the de minimis thresholds, noting that those foreign branches
themselves fall within the ``U.S. person'' definition,\356\ and stating
that excluding those transactions would serve as a loophole from
regulation.\357\ In contrast, one commenter stated that such
transactions should be excluded from the de minimis analysis even if
U.S. personnel are involved in soliciting, negotiating, executing or
booking the transaction.\358\
---------------------------------------------------------------------------

    \356\ See AFR Letter I at 6 (supporting the premise that offices
and branches of U.S. persons are ``an integral part of the U.S.
person'' but arguing that it is inconsistent to treat such foreign
branches different from their U.S. parent institutions); BM Letter
at 18 (noting that the foreign branch of a U.S. person should be
treated no differently than the U.S. person).
    \357\ See AFR Letter I at 6-7 (``With these incentives [related
to transactions with foreign branches, offices and guaranteed
subsidiaries and affiliates of U.S. persons], it is unlikely that
any foreign entities will choose to trade within the United States
directly, and quite likely that U.S. financial institutions will
simply advise their clients to trade with their foreign branches if
they want to avoid Dodd-Frank''); BM Letter at 3, 18-19 (``This
exception is no more than a loophole based upon a scare tactic,
which will cause U.S. firms to operate their SBS business through
offshore branches.'').
    \358\ See SIFMA/FIA/FSR Letter at A-15 to A-16 (supporting the
proposed approach and urging the Commission to extend the exclusion
to transactions between non-U.S. persons and foreign branches even
if they are conducted within the United States).
---------------------------------------------------------------------------

    Commenters also addressed the application of the exception to non-
U.S. persons' dealing activities involving counterparties that are
guaranteed affiliates of non-U.S. persons. The proposal did not require
such transactions to be counted. One commenter expressed support for
the fact that our proposal, unlike the CFTC's guidance, did not require
non-U.S. persons to count certain transactions with non-U.S.
counterparties that are guaranteed by U.S. persons.\359\ On the other
hand, one commenter stated that non-U.S. persons should count against
the thresholds security-based swaps entered into with guaranteed
affiliates and subsidiaries of U.S. persons if those affiliates and
subsidiaries are not included within the ``U.S. person''
definition.\360\ Also, as noted above, that commenter and one other
commenter generally suggested that the presence of explicit or implicit
guarantees of foreign affiliates should trigger application of the
Exchange Act.\361\
---------------------------------------------------------------------------

    \359\ See SIFMA/FIA/FSR Letter at A-17. Under the CFTC's
guidance, non-U.S. persons would generally count certain dealing
transactions involving counterparties that are guaranteed affiliates
of U.S. persons, subject to exceptions. See CFTC Cross-Border
Guidance, 78 FR 45319.
    \360\ See AFR Letter I at 7-8 and note 28 (stating that the
proposal ``incentivizes U.S. institutions to execute SBS indirectly
by using foreign affiliates, subsidiaries, branches and offices,''
and thus lead U.S. institutions to incur risks ``by trading with
foreign entities without the full regulatory protections of Dodd-
Frank''; also acknowledging that U.S. guarantors would count those
trades for determining whether the guarantor is a major participant,
but adding that major participants are subject to fewer requirements
than dealers ``so this is not a satisfactory method for addressing
the risks presented by U.S. parent institutions guaranteeing the
swaps of foreign subsidiaries and affiliates'').
    \361\ See note 333, supra.
---------------------------------------------------------------------------

(b) Final Rule
    The final rule has been modified from the proposal to require non-
U.S. persons (other than conduit affiliates \362\) to count, against
the de minimis thresholds, their dealing transactions with U.S. persons
other than certain transactions with the foreign branches of registered
security-based swap dealers.\363\ The proposal would have excluded all
of the non-U.S. person's transactions with a foreign branch (other than
``transactions conducted within the United States'') regardless of the
branch's registration status.
---------------------------------------------------------------------------

    \362\ The separate counting requirements applicable to conduit
affiliates are addressed above. See section 0, supra.
    \363\ See Exchange Act rule 3a71-3(b)(1)(iii)(A). ``Foreign
branch'' is defined in Exchange Act rule 3a71-3(a)(2).
---------------------------------------------------------------------------

    The requirement that such non-U.S. persons must count their dealing
transactions with U.S. persons against the de minimis thresholds
reflects the fact that dealing activity involving counterparties who
are U.S. persons necessarily involves the performance, at least in
part, of dealing activity within the United States. As discussed above,
a non-U.S. person engaged in dealing activity with U.S. persons in an
amount sufficient to implicate the de minimis thresholds reasonably can
be concluded to constitute dealing activity within the United States by
virtue of indicating that the non-U.S. person is commonly known in the
trade as a security-based swap dealer within the United States, and
that the non-U.S. person is regularly entering into security-based
swaps as an ordinary course of business within the United States.\364\
Similarly, that non-U.S. person seeks to profit by, among other things,
providing liquidity within the United States and engaging in market
making in security-based swaps within the United States, and its
decision to engage in dealing activity with U.S. persons affects the
liquidity of the security-based swap market within the United States.
U.S. persons incur risks arising from this dealing activity, which in
turn potentially creates risk to the U.S. financial system more
generally. Transactions with U.S. persons further raise market
transparency and counterparty protection concerns that Title VII is
intended to address. Accordingly, the dealing activity of such a non-
U.S. person is best characterized as occurring, at least in part,
within the United States to the extent that the dealing activity
involves a U.S. person.\365\ No commenters to the Cross-

Border Proposing Release expressed opposition to generally requiring
non-U.S. persons to count their dealing transactions with U.S. persons
(other than comments regarding transactions with foreign branches, as
discussed below).
---------------------------------------------------------------------------

    \364\ See section 0, supra. We also note that the Commission's
traditional approach toward the registration of securities brokers
and dealers under the Exchange Act generally requires registration
of foreign brokers or dealers that, from outside the United States,
induce or attempt to induce securities transactions by persons
within the United States. See Cross-Border Proposing Release, 78 FR
30990 n.213 and accompanying text.
    In this regard we recognize that Exchange Act rule 15a-6, which
provides an exemption for the activities of certain foreign broker-
dealers, includes an exemption for transactions in securities with
or for persons ``that have not been solicited by the foreign broker
or dealer.'' Exchange Act rule 15a-6(a)(1). In adopting this
provision, the Commission stated that it ``does not believe, as a
policy matter, that registration is necessary if U.S. investors have
sought out foreign broker-dealers outside the United States and
initiated transactions in foreign securities markets entirely of
their own accord.'' See 54 FR 30013, 30017 (Jul. 18, 1989). The
Commission further stated that a narrow construction of
``solicitation'' would be inconsistent with the Exchange Act. See
id. at 30018. We do not believe that a similar unsolicited
exception--which reflects a policy decision rather than a matter of
statutory scope--would be appropriate in this context, particularly
given that situations in which non-U.S. persons engage in dealing
activity with U.S. persons in an amount that is significant enough
to implicate the de minimis thresholds would not appear consistent
with a policy allowing non-U.S. persons to accommodate transactions
which U.S. persons initiate ``entirely of their own accord.''
Moreover, we note that the definition of ``security-based swap
dealer'' includes persons that hold themselves out as security-based
swap dealers or that are commonly known in the trade as security-
based swap dealers. See Exchange Act section 3(a)(71)(A). Such
persons may not actively solicit transactions from particular
customers, and nothing in the statutory definition suggests that
active solicitation on the part of such persons is required for them
to fall within the definition of ``security-based swap dealer.''
    \365\ For the above reasons, we conclude that this final rule is
not being applied to persons who are ``transact[ing] a business in
security-based swaps without the jurisdiction of the United
States,'' within the meaning of Exchange Act section 30(c). See
section 0, supra. We also believe, moreover, that this final rule is
necessary or appropriate as a prophylactic measure to help prevent
the evasion of the provisions of the Exchange Act that were added by
the Dodd-Frank Act, and thus help ensure that the relevant purposes
of the Dodd-Frank Act are not undermined. Without this rule, market
participants could engage in dealing activity with persons within
the U.S. market, causing the U.S. person counterparties to incur
associated risks simply by using non-U.S. persons to engage in those
transactions with U.S. counterparties.
---------------------------------------------------------------------------

    The final rule permits such non-U.S. persons not to count certain
dealing transactions conducted through a foreign branch of a
counterparty that is a U.S. bank as part of the de minimis analysis.
For this exclusion to be effective, persons located within the United
States cannot be involved in arranging, negotiating, or executing the
transaction. Moreover--and in contrast to the proposal--the
counterparty bank must be registered as a security-based swap
dealer,\366\ unless the transaction occurs prior to 60 days following
the effective date of final rules providing for the registration of
security-based swap dealers.\367\ Registration of the counterparty U.S.
bank would not be required for the exclusion to be effective before
then, given that the non-U.S. person would not be able to know with
certainty whether the U.S. bank in the future would register with the
Commission as a security-based swap dealer.\368\
---------------------------------------------------------------------------

    \366\ See Exchange Act rule 3a71-3(b)(1)(iii)(A)(1).
    As addressed in the Cross-Border Proposing Release, the ability
of U.S. banks to conduct security-based swap activity potentially
will be limited by section 716 of the Dodd-Frank Act, which in part
prohibits certain federal assistance to security-based swap dealers,
and by section 619 of the Dodd-Frank Act, which in part prohibits
banking entities from engaging in proprietary trading. See Cross-
Border Proposing Release, 78 FR 31002 n.326. The prohibitions of
section 619 do not extend to certain market making activities. See
Dodd-Frank Act section 619(d)(1)(B). In December of 2013, the
Commission, together with the Office of the Comptroller of Currency,
the Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the CFTC, issued final rules implementing section
619 of the Dodd-Frank Act. See 79 FR 5536 (Jan. 31, 2014). In
addition, based on our understanding of changes in the way major
U.S. dealers engage with non-U.S. counterparties in the single-name
CDS market following the issuance of the CFTC Cross-Border Guidance,
we believe that few, if any, U.S. persons currently may participate
in the single-name CDS market through their foreign branches.
    \367\ See Exchange Act rule 3a71-3(b)(1)(iii)(A)(2).
    \368\ In other words, this provision will help to avoid
requiring non-U.S. persons to speculate whether their counterparties
would register, and to face the consequences of their speculation
being wrong.
---------------------------------------------------------------------------

    As we noted in the proposal, although a foreign branch is part of a
``U.S. person,'' and dealing transactions with foreign branches pose
risk to the U.S. financial system, requiring non-U.S. persons to count
transactions with foreign branches ``could limit access of U.S. banks
to non-U.S. counterparties when they conduct their foreign security-
based swap dealing activity through foreign branches because non-U.S.
persons may not be willing to enter into transactions with them in
order to avoid being required to register as a security-based swap
dealer.'' \369\ We continue to believe that generally permitting a non-
U.S. person not to count those types of transactions that do not
involve U.S. personnel against the thresholds thus should help avoid
the disparate treatment of foreign branches that engage in security-
based swap dealing activity and that seek to access offshore dealing
services, compared to other persons that engage in security-based swap
dealing activities outside the U.S.
---------------------------------------------------------------------------

    \369\ Cross-Border Proposing Release, 78 FR 31003.
---------------------------------------------------------------------------

    The final rule differs from the proposal in that the final rule
permits a non-U.S. person not to count its transactions with a foreign
branch of a U.S. person against the de minimis thresholds only when the
foreign branch is part of a registered security-based swap dealer (or
for a temporary period of time prior to 60 days prior to the
effectiveness of the dealer registration requirements), rather than
transactions with any foreign branch. This tailoring of the proposal
seeks to balance the above concerns that the proposed approach would
result in disparate treatment of foreign branches and U.S. persons
having inadequate access to liquidity located outside the United
States, against the purposes of dealer regulation under Title VII. This
consideration of competing interests results in an approach that will
help to focus the application of the de minimis exception in such a way
as to ensure that a registered security-based swap dealer is involved
in the transaction, and thus that relevant Title VII provisions
applicable to dealers (such as margin requirements) will apply to the
transaction.\370\ This manner of focusing the exclusion also is
consistent with the approach taken by the CFTC in its cross-border
guidance.\371\
---------------------------------------------------------------------------

