigating 
conflicts of interest should apply to both SBSEFs and SBS exchanges, or 
should different restrictions apply to each type of trading venue? If 
you believe different restrictions should apply, please explain why and 
what different restrictions you believe should be incorporated into 
Rule 834?
    185. Are there any proposed requirements in Rule 834 that existing 
national securities exchanges, which could in the future elect to list 
SBS and thereby become SBS exchanges, would find difficult to comply 
with? Would any of the requirements proposed in Rule 834 conflict with 
their existing rules? If so, please describe.
    186. Are there other types of conflict of interest that SBS dealers 
and major SBS participants might enjoy as members of an SBSEF or SBS 
exchange? If so, discuss how any such conflict could be addressed via 
Commission rulemaking.
    187. Do you believe that SBS dealers and major SBS participants can 
exercise anticompetitive influence over one or more SBSEFs or SBS 
exchanges even if not members of those trading venues? If so, what 
additional measures would you recommend to combat that anticompetitive 
influence?

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

    The Commission is also proposing new Rule 835 to require an SBSEF 
to provide the Commission notice of a final disciplinary action, a 
final action

[[Page 28931]]

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 also would 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) uses 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 \267\ 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.
---------------------------------------------------------------------------

    \267\ 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 proposed 
Rule 819(g)(13)(ii).\268\ 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. The Commission preliminarily 
believes that it is appropriate to exclude disciplinary actions that 
are summary actions under an SBSEF's summary fine schedule \269\ 
because the Commission expects such summary actions, if applicable, to 
comprise lesser disciplinary actions that do not warrant appeal. The 
CFTC has parallel procedures relating to review of SEF disciplinary 
actions also excludes summary actions under an SEF's summary fine 
schedule.\270\
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    \268\ As discussed above, see supra section VIII(B)(1), 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.
    \269\ 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).
    \270\ See 17 CFR 9.1(b)(2).
---------------------------------------------------------------------------

    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 must 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 seeks comment on the following:
    188. Do you agree with the proposed definition of ``final 
disciplinary action'' in proposed Rule 835? Why or why not? If not, how 
would you revise the definition? Do you think it would be appropriate 
to exclude disciplinary actions that are summary actions under an 
SBSEF's summary fine schedule from such definition? Why or why not?
    189. Do you agree with how the proposed rules and rule amendments 
address when an aggrieved party may seek Commission review of a denial 
or conditioning of membership, or a denial or limitation of access? Why 
or why not? If not, how would you revise those provisions?
    190. In particular, do the proposed rules contain sufficient detail 
to address all types of denials or conditionings of membership or 
denials or limitations on access? Are there particular scenarios that 
commenters believe the Commission should address in Rule 835? If so, 
please describe in detail.
    191. Are the contents of the required notice to the Commission in 
proposed Rule 835 appropriate? Do you believe these would provide the 
Commission with enough detail regarding final disciplinary actions, 
denials or conditionings of membership, and denials or limitations on 
access? If not, what other information should be required in the 
notice?

XII. 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'' also would likely meet the definition of 
``exchange'' set forth in section 3(a)(1) of the SEA \271\ and the 
interpretation of that definition set forth in Rule 3b-16 
thereunder.\272\ Thus, absent an exemption, an entity needing to 
register with the Commission as an SBSEF also would likely need to 
register with the

[[Page 28932]]

Commission as a national securities exchange.\273\ The Commission 
previously has 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.'' \274\
---------------------------------------------------------------------------

    \271\ 15 U.S.C. 78c(a)(1).
    \272\ 17 CFR 240.3b-16 (providing that an entity generally is 
considered to meet the definition of ``exchange'' if it brings 
together the orders for securities of multiple buyers and sellers 
and uses established, non-discretionary methods--whether by 
providing a trading facility or by setting rules--under which such 
orders interact with each other, and the buyers and sellers entering 
such orders agree to the terms of a trade).
    \273\ See section 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'').
    \274\ 2011 SBSEF Proposal, 76 FR at 10958.
---------------------------------------------------------------------------

    Therefore, the Commission is proposing to exercise its authority 
under section 36(a)(1) of the SEA \275\ 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 other securities) and has registered with 
the Commission as an SBSEF. To effect this exemption, the Commission is 
proposing to amend Rule 3a1-1 under the SEA \276\ by adding new 
paragraph (a)(4).\277\
---------------------------------------------------------------------------

    \275\ 15 U.S.C. 78mm(a)(1).
    \276\ 17 CFR 240.3a1-1.
    \277\ The amended rule would provide that an organization, 
association, or group of persons shall be exempt from the definition 
of the term ``exchange'' if such organization, association, or group 
of persons has registered with the Commission as an SBSEF pursuant 
to Rule 803 and provides a market place for no securities other than 
SBS.
---------------------------------------------------------------------------

    The proposed amendment provides that an entity that has registered 
with the Commission as an SBSEF pursuant to proposed Rule 803 and 
provides a market place for no securities other than SBS would not fall 
within the definition of ``exchange,'' 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. Section 5 also 
provides that a broker or dealer may not ``us[e] any facility of an 
exchange within or subject to the jurisdiction of the United States to 
effect any transaction in a security, or to report any such 
transaction, unless such exchange (1) is registered as a national 
securities exchange . . . or (2) is exempted from such registration . . 
. by reason of the limited volume of transactions effected on such 
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 proposed Rule 3a1-1(a)(4) would not be an exchange 
within the meaning of section 5.
    In addition, the Commission is proposing a 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 such 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. 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.\278\ 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 quotes for 
those SBS products, and can require them to trade as a way to promote 
accurate submissions. 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 previously has 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.'' \279\ The Commission is 
now proposing to codify this exemption. 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.
---------------------------------------------------------------------------

    \278\ See supra note 37.
    \279\ See id.
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    Finally, the Commission is proposing 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 retract 
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 is proposing to amend the 
introductory language of paragraph (b) of Rule 3a1-1 to cover only 
paragraphs (a)(1) through (3), not paragraph (a) as a whole.
    The changed language is designed to clarify that the retraction 
provisions would not apply to organizations, associations, or groups of 
persons who fall within proposed Rule 3a1-1(a)(4) or (a)(5). Thus, even 
if a registered SBSEF were to grow very large, Rule 3a1-1(b), as 
proposed to be amended, would not afford a basis for the Commission to 
retract an SBSEF's exemption from the definition of ``exchange'' under 
proposed Rule 3a1-1(a)(4), which would force the SBSEF to register as a 
national securities exchange (to avoid being a registered exchange). 
The Commission preliminarily believes that, in adopting section 3D of 
the SEA, Congress gave the Commission a mechanism to regulate SBSEFs of 
any size. Nothing in section 3D suggests that, if an SBSEF were to grow 
above a certain size, the Commission should be able to withdraw that 
entity's ability to operate as an SBSEF and instead compel it to 
register as a national securities exchange.
    Finally, the Commission preliminarily believes that it is not 
necessary to apply the retraction provisions in Rule 3a1-1(b) to 
registered clearing agencies that engage in forced trading sessions and 
are covered by proposed Rule 3a1-1(a)(5). SBS transactions effected 
using this functionality are designed to facilitate the clearance and 
settlement process by rendering more accurate the daily valuation that 
is used to calculate margin requirements. The entities that utilize 
this functionality are already registered with the Commission--as 
clearing agencies--and carry out these operations under rules that have 
been approved by the Commission. This trading functionality is not 
effected for the purpose of conducting open-market transactions between 
parties who are seeking to increase or decrease their positions for 
investment or hedging purposes. Therefore, the Commission preliminarily 
believes that it would not be appropriate to apply the retraction 
provisions of Rule 3a1-1(b) to clearing agencies that would be covered 
by proposed Rule 3a1-1(a)(5), as this would force these clearing 
agencies also to register as national securities exchanges.
    The Commission seeks comment on the following:
    192. Do you agree in general with the Commission's proposal to 
exempt from

[[Page 28933]]

the statutory definition of ``exchange'' any registered SBSEF that 
provides a market place for no securities other than SBS and any SBS 
clearing agency that engages in forced trading sessions? Why or why 
not?
    193. Do you agree with the particular language of proposed 
paragraphs (a)(4) and (a)(5) of Rule 3a1-1? If not, how would you amend 
the language?
    194. Do you agree with the Commission's preliminary view, reflected 
in the proposed new introductory language to paragraph (b) of Rule 3a1-
1, that entities qualifying for an exemption from the definition of 
``exchange'' under proposed paragraphs (a)(4) and (a)(5) of Rule 3a1-1 
should not be subject to the retraction provisions of Rule 3a1-1(b)? 
Why or why not?

XIII. 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.'' \280\ Absent an exception or exemption, an SBSEF--in 
addition to being subject to the registration and regulatory 
requirements for SBSEFs--also would be required to register with the 
Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA 
\281\ and would be subject to all regulatory requirements applicable to 
brokers.\282\ 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.\283\
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    \280\ See section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4).
    \281\ 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.
    \282\ As discussed in note 43 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 compliance date for the Commission's 
final SBSEF rules.
    \283\ See 17 CFR 240.10b-10 and 240.10b-16.
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    The Commission is proposing a new Rule 15a-12 under the SEA that 
would deem registration with the Commission as an SBSEF also to 
constitute registration as a broker, and would exempt a registered 
SBSEF from many broker requirements in light of the SBSEF regulatory 
regime to which it would also be subject.
    One statutory provision from which a registered SBSEF would be 
exempted is section 17(a) of the SEA,\284\ which requires a registered 
broker (among other types of registered entity) to make and keep 
records as prescribed by Commission rule. Because SBSEFs are required 
to make and keep records as prescribed by Commission rule under section 
3D(d)(9) of the SEA, imposing section 17(a) on SBSEFs would be 
redundant. By contrast, one statutory provision that would continue to 
apply to registered SBSEFs in their dual capacity as registered brokers 
would be section 17(b) of the SEA.\285\
---------------------------------------------------------------------------

    \284\ 15 U.S.C. 78q(a).
    \285\ 15 U.S.C. 78q(b) (providing that the records of registered 
brokers, among other types of registered entity, are subject to 
examination by representatives of the Commission).
---------------------------------------------------------------------------

    In addition, under section 15(b)(8) of the SEA, it is unlawful for 
any registered broker or dealer to effect transactions in securities 
unless it is a member of an SRO.\286\ Brokers and dealers also must 
comply with a number of financial responsibility regulations, such as 
the net capital and customer protection rules.\287\ A registered broker 
or dealer also must make and keep current books and records relating to 
its business and detailing, among other things, securities 
transactions, money balances, and securities positions; keep records 
for required periods and furnish copies of those records to the 
Commission on request; and file certain financial reports with the 
Commission.\288\
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    \286\ See 15 U.S.C. 78o(b)(8) and 240.15b9-1.
    \287\ See 17 CFR 240.15c3-1 and 240.15c3-3.
    \288\ See 17 CFR 240.17a-3, 240.17a-4, and 240.17a-5.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Congress did not intend 
to subject SBSEFs that act only as SBSEFs to a dual regulatory 
regime.\289\ Therefore, using its authority under section 36(a)(1) of 
the SEA and its authority to establish procedures regarding the 
registration of brokers, the Commission is proposing new Rule 15a-12 
under the SEA that would allow an SBSEF that is a broker, solely due to 
its activity with respect to SBS executed on or through the SBSEF, to 
satisfy the requirement to register as a broker by registering as an 
SBSEF.\290\ Proposed Rule 15a-12(b) would provide that such an entity, 
if it registered as an SBSEF pursuant proposed Rule 803, would be 
deemed also to have registered with the Commission pursuant to sections 
15(a) and (b) of the SEA. The Commission is not proposing to exempt 
SBSEFs from registration as brokers; rather, given the registration and 
regulatory requirements being proposed for SBSEFs through Regulation 
SE, it is proposing to eliminate a separate registration process for 
broker/SBSEFs and much of the additive layer of regulation for brokers 
that the Commission preliminarily believes is not necessary in light of 
the regulatory regime for SBSEFs.
---------------------------------------------------------------------------

    \289\ See 2011 SBSEF Proposal, 76 FR at 10959 (noting that this 
framework indicates that Congress did not intend for entities that 
meet the definition of SBSEF also to be subject to all of the 
requirements set forth in the SEA and the rules and regulations 
thereunder applicable to brokers).
    \290\ A foreign SBS trading venue covered by an exemption under 
proposed Rule 833(a) would be exempt from the SEA's definition of 
``broker'' and, as a result, would not need rely on proposed Rule 
15a-12.
---------------------------------------------------------------------------

    Proposed Rule 15a-12 could not be utilized by an SBSEF that engaged 
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 
proposed 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 not avail itself of proposed Rule 15a-12 
because it would not be an SBSEF-B under the rule.
    Paragraphs (c) to (e) of proposed Rule 15a-12 would set out the 
scope of broker requirements from which an SBSEF-B would be exempted 
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 
that it applies to an SBSEF. Paragraph (d) of proposed Rule 15a-12 
would provide that, notwithstanding paragraph (c), an SBSEF-B would 
still be subject to sections 15(b)(4),\291\ 15(b)(6),\292\ and 17(b) of 
the SEA.\293\
---------------------------------------------------------------------------

    \291\ 15 U.S.C. 78o(b)(4).
    \292\ 15 U.S.C. 78o(b)(6).
    \293\ 15 U.S.C. 78q(b).
---------------------------------------------------------------------------

    Sections 15(b)(4) and 15(b)(6) of the SEA serve as the basis for 
enforcing the

[[Page 28934]]

Federal securities laws against registered brokers. Section 15(b)(4) 
provides that the Commission, upon the making of specified findings, 
shall censure; place limitations on the activities, functions, or 
operations of; suspend for a period not exceeding 12 months; or revoke 
the registration of any broker or dealer. Similarly, section 15(b)(6) 
of the SEA requires the Commission, upon the making of specified 
findings, to censure, place limitations on, suspend, or bar such person 
an associated person. Section 17(b) of the SEA is the legal basis under 
which the Commission may examine registered brokers for compliance with 
the Federal securities laws. Section 17(b) authorizes the Commission to 
conduct reasonable periodic, special, or other examinations of all 
records maintained by entities described in section 17(a), including 
registered brokers. These examinations may be conducted at any time, or 
from time to time, as the Commission deems necessary or appropriate in 
the public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the SEA.\294\ Proposed Rule 15a-12 would 
specify that these examination and statutory disqualification 
provisions pertaining to registered brokers continue to apply, despite 
Rule 15a-12 exempting an SBSEF-B from other broker requirements under 
the SEA.
---------------------------------------------------------------------------

    \294\ Id.
---------------------------------------------------------------------------

    Finally, paragraph (e) of proposed Rule 15a-12 would exempt an 
SBSEF-B from the Securities Investor Protection Act (``SIPA''). 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.\295\ SIPC protection is funded by assessments made on member 
firms.\296\
---------------------------------------------------------------------------

    \295\ 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)'').
    \296\ See 15 U.S.C. 78ddd(d).
---------------------------------------------------------------------------

    Section 2 of SIPA \297\ 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. The Commission preliminarily believes that it 
would not be equitable to require an SBSEF-B to become a member of SIPC 
and pay SIPC assessments, since 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,\298\ the Commission 
preliminarily believes 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 proposing to codify this exemption as Rule 15a-12(e).
---------------------------------------------------------------------------

    \297\ 15 U.S.C. 78bbb.
    \298\ 15 U.S.C. 78mm(a)(1) (giving the Commission broad 
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 seeks comment on the following:
    195. Do you agree in principle with proposed Rule 15a-12? Why or 
why not?
    196. Do you agree with the specific language of proposed Rule 15a-
12? If not, how would you revise the rule language, and why?
    197. Are there any provisions listed in paragraph (d) of proposed 
Rule 15a-12 to which an SBSEF-B should not be subject? If so, what 
provisions and why? Are there any other provisions or broker 
requirements to which an SBSEF-B should be subject (and thus added to 
paragraph (d) of proposed Rule 15a-12)? If so, what provisions or 
requirements and why?
    198. Do you believe that it is appropriate to exempt SBSEF-Bs from 
SIPA, as reflected in proposed Rule 15a-12(e)? Why or why not?

XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition of 
``Clearing Agency'' for Unregistered SBSEFs

    In 2020, the Commission adopted Rule 17Ad-24 under the SEA \299\ to 
exempt from the definition of ``clearing agency'' in section 3(a)(23) 
of the SEA \300\ 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.\301\ 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.\302\ The Commission 
preliminarily believes that, if it adopts a framework for the 
registration of SBSEFs, the 2011 Temporary 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.
---------------------------------------------------------------------------

    \299\ 17 CFR 240.17Ad-24.
    \300\ 15 U.S.C. 78c(a)(23).
    \301\ See SEA Release No. 90667 (December 16, 2020), 86 FR 7637 
(February 1, 2021).
    \302\ See id., 86 FR at 7650; SEA Release No. 64796 (July 1, 
2011), 76 FR 39963, 39964 (July 7, 2011) (``2011 Temporary 
Exemption'').
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    199. Should the Commission sunset the 2011 Temporary Exemption to 
coincide with the compliance date for Regulation SE, if adopted? If 
not, what timeline for sunsetting the 2011 Temporary Exemption would be 
appropriate?

XV. Electronic Filings Under Regulation SE

    Various provisions of proposed Regulation SE would require 
registered SBSEFs (or SBSEF applicants) to file specified information 
electronically with the Commission using the Electronic Data Gathering, 
Analysis, and Retrieval (``EDGAR'') system in Inline XBRL, a 
structured, machine-readable data language. Such provisions include:
     Proposed Rule 803(b)(1)(i) and (b)(3), regarding filings 
of, and amendments to, a Form SBSEF application.
     Proposed Rules 803(e) and 803(f), regarding requests to 
withdraw or vacate an application for registration.
     Proposed Rule 804(a)(1), regarding filings for listing 
products for trading by certification.
     Proposed Rule 805(a)(1), regarding filings for voluntary 
submission of new products for Commission review and approval.
     Proposed Rule 806(a)(1), regarding filings for voluntary 
submission of rules for Commission review and approval.
     Proposed Rule 807(a)(1), regarding filings for self-
certification of rules.
     Proposed Rule 807(d), regarding filings of weekly 
notifications to the

[[Page 28935]]

Commission of rules and rule amendments that were not required to be 
certified.
     Proposed Rule 829(g)(6), regarding submission to the 
Commission of reports related to financial resources and related 
documentation.
     Proposed Rule 831(j)(2), regarding submission to the 
Commission of the annual compliance report of SBSEF's CCO.
    Requiring SBSEFs to file this information in EDGAR would provide 
the Commission and the public with a centralized, publicly accessible 
electronic database for the information, thereby facilitating its use. 
EDGAR would also enable technical validation of the disclosures, thus 
potentially reducing the incidence of non-discretionary errors (e.g., 
including text for a disclosure that should contain only numbers). 
Moreover, requiring Inline XBRL tagging of the reported disclosures, 
which would specifically comprise Inline XBRL block text tags for any 
narrative disclosures, as well as detail tags for individual data 
points, would make the 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 the reports.\303\
---------------------------------------------------------------------------

    \303\ See Release No. 33-10514 (June 28, 2018), 83 FR 40846, 
40847 (August 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.
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    200. Would EDGAR be an appropriate system for these filings? Or 
should the Commission use its Electronic Form Filing System/SRO Rule 
Tracking System (``EFFS/SRTS'') or another file transfer system 
instead? \304\ Would requiring these materials to be filed in EDGAR, 
EFFS/SRTS, or another file transfer system be more beneficial for 
SBSEFs and other market participants? If so, why? How would the use of 
these different systems impact the usability and accessibility of the 
materials for data users? Is there another method of electronic 
submission that is preferable? If so, please identify that method, why 
you believe it should be used, and the estimated costs of such system 
for filers.
---------------------------------------------------------------------------

    \304\ The Commission's EFFS/SRTS system was not designed to 
support filings using an open structured data language such as 
Inline XBRL. As a result, requiring registrants to submit filings 
via the EFFS/SRTS system may not be compatible with a requirement to 
use Inline XBRL or any other open structured data language for the 
filings.
---------------------------------------------------------------------------

    201. Should all filings be made through the same electronic system, 
or would different filing systems be appropriate for different types of 
filings? If the latter, please discuss.
    202. Would Inline XBRL be an appropriate data language for these 
filings? Or should the Commission use a different structured data 
language? If so, which data language should be required, and why? Would 
requiring a different structured data language be more beneficial for 
SBSEFs and other market participants? How would the use of a different 
data language impact the usability and accessibility of the materials 
for data users? What time or expense is associated with your 
recommended structured data language? Would a particular structured 
data language require any filers or users to license commercial 
software they otherwise would not, and, if so, at what expense?

