[Federal Register Volume 81, Number 156 (Friday, August 12, 2016)]
[Rules and Regulations]
[Pages 53545-53655]
[FR Doc No: 2016-17032]

Vol. 81

Friday,

No. 156

August 12, 2016

Part II

Securities and Exchange Commission

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17 CFR Part 242

 Regulation SBSR--Reporting and Dissemination of Security-Based Swap
Information; Final Rule

Federal Register / Vol. 81 , No. 156 / Friday, August 12, 2016 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-78321; File No. S7-03-15]
RIN 3235-AL71

Regulation SBSR--Reporting and Dissemination of Security-Based
Swap Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting certain amendments to Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information
(``Regulation SBSR''). Specifically, new Rule 901(a)(1) of Regulation
SBSR requires a platform (i.e., a national securities exchange or
security-based swap execution facility (``SB SEF'') that is registered
with the Commission or exempt from registration) to report a security-
based swap executed on such platform that will be submitted to
clearing. New Rule 901(a)(2)(i) of Regulation SBSR requires a
registered clearing agency to report any security-based swap to which
it is a counterparty. The Commission is adopting certain conforming
amendments to other provisions of Regulation SBSR in light of the newly
adopted amendments to Rule 901(a), and an amendment that would require
registered security-based swap data repositories (``SDRs'') to provide
the security-based swap transaction data that they are required to
publicly disseminate to the users of the information on a non-fee
basis. The Commission also is adopting amendments to Rule 908(a) to
extend Regulation SBSR's regulatory reporting and public dissemination
requirements to additional types of cross-border security-based swaps.
The Commission is offering guidance regarding the application of
Regulation SBSR to prime brokerage transactions and to the allocation
of cleared security-based swaps. Finally, the Commission is adopting a
new compliance schedule for the portions of Regulation SBSR for which
the Commission has not previously specified compliance dates.

DATES: Effective Date: October 11, 2016.
    Compliance Dates: For a discussion of the Compliance Dates for
Regulation SBSR, see Section X of the Supplementary Information.

FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at
(202) 551-5602; Sarah Albertson, Special Counsel, at<PHONE_NUMBER>;
Yvonne Fraticelli, Special Counsel, at<PHONE_NUMBER>; Kathleen Gross,
Special Counsel, at<PHONE_NUMBER>; David Michehl, Special Counsel, at
(202) 551-5627; or Geoffrey Pemble, Special Counsel, at<PHONE_NUMBER>;
all of the Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Economic Considerations and Baseline Analysis
    A. Baseline
    1. Available Data Regarding Security-Based Swap Activity
    2. Clearing Activity in Single-Name CDS
    3. Current Market Structure for Security-Based Swap
Infrastructure
    a. Exchanges and SB SEFs
    b. Clearing Agencies
    c. Trade Repositories
    d. Vertical Integration of Security-Based Swap Market
Infrastructure
    4. Security-Based Swap Market: Market Participants and Dealing
Structures
    a. Market Centers
    b. Common Business Structures for Firms Engaged in Security-
Based Swap Dealing Activity
    c. Current Estimates of Number of Security-Based Swap Dealers
    d. Arranging, Negotiating, and Executing Activity Using
Personnel Located in a U.S. Branch or Office
    5. Security-Based Swap Market: Levels of Security-Based Swap
Trading Activity
    6. Global Regulatory Efforts
    B. Economic Considerations
    1. Security-Based Swap Market Infrastructure
    2. Competition Among Security-Based Swap Infrastructure
Providers
    3. Security-Based Swaps Trading by Non-U.S. Persons Within the
United States
III. Reporting by Registered Clearing Agencies
    A. Background
    1. Clearing Process for Security Based Swaps
    2. Proposed Rules and General Summary of Comments
    B. Discussion and Final Rules
    C. Choice of Registered SDR for Clearing Transactions
    D. Scope of Clearing Agencies Covered by Final Rules
    E. Reporting Under the Principal Model of Clearing
    F. Clearing Transactions and Other Unique Identification Codes
    G. Reporting Whether an Alpha Transaction Is Accepted for
Clearing
    H. A Registered Clearing Agency Must Know the Transaction ID of
the Alpha and the Identity of the Alpha SDR
    I. Alpha Submitted to Clearing Before It Is Reported to a
Registered SDR
    J. Consequences of Rejection
    K. Scope of Clearing Transactions
    L. Reporting of Historical Clearing Transactions
IV. Reporting by Platforms
    A. Overview
    B. A Platform Is Not Required To Report All Transactions
Occurring on Its Facilities
    C. Data Elements That a Platform Must Report
    D. Platform Duty to Report Secondary Trade Information
    E. Platform Has No Duty To Report Life Cycle Events
    F. Implementation Issues
    G. Reporting Duty Applies Even to Unregistered Platforms
V. Additional Matters Concerning Platforms and Registered Clearing
Agencies
    A. Extending ``Participant'' Status
    B. Examples of Reporting Workflows Involving Platforms and
Registered Clearing Agencies
    C. Amendments to Rule 905(a)
    D. Requirements Related to Participant Providing Ultimate Parent
and Affiliate Information to Registered SDR
    E. Additional Entities Must Have Policies and Procedures for
Supporting Their Reporting Duties
VI. Reporting and Public Dissemination of Security-Based Swaps
Involving Allocation
    A. Background
    B. Guidance on How Regulation SBSR Applies to Bunched Order
Executions
    1. Example 1: Off-Platform Cleared Transaction
    a. Reporting the Bunched Order Alpha
    b. Reporting the Security-Based Swaps Resulting From Allocation
    2. Example 2: Cleared Platform Transaction
    a. Reporting the Bunched Order Alpha
    b. Reporting the Security-Based Swaps Resulting From Allocation
    C. Comments Received
    D. Conforming Amendment to Rule 901(d)(4)
VII. Reporting and Public Dissemination of Prime Brokerage
Transactions
    A. Background
    B. Reporting of Security-Based Swaps Resulting From Prime
Brokerage Arrangements
    1. If There Are Three Legs
    2. If There Are Two Legs
    C. Public Dissemination of Prime Brokerage Transactions
    D. If the Prime Broker Rejects the Initial Security-Based Swap
VIII. Prohibition on Registered SDRs From Charging Fees for or
Imposing Usage Restrictions on Publicly Disseminated Data
    A. Background
    B. Comments Received and Final Rule
    C. Other Interpretive Issues
IX. Cross-Border Matters
    A. Introduction
    B. Existing Rules 901 and 908
    C. Extending Regulation SBSR to All ANE Transactions
    1. Description of Proposed Rule
    2. Discussion of Comments and Final Rule
    a. Impact on Regulatory Reporting
    b. Impact on Public Dissemination
    c. Impact of Substituted Compliance