    \370\ We note that the mere involvement of a registered dealer
in a transaction by itself would not implicate the above concerns
regarding disparate treatment and liquidity that balance against the
purposes of dealer regulation when it is not acting through a
foreign branch, and thus by itself would not be sufficient to
justify a more general exception to these counting principles (e.g.,
an exception for a non-U.S. person's dealing transactions involving
any U.S. person that is registered as a security-based swap dealer).
    \371\ See CFTC Cross-Border Guidance, 78 FR 45319.
---------------------------------------------------------------------------

    In adopting an exclusion for certain transactions with foreign
branches, we recognize that some commenters opposed having any such
exclusion for a non-U.S. person's transactions with a foreign branch,
stating that the breadth of the proposed exclusion would facilitate the
avoidance of the Dodd-Frank Act even while U.S. entities incur the
risks of transactions with foreign entities, and that the exclusion
would be based on a ``scare tactic.'' \372\ We nonetheless believe that
this approach is justified by concerns about disparate treatment, along
with associated liquidity concerns.\373\ We also note that the
modification of the proposal--such that transactions with foreign
branches are excluded only if the foreign branch is part of a
registered dealer--should help address concerns that the exclusion
would promote evasion of the dealer requirements.\374\ Also, as
discussed below, a transaction would not constitute a ``transaction
conducted through a foreign branch'' if personnel located in the United
States were responsible for arranging, negotiating or executing the
transaction.
---------------------------------------------------------------------------

    \372\ See note 357, supra.
    \373\ In this regard we recognize that dealing activity
involving foreign branches of U.S. banks does pose risks to the U.S.
bank of which the foreign branch is a part and potentially to the
U.S. financial system. Such risks are mitigated in part, however, in
that foreign branches of banks that are registered security-based
swap dealers will be subject to a number of Title VII regulatory
requirements, including capital and margin requirements, that are
designed to protect the system against those risks. Furthermore,
this limitation is designed to help preserve liquidity throughout
the system, given that absent the exclusion non-U.S. dealers may
have reasons to favor non-U.S. counterparties to avoid the
regulatory requirements of Title VII, which could threaten to
fragment liquidity across geographical or jurisdictional lines.
    \374\ This modification--in conjunction with the fact that
dealing transactions conducted through the foreign branch of a U.S.
bank will have to be counted against the bank's de minimis
thresholds regardless of counterparty (as was proposed)--will limit
the possibility that U.S. banks could engage in a significant amount
of security-based swap business through their foreign branches
without either the banks or their non-U.S. counterparties being
subject to dealer regulation.
---------------------------------------------------------------------------

    We also recognize that commenters took the view that such an
exclusion is inconsistent with the fact that foreign branches fall
within the ``U.S. person'' definition.\375\ In our view, the exclusion
does not disregard the U.S.-person status of foreign branches. Instead,
as discussed above, we believe that this exclusion is appropriate to
address market concerns regarding disparate treatment of the dealing
activity of foreign branches, notwithstanding that U.S.-person status.
---------------------------------------------------------------------------

    \375\ See note 356, supra.
---------------------------------------------------------------------------

    We also have considered the view of one commenter that all of a
non-U.S. person's transactions with foreign branches should be excluded
from the

analysis, even if U.S. personnel are involved in soliciting,
negotiating, executing or booking the transaction.\376\ As discussed
elsewhere, we conclude that a non-U.S. person's dealing transactions
within the United States should be counted against the thresholds.\377\
More generally, for the reasons addressed above we conclude that the
proposed exclusion related to a non-U.S. person's transactions with a
foreign branch should be narrowed--not widened.
---------------------------------------------------------------------------

    \376\ See note 358, supra.
    \377\ See section 0, supra.
---------------------------------------------------------------------------

    The final rule retains the proposed definition of ``foreign
branch,'' which encompasses any branch of a U.S. bank that is located
outside the United States, operates for valid business reasons, and is
engaged in the business of banking and is subject to substantive
banking regulation in the jurisdiction where it is located.\378\ As
discussed in the Cross-Border Proposing Release, we believe these
factors appropriately focus on the location of the branch, the nature
of its business and its regulation in a foreign jurisdiction.\379\
---------------------------------------------------------------------------

    \378\ See Exchange Act rule 3a71-3(a)(2).
    \379\ See Cross-Border Proposing Release, 78 FR 31002. No
commenters specifically addressed the proposed definition of
``foreign branch.''
    We are adopting this definition as proposed while recognizing
that it differs from the CFTC's interpretation of ``foreign branch''
in its cross-border guidance. See CFTC Cross-Border Guidance, 78 FR
45329 (interpreting ``foreign branch'' in part by reference to
designation by banking regulators, and by reference to the
accounting of profits and losses). However, we believe that any
foreign branch of a U.S. bank that would generally be considered a
foreign branch under the CFTC Cross-Border Guidance also likely
would be a foreign branch under our final rule.
---------------------------------------------------------------------------

    The final rule modifies the proposed definition of ``transaction
conducted through a foreign branch'' to provide that the definition
addresses transactions that are arranged, negotiated, and executed by a
U.S. person through a foreign branch if both: (a) The foreign branch is
the counterparty to the transaction; and (b) the security-based swap
transaction is arranged, negotiated, and executed on behalf of the
foreign branch solely by persons located outside the United
States.\380\ We believe that this definition identifies the functions
associated with foreign branch activity in a manner that appropriately
focuses the exclusion for non-U.S. person's transactions toward
situations in which the branch performs the core dealing functions
outside the United States.\381\
---------------------------------------------------------------------------

    \380\ See Exchange Act rule 3a71-3(a)(3)(i). No commenters
specifically addressed the proposed definition.
    \381\ The proposed definition would have addressed transactions
that are ``solicited, negotiated, or executed'' by persons outside
the United States. The final rule refers to ``arranged'' in lieu of
``solicited'' to reflect the fact that a person may engage in
dealing activity not only through transactions that the person
actively solicits, but also through transactions that result from
counterparties reaching out to the person. See generally Exchange
Act section 3(a)(71)(A)(i) (defining ``security-based swap dealer''
in part to encompass any person who ``holds themselves out as a
dealer in security-based swaps'').
    Under the proposed rule, ``transaction conducted through a
foreign branch'' was defined, in part, to exclude any transaction
solicited, negotiated, or executed by a person within the United
States on behalf of the foreign branch. See proposed Exchange Act
rule 3a71-3(a)(4)(i)(B). Under the final rule, this element of the
definition is set forth in the affirmative and provides that the
transaction must be arranged, negotiated, and executed on behalf of
the foreign branch solely by persons located outside the United
States. See Exchange Act Rule 3a71-3(a)(3)(i)(B). Consistent with
the proposed rule, the final definition requires all relevant
activity to be performed outside the United States for a transaction
to fall within the definition of ``transaction conducted through a
foreign branch.''
---------------------------------------------------------------------------

    Similar to the proposal, the final definition of ``transaction
conducted through a foreign branch'' also states that a person need not
consider its counterparty's activities in connection with the
transaction--i.e., where its counterparty's personnel arranged,
negotiated and executed the transaction--if the person received a
representation from the counterparty that the transaction is arranged,
negotiated, and executed on behalf of the branch solely by persons
located outside the United States, unless the person knows or has
reason to know that the representation is not accurate. For these
purposes a person would have reason to know the representation is not
accurate if a reasonable person should know, under all of the facts of
which the person is aware, that it is not accurate.\382\ This is
intended to help address operational difficulties that a non-U.S.
person otherwise could face in investigating the activities of its
counterparty to ensure compliance with the rule.
---------------------------------------------------------------------------

    \382\ See Exchange Act rule 3a71-3(a)(3)(ii). This
representation provision within the final definition also contains
certain clarifying changes from the proposal, in part to reflect the
reference to ``arranged'' in lieu of ``solicited.'' See note 364,
supra. The final rule has been modified from the proposal to reflect
the change in the definition of ``transaction conducted through a
foreign branch'' described above. See note 382, supra. Also,
consistent with the analogous representation provisions of the
``U.S. person'' definition, the final rule also changes the proposal
to reflect that the non-U.S. person may not rely on the
representation if it knows that the representation is not accurate,
or has reason to know that the representation is not accurate; for
these purposes a person would have reason to know the representation
is not accurate if a reasonable person should know, under all of the
facts of which the person is aware, that it is not accurate. This
``know or have reason to know'' standard should help ensure that
potential security-based swap dealers and major security-based swap
participants do not disregard facts that may call into question the
validity of the representation. See note 302, supra, and
accompanying text. In addition, applying a single standard of
reliance to all representations regarding the status of a person or
transaction for purposes of the final rule will reduce the potential
complexity of establishing policies and procedures associated with
reliance on such representations. See section 0, supra.
---------------------------------------------------------------------------

    Separately, the final rule, consistent with the proposal, does not
require such non-U.S. persons to count, against the de minimis
thresholds, their dealing transactions with non-U.S. persons whose
security-based swap transactions are guaranteed by a U.S. person. We
recognize the significance of commenter concerns regarding the risk
posed to the United States by such security-based swaps, and regarding
the potential use of such guaranteed affiliates to evade the Dodd-Frank
Act.\383\ We nonetheless believe that such concerns are adequately
addressed by the requirement that guaranteed affiliates count their own
dealing activity against the de minimis thresholds when the
counterparty has recourse to a U.S. person. Although there can remain
residual risk to U.S. markets associated with the security-based swaps
involving such non-U.S. guaranteed affiliates, we do not believe that
such risk is significant enough to warrant a requirement that non-U.S.
persons count all of their dealing activity involving such non-U.S.
guaranteed affiliates against their own de minimis thresholds. In this
regard we note that such a requirement would necessitate certain non-
U.S. persons to incur compliance costs associated with assessing
whether their counterparties are guaranteed affiliates.\384\ For
similar reasons, the final rule does not require such non-U.S. persons
to count, against the thresholds, their dealing transactions involving
non-U.S. persons that are conduit affiliates.
---------------------------------------------------------------------------

    \383\ See note 360, supra.
    \384\ In taking this position we also recognize that the CFTC
takes a different approach in its cross-border guidance, which
generally considers it appropriate for such non-U.S. persons to
count their dealing transactions with guaranteed affiliate
counterparties, subject to certain exceptions. See CFTC Cross-Border
Guidance, 78 FR 45319, 45324 (stating there generally is no need for
non-U.S. persons to count such dealing transactions with a
counterparty that is a registered dealer, an affiliate of a
registered dealer whose own dealing activities are below the
relevant de minimis thresholds, or is guaranteed by a U.S. person
that is not a financial entity).
---------------------------------------------------------------------------

F. Application of the Exception's Aggregation Principles to Cross-
Border Dealing Activity

1. Proposed Approach and Commenters' Views
    The Cross-Border Proposing Release also addressed the cross-border

implementation of a previously adopted rule requiring a person to count
dealing transactions by its affiliates against its own de minimis
thresholds.\385\ Under the proposal, a person engaged in dealing
activity would have had to count: (i) Dealing transactions by its U.S.
affiliates, including transactions conducted through a foreign branch;
and (ii) all dealing transactions of its non-U.S. affiliates where the
counterparty is a U.S. person other than a foreign branch, or where the
transaction is conducted within the United States.\386\
---------------------------------------------------------------------------