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

    As noted above,\305\ SEA Core Principle 2 directs an SBSEF to 
exercise regulatory powers over its market.\306\ Under proposed 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.\307\ SEA Core Principle 2 also requires an SBSEF 
to establish rules governing access to its market.\308\ 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. The Commission preliminarily believes 
that general principles of due process necessitate an appeals procedure 
for final disciplinary actions taken by an SBSEF, for denials or 
conditionings of membership, and for limitations or denials of access. 
Accordingly, the Commission is proposing a number of amendments to its 
Rules of Practice to allow for such appeals, and notes that the CFTC 
has similar procedures with respect to SEFs.\309\
---------------------------------------------------------------------------

    \305\ See supra section VIII(B).
    \306\ 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).
    \307\ See supra section VIII(B). See also proposed Rule 
819(c)(3) (relating to limitations on access, including suspensions 
and permanent bars); proposed Rule 819(g) (relating to disciplinary 
procedures and sanctions).
    \308\ 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).
    \309\ See 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.
---------------------------------------------------------------------------

A. Amendment to Rule 101

    Existing Rule 101 of the Commission's Rules of Practice \310\ 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 is proposing a 
new paragraph (a)(9)(ix) of Rule 101 that would provide 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 applicability 
of the Rules of Practice.
---------------------------------------------------------------------------

    \310\ 17 CFR 201.101.
---------------------------------------------------------------------------

B. Amendment to Rule 202

    Existing Rule 202 of the Commission's Rules of Practice \311\ 
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 PCAOB. Because the Commission is proposing new Rules 442 and 443, 
which set out specific procedures with respect to proceedings to review 
a determination of an SBSEF,\312\ the Commission is proposing to revise 
Rule 202(a) to add such SBSEF-related proceedings to the list of 
exclusions.
---------------------------------------------------------------------------

    \311\ 17 CFR 201.202.
    \312\ See infra sections XVI(E) and (F).
---------------------------------------------------------------------------

C. Amendment to Rule 210

    Existing Rule 210 of the Commission's Rules of Practice \313\ sets 
out Commission rules with respect to parties, limited participants, and 
amici curiae in various proceedings before the Commission. Paragraph 
(a)(1) of Rule 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

[[Page 28936]]

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 is proposing new Rules 442 and 443, which set out specific 
procedures with respect to proceedings to review a determination of an 
SBSEF,\314\ the Commission is proposing to revise Rule 210 to exclude 
proceedings to review a determination by an SBSEF among those types of 
proceedings from which persons may be granted leave to become a party 
or a non-party participant on a limited basis.
---------------------------------------------------------------------------

    \313\ 17 CFR 201.210.
    \314\ See infra sections XVI(E) and (F).
---------------------------------------------------------------------------

D. Amendment to Rule 401

    The Commission is proposing to amend existing Rule 401 of its Rules 
of Practice by adding a new paragraph (f). New paragraph (f)(1) of 
existing Rule 401 would permit any person aggrieved by a stay of action 
by an SBSEF entered in accordance with proposed 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. New paragraph 
(f)(2) would provide that the Commission may lift a stay summarily, 
without notice and opportunity for hearing. Finally, new 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.
    The Commission preliminarily believes that 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 proposed Rule 442, an aggrieved person 
could 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 application would 
operate as a stay of the SBSEF's determination. The Commission 
preliminarily believes that, 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 proposed Rule 401(f)(2) to lift a 
stay summarily, without notice and opportunity of hearing.

E. Rule 442--Right To Appeal

    Proposed new Rule 442 \315\ would establish the right to an appeal 
to the Commission of certain determinations made by an SBSEF, and set 
out certain procedural matters relating to any such appeal. Paragraph 
(a) of proposed Rule 442 would provide 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 proposed Rule 835(b)(1); (2) final action with 
respect to a denial or conditioning of membership, as defined in 
proposed 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 proposed Rule 835(b)(2). Paragraph (b) of proposed Rule 442 would 
set forth the procedure in such cases. Specifically, an aggrieved 
person could 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 proposed Rule 835 is 
received by the aggrieved person, and must serve the application on the 
SBSEF at the same time.\316\ Paragraph (c) of proposed Rule 442 would 
provide that filing an application for review with the Commission 
pursuant to proposed 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 proposed Rule 401(f) or upon its 
own motion.\317\ The Commission preliminarily believes that it is 
appropriate for the filing of an application for review to operate as 
an automatic stay of the SBSEF's determination, because such 
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. 
In addition, the Commission is proposing in Rule 401(f) a procedure 
whereby a person aggrieved by such stay, including the SBSEF, could 
request that the Commission lift the stay. The proposed rules also 
contain certain requirements relating to certification of the record 
and service of the index.\318\ 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 such record, and serve one copy of the index on each party, 
subject to the requirements in proposed Rule 442(d)(2) relating to 
sensitive personal information; if applicable, such filings would have 
to be certified that they have complied with such requirements relating 
to sensitive personal information. The Commission believes 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.
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    \315\ 17 CFR 201.442.
    \316\ Such 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.
    \317\ 17 CFR 201.442(c).
    \318\ 17 CFR 201.442(d)-(e).
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F. Rule 443--Sua Sponte Review by Commission

    New proposed Rule 443 \319\ would provide that the Commission, on 
its own initiative, could 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 proposed Rule 
442(a) within 40 days after the SBSEF filed notice thereof.
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    \319\ 17 CFR 201.443.
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    Proposed Rule 443 would further provide that the Commission could 
at any time before issuing its decision raise or consider any matter 
that it deems material, whether or not raised by the parties. If the 
Commission did so, under proposed Rule 443 the Commission would 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. The Commission preliminarily believes that it is appropriate 
that it have the ability to review any determination filed by an SBSEF 
that could be subject to an application for review under proposed

[[Page 28937]]

Rule 442(a), even without an appeal of such determination by an 
aggrieved party, should it believe that further consideration is 
warranted. Therefore, the proposed rule would provide the Commission 
authority to obtain additional information through supplemental 
briefings, as needed.

G. Amendment to Rule 450

    Existing Rule 450 of the Commission's Rules of Practice \320\ 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 is proposing to amend Rule 
450(a)(2) by adding a new paragraph (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).''
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    \320\ 17 CFR 201.450.
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H. Amendment to Rule 460

    Existing Rule 460 of the Commission's Rules of Practice \321\ 
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 is proposing a new paragraph 
(a)(4) of Rule 460 that would state 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.
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    \321\ 17 CFR 201.460.
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I. Request for Comment

    The Commission requests comment on all aspects of its proposed 
rules and rule amendments to provide for applications for review by the 
Commission of an SBSEF's final disciplinary action or denial or 
limitation of access. In particular:
    203. Do you agree in general that final disciplinary action and 
denials or limitations of access by an SBSEF be afforded a review 
process under the Commission's Rules of Practice? Why or why not?
    204. Should aggrieved parties be permitted to submit a motion for a 
stay of an action by an SBSEF under proposed Rule 401(f)? Do you 
believe that there may be instances in which a motion for a stay may be 
necessary? Why or why not? Are there any particular provisions that 
should be added or should not be included in such a process? If so, 
please describe.
    205. Are the provisions relating to SBSEFs under proposed Rule 442 
appropriate? Are there additional requirements that should be included 
or items that should be omitted? Are the provisions relating to 
sensitive personal information and exceptions under proposed paragraph 
(d)(2) appropriate? Why or why not?
    206. Is it appropriate for the Commission to be able to review 
determinations of an SBSEF sua sponte under proposed Rule 443? Why or 
why not?

XVII. Conclusion

    The Commission requests comment on all aspects of proposed 
Regulation SE, including any provision of a proposed rule about which 
the Commission did not ask a specific question above. In addition, the 
Commission seeks commenters' views on whether Regulation SE should 
address any other aspects of SBSEFs or SBS execution generally where 
the Commission has not proposed a specific rule. In particular:
    207. Are there any other CFTC rules, or provisions of the CEA 
itself, relating to SEFs that you believe should be adapted by the 
Commission to apply to SBSEFs? If so, which rules or provisions and 
why?
    208. Are there any other requirements that the Commission should 
apply to SBSEF members, or which the Commission should require SBSEFs 
to apply to their members? If so, what requirements and why? What would 
be the legal basis for those additional requirements?

XVIII. Compliance Schedule

    To facilitate the efficient registration of SBSEFs and compliance 
with Regulation SE, the Commission intends to include a compliance 
schedule along with any final rules, if adopted. To assist it in 
developing an appropriate compliance schedule, the Commission seeks 
comment on the following matters:
    209. If the Commission were to substantially harmonize its SBSEF 
rules and registration procedures with those of the CFTC, as proposed, 
how long would respondents need to submit a Form SBSEF to the 
Commission after Regulation SE and Form SBSEF are adopted (assuming 
that the applicant is not registered as a SEF with the CFTC)?
    210. Please provide your view of the optimal compliance schedule(s) 
and explain your rationale.
    211. Should the compliance date for foreign SBS trading venues that 
seek an exemption order under Rule 833(a) coincide with the date by 
which SBSEF applicants would have to be registered by the Commission? 
If you believe that such foreign SBS trading venues should have a 
different compliance date, what date should that be and why?

XIX. Economic Analysis

A. Introduction

    To increase the transparency and oversight of the OTC derivatives 
market,\322\ 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 \323\ 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 proposing Regulation SE and associated forms that would 
create a regime for the registration and regulation of SBSEFs and 
address other issues relating to SBS execution generally.\324\ One of 
the rules being proposed as part of Regulation SE, Rule 834, would 
implement section 765 of the Dodd-Frank Act, which is intended to 
mitigate conflicts of interest at SBSEFs and SBS exchanges. Other rules 
being proposed as part of Regulation SE would address the cross-border 
application of the SEA's trading venue registration requirements and 
the trade execution requirement for SBS.
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    \322\ See Public Law 111-203 Preamble.
    \323\ 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 VIII.
    \324\ Among other things, the Commission is proposing 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.
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    In addition, the Commission is proposing to amend 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 also 
is proposing 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 also 
is proposing certain new rules and amendments to its Rules of Practice 
to

[[Page 28938]]

allow persons who are aggrieved by certain determinations by an SBSEF 
to apply for review by the Commission. The Commission also is 
withdrawing all previously proposed rules regarding these subjects.
    Currently, SBS trade in the OTC market, rather than on regulated 
markets. 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.\325\ SBS dealers can have hundreds of 
counterparties, consisting of end users and other SBS dealers. Trading 
venues may serve hundreds of participants, consisting of SBS dealers 
and end users. 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 OTC derivatives regulations 
imposed by local regulatory authorities.
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    \325\ See also section IX(A) supra and XIX(B)(2)(c) infra 
(discussing the global nature of the SBS market).
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    The Commission is mindful of the economic effects, including the 
costs and benefits, of the proposal. 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 
proposal, including its anticipated and estimated benefits and costs 
and its 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.

B. Economic Baseline

    To assess the economic effects of the proposed rules and 
amendments, the Commission is using as the baseline the SBS market as 
it currently exists, including applicable rules the Commission has 
already adopted, but excluding rules the Commission has proposed but 
not yet finalized. 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,\326\ the Cross-Border 
Adopting Release,\327\ the SDR Rules and Core Principles Adopting 
Release,\328\ the Regulation SBSR Adopting Release I,\329\ the 
Registration Adopting Release,\330\ the ANE Adopting Release,\331\ the 
Business Conduct Adopting Release,\332\ the Trade Acknowledgement and 
Verification Adopting Release,\333\ the Regulation SBSR Adopting 
Release II,\334\ the Rule of Practice 194 Adopting Release,\335\ the 
Capital, Margin, and Segregation Adopting Release,\336\ the 
Recordkeeping and Reporting Adopting Release,\337\ the Risk Mitigation 
Adopting Release,\338\ the Cross-Border Amendments Adopting 
Release,\339\ and the Clearing Exemption Adopting Release.\340\ The 
baseline also includes the Temporary SBSEF Exemptions \341\ and the 
CFTC rules that apply to CFTC-registered SEFs. The following sections 
discuss available data from the SBS market; SBS activity and market 
participants; distribution of transaction size; other markets and 
existing regulatory frameworks; number of entities that likely will 
register as SBSEFs; SBS trading on platforms; global regulatory 
efforts; and trading models.
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    \326\ 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 (April 27, 2012), 77 FR 30596 (May 23, 2012) 
(``Intermediary Definitions Adopting Release'').
    \327\ 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 (August 12, 2014) (``Cross-Border Adopting 
Release'').
    \328\ See Security-Based Swap Data Repository Registration, 
Duties, and Core Principles, SEA Release No. 74246 (February 11, 
2015), 80 FR 14438 (March 19, 2015) (``SDR Rules and Core Principles 
Adopting Release'').
    \329\ See supra note 84.
    \330\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, SEA Release No. 75611 
(August 5, 2015), 80 FR 48964 (August 14, 2015) (``Registration 
Adopting Release'').
    \331\ 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 (February 10, 2016), 81 FR 
8598 (February 19, 2016) (``ANE Adopting Release'').
    \332\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, SEA Release No. 
77617 (April 14, 2016), 81 FR 29960 (May 13, 2016) (``Business 
Conduct Adopting Release'').
    \333\ 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'').
    \334\ See supra note 229.
    \335\ 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 (December 19, 2018), 84 FR 4906-
47 (February 19, 2019) (``Rule of Practice 194 Adopting Release'').
    \336\ 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 (August 
22, 2019) (``Capital, Margin, and Segregation Adopting Release'').
    \337\ See 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 
(September 19, 2019), 84 FR 68550 (December 16, 2019) 
(``Recordkeeping and Reporting Adopting Release'').
    \338\ See Risk Mitigation Techniques for Uncleared Security-
Based Swaps, SEA Release No. 87782 (December 18, 2019), 85 FR 6359 
(February 4, 2020) (``Risk Mitigation Adopting Release'').
    \339\ See Cross-Border Application of Certain Security-Based 
Swap Requirements, SEA Release No. 87780 (December 18, 2019), 85 FR 
6270 (February 4, 2020) (``Cross-Border Amendments Adopting 
Release'').
    \340\ 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 (December 16, 
2020), 86 FR 7637 (February 1, 2021) (``Clearing Exemption Adopting 
Release'').
    \341\ See supra section V and note 42.
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1. Available Data From the SBS Market
    The Commission's understanding of the market is informed, in part, 
by available data on SBS transactions, though the Commission 
acknowledges that limitations in the data limit the extent to which it 
is possible to quantitatively characterize the market.\342\ Since these 
data do not cover the entire market, the Commission has analyzed market 
activity using a sample of transaction data that includes only certain 
segments of the market. The

[[Page 28939]]

Commission believes, however, that the data underlying this analysis 
provides reasonably comprehensive information regarding single-name CDS 
transactions and the composition of the participants in the single-name 
CDS market.
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    \342\ The Commission also relies on qualitative information 
regarding market structure and evolving market practices provided by 
commenters and knowledge and expertise of Commission staff.
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    Specifically, the analysis of the current state of the SBS market 
is based on data obtained from the DTCC Derivatives Repository Limited 
Trade Information Warehouse (``TIW''), especially data regarding the 
activity of market participants in the single-name CDS market during 
the period from 2008 to 2020. Although SBS are not limited to single-
name CDS,\343\ single-name CDS contracts make up a majority of SBS, and 
we believe that the single-name CDS data are sufficiently 
representative of the market to inform our analysis of the current SBS 
market. According to data published by the Bank for International 
Settlements (``BIS''), as of December 2020, the global notional amount 
outstanding in single-name CDS was approximately $3.5 trillion,\344\ in 
multi-name index CDS was approximately $4.5 trillion, and in multi-
name, non-index CDS was approximately $347 billion.\345\ The total 
gross market value outstanding in single-name CDS was approximately $77 
billion, and in multi-name CDS instruments was approximately $125 
billion.\346\ The global notional amount outstanding in equity forwards 
and swaps as of December 2020 was $3.6 trillion, with total gross 
market value of $321 billion.\347\
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    \343\ The Commission explains below that data related to single-
name CDS provide reasonably comprehensive information for the 
purpose of this analysis.
    \344\ The global notional amount outstanding represents the 
total face amount used to calculate payments under outstanding 
contracts. The gross market value is the cost of replacing all open 
contracts at current market prices.
    \345\ See Global OTC Derivatives Market: Table D5.2 Commodity 
Contracts, Credit Default Swap, BIS (updated January 13, 2022), 
available at https://stats.bis.org/statx/srs/table/d5.2.
    \346\ See id.
    \347\ These totals include swaps and SBS, as well as products 
that are excluded from the definition of ``swap,'' such as certain 
equity forwards. See Global OTC Derivatives Market: Table D5.1 
Foreign Exchange, Interest Rate, Equity Linked Contracts, BIS 
(updated January 13, 2022), available at https://stats.bis.org/statx/srs/table/d5.1. For the purposes of this analysis, the 
Commission assumes that multi-name index CDS are not narrow-based 
index CDS and therefore do not fall within the definition of 
``security-based swap.'' See 15 U.S.C. 78c(a)(68)(A). See also 
Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping, 77 FR 48208. The Commission also assumes 
that all instruments reported as equity forwards and swaps are SBS, 
potentially resulting in underestimation of the proportion of the 
SBS market represented by single-name CDS. Therefore, when measured 
on the basis of gross notional outstanding, single-name CDS appear 
to constitute roughly 49% of the SBS market. Although the BIS data 
reflect the global OTC derivatives market and not just the U.S. 
market, the Commission has no reason to believe that this ratio 
differs significantly in the U.S. market.
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    The data available from TIW does not encompass those CDS 
transactions that both: (i) Do not involve U.S. counterparties; \348\ 
and (ii) are based on non-U.S. reference entities. Notwithstanding this 
limitation, the TIW single-name CDS data should provide sufficient 
information to permit the Commission to identify the types of market 
participants active in the SBS market and the general pattern of 
dealing within that market.\349\
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    \348\ Following publication of the Warehouse Trust Guidance on 
CDS data access, TIW surveyed market participants, asking for the 
physical address associated with each of their accounts (i.e., where 
the account is organized as a legal entity). This physical address 
is designated the registered office location by TIW. When an account 
reports a registered office location, the Commission has assumed 
that the registered office location reflects the place of domicile 
for the fund or account. When an account does not report a 
registered office location, the Commission has assumed that the 
settlement country reported by the investment adviser or parent 
entity to the fund or account is the place of domicile. Thus, for 
purposes of this analysis, the Commission has classified accounts as 
``U.S. counterparties'' when they have reported a registered office 
location in the United States. The Commission notes, however, that 
this classification is not necessarily identical in all cases to the 
definition of ``U.S. person'' under SEA Rule 3a71-3(a)(4).
    \349\ The challenges the Commission faces in estimating measures 
of current market activity stem, in part, from the absence of 
comprehensive reporting requirements for SBS market participants. 
The Commission has adopted rules regarding regulatory reporting and 
public dissemination of SBS transactions that are designed, when 
fully implemented, to provide the Commission with additional 
measures of market activity that will allow the Commission to better 
understand and monitor activity in the SBS market. See Regulation 
SBSR Adopting Release II, 81 FR at 53545.
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    In addition to the TIW single-name CDS data, the Commission uses 
data on SBS transactions reported to registered security-based swap 
data repositories (SDRs) to describe the baseline. Beginning on 
November 8, 2021, market participants are required to report SBS 
transactions to registered SDRs pursuant to Regulation SBSR. The 
Commission uses data on SBS transactions in the credit, equity, and 
interest rate asset classes that were executed between November 8, 2021 
and February 28, 2022 to quantify the extent of SBS trading on 
platforms.
2. SBS Market Activity and Participants
a. SBS Entities
    Final SBS Entity registration rules have been adopted and 
compliance was required as of November 1, 2021.\350\ As of January 3, 
2022, 44 entities had registered with the Commission as SBS dealers and 
no entity had registered as a major SBS participant.\351\
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    \350\ 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.
    \351\ See List of Registered Security-Based Swap Dealers and 
Major Security-Based Swap Participants, available at: https://www.sec.gov/files/list_of_sbsds_msbsps-_01-03-2022locked-final.xlsx 
(providing the list of registered SBS dealers and major SBS 
participants that was updated as of January 3, 2022).
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    Firms that act as SBS dealers play a central role in the SBS 
market. Based on an analysis of 2020 single-name CDS data in TIW, 
accounts of registered SBS dealer firms intermediated transactions with 
a gross notional amount of approximately $1.99 trillion, with 
approximately 55% of the gross notional intermediated by the top five 
SBS dealer accounts.\352\
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    \352\ The Commission staff analysis of TIW transaction records 
indicates that approximately 99% of single-name CDS price-forming 
transactions in 2020 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These SBS dealers transact with hundreds or thousands of 
counterparties. Approximately 8% of accounts of SBS dealer firms 
observable in TIW have entered into SBS with over 1,000 unique 
counterparty accounts as of year-end 2020.\353\ Another 23% of these 
accounts transacted with 500 to 1,000 unique counterparty accounts; 38% 
transacted with 100 to 500 unique accounts; and 31% of these accounts 
intermediated SBS with fewer than 100 unique counterparties in 2020. 
The median SBS dealer account transacted with 276 unique accounts (with 
an average of approximately 416 unique accounts). Non-SBS dealer 
counterparties transacted almost exclusively with these SBS dealers. In 
2020, the median non-SBS dealer counterparty transacted with 1.3 SBS 
dealer accounts (with an average of approximately 2.5 SBS dealer 
accounts).
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    \353\ Many dealer entities and financial groups transact through 
numerous accounts. Given that individual accounts may transact with 
hundreds of counterparties, the Commission may infer that entities 
and financial groups may transact with at least as many 
counterparties as the largest of their accounts.
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b. Other SBS Market Participants
    In addition to SBS dealers, thousands of other participants appear 
as counterparties to SBS transactions in our sample, including but not 
limited to: Investment companies, pension funds, private funds, 
sovereign entities, and industrial companies. The Commission observes 
that most non-SBS dealer users of SBS do not engage in trading 
directly, but trade through banks, investment advisers, or other

[[Page 28940]]

types of firms acting as SBS dealers or agents. Based on an analysis of 
the counterparties to trades reported to the TIW, there are 2,321 
entities that engaged directly in trading between November 2006 and 
December 2020.\354\
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    \354\ These 2,321 entities, which are presented in more detail 
in Table 1, include all DTCC-defined ``firms'' shown in TIW as 
transaction counterparties that report at least one transaction to 
TIW as of December 2020. The staff in the Division of Economic and 
Risk Analysis classified these firms, which are shown as transaction 
counterparties, by machine matching names to known third-party 
databases and by manual classification. See, e.g., ANE Adopting 
Release, 81 FR at 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, and a firm's public 
website or the public website of the account represented by a firm. 
The staff also referred to ISDA protocol adherence letters available 
on the ISDA website.
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    As shown in Table 1 below, close to three-quarters of these 
entities (DTCC-defined ``firms'' shown in TIW, which we refer to here 
as ``transacting agents'') were identified as investment advisers, of 
which approximately 40% (about 32% of all transacting agents) were 
registered as investment advisers under the Investment Advisers 
Act.\355\ Although investment advisers are the vast majority of 
transacting agents, the transactions they executed account for only 
14.2% of all single-name CDS trading activity reported to the TIW, 
measured by number of transaction-sides (each transaction has two 
transaction sides, i.e., two transaction counterparties). The vast 
majority of transactions (82.1%) measured by number of transaction-
sides were executed by ISDA-recognized SBS dealers.
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    \355\ See 15 U.S.C. 80b1-80b21. Transacting agents participate 
directly in the SBS market, without relying on an intermediary, on 
behalf of principals. For example, a university endowment might hold 
a position in SBS that is established by an investment adviser that 
transacts on the endowment's behalf. In this case, the university 
endowment is a principal that uses the investment adviser as its 
transacting agent.