    D. Extending Regulation SBSR to All Transactions Executed on a
U.S. Platform Effected By or Through a Registered Broker-Dealer
    E. Public Dissemination of Covered Cross-Border Transactions
    F. Expanding Rule 908(b)
    1. Expanding Rule 908(b) To Include All Platforms and Registered
Clearing Agencies
    2. Expanding Rule 908(b) To Include Non-U.S. Persons Engaging in
ANE Transactions
    G. Reporting Duties of Unregistered Persons
    1. Description of Proposed Rules
    2. Discussion of Comments and Final Rules
    a. Transactions Where One or Both Sides Consist Only of
Unregistered Persons
    b. Transactions Involving a Registered Broker-Dealer
    H. Conforming Amendments
    1. Expanding Definition of ``Participant''
    2. Rule 901(d)(9)
    3. Limitation of Duty To Report Ultimate Parent and Affiliate
Information
    I. Availability of Substituted Compliance
X. Compliance Schedule for Regulation SBSR
    A. Proposed Compliance Schedule
    B. General Summary of Comments Received
    C. Compliance Date 1
    1. Compliance With Regulation SBSR Follows Security-Based Swap
Dealer Registration
    2. At Least Six Months Between First SDR to Register and
Compliance Date 1
    3. There May Be Separate Compliance Dates for Separate Asset
Classes
    4. ``First-Mover'' Concerns
    5. No Delay for Substituted Compliance Determinations
    6. No Delay for Adoption of SB SEF Rules
    7. Compliance With UIC Requirements
    a. UICs for Legal Entities
    b. Branch ID, Trading Desk ID, and Trader ID
    c. Transaction ID
    d. Product ID
    8. Switching of Reporting Side Designation
    D. Compliance Date 2
    E. New Compliance Date 3 for Historical Security-Based Swaps
    F. No Separate Compliance Dates for Cross-Border Transactions
    G. Exemptions Related to the Compliance Schedule
    H. Substituted Compliance Requests
XI. Paperwork Reduction Act
    A. Definitions--Rule 900
    B. Reporting Obligations--Rule 901
    1. Existing Rule 901
    2. Rule 901--Amendments
    a. Rule 901--Reporting Obligations Resulting From Amendments to
Rule 901(a)(2)(ii)(E)
    i. Summary of Collection of Information
    ii. Respondents
    iii. Total Initial and Annual Reporting Burdens
    b. Rule 901--Reporting Obligations for Platforms and Clearing
Agencies Resulting From Amendments to Rules 901(a)(1) and (2) and
Platforms and Reporting Sides Resulting From Amendments to Rule
901(a)(3)
    i. Summary of Collection of Information
    ii. Respondents
    iii. Total Initial and Annual Reporting Burdens
    a) Platforms and Registered Clearing Agencies
    b) Rule 901(a)(3) Burdens
    c) Bunched Order Executions and Allocations
    d) Prime Brokerage Transactions
    3. Rule 901--Aggregate Total PRA Burdens and Costs
    a. For Platforms
    b. For Registered Clearing Agencies
    c. For New Broker-Dealer Respondents
    d. For Reporting Sides
    C. Correction of Errors in Security-Based Swap Information--Rule
905
    1. Existing Rule 905
    2. Amendments to Rule 905
    a. Summary of Collection of Information
    b. Respondents
    c. Total Initial and Annual Reporting Burdens
    i. New Broker-Dealer Respondents
    ii. For Platforms and Registered Clearing Agencies
    iii. For Non-Reporting Sides
    iv. For Registered SDRs
    v. Aggregate Reporting Burdens Under Rule 905
    D. Other Duties of Participants--Rule 906
    1. Existing Rule 906
    2. Amendments to Rule 906
    a. Rule 906(a)
    b. Rule 906(b)--Amendments
    c. Rule 906(c)--Amendments
    i. Summary of Collection of Information
    ii. Respondents
    iii. Total Initial and Annual Reporting and Recordkeeping
Burdens
    3. Rule 906--Aggregate Total PRA Burdens and Costs
    a. For Platforms and Registered Clearing Agencies
    b. For Registered SDRs
    c. For Participants
    d. For New Broker-Dealer Respondents
    e. Aggregate Rule 906 Burdens
    E. Policies and Procedures of Registered SDRs--Rule 907
    1. Existing Rule 907
    2. Rule 907--Amendments
    3. Rule 907--Aggregate Total PRA Burdens and Costs
    F. Cross-Border Matters--Rule 908
    1. Existing Rule 908
    2. Rule 908--Amendments
    3. Rule 908--Aggregate Total Burdens and Costs
    G. Additional PRA Discussion
    1. Use of Information
    2. Recordkeeping Requirements
    3. Collection of Information Is Mandatory
    4. Confidentiality of Responses to Collection of Information
XII. Economic Analysis
    A. Programmatic Costs of Amendments to Regulation SBSR
    1. Programmatic Costs of Newly Adopted Requirements
    a. For Platforms and Registered Clearing Agencies
    b. For Platforms and Reporting Sides of Alphas
    c. Total Costs of Platforms, Registered Clearing Agencies, and
Reporting Sides Relating to Amendments to Rule 901
    d. Reporting by Unregistered Persons
    2. Amendment to Rule 905(a)
    3. Amendments to Rule 906(c)
    4. Amendments That Subject Additional Cross-Border Security-
Based Swaps to Regulation SBSR
    a. ANE Transactions Involving Unregistered Entities
    b. Transactions Executed on a Platform or By or Through a
Registered Broker-Dealer
    5. Amendments to Rule 908(b)
    6. Other Conforming Amendments
    7. Discussion of Comments Received
    B. Assessment Costs of Unregistered Entities Related to ANE
Transactions
    1. Assessment Costs of Foreign Dealing Entities Engaged in ANE
Transactions
    2. Assessment Costs of Unregistered U.S. Persons Engaging in
Security-Based Swaps Against Foreign Entities
    3. Assessment Costs Associated With Rule 901(a)(2)(ii)(E)(4)
    4. Discussion of Comments Received
XIII. Economic Effects and Effects on Efficiency, Competition, and
Capital Formation
    A. Reporting of Clearing Transactions
    B. Alternative Approaches to Reporting Clearing Transactions
    1. Alternative 1
    2. Alternative 2
    3. Alternative 3
    4. Commenter Views
    C. Reporting by Platforms
    1. Alternative Approaches to Reporting Platform-Executed
Transactions
    D. Reporting of Clearing Transactions Involving Allocation
    E. Application of Regulation SBSR to Prime Brokerage
Transactions
    F. Prohibition of Fees and Usage Restrictions for Public
Dissemination
    G. Compliance Schedule for Regulation SBSR
    H. Amendments Related to Cross-Border Transactions
    1. Competition
    2. Efficiency
    3. Capital Formation
XIV. Regulatory Flexibility Act Certification
XV. Statutory Basis

I. Introduction

    Section 13A(a)(1) of the Exchange Act \1\ provides that each
security-based swap that is not accepted for clearing by any clearing
agency or derivatives clearing organization shall be subject to
regulatory reporting. Section 13(m)(1)(G) of the Exchange Act \2\
provides that each security-based swap (whether cleared or uncleared)
shall be reported to a registered SDR, and Section 13(m)(1)(C) of the
Exchange Act \3\ generally provides that