    \385\ See Exchange Act rule 3a71-2 (requiring that a person
count against the thresholds its dealing activity plus that of ``any
other entity controlling, controlled by, or under common control
with the person'').
    \386\ See proposed Exchange Act rule 3a71-3(b)(2).
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release we took the view that the
approach would be consistent with the Dodd-Frank Act's statutory focus
on the U.S. security-based swap market, in that the dealing of a
person's U.S. affiliates would impact the U.S. financial system
regardless of the location of the affiliate's counterparty, but that
the dealing of a person's non-U.S. affiliates with other non-U.S.
persons outside the United States would not impact the U.S. financial
system to the same extent. We also took the view that the aggregation
approach would minimize the opportunity for a person to evasively
engage in large amounts of dealing activity, and that the approach
would be in accordance with other aspects of the proposal governing
which transactions would be applied against the thresholds.\387\
---------------------------------------------------------------------------

    \387\ See Cross-Border Proposing Release, 78 FR 31004.
---------------------------------------------------------------------------

    The proposal separately would have permitted a person not to
include, as part of the de minimis analysis, transactions by an
affiliate that is registered as a security-based swap dealer, so long
as the person's dealing activity is ``operationally independent'' of
the dealer's activity.\388\ For these purposes, the person and its
registered dealer affiliate would be considered to be ``operationally
independent'' if the two entities maintained separate sales and trading
functions, operations (including separate back offices) and risk
management.\389\
---------------------------------------------------------------------------

    \388\ See proposed Exchange Act rule 3a71-4.
    \389\ See Cross-Border Proposing Release, 78 FR 31005.
---------------------------------------------------------------------------

    This aspect of the proposal recognized that any person affiliated
with a registered dealer otherwise would have to count the registered
affiliate's dealing activity against the person's own de minimis
thresholds, which likely would require the person to register as a
dealer if it engages in any dealing activity. We stated in the Cross-
Border Proposing Release that, in our preliminary view, this outcome of
preventing all affiliates of a dealer from taking advantage of the de
minimis exception would not be consistent with the statutory purpose of
the exception. We noted, moreover, that this scenario would not appear
to raise the anti-evasion concerns at the core of the aggregation
provisions, given that it would apply only where a corporate group
already included a registered dealer subject to Commission
oversight.\390\
---------------------------------------------------------------------------

    \390\ See id.
---------------------------------------------------------------------------

    A number of commenters opposed the operational independence
condition to the proposed exclusion, arguing that it would hinder
operational efficiency--including the use of group-wide risk
management--without any countervailing benefit,\391\ and that the
requirement was vague and would impede the growth of different business
models.\392\ Commenters also pointed out that, in the parallel
discussion in the CFTC's cross-border guidance, the CFTC did not
interpret its cross-border statute as requiring operational
independence.\393\ One of these commenters further opposed the use of
any aggregation requirement in connection with the de minimis
exception.\394\ One commenter expressed particular concerns regarding
the application of aggregation principles in connection with joint
venture arrangements involving dealer shareholders.\395\ One commenter
supported the proposed approach as an anti-evasion safeguard.\396\ One
commenter suggested we eliminate the ``operationally independent''
requirement but, to prevent evasion of the dealer requirements,
prohibit a registered dealer from using an unregistered affiliate as a
booking vehicle.\397\
---------------------------------------------------------------------------

    \391\ See SIFMA/FIA/FSR Letter at A-13 to A-15 (stating that the
operational independence condition is overbroad and unnecessary to
achieve the statutory goals in that it ``would have the effect of
tying registration requirements to firms' internal risk management
strategies or limited efficient leverage of back office functions''
without any regulatory benefit and noting that the requirement would
be burdensome for smaller market participants who would need to
register solely due to their affiliation with larger entities); IIB
Letter at 14-15 (stating that preventing the sharing of group-wide
risk management and other resources would have the effect of
nullifying the exclusion from the aggregation requirement for
affiliates that are registered security-based swap dealers); JSDA
Letter at 4-5 (stating that the ``operationally independent''
condition would discourage efficient global management of
transactions).
    \392\ See JFMC Letter at 6-7.
    \393\ See SIFMA/FIA/FSR Letter at A-15; JFMC Letter at 6-7; IIB
Letter at 14.
    \394\ See SIFMA/FIA/FSR Letter at A-12 to A-13 (stating that the
aggregation requirement ``effectively disregards the legal
independence of entities'' and that the Commission's existing anti-
evasion capabilities are sufficient to guard against abuses; also
stating that had the aggregation requirement been proposed as part
of the underlying definitional rules SIFMA would have objected to
the requirement).
    \395\ See JSDA Letter at 5 (requesting that aggregation not be
required of the minority shareholder of a joint venture); see also
MUFJ Letter at 2-8 (generally opposing aggregation for such joint
venture arrangements).
    \396\ See BM Letter at 17 (stating that the condition is a
safeguard that addresses evasion concerns while promoting the
purpose of the de minimis exception).
    \397\ IIB Letter at 14-15.
---------------------------------------------------------------------------

2. Final Rule
    The final rule governing aggregation, like the proposal, generally
applies the principles that govern the counting of a person's own
dealing activity to also determine how the person must count its
affiliates' dealing activities for purposes of the de minimis
exception. Accordingly, the rule has been modified from the proposal to
be consistent with changes to the proposed provisions regarding the
counting of a person's dealing activity.
    Moreover, the final rule modifies the exclusion from having to
aggregate the dealing transactions of a person's registered dealer
affiliate from the proposal, both to remove the operational
independence condition and to address situations in which a person's
affiliate has exceeded the de minimis thresholds but is in the process
of registering as a dealer.
(a) General Provisions Regarding Aggregation of Cross-Border
Transactions
    The final rule, like the proposal, provides in part that if a
person engages in dealing transactions counted against the de minimis
thresholds, the person also must count all dealing transactions in
which any U.S. person controlling, controlled by, or under common
control with the person engages, including transactions conducted
through a foreign branch.\398\ The final rule has been revised from the
proposal to further provide that the person should

count all dealing transactions of its conduit affiliates.\399\ Finally,
the final rule has been modified from the proposal to provide that the
person must count all dealing transactions of non-U.S. person
affiliates that: (a) Are entered into with U.S. persons other than the
foreign branches of registered dealers; or (b) constitute dealing
activity subject to a guarantee giving the non-U.S. person's
counterparty rights of recourse against a U.S. person affiliated with
the non-U.S. person.\400\
---------------------------------------------------------------------------

    \398\ See Exchange Act rule 3a71-3(b)(2)(i). Consistent with our
position in the Intermediary Definitions Adopting Release (see 77 FR
30631 n.437) and in the Cross-Border Proposing Release (see 78 FR
31004), and with our position regarding the de minimis exception
when there is a right of recourse against a U.S. person (see note
336, supra) for purposes of determining whether a person is
controlling, controlled by, or under common control with another
person (i.e., an affiliate), we interpret control to mean the direct
or indirect power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting
securities, by contract or otherwise.
    \399\ See Exchange Act rule 3a71-3(b)(2)(ii).
    \400\ See Exchange Act rule 3a71-3(b)(2)(iii) (cross-referencing
the direct counting provisions of paragraph (b)(1)(iii), applicable
to non-U.S. persons other than conduit affiliates); see also
Sections 0, supra (addressing counting by non-U.S. persons engaged
in dealing activity whose counterparties are U.S. persons); and 0
(addressing counting by non-U.S. persons engaged in dealing activity
when their counterparties have recourse against a U.S. person).
---------------------------------------------------------------------------

    These modifications from the proposal are consistent with similar
modifications made to the rules regarding the counting of a person's
own transactions for purposes of the de minimis exception, and reflect
the risk concerns and interests discussed above. The aggregation
requirement serves to prevent evasion of the dealer registration
requirements by persons that otherwise may seek to avoid dealer
registration by simply dividing up dealing activity in excess of the de
minimis thresholds among multiple affiliates.\401\ In keeping with that
purpose, in the cross-border context it is appropriate to require a
person's affiliates to count the same dealing transactions that the
person itself would be required to count for purposes of the de minimis
exception--unless, as discussed below, the person is registered as a
dealer.\402\ Because this approach incorporates the direct counting
standards discussed above, we believe that the approach implements the
de minimis exception in a manner that is consistent with the Dodd-Frank
Act's focus on the U.S. security-based swap market.\403\
---------------------------------------------------------------------------

    \401\ See Intermediary Definitions Adopting Release, 77 FR
30631.
    \402\ As noted above, one commenter questioned whether any
aggregation principles should be applied in the de minimis context,
arguing that the requirement disregards the legal independence of
entities and disregards the possibility that two entities under
common control may operate independently of each other. The comment
further stated that the Commission's existing anti-evasion
capacities are sufficient to guard against abuse without requiring
aggregation. See note 391, supra. In our view, however, the
aggregation provision is tailored appropriately to prevent evasion
of the limits of the de minimis exception. See Intermediary
Definitions Adopting Release, 77 FR 30631 (discussing the use of the
aggregation principles in light of the ``increased notional
thresholds of the final [definitional] rules, and the resulting
opportunity for a person to evasively engage in large amounts of
dealing activity if it can multiply those thresholds''; and
addressing the use of the common control standard ``as a means
reasonably designed to prevent evasion of the limitations of that
exception''). We further believe that this aggregation approach
would be more effective at implementing the de minimis exception
than a case-by-case approach, because the aggregation provision
would provide upfront objective standards regarding which affiliate
transactions must be counted against the thresholds, and thus help
avoid uncertainty. Moreover, as discussed below, we are revising the
aggregation provisions to allow the exclusion of the positions of
affiliates that are registered as dealers (or that are in the
process of registering), in response to comments.
    \403\ In short, we believe that this final rule is necessary or
appropriate as a prophylactic measure to help prevent the evasion of
the provisions of the Exchange Act that were added by the Dodd-Frank
Act, and thus help ensure that the relevant purposes of the Dodd-
Frank Act are not undermined. Without this rule, corporate groups
may engage in dealing activity above the de minimis thresholds
within the United States while avoiding dealer regulation under
Title VII by dividing up the dealing activity among multiple
affiliated entities, none of which individually engages in dealing
activity above the thresholds.
---------------------------------------------------------------------------

(b) Application To Dealing Activities of Registered Affiliates
    In addition, we are adopting an exception which provides that a
person need not count against the de minimis thresholds the security-
based swap transactions of an affiliate that either is: (1) Registered
with the Commission as a dealer; or (2) deemed not to be a dealer
pursuant to the provisions of Exchange Act rule 3a71-2(b), which
addresses persons who have exceeded the de minimis thresholds but are
in the process of registering.\404\
---------------------------------------------------------------------------

    \404\ See Exchange Act rule 3a71-4. This exception, when
available, applies to all of the dealing of a person's registered
dealing affiliate (or affiliate deemed not to be a dealer pursuant
to the provisions of Exchange Act rule 3a71-2(b)), regardless of the
counterparty or the location of the transaction, and regardless of
whether the dealing transaction otherwise implicates cross-border
issues.
---------------------------------------------------------------------------

    In part, this final rule has been modified from the proposal by
removing the proposed operational independence condition. After
considering the views of several commenters that the proposed
operational independence condition would tend to inhibit operational
efficiencies,\405\ we are persuaded that excluding the condition from
the final rule would help facilitate efficiency and avoid deterring
beneficial group-wide risk management practices. In this regard we also
note that even with the removal of the proposed operational
independence condition, the aggregation provisions would prevent a
corporate group from cumulatively engaging in aggregate relevant
dealing activity--outside of its registered dealers--in excess of the
de minimis thresholds.\406\
---------------------------------------------------------------------------