 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                   November 2006 Through December 2020, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                                    Transaction
                       Transacting agents                             Number          Percent         share %
----------------------------------------------------------------------------------------------------------------
Investment Advisers.............................................           1,823            78.5            14.2
--SEC registered................................................             734            31.6             9.5
Banks...........................................................             274            11.8             3.3
Pension Funds...................................................              30             1.3             0.1
Insurance Companies.............................................              48             2.1             0.2
ISDA-Recognized SBS Dealers \356\...............................              17             0.7            82.1
Other \357\.....................................................             129             5.6             0.2
                                                                 -----------------------------------------------
    Total.......................................................           2,321           100.0             100
----------------------------------------------------------------------------------------------------------------

    Principal holders of CDS risk exposure are represented by 
``accounts'' in the TIW.\358\ The staff's analysis of these accounts in 
TIW shows that the 2,321 transacting agents classified in Table 1 
represent 15,187 principal risk holders. Table 2 below classifies these 
principal risk holders by their counterparty type and whether they are 
represented by a registered or unregistered investment adviser.\359\ 
For instance, banks in Table 1 allocated transactions across 370 
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 1 allocated transactions across 
104 accounts. Private funds are the largest type of account holders 
that the Commission was able to classify, and although not verified 
through a recognized database, most of the funds we were not able to 
classify appear to be private funds.\360\
---------------------------------------------------------------------------

    \356\ 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: J.P. Morgan Chase NA (and Bear 
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch), 
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS, 
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman 
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, 
Cr[eacute]dit Agricole, Wells Fargo, and Nomura. See, e.g., ISDA, 
2010 ISDA Operations Benchmarking Survey (2010), available at 
https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.
    \357\ 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 in Table 1 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.
    \358\ ``Accounts'' as defined in the 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 account for 
its U.S. headquarters and one DTCC account for one of its foreign 
branches.
    \359\ 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.
    \360\ 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 5,800 DTCC accounts unclassified by type. Although 
unclassified, each account was manually reviewed to verify that it 
was not likely to be a special entity within the meaning of the 
Dodd-Frank Act and instead was likely to be an entity such as a 
corporation, an insurance company, or a bank.

[[Page 28941]]

      Table 2--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 November 2006 Through December 2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Account holders by type                           Number    Represented by a registered
                                                                investment adviser
                                          Represented by an unregistered
                                                investment adviser
                                            Participant is transacting
                                                    agent \361\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds...........................           4,447           2,283             51%           2,089             47%              75              2%
DFA Special Entities....................           1,542           1,476             96%              43              3%              23              1%
Registered Investment Companies.........           1,382           1,295             94%              82              6%               5              0%
Banks (non-ISDA-recognized SBS dealers).             370              26              7%               9              2%             335             91%
Insurance Companies.....................             341             210             62%              46             13%              85             25%
ISDA-Recognized SBS Dealers.............             104               0              0%               0              0%             104            100%
Foreign Sovereigns......................              93              67             72%               6              6%              20             22%
Non-Financial Corporations..............             125              93             74%              10              8%              22             18%
Finance Companies.......................              59              43             73%               0              0%              16             27%
Other/Unclassified......................           6,724           4,081             61%           2,348             35%             295              4%
                                         ---------------------------------------------------------------------------------------------------------------
    All.................................          15,187           9,574             63%           4,633             31%             980              6%
--------------------------------------------------------------------------------------------------------------------------------------------------------

c. SBS Market Participant Domiciles
---------------------------------------------------------------------------

    \361\ 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 SBS market have shifted over time. It is unclear 
whether these shifts represent changes in the types of participants 
active in this market, changes in reporting, or changes in transaction 
volumes in particular underliers. For example, the percentage of new 
entrants that are foreign accounts increased from 24.4% in the first 
quarter of 2008 to approximately 50% in the last quarter of 2020, which 
might reflect an increase in participation by foreign account holders 
in the SBS market, though the total number of new entrants that are 
foreign accounts decreased from 112 in the first quarter of 2008 to 38 
in the last quarter of 2020.\362\ 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 11.8% in 
the last quarter of 2020, and the absolute number changed from 21 to 9, 
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.\363\ 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 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.\364\
---------------------------------------------------------------------------

    \362\ These estimates were calculated by Commission staff using 
TIW data.
    \363\ See Charles Levinson, U.S. banks moved billions in trades 
beyond the CFTC's reach, Reuters (August 21, 2015) (retrieved from 
Factiva database). The estimates of 21 and 25 were calculated by 
Commission staff using TIW data.
    \364\ The available data do not include all SBS transactions but 
only transactions in single-name CDS that involve either (1) at 
least one account domiciled in the United States (regardless of the 
reference entity); or (2) single-name CDS on a U.S. reference entity 
(regardless of the U.S.-person status of the counterparties).
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 28942]]

[GRAPHIC] [TIFF OMITTED] TP11MY22.000

BILLING CODE 8011-01-C
    Figure 2 below describes the percentage of global, notional 
transaction volume in North American corporate single-name CDS reported 
to TIW between January 2011 and December 2020, 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 2020. 
This fall 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 ten years,\365\ from just under $2 trillion in 2011 to less 
than $500 billion in 2020.\366\
---------------------------------------------------------------------------

    \365\ The start of this decline predates the enactment of the 
Dodd-Frank Act and the proposal of rules thereunder, which is 
important to note for the purpose of understanding the economic 
baseline for this rulemaking.
    \366\ This estimate is lower than the gross notional amount of 
$3.5 trillion noted in section XIX(B)(1), supra, as it includes only 
the subset of single-name CDS referencing North American corporate 
documentation.

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

[[Page 28943]]

[GRAPHIC] [TIFF OMITTED] TP11MY22.001

    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 
privately observe.
    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American 
corporate single-name CDS reflected in the set of data that the 
Commission analyzed was between counterparties domiciled in the United 
States and counterparties domiciled abroad, as shown in Figure 3 below. 
Using the self-reported registered office location of the TIW accounts 
as a proxy for domicile, the Commission estimates that only 13% of the 
global transaction volume by notional volume between 2008 and 2020 was 
between two U.S.-domiciled counterparties, compared to 49% entered into 
between one U.S.-domiciled counterparty and a foreign-domiciled 
counterparty, and 38% entered into between two foreign-domiciled 
counterparties.\367\
---------------------------------------------------------------------------

    \367\ 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 the Commission notes that 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 
35%, and to 50% for transactions entered into between a U.S.-domiciled 
counterparty and a foreign-domiciled counterparty. By contrast, the 
proportion of activity between two foreign-domiciled counterparties 
drops from 38% to 15%. This change in respective shares based on 
different classifications suggests that the activity of foreign 
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts 
for a higher percentage of 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 85%) of all reported transactions 
in North American corporate single-name CDS.
    Financial groups based in the United States are also involved in a 
majority of interdealer transactions in North

[[Page 28944]]

American corporate single-name CDS. Of the 2020 transactions on North 
American corporate single-name CDS between two ISDA-recognized SBS 
dealers and their branches or affiliates, 81% of transaction notional 
volume involved at least one account of an entity with a U.S. 
parent.\368\ The Commission notes, in addition, that 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, 81% 
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 19% of such transactions 
involved an ISDA-recognized SBS dealer and a U.S.-person non-SBS 
dealer.
---------------------------------------------------------------------------

    \368\ Since the Commission is unable to pair up the same-day 
cleared trades, this 81% estimate is based on bilateral trades that 
were not same-day cleared.
[GRAPHIC] [TIFF OMITTED] TP11MY22.002

BILLING CODE 8011-01-C
3. Distribution of Transaction Size
    In proposing the definition of a block trade, the Commission has 
considered the distribution of transaction size in the single-name CDS 
market, which the Commission believes is representative of the market 
for 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).\369\ Table 3 reports the total number of newly 
initiated price-forming CDS transactions referencing North American 
corporate single-name reference entities. The table also reports the 
number and percentage of such transactions with a size (notional 
amount) of at least $5 million. These statistics are reported for each 
year between 2011 and 2020 and for the entire ten-year period.
---------------------------------------------------------------------------

    \369\ See proposed Rule 802. In considering a block trade 
definition, the Commission also took into consideration that FINRA 
applies a $5 million cap when disseminating transaction reports of 
economically similar cash debt securities. See supra section VII(E).
---------------------------------------------------------------------------

    Overall, the number of newly initiated price-forming transactions 
exhibited a declining trend between 2011 and 2020. The number of such 
transactions decreased from around 180,000 in 2011 to around 90,000 in 
2019, with an uptick to around 127,000 transactions in 2020. The number 
of newly initiated price-forming transactions with a notional size of 
at least $5 million also exhibits a declining trend between 2011 and 
2020, but without an uptick in 2020. As a percentage of all newly 
initiated price-forming transactions, those with a notional size of at 
least $5 million fell from 88% to 23% between 2011 and 2020.

[[Page 28945]]

                Table 3--The Distribution of North American Corporate Single-Name CDS Trade Sizes
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of     Percentage of
                                                                                   transactions    transactions
                                                                     Number of     with size of    with size of
                                                                   transactions     at least $5     at least $5
                                                                                      million         million
----------------------------------------------------------------------------------------------------------------
2011............................................................         180,700         159,061              88
2012............................................................         165,479         121,151              73
2013............................................................         130,570          87,515              67
2014............................................................         127,410          80,122              63
2015............................................................         107,698          53,991              50
2016............................................................          97,459          37,273              38
2017............................................................          80,513          33,695              42
2018............................................................          88,787          34,840              39
2019............................................................          89,823          34,811              39
2020............................................................         127,379          29,354              23
2011-2020.......................................................       1,195,816         671,810              56
----------------------------------------------------------------------------------------------------------------

4. 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.\370\ This is notwithstanding the fact that 
the SBS market is a small fraction of the swap market and the single-
name CDS market, which falls under SEC jurisdiction, is smaller than 
the index CDS market, which falls under CFTC jurisdiction.\371\ 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 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,\372\ creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \370\ See Rule 194 Proposing Release, 80 FR at 51711.
    \371\ According to data published by BIS, as of December 2020, 
the global swap market (comprising, for purposes of this discussion, 
IRS, foreign exchange swaps, multi-name index CDS, and commodity 
swaps) had a global notional amount outstanding of approximately 
$571 trillion, while the global SBS market (comprising, for purposes 
of this discussion, single-name equity swaps and forwards and 
single-name CDS) had a global notional amount outstanding of 
approximately $7.1 trillion. The global notional amount outstanding 
in single-name CDS was approximately $3.5 trillion and in multi-name 
index CDS was approximately $4.5 trillion. The Commission 
preliminarily believes that the relative magnitudes presented by 
these statistics for the global OTC derivatives market are also 
representative of the U.S. OTC derivatives markets. See Table D5.2, 
BIS, supra note 345; Table D5.1, BIS, supra note 347. See also supra 
section XIX(B)(1).
    \372\ ``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 4149 TIW accounts that participated in the 
market for single-name CDS in 2020 revealed that approximately 3096 of 
those accounts, or 75%, also participated in the market for index CDS. 
Of the accounts that participated in both markets, data regarding 
transactions in 2020 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 61%; 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 11%. As a result of cross-market participation, 
informational efficiency, pricing and liquidity may spill over across 
markets.\373\
---------------------------------------------------------------------------

    \373\ See Business Conduct Adopting Release, 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, September 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 44 registered SBS dealers, 41 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 44 
registered SBS dealers, 27 have a prudential regulator.
5. 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. 
Currently, 20 SEFs have permanent or temporary registration with the 
CFTC.\374\ Of these SEFs, eight list index CDS for trading.\375\ If 
these

[[Page 28946]]

SEFs were to list single-name CDS or other SBS for trading, they would 
be required to register as SBSEFs with the Commission. In 2021, 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 $8 trillion 
(69%); one SEF had the second largest share at $2.1 trillion (18%); and 
the remaining 13% of volume was shared among the other five SEFs.\376\ 
The Commission preliminarily believes that the number of SBSEF 
registrants most likely falls between two and eight, but acknowledges 
uncertainty around the upper end of this estimate. The Commission 
preliminarily believes that the likely number of SBSEF registrants 
would be five. The Commission invites commenters to provide feedback on 
the number of entities that will register as SBSEFs.
---------------------------------------------------------------------------

    \374\ See supra note 17.
    \375\ 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 SEF Contract Specifications 
(January 21, 2022), available at http://www.bgcsef.com/wp-content/uploads/2022/01/BGC-SEF-Contract-Specifications_01-21-22.pdf; 
Bloomberg SEF LLC Rulebook (February 24, 2022), available at https://assets.bbhub.io/professional/sites/10/BSEF-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: 2.38 
(effective December 15, 2021), available at https://www.theice.com/publicdocs/swap_trade/Rulebook.pdf; Letter from Ron Steinfeld, CCO, 
MarketAxess SEF Corp., to CFTC regarding Listing Products for 
Trading by Certification Pursuant to CFTC Rule 40.2 (January 13, 
2015), available at https://content.marketaxess.com/sites/default/files/marketaxess-sef-product-listing-filing-and-appendices-january-13-2015.pdf; TW SEF LLC, Swap Execution Facility Rules (effective 
October 1, 2021), available at https://www.tradeweb.com/4a7851/globalassets/our-businesses/market-regulation/sef-rulebook-oct-1-2021/tw-sef-rulebook_9.17.21.pdf; Category: Rulebook, Tradition SEF, 
available at https://www.traditionsef.com/regulatory/filter/rulebook/all/all; tpSEF Inc. rulebook, tpSEF Inc., tpSEF Inc. 
Rulebook Appendix B: tpSEF Inc. Swap Specifications (effective July 
2, 2021), available at https://www.tullettprebon.com/swap_execution_facility/documents/tpSEF%20-%20Rulebook%20-%20Appendix%20B%20-%20Swap%20Specifications.pdf?20211031.
    \376\ 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.
---------------------------------------------------------------------------

6. SBS Trading on Platforms
    By analyzing SBS transactions reported to registered SDRs,\377\ the 
Commission has obtained a preliminarily estimate of the extent of SBS 
trading on platforms. Of the new transactions in credit SBS executed 
between November 8, 2021 and February 28, 2022, 6,131 were executed on 
platforms (2% of all new transactions in credit SBS transactions). 
During the same period, 44 new transactions in equity SBS were executed 
on platforms (less than 0.01% of all new transactions in equity SBS 
transactions), while no new transactions in interest rate SBS were 
executed on platforms. These observations suggest that the vast 
majority of SBS trading continues to be conducted bilaterally in the 
OTC market. The Commission invites commenters to provide feedback on 
the extent of SBS trading on platforms.
---------------------------------------------------------------------------

    \377\ Beginning on November 8, 2021, market participants were 
required to report SBS transactions to registered SDRs pursuant to 
Regulation SBSR.
---------------------------------------------------------------------------

    The Commission preliminarily identifies 11 platforms on which new 
SBS transactions were executed between November 8, 2021 and February 
28, 2022. Of these 11 platforms, ten are foreign SBS trading venues and 
one is a U.S. SBS trading venue that is affiliated with a CFTC-
registered SEF. Of the new transactions in credit SBS executed between 
November 8, 2021 and February 28, 2022, 2,126 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 (0.7% of all new transactions in credit SBS transactions). 
During the same period, 30 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).
7. 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.\378\ In 
subsequent summits, the G20 leaders have returned to OTC derivatives 
regulatory reform and encouraged international consultation in 
developing standards for these markets.\379\
---------------------------------------------------------------------------

    \378\ See G20, Leaders' Statement: The Pittsburgh Summit 
(September 24-25, 2009) at paragraph 13.
    \379\ See, e.g., G20, Toronto Summit Declaration (June 27, 2010) 
at Annex II paragraph 25; Cannes Summit Final Declaration--Building 
Our Common Future: Renewed Collective Action for the Benefit of All 
(November 4, 2011) at paragraph 24.
---------------------------------------------------------------------------

    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; 
\380\ (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 
proposed in this release concern the registration and regulation of 
SBSEFs, a type of organized trading platform.
---------------------------------------------------------------------------

    \380\ See supra note 94.
---------------------------------------------------------------------------

    As of the end of 2021, 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.\381\ Seven foreign jurisdictions have made determinations 
with respect to the specific OTC derivatives that are required to be 
traded on platforms.\382\
---------------------------------------------------------------------------

    \381\ 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 2021 
Tables 1 & K (December 3, 2021), available at https://www.fsb.org/2021/12/otc-derivatives-market-reforms-implementation-progress-in-2021/ (describing progress made towards implementing platform 
trading requirements in 2021); FSB, OTC Derivatives Market Reforms: 
2019 Progress Report on Implementation Table A (October 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).
    \382\ These jurisdictions are China (bond forwards; certain 
currency forwards, options, and swaps); the European Union (certain 
index CDS; certain IRS denominated in Euro, U.S. dollar, and British 
pound); India (certain overnight index swaps); Indonesia (equity and 
commodity derivative products); Japan (selected Yen-denominated 
IRS); Mexico (certain Peso-denominated IRS); and Singapore (certain 
IRS denominated in Euro, US dollar, and British pound). See FSB, 
2019 Progress Report, supra note 381, Table R. In its 2021 report, 
see supra note 381, the FSB noted no change in status in the 
implementation of platform trading requirements, including platform 
trading determinations, since its 2019 report.
---------------------------------------------------------------------------

8. 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) and central 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. The Commission solicits comments 
on the accuracy of this description.
    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

[[Page 28947]]

potential counterparty to negotiate an SBS transaction. Once the terms 
are agreed, the SBS transaction is executed and the terms are 
memorialized.\383\ In a bilateral negotiation, there might be no pre-
trade or post-trade transparency available to the market place 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.
---------------------------------------------------------------------------

    \383\ See, e.g., Trade Acknowledgement and Verification Adopting 
Release, 81 FR at 39809.
---------------------------------------------------------------------------

    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 dealers).\384\ 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.\385\ 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.
---------------------------------------------------------------------------

    \384\ 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).
    \385\ 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.\386\ 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.
---------------------------------------------------------------------------