transaction, volume, and pricing data of security-based swaps shall be
publically disseminated in real time.\4\
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    \1\ 15 U.S.C. 78m-1(a)(1). All references in this release to the
Exchange Act refer to the Securities Exchange Act of 1934.
    \2\ 15 U.S.C. 78m(m)(1)(G).
    \3\ 15 U.S.C. 78m(m)(1)(C).
    \4\ In addition, Section 13(m)(1)(E) of the Exchange Act, 15
U.S.C. 78m(m)(1)(E), provides that, with respect to cleared
security-based swaps, the rule promulgated by the Commission related
to public dissemination shall contain provisions, among others, that
``specify the criteria for determining what constitutes a large
notional security-based swap transaction (block trade) for
particular markets and contracts'' and ``specify the appropriate
time delay for reporting large notional security-based swap
transactions (block trades) to the public.''
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    In February 2015, the Commission adopted Regulation SBSR,\5\ which
consists of Rules 900 to 909 under the Exchange Act and provides for
the regulatory reporting and public dissemination of security-based
swap transactions. At the same time that it adopted Regulation SBSR,
the Commission also proposed certain additional rules and guidance
relating to regulatory reporting and public dissemination of security-
based swap transactions that were not addressed in the Regulation SBSR
Adopting Release.\6\ In April 2015, the Commission proposed certain
rules that would address the application of Title VII requirements to
security-based swap activity engaged in by non-U.S. persons within the
United States,\7\ including how Regulation SBSR would apply to such
activity, and certain related issues. In this release, the Commission
is adopting, with a number of revisions, the amendments to Regulation
SBSR contained in the Regulation SBSR Proposed Amendments Release and
the U.S. Activity Proposal.
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    \5\ Securities Exchange Act Release No. 74244 (February 11,
2015), 80 FR 14564 (March 19, 2015) (``Regulation SBSR Adopting
Release''). The Commission initially proposed Regulation SBSR in
November 2010. See Securities Exchange Act Release No. 63346
(November 19, 2010), 75 FR 75207 (December 2, 2010) (``Regulation
SBSR Proposing Release''). In May 2013, the Commission re-proposed
the entirety of Regulation SBSR as part of a larger release that
proposed rules and interpretations regarding the application of
Title VII of the Dodd-Frank Act (``Title VII'') to cross-border
security-based swap activities. See Securities Exchange Act Release
No. 69490 (May 1, 2013), 78 FR 30967 (May 23, 2013) (``Cross-Border
Proposing Release'').
    \6\ Securities Exchange Act Release No. 74244 (February 11,
2015), 80 FR 14740 (March 19, 2015) (``Regulation SBSR Proposed
Amendments Release'').
    \7\ Securities Exchange Act Release No. 74834 (April 29, 2015),
80 FR 27444 (May 13, 2015) (``U.S. Activity Proposal'').
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    The Commission received 18 comments on the Regulation SBSR Proposed
Amendments Release \8\ and 16 comments on the U.S. Activity Proposal,
of which seven addressed issues relating to Regulation SBSR.\9\ Below,
the Commission responds to issues raised in those comments and
discusses the amendments to Regulation SBSR being adopted herein. Some
commenters directed comments to the rules the Commission already
adopted in the Regulation SBSR Adopting Release.\10\ As the Commission
stated in the Regulation SBSR Proposed Amendments Release, however, the
Commission did not reopen comment on the rules that it adopted in the
Regulation SBSR Adopting Release.\11\ Accordingly, these comments are
beyond the scope of this release and are not addressed herein.
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    \8\ See letters to Brent J. Fields, Secretary, Commission, from
Larry E. Thompson, Vice Chairman and General Counsel, Depository
Trust & Clearing Corporation (``DTCC''), dated May 4, 2015 (``DTCC
Letter''); Susan Milligan, Head of U.S. Public Affairs, LCH.Clearnet
Group Limited, dated May 4, 2015 (``LCH.Clearnet Letter''); Marcus
Sch[uuml]ler, Head of Regulatory Affairs, Markit, dated May 4, 2015
(``Markit Letter''); and Vincent A. McGonagle, Director, Division of
Market Oversight, and Phyllis P. Dietz, Acting Director, Division of
Clearing and Risk, Wholesale Market Brokers' Association, Americas
(``WMBAA''), dated May 4, 2015 (``WMBAA Letter''); letters to
Elizabeth M. Murphy, Secretary, Commission, from Marisol Collazo,
Chief Executive Officer, DTCC Data Repository (U.S.) LLC, Bruce A.
Tupper, President, ICE Trade Vault, LLC, and Jonathan A. Thursby,
Global Head of Repository Services, CME Group, dated June 10, 2015
(``DTCC/ICE/CME Letter''); Kara Dutta, General Counsel, and Bruce A.
Tupper, President, ICE Trade Vault, LLC, dated May 4, 2015 (``ICE
Letter''); Tara Kruse, Director, Co-Head of Data, Reporting, and
FpML, International Swaps and Derivatives Association, Inc.
(``ISDA''), and Kyle Brandon, Managing Director, Director of
Research, Securities Industry and Financial Markets Association
(``SIFMA''), dated May 4, 2015 (``ISDA/SIFMA Letter''); undated
letter from Timothy W. Cameron, Managing Director-Head, and Laura
Martin, Managing Director and Associate General Counsel, Asset
Management Group, SIFMA (``SIFMA-AMG II''); letters to the
Secretary, Commission, from Dennis M. Kelleher, President and Chief
Executive Officer, Stephen W. Hall, Securities Specialist, and Todd
Philips, Attorney, Better Markets, Inc., dated May 4, 2015 (``Better
Markets Letter''); Allan D. Grody, President, Financial InterGroup
Holdings Ltd, dated May 18, 2015 (``Financial InterGroup Letter'');
and Tara Kruse, Director, Co-Head of Data, Reporting, and FpML,
ISDA, dated November 25, 2015 (``ISDA III''); letter to Michael Gaw,
Assistant Director, Office of Market Supervision (``OMS''), Division
of Trading and Markets, Commission, from Bert Fuqua, General
Counsel, Investment Bank Americas Legal, UBS AG, and Michael Loftus,
Managing Director, Investment Bank Americas Legal, UBS AG, dated May
6, 2016 (``UBS Letter''); letter to Michael Gaw, Assistant Director,
OMS, Division of Trading and Markets (``Division''), Commission, and
Tom Eady, Senior Policy Advisor, Division, Commission, from Tara
Kruse, Director, Co-Head of Data, Reporting and FpML, ISDA, dated
August 3, 2015 (``ISDA II''); letter from Chris Barnard, dated May
4, 2015 (``Barnard I''). Four comments, although submitted to the
comment file for the Regulation SBSR Proposed Amendments Release,
were not germane to the proposal and are not considered here.
    \9\ See UBS Letter and letters to Brent J. Fields, Secretary,
Commission, from Dan Waters, Managing Director, ICI Global, dated
July 13, 2015 (``ICI Global Letter''); Sarah A. Miller, Chief
Executive Officer, Institute of International Bankers (``IIB''),
dated July 13, 2015 (``IIB Letter''); David Geen, General Counsel,
ISDA, dated July 13, 2015 (``ISDA I''); Timothy W. Cameron, Managing
Director-Head, and Laura Martin, Managing Director and Associate
General Counsel, Asset Management Group, SIFMA, dated July 13, 2015
(``SIFMA-AMG I''); Kenneth E. Bentsen, Jr., President and Chief
Executive Officer, SIFMA, and Rich Foster, Senior Vice President and
Senior Counsel for Regulatory and Legal Affairs, Financial Services
Roundtable (``FSR''), dated July 13, 2015 (``SIFMA/FSR Letter'');
letter from Chris Barnard, dated June 26, 2015 (``Barnard II'').
    \10\ The issues raised by these commenters included, for
example, the 24-hour reporting delay adopted in the Regulation SBSR
Adopting Release; the ability to report all transaction information
required by Regulation SBSR in light of certain foreign privacy
laws; the identification of indirect counterparties; public
dissemination of certain illiquid security-based swaps; the
requirement for registered SDRs to disseminate the full notional
size of all transactions; and the requirement that a registered SDR
immediately disseminate information upon receiving a transaction
report.
    \11\ See 80 FR at 14741, n. 8.
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II. Economic Considerations and Baseline Analysis

    To provide context for understanding the rules being adopted today
and the related economic analysis that follows, this section describes
the current state of the security-based swap market and the existing
regulatory framework; it also identifies broad economic considerations
that underlie the likely economic effects of these rules.