    \405\ See notes 391 and 392, supra.
    \406\ We recognize that one commenter supported the proposed
operational independence condition, stating that the condition would
address evasion concerns while promoting the statutory purpose of
the de minimis exception. See note 396, supra. After further
consideration, however, we believe that the fact that the
aggregation provision will still limit cumulative group-wide dealing
activity by unregistered entities to no more than the de minimis
thresholds should suffice as a safeguard against evasive activity.
This is particularly true given that those thresholds are
significantly below the amounts of dealing typically engaged in by
persons above the thresholds. See Intermediary Definitions Adopting
Release, 77 FR 30636 (noting that, out of 28 potential dealers that
had three or more counterparties that themselves were not recognized
as dealers by ISDA, 15 of those exceeded a notional transaction
threshold of $100 billion and accounted for over 98 percent of the
total activity of all 28 entities).
    We also note that certain commenters raised concerns about the
application of the aggregation provisions generally in the context
of joint ventures, particularly in the context of minority
shareholders. See note 395, supra. Those issues regarding the scope
of the aggregation provisions that the Commission previously adopted
are not unique to the cross-border context, and in our view are
outside the scope of this release. We note generally, however, that
in the Intermediary Definitions Adopting Release we concluded that a
common control standard is more appropriate than a majority-
ownership standard in the context of the anti-evasive purposes of
the aggregation requirement. See Intermediary Definitions Adopting
Release, 77 FR 30631 n.437.
---------------------------------------------------------------------------

    The final rule also has been modified from the proposal to permit a
person to rely on this provision if its affiliate is in the process of
registering as a dealer. The de minimis rule generally provides that a
person that is not registered as a dealer but that no longer falls
below the applicable de minimis thresholds nonetheless will be deemed
not to be a dealer until the earlier of the date in which it submits a
complete application for registration as a dealer, or two months after
the end of the month that it becomes no longer able to take advantage
of the exception.\407\ That provision was intended to avoid market
disruption in conjunction with the registration process.\408\ Upon
further consideration, we similarly believe that the provision at issue
here should allow a person not to count the transactions of its
affiliates that are in the process of registering as dealers, to avoid
market disruption that may otherwise result due to the prospect of a
person intermittently exceeding the de minimis thresholds when its
affiliates are in the process of registering. Such situations,
moreover, would not appear to provide practical opportunities for
corporate groups to evade dealer registration by

dividing dealing activities among multiple affiliates.
---------------------------------------------------------------------------

    \407\ See Exchange Act rule 3a71-2(b).
    \408\ See Intermediary Definitions Adopting Release, 77 FR
30643.
---------------------------------------------------------------------------

G. Exception for Cleared Anonymous Transactions

1. Proposed Approach and Commenters' Views
    Three commenters expressed the view \409\ that the Commission's
final rules should include a provision similar to an aspect of the CFTC
Cross-Border Guidance, which stated the CFTC's view that certain
dealing transactions that are executed anonymously and cleared
generally would not be counted against the de minimis thresholds.\410\
One commenter particularly emphasized that market participants would
not have information available regarding a counterparty's identity in
an anonymous transaction, and suggested that the prospect of becoming
subject to dealer registration could deter non-U.S. liquidity providers
from participating on security-based swap markets that provide access
to U.S. persons.\411\
---------------------------------------------------------------------------

    \409\ See IIB Letter at 13-14; JSDA Letter at 4; JFMC Letter at
5.
    \410\ See CFTC Cross-Border Guidance, 78 FR 45325 (stating that
when a non-U.S. person that is not a guaranteed or conduit affiliate
enters in to swaps anonymously on CFTC-registered platforms, and the
swaps are cleared, the non-U.S. person would generally not have to
count those swaps against the applicable thresholds, noting that, in
such circumstances, the non-U.S. person would not have any prior
information regarding its counterparty; also interpreting the CFTC's
cross-border jurisdiction such that, with respect to such cleared
and anonymously executed swaps, the non-U.S. person would generally
satisfy certain transaction-level requirements).
    The Cross-Border Proposing Release generally requested comment
as to whether the proposed de minimis approach would place market
participants at a competitive advantage or disadvantage, and as to
whether there are other measures the Commission should consider to
implement the de minimis exception. See Cross-Border Proposing
Release, 78 FR 30996. More generally, the Commission also requested
comment regarding the proposals as whole, and regarding consistency
with the CFTC's cross-border approach, including comments regarding
the impact of differences between the two approaches, and comments
regarding whether the Commission's proposed approach should be
modified to conform with that taken by the CFTC. See id. at 31102.
    \411\ See IIB Letter at 13-14.
---------------------------------------------------------------------------

2. Final Rule
    After considering commenter views we have concluded that this type
of exception is appropriate, particularly given that the final de
minimis rules turn in part on the domicile of the counterparty to the
non-U.S. person, and this information would be unavailable to the non-
U.S. person that is a counterparty to a cleared anonymous transaction.
Absent such an exception, it is possible that execution facilities
would exclude U.S. market participants to prevent their non-U.S.
members from having to face the prospect of dealer regulation, which
could impair market liquidity and increase costs and risks.\412\
---------------------------------------------------------------------------

    \412\ The exclusion for cleared anonymous transactions is
intended to avoid placing market participants in a position where
counterparty-related information needed for compliance would be
unavailable, which may in turn lead execution facilities to exclude
U.S. persons. We also note that the exclusion would strengthen
incentives for shifting activity to transparent trading venues,
which is a key goal of Title VII. While these transactions may pose
risks to U.S. persons and to the U.S. financial system as a whole,
those risks may be offset by the liquidity and transparency benefits
that occur due to trading on transparent venues. Furthermore, the
characteristics expected to be associated with central clearing
(e.g., the daily exchange of mark-to-market margin) have parallels
to the capital and margin requirements for registered dealers in
terms of helping to protect the financial system against the risks
introduced by particular transactions. On the other hand, such risk
mitigation may be absent to the extent that the relevant clearing
agency--which under the exception is not required to be registered
with the Commission--does not follow standards consistent with the
Title VII requirements applicable to registered clearing agencies.
---------------------------------------------------------------------------

    For those reasons, the final rule has been revised from the
proposal to except, from having to be counted against the de minimis
thresholds, certain security-based swap transactions that a non-U.S.
person enters into anonymously on an execution facility or national
securities exchange and that are cleared through a clearing
agency.\413\
---------------------------------------------------------------------------

    \413\ See Exchange Act rule 3a71-5. This exception solely
addresses the issue of whether a particular transaction needs to be
counted against the de minimis thresholds. It does not address the
issue of when a particular execution facility or clearing agency
needs to register with the Commission. The Cross-Border Proposing
Release separately addressed cross-border issues regarding when an
execution facility or clearing agency would have to register with
the Commission. See Cross-Border Proposing Release, 78 FR 31054-58
(regarding security-based swap execution facility registration), 78
FR 31038-40 (regarding clearing agency registration); see also
Registration and Regulation of Security-Based Swap Execution
Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR
10948 (Feb. 28, 2011) (proposed rules regarding registration and
other requirements applicable to security-based swap execution
facilities).
    This exception also does not address the application of section
5 of the Securities Act to such transactions. Rule 239 under the
Securities Act (17 CFR 230.239) provides an exemption under the
Securities Act for certain security-based swap transactions
involving an eligible clearing agency. This exemption does not apply
to security-based swap transactions not involving an eligible
clearing agency, such as the anonymous transactions entered into on
the execution facility or national securities exchange, regardless
of whether the security-based swaps subsequently are cleared by an
eligible clearing agency. See Exemptions for Security-Based Swaps
Issued By Certain Clearing Agencies, Securities Act Release No. 9308
(Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012).
---------------------------------------------------------------------------

    In particular, the final rule in part provides that a non-U.S.
person need not count such cleared anonymous transactions against the
threshold, unless the non-U.S. person is a conduit affiliate.\414\ In
addition, the final rule permits an affiliate (that itself may be a
U.S. or non-U.S. person) of such a non-U.S. person not to count such
transactions of the non-U.S. person against the affiliate's own
thresholds for purposes of the aggregation provisions, unless the non-
U.S. person is a conduit affiliate.\415\
---------------------------------------------------------------------------

    \414\ See Exchange Act rule 3a71-5(a). This exception applies
regardless of whether the execution facility on which the
transaction is entered into, or the clearing agency through which it
is cleared, needs to be registered with the Commission. This is
because the exclusion of U.S. market participants from an overseas
execution or clearing facility--a result this exception is intended
to guard against--could impair the markets regardless of whether the
facility from which U.S. persons are excluded in fact are
registered, and thus lead to increased costs and risks.
    \415\ See Exchange Act rule 3a71-5(a)(2), (b).
---------------------------------------------------------------------------

    The exception is not available when the non-U.S. person is a
conduit affiliate because conduit affiliates are required to count all
of their dealing transaction against the thresholds regardless of
whether their counterparty is a U.S. or a non-U.S. person. As a result,
the anonymous nature of the transaction would not cause implementation
issues for conduit affiliates.
    For purposes of the exception, a transaction would be ``anonymous''
only if the counterparty to the transaction in fact is unknown to the
non-U.S. person prior to the transaction. The transaction would not be
``anonymous'' if, for example, a person submitted the transaction to an
execution facility after accepting a request for quotation from a known
counterparty or a known group of potential counterparties, even if the
process of submitting the transaction itself did not involve a named
counterparty.

H. Additional Issues

1. Particular Activities and Entities
    Commenters to the Cross-Border Proposing Release raised issues
regarding the application of the dealer registration requirement to
limited security-based swap activities by certain ``run-off''
entities,\416\ and in the context of portfolio compression.\417\ Those

issues are not unique to the cross-border context, and are outside of
the scope of this release. We generally note, moreover, that in the
Intermediary Definitions Adopting Release we considered and rejected
certain requests for categorical exclusions from dealer definition.
With regard to issues regarding the relevance of those or other
activities to the de minimis analysis, we generally note that the
dealer registration requirement necessarily distinguishes between a
person's dealing and non-dealing activities.\418\
---------------------------------------------------------------------------

    \416\ See SIFMA/FIA/FSR Letter at A-18 (addressing entities that
are consolidating U.S.-facing dealing activities worldwide into one
or a few registered dealers, but that may not be able to transfer or
terminate their legacy security-based swap portfolios and thus may
need to enter into new transactions in connection with those legacy
portfolios); JSDA Letter at 4 (suggesting that including contract
cancellations, alternations and transfers within the de minimis
calculation ``might invite a rush of cancellation before the
enforcement of the proposed rules and make it difficult to cancel or
transfer contracts for reducing risks'').
    \417\ See TriOptima Letter at 3-4 (explaining that portfolio
compression services do not involve any of the enumerated factors
that the Commission has identified as indicators of dealing
activity).
    \418\ See generally Intermediary Definitions Adopting Release,
77 FR 30616-20 (discussing application of the dealer-trader
distinction to security-based swap transactions).
---------------------------------------------------------------------------

2. Foreign Public Sector Financial Institutions and Government-Related
Entities
    As discussed above, the final rule defining ``U.S. person'' (like
the proposed definition of that term) specifically excludes several
foreign public sector financial institutions and their agencies and
pension plans, and more generally excludes any other similar
international organization and its agencies and pension plans.\419\
Certain commenters requested that we take further action to address the
application of the dealer definition and its de minimis exception to
security-based swap activities involving such foreign public sector
financial institutions. Those commenters in part stated that such
organizations should not be required to register as security-based swap
dealers, and that those organizations' affiliates should be considered
immune from domestic regulation to the same extent as the organizations
themselves.\420\ In our view, however, such issues are outside the
scope of this release, given that the source of any such privileges and
immunities is found outside of the Dodd-Frank Act and the federal
securities laws.
---------------------------------------------------------------------------

    \419\ See section 0, supra.
    \420\ See, e.g., WB/IFC Letter at 2-4, 6-7 (also stating that
such organizations should not be required to register as major
participants or to clear security-based swaps, and that affiliates
of such organizations should be excluded from the ``U.S. person''
definition); SC Letter at 16-24 (contending that the privileges and
immunities afforded such organizations would be violated by their
direct regulation as dealers or major participants, or by direct
regulation equivalents, and that affiliates of such organizations
also are immune from regulation); IDB Letter at 5. See also notes
225 and 229, supra.
---------------------------------------------------------------------------