    \386\ 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 (January 26, 2022), 87 FR 15496 
(March 18, 2022) (``ATS-G Proposal''), section VIII(B)(1)(a) 
therein.
---------------------------------------------------------------------------

    A third 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 but exists for 
the trading of SBS in Europe. 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.\387\ 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 two 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.
---------------------------------------------------------------------------

    \387\ Under CFTC rules applicable to the swap market, 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 VII(E) (discussing proposed Rule 815).
---------------------------------------------------------------------------

    The three 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, Costs, and Reasonable Alternatives

    This section discusses the benefits and costs of the proposal. The 
section also discusses a number of alternatives that the Commission 
considered when formulating the proposed rules and amendments.
    The Commission's consideration of the benefits and costs of the 
proposal takes into account the connection between the trade execution 
requirement and the mandatory clearing requirement mandated by 
Congress. The Dodd-Frank Act amends 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; \388\ 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.\389\ The 
benefits and costs associated with the trade execution requirement 
would not materialize unless and until the Commission makes mandatory 
clearing determinations, i.e., determining what

[[Page 28948]]

SBS transactions must be cleared by a clearing agency.
---------------------------------------------------------------------------

    \388\ See Public Law 111-203, section 763(a) (adding section 
3C(a)(1) of the SEA).
    \389\ See Public Law 111-203, section 763(a) (adding section 
3C(h) of the SEA). See also Public Law 111-203, section 761(a) 
(adding section 3(a)(77) of the SEA to define the term ``security-
based swap execution facility'').
---------------------------------------------------------------------------

    The Commission preliminarily believes that the general approach to 
proposing requirements relating to SBS execution could mitigate costs 
associated with the proposal. As discussed in section III, 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 preliminarily 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 likely would result in 
compliance costs for registered SBSEFs that are lower than compliance 
costs that would have resulted had the Commission chosen not to follow 
the CFTC's approach.\390\
---------------------------------------------------------------------------

    \390\ In section XX infra, for purposes of the PRA, the 
Commission preliminarily estimates burdens applicable to a stand-
alone SBSEF. However, the Commission preliminarily believes 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 proposed 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.
---------------------------------------------------------------------------

    In assessing the economic impact of the proposed rules, the 
Commission considers the broader costs and benefits associated with the 
application of the proposed rules, including the costs and benefits of 
applying the substantive Title VII requirements to the trading of 
SBS.\391\ 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.
---------------------------------------------------------------------------

    \391\ 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.
---------------------------------------------------------------------------

    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 proposed rules, if adopted 
by the Commission. 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 would not differ 
from the current baseline and the potential costs and benefits 
discussed below would 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 would move trading of 
the products covered by the determinations onto SBSEFs, which could 
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 the proposed rules 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 would 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 would 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 would arise. The Commission does not have the data to 
determine which of the above possibilities will prevail should the 
proposed rules be adopted.
    The Commission has attempted to quantify economic effects where 
possible, but much of the discussion of economic effects is necessarily 
qualitative. The Commission requests comment and, with regard to any 
comments, such comments are of greatest assistance if they are 
accompanied by supporting data and analysis of the issues addressed.
1. Overarching Benefits of the Proposal
    Broadly, the Commission anticipates that proposed Regulation SE may 
bring several overarching benefits to the SBS market.
    Improved Transparency. The proposal would enable the Commission to 
obtain information about SBSEFs, thereby facilitating the Commission's 
oversight of these entities.\392\
---------------------------------------------------------------------------

    \392\ For example, proposed Rule 826 would, among other things, 
require 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 also the discussion below on 
how the proposal would provide the means for the Commission to gain 
better insight into and oversight of SBSEFs and the SBS market.
---------------------------------------------------------------------------

    In addition, the proposed requirements relating to pre-trade 
transparency would increase pre-trade transparency in the market for 
SBS.\393\ 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.\394\ The 
Commission preliminarily believes that the proposed requirements with 
respect to pre-trade price transparency should lead to more efficient 
pricing in the SBS market.\395\
---------------------------------------------------------------------------

    \393\ Proposed Rules 803(a)(2) and (3) would require an SBSEF to 
offer, at a minimum, an order book for SBS trading, subject to 
certain exceptions related to package transactions. Proposed Rule 
815 would require SBS transactions subject to the trade execution 
requirement to be executed using either an order book or via an RFQ-
to-3 system. Proposed Rule 816 would set forth the process by which 
an SBSEF would subject an SBS to the trade execution requirement. 
Proposed Rule 832 would describe those cross-border SBS transactions 
that would be subject to the trade execution requirement.
    \394\ See, e.g., Ananth Madhavan, Market Microstructure: A 
Practitioner's Guide, Fin. Analysts J., Vol. 58, at 38 (2002) 
(nondisclosure of pre-trade price information benefits dealers by 
reducing price competition).
    \395\ See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An 
Analysis of Pre-trade Transparency at the NYSE, J. Fin., Vol. LX 
(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.\396\ The Commission is not aware of any difference 
between the

[[Page 28949]]

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.\397\ However, the 
Commission preliminarily believes that by proposing 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 attenuate potential 
concerns associated with the exposure of pre-trade trading interest.
---------------------------------------------------------------------------

    \396\ 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).
    \397\ See, e.g., Ananth Madhavan, et al., Should Securities 
Markets Be Transparent?, J. of Fin. Markets, Vol. 8 (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).
---------------------------------------------------------------------------

    Improved oversight of trading. Regulation SE would require, 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.\398\ These requirements are designed to 
provide an SBSEF with sufficient information to oversee trading on its 
market, including detecting and deterring abusive trading practices.
---------------------------------------------------------------------------

    \398\ See proposed Rules 819, 821, 822, and 826.
---------------------------------------------------------------------------

    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, the Commission preliminarily believes that the proposal 
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.\399\ 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 proposed rules 
would provide a framework for allowing a number of trading venues to 
register as SBSEFs and thus more effectively compete for business in 
SBS. Furthermore, proposed 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. In addition, proposed 
Rule 819(c) would, among other things, require an SBSEF to provide any 
ECP with impartial access to its market(s) and market services.
---------------------------------------------------------------------------

    \399\ See supra section XIX(B)(2).
---------------------------------------------------------------------------

    The proposed new rules and amendments to the Commission's Rules of 
Practice would 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 seek an application for review by the 
Commission.\400\ These proposed rules and amendments are designed to 
improve access to SBSEFs by creating a procedure for making appeals to 
the Commission, thereby limiting the ability of an SBSEF to make a 
disciplinary action, denial or conditioning of membership, or denial or 
limitation of access without any recourse by the affected party. Taken 
together, these proposed 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 could increase competition in liquidity 
provision and lower trading costs, which may lead to increased 
participation in the SBS market.
---------------------------------------------------------------------------

    \400\ See proposed Rules 442 and 443; proposed amendments to 
Rules 101, 202, 210, 401, 450, and 460.
---------------------------------------------------------------------------

    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.\401\ The proposal 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 \402\ 
and to obtain other relevant information from SBSEFs.\403\
---------------------------------------------------------------------------

    \401\ See Public Law 111-203, Preamble.
    \402\ See proposed Rules 804, 805, 806, and 807.
    \403\ See proposed Rule 811.
---------------------------------------------------------------------------

    Additionally, proposed Rule 826(b) would require every SBSEF to 
keep full, complete, and systematic records of all activities relating 
to its business with respect to SBS. In addition, proposed Rule 819(f) 
would require 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, proposed Rule 835 would 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, which would 
allow the Commission to review the SBSEF's disciplinary process and 
exercise of its regulatory powers, providing the Commission an 
additional tool to carry out its oversight responsibilities. The 
proposed registration requirements and related proposed 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 the requirements of proposed 
Regulation SE 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.\404\ The 
proposed 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

[[Page 28950]]

transactions in SBS at a lower expense per transaction. Such increased 
efficiency could enable members of the SBSEF to handle increased 
volumes of SBS with greater efficiency.
---------------------------------------------------------------------------

    \404\ See proposed Rules 819(d)(4) and 826.
---------------------------------------------------------------------------

2. Benefits Associated With Specific Proposed Rules
    In addition to the broad benefits that the Commission anticipates 
as a result of proposed Regulation SE, individual rules could bring 
particular benefits to the SBS market. These include the following:
    Registration requirements and Form SBSEF. SBSEF registration is 
required under the Dodd-Frank Act.\405\ Proposed 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 proposed Rule 803 
would implement this statutory requirement and assist the Commission in 
overseeing and regulating the SBS market. The information to be 
provided on proposed 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. Proposed 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.
---------------------------------------------------------------------------

    \405\ See section 3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1).
---------------------------------------------------------------------------

    Proposed exemptions (proposed Rule 833, proposed Rule 816(e), 
proposed amendments to Rule 3a1-1, and proposed Rule 15a-12). Proposed 
Rule 833 is designed to preserve access to foreign markets by ``covered 
persons'' (as defined in proposed Rule 832). As discussed in section 
XIX(B)(6), 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 proposed 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 would 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.\406\ Thus, removal of the existing 
exemption would merely restore 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, proposed Rule 833(a) would allow foreign 
SBS trading venues to operate in conditions similar to the current 
baseline (if the Commission ultimately grants an exemption under Rule 
833(a)).
---------------------------------------------------------------------------

    \406\ See supra section V, note 43.
---------------------------------------------------------------------------

    Currently, market participants that trade SBS that would be covered 
by proposed Rule 816(e) \407\ do not trade these products on registered 
exchanges or registered SBSEFs. Proposed Rule 816(e), by providing 
exemptions from the trade execution requirement for these SBS, would 
preserve the status quo for these SBS.
---------------------------------------------------------------------------

    \407\ Proposed paragraphs (e)(1), (2), and (3) of Rule 816 would 
exempt from the trade execution requirement, respectively: An SBS 
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; an SBS that qualifies for an exception 
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; and an SBS transaction that is 
executed between counterparties that qualify as ``eligible affiliate 
counterparties.''
---------------------------------------------------------------------------

    Proposed paragraph (a)(4) of Rule 3a1-1 would provide that an 
entity that has registered with the Commission as an SBSEF and provides 
a market place for no securities other than SBS would not fall within 
the definition of ``exchange'' 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). The Commission 
preliminarily believes that the benefit of the proposed amendment would 
be to clarify to prospective SBSEF applicants that, if they register 
with the Commission as SBSEFs, they would not face duplicative 
registration and regulatory requirements as exchanges. In addition, 
proposed paragraph (a)(5) of Rule 3a1-1 would codify a series of 
exemptions that the Commission has granted over several years to SBS 
clearing agencies that operate ``forced trading'' sessions. Because the 
proposed amendment is intended to codify existing exemptions, the 
Commission preliminarily believes that any associated economic effects 
would be minimal.
    Proposed 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 proposed rule, 
such SBSEFs (defined as ``SBSEF-Bs'' for purposes of Rule 15a-12) would 
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. Proposed Rule 15a-12 would allow an SBSEF-B 
to satisfy the requirement to register as a broker by registering as an 
SBSEF under proposed Rule 803, and would exempt 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 proposed rule, SBSEF-Bs could 
avoid incurring what the Commission preliminarily believes to be 
duplicative and unnecessary compliance burdens. Each SBSEF-B could save 
an estimated $324,849 in initial broker registration costs \408\ and

[[Page 28951]]

$59,063 in annual ongoing costs of meeting broker registration 
requirements.\409\ 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 $823 in ongoing costs 
associated with satisfying broker minimum capital requirements.\410\ 
The estimated aggregate initial and annual ongoing savings are 
$1,624,245 and $299,430, respectively.\411\
---------------------------------------------------------------------------

    \408\ 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 December 2021, these costs are $324,849.
    \409\ 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 at 6312. 
Adjusted for inflation through December 2021, these costs are 
$59,063. 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.
    \410\ The Commission preliminarily believes that, absent the 
proposed 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 preliminarily estimates the cost of capital using the 
annual stock returns on a value-weighted portfolio of financial 
stocks from 1986 to 2021 (see website of Professor Ken French, 
available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on March 14, 2022). 
These returns were averaged to arrive at an estimate of 16.45%. The 
cost of capital = 16.45% x $5,000 = $823.
    \411\ The Commission preliminarily estimates the number of 
SBSEF-Bs as the number of entities that likely will register as 
SBSEFs. See supra section XIX(B)(5). Aggregate initial savings = 
$324,849 x 5 (number of SBSEF-Bs) = $1,624,245. Aggregate annual 
ongoing savings = ($59,063 + $823) x 5 (number of SBSEFs) = 
$299,430.
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    Rule and product filings. Proposed Rules 806 and 807 would set 
forth alternative filing processes for a new rule or rule amendment of 
a registered SBSEF, and proposed Rules 804 and 805 would set forth 
alternative filing processes for an SBSEF to file an SBS product that 
it wishes to list. Proposed 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 
would 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.\412\ The information to be provided by the 
SBSEF under proposed Rules 804, 805, and 810 would further the ability 
of the Commission to obtain information regarding SBS that an SBSEF 
intends to list on its market. The proposed rules would assist the 
Commission in overseeing and regulating the trading of SBS and to help 
ensure that SBSEFs operate in compliance with the SEA.
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    \412\ See proposed Rules 804(a)(3)(iv) and 807(a)(6)(iv) .
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    In addition, proposed Rule 806(a)(5), which would require 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. Proposed Rule 808 is designed 
to facilitate the public's ability to obtain information from SBSEF 
applications as well as rule and product filings. Proposed Rule 808(a) 
would specify the parts of an SBSEF application that shall be made 
publicly available unless confidential treatment is obtained pursuant 
to SEA Rule 24b-2. Proposed Rule 808(b) would provide that an SBSEF's 
rule and product filings shall be made publicly available unless 
confidential treatment is obtained pursuant to SEA Rule 24b-2. Proposed 
Rule 808(c) would provide that the terms and conditions of a product 
submitted to the Commission pursuant to any of proposed 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.
    Proposed Rule 809 would provide a mechanism for the staying or 
tolling of a filing by an SBSEF relating to a product while the 
appropriate jurisdictional classification of that product is 
determined. The proposed 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, proposed 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 proposed 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. Proposed Rule 831 would, among other 
things, require the CCO of an SBSEF to submit an annual compliance 
report and annual financial report to the Commission. These reports 
would 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 and financial state 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, proposed Rule 831 would promote 
regulatory compliance on SBSEFs and the SBS market generally. 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.
    Conflicts of Interest. Proposed Rule 831 would, among other things, 
require the CCO to resolve material conflicts of interest that may 
arise in consultation with the governing board or the senior officers 
of the SBSEF.\413\ Proposed Rule 828(a) would require 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. Proposed Rule 828(b) would require an SBSEF to 
comply with the requirements of proposed Rule 834 which is designed to 
implement section 765 of the Dodd-Frank Act with respect to SBSEFs and 
SBS exchanges. Proposed Rule 834 would, among other things, impose a 
20% cap on the voting interest held by an individual member of an SBSEF 
or SBS exchange, mitigate conflicts of interest in the disciplinary 
process of an SBSEF or SBS exchange, set forth certain minimum 
requirements for the composition of the governing board of an SBSEF or 
SBS exchange, set forth

[[Page 28952]]

reporting requirements related to governing board elections, and 
address the avoidance of conflicts of interest in the execution of 
regulatory functions by an SBSEF or SBS exchange.\414\
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    \413\ See proposed Rules 831(a)(2)(iii) and (h)(2).
    \414\ See proposed Rules 834(b) to (g).
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    The Commission preliminarily believes that the proposed rules would 
mitigate conflicts of interest between an SBSEF or SBS exchange and its 
members as discussed in section X. 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. The proposal, by mitigating 
such conflicts of interest \415\ could help ensure access to SBSEFs and 
SBS exchanges and in turn increase competition in liquidity provision 
and lower transaction costs. The Commission preliminarily believes that 
proposed Rules 834(e), (f), and (g) also may promote good governance at 
SBSEFs and SBS exchanges. To the extent that improved 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 proposed rules.
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    \415\ See, e.g., proposed Rule 834(b) (proposing a 20% cap on 
the voting interest held by an individual member of an SBSEF or SBS 
exchange).
---------------------------------------------------------------------------

    Structured Data Requirement. Proposed Rule 825(c)(3) would require 
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.\416\ The 
Commission preliminarily believes that requiring the Daily Market Data 
Report to be provided in a structured, machine-readable format (using a 
Commission-created XML schema) would 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 would be 
made available in a consistent and openly accessible manner that would 
allow for automatic processing by software applications, thus enabling 
search capabilities and statistical and comparative analyses across 
SBSEFs and date ranges.\417\ Absent a structured data requirement, any 
SBS market participants and market observers seeking to use the data 
would have to spend time manually collecting and entering the data into 
a format that allows for analysis, thus increasing the time needed to 
analyze the data and potentially leading to data errors. Alternatively, 
data users could choose to subscribe to a service provider specializing 
in such a data aggregation and comparison process. Under that scenario, 
data users would be unable to access the posted data on as timely a 
basis as they would if the disclosures were machine-readable upon 
posting, and users would also incur monetary costs in paying for the 
aggregated data.
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    \416\ See supra note 392 and accompanying text.
    \417\ In addition, the associated PDF renderer would provide 
users with a human-readable document for those who prefer to review 
manually individual reports, while still providing a uniform 
presentation.
---------------------------------------------------------------------------

    Proposed Regulation SE would require SBSEFs to file documents 
required under various provisions in the EDGAR system using Inline 
XBRL, a structured (machine-readable) data language.\418\ Requiring a 
centralized filing location and a machine-readable data language for 
the filings would 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 
disclosures.
---------------------------------------------------------------------------

    \418\ This includes the documents required under: proposed Rule 
803(b)(1)(i) and (3) (filings of, and amendments to, a Form SBSEF 
application); proposed Rules 803(e) and 803(f) (requests to withdraw 
or vacate an application for registration); proposed Rule 804(a)(1) 
(filings for listing products for trading by certification); 
proposed Rule 805(a)(1) (filings for voluntary submission of new 
products for Commission review and approval); proposed Rule 
806(a)(1) (filings for voluntary submission of rules for Commission 
review and approval); proposed Rule 807(a)(1) (filings for self-
certification of rules); proposed Rule 807(d) (filings of weekly 
notifications to the Commission of rules and rule amendments that 
were not required to be certified); proposed Rule 829(g)(6) 
(submission to the Commission of reports related to financial 
resources and related documentation); proposed Rule 831(j)(2) 
(submission to the Commission of the annual compliance report of 
SBSEF's CCO). See supra section XV.
---------------------------------------------------------------------------

    Unlike the XML schema that would be used for Daily Market Data 
Reports, Inline XBRL would provide the ability to tag detailed facts 
within narrative text blocks, and is thus likely more well-suited to 
accommodate the other filings required under proposed Regulation SE, 
many of which require narrative discussions (e.g., the explanation and 
analysis of the product and its compliance with applicable provisions 
of the SEA for a product filing required under Rule 804).\419\ In 
addition, certain proposed SBSEF 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.\420\
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    \419\ See proposed Rule 804(c)(3)(v).
    \420\ For example, because Inline XBRL enables the block tagging 
of textual narrative disclosures and the individual tagging of 
numeric disclosures nested within those textual narrative 
disclosures, it facilitates the comprehensive capture and 
communication of information contained in notes to financial 
statements.
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3. Costs
    Although the Commission preliminarily believes that proposed 
Regulation SE would benefit the SBS market, the Commission recognizes 
that the proposed Regulation SE also would entail certain costs. 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 
proposed 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 proposed 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.\421\ At the same time, if the proposed rules 
relating to

[[Page 28953]]

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

    \421\ See section XIX(C) (noting that the benefits and costs 
associated with the trade execution requirement would not 
materialize unless and until the Commission makes mandatory clearing 
determinations).
---------------------------------------------------------------------------

    In addition, SBS traded on SBSEFs may be perceived to be subject to 
increased costs, monetary and otherwise. For example, the proposed 
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 are 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.\422\ If 
market participants view the Commission's proposal 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 MAT determinations that would require SBS trading 
to occur on SBSEFs or exchanges. On the other hand, if the proposed 
requirements with respect to pre-trade transparency are too loose, 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 proposed 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.
---------------------------------------------------------------------------