A. Baseline

    To assess the economic impact of the final rules described in this
release, the Commission employs as a baseline the security-based swap
market as it exists at the time of this release, including applicable
rules that the Commission already has adopted but excluding rules that
the Commission has proposed but not yet finalized.\12\ The analysis
includes the statutory and regulatory provisions that currently govern
the security-based swap market pursuant to the Dodd-Frank Act, rules
adopted in the Intermediary Definitions Adopting Release,\13\ the
Cross-Border Adopting Release,\14\ the SDR Adopting Release,\15\ and
the U.S. Activity Adopting Release.\16\ In addition, the baseline

includes rules that have been adopted but for which compliance is not
yet required, including the SBS Entity Registration Adopting
Release,\17\ the Regulation SBSR Adopting Release,\18\ and the External
Business Conduct Adopting Release,\19\ as these final rules--even if
compliance is not required--are part of the existing regulatory
landscape that market participants must take into account when
conducting their security-based swap activity.
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    \12\ The Commission also considered, where appropriate, the
impact of rules and technical standards promulgated by other
regulators, such as the CFTC and the European Securities and Markets
Authority (``ESMA''), on practices in the security-based swap
market.
    \13\ See Securities Exchange Act Release No. 66868 (April 27,
2012), 77 FR 30596 (May 23, 2012) (``Intermediary Definitions
Adopting Release'').
    \14\ See Securities Exchange Act Release No. 72472 (June 25,
2014), 79 FR 47278 (August 12, 2014) (``Cross-Border Adopting
Release'').
    \15\ See Securities Exchange Act Release No. 74246 (February 11,
2015), 80 FR 14438 (March 19, 2015) (``SDR Adopting Release'').
    \16\ See Securities Exchange Act Release No. 77104 (February 10,
2016), 81 FR 8598 (February 19, 2016) (``U.S. Activity Adopting
Release'').
    \17\ See Securities Exchange Act Release No. 75611 (August 5,
2015), 80 FR 48963 (August 14, 2015) (``SBS Entities Registration
Adopting Release'').
    \18\ See supra note 5.
    \19\ See Securities Exchange Act Release No. 77617 (April 14,
2016), 81 FR 29960 (May 13, 2016) (``External Business Conduct
Adopting Release'').
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    The following sections provide an overview of aspects of the
security-based swap market that are likely to be most affected by the
amendments and guidance being adopted today, as well as elements of the
current market structure, such as central clearing and platform
trading, that are likely to determine the scope of transactions that
will be covered by them.
1. Available Data Regarding Security-Based Swap Activity
    The Commission's understanding of the market is informed in part by
available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data prevent the
Commission from quantitatively characterizing certain aspects of the
market.\20\ Because these data do not cover the entire market, the
Commission has developed an understanding of market activity using a
sample of transaction data that includes only certain portions of the
market. The Commission believes, however, that the data underlying its
analysis here provide reasonably comprehensive information regarding
single-name credit default swap (``CDS'') transactions and the
composition of participants in the single-name CDS market.
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    \20\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters, both in letters and in meetings with Commission staff,
and knowledge and expertise of Commission staff.
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    Specifically, the Commission's analysis of the state of the current
security-based swap market is based on data obtained from the DTCC
Derivatives Repository Limited Trade Information Warehouse (``TIW''),
especially data regarding the activity of market participants in the
single-name CDS market during the period from 2008 to 2015. According
to data published by the Bank for International Settlements (``BIS''),
the global notional amount outstanding in single-name CDS was
approximately $7.18 trillion,\21\ in multi-name index CDS was
approximately $4.74 trillion, and in multi-name, non-index CDS was
approximately $373 billion. The total gross market value outstanding in
single-name CDS was approximately $284 billion, and in multi-name CDS
instruments was approximately $137 billion.\22\ The global notional
amount outstanding in equity forwards and swaps as of December 2015 was
$3.32 trillion, with total gross market value of $147 billion.\23\ As
these figure show (and as the Commission has previously noted),
although the definition of security-based swaps is not limited to
single-name CDS, single-name CDS make up a vast majority of security-
based swaps in terms of notional amount outstanding, and the Commission
believes that the single-name CDS data are sufficiently representative
of the market to inform the Commission's analysis of the state of the
current security-based swap market.\24\
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    \21\ The global notional amount outstanding represents the total
face amount of the swap used to calculate payments. The gross market
value is the cost of replacing all open contracts at current market
prices.
    \22\ See Semi-annual OTC derivatives statistics (December 2015),
Table D5, available at http://www.bis.org/statistics/derstats.htm
(last viewed May 25, 2016).
    \23\ These totals include both swaps and security-based swaps,
as well as products that are excluded from the definition of
``swap,'' such as certain equity forwards.
    \24\ See U.S. Activity Adopting Release, 81 FR at 8601.
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    The Commission notes that the data available to it from TIW do not
encompass those CDS transactions that both: (1) Do not involve U.S.
counterparties; \25\ and (2) are based on non-U.S. reference entities.
Notwithstanding this limitation, the TIW data should provide sufficient
information to permit the Commission to identify the types of market
participants active in the security-based swap market and the general
pattern of dealing within that market.\26\
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    \25\ The Commission has classified accounts as ``U.S.
counterparties'' based on TIW's entity domicile determinations. The
Commission notes, however, that TIW's entity domicile determinations
are not necessarily identical in all cases to the definition of
``U.S. person'' under Exchange Act Rule 3a71-3(a)(4), 17 CFR
240.3a71-3(a)(4).
    \26\ The challenges the Commission faces in estimating measures
of current market activity stems, in part, from the absence of
comprehensive reporting requirements for security-based swap market
participants. The Commission has adopted rules regarding trade
reporting, data elements, and public reporting for security-based
swaps that are designed to, when fully implemented, provide us with
appropriate measures of market activity. See Regulation SBSR
Adopting Release, 80 FR at 14699-700.
---------------------------------------------------------------------------

    One commenter recommended that the Commission collect a more
complete set of data to more precisely estimate the number of non-U.S.
persons that would be affected by the proposed rules.\27\ Given the
absence of comprehensive reporting requirements for security-based swap
transactions, and the fact that the location of personnel that arrange,
negotiate, or execute a security-based swap transaction is not
currently available in TIW, a more precise estimate of the number of
non-U.S. persons affected by the adopted rules is not currently
feasible.
---------------------------------------------------------------------------

    \27\ See ISDA Letter at 3, 7 (arguing that the Commission lacks
complete data to estimate the number of non-U.S. persons that use
U.S. personnel to arrange, negotiate, or execute security-based swap
transactions or the number of registered U.S. broker-dealers that
intermediate these transactions and that this ``makes it difficult
or impossible for the Commission to formulate a useful estimate of
the market impact, cost and benefits of the Proposal''; suggesting
that the Commission ``gather[ ] more robust and complete data prior
to finalizing a rulemaking that will have meaningful impact on a
global market'').
---------------------------------------------------------------------------