    Separately, commenters stated that non-U.S. persons should not have
to count their dealing transactions involving those organizations
against the non-U.S. persons' dealer de minimis thresholds, on the
grounds that counting such transactions would constitute the
impermissible regulation of such organizations even if those were
``transactions conducted within the United States.'' \421\ As noted
below, we have determined not to include the ``transaction conducted
within the United States'' provisions in this final rule. With that
said, we do not concur with the suggestion that counting a person's
dealing transactions with such organizations against the de minimis
thresholds--when otherwise provided for by the rules--involves the
regulation of such organizations. Requiring a person to count, against
the de minimis thresholds, the person's dealing transactions involving
such an international organization as counterparty simply reflects the
application of the federal securities laws to that person and its
dealing activities, and does not constitute the regulation of the
international organization. A person's security-based swap dealing
transaction with such an international organization accordingly are
considered the same, for purposes of applying the de minimis thresholds
and other Title VII requirements, as a dealing transaction with some
other non-U.S. person counterparty.
---------------------------------------------------------------------------

    \421\ See SC Letter at 18-19 (stating that the inclusion of such
transactions against a counterparty's de minimis thresholds would be
``tantamount to regulation of the operations of the World Bank and
the IFC, in violation of their privileges and immunities''); WB/IFC
Letter (incorporating SC Letter). These comments did not object to
the inclusion of transactions between a U.S. person and an FPSFI,
because the Commission would have jurisdiction to regulate that
``U.S. person'' for other reasons and it would not be regulated
simply because it does business with the FPSFI. See SC Letter at
note 21.
---------------------------------------------------------------------------

    Finally, two commenters stated that they should not be subject to
the possibility of dealer regulation for comity reasons, on the grounds
that they are arms of a foreign government.\422\ We believe that such
issues best are addressed on a case-by-case basis, but we generally
note that the prospect of dealer regulation is relevant only to the
extent that a person engages in dealing activity.
---------------------------------------------------------------------------

    \422\ See KfW Letter; FMS-WM Letter.
---------------------------------------------------------------------------

I. Economic Analysis of the Final Cross-Border Dealer De Minimis Rule

    These final rules and guidance regarding the cross-border
implementation of the de minimis exception to the ``security-based swap
dealer'' definition will affect the costs and benefits of dealer
regulation by determining which dealing transactions will be counted
against the exception's thresholds.\423\ The cross-border rules have
the potential to be important in determining the extent to which the
risk mitigation and other benefits of Title VII (such as market
transparency and customer protection) are achieved, given the core role
that dealers play within the security-based swap market and the
market's cross-border nature.\424\
---------------------------------------------------------------------------

    \423\ As we noted in the Intermediary Definitions Adopting
Release, because the de minimis exception will determine which
entities engaged in security-based swap dealing activity ultimately
will be regulated as dealers under Title VII, the exception will
have an effect on the burdens and benefits associated with dealer
regulation. See Intermediary Definitions Adopting Release, 77 FR
30628-30. The thresholds used in the de minimis exception
accordingly were set at a level that sought to meet the goals of
Title VII while appropriately minimizing the costs to market
participants by providing for the regulation, as dealers, ``of
persons responsible for the vast majority of dealing activity within
the market.'' See id. at 30638-40.
    \424\ See section 0, supra.
---------------------------------------------------------------------------

    Commenters addressed the associated cost-benefit issues from a
variety of perspectives. Some directly addressed the link between the
cross-border scope of the dealer definition and the associated costs
and benefits, by arguing that cost-benefit principles warranted greater
harmonization with approaches taken by the CFTC or foreign
regulators.\425\ Commenters also

addressed the need for cost-benefit analysis,\426\ or questioned the
adequacy of the Cross-Border Proposal's cost-benefit assessment.\427\
Other comments that addressed the dealer definition implicate the
tradeoff between the costs and benefits associated with the
definition's scope, even when the commenters did not directly address
the economic analysis in the Cross-Border Proposing Release or
otherwise explicitly raise cost-benefit considerations.\428\
---------------------------------------------------------------------------

    \425\ See, e.g., IIB Letter (stating that cost-benefit
considerations warrant harmonization to the CFTC and foreign
regulatory authorities with regard to cross-border rules, and that
divergence generally would be warranted only if the Commission's
rules are more flexible, and thence would not preclude the voluntary
adoption of consistent practices).
    Although we have considered those comments that expressed
complete or partial support in favor of consistency with the CFTC
guidance, these final rules nonetheless follow approaches that
differ from those taken by the CFTC in certain regards, generally by
taking approaches that are narrower in scope than those adopted by
the CFTC. See supra note 255 (Commission's definition of ``U.S.
person'' differs from the CFTC approach in part by not including
investment companies that beneficially are majority-owned by U.S.
persons); note 353 and accompanying text (Commission's rules
regarding the treatment of guaranteed affiliates of U.S. persons
focuses on the presence of recourse against a U.S. guarantor, in
contrast to the CFTC approach that more generally accounts for
financial support commitments regardless of recourse rights), note
325(Commission's definition of ``conduit affiliate'' differs from
the CFTC's approach in part by not considering financial statement
treatment); note 379 (discussing expectation that any foreign branch
of a U.S. bank that generally would be considered a foreign branch
under the CFTC Cross-Border Guidance also likely would be a foreign
branch under our final rule).
    We also have considered initiatives by foreign regulators
related to the regulation of OTC derivatives. In that regard, we
note that the regulatory regimes in certain other jurisdictions do
not provide for the registration of persons who function as dealers,
in contrast to the approach Congress took in Title VII. Also, we
expect to take into account the regulatory frameworks followed in
other jurisdictions as we assess requests for substituted compliance
in connection with the substantive requirements applicable to
security-based swap dealers and other market participants. Those
substituted compliance assessments are geared to promote Title VII
in a way that fairly accounts for other regimes by assessing the
requirements of those regimes on a function-by-function basis.
    \426\ See BM Letter, note 28, supra. As stated above, the
Commission in fact is sensitive to the economic consequences of its
rules, and has taken the costs and benefits into account in adopting
these rules.
    \427\ See CDEU Letter, note 28, supra. This commenter
particularly expressed the view that the Commission's proposal had
failed to engage in an adequate consideration of cost-benefit
principles, and instead stated that the Commission should ``conduct
a direct cost-benefit analysis of the conflicting rule regimes
(e.g., with the European Market Infrastructure Regulation and the
CFTC's cross-border guidance).'' That commenter further expressed
the view that, in requesting comment on the proposal's cost-benefit
analysis, the Commission actually ``asks the public to conduct such
an analysis for the SEC'' in lieu of the Commission having conducted
its own analysis. See id.
    In actuality, our request for comment simply gave the public the
opportunity to address our economic analysis. The economic
assessment in this release specifically addresses those economic
impacts in a context where many entities may have taken steps to
follow the CFTC's cross-border guidance, and also recognizes that
market participants may seek to structure their activities to avoid
Title VII given differences between Title VII regulation and the
regulation present in foreign regimes.
    \428\ For example, one comment in opposition to the proposed
``operational independence'' condition to the exception to the
aggregation requirement for positions of affiliates that are
registered as security-based swap dealers in part addressed the
extra costs that would be associated with such a provision. See
SIFMA/FIA/FSR Letter, note 391, supra. As discussed above, that
proposed condition has been removed. See section IV.F, supra.
---------------------------------------------------------------------------

    We have taken economic effects into account in adopting these final
cross-border rules and providing guidance. In doing so, we believe that
a narrow application of dealer regulation under Title VII--such as one
that is limited to dealing activity that might be viewed as occurring
solely within the United States--would not be sufficient to achieve the
purposes of Title VII in light of the attributes of the security-based
swap market, including the market's global nature, the concentration of
dealing activity, the key role played by dealers and the risks posed by
dealers via their legal and financial relationships. At the same time,
we recognize that the cross-border application of Title VII has the
potential to reduce liquidity within the U.S. market to the extent it
increases the costs of entering into security-based swaps or provides
incentives for particular market participants to avoid the U.S. market
by operating wholly outside the Title VII framework.
    The cross-border rules applying the ``security-based swap dealer''
definition to cross-border dealing activity implicate two categories of
costs and benefits. First, certain current and future participants in
the security-based swap market will incur assessment costs in
connection with determining whether they fall within the ``security-
based swap dealer'' definition and thus would have to register with the
Commission.
    Second, the registration and regulation of some entities as
security-based swap dealers will lead to programmatic costs and
benefits arising as a consequence of the Title VII requirements that
apply to registered security-based swap dealers, such as the capital,
margin, and business conduct requirements.\429\ These requirements may
be expected to impose certain costs on participants acting as dealers,
but also to produce benefits to the market and its participants,
including counterparty protections and risk-mitigation benefits.
---------------------------------------------------------------------------

    \429\ See Cross-Border Proposing Release, 78 FR 31135.
---------------------------------------------------------------------------

    We discuss the programmatic and assessment costs and benefits
associated with the final rules more fully below. We also discuss the
economic impact of certain potential alternatives to the approach taken
by the final rules.
1. Programmatic Costs and Benefits
(a) Cost-Benefit Considerations of the Final Rules
    Exchange Act rules 3a71-3, 3a71-4, and 3a71-5 will permit market
participants to exclude certain dealing transactions from their de
minimis calculations, and thus may cause particular entities that
engage in certain dealing activities not to be regulated as security-
based swap dealers. The rules accordingly may be expected to affect the
programmatic costs and benefits associated with the regulation of
security-based swap dealers under Title VII, given that those costs and
benefits are determined in part by which persons will be regulated as
security-based swap dealers.\430\
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    \430\ See Intermediary Definitions Adopting Release, 77 FR
30724.
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    This does not mean that there is a one-to-one relationship between
a person not being a ``security-based swap dealer'' as a result of
these cross-border rules, and the resulting change to programmatic
benefits and costs. Indeed, although these rules may determine which
particular entities will be regulated as dealers, it does not follow
that total programmatic costs and benefits will vary by an amount
proportional to the volume of those entities' dealing activity. As the
Commission explained in the Intermediary Definitions Adopting Release,
some of the costs and benefits of regulating dealers may be fixed,
while others may be variable depending on a particular person's
security-based swap dealing activity.\431\ In practice, the
programmatic benefits associated with the regulation of persons engaged
in security-based swap dealing activity--in other words, the expected
transparency, customer protection and market efficiency objectives
associated with dealer regulation--likely will vary depending on the
type and nature of those persons' dealing activity, including the
degree to which those persons engage in security-based swap dealing
activity within the United States or in a manner likely to give rise to
Title VII concerns within the United States.
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    \431\ See id. (``Some of the costs of regulating a particular
person as a dealer or major participants, such as costs of
registration, may largely be fixed. At the same time, other costs
associated with regulating that person as a dealer or major
participant (e.g., costs associated with margin and capital
requirements) may be variable, reflecting the level of the person's
security-based swap activity. Similarly, the regulatory benefits
that would arise from deeming that person to be a dealer or major
participant (e.g., benefits associated with increased transparency
and efficiency, and reduced risks faced by customers and
counterparties), although not quantifiable, may be expected to be
variable in a way that reflects the person's security-based swap
activity.'').
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    We believe that the cross-border rules we are adopting today will
focus the regulation of security-based swap dealers under Title VII
upon those entities that engage in security-based swap transactions
that occur in the United States, or on the prevention of evasion. Our
definition of ``security-based swap dealer'' seeks to capture those
entities for which regulation of security-based swap activity is
warranted due to the nature of their activities with other market
participants.\432\ Specifically, we have focused the rules on those
market participants that are likely to have financial and legal
relationships within the United States. This set of entities includes
those that currently provide liquidity to U.S. persons as market makers
in the OTC security-based swap market and those that trade with U.S.
persons as market makers for security-based swaps on organized trading
venues. Regulation of these entities will