    \422\ See, e.g., Ananth Madhavan, Market Microstructure: A 
Survey, J. of Fin. Markets, Vol. 3 (2000).
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    The Commission preliminarily believes that 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. The Commission invites commenters to provide feedback 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.
    As discussed in section XIX(B), the Commission preliminarily 
believes that prospective SBSEF registrants are likely to be CFTC-
registered SEFs that are active in the index CDS market. Because the 
proposed rules are harmonized as closely as practicable with analogous 
CFTC rules for SEFs, unless a reason exists to do otherwise in a 
particular area, the Commission preliminarily believes that 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 \423\ and making limited changes to their 
systems, policies, and procedures to comply with proposed SEC rules 
that differ slightly from analogous CFTC rules. The Commission 
preliminarily estimates the one-time costs associated with such changes 
to systems, policies, and procedures would range between $25,000 and 
$1.5 million per SBSEF, depending on the changes needed. 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 million to $2 million.\424\ The Commission invites 
commenters to provide feedback on the costs that SEFs may incur should 
they register as SBSEFs.
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    \423\ See infra section XIX(C)(3)(c) (discussing the costs that 
these entities might incur to list SBS products).
    \424\ In the 2011 SBSEF Proposal, the Commission estimated that 
an entity owning or operating a platform for the trading of OTC 
derivatives would incur costs of between $50,000 and $3 million to 
enhance its platform to be compatible with proposed requirements in 
that release. Further, such an entity would incur annual ongoing 
costs of between $2 million and $4 million to maintain such 
enhancements. See 2011 SBSEF Proposal, 76 FR at 11041. The 
Commission is revising these estimates downward by 50%, taking into 
account any potential inflationary effects, because harmonizing 
proposed Regulation SE closely with CFTC rules likely would reduce 
the one-time and annual ongoing costs incurred by SEFs to change 
their systems, policies, and procedures to comply with proposed 
Regulation SE, if they choose to register as SBSEFs. Therefore, the 
Commission preliminarily estimates that the one-time costs 
associated with changes to systems, policies, and procedures would 
range between $50,000/2 = $25,000 and $3 million/2 = $1.5 million 
per SBSEF, depending on the changes needed. The annual ongoing costs 
are preliminarily estimated to be between $2 million/2 = $1 million 
and $4 million/2 = $2 million.
---------------------------------------------------------------------------

    We detail below cost estimates for specifics parts of the proposed 
rules. Many of these costs estimates are based on the PRA estimates of 
costs and burdens from section XX.\425\
---------------------------------------------------------------------------

    \425\ In section XX infra, for purposes of the PRA, the 
Commission preliminarily 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 proposed in 
Regulation SE. Therefore, the Commission's burden estimates are 
greater for stand-alone SBSEFs than may exist in practice, 
considering the effect of overlapping CFTC rules.
---------------------------------------------------------------------------

a. Registration Requirements for SBSEFs and Form SBSEF
    The Commission preliminarily believes that the proposed 
registration provisions would impose costs on entities that seek 
registration as SBSEFs. The Commission preliminarily estimates that 
initial filings on Form SBSEF by prospective SBSEFs seeking to register 
with the Commission pursuant to proposed Rule 803 would result in 
aggregate initial costs of $94,400 for prospective SBSEFs.\426\
---------------------------------------------------------------------------

    \426\ $94,400 = 1,475 burden hours x $64/hour blended hourly 
rate. The $64/hour blended hourly rate is the $59/hour blended 
hourly rate computed by the CFTC and adjusted for CPI inflation 
through December 2021. The CFTC used the blended hourly wage to 
estimate PRA costs associated with part 37. See infra section 
XX(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. CPI inflation adjustment is based on 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.
---------------------------------------------------------------------------

b. Ongoing Compliance With Other Requirements That Are Similar to the 
Remainder of Part 37
    As discussed in section XX(D)(2)(b), the Commission preliminarily 
estimates the aggregate annual paperwork burden for SBSEFs to comply 
with all of the proposed SBSEF rules that have analogs in part 37 to be 
1935 hours.\427\ These burdens are estimated to impose

[[Page 28954]]

aggregate ongoing annual costs of $123,840 on SBSEFs.\428\
---------------------------------------------------------------------------

    \427\ See infra section XX(D)(2)(b). This estimate excludes the 
paperwork burdens associated with registration requirements for 
SBSEFs and Form SBSEF and provisions of certain proposed rules to be 
discussed subsequently.
    \428\ $123,840 = 1,935 burden hours x $64/hour blended hourly 
rate. See supra note 426 (derivation of the $64/hour blended hourly 
rate).
---------------------------------------------------------------------------

c. Rule and Product Filing Processes for SBSEFs
    The Commission preliminarily estimates that the aggregate ongoing 
annual costs incurred by all SBSEFs to prepare and submit rule and 
product filings under proposed Rules 804, 805, 806, and 807 (including 
the cover sheet) would be $31,200.\429\
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    \429\ $31,200 = 300 hours x $104/hour blended hourly rate. The 
$104/hour blended hourly rate is the $96.26/hour blended hourly rate 
computed by the CFTC and adjusted for CPI inflation through December 
2021. The CFTC used the blended hourly rate to estimate PRA costs 
associated with part 40. See section XX(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. CPI inflation 
adjustment is based on data published by the Bureau of Labor 
Statistics. See U.S. Bureau of Labor Statistics, supra note 426. 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 note 84.
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d. Proposed Rules 809, 811, 819, 826, 829, 833, 834, and 835
    The Commission preliminarily estimates the aggregate ongoing annual 
costs incurred by SBSEFs to comply with proposed Rule 809 would be 
$108.\430\
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    \430\ $108 = 1.25 hours x $86/hour hourly rate for a compliance 
officer. The $86/hour hourly rate for a compliance officer is the 
$70/hour hourly rate for a compliance officer computed by the CFTC 
and adjusted for CPI inflation through December 2021. The CFTC used 
the hourly rate to estimate PRA costs associated with Sec.  40.12 
after which proposed Rule 809 is modelled. See infra section 
XX(D)(3)(b)(ii); Revised Supporting Statement for New Information 
Collections: part 40, Provisions Common to Registered Entities, OMB 
Control Number 3038-AD07, Attachment A (October 14, 2011), available 
at: https://omb.report/icr/201203-3038-005/doc/31042501. CPI 
inflation adjustment is based on data published by the Bureau of 
Labor Statistics. See U.S. Bureau of Labor Statistics, supra note 
426.
---------------------------------------------------------------------------

    The Commission preliminarily estimates the aggregate ongoing annual 
costs incurred by SBSEFs to comply with requests for documents or 
information pursuant to proposed Rule 811(d) would be $88.\431\
---------------------------------------------------------------------------

    \431\ $88 = 1 hour x $88/hour hourly rate for an attorney. The 
$88/hour hourly rate is the $80/hour hourly rate computed by the 
CFTC and adjusted for CPI inflation through December 2021. The CFTC 
used the hourly rate to estimate PRA costs associated with Part 1.6. 
See infra section XX(D)(4)(a); OMB, Supporting Statement for New and 
Revised Information Collections: OMB Control Number 3038-0033 
(August 23, 2018), available at https://omb.report/icr/201808-3038-004/doc/85625801.pdf. CPI inflation adjustment is based on data 
published by the Bureau of Labor Statistics. See U.S. Bureau of 
Labor Statistics, supra note 426.
---------------------------------------------------------------------------

    The Commission preliminarily estimates the aggregate ongoing annual 
costs incurred by SBSEFs to comply with proposed Rule 819(i) would be 
$25,546.\432\
---------------------------------------------------------------------------

    \432\ $25,546 = 399.15 hours x $64/hour blended hourly rate. The 
Commission preliminarily believes that the burdens associated with 
this proposed rule are not different from burdens associated with 
proposed rules that have part 37 analogs. Thus, the Commission 
preliminarily believes that it would be appropriate to apply the 
$64/hour blended hourly rate to estimate the paperwork related costs 
associated with this proposed rule. See infra section XX(D)(4)(c). 
See also supra note 426 (derivation of the $64/hour blended hourly 
rate).
---------------------------------------------------------------------------

    The Commission preliminarily estimates the aggregate ongoing annual 
costs incurred by SBSEFs to comply with proposed Rule 819(j) would be 
$1,135.\433\
---------------------------------------------------------------------------

    \433\ $1,135 = 2.5 hours x $454/hour national hourly rate for an 
attorney. See infra section XX(D)(4)(d). 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 December 2021) 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 preliminarily estimates the aggregate ongoing annual 
costs incurred by SBSEFs to update information required by proposed 
Rule 826(f) would be $152.\434\ The Commission preliminarily estimates 
that interested parties would incur aggregate one-time costs of 
$108,960 in the first year and $72,640 in each subsequent year to 
submit exemption requests under one or both paragraphs of proposed Rule 
833.\435\
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    \434\ $152 = 2 hours x $76/hour national hourly rate for a 
compliance clerk. See infra section XX(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 December 2021) 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.
    \435\ First year costs: $108,960 = 240 hours x $454/hour 
national hourly rate for an attorney. Costs in each subsequent year: 
$72,640 = 160 hours x $454/hour national hourly rate for an 
attorney. See infra section XX(D)(5)(a). See also supra note 433 
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that SBSEFs and SBS 
exchanges would incur aggregate one-time costs of $47,880 associated 
with drafting and implementing rules to comply with proposed Rules 
834(b) and (c).\436\
---------------------------------------------------------------------------

    \436\ $47,880 = 120 hours x $399/hour national hourly rate for a 
compliance attorney. The estimate of 120 burden hours is based on 
the Commission's preliminary estimate that five SBSEFs and three SBS 
exchanges will incur paperwork burdens associated with proposed 
Rules 834(b) and (c). See infra section XX(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 December 2021) 
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 preliminarily estimates that SBSEFs and SBS 
exchanges would incur aggregate ongoing annual costs of $640 to comply 
with proposed Rules 834(d), 834(e), and 834(f).\437\
---------------------------------------------------------------------------

    \437\ $640 = 10 hours x $64/hour blended hourly rate. Further, 
the costs incurred by SBSEFs = 5 (number of SBSEFs) x 1.25 hours per 
SBSEF x $64/hour blended hourly rate = $400. The Commission 
preliminarily believes that the burdens associated with this 
proposed rule are not different from burdens associated with 
proposed rules that have part 37 analogs. Thus, the Commission 
preliminarily believes that it would be appropriate to apply the 
$64/hour blended hourly rate to estimate the paperwork related costs 
associated with this proposed rule. See infra section XX(D)(4)(g). 
See also supra note 426 (derivation of the $64/hour blended hourly 
rate).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that SBSEFs and SBS 
exchanges would incur aggregate one-time costs of $1,024 to comply with 
proposed Rule 834(g).\438\
---------------------------------------------------------------------------

    \438\ $1,024 = 16 hours x $64/hour blended hourly rate. The 
Commission preliminarily believes that the burdens associated with 
this proposed rule are not different from burdens associated with 
proposed rules that have part 37 analogs. Thus, the Commission 
preliminarily believes that it would be appropriate to apply the 
$64/hour blended hourly rate to estimate the paperwork related costs 
associated with this proposed rule. See infra section XX(D)(4)(g). 
See also supra note 426 (derivation of the $64/hour blended hourly 
rate).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that SBSEFs would incur 
aggregate ongoing annual costs of $20,430 to comply with proposed Rule 
835.\439\
---------------------------------------------------------------------------

    \439\ $20,430 = 45 hours x $454/hour national hourly rate for an 
attorney. See infra section XX(D)(5)(b). See also supra note 433 
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

    The Commission preliminarily believes that SBSEFs likely would 
incur costs to comply with the financial resources requirement of 
proposed Rule 829(b). Assuming that SBSEFs satisfy this requirement by 
holding financial resources in the form of their own capital pursuant 
to proposed Rule 829(c)(1), the Commission preliminarily estimates that 
SBSEFs would incur an aggregate annual cost of capital of $33,377.\440\ 
SBSEFs could lower this

[[Page 28955]]

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 proposed 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),\441\ that tend to generate 
little or no return.
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    \440\ The Commission preliminarily estimates the financial 
resources that SBSEFs would need to hold pursuant to proposed Rule 
829(b) as their projected operating costs. See proposed Rule 829(b). 
Further, the Commission preliminarily estimates SBSEFs' projected 
operating costs as the sum of the aggregate ongoing annual costs 
incurred by SBSEFs to comply with proposed Regulation SE. Thus, 
SBSEFs' estimated projected operating costs = $123,840 (ongoing 
compliance with other proposed requirements that are similar to the 
remainder of part 37) + $31,200 (rule and product filing processes 
by SBSEFs) + $108 (proposed Rule 809) + $88 (proposed Rule 811(d)) + 
$25,546 (proposed Rule 819(i)) + $1,135 (proposed Rule 819(j)) + 
$152 (proposed Rule 826(f)) + $400 (proposed Rules 834(d), (e), and 
(f)) + $20,430 (proposed Rule 835) = $202,898. Thus, the Commission 
preliminarily estimates that SBSEFs would hold $203,221 in the form 
of their own capital to comply with proposed Rule 829(b). The 
Commission preliminarily estimates SBSEFs' cost of capital using the 
annual stock returns on a value-weighted portfolio of financial 
stocks from 1986 to 2021. See website of Professor Ken French, 
available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on March 14, 2022). 
These returns were averaged to arrive at an estimate of 16.45%. 
SBSEFs' aggregate annual cost of capital = $202,898 x 16.45% = 
$33,377. 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 proposed 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.
    \441\ The CFTC's experience overseeing SEFs would appear to 
support the preliminarily belief that SBSEFs would hold 
unencumbered, liquid financial assets rather than obtain a line of 
credit to comply with proposed Rule 829(d). In a previous 
rulemaking, the CFTC noted that most SEFs satisfy the liquidity 
requirement of Sec.  37.1303 (the analog of proposed 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 (February 11, 2021) (``2021 SEF Amendments Adopting Release'').
---------------------------------------------------------------------------

e. Assessment Costs
    The Commission preliminarily believes that 87 entities likely would 
incur assessment costs as a result of proposed Rule 832, based on an 
analysis of counterparties to U.S. single-name CDS. 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. The Commission preliminarily 
believes that 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 Commission preliminarily believes that 
the assessment costs associated with proposed 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. The Commission 
preliminarily believes that such assessment costs would be 
approximately $18,160 per entity.\442\ The Commission preliminarily 
believes that 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.
---------------------------------------------------------------------------

    \442\ $18,160 = 40 hours x $454/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 433 (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 $14,802 per entity.\443\ Therefore, the Commission estimates 
the total one-time costs per entity associated with proposed Rule 832 
could be $32,962 and the aggregate one-time costs could be 
$2,867,694.\444\ 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 proposed Rule 832 
may be less.
---------------------------------------------------------------------------

    \443\ 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 proposed Rule 832). 
$14,802 = (2 hours x $399/hour national hourly rate for a compliance 
attorney) + (4 hours x $338/hour national hourly rate for a 
compliance manager) + (40 hours x $263/hour national hourly rate for 
a programmer analyst) + (4 hours x $250/hour national hourly rate 
for a senior internal auditor) + (2 hours x $566/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 December 2021) 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 Proposing Release (see 78 FR at 
31140, n. 1425) and adjusted for inflation through December 2021.
    \444\ Total one-time costs per entity = $18,160 (compliance 
policy and procedure) + $14,802 (systems) = $32,962. Aggregate one-
time costs = 87 entities x $32,962 = $2,867,694.
---------------------------------------------------------------------------

f. Structured Data Costs
    The Commission preliminarily believes that SBSEFs would 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 a 
structured format to fulfill their reporting requirements under 
Regulation SBSR, the compliance cost associated with the Rule 825(c)(3) 
requirement would be limited to the cost prospective SBSEF registrants 
would incur to update their systems to incorporate the Commission's XML 
schema for Daily Market Data Reports.\445\ 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.\446\
---------------------------------------------------------------------------

    \445\ 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'').
    \446\ See infra note 424 and accompanying text.
---------------------------------------------------------------------------

    With respect to the proposed Inline XBRL requirement for other 
documents required under proposed Regulation SE, the Commission 
preliminarily believes that SBSEFs would 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 would result from the proposed tagging 
requirement, because prospective SBSEF registrants are not currently 
subject to Inline XBRL requirements. Similarly, because prospective 
SBSEF registrants are not currently subject to EDGAR requirements, the 
Commission preliminarily believes they will incur a one-time compliance 
burden of submitting a Form ID as required by

[[Page 28956]]

Rule 10(b) of Regulation S-T.\447\ 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.\448\
---------------------------------------------------------------------------

    \447\ See 17 CFR 232.10(b).
    \448\ See infra note 424 and accompanying text.
---------------------------------------------------------------------------

4. Reasonable Alternatives
    The Commission considered a number of alternatives when formulating 
the proposed rules and amendments.
    In developing proposed Regulation SE, the Commission considered the 
alternative of not harmonizing its rules with analogous CFTC rules. As 
discussed in sections II and XIX(B), the entities that are most likely 
to register with the Commission as SBSEFs are those already registered 
with the CFTC as SEFs. These entities have made substantial investments 
in systems, policies, and procedures to comply with and adapt to the 
regulatory system developed by the CFTC. Under the proposed approach of 
harmonizing with CFTC rules to the extent possible, dually registered 
entities could utilize their existing systems, policies, and procedures 
to comply with the Commission's SBSEF rules, and SEF market 
participants would face no or only incremental changes to trade SBS as 
well as swaps on those facilities, and to comply with the Commission's 
rules regarding SBS trading. Under the alternative approach whereby the 
Commission establishes 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. Further, proposed requirements that 
are significantly different from the rules that apply to the swap 
market could cause SEFs to question whether it is economically viable 
to enter the SBS market and to register with the Commission as SBSEFs. 
The Commission preliminary believes that the proposed approach would 
deliver to the SBS market the regulatory benefits generated by the CFTC 
regulatory framework and help promote the trading of SBS on regulated 
platforms, while imposing only limited costs on SBSEFs. The Commission 
preliminarily believes that this trade-off is preferable to the trade-
off associated with the alternative approach.
    In formulating the proposed definition of ``block trade,'' the 
Commission considered the alternative of harmonizing the third prong of 
the proposed definition with the third prong of the CFTC definition of 
``block trade.'' The third prong of the 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.'' As discussed in section VII(E), because SBS are not within 
the CFTC's jurisdiction, the CFTC has never considered what an 
appropriate minimum block size threshold would be for any SBS asset 
class. There is no CFTC-defined threshold with which to harmonize when 
formulating the third prong of the proposed definition of ``block 
trade.'' Accordingly, the Commission preliminarily believes that 
establishing a threshold tailored specifically for the SBS market is 
preferable to the alternative.
    In formulating proposed Rule 804(a)(2), the Commission considered 
the alternative of proposing a one-business-day review of a self-
certified SBS product before an SBSEF could list the product. This 
alternative would harmonize with the parallel provision in Sec.  
40.2(a).\449\ The Commission preliminarily believes that a ten-
business-day review period for self-certified SBS products before they 
can be listed strikes a reasonable balance between allowing SBSEFs to 
bring new products to market quickly while affording the Commission 
staff a reasonable period in which to assess them. The 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,\450\ which the Commission is proposing to replicate in Rule 
807(a)(3).\451\ Thus, the Commission preliminarily believes the 
proposed approach is preferable to the alternative.
---------------------------------------------------------------------------

    \449\ See Sec.  40.2(a)(2) (one condition 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).
    \450\ See Sec.  40.6(a)(3) (one condition 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 ten business days prior to the SEF's 
implementation of the rule or rule amendment).
    \451\ See infra section VI(D).
---------------------------------------------------------------------------

    In formulating proposed Rule 825(c), which would require an SBSEF 
to publish a ``Daily Market Data Report'' on its website, the 
Commission considered the alternative of requiring SBSEFs to submit the 
information in such reports directly to the Commission. The Commission 
believes that the regulatory data that it is receiving pursuant to 
Regulation SBSR would generate the same information as that contained 
in such reports. Thus, the Commission preliminarily believes that the 
proposed approach is preferable to the alternative because it would 
relieve SBSEFs of the need to send daily reports to Commission while 
preserving the Commission's ability to be informed about SBSEF market 
activity via the regulatory data it receives pursuant to Regulation 
SBSR.
    The Commission also considered the alternative of requiring a 
structured data language other than Inline XBRL for SBSEF filings. For 
example, the Commission could create an XML-based data language (i.e., 
an XML schema) specific to SBSEF filings, similar to the XML schema to 
be used for Daily Market Data Reports under proposed Rule 825. The 
Commission preliminarily believes, however, that Inline XBRL would be 
more suitable for SBSEF filings to the Commission. As noted, unlike an 
XML schema that would be used under this alternative, Inline XBRL would 
provide the ability to tag detailed facts within narrative text blocks, 
and is thus likely more well-suited to accommodate the other filings 
required under proposed Regulation SE, many of which require narrative 
discussions (e.g., the explanation and analysis of the product and its 
compliance with applicable provisions of the SEA for a product filing 
required under Rule 804). In addition, certain proposed SBSEF 
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.\452\
---------------------------------------------------------------------------

    \452\ See supra section XIX(C)(2).
---------------------------------------------------------------------------

    Another alternative that the Commission considered is to require 
that an exemption order under proposed Rule 833(a) could apply to a 
foreign trading venue only if it traded SBS and no other types of 
securities. Under this alternative, an exemption order would be 
unavailable to a foreign trading venue that trades SBS and other types 
of securities. The Commission preliminarily believes, however, that 
this alternative is unnecessary. Other jurisdictions might have market 
structures where it is common to trade SBS and other types of 
securities on the same trading venue. The Commission preliminarily 
believes that it would be inequitable to disqualify such jurisdictions 
ex ante from qualifying for a Rule 833(a) exemption.
    In connection with the proposed amendments to Rule 3a1-1, the