2. Clearing Activity in Single-Name CDS
    Currently, there is no regulatory requirement in the United States
to clear security-based swaps. Clearing for certain single-name CDS
products occurs on a voluntary basis. Voluntary clearing activity in
single-name CDS has steadily increased in recent years. As of the end
of 2015, ICE Clear Credit accepted for clearing security-based swap
products based on a total of 232 North American corporate reference
entities, 174 European corporate reference entities, and 21 individual
sovereign reference entities.
    Figure 1, below, shows characteristics of new trades in single-name
CDS that reference North American standard corporate ISDA
documentation. In particular, the figure documents that about half of
all clearable transactions are cleared. Analysis of trade activity from
January 2011 to December 2015 indicates that, out of $3,460 billion of
notional amount traded in North American corporate single-name CDS
products that are accepted for clearing during the 60 months ending
December 2015, approximately 70%, or $2,422 billion, had
characteristics making them suitable for clearing by ICE Clear Credit
and represented trades between two ICE Clear Credit clearing members.
Approximately 80% of this notional value, or $1,938 billion, was
cleared through ICE Clear Credit, or 56% of the total volume of new
trade activity. As of the end of 2015, ICE Clear Europe

accepted for clearing single-name CDS products referencing a total of
176 European corporate reference entities and seven sovereign reference
entities. Analysis of new trade activity from January 2011 to December
2015 indicates that, out of [euro]1,963 billion of notional volume
traded in European corporate single-name CDS products that are accepted
for clearing during the 60 months ending December 2015, approximately
58%, or [euro]1,139 billion, had characteristics making them suitable
for clearing by ICE Clear Europe and represented trades between two ICE
Clear Europe clearing members. Approximately 71% of this notional
amount, or [euro]805 billion, was cleared through ICE Clear Europe, or
41% of the total volume of new trade activity.\28\
---------------------------------------------------------------------------

    \28\ These numbers do not include transactions in European
corporate single-name CDS that were cleared by ICE Clear Credit.
During the sample period, a total of 2,168 transactions in European
corporate single-name CDS (with a total gross notional amount of
approximately [euro]11 billion) were cleared by ICE Clear Credit.
All but one of these transactions occurred between 2014 and 2015.
For historical data, see https://www.theice.com/marketdata/reports/99 (last visited on May 25, 2016).
[GRAPHIC] [TIFF OMITTED] TR12AU16.000

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

    \29\ The Commission believes that it is reasonable to assume
that, when clearing occurs within 14 days of execution,
counterparties made the decision to clear at the time of execution
and not as a result of information arriving after execution.
---------------------------------------------------------------------------

3. Current Market Structure for Security-Based Swap Infrastructure
a. Exchanges and SB SEFs
    The rules and amendments adopted herein address how transactions
conducted on platforms (i.e., national securities exchanges and SB
SEFs) must be reported under Regulation SBSR. Currently, there are no
SB SEFs registered with the Commission, and as a result, there is no
registered SB SEF trading activity to report. There are, however,
currently 22 swap execution facilities (``SEFs'') that are either
temporarily registered with the Commodity Futures Trading Commission
(``CFTC'') or whose temporary registrations are pending with the CFTC
and currently are exempt from registration with the Commission.\30\ As
the Commission noted in the U.S. Activity Adopting Release, the cash
flows of security-based swaps and other swaps are closely related and
many participants in the swap market also participate in the security-
based swap market.\31\ Likewise, the Commission believes that it is
possible that some entities that currently act as SEFs will register
with the Commission as SB SEFs. The Commission anticipates that, owing
to the smaller size of the security-based swap market, there will be
fewer platforms for executing transactions in security-based swaps than
the 22 SEFs reported within the CFTC's jurisdiction. Under newly
adopted Rule 901(a)(1), a platform is required to report to a
registered SDR any security-based swap transaction that is executed on
the platform and submitted to clearing.
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 64678 (June 15,
2011), 76 FR 36287, at 36306 (June 22, 2011) (Temporary Exemptions
and Other Temporary Relief, Together With Information on Compliance
Dates for New Provisions of the Securities Exchange Act of 1934
Applicable to Security-Based Swaps) (``Effective Date Release'')
(exempting persons that operate a facility for the trading or
processing of security-based swaps that is not currently registered
as a national securities exchange or that cannot yet register as an
SB SEF because final rules for such registration have not yet been
adopted from the requirements of Section 3D(a)(1) of the Exchange
Act until the earliest compliance date set forth in any of the final
rules regarding registration of SB SEFs). A list of SEFs that are
either temporarily registered with the CFTC or whose temporary
registrations are pending with the CFTC is available at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (last
visited May 25, 2016).
    \31\ See 81 FR at 8609.
---------------------------------------------------------------------------

b. Clearing Agencies
    The market for clearing services in the security-based swap market
is currently concentrated among a handful of firms. Table 1 lists the
firms that currently clear index and single-name CDS and identifies the
segments of the market each firm serves. While there may be several
choices available to participants interested in cleared index CDS

transactions, only two firms (albeit with the same parent) clear
sovereign single-name CDS and only a single firm serves the market for
North American single-name CDS. Concentration of clearing services
within a limited set of clearing agencies can be explained, in part, by
the existence of strong economies of scale in central clearing.\32\
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release No. 68080 (October 22,
2012), 77 FR at 66265 (November 2, 2012) (noting that economies of
scale can result in natural monopolies). See also Craig Pirrong,
``The Industrial Organization of Execution, Clearing and Settlement
in Financial Markets,'' Working Paper (2007), available at http://www.bauer.uh.edu/spirrong/Clearing_silos.pdf (last visited May 25,
2016) (discussing the presence of economies of scale in central
clearing).
---------------------------------------------------------------------------

    The rules adopted today will, among other things, assign regulatory
reporting duties for clearing transactions (i.e., security-based swaps
to which registered clearing agencies are direct counterparties). Any
rule that would assign reporting duties for clearing transactions would
affect the accessibility of data related to a large number of security-
based swap transactions. In addition, the number of clearing
transactions would affect the magnitude of the regulatory burdens
associated with those reporting duties.

                                         Table 1--Clearing Agencies Currently Clearing Index and Single-Name CDS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      North American      European         Japanese        Sovereign          Index
--------------------------------------------------------------------------------------------------------------------------------------------------------
ICE Clear Credit \33\..............................................               X                X   ...............               X                X
ICE Clear Europe \34\..............................................  ...............               X   ...............               X                X
CME \35\...........................................................  ...............  ...............  ...............  ...............               X
LCH.Clearnet \36\..................................................  ...............               X   ...............  ...............               X
JSCC \37\..........................................................  ...............  ...............               X   ...............               X
--------------------------------------------------------------------------------------------------------------------------------------------------------

c. Trade Repositories
    The market for data services has evolved along similar lines. While
there is currently no mandatory reporting requirement for the single-
name CDS market, virtually all transactions are voluntarily reported to
TIW, which maintains a legal record of transactions.\38\ That there
currently is a single dominant provider of recordkeeping services for
security-based swaps is consistent with the presence of a natural
monopoly for a service that involves a predominantly fixed cost
investment with low marginal costs of operation.
---------------------------------------------------------------------------

    \33\ A current list of single-name and index CDS cleared by ICE
Clear Credit is available at: https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Clearing_Eligible_Products.xls (last
visited May 25, 2016).
    \34\ A current list of single-name and index CDS cleared by ICE
Clear Europe is available at: https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Cleared_Products_List.xlsx (last
visited on May 25, 2016).
    \35\ A current list of CDS cleared by CME is available at:
http://www.cmegroup.com/trading/cds/files/cleared-cds-product-specs.xls (last visited May 25, 2016).
    \36\ A current list of single-name and index CDS cleared by
LCH.Clearnet is available at: http://www.lchclearnet.com/documents/731485/762470/cdsclear_product_list_oct_2015_.xlsx/20b23881-9973-4671-8e78-ee4cfc04b693 (last visited May 25, 2016).
    \37\ A current list of single-name and index CDS cleared by the
Japanese Securities Clearing Corporation is available at: http://www.jscc.co.jp/en/data/en/2015/05/Settlement_Prices.pdf (last
visited May 25, 2016).
    \38\ See http://www.dtcc.com/derivatives-services/trade-information-warehouse (last visited May 25, 2016) (describing the
function and coverage of TIW).
---------------------------------------------------------------------------