mitigate risk and promote stability for U.S. persons and potentially
the U.S. financial markets by increasing the likelihood that they are
able to meet their obligations under security-based swap contracts
against counterparties with ties to the U.S. financial system once they
are subject to the final adopted rules regarding the requirements
applicable to dealers (rules establishing capital and margin
requirements for registered security-based swap dealers). Furthermore,
regulation of these entities as dealers may enable them to continue to
provide liquidity to their counterparties, particularly in times when
the markets are under financial stress and their counterparties may
struggle to meet their financial obligations. We also believe that
regulation of these entities will further other goals of Title VII,
particularly as we consider future substantive regulation of the
security-based swap market. In other words, these requirements will
direct the application of the de minimis thresholds--which themselves
are the product of cost-benefit considerations--toward those dealing
activities in U.S. financial markets that most directly implicate the
purposes of Title VII. As such, these rules reflect our assessment and
evaluation of those programmatic costs and benefits:
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    \432\ See id. at 30617.
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     Dealing by U.S. persons--The ``U.S. person'' definition
captures entities whose security-based swap activities pose risks to
the United States that may raise the concerns intended to be addressed
by Title VII, regardless of the status of their counterparty.\433\ The
requirement that U.S. persons, including foreign branches, count all of
their dealing transactions against the de minimis thresholds reflects
the domestic nature of their dealing activity, particularly given that
it is the financial resources of the entire person that enable it to
engage in dealing activity.\434\
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    \433\ See section 0, supra.
    \434\ See section 0, supra.
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     Dealing by guaranteed affiliates of U.S. persons--The
requirement that non-U.S. persons count all their dealing transactions
that are subject to a recourse guarantee by a U.S. affiliate, even when
the counterparty is another non-U.S. person, reflects the domestic
nature of that activity and the risks that those recourse guarantees
pose to U.S. persons and potentially to the U.S. financial system via
the U.S. person guarantor.\435\
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    \435\ See section 0, supra. In the Cross-Border Proposing
Release we preliminarily concluded that the risks associated with
such guarantees could be adequately addressed through major
participant regulation. We have reconsidered that view for the
reasons discussed above.
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     Dealing by other non-U.S. persons with U.S.-person
counterparties--The general requirement that non-U.S. persons count
their dealing transactions with counterparties that are U.S. persons
reflects the domestic nature of that activity and the concerns raised
by the performance of dealing activity within the United States,
impacts on U.S. market liquidity, risks that this dealing activity
poses to U.S. persons and potentially toward the U.S. financial system
as a whole, and counterparty and market transparency concerns.\436\
This general requirement is limited, however, as it does not extend to
transactions with foreign branches of U.S. banks that are registered as
dealers, or to certain cleared anonymous transactions. While those
excluded transactions also involve the performance, at least in part,
of relevant dealing activity within the United States, implicate Title
VII concerns, and import risk into the United States--and their
counting against the thresholds thus would be consistent with achieving
the programmatic benefits of dealer regulation--their exclusion is
nevertheless warranted by considerations regarding market access by
U.S. persons (in the case of transactions with certain foreign branches
of U.S. banks) \437\ and by considerations regarding information
availability and market liquidity (in the case of the exclusion for
cleared anonymous transactions).\438\
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    \436\ See section 0, supra.
    \437\ See section 0, supra. Although dealing activity involving
foreign branches of U.S. banks does pose risks to the U.S. bank of
which the foreign branch is a part and potentially to the U.S.
financial system, foreign branches of registered security-based swap
dealers will be subject to a number of Title VII regulatory
requirements, including capital and margin requirements, that are
designed to protect the system against those risks. Furthermore,
this limitation is guided in part by the desire to preserve
liquidity throughout the system, given that absent the exclusion
non-U.S. dealers may have reasons to favor non-U.S. counterparties
to avoid the regulatory requirements of Title VII, which could
threaten to fragment liquidity across geographical or jurisdictional
lines.
    \438\ See section 0, supra. As noted above, see note 412, supra,
the exclusion for cleared anonymous transactions is driven by
concerns about counterparty-related information needed for
compliance being unavailable, which in turn may lead U.S. persons to
be excluded from certain execution facilities. The exclusion for
such transactions also would be expected to have the effect of
strengthening incentives for shifting activity to transparent
trading venues, a key goal of Title VII. While these transactions of
non-U.S. persons may pose risks to the U.S. bank of which the
foreign branch is a part and potentially to the U.S. financial
system as a whole, those risks may be offset by the liquidity and
transparency benefits that occur due to trading on transparent
venues. Furthermore, certain of the characteristics we expect to be
associated with central clearing (e.g., the daily exchange of mark-
to-market margin) serve similar functions as the capital and margin
requirements for registered dealers in terms of helping to protect
the financial system against the risks introduced by particular
transactions. Of course, such risk mitigation may be absent to the
extent that the relevant clearing agency--which under the exception
is not required to be registered with the Commission--does not
follow standards consistent with the Title VII requirements
applicable to registered clearing agencies. As noted above,
moreover, see note 413, supra, we are not addressing the
registration requirements for such clearing agencies in this
release.
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     Anti-evasion provisions--The requirement that conduit
affiliates count all of their dealing activities against the
thresholds, and the cross-border application of the aggregation
requirements related to the de minimis exception, both reflect targeted
efforts to prevent evasion of the security-based swap dealer
requirements of Title VII.\439\ We are adopting a definition of
``conduit affiliate'' that excludes affiliates of registered security-
based swap dealers and major security-based swap participants to avoid
imposing costs on registered persons in situations where the types of
evasion concerns that the conduit affiliate definition is intended to
address are minimal.
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    \439\ See sections 0 and 0, supra.
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    In short, these final rules apply the de minimis thresholds--which
themselves reflect cost-benefit considerations \440\--to cross-border
security-based swap activity in a way that directs the focus of dealer
regulation toward those entities whose security-based swap dealing
activities most fully implicate the purposes of Title VII, or that is
reasonably designed to prevent evasion of dealer regulation under Title
VII.
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    \440\ Based on an analysis of dealing activity within the
security-based swap market, we concluded that a de minimis threshold
of $3 billion for dealing activity involving security-based swaps
would capture over 99 percent of dealing activity within the single-
name CDS market under the ambit of dealer regulation. See
Intermediary Definitions Adopting Release, 77 FR 30639. We also
concluded that this amount constituted a reasonable threshold,
though not the only such threshold, for addressing the relevant
competing factors--including the fact that the economic benefits
provided by dealer requirements in large part will depend on the
proportion of security-based swaps that are transacted subject to
those requirements, while certain of the costs associated with
dealer regulation would include costs that are independent of the
amount of a person's dealing activity. See Intermediary Definitions
Adopting Release, 77 FR 30629, 30639.
     As noted above, in application the general de minimis threshold
currently is subject to an $8 billion phase-in level, and that
phase-in level will remain in place until the Commission, following
a study, either determines to terminate the phase-in level or adopts
a different threshold. See part IV.A, supra.
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release, we concluded that ``[t]o the
extent that an entity engaged in dealing activity wholly outside the
United

States poses risks to the U.S. financial system, we preliminarily
believe that subjecting it to dealer registration and the related
requirements would not generate the types of programmatic benefits that
Title VII dealer regulation is intended to produce, as the dealing
activity of such entity poses risks to counterparties outside the
United States.'' \441\ These final rules and guidance regarding which
transactions are to be counted against the de minimis thresholds are
consistent with that principle, although in part they reflect a further
assessment of the programmatic benefits resulting from the application
of dealer regulation to non-U.S. persons when there is a recourse
guarantee against a U.S. affiliate, including the benefits resulting
from the application of financial responsibility requirements imposed
upon registered security-based swap dealers. In this regard, the final
rules and guidance reflect a reconsideration of our earlier conclusion
that the risks to U.S. persons arising from such guarantees could
adequately be addressed by the regulation of major security-based swap
participants. In addition, these final rules and guidance more fully
account for anti-evasion concerns associated with the potential for a
U.S. person to engage in dealing activity using a guaranteed non-U.S.
affiliate that is economically equivalent to the U.S. person itself
entering into those dealing transactions.
---------------------------------------------------------------------------

    \441\ See Cross-Border Proposing Release, 77 FR 31137.
---------------------------------------------------------------------------

(b) Evaluation of Programmatic Impacts
    In setting the de minimis thresholds as part of the Intermediary
Definitions Adopting Release, we attempted to identify a level of
dealing activity that would identify and capture the entities for which
the Title VII dealer requirements are most appropriate, without
imposing the costs of Title VII on those entities for which regulation
currently may not be justified in light of the purposes of the
statute.\442\ We particularly took into account data regarding the
activities of participants in the security-based swap market, including
data regarding activity suggestive of dealing. Based on this analysis,
we estimated that up to 50 entities in the security-based swap market
might register as security-based swap dealers.\443\ Those estimates--
made outside of the context the cross-border application of the dealer
definition--provide a baseline against which the Commission can analyze
the programmatic costs and benefits and assessment costs of the final
rules applying the de minimis exception to cross-border activities.
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    \442\ See Intermediary Definitions Adopting Release, 77 FR
30724-25.
    \443\ See section 0, supra; see also Intermediary Definitions
Adopting Release, 77 FR 30635.
    We stated that this was a ``conservative'' estimate. See
Intermediary Definitions Adopting Release, 77 FR 30725 and n.1457.
In establishing the de minimis threshold, we analyzed the percentage
of the market activity that would likely be attributable to
registered security-based swap dealers under various thresholds and
various screens designed to identify entities that are engaged in
dealing activity. See id. at 30636. Our analysis placed particular
weight on the screen that identified entities that engaged in
security-based swap transactions with three or more counterparties
that themselves were not identified as dealers by ISDA. See id. at
30636. Of the 28 firms and corporate groups that satisfied this
criterion, 25 also engaged in activity over the $3 billion
threshold. See id. Based on this analysis, together with our
expectation that some of the included corporate groups would
register more than a single security-based swap dealer and that new
entrants may be likely to enter the market, we estimated that as
many as 50 entities would ultimately be required to register as a
security-based swap dealer. See id. at 30725 n.1457.
---------------------------------------------------------------------------

    We believe the methodology used in the Intermediary Definitions
Adopting Release also is appropriate for considering the potential
programmatic costs and benefits associated with the final cross-border
rules. This methodology particularly can help provide context as to how
rules regarding the cross-border application of the de minimis
exception may change the number of entities that must register as
security-based swap dealers, and thus help provide perspective
regarding the corresponding impact on the programmatic costs and
benefits of Title VII. Applying that methodology to 2012 data regarding
the single-name CDS market suggests that under these final rules
approximately 50 entities may have to register as dealers--a number
that is consistent with our estimates as part of the Intermediary
Definitions Adopting Release.\444\
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    \444\ While these revised figures are based on methodology
similar to what Commission staff employed in the Intermediary
Definitions Adopting Release, they make use of newer data and also
account for the final rules' approach to counting dealing
transactions against the de minimis thresholds.
     Consistent with that methodology regarding the use of market
data to identify entities that may be engaged in dealing activity
pursuant to the dealer-trader distinction (see id. 30636 n.478), the
data indicated that in 2012, 40 entities engaged in the single-name
security-based swap market had three or more counterparties that
were not identified by ISDA as dealers. Of those 40 entities, 27 had
$3 billion or more in notional single-name CDS activity over a 12
month period. Applying the principles reflected in these final rules
regarding the counting of transactions against the de minimis
thresholds suggests that 25 of those entities would have $3 billion
or more in notional transactions counted against the thresholds.
Applying the aggregation rules (by aggregating the transactions,
that are subject to counting, of other affiliates within a corporate
group that individually do not have $3 billion in transactions
subject to counting) increases that number to 26 entities. Based on
this data, we believe that it is reasonable to conclude that up to
50 entities ultimately may register as security-based swap dealers,
although fewer dealers also is possible.
     To apply the counting tests of these final rules to the data,
Commission staff identified DTCC-TIW accounts associated with
foreign branches and foreign subsidiaries of U.S. entities and
counted all transaction activity in these accounts against the
firm's de minimis threshold. Commission staff further counted non-
U.S. persons' activity against U.S. persons and foreign branches and
subsidiaries of U.S. persons against the de minimis thresholds.
---------------------------------------------------------------------------