[[Page 28957]]

Commission considered the alternative of applying the retraction 
provisions of Rule 3a1-1(b) to SBSEFs and clearing agencies that are 
covered by proposed paragraphs (a)(4) and (a)(5), respectively, of Rule 
3a1-1. Under this alternative, if a registered SBSEF or a registered 
clearing agency were to grow above a certain size, its exemption under 
proposed paragraph (a)(4) or (a)(5), respectively, could be retracted, 
forcing it to register as a national securities exchange.
    The Commission preliminarily believes that, in adopting section 3D 
of the SEA, Congress gave the Commission a mechanism to regulate SBSEFs 
of any size. Nothing in section 3D suggests that, if an SBSEF were to 
grow above a certain size, the Commission should be able to withdraw 
that entity's ability to operate as an SBSEF and instead compel it to 
register as a national securities exchange. The Commission 
preliminarily believes that it is not necessary to apply the retraction 
provisions in Rule 3a1-1(b) to registered clearing agencies that engage 
in forced trading sessions and are covered by proposed Rule 3a1-
1(a)(5). SBS transactions effected using this functionality are 
designed to facilitate the clearance and settlement process, and forced 
trading sessions are carried out by registered clearing agencies under 
rules that have been approved by the Commission. This trading 
functionality is not effected for the purpose of conducting open-market 
transactions. Therefore, the Commission preliminarily believes that it 
would not be appropriate to apply the retraction provisions of Rule 
3a1-1(b) to clearing agencies that would be covered by proposed Rule 
3a1-1(a)(5), as this would force these clearing agencies also to 
register as national securities exchanges. For the above reasons, the 
Commission preliminarily believes that the proposed approach is 
preferable to this alternative.
    In connection with proposed Rule 15a-12, the Commission considered 
the alternative of not exempting SBSEF-Bs from section 17(a) of the 
SEA, which requires a registered broker (among other types of 
registered entity) to make and keep records as prescribed by Commission 
rule.\453\ This approach would subject SBSEF-Bs to the full scope of 
the Commission's books and records rules under section 17(a). The 
Commission is proposing instead to utilize proposed Rule 15a-12 to 
exempt SBSEF-Bs from section 17(a), among other provisions applying to 
brokers, and instead to subject SBSEF-Bs to proposed new Rule 826, 
which derives its statutory authority from Core Principle 9 in section 
3D of the SEA. This approach would allow the Commission to tailor a 
books and records rule specifically to the limited business as an 
SBSEF-B and to better harmonize with the books and records requirements 
of the CFTC to which the SBSEF-B would likely also be subject.
---------------------------------------------------------------------------

    \453\ 15 U.S.C. 78q(a).
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

    Proposed Regulation SE and the other proposed rules and rule 
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.\454\ 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. Further, proposed rules that improve access to SBSEFs by market 
participants could increase participation and competition in liquidity 
provision in the SBS market.\455\ 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.
---------------------------------------------------------------------------

    \454\ See supra section XIX(B)(2).
    \455\ See supra section XIX(C)(1) (discussing improved access 
and competition as an overarching benefit of the proposal).
---------------------------------------------------------------------------

2. Capital Formation
    The Commission preliminary believes that the proposal could promote 
capital formation by helping to improve regulatory oversight and market 
integrity. Regulation SE would require, 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.\456\ These requirements are designed to provide an SBSEF 
with sufficient information to oversee trading on its market, including 
detecting and deterring abusive trading practices.\457\ The proposed 
audit trail and recordkeeping and reporting requirements, by providing 
the Commission access to information about SBSEFs, would 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.\458\ Further, proposed 
Rule 831, the proposed requirements relating to the CCO, would promote 
regulatory compliance on SBSEFs and the SBS market generally.\459\ In 
addition, the proposal would provide for various safeguards to help 
promote market integrity, including proposed Rule 819(c) relating to 
impartial access to the SBSEF \460\ and proposed Rule 830 relating to 
systems safeguards. Any resulting increase in regulatory oversight and 
market integrity likely would increase market participants' confidence 
in the soundness and fairness of SBSEFs, which in turn could spill over 
into increased confidence in the soundness and fairness 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 
Commission preliminarily believes that the proposed rules would help 
encourage capital formation.
---------------------------------------------------------------------------

    \456\ See proposed Rules 819, 821, 822, and 826.
    \457\ See supra section XIX(C)(1) (discussing improved oversight 
of trading by SBSEFs as an overarching benefit of the proposal).
    \458\ See supra section XIX(C)(1) (discussing improved 
Commission oversight as an overarching benefit of the proposal).
    \459\ See supra section XIX(C)(2) (discussing the benefits 
associated with proposed Rule 831).
    \460\ See supra note 455.
---------------------------------------------------------------------------

    By reducing the risk of trading disruptions on SBSEFs, proposed 
Rules 829 and 830 could lead to the greater use of SBS traded on 
SBSEFs. This in turn could promote capital formation as discussed 
above.
3. Efficiency
    The Commission preliminarily believes that the proposed 
requirements with respect to pre-trade price transparency could lead to 
more efficient pricing in the SBS market. The proposed rules are 
designed to increase pre-trade price transparency for SBS, which should 
aid market participants in evaluating current market prices for

[[Page 28958]]

SBS, thereby furthering more efficient price discovery. Price 
transparency, coupled with increased competition in liquidity provision 
as discussed above,\461\ could further decrease the spread in quoted 
prices, and thus could lead to higher efficiency in the trading of 
these securities.
---------------------------------------------------------------------------

    \461\ See supra section XIX(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. The Commission 
preliminarily believes that several factors mitigate such concerns. 
First, pursuant to proposed 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 only the desired amount of information about 
trading interest. Second, pursuant to proposed Rule 815(a)(2), and as 
discussed earlier, an SBSEF would 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.
    The Commission preliminarily believes that the proposed 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.

F. Request for Comment

    The Commission is requesting comment regarding the economic 
analysis set forth herein. To the extent possible, the Commission 
requests that market participants and other commenters provide 
supporting data and analysis with respect to the benefits, costs, and 
effects on competition, efficiency, and capital formation of adopting 
the proposed rules and amendments or any reasonable alternatives. In 
addition, the Commission asks commenters to consider the following 
questions:
    212. What additional qualitative or quantitative information should 
the Commission include as part of the baseline for its economic 
analysis of the proposed rules and amendments?
    213. What additional information can the Commission use to estimate 
the costs and benefits of implementing the proposed rules and 
amendments?
    214. Has the Commission considered all relevant aspects of the 
proposed rules and amendments? Has the Commission accurately described 
the costs and benefits of the proposed rules and amendments? Why or why 
not? Please identify any other benefits associated with the proposed 
rules and amendments in detail. Please identify any costs associated 
with the proposed rules and amendments that the Commission has not 
identified. If possible, please provide quantification or data that 
would enable a quantification of such effects.
    215. What are the economic effects of the discussed reasonable 
alternatives? Are there any additional reasonable alternatives that the 
Commission should include? If so, please identify such alternatives and 
any economic effects associated with such alternatives. If possible, 
please provide data that would enable a quantification of such effects.
    216. The Commission preliminarily estimates that five CFTC-
registered SEFs likely would register as SBSEFs. How many entities do 
you believe will seek to register with the Commission as SBSEFs? Of 
these, how many would be CFTC-registered SEFs seeking to be dually-
registered SEF/SBSEFs and how many would be standalone SBSEFs?
    217. Are SBS products being traded on unregistered SBSEFs? If so, 
please provide data on (1) the types of SBS that are being traded on 
unregistered SBSEFs; and (2) the volume of such SBS that are being 
traded on unregistered SBSEFs.
    218. Does the Commission's description of SBS trade execution 
practices accurately capture the trade execution practices currently 
used in the trading of SBS? If not, please identify and describe the 
execution practices that are currently used to trade SBS.
    219. What costs would CFTC-registered SEFs incur if they elect to 
register and operate as SBSEFs under proposed Regulation SE? Would 
these entities incur costs associated with the de novo formation of an 
SBSEF? Alternatively, would they incur costs associated with listing 
SBS products on their venues and making limited changes to their 
systems, policies, and procedures to the extent that the proposed rules 
differ from analogous CFTC rules? Are there other costs that have not 
been identified?
    220. What would be the likely fees and costs associated with 
transacting on SBSEFs? What are the fees and costs associated with 
transacting on unregulated trading venues that exist in today's OTC 
derivatives market?

XX. Paperwork Reduction Act

    Certain provisions of the proposed rules contain new ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\462\ The Commission is submitting the 
proposed collection of information to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 
CFR 1320.11. The title of the new collection of information is 
``Regulation SE.'' As proposed, Regulation SE would create a regime for 
the registration and regulation of SBSEFs and address other issues 
relating to SBS execution.
---------------------------------------------------------------------------

    \462\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to amend Rule 3a-1 under 
the SEA to exempt a registered SBSEF from the statutory definition of 
``exchange.'' Furthermore, the Commission is proposing 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 under the SEA.
    Proposed Regulation SE would include rules regarding the 
registration of a prospective SBSEF on Form SBSEF, the filing of new or 
amended rules or new products with the Commission, and rules 
harmonizing the Commission's SBSEF regime with the CFTC's parallel SEF 
regime.\463\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the agency 
displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \463\ See supra section III. As proposed, 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 proposed rules and rule amendments would include a collection 
of information within the meaning of the PRA for SBSEFs that would be 
required to comply with Regulation SE and file a Form SBSEF with the

[[Page 28959]]

Commission. In addition, proposed Rule 833 would include a collection 
of information within the meaning of the PRA for persons that wish to 
seek an exemption order under that rule, and proposed Rule 834 would 
include a collection of information within the meaning of the PRA for 
SBS exchanges (in addition to SBSEFs).
    Many of the proposed rules that comprise Regulation SE are modelled 
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 
would allow such 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 modelled its methodology, 
assumptions, and calculations on those of the CFTC, while making 
adjustments that reflect differences between the scale of the market 
for swaps relative to the market for SBS, such as the estimated number 
of SBSEFs, number of SBS market participants, and number of SBS 
transactions, as necessary.
    The following is a summary of the rules contained in proposed 
Regulation SE.\464\ The paperwork burdens associated with proposed 
Regulation SE are discussed in section XX(D) below.
---------------------------------------------------------------------------

    \464\ See supra section IV(A) (discussing proposed Rule 800); 
section IV(B) (discussing proposed Rule 801); section IV(C) 
(discussing proposed Rule 802); section V(A) (discussing the 
registration provisions contained in proposed Rule 803); section 
V(B) (discussing Form SBSEF); section VI(A) (discussing proposed 
Rule 804); section VI(B) (discussing proposed Rule 805); section 
VI(C) (discussing proposed Rule 806); section VI(D) (discussing 
proposed Rule 807); section VI(F) (discussing proposed Rule 808); 
section VI(G) (discussing proposed Rule 809); section VI(H) 
(discussing proposed Rule 810); section VII(A) (discussing proposed 
Rule 811); section VII(B) (discussing proposed Rule 812); section 
VII(C) (discussing proposed Rule 813); section VII(D) (discussing 
proposed Rule 814); section VII(E) (discussing proposed Rule 815); 
section VII(F) (discussing proposed Rule 816); section VII(G) 
(discussing proposed Rule 817); section VIII(A) (discussing proposed 
Rule 818); section VIII(B) (discussing proposed Rule 819); section 
VIII(C) (discussing proposed Rule 820); section VIII(D) (discussing 
proposed Rule 821); section VIII(E) (discussing proposed Rule 822); 
section VIII(F) (discussing proposed Rule 823); section VIII(G) 
(discussing proposed Rule 824); section VIII(H) (discussing proposed 
Rule 825); section VIII(I) (discussing proposed Rule 826); section 
VIII(J) (discussing proposed Rule 827); section VIII(K) (discussing 
proposed Rule 828); section VIII(L) (discussing proposed Rule 829); 
section VIII(M) (discussing proposed Rule 830); section VIII(N) 
(discussing proposed Rule 831); section IX(A) (discussing proposed 
Rule 832); section IX(B) (discussing proposed Rule 833); section X 
(discussing proposed Rule 834); section XI (discussing the notice 
required by proposed Rule 835); section XII (discussing proposed 
amendments to Rule 3a1-1); section XIII (discussing proposed Rule 
15a-12); section XVI (discussing new rules and proposed amendments 
to the Commission's Rules of Practice).
    \465\ Each of the filings that would be required by proposed 
Rules 804 through 807, 809, and 816 would have to include a 
submission cover sheet that is also being proposed herein. Because 
the cover sheet is an integral part of the filing--it is the 
mechanism whereby an SBSEF would inform the Commission what type of 
filing is enclosed--the paperwork burdens for the cover sheet are 
not estimated separately from the paperwork burden of the 
substantive filing.

----------------------------------------------------------------------------------------------------------------
     Proposed rule number and title              Overview of proposed rule           Paperwork  burden  created?
----------------------------------------------------------------------------------------------------------------
800--Scope.............................  would state that the provisions of this    No
                                          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.............  would require an SBSEF to comply with all  No
                                          applicable Commission rules, including
                                          any related definitions and cross-
                                          referenced sections.
802--Definitions.......................  Definitions..............................  No
803--Requirements and procedures for     would set out a process for registering    Yes
 registration.                            with the Commission as an SBSEF,
                                          including the submission of Form SBSEF.
804--Listing products for trading by     procedures by which an SBSEF, via self-    Yes \465\
 certification.                           certification, may list a product for
                                          trading.
805--Voluntary submission of new         procedures for voluntary submission of     Yes
 products for Commission review and       new products for Commission review and
 approval.                                approval.
806--Voluntary submission of rules for   procedures for voluntary submission of     Yes
 Commission review and approval.          new rules or rule amendments for
                                          Commission review and approval.
807--Self-certification of rules.......  whereby an SBSEF can implement a new rule  Yes
                                          or rule amendment via self-certification.
808--Availability of public information  would set out the information that will    No
                                          be made public with respect to
                                          applications to become an SBSEF as well
                                          as filings relating to rules and
                                          products.
809--Staying of certification and        would provide for a stay of a product      Yes
 tolling of review period pending         certification or tolling of a review
 jurisdictional determination.            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 that are  would provide that an applicant for        Yes
 not yet registered and by dormant        registration as an SBSEF may submit for
 SBSEFs.                                  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 SBSEF       would provide that an SBSEF shall submit   Yes
 compliance.                              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.

[[Page 28960]]

 
812--Enforceability....................  would provide that a transaction entered   Yes
                                          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
                                          would require 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 collected    would provide that an SBSEF shall not use  No
 for regulatory purposes.                 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,
                                          without such person's consent; also
                                          would require 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 national    would provide that an entity that intends  No
 securities exchange 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 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,
                                          identify whether electronic trading of
                                          SBS is taking place on or through the
                                          national securities exchange or the
                                          SBSEF.
815--Methods of execution for Required   would provide that a Required Transaction  Yes
 and Permitted 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 would require 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 requirement and     would set out a process and standards for  Yes
 exemptions therefrom.                    an SBSEF to MAT an SBS; also would
                                          establish certain exemptions from the
                                          trade execution requirement.
817--Trade execution compliance          would provide that an SBS transaction      No
 schedule.                                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 (Compliance with   would require a registered SBSEF to        Yes
 Core Principles).                        comply with the SEA's Core Principles
                                          for SBSEFs.
819--Core Principle 2 (Compliance with   would require a registered SBSEF to        Yes
 rules).                                  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 would require 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
                                          would require 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 readily   would require that SBSEF to permit         Yes
 susceptible to manipulation).            trading only in SBS that are not readily
                                          susceptible to manipulation.
821--Core Principle 4 (Monitoring of     would require an SBSEF to establish and    Yes
 trading and trade processing).           enforce 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 would require 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 to        would require an SBSEF to establish and    Yes
 obtain information).                     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 (Financial         would require an SBSEF to establish and    Yes
 integrity of transactions).              enforce rules for ensuring the financial
                                          integrity of SBS on its facility,
                                          including the clearance and settlement
                                          of the SBS; also would require 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 (Emergency         would require an SBSEF to adopt rules to   Yes
 authority).                              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            would require an SBSEF to make public      Yes
 publication of trading information).     timely 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.

[[Page 28961]]

 
826--Core Principle 9 (Recordkeeping     would set forth recordkeeping and          Yes
 and reporting).                          reporting obligations for SBSEFs and
                                          require 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.
827--Core Principle 10 (Antitrust        would provide that, unless necessary or    No
 considerations).                         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 (Conflicts of     would require an SBSEF to establish and    Yes
 interest).                               enforce rules to minimize conflicts of
                                          interest in its decision-making process
                                          and establish a process for resolving
                                          such conflicts.
829--Core Principle 12 (Financial        would require an SBSEF to have adequate    Yes
 resources).                              financial, operational, and managerial
                                          resources to discharge its
                                          responsibilities; also would set forth
                                          the standards used to calculate the
                                          adequacy of such resources; and require
                                          certain reports to the Commission.
830--Core Principle 13 (System           would require an SBSEF to establish and    Yes
 safeguards).                             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; also would
                                          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 (Designation of   would require an SBSEF to designate a CCO  Yes
 CCO).                                    and set forth regulatory and reporting
                                          obligations for the CCO.
832--Cross-border mandatory trade        would explain when the SEA's trade         No
 execution.                               execution requirement applies to a cross-
                                          border SBS transaction.
833--Cross-border exemptions...........  would provide for a process by which the   Yes
                                          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 of          would provide that each SBSEF and SBS      Yes
 interest of SBSEFs 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, and from exercising
                                          disproportionate influence in
                                          disciplinary proceedings; also would
                                          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 SBSEF of    would provide that, if an SBSEF issues a   Yes
 final disciplinary action or denial or   final disciplinary action against a
 limitation of access.                    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..............  would exempt from the SEA definition of    No
                                          ``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 SBSEFs     would exempt a registered SBSEF from       No
 from certain broker requirements.        certain broker requirements while
                                          affirming that an SBSEF is a broker
                                          under the SEA.
Proposed rules and amendments to the     new rules and amendments to the Rules of   No **
 Commission's Rules of Practice.          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.
----------------------------------------------------------------------------------------------------------------
** 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 proposed revisions to the Commission's Rules of Practice 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. However, the Commission believes that it
  would be useful to publish the rules for notice and comment. 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.

B. Proposed Use of Information

1. Registration Requirements and Form SBSEF
    Proposed Regulation SE would impose various requirements relating 
to SBSEF registration, which are set forth in proposed Rule 803.\466\
---------------------------------------------------------------------------

    \466\ 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 proposed rules would 
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 that 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

[[Page 28962]]

the registration information would be publicly available, 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 proposed Regulation SE would require SBSEFs 
to establish certain rules, policies, and procedures to comply with 
applicable requirements of the SEA and the Commission's rules 
thereunder.\467\ The rules also would help an SBSEF's members to 
understand and comply with requirements of the SBSEF.
---------------------------------------------------------------------------

    \467\ 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 proposed Regulation SE would require SBSEFs 
and certain other persons to submit reports or provide specified 
information.\468\ This information generally would 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.
---------------------------------------------------------------------------

    \468\ 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
    Proposed Regulation SE would require an SBSEF to keep specified 
records.\469\ The audit trail information required to be maintained 
under proposed Regulation SE would aid the SBSEF in detecting and 
deterring fraudulent and manipulative acts with respect to trading on 
its market, as well as help it 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 would provide a valuable tool to 
help the Commission carry out its oversight responsibility over SBSEFs 
and the SBS markets in general.
---------------------------------------------------------------------------

    \469\ 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
    Proposed Regulation SE would impose certain publication burdens on 
SBSEFs in proposed Rule 825.\470\
---------------------------------------------------------------------------

    \470\ See proposed Rule 825 (requiring an SBSEF to make publicly 
available a ``Daily Market Data Report'').
---------------------------------------------------------------------------

    The requirement contained in proposed 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 would 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, proposed Rule 825 would require 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
    Proposed Regulation SE would establish various filing requirements 
applicable to SBSEFs. Proposed Rules 804 and 805 would provide 
mechanisms for an SBSEF to submit filings for new products that they 
seek to list either through a self-certification process or by 
voluntarily requesting approval of the Commission, respectively. 
Proposed Rules 806 and 807 would require an SBSEF to submit new rule or 
rule amendments either through a self-certification process or by 
voluntarily requesting approval of the Commission, respectively.
    Proposed Rule 808 would address 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. Proposed Rule 809 would establish procedures for 
addressing a situation where an SBSEF wishes to list a product and it 
is unclear whether the product is an SBS or swap (i.e., whether it 
properly falls under the jurisdiction of the SEC or the CFTC). Proposed 
Rule 810 would provide 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 that would be collected under proposed Rules 804 
and 805 would help the Commission assess whether an SBS listed by an 
SBSEF complies with relevant provisions of the SEA. In addition, this 
information would assist the Commission in overseeing the SBSEF's 
compliance with its regulatory obligations generally and to learn about 
developments in the SBS product market. Proposed Rules 804 and 805 also 
would 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 that would be collected under proposed Rules 806 
and 807 would 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. Proposed Rules 806 and 807 also would 
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 proposed Rules 809 and 810 would 
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 would 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
    Proposed Regulation SE includes Rule 831 that would set out 
requirements relating to an SBSEF's CCO.
    The information that would be collected under proposed Rule 831 
would 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 would provide the 
Commission with important information on the financial health of the 
SBSEF.