    There are currently no SDRs registered with the Commission.\39\
Registration requirements are part of the new rules discussed in the
SDR Adopting Release.\40\ In the absence of SEC-registered SDRs, the
analysis of the economic effects of the adopted rules and amendments
discussed in this release on SDRs is informed by the experience of the
CFTC-registered swap data repositories that operate in the swap market.
The CFTC has provisionally registered four swap data repositories to
accept transactions in swap credit derivatives.\41\
---------------------------------------------------------------------------

    \39\ ICE Trade Vault, LLC, and DTCC Data Repository (U.S.) LLC
(``DDR'') each have filed an application with the Commission to
register as an SDR. See Securities Exchange Act Release No. 77699
(April 22, 2016), 81 FR 25475 (April 28, 2016) (ICE Trade Vault);
Securities Exchange Act Release No. 78216 (June 30, 2016), 81 FR at
44379 (July 7, 2016).
    \40\ See 80 FR at 14457-69.
    \41\ A list of swap data repositories provisionally registered
with the CFTC is available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=DataRepositories (last visited May 25, 2016).
---------------------------------------------------------------------------

    It is reasonable to estimate that a similar number of persons
provisionally registered with the CFTC to service the equity and credit
swap markets might seek to register with the Commission as SDRs, and
that other persons could seek to register with both the CFTC and the
Commission as swap data repositories and SDRs, respectively. There are
economic incentives for the dual registration attributed to the fact
that many of the market participants in the security-based swap market
also participate in the swap market. Moreover, once a swap data
repository is registered with the CFTC and the required infrastructure
for regulatory reporting and public dissemination is in place, the
marginal costs for a swap data repository to also register with the
Commission as an SDR, adding products and databases and implementing
modifications to account for differences between Commission and CFTC
rules, will likely be lower than the initial cost of registration with
the CFTC.
d. Vertical Integration of Security-Based Swap Market Infrastructure
    The Commission has already observed vertical integration of swap
market infrastructure: Clearing agencies have entered the market for
record keeping services for swaps by provisionally registering
themselves, or their affiliates, as swap data repositories with the
CFTC. Under the CFTC swap reporting regime, two provisionally
registered swap data repositories are, or are affiliated with, clearing
agencies that clear swaps. These clearing agencies have adopted rules
providing that they will satisfy their CFTC swap reporting obligations
by reporting to their own, or their affiliated, swap data
repository.\42\ As a result, beta and gamma transactions and subsequent
netting transactions that arise from the clearing process are reported
by each of these clearing agencies to their associated swap data
repositories.
---------------------------------------------------------------------------

    \42\ See CME Clearing Rule 1001 (Regulatory Reporting of Swap
Data); ICE Clear Credit Clearing Rule 211 (Regulatory Reporting of
Swap Data).
---------------------------------------------------------------------------

4. Security-Based Swap Market: Market Participants and Dealing
Structures
a. Market Centers
    Financial groups engaged in security-based swap dealing activity
operate in multiple market centers and carry out such activity with
counterparties

around the world.\43\ Several commenters noted that many market
participants that engage in dealing activity prefer to use traders and
manage risk for security-based swaps in the jurisdiction where the
underlier is traded.\44\ Thus, although a significant amount of the
dealing activity in security-based swaps on U.S. reference entities
involves non-U.S. dealers, the Commission understands that these
dealers tend to carry out much of the security-based swap trading and
related risk-management activities in these security-based swaps within
the United States.\45\ Some dealers have explained that being able to
centralize their trading, sales, risk management, and other activities
related to U.S. reference entities in U.S. operations (even when the
resulting transaction is booked in a foreign entity) improves the
efficiency of their dealing business.\46\
---------------------------------------------------------------------------

    \43\ See U.S. Activity Adopting Release, 81 FR at 8603-604.
    \44\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA I at 5;
MFA/AIMA Letter at 7, n. 34.
    \45\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at
5.
    \46\ See id.
---------------------------------------------------------------------------

    Consistent with these operational concerns and the global nature of
the security-based swap market, the available data appear to confirm
that participants in this market are in fact active in market centers
around the globe. Although, as noted above, the available data do not
permit the Commission to identify the location of personnel in a
transaction, TIW transaction records indicate that firms that are
likely to be security-based swap dealers operate out of branch
locations in key market centers around the world, including New York,
London, Tokyo, Hong Kong, Chicago, Sydney, Toronto, Frankfurt,
Singapore and the Cayman Islands.
    Given these market characteristics and practices, participants in
the security-based swap market may bear the financial risk of a
security-based swap transaction in a location different from the
location where the transaction is arranged, negotiated, or executed, or
where economic decisions are made by managers on behalf of beneficial
owners. And market activity may occur in a jurisdiction other than
where the market participant or its counterparty books the transaction.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a counterparty located in a
jurisdiction that is different from the market center or centers in
which it participates.
b. Common Business Structures for Firms Engaged in Security-Based Swap
Dealing Activity
    A financial group that engages in a global security-based swap
dealing business in multiple market centers may choose to structure its
dealing business in a number of different ways. This structure,
including where it books the transactions that constitute that business
and how it carries out market-facing activities that generate those
transactions, reflects a range of business and regulatory
considerations, which each financial group may weigh differently.
    A financial group may choose to book all of its security-based swap
transactions, regardless of where the transaction originated, in a
single, central booking entity. That entity generally retains the risk
associated with that transaction, but it also may lay off that risk to
another affiliate via a back-to-back transaction or an assignment of
the security-based swap.\47\ Alternatively, a financial group may book
security-based swaps arising from its dealing business in separate
affiliates, which may be located in the jurisdiction where it
originates the risk associated with those security-based swaps, or
alternatively, the jurisdiction where it manages that risk.\48\ Some
financial groups may book transactions originating in a particular
region to an affiliate established in a jurisdiction located in that
region.\49\
---------------------------------------------------------------------------

    \47\ See U.S. Activity Adopting Release, 81 FR at 8604.
    \48\ See id.
    \49\ There is some indication that this booking structure is
becoming increasingly common in the market. See, e.g., ``Regional
swaps booking replacing global hubs,'' Risk.net (Sept. 4, 2015),
available at: http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs.
---------------------------------------------------------------------------

    Regardless of where a financial group determines to book its
security-based swaps arising out of its dealing activity, it is likely
to operate offices that perform sales or trading functions in one or
more market centers in other jurisdictions. Maintaining sales and
trading desks in global market centers permits the financial group to
deal with counterparties in that jurisdiction or in a specific
geographic region, or to ensure that it is able to provide liquidity to
counterparties in other jurisdictions, for example, when a
counterparty's home financial markets are closed.\50\ A financial group
engaged in security-based swap dealing business also may choose to
manage its trading book in particular reference entities or securities
primarily from a trading desk that can take advantage of local
expertise in such products or that can gain access to better liquidity,
which may permit it to more efficiently price such products or to
otherwise compete more effectively in the security-based swap
market.\51\ Some financial groups prefer to centralize risk management,
pricing, and hedging for specific products with the personnel
responsible for carrying out the trading of such products to mitigate
operational risk associated with transactions in those products.
---------------------------------------------------------------------------

    \50\ These offices may be branches or offices of the booking
entity itself, or branches or offices of an affiliated agent, such
as, in the United States, a registered broker-dealer. See U.S.
Activity Adopting Release, 81 FR at 8604-605.
    \51\ See id. at 8605.
---------------------------------------------------------------------------