    We recognize that there are limitations to using this methodology
to consider the potential programmatic impact of the cross-border
rules. These include limitations associated with the fact that the
available data does not extend to all types of security-based
swaps,\445\ and challenges in extrapolating transaction data into
inferences of dealing activity.\446\ Also, the available single-name
CDS data in certain regards potentially may lead the impact of these
rules to be underestimated or overestimated:
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    \445\ In these assessments, we have taken into account data
obtained from DTCC-TIW regarding the activity of participants in the
single-name CDS market. See Intermediary Definitions Adopting
Release, 77 FR 30635. The present assessments use data from 2012,
rather than the 2011 period used in connection with the Intermediary
Definitions Adopting Release.
    As part of the Intermediary Definitions Adopting Release we also
considered more limited publicly available data regarding equity
swaps. See id. at 30636 n.476, and 30637 n.485. The lack of market
data is significant in the context of total return swaps on equity
and debt, in that we do not have the same amount of information
regarding those products as we have in connection with the present
market for single name CDS. See id. at 30724 n.1456. Although the
definition of security-based swaps is not limited to single-name
CDS, we believe that the single-name CDS data are sufficiently
representative of the market to help inform the analysis. See id. at
30636.
    \446\ As we noted in the Intermediary Definitions Adopting
Release, the data incorporates transactions reflecting both dealing
activity and non-dealing activity, including transactions by persons
who may engage in no dealing activity whatsoever. See id. at 30635-
36. For these purposes we have identified potential dealers based on
whether an entity engaged in the single-name security-based swap
market had three or more counterparties that were not identified by
ISDA as dealers. We recognize that this may be imperfect as a tool
for identifying dealing activity, given that the presence or absence
of dealing activity ultimately turns upon the relevant facts and
circumstances of an entity's security-based swap transactions, as
informed by the dealer-trader distinction.
---------------------------------------------------------------------------

     The Commission's access to data on CDS that are written on
non-U.S. reference entities does not extend to data regarding
transactions between two counterparties that are not domiciled in the
United States, or guaranteed by a person domiciled in the United
States.\447\ More generally, the

Commission's access to data also does not extend to transactions among
affiliated entities. The available data thus does not extend to the
activities of non-U.S. conduit affiliates, to the extent that they
engage in transactions with non-U.S. persons (that themselves are not
the subject of a guarantee), and potentially makes the assessment
underinclusive to the extent that conduit affiliates engaged in dealing
activity during the relevant period.
---------------------------------------------------------------------------

    \447\ The Commission has more complete access to data regarding
transactions involving single-name CDS on U.S. reference entities.
---------------------------------------------------------------------------

     The available data also does not specifically distinguish
those transactions of non-U.S. persons that are subject to a guarantee
by a U.S. person, and other (non-guaranteed) transactions by such non-
U.S. persons. As a result, we have assumed that all foreign
subsidiaries of U.S. persons rely on guarantees for all transactions,
which potentially overestimates the level of transaction activity that
would count toward de minimis thresholds for U.S. persons with foreign
subsidiaries.
    Separately, the programmatic costs and benefits associated with the
implementation of these rules cannot be quantified with any degree of
precision because the full range of the de minimis exception's effects
on the programmatic costs and benefits also will reflect final rules--
which have yet to be finalized--implementing the Title VII entity-level
and transaction-level requirements applicable to security-based swap
dealers.
    In addition, the programmatic benefits and costs associated with
the cross-border application of the de minimis exception may change as
market participants modify their business structure or practices in
response to these rules. To avoid the prospect of being regulated as a
security-based swap dealer, some market participants may restructure
their businesses or take other steps (such as avoiding engaging in
security-based swap activities involving U.S. persons) to avoid having
their dealing transactions counted against the de minimis thresholds.
Other market participants may take similar steps in response to
counterparty demands. We understand that some market participants
already have taken these types of steps to restructure their
derivatives operations in response to the implementation of Title VII
requirements related to swaps. More fundamentally, there are inherent
challenges associated with attempting to quantify the risk-mitigation
and other benefits of financial regulation.\448\ The programmatic
impact of these rules may further reflect the fact that certain
entities that are deemed to be security-based swap dealers, and hence
are subject to the applicable Title VII dealer requirements, separately
may be subject to other regulatory requirements that are analogous to
the security-based swap dealer requirements. For example, we recognize
that certain entities that are deemed to be security-based swap dealers
pursuant to these rules also may be registered as swap dealers with the
CFTC, pursuant to the CEA. Those entities' compliance with CFTC
requirements applicable to swap dealers potentially may mitigate the
programmatic effect of these rules--in terms of both costs and
benefits--to the extent that those CFTC requirements are comparable
with the SEC's yet-to-be-finalized substantive rules applicable to
security-based swap dealers. The potential availability of substituted
compliance, whereby a market participant may comply with a Title VII
security-based swap dealer requirement by complying with a comparable
requirement of a foreign financial regulator, also may affect the final
programmatic impact of these rules.
---------------------------------------------------------------------------

    \448\ In the Intermediary Definitions Adopting Release, we and
the CFTC noted that we are ``not of the general view that the costs
of extending regulation to any particular entity must be outweighed
by the quantifiable or other benefits to be achieved with respect to
that particular entity.'' See Intermediary Definitions Adopting
Release, 77 FR 30630. We also noted that ``it does not appear
possible to demonstrate empirically--let alone quantify--the
increase or decrease in the possibility that a financial crisis
would occur at a particular future time and with a particular
intensity in the absence of financial regulation or as a result of
varying levels or types of financial regulation.'' See id. at 30630
n.421 (also noting the difficulty of demonstrating empirically
``that the customer protections associated with dealer regulation
would increase or decrease the likelihood that any particular market
participant would suffer injury (or the degree to which the
participant would suffer injury) associated with entering into an
inappropriate swap or security-based swap'').
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    In general, however, and consistent with our territorial approach,
we believe that these rules are targeted appropriately, and do not
apply dealer regulation to those entities that have a more limited
involvement in the U.S. financial system and hence whose regulation as
a security-based swap dealer under Title VII would be less linked to
programmatic benefits (i.e., non-U.S. persons that engage in security-
based swap dealing activity entirely, or almost entirely, outside the
United States with non-U.S. persons or with certain foreign branches),
while applying dealer regulation to those entities whose dealing
activity would be more likely to produce programmatic benefits under
Title VII. The nexus between specific aspects of these requirements and
the programmatic costs and benefits also is addressed below in
connection with our consideration of various alternatives to the
approach taken in the final rules.
    Finally, we recognize that the U.S. market participants and
transactions regulated under Title VII are a subset of the overall
global security-based swap market and that shocks to risk or liquidity
arising from a foreign entity's dealing activity outside the United
States may spill into the United States. Such spillover risks
associated with dealing activity that falls outside the scope of Title
VII have the potential to affect U.S. persons and the U.S. financial
system either through a foreign entity's transactions with foreign
entities, which, in turn, transact with U.S. persons (and may, as a
result, be registered security-based swap dealers or major security-
based swap participants), or through membership in a clearing agency
that may provide CCP services in the United States or have a U.S.
person as a clearing member. We also have considered these spillovers
in connection with our analysis of the effects of these final cross-
border rules on efficiency, competition and capital formation.\449\
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    \449\ See section 0, supra.
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2. Assessment Costs
    The analysis of how these cross-border rules will affect the
assessment costs associated with the ``security-based swap dealer''
definition and its de minimis exception is related to the assessment
cost analysis described in the Intermediary Definitions Adopting
Release,\450\ but must also account for certain issues specific to
these cross-border rules. While in certain regards those assessment
costs can more readily be estimated than the programmatic effects
discussed above, the assessment costs associated with the cross-border
application of the Title VII dealer requirements will be considerably
smaller in significance than those programmatic effects.
---------------------------------------------------------------------------

    \450\ See Intermediary Definitions Adopting Release, 77 FR
30731-32.
---------------------------------------------------------------------------

    The Intermediary Definitions Adopting Release addressed how certain
market participants whose security-based swap activities exceed or are
not materially below the de minimis threshold may be expected to incur
assessment costs in connection with the dealer analysis.\451\ In that
release we estimated that 166 entities--out of over one thousand U.S.
and non-U.S. entities

that engaged in single-name CDS transactions in 2011--had more than $2
billion in single-name CDS transactions over the previous 12 months,
and as a result would engage in the dealer analysis.\452\ Based on
those numbers, and assuming that that all of those entities retain
outside counsel to analyze their status under the security-based swap
dealer definition, including the de minimis exception, we estimated
that the legal costs associated with assessing market participants'
potential status as security-based swap dealers may approach $4.2
million.\453\
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    \451\ See id. at 30731. These assessment costs include costs
associated with analyzing a person's security-based swap activities
to determine whether those activities constitute dealing activity
and the costs of monitoring the volume of dealing activity against
the de minimis threshold.
    \452\ Id. at 30731-32. As discussed below, a comparable
assessment using 2012 data indicates that there were approximately
210 entities in the single-name CDS market with more than $2 billion
in transactions over 12 months. That analysis accounts for the
aggregation of affiliate activity for purposes of the de minimis
analysis, by first counting individual accounts with more than $2
billion in activity, and then aggregating any remaining accounts to
the level of the ultimate parent and counting those also.
    \453\ See id. We estimated that the per-entity cost of the
dealer analysis would be approximately $25,000. Our estimate of
aggregate industry-wide costs of $4.2 million reflected the costs
that may be incurred by all 166 entities. See id.
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    Application of these cross-border rules to the de minimis exception
can be expected to affect the assessment costs that market participants
will incur. In part, certain non-U.S. persons may be expected to incur
personnel costs and legal costs--beyond the legal costs addressed as
part of the Intermediary Definitions Adopting Release--associated with
analyzing these cross-border rules and developing systems and
procedures to assess which transactions would have to be counted
against the de minimis thresholds (or with the purpose of avoiding
activities within the United States that would be sufficient to meet
the applicable thresholds). On the other hand, while certain market
participants also would incur additional legal costs associated with
the dealer determination (i.e., the assessment of whether particular
activities constitute dealing activity for purposes of the analysis)
addressed in the Intermediary Definitions Adopting Release, the
application of the cross-border rules may reduce the number of entities
that incur such legal costs.
    In adopting these rules we estimate the assessment costs that
market participants may incur as a result. As discussed below, however,
these costs in practice may be mitigated in large part by steps that
market participants already have taken in response to other regulatory
initiatives, including the CFTC Cross-Border Guidance.
(a) Legal Costs
    The implementation of these cross-border rules in some
circumstances has the potential to change the legal costs identified in
the Intermediary Definitions Adopting Release, including by adding new
categories of legal costs that non-U.S. persons may incur in connection
with applying the de minimis exception in the cross-border context.
    Legal costs related to application of the dealer-trader
distinction--As discussed in the Intermediary Definitions Adopting
Release, certain market participants will incur assessment costs
relating to performing the analysis as to whether their security-based
swap activities constitute dealing. For purposes of that release we
assumed that only entities with more than $2 billion in security-based
swap transactions over the previous 12 months would be likely to engage
in the full dealer analysis, and, based on analysis of single-name CDS
data, we concluded that there were 166 market participants that would
meet those criteria.\454\
---------------------------------------------------------------------------

    \454\ See id. at 30731-32. Using an estimate of $25,000 in legal
costs per firm, this led to a total estimate of $4.2 million. See
id. at 30732.
---------------------------------------------------------------------------

    In the cross-border context, we believe that some non-U.S. persons
that have more than $2 billion in total security-based swap
transactions over the previous 12 months nonetheless may be expected to
forgo the costs of performing the dealing activity analysis, if only a
comparatively low volume of their security-based swap activity involves
U.S. counterparties or otherwise potentially needs to be counted
against the de minimis thresholds. In particular, we believe that it is
unlikely that non-U.S. persons would engage in the dealer analysis (and
hence would not be likely to incur such legal costs described in the
Intermediary Definitions Adopting Release) if over the previous 12
months they have less than $2 billion in security-based swap
transactions that potentially would have to be counted against the
thresholds.\455\
---------------------------------------------------------------------------

    \455\ See Cross-Border Proposing Release, 78 FR 31141.
---------------------------------------------------------------------------

    Available data from 2012 indicates that 218 entities worldwide (147
of which are domiciled in the United States and 71 domiciled elsewhere)
had security-based swap activity, with all counterparties, of $2
billion or more. Of those 218 entities 202 had total activity of $2
billion or more that--to the extent it constituted dealing activity--
would appear to have to be counted against the de minimis thresholds.
Those 202 entities consisted of 147 entities domiciled in the United
States (which would have to count all of their dealing transactions),
and 55 entities domiciled elsewhere that have $2 billion in
transactions with U.S. counterparties or that otherwise may have to be
counted for purposes of the de minimis analysis.\456\ To the extent
that all 202 of those entities engage in the legal analysis related to
which of their security-based swap activities constitutes dealing under
the dealer-trader distinction (while recognizing that some such
entities may conclude that, based on the nature of their business, they
engage in dealing activities and that no such additional analysis is
necessary), and assuming that such analyses amount to $30,000 per
entity,\457\ those 202 entities would incur a total of approximately
$6.1 million in such legal costs.\458\
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    \456\ A total of 16 of those 71 entities that are not domiciled
in the United States appear to have less than $2 billion in activity
that involve U.S. counterparties or that otherwise would appear to
potentially have to be counted against the de minimis thresholds.
    \457\ In the Intermediary Definitions Adopting Release, we
estimated that such costs may range from $20,000 to $30,000. See
Intermediary Definitions Adopting Release, 77 FR 30732. For purposes
of this analysis, we conservatively are using the upper end of that
range.
    \458\ This analysis of data related to potential assessment
costs reflects both the activities of individual DTCC-TIW accounts
as well as the activities of transacting agents. The analysis in
particular first considers the number of accounts that have $2
billion or more in annual security-based swap activity, and then,
after removing those particular accounts, considers activity
aggregated at the level of individual transacting agents. This
analysis is comparable to the analysis we use to estimate the
potential number of dealers under the final rules. See note 444,
supra. This analysis is distinct from the analogous analysis we used
in the Intermediary Definitions Adopting Release to estimate the
number of entities that may be expected to perform the dealer-trader
analysis (see notes 149 through 151 and accompanying text, supra),
which focuses on activity at the transacting agent level, because
further experience with the associated data permits us to conduct a
more granular analysis of that data. See generally Cross-Border
Proposing Release, 78 FR 31137 n.1407.
     These estimates do not reflect a new category of costs arising
from the cross-border rules. They instead are a revision of a
category of previously identified costs that market participants may
incur in engaging in the dealer-trader analysis, using newer data
and reflecting only trades that are counted under the final cross-
border rules.
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    Legal costs related to systems and analysis--As noted above, out of
the 218 entities that had total security-based swap activity of $2
billion or more in 2012, 71 are domiciled outside of the United States.
Upon further consideration (and in addition to the estimates in the
Cross-Border Proposing Release), we also believe that it is reasonable
to conclude that those 71 entities may have to incur one-time

legal expenses related to the development of systems and analysis
expenses--discussed below--to identify which of their total security-
based swap transactions potentially must be counted for purposes of the
de minimis analysis consistent with these cross-border rules. This
additional cost estimate reflects the fact that the development of such
systems and procedures must address cross-border rules that require
accounting for factors such as whether an entity's security-based swaps
are subject to guarantees from affiliated U.S. persons, and whether its
counterparties are U.S. persons.\459\ We estimate that such legal costs
would amount to approximately $30,400 per entity, and that those 60
entities would incur total costs of approximately $2.2 million.\460\
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    \459\ We would not expect U.S. persons with more than $2 billion
in activities to incur such costs, given that U.S. persons would
need to count all of their dealing activities against the de minimis
thresholds.
    \460\ This estimate of $30,400 reflects an assumption that such
efforts would require 80 hours of in-house legal or compliance
staff's time. Based upon data from SIFMA's Management & Professional
Earnings in the Securities Industry 2012 (modified by the Commission
staff to account for an 1800-hour-work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead),
the staff estimates that the average national hourly rate for an in-
house attorney is $380.
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(b) Costs Related to Systems, Analysis, and Representations
    Transaction-monitoring systems--The elements introduced by the
final cross-border rules may cause certain non-U.S. persons to
implement systems to identify whether their dealing transactions exceed
the de minimis thresholds.\461\ Such systems may reflect the need for
non-U.S. persons to: (i) Identify whether their dealing counterparties
are ``U.S. persons''; (ii) determine whether their dealing transactions
with a U.S. person constitutes ``transactions conducted through a
foreign branch'' (which itself requires consideration of whether their
counterparty is a ``foreign branch'') and--of those--determine which
transactions involve a foreign branch of a U.S. bank that itself is
registered as a security-based swap dealer; (iii) determine whether
particular transactions are subject to a recourse guarantee against a
U.S. affiliate; (iv) evaluate the applicability of the aggregation
principles; and (v) evaluate the availability of the exception for
cleared anonymous transactions.\462\
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    \461\ It is possible that a subset of non-U.S. dealers may
reasonably conclude they are above the de minimis thresholds and
should register with the Commission as security-based swap dealers,
without establishing systems to analyze their status under the
exception, in light of the nature of their operations and their
activity within the United States.
    Moreover, in considering the assessment costs associated with
the final rules, we continue to hold the expectation, noted in the
Intermediary Definitions Adopting Release, that market participants
generally would be aware of the notional amount of their activity
involving security-based swaps as a matter of good business
practice. See Intermediary Definitions Adopting Release, 77 FR
30732. These systems cost estimates for non-U.S. persons are
provided in recognition of the fact that non-U.S. persons will
likely need to distinguish those transactions that must be counted
against their de minimis thresholds and those that do not need to be
included.
    \462\ In considering the assessment costs associated with the
final rules, we believe that a potential dealer assessment of
whether it is a ``conduit affiliate'' would not require the use of
any systems. A conduit affiliate must count all of its dealing
transactions, making transaction-specific tracking unnecessary.
Moreover, the question of whether a person acts as a conduit
affiliate would turn upon whether it engages in certain security-
based transactions on behalf of a U.S. affiliate, accompanied by
back-to-back transactions with that affiliate. That analysis
fundamentally is different from the transaction-specific assessments
that are more likely to require the development of new systems for
monitoring the attributes of particular transactions.
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    In general, we believe that the costs of such systems should be
similar to the costs estimated in the Intermediary Definitions Adopting
Release for a system to monitor positions for purposes of the major
security-based swap participant thresholds. In both cases--the
assessment of dealer status in the cross-border context and the
assessment of major participant status--such systems would have to flag
a person's security-based swaps against the specific criteria embedded
in the final rules, and then compare the cumulative amount of security-
based swaps that meet those criteria against regulatory
thresholds.\463\ Based on the methodology set forth in the Intermediary
Definitions Adopting Release related to systems associated with the
major participant analysis, we estimate that such systems would be
associated with one-time programming costs of $14,904 and ongoing
annual systems costs of $16,612 per entity.\464\
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    \463\ As discussed in the Cross-Border Proposing Release, we
would expect that market participants would be aware of the notional
amount of their security-based swap activity as a matter of good
business practice. See Cross-Border Proposing Release, 78 FR 31140.
    \464\ In the Intermediary Definitions Adopting Release, we
estimated that the one-time programming costs of $13,692 per entity
and annual ongoing assessment costs of $15,268. See Intermediary
Definitions Adopting Release, 77 FR 30734-35 and accompanying text
(providing an explanation of the methodology used to estimate these
costs). The hourly cost figures in the Intermediary Definitions
Adopting Release for the positions of Compliance Attorney,
Compliance Manager, Programmer Analyst, and Senior Internal Auditor
were based on data from SIFMA's Management & Professional Earnings
in the Securities Industry 2010.
    For purposes of the cost estimates in this release, we have
updated these figures with more recent data as follows: The figure
for a Compliance Attorney is $334/hour, the figure for a Compliance
Manager is $283/hour, the figure for a Programmer Analyst is $220/
hour, and the figure for a Senior Internal Auditor is $209/hour,
each from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by SEC staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead. We also have updated the
Intermediary Definitions Adopting Release's $464/hour figure for a
Chief Financial Officer, which was based on 2011 data, with a
revised figure of $500/hour, for a Chief Financial Officer with five
years of experience in New York, that is from http://www.payscale.com, modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead. See http://www.payscale.com (last visited Apr. 16, 2014). Incorporating these
new cost figures, the updated one-time programming costs based upon
our assumptions regarding the number of hours required in the
Intermediary Definitions Adopting Release would be $15,287 per
entity, i.e., (Compliance Attorney at $334 per hour for 2 hours) +
(Compliance Manager at $283 per hour for 8 hours) + (Programmer
Analyst at $220 per hour for 40 hours) + (Senior Internal Auditor at
$209 per hour for 8 hours) + (Chief Financial Officer at $500 per
hour for 3 hours) = $14,904, and the annual ongoing costs would be
$16,612 per entity, i.e., ((Senior Internal Auditor at $209 per hour
for 16 hours) + Compliance Attorney at $334 per hour for 4 hours) +
(Compliance Manager at $283 per hour for 4 hours) + (Chief Financial
Officer at $500 per hour for 4 hours) + (Programmer Analyst at $220
per hour for 40 hours) = $16,612).
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    Analysis of counterparty status, including representations--Non-
U.S. market participants also would be likely to incur costs arising
from the need to assess the potential U.S.-person status of their
counterparties, and in some cases to obtain and maintain records
related to representations regarding their counterparties' U.S.-person
status.\465\ We anticipate that non-U.S. persons are likely to review
existing information (e.g., information already available in connection
with account opening materials and ``know your customer'' practices) to
assess whether their

counterparties are U.S. persons. Non-U.S. persons at times may also
request and maintain representations from their counterparties to help
determine or confirm their counterparties' status. Accordingly, in our
view, such assessment costs primarily would encompass one-time costs to
review and assess existing information regarding counterparty domicile,
principal place of business, and other factors relevant to potential
U.S.-person status, as well as one-time costs associated with
requesting and collecting representations from counterparties.\466\ The
Commission believes that such one-time costs would be approximately
$732 thousand per firm.\467\
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    \465\ Non-U.S. market participants potentially may also assess
and seek representations related to whether their security-based
swap activity with a particular counterparty constitutes
transactions conducted through a foreign branch of a U.S. bank
(including representations regarding the non-involvement of U.S.
personnel) that is registered as a security-based swap dealer. Based
on our understanding of changes in the way major U.S. dealers engage
with non-U.S. counterparties in the single-name CDS market following
the issuance of the CFTC Cross-Border Guidance, we believe that few,
if any, U.S. persons currently may participate in this market
through their foreign branches. Also, as noted above, other
regulatory provisions may limit the ability of U.S. banks to conduct
security-based swap activity. See note 366, supra. Accordingly, we
do not believe that it is likely that non-U.S. market participants
will independently assess, and seek representations related to, the
foreign branch status of their counterparties. Instead, we believe
that it is likely that such non-U.S. persons will focus on assessing
the U.S.-person status of the bank for which the foreign branch is a
part.
    \466\ We expect that an assessment of whether a particular
counterparty is a U.S. person--once properly made--generally will
not vary over time, given that the components of the ``U.S. person''
definition generally would not be expected to vary for a particular
counterparty absent changes such as a corporate reorganization,
restructuring or merger. With that said, we believe market
participants will likely monitor for the presence of information
that may indicate that the representations they have received in
connection with a person's U.S.-person status are outdated or