[[Page 28963]]

8. Surveillance Systems Requirements for SBSEFs
    The proposed rules that would require an SBSEF to maintain 
surveillance systems and to monitor trading \471\ 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.
---------------------------------------------------------------------------

    \471\ 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 proposed Regulation SE would be: (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) and general industry information, the 
Commission preliminarily estimates that five entities will seek to 
register as SBSEFs and thus become subject to the collection of 
information requirements of these proposed rules.
    The Commission preliminarily estimates that three persons would 
request exemption orders under one or both paragraphs \472\ of proposed 
Rule 833.\473\ The CFTC has granted three exemptions similar to those 
contemplated by proposed Rule 833,\474\ 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.
---------------------------------------------------------------------------

    \472\ See supra note 254.
    \473\ 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 
proposed Rule 832) who are members of such trading venues.
    \474\ See supra note 244.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that three entities will 
operate as SBS exchanges. These are likely to be existing national 
securities exchanges that, in the future, seek to list SBS and thereby 
become SBS exchanges.
    The Commission considered whether any provision of proposed 
Regulation SE would impose any burdens (as defined in the PRA) on SBSEF 
members, but has determined that they would not.

D. Total Annual Reporting and Recordkeeping Burden

1. Overview
    The CFTC, based on experience gained in developing rules for SEFs 
and regulating the SEF market, over the years has 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 proposed Regulation SE are modelled.\475\ Those 
estimates are presented in the form of aggregate totals for compliance 
with:
---------------------------------------------------------------------------

    \475\ 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 (November 27, 2020), 85 FR 82313, 82324 (December 18, 
2020) (Final Rule PRA for Sec.  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, Sec.  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 February 24, 2021), available at https://omb.report/omb/3038-0093 (PRA Supporting Statements for CFTC part 
40, Sec.  36.1); Notification of Pending Legal Proceedings: OMB 
Control Number 3038-0033 Supporting Statements (last updated August 
24, 2018), available at https://omb.report/omb/3038-0033 (PRA 
Supporting Statements for Sec. Sec.  1.60(a), (c), and (e)); 
Adaptation of Regulations To Incorporate Swaps (October 16, 2012), 
77 FR 66288, 66306-08 (November 2, 2012) (Final Rule PRA for 
Sec. Sec.  1.59 and 1.37(c)); Recordkeeping (May 23, 2017), 82 FR 
24479, 24485 (May 30, 2017) (Final Rule PRA for Sec.  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 Sec. Sec.  
1.31, 1.37(c), 1.59, and 1.67); Service on Self-Regulatory 
Organization Governing Boards or Committees by Persons with 
Disciplinary Histories (February 27, 1990), 55 FR 7884, 7890 (March 
6, 1990) (Final Rule PRA for Sec.  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 
for Sec.  1.64); Voting by Interested Members of Self-Regulatory 
Organization Governing Boards and Committees (December 23, 1998), 64 
FR 16, 22 (January 4, 1999) (Final Rule PRA for Sec.  1.69); Rules 
Pertaining to Contract Markets and Their Members: OMB Control Number 
3038-0022 Supporting Statements (last updated December 21, 2010), 
available at https://omb.report/omb/3038-0022 (PRA Supporting 
Statements for Sec. Sec.  1.63, 1.64, and 1.69); Swap Data 
Recordkeeping and Reporting Requirements (December 20, 2011), 77 FR 
2136, 2171-76 (January 13, 2012) (Final Rule PRA for Sec.  45.2); 
Swap Data Recordkeeping and Reporting Requirements: OMB Control 
Number 3038-0096 Supporting Statements (last updated March 16, 
2021), available at https://omb.report/omb/3038-0096 (PRA Supporting 
Statements for Sec.  45.2); Repeal of the Exempt Commercial Market 
and Exempt Board of Trade Exemptions (September 28, 2015), 80 FR 
59575, 59576 (October 2, 2015) (Final Rule PRA for Sec.  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
     Sec. Sec.  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 would be, with limited exceptions 
discussed above, substantively similar to those applicable to SEFs. 
Therefore, the Commission is basing its preliminary estimates for the 
paperwork burdens for SBSEFs on the CFTC's paperwork burden 
calculations for analog rules that apply to SEFs, which have been 
approved by OMB.\476\ 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 the SBS 
business of dually registered SEF/SBSEFs is likely to be smaller than 
the swap business.
---------------------------------------------------------------------------

    \476\ Proposed Rule 835, which would require 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 
proposed Commission rules, the Commission does not believe it needs to 
substantially deviate from the CFTC's estimates of aggregated burden 
hours for compliance (beyond scaling back the CFTC's estimates to 
account for fewer SBSEFs than SEFs, and the smaller size of the SBS 
market relative to the swap market). These minor differences between 
the CFTC's existing rules for SEFs and the Commission's proposed 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, or, in other 
cases, by differences between the swap market and SBS market. In either 
case, however, the Commission preliminarily anticipates that the 
burdens on SBSEFs would be substantially similar to the burdens set out 
in the CFTC estimates,

[[Page 28964]]

which serve as the basis for the Commission's estimates.\477\ 
Furthermore, the Commission preliminarily believes that 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.
---------------------------------------------------------------------------

    \477\ The Commission notes that, 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 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 proposed by the Commission are adapted from existing 
rules of the CFTC. With these proposed 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.\478\ The 
Commission requests comments on its entire proposed approach to 
estimating burden hours.\479\
---------------------------------------------------------------------------

    \478\ However, the Commission will note instances where a 
proposed 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 proposed SEC requirement, and in reality there would be few or 
perhaps even zero marginal burdens imposed on dually registered SEF/
SBSEFs.
    \479\ The burden hours discussed below represent annual/ongoing 
burdens, with three exceptions that represent initial, one-time 
burdens: registration burdens for SBSEFs under proposed Rule 803, 
exemption requests regarding foreign SBS trading venues under 
proposed Rule 833, and certain rules under proposed Rules 834(b) and 
(c).
---------------------------------------------------------------------------

2. Aggregate Burdens for Rules Modelled 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 
proposed Rule 803, on a one-time basis. The Commission preliminarily 
estimates that five entities initially would seek to register with the 
Commission as SBSEFs. The Commission estimates the burdens of proposed 
Rule 803 and Form SBSEF to be 1,475 hours. 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). Proposed Form SBSEF 
would request almost exactly the same information as required by Form 
SEF. Proposed 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.\480\ 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. The Commission preliminarily believes that SBSEFs 
would prepare Form SBSEF internally. The Commission requests comment on 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \480\ 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 preliminarily estimates the aggregate ongoing annual 
hour burden for compliance with all of the proposed SBSEF rules that 
have analogs in part 37 to be 1,935 hours.\481\ 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.\482\ With exception of Sec.  37.600, which 
implements a CEA Core Principle for SEFs relating to position limits 
that is not in the SEA, every other section of part 37 has an analog in 
proposed Regulation SE that is substantively similar.\483\ Therefore, 
the Commission preliminarily estimates that the aggregate CFTC estimate 
of 387 hours per SEF per year serves as a reasonable estimate for the 
annual hourly burden on each SBSEF.
---------------------------------------------------------------------------

    \481\ 1,935 hours = 387 hours (annual burden per respondent) x 5 
(number of respondents).
    \482\ 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).
    \483\ As discussed previously, portions of the CFTC guidance 
have been incorporated into certain rules being proposed by the 
Commission in Regulation SE. The CFTC guidance clarifies portions of 
its rules by suggesting means for compliance and does not 
fundamentally alter those rules. Therefore, the Commission believes 
that 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 proposed rules.
---------------------------------------------------------------------------

    As discussed in more detail below, certain SBSEF rules proposed in 
Regulation SE are derived from other parts of the CFTC rules (e.g., 
part 40) and the burdens for those section 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 
proposed SBSEF rule. Please see above for more detailed descriptions of 
a particular proposed SBSEF rule.

------------------------------------------------------------------------
                                                         Analogous SBSEF
                                                          Rule No. (387
                                                        aggregate burden
                                                         hours per SBSEF
                                                         not  including
                                                          proposed Rule
   CFTC part 37 section (387                                   803
  aggregate  burden hours per                            (registration)
 SEF not including Sec.   37.3           Topic             and certain
        (registration)                                   other rules not
                                                           modelled on
                                                          part 37 rules
                                                           (discussed
                                                          separately in
                                                         the  following
                                                            sections)
------------------------------------------------------------------------
37.1..........................  scope.................  800.
37.2..........................  applicable provisions.  801.
37.4..........................  procedures for listing  810.
                                 products.
37.5..........................  compliance............  811.

[[Page 28965]]

 
37.6..........................  enforceability........  812.
37.7..........................  prohibited use of data  813.
37.8..........................  entities operating as   814.
                                 SEFs and DCMs.
37.9..........................  methods of execution..  815.
37.10.........................  process to make swaps   816.
                                 available for trade.
37.11.........................  reserved section......  not applicable.
37.12.........................  trade execution         817.
                                 compliance schedule.
37.100........................  CP 1 (compliance with   818 (CP1).
                                 Core Principles).
37.200 through 37.206.........  CP 2 (compliance with   819 (CP2).
                                 rules).
37.300 through 37.301.........  CP 3 (manipulation)...  820 (CP3).
37.400 through 37.408.........  CP 4 (monitoring of     821 (CP4).
                                 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 limits)  no equivalent
                                                         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 of    825 (CP 8).
                                 trading information).
37.1000 through 37.1001.......  CP 10 (recordkeeping    826 (CP 9).
                                 and reporting).
37.1100 through 37.1101.......  CP 11 (anti-trust)....  827 (CP10).
37.1200.......................  CP 12 (conflicts of     828 (CP 11).
                                 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.\484\
Appendix B....................  Guidance relating to    guidance
                                 Core Principles.        incorporated
                                                         throughout
                                                         proposed rules
                                                         818 through
                                                         831.
------------------------------------------------------------------------

3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules
---------------------------------------------------------------------------

    \484\ The burdens of registering using Form SBSEF are discussed 
in the previous section.
---------------------------------------------------------------------------

    A number of rules contained in Proposed Regulation SE are modelled 
after 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 proposing Rules 
804, 805, 806, and 807--which are closely modelled 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, proposed Rule 808 is 
modelled after Sec.  40.8 and would provide that certain information in 
a Form SBSEF application or a rule or product filing would be made 
publicly available, notwithstanding the SBSEF's request for 
confidential treatment. Proposed Rule 809 is loosely modelled after 
Sec.  40.12 and would set 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
    Under proposed Rules 804 and 805, an SBSEF would be required to 
submit filings for new products that it seeks to list. Under proposed 
Rules 806 and 807, an SBSEF would be 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 proposed rule and product 
filing processes in proposed 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.\485\ The Commission is estimating a total of five SBSEF 
respondents. The Commission preliminarily estimates that the aggregate 
ongoing annual hourly burden for all SBSEFs to prepare and submit rule 
and product filings under proposed Rules 804, 805, 806, and 807 
(including the cover sheet) \486\ would be 300 hours.
---------------------------------------------------------------------------

    \485\ See 75 FR 67282 (November 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).
    \486\ Each of the filings that would be required by proposed 
Rules 804 through 807 would have to include a submission cover sheet 
that is modelled 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 proposed Rules 804 through 807, which are based upon the 
CFTC's estimates. See supra note 465.
---------------------------------------------------------------------------

    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,\487\ the 
Commission believes that an estimate of 30 responses is appropriate 
given the more limited scope of the SBS market, as opposed to the swap 
market. This would result in a total estimated ongoing annual burden of 
60 hours per respondent \488\ and 300 hours for all the respondents

[[Page 28966]]

annually.\489\ The Commission solicits comments regarding the accuracy 
of its estimates.
---------------------------------------------------------------------------

    \487\ See id.
    \488\ 60 hours = 30 (number of responses per year per 
respondent) x 2 hours (burden per response).
    \489\ 300 hours = 60 hours (annual burden per respondent 
pursuant to proposed Rules 804, 805, 806, and 807) x 5 (number of 
respondents).
---------------------------------------------------------------------------

b. Burdens Related to Rules Modelled After Other Part 40 Rules
i. Rule 802
    Certain definitions contained in proposed Rule 802 are modelled 
after provisions of part 40. These definitions would not result in any 
paperwork burden.
ii. Rule 809
    Proposed Rule 809 is loosely modelled on Sec.  40.12 of the CFTC's 
rules and would apply in situations where 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. Proposed Rule 809 would provide that a 
product certification made by an SBSEF pursuant to proposed Rule 804 
shall be stayed, or the review period for a product that has been 
submitted for Commission approval by an SBSEF pursuant to proposed 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 \490\ by the SBSEF, the SEC, or the CFTC.
---------------------------------------------------------------------------

    \490\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

    Proposed Rule 809 itself does not include a process for determining 
whether the SEC or CFTC has jurisdiction over a product. Proposed 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.\491\ The only burden imposed on an SBSEF under Rule 809 would be 
checking a box on the submission cover sheet if the SBSEF intends to 
request a joint interpretation from the Commission and the CFTC 
pursuant to SEA Rule 3a68-2.\492\ The Commission preliminarily 
estimates that each such indication would impose a burden of 0.25 
hours. Furthermore, the Commission preliminarily estimates that each 
SBSEF would make one such indication per year.\493\ Accordingly, the 
aggregate ongoing annual burden for all SBSEFs to comply with Rule 809 
would be 1.25 hours.\494\ The Commission believes that this work, 
should it be required, would be conducted internally. The Commission 
solicits comment as to the accuracy of these estimates.
---------------------------------------------------------------------------

    \491\ 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 (December 23, 2021), available at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
    \492\ See supra section VI(E).
    \493\ The Commission preliminarily believes that 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.
    \494\ 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 Modelled After CFTC Rules Other Than 
Parts 37 and 40
    The proposed rules similar to rules of the CFTC other than part 37 
and part 40 are proposed Rules 811(d), 816(e), 819(h), 819(i), 819(j), 
819(k), 826(f), and 834. These proposed 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 proposed Rule 811 would adapt paragraphs (a), (c), 
and (e) of Sec.  1.60 to apply to SBSEFs. Paragraph (d)(1) would 
require 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 its property or assets is 
subject. Paragraph (d)(2) would require 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 preliminarily estimates that an SBSEF would provide 
the information required by proposed Rule 811(d) once per year, and 
that each submission would take 0.20 hours. Thus, the Commission 
preliminarily estimates that the aggregate ongoing annual burden for 
all SBSEFs to comply with requests for documents or information 
pursuant to proposed Rule 811(d) would be 1 hour.\495\ 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 79 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 0.20 hour, totaling 15.8 hours (79 x 0.20) 
annually.\496\
---------------------------------------------------------------------------

    \495\ 1 (number of responses per year per respondent) x 0.20 
hours (burden per response) x 5 (number of respondents) = 1 hour.
    \496\ See OMB, Supporting Statement for New and Revised 
Information Collections: OMB Control Number 3038-0033 (August 23, 
2018), available at https://omb.report/icr/201808-3038-004/doc/85625801.pdf.
---------------------------------------------------------------------------

    For PRA purposes, the Commission preliminarily believes that it is 
reasonable to apply the CFTC's approach to proposed Rule 811(d). The 
Commission believes that this work, should it be required, would be 
conducted internally. The Commission solicits comment as to the 
accuracy of these estimates.
b. Rule 819(h)
    Paragraph (h) of proposed Rule 819 generally would 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 modelled 
on Sec.  1.59 of the CFTC's rules. The Commission does not believe that 
this proposed rule would result in a paperwork burden.
c. Rule 819(i)
    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 impose certain other duties on the SBSEF 
associated with that fundamental requirement. Proposed Rule 819(i) is 
modelled on Sec.  1.63 of the CFTC's rules.

[[Page 28967]]

    The Commission preliminarily estimates that an SBSEF would provide 
the information required by proposed Rule 819(i) once per year, and 
that each submission would take 79.83 hours. Thus, the Commission 
preliminarily estimates that the aggregate ongoing annual burden for 
all SBSEFs to comply with proposed Rule 819(i) would be 399.15 
hours.\497\ The Commission is basing its estimate on the one that 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 submission to the CFTC per year. The CFTC further estimated that 
the time required to prepare one submission is approximately 79.83 
hours.\498\
---------------------------------------------------------------------------

    \497\ 1 (number of responses per year per respondent) x 79.83 
hours (burden per response) x 5 (number of respondents) = 399.15 
hours.
    \498\ See CFTC, Service on Self-Regulatory Organization 
Governing Boards or Committees by Persons with Disciplinary 
Histories (February 27, 1990), 55 FR 7884, 7890 (March 6, 1990) 
(final rule PRA for Sec.  1.63).
---------------------------------------------------------------------------

    For PRA purposes, the Commission preliminarily believes that it is 
reasonable to apply the CFTC's approach to proposed Rule 819(i), and 
that this work would be conducted internally. The Commission solicits 
comment as to the accuracy of these estimates.
d. Rule 819(j)
    Paragraph (j) of proposed Rule 819 is modelled on Sec.  1.67 of the 
CFTC's rules. Rule 819(j)(1) would provide 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 preliminarily 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.\499\ The Commission estimates 
that these notices would occur once per year at each SBSEF, resulting 
in an aggregate ongoing annual burden to comply with proposed Rule 
819(j) of 2.5 hours.\500\ The Commission believes that this work, 
should it be required, would be conducted internally. The Commission 
solicits comment as to the accuracy of these estimates.
---------------------------------------------------------------------------

    \499\ Proposed Rule 819(j) would not address any of the 
requirements or process concerning taking final disciplinary 
actions; it merely would require 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 
(November 19, 2014), 79 FR 72251, 72381 (December 5, 2014).
    \500\ 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 proposed Rule 819 would require 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. Proposed 
Rule 819(k) is modelled on provisions of Sec.  15.05 of the CFTC's 
rules that apply to SEFs. The Commission does not believe that this 
proposed rule would result in a paperwork burden.
f. Rule 826(f)
    Proposed Rule 826(f) is modelled on Sec.  1.37(c) and would require 
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 preliminarily 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 
preliminarily estimates that the aggregate ongoing annual burden for 
all SBSEFs to comply with requests for documents or information 
pursuant to proposed Rule 826(f) would be 2 hours.\501\ 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).
---------------------------------------------------------------------------

    \501\ 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, the Commission preliminarily believes that it is 
reasonable to apply the CFTC's approach to proposed Rule 826(f). The 
Commission believes that this work, should it be required, would be 
conducted internally. The Commission solicits comment as to the 
accuracy of these estimates.
g. Rule 834
    Proposed Rule 834 of Regulation SE would implement 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). 
Proposed Rule 834 would provide 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. Proposed Rule 834 also would 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. Establishing such rules and submitting such 
lists to the Commission would result in a paperwork burden for SBSEFs 
and SBS exchanges.
    The Commission preliminarily estimates that proposed 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.\502\ 
Proposed Rules 834(b) and (c) are substantially similar to proposed 
Rule 702(c) of Regulation MC.\503\ 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.\504\
---------------------------------------------------------------------------

    \502\ 1 (number of responses per respondent) x 15 hours (burden 
per response) x 8 (5 SBSEFs + 3 SBS exchanges) = 120 hours.
    \503\ Regulation MC Proposal, 75 FR at 65916.
    \504\ See id.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily estimates that proposed 
Rule 834(d), proposed Rule 834(e), and proposed Rule 834(f), combined, 
would result in an aggregate ongoing annual paperwork burden of 10 
hours.\505\ Proposed Rules 834(d), (e), and (f) are substantially 
similar to proposed Rule 702(h) in Regulation MC in 2010 \506\ 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

[[Page 28968]]

CFTC's estimate that Rules 1.41(d),\507\ 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.\508\
---------------------------------------------------------------------------

    \505\ 10 hours = 1 (number of responses per respondent) x 1.25 
hours (burden per response) x 8 (number of SBSEF + SBS exchange 
respondents).
    \506\ Regulation MC Proposal, 75 FR at 65932.
    \507\ 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 proposed Rules 
834(d), (e), and (f).
    \508\ See 58 FR 37644, 37653.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that proposed Rule 834(g) 
would have an aggregate ongoing annual burden of 16 hours.\509\ 
Proposed 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.\510\
---------------------------------------------------------------------------

    \509\ 16 hours = 1 (number of responses per respondent) x 2 
hours (burden per response) x 8 (number of SBSEF + SBS exchange 
respondents).
    \510\ See 64 FR at 16, 22.
---------------------------------------------------------------------------

    The Commission does not believe that proposed Rule 834(h) would 
result in a paperwork burden not already included in the above 
estimates. Proposed Rule 834(h) collates into a single rule the 
requirements for an SBSEF to file rules to comply with proposed Rule 
834. As it has already described the paperwork burdens of proposed 
Rules 834(b) through (g), the Commission does not believe that proposed 
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.\511\
---------------------------------------------------------------------------

    \511\ 26 hours = 10 hours (from the second sentence of proposed 
Rules 834(d), 834(e), and 834(f)) + 16 hours (from proposed Rule 
834(g)) + 0 hours (from proposed Rule 834(h).
---------------------------------------------------------------------------

5. Miscellaneous Burdens
a. Rule 833
    Proposed Rule 833 would describe 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,\512\ the Commission preliminarily 
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 2 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 is 
required. The Commission preliminarily estimates the burden to submit 
an exemption request under one or both paragraphs of proposed Rule 833 
would be 240 hours in the first year \513\ and 160 hours in each 
subsequent year.\514\ The Commission solicits comment as to the 
accuracy of these estimates.
---------------------------------------------------------------------------

    \512\ See supra note 244.
    \513\ 240 hours (80 hours of in-house counsel time) x (3 
respondents).
    \514\ 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 proposed 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 
preliminarily 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
    Proposed Rule 835 would provide 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 preliminarily 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.\515\ The Commission preliminarily believes 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 proposed Rule 835 of 45 hours.\516\ The 
Commission believes that this work, should it be required, would be 
conducted internally. The Commission solicits comment as to the 
accuracy of these estimates.
---------------------------------------------------------------------------

    \515\ 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 
(November 19, 2014), 79 FR 72251, 72381 (December 5, 2014).
    \516\ 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 preliminarily estimates that 
the total one-time burden for all SBSEFs, persons that seek an 
exemption order under proposed Rule 833, and SBS exchanges combined 
pursuant to the requirements under Regulation SE is equal to 1,995 
hours. The Commission preliminarily estimates that annual ongoing 
burden for all SBSEFs, persons that seek an exemption order under 
proposed Rule 833, and SBS exchanges combined pursuant to the 
requirements under Regulation SE is equal to 2,711.9 hours.
---------------------------------------------------------------------------

    \517\ Three respondents in the first year and then two each 
subsequent year.