    The financial group affiliate that books these transactions may
carry out related market-facing activities, whether in its home
jurisdiction or in a foreign jurisdiction, using either its own
personnel or the personnel of an affiliated or unaffiliated agent. For
example, the financial group may determine that another affiliate in
the financial group employs personnel who possess expertise in relevant
products or who have established sales relationships with key
counterparties in a foreign jurisdiction, making it more efficient to
use the personnel of the affiliate to engage in security-based swap
dealing activity on its behalf in that jurisdiction.\52\ In these
cases, the affiliate that books these transactions and its affiliated
agent may operate as an integrated dealing business, each performing
distinct core functions in carrying out that business.
---------------------------------------------------------------------------

    \52\ See id.
---------------------------------------------------------------------------

    Alternatively, the financial group affiliate that books these
transactions may in some circumstances determine to engage the services
of an unaffiliated agent through which it can engage in dealing
activity. For example, a financial group may determine that using an
interdealer broker may provide an efficient means of participating in
the interdealer market in its own, or in another, jurisdiction,
particularly if it is seeking to do so anonymously or to take a
position in products that trade relatively infrequently.\53\ A
financial group may also use unaffiliated agents that operate at its
direction. Such an arrangement may be particularly valuable in enabling
a financial group to service clients or access liquidity in

jurisdictions in which it has no security-based swap operations of its
own.
---------------------------------------------------------------------------

    \53\ The Commission understands that inter-dealer brokers may
provide voice or electronic trading services that, among other
things, permit dealers to take positions or hedge risks in a manner
that preserves their anonymity until the trade is executed. These
inter-dealer brokers also may play a particularly important role in
facilitating transactions in less-liquid security-based swaps.
---------------------------------------------------------------------------

    The Commission understands that financial group affiliates (whether
affiliated with U.S.-based financial groups or not) that are
established in foreign jurisdictions may use any of these structures to
engage in dealing activity in the United States, and that they may seek
to engage in dealing activity in the United States to transact with
both U.S.-person and non-U.S.-person counterparties. In transactions
with non-U.S.-person counterparties, these foreign affiliates may
affirmatively seek to engage in dealing activity in the United States
because the sales personnel of the non-U.S.-person dealer (or of its
agent) in the United States have existing relationships with
counterparties in other locations (such as Canada or Latin America) or
because the trading personnel of the non-U.S. person dealer (or of its
agent) in the United States have the expertise to manage the trading
books for security-based swaps on U.S. reference securities or
entities. The Commission understands that some of these foreign
affiliates engage in dealing activity in the United States through
their personnel (or personnel of their affiliates) in part to ensure
that they are able to provide their own counterparties, or those of
financial group affiliates in other jurisdictions, with access to
liquidity (often in non-U.S. reference entities) during U.S. business
hours, permitting them to meet client demand even when the home markets
are closed. In some cases, such as when seeking to transact with other
dealers through an interdealer broker, these foreign affiliates may
act, in a dealing capacity, in the United States through an
unaffiliated, third-party agent.
c. Current Estimates of Number of Security-Based Swap Dealers
    Security-based swap activity is concentrated in a relatively small
number of dealers, which already represent a small percentage of all
market participants active in the security-based swap market.\54\ Based
on an analysis of 2015 data, the Commission's earlier estimates of the
number of entities likely to register as security-based swap dealers
remain largely unchanged.\55\ Of the approximately 50 entities that the
Commission estimates might register as security-based swap dealers, the
Commission believes that it is reasonable to expect 22 to be non-U.S.
persons.\56\ Under the rules as they currently exist, the Commission
identified approximately 170 entities engaged in single-name CDS
activity, with all counterparties, of $2 billion or more. Of those
entities, 104 are expected to incur assessment costs to determine
whether they meet the definition of ``security-based swap dealer.''
Approximately 47 of these entities are non-U.S. persons.\57\
---------------------------------------------------------------------------

    \54\ See U.S. Activity Adopting Release, 81 FR at 8605.
    \55\ See id.
    \56\ These estimates are based on the number of accounts in TIW
data with total notional volume in excess of de minimis thresholds,
increased by a factor of two, to account for any potential growth in
the security-based swap market, to account for the fact that the
Commission is limited in observing transaction records for activity
between non-U.S. persons that reference U.S. underliers, and to
account for the fact that the Commission does not observe security-
based swap transactions other than in single-name CDS. See U.S.
Activity Adopting Release, 81 FR at 8605.
    \57\ See id.
---------------------------------------------------------------------------

    Many of these dealers are already subject to other regulatory
frameworks under U.S. law based on their role as intermediaries or on
the volume of their positions in other products, such as swaps.
Available data support the Commission's prior estimates, based on the
Commission's experience and understanding of the swap and security-
based swap market, that, of the 55 firms that might register as
security-based swap dealers or major security-based swap participants,
approximately 35 would also be registered with the CFTC as swap dealers
or major swap participants.\58\ Based on an analysis of TIW data and
filings with the Commission, the Commission estimates that 16 market
participants that will register as security-based swap dealers have
already registered with the Commission as broker-dealers and are thus
subject to Exchange Act and Financial Industry Regulatory Authority
(``FINRA'') requirements applicable to such entities. Finally, as the
Commission discusses below, some dealers may be subject to similar
requirements in one or more foreign jurisdictions.\59\
---------------------------------------------------------------------------

    \58\ See id.
    \59\ See id. at 8605-606.
---------------------------------------------------------------------------

    Finally, the Commission also notes that it has adopted rules for
the registration of security-based swap dealers and major security-
based swap participants, although market participants are not yet
required to comply with those rules.\60\ Thus, there are not yet any
security-based swap dealers or major security-based swap participants
registered with the Commission.
---------------------------------------------------------------------------

    \60\ In the SBS Entity Registration Adopting Release, the
Commission established the compliance date for security-based swap
dealer and major security-based swap participant registration (the
``SBS entities registration compliance date'') as the later of six
months after the date of publication in the Federal Register of a
final rule release adopting rules establishing capital, margin and
segregation requirements for SBS entities; the compliance date of
final rules establishing recordkeeping and reporting requirements
for SBS entities; the compliance date of final rules establishing
business conduct requirements under Exchange Act Sections 15F(h) and
15F(k); or the compliance date for final rules establishing a
process for a registered SBS entities to make an application to the
Commission to allow an associated person who is subject to a
statutory disqualification to effect or be involved in effecting
security-based swaps on the SBS entities' behalf. See 80 FR at
48964.
---------------------------------------------------------------------------

d. Arranging, Negotiating, and Executing Activity Using Personnel
Located in a U.S. Branch or Office
    Under rules recently adopted by the Commission as part of the U.S.
Activity Adopting Release, non-U.S. persons will be required to apply
transactions with other non-U.S. persons in connection with their
dealing activity towards their de minimis thresholds when those
transactions are arranged, negotiated, or executed by personnel located
in a U.S. branch or office, or by personnel of an agent of such non-
U.S. person located in a U.S. branch or office.\61\ As a result of this
requirement, certain market participants will likely incur costs
associated with determining the location of relevant personnel who
arrange, negotiate, or execute a transaction,\62\ and, having
determined the locations, these market participants will be able to
identify those transactions that are arranged, negotiated, or executed
by personnel located in a U.S. branch or office, or by personnel of an
agent of such non-U.S. person located in a U.S. branch or office. The
Commission estimated that an additional 20 non-U.S. persons, beyond the
56 identified under the Cross-Border Adopting Release, were likely to
incur assessment costs in connection with the de minimis exception as a
result of these rules.\63\
---------------------------------------------------------------------------

    \61\ See Rule 3a71-3(C) under the Exchange Act, 17 CFR 240.3a71-
3(C).
    \62\ See U.S. Activity Adopting Release, 81 FR at 8627-28.
    \63\ See id. at 8627.
---------------------------------------------------------------------------

    To estimate the number of unregistered foreign entities that
arrange, negotiate, or execute security-based swap transactions using
U.S. personnel in connection with their dealing activity for the
purpose of this rulemaking, Commission staff used 2015 TIW single-name
CDS transaction data to identify foreign entities that have three or
more counterparties that are not recognized as dealers by ISDA and that
traded less than $3 billion in notional volume and identified four
entities that

met these criteria. In 2015, these four entities were counterparties to
1,080 transactions in single-name CDS, referencing 186 reference
entities, with a total notional volume of $5.2 billion. The Commission
believes that these foreign dealing entities that are likely to remain
unregistered engage in transactions in essentially the same products as
foreign dealing entities that are likely to register as security-based
swap dealers. The Commission staff observed in the 2015 data that
foreign dealing entities that are likely to register as security-based
swap dealers based on single-name CDS transaction activity in 2015
traded in 185 out of the 186 reference entities that the smaller
foreign dealing entities had traded in.
    These smaller foreign dealing entities were counterparties to a
very small number of security-based swaps involving foreign dealing
entities engaging in U.S. activity. Using 2015 TIW data, the Commission
estimates that foreign dealing entities that likely would register with
Commission as security-based swap dealers based on their transaction
activity in 2015, were counterparties to nearly all security-based
swaps involving foreign dealing entities engaging in U.S. activity.\64\
---------------------------------------------------------------------------

    \64\ The Commission staff analysis of TIW transaction records
indicates that approximately 99.72% of single-name CDS price-forming
transactions and 99.73% of price-forming transaction volume in 2015
that involved foreign dealing entities involved a foreign dealing
entity likely to register with the Commission as a security-based
swap dealer based on its 2015 transaction activity.
---------------------------------------------------------------------------

5. Security-Based Swap Market: Levels of Security-Based Swap Trading
Activity
    As already noted, firms that act as dealers play a central role in
the security-based swap market. Based on an analysis of 2015 single-
name CDS data in TIW, accounts of those firms that are likely to exceed
the security-based swap dealer de minimis thresholds and trigger
registration requirements intermediated transactions with a gross
notional amount of approximately $5.8 trillion, approximately 60% of
which was intermediated by the top five dealer accounts.\65\
---------------------------------------------------------------------------

    \65\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2015 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of
counterparties. Approximately 24% of accounts of firms expected to
register as security-based dealers and observable in TIW have entered
into security-based swaps with over 1,000 unique counterparty accounts
as of year-end 2015.\66\ Another 24% of these accounts transacted with
500 to 1,000 unique counterparty accounts; 16% transacted with 100 to
500 unique accounts; and 36% of these accounts intermediated swaps with
fewer than 100 unique counterparties in 2015. The median dealer account
transacted with 481 unique accounts (with an average of approximately
635 unique accounts). Non-dealer counterparties transacted almost
exclusively with these dealers. The median non-dealer counterparty
transacted with three dealer accounts (with an average of approximately
four dealer accounts) in 2015.
---------------------------------------------------------------------------

    \66\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission may infer that entities
and financial groups may transact with at least as many
counterparties as the largest of their accounts.
---------------------------------------------------------------------------

    Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to TIW between January 2008 and December 2015, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty.
    Figure 2 also shows that the portion of the notional volume of
North American corporate single-name CDS represented by interdealer
transactions has remained fairly constant and that interdealer
transactions continue to represent a significant majority of trading
activity, even as notional volume has declined over the past seven
years,\67\ from more than $6 trillion in 2008 to less than $1.3
trillion in 2015.\68\
---------------------------------------------------------------------------

    \67\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
    \68\ This estimate is lower than the gross notional amount of
$5.8 trillion noted above as it includes only the subset of single-
name CDS referencing North American corporate documentation. See
supra note 65.

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

[GRAPHIC] [TIFF OMITTED] TR12AU16.001

    The high level of interdealer trading activity reflects the central
position of a small number of dealers, each of which intermediates
trades with many hundreds of counterparties. While the Commission is
unable to quantify the current level of trading costs for single-name
CDS, those dealers appear to enjoy market power as a result of their
small number and the large proportion of order flow that they privately
observe.
    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data that the
Commission analyzed was between counterparties domiciled in the United
States and counterparties domiciled abroad, as shown in Figure 3 below.
Using the self-reported registered office location of the TIW accounts
as a proxy for domicile, the Commission estimates that only 12% of the
global transaction volume by notional volume between 2008 and 2015 was
between two U.S.-domiciled counterparties, compared to 48% entered into
between one U.S.-domiciled counterparty and a foreign-domiciled
counterparty and 40% entered into between two foreign-domiciled
counterparties.\69\
---------------------------------------------------------------------------

    \69\ For purposes of this discussion, the Commission has assumed
that the registered office location reflects the place of domicile
for the fund or account, but the Commission notes that this domicile
does not necessarily correspond to the location of an entity's sales
or trading desk. See U.S. Activity Adopting Release, 81 FR at 8607,
n. 83.
---------------------------------------------------------------------------

    If the Commission considers the number of cross-border transactions
instead from the perspective of the domicile of the corporate group
(e.g., by classifying a foreign bank branch or foreign subsidiary of a
U.S. entity as domiciled in the United States), the percentages shift
significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to
33%, and to 52% for transactions entered into between a U.S.-domiciled
counterparty and a foreign-domiciled counterparty. By contrast, the
proportion of activity between two foreign-domiciled counterparties
drops from 40% to 16%. This change in respective shares based on
different classifications suggests that the activity of foreign
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts
for a higher percentage of security-based swap activity than U.S.
subsidiaries of foreign firms and U.S. branches of foreign banks. It
also demonstrates that financial groups based in the United States are
involved in an overwhelming majority (approximately 85%) of all
reported transactions in North American corporate single-name CDS.
    Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS. Of transactions on North American corporate single-
name CDS between two ISDA-recognized dealers and their branches or
affiliates, 93% of transaction notional volume involved at least one
account of an entity with a U.S. parent.
    The Commission notes, in addition, that a significant majority of
North American corporate single-name CDS transactions occur in the
interdealer market or between dealers and foreign non-dealers, with the
remaining (and much smaller) portion of the market consisting of
transactions between dealers and U.S.-person non-dealers. Specifically,
74% of North American corporate single-name CDS transactions involved
either two ISDA-recognized dealers or an ISDA-recognized dealer

and a foreign non-dealer. Approximately 16.5% of such transactions
involved an ISDA-recognized dealer and a U.S.-person non-dealer.
[GRAPHIC] [TIFF OMITTED] TR12AU16.002

6. Global Regulatory Efforts
    In 2009, the G20 Leaders--whose membership includes the United
States, 18 other countries, and the European Union--addressed global
improvements in the OTC derivatives markets. They expressed their view
on a variety of issues relating to OTC derivatives contracts. In
subsequent summits, the G20 Leaders have returned to OTC derivatives
regulatory reform and encouraged international consultation in
developing standards for these markets.\70\
---------------------------------------------------------------------------

    \70\ See, e.g., G20 Leaders' Final Declaration (November 2011),
paragraph 24, available at: http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html (last visited on May 25, 2016).
---------------------------------------------------------------------------

    Foreign legislative and regulatory efforts have focused on five
general areas: moving OTC derivatives onto organized trading platforms,