                                        Summary of Aggregate Burden Hours
----------------------------------------------------------------------------------------------------------------
                                       Burden hours
     Proposed rule or provision       per respondent      One-time or ongoing       Respondents     Total hours
----------------------------------------------------------------------------------------------------------------
Registration (Rule 803, Form SBSEF).             295  One-Time..................               5           1,475
Rules modelled on CFTC part 37                   387  Ongoing...................               5           1,935
 (other than registration).
Rule and product filing processes                 60  Ongoing...................               5             300
 (Rules 804 through 807).
809.................................            0.25  Ongoing...................               5            1.25
811(d)..............................             0.2  Ongoing...................               5               1
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..................     \517\ 3 & 2       240 & 160

[[Page 28969]]

 
834(b) through (c)..................              15  One-Time..................               8             120
834(d) through (g)..................            3.25  Ongoing...................               8              26
835.................................               9  Ongoing...................               5              45
----------------------------------------------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    The collections of information imposed on SBSEFs throughout 
Regulation SE would be mandatory for registered SBSEFs. The collection 
of information with respect to proposed Rule 833 would be mandatory for 
persons that seek an exemption order under Rule 833. The collection of 
information with respect to proposed Rule 834 would be 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. Proposed Rule 826 under Regulation 
SE would implement 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.

H. Request for Comment

    The Commission solicits comment on all aspects of its PRA estimates 
regarding the above, particularly the following:
    221. Please provide any data or analysis bearing on whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the agency, including whether the 
information shall have practical utility.
    222. Do you believe that the Commission's estimate of the burden of 
the proposed collections of information is accurate? Why or why not? If 
not, what aspects (in your view) require adjustment? To the extent 
possible, please provide data to support your contention.
    223. Do you believe that there are ways to enhance the quality, 
utility, and clarity of the information proposed to be collected? If 
so, please describe.
    224. Do you believe that there are ways to minimize the burden of 
collection of information on respondents, including through the use of 
automated collection techniques or other forms of information 
technology? If so, please describe.
    225. Do you believe that the proposed rules and amendments would 
have any effects on any other collection of information not previously 
identified in this section? If so, please describe and quantify to the 
extent feasible.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology. Persons wishing to 
submit comments on the collection of information requirements should 
direct them to the OMB Desk Officer for the Securities and Exchange 
Commission, [email protected], and should send 
a copy to Vanessa A. Countryman, Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090 with reference 
to File No. S7-14-22. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication; 
therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. Requests for the 
materials submitted to OMB by the Commission with regard to this 
collection of information should be in writing, refer to File No. S7-
14-22, and be submitted to the Securities and Exchange Commission, 
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736. As 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication, a comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication.

XXI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \518\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\519\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \520\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule or proposed rule 
amendment which, if adopted, would not have a significant economic 
impact on a substantial number of small entities.\521\
---------------------------------------------------------------------------

    \518\ 5 U.S.C. 601 et seq.
    \519\ 5 U.S.C. 603(a).
    \520\ 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 
proposed rulemaking, are set forth in Rule 0-10 under the SEA, 17 
CFR 240.0-10. See SEA Release No. 18452 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. AS-305).
    \521\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. SBSEFs

    Most of proposed Regulation SE, and the related rules and rule 
amendments, would 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 preliminarily estimates that five entities will seek to

[[Page 28970]]

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 RFA, a 
small entity includes: (1) When used with reference to an ``issuer'' or 
a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; \522\ 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,\523\ 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.\524\ Under the standards adopted 
by the Small Business Administration (``SBA''), entities in financial 
investments and related activities \525\ are considered small entities 
if they have $41.5 million or less in annual receipts.
---------------------------------------------------------------------------

    \522\ See 17 CFR 240.0-10(a).
    \523\ 17 CFR 240.17a-5(d).
    \524\ See 17 CFR 240.0-10(c).
    \525\ 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.
---------------------------------------------------------------------------

    The Commission preliminarily believes that 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 and annual receipts in excess of $41,500,000. 
Therefore, the Commission preliminarily believes that none of the 
potential SBSEFs would be considered small entities.

B. Persons Requesting an Exemption Order Pursuant to Rule 833

    Proposed Rule 833 would describe 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,\526\ the Commission preliminarily estimates that there 
would be three requests under one or both paragraphs of proposed 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 proposed Rule 832) who are members of such 
trading venues.
---------------------------------------------------------------------------

    \526\ See supra note 244.
---------------------------------------------------------------------------

    Based on the Commission's existing information about the SBS 
market, the Commission preliminarily believes that no person likely to 
request an exemption order pursuant to proposed Rule 833 would be 
considered a small entity. The Commission preliminarily believes 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 preliminarily believes that they would not be considered 
small entities.

C. SBS Exchanges

    Certain rules under proposed Regulation SE would apply to SBS 
exchanges. Currently, there are no SBS exchanges. However, the 
Commission preliminarily estimates that there could be up to three 
entities would be considered SBS exchanges and would thus be subject to 
certain requirements of proposed 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 \527\ and is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization.\528\ Under the standards adopted by the SBA, entities 
involved in financial investments and related activities \529\ are 
considered small entities if they have $41.5 million or less in annual 
receipts.
---------------------------------------------------------------------------

    \527\ 17 CFR 242.601.
    \528\ See 17 CFR 240.0-10(e).
    \529\ 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, the Commission 
preliminarily believes that 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 the proposed Regulation SE is 
a ``small entity'' for the purposes of the RFA. In addition, the 
Commission preliminarily believes that any SBS exchange would have 
annual receipts in excess of $41,500,000. Therefore, the Commission 
preliminarily believes that no potential SBS exchange would be 
considered small entities.

D. Certification

    For the foregoing reasons, the Commission certifies 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. The Commission invites commenters to address 
whether the proposed rules would have a significant economic impact on 
a substantial number of small entities, and, if so, what would be the 
nature of any impact on small entities. The Commission requests that 
commenters provide empirical data to illustrate the extent of the 
impact.

XXII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, (``SBREFA''),\530\ the Commission requests comment on the 
potential effect of the proposed Regulation SE, and related proposed 
rules and rule amendments under the SEA, on the United States economy 
on an annual basis. The Commission also requests comment on any 
potential increases in costs or prices for consumers or individual 
industries, and any potential effect on competition, investment, or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \530\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

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,

[[Page 28971]]

respectively) and the Dodd-Frank Act (particularly section 765 thereof, 
15 U.S.C. 8343), the Commission is proposing to amend 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 proposing 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 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 proposing 
to amend title 17, chapter II of the Code of the Federal Regulations as 
follows:

PART 201--RULES OF PRACTICE

0
1. The authority citation for part 201, subpart D, is revised to read 
as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 
78c(b), 78c-4, 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78s, 78u-
2, 78u-3, 78v, 78w, 77sss, 77ttt, 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.

Sec.  201.101   Definitions.

0
2. Amend Sec.  201.101 by adding paragraph (a)(9)(ix) to read as 
follows:
* * * * *
    (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
3. 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
4. Amend Sec.  201.210 by revising the paragraph (a) heading, paragraph 
(a)(1), paragraph (b) heading, paragraph (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
5. 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
6. Add Sec.  201.442 to read as follows:

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:

[[Page 28972]]

    (1) Final disciplinary action, as defined in Sec.  240.835(b)(1);
    (2) Final action with respect to a denial or conditioning of 
membership, as defined in Sec.  240.835(b)(2); 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).
    (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 by 
the security-based swap execution facility of the determination is 
received by the aggrieved person. 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).
    (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
7. 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
8. Amend Sec.  201.450, by redesignating paragraphs (a)(2)(iv) and 
(a)(2)(v) as paragraphs (a)(2)(v) and (a)(2)(vi) and 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
9. 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--GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS

0
10. 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, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
0
11. Amend Sec.  232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2) and (4);
0
b. Adding paragraph (b)(1)(iii); and
0
c. Revising Note 1 to Sec.  232.405.
    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), 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), 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), General Instruction C.3.(g)

[[Page 28973]]

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 C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 
of this chapter), Rules 803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1), 
805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of 
Regulation SE (Sec. Sec.  242.803 through 807, 829, and 831 of this 
chapter), Registration Instructions to Form SBSEF (Sec.  249.2001 of 
this chapter), and Instruction A to the Security-Based Swap Execution 
Facility Submission Cover Sheet (Sec.  249.2002 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), 
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), 
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), 
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 C.4 of Form N-CSR 
(Sec. Sec.  249.331 and 274.128 of this chapter), Rules 803(b)(1)(i), 
803(b)(3), 803(e), 804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), 807(d), 
829(g)(6), and 831(j)(2) of Regulation SE (Sec. Sec.  242.803 through 
242.807, 242.829, and 242.831 of this chapter), Registration 
Instructions to Form SBSEF (Sec.  249.2001 of this chapter), and 
Instruction A to the Security-Based Swap Execution Facility Submission 
Cover Sheet (Sec.  249.2002 of this chapter), as applicable;
* * * * *
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, Item 601(b)(101) of Regulation S-K (Sec.  229.601(b)(101) 
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), 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), 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 C.4 of Form 
N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter), Rules 
803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1), 805(a)(1), 806(a)(1), 
807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of Regulation SE 
(Sec. Sec.  242.803 through 242.807, 242.829, and 242.831 of this 
chapter), Registration Instructions to Form SBSEF (Sec.  249.2001 of 
this chapter), or Instruction A to the Security-Based Swap Execution 
Facility Submission Cover Sheet (Sec.  249.2002 of this chapter), as 
applicable.
    (b) * * *
    (1) * * *
    (iii) For electronic filers subject to Regulation SE (Sec. Sec.  
242.800 et seq.), the content of documents required to be filed 
electronically under Rules 803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1), 
805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of 
Regulation SE (Sec. Sec.  242.803 through 807, 829, and 831 of this 
chapter), Registration Instructions to Form SBSEF (Sec.  249.2001 of 
this chapter), and Instruction A to the Security-Based Swap Execution 
Facility Submission Cover Sheet (Sec.  249.2002 of this chapter), 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). 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). Rules 803(b)(1)(i), 803(b)(3), 803(e), 
804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and 
831(j)(2) of Regulation SE (Sec. Sec.  242.803 through 242.807, 
242.829, and 242.831 of this chapter), Registration Instructions to 
Form SBSEF (Sec.  249.2001 of this chapter), and Instruction A to 
the Security-Based Swap Execution Facility Submission Cover Sheet 
(Sec.  249.2002 of this chapter), as applicable. Section 
229.601(b)(101) (Item 601(b)(101) of Regulation S-K), paragraph 
(101) of Part II--Information not Required to be Delivered to 
Offerees or Purchasers of Form F-10, paragraph 101 of the 
Instructions as to Exhibits of Form 20-F, paragraph B.(15) of the 
General Instructions to Form 40-F, and paragraph C.(6) of the 
General Instructions to Form 6-K all prohibit submission of an 
Interactive Data File by an issuer that prepares its financial 
statements in accordance with 17 CFR 210.6-01 through 210.6-10 
(Article 6 of Regulation S-X). For an issuer that is a management 
investment company or separate account registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or 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)), 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), and General Instruction C.4 of 
Form N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter), as 
applicable, specifies the circumstances under which an Interactive 
Data File must be submitted.

* * * * *

[[Page 28974]]

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

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

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
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
13. Amend Sec.  240.3a1-1 by adding paragraphs (a)(4) and (5) and 
revising paragraph (b) introductory text to 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 and provides a market place 
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.
    (b) Notwithstanding paragraphs (a)(1) through (a)(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
14. 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 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, AND SE AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
15. The general authority citation for part 242 is revised and an 
authority citation for Sec. Sec.  242.800 through 242.835 is added 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.
* * * * *
    Sections 242.800 through 242.835 are also issued under sec. 943, 
Pub. L. 111-203, Section 763.
0
16. The heading for part 242 is revised to read as set forth above.
0
17. Sections 242.800 through 242.835 are added to read as follows:

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 this section 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 (the ``Act'').

Sec.  242.801   Applicable provisions.

    A security-based swap execution facility shall comply with the 
requirements of this section 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 a rule in 
this chapter, are defined as follows solely for purposes of this 
chapter:
    Block trade means a security-based swap transaction that is subject 
to

[[Page 28975]]

public dissemination pursuant to Sec.  242.902 and:
    (1) Involves a security-based swap that is listed on a security-
based swap execution facility or national securities exchange;
    (2) Is executed on a security-based swap execution facility's 
trading system or platform that is not an order book or occurs away 
from the security-based swap execution facility's or national 
securities exchange's system or platform and is executed pursuant to 
the rules and procedures of the security-based swap execution facility 
or national securities exchange;
    (3) Is a security-based swap 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; and
    (4) Is reported subject to the rules and procedures of the 
security-based swap execution facility or national securities exchange.
    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 
Savings 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 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.
    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.
    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:
    (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

[[Page 28976]]

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 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.
    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, 
by-law, 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
    (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 (z)(2)(i)(A) through (C) is excluded from the 
meaning of the term ``trading facility'' for the purposes of this 
chapter 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).

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) Minimum trading functionality. 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),

[[Page 28977]]

(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) An entity requesting 
registration as a security-based swap execution facility shall:
    (i) File electronically a complete Form SBSEF as set forth in Sec.  
249.2001, or any successor forms, and all information and documentation 
described in such forms with the Commission using the EDGAR system as 
an Interactive Data File in accordance with Sec.  232.405; 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.
    (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 as an Interactive Data File 
in accordance with Sec.  232.405.
    (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 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 as an Interactive Data File in 
accordance with

[[Page 28978]]

Sec.  232.405. 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 as an Interactive Data File in accordance with Sec.  
232.405 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 of this section. 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 EDGAR system as 
an Interactive Data File in accordance with Sec.  232.405;
    (2) The Commission has received the submission by the open of 
business on the business day that is ten 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 in Sec.  249.2002;
    (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; and
    (vii) A request for confidential treatment, if appropriate, as 
permitted under Sec.  240.24b-2.
    (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 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 EDGAR 
system as an Interactive Data File in accordance with Sec.  232.405;
    (2) Include a copy of the submission cover sheet in accordance with 
the instructions in Sec.  249.2002;
    (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;
    (7) Certify that the security-based swap execution facility posted 
a notice of its request for Commission approval

[[Page 28979]]

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; 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) 45-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 242.807, 
subsequent to implementation of the rule. A request for approval shall:
    (1) Be filed electronically with the Commission using the EDGAR 
system as an Interactive Data File in accordance with Sec.  232.405;
    (2) Include a copy of the submission cover sheet in accordance with 
the instructions in appendix B to Regulation SE (17 CFR 242.800 through 
242.835);
    (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 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;
    (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.
    (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

[[Page 28980]]

the Act or the Commission's rules thereunder.
    (c) 45-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 EDGAR system as 
an Interactive Data File in accordance with Sec.  232.405 of this 
chapter.
    (2) The security-based swap execution facility has provided a 
certification that 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 ten 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 in Sec.  249.2002 of this chapter (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

[[Page 28981]]

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 ten 
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 ten-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 EDGAR system as an Interactive Data File in 
accordance with Sec.  232.405; 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
    (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; and
    (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.
    (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

[[Page 28982]]

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 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 
ten 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 a transfer of an equity interest of 50 
percent or more in a security-based swap execution facility, 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 thereunder;
    (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

[[Page 28983]]

Commission shall be submitted electronically in a form and manner 
specified by the Commission within ten 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.  
242.800(x) or in paragraph (a)(3) of this section for request-for-quote 
systems.
    (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. 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

[[Page 28984]]

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, 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; and
    (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.
    (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 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 execution facility 
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 paragraph (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.

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 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.

[[Page 28985]]

    (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.

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, including block 
trades.
    (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, including block trades, if offered.
    (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

[[Page 28986]]

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.
    (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 
block trades or other types of 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 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 national securities 
exchange, a national

[[Page 28987]]

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.
    (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 Core Principle 9 and Sec.  242.826.
    (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

[[Page 28988]]

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:
    (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

[[Page 28989]]

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:
    (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

[[Page 28990]]

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.
    (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) of this section:
    (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 ten 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 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 ten 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;

[[Page 28991]]

    (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 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 $5000 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 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

[[Page 28992]]

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 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-

[[Page 28993]]

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 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;
    (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

[[Page 28994]]

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 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 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 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 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 (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);
    (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 
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 no later than 
the security-based swap execution facility's commencement of trading on 
the next business day after the day to which the information pertains.
    (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 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

[[Page 28995]]

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 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

[[Page 28996]]

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 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 (h) 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 paragraph (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.

[[Page 28997]]

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
    (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

[[Page 28998]]

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.
    (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 Core 
Principle 9 and Sec.  242.826, 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 Core Principle 9 and 
Sec.  242.826.
    (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

[[Page 28999]]

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 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.

[[Page 29000]]

    (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 under the Act, including rules prescribed by the Commission 
pursuant to section 3D of the Act; and
    (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:

[[Page 29001]]

    (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;
    (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 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 Core Principle 9 and Sec.  242.826.

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 below in paragraph (b) of this rule.
    (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) For purposes of this section:
    Family relationship of a person means the person's spouse, former 
spouse, parent, step-parent, child, step-child, sibling, step-brother, 
step-sister, 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

[[Page 29002]]

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.
    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) 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.
    (c) 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 (a) 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) 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) Each security-based swap execution facility and SBS exchange 
shall ensure that:
    (1) 20 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 committees is subject to a conflicts restriction in any 
matter involving a

[[Page 29003]]

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 sought an adjudication or hearing with 
respect to the matter, or otherwise 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 sought an 
adjudication or hearing, or otherwise 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 29004]]

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
18. 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
19. Add Sec.  249.2001 to read as follows:

Sec.  249.2001   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.

    By the Commission.

    Dated: April 6, 2022.
Vanessa A. Countryman,
Secretary.

Appendix A

    Note: Form SBSEF will not appear in the Code of Federal 
Regulations.
BILLING CODE 8011-01-P

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Appendix B

0
19. Add Sec.  249.2002 to read as follows:

Sec.  249.2002   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 
Rules 804 through 807, 809, and 816 (Sec.  242.804 through 242.807, 
242.809, and 242.816).
    Note: The submission cover sheet will not appear in the Code of 
Federal Regulations.

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[FR Doc. 2022-07850 Filed 5-10-22; 8:45 am]
BILLING CODE 8011-01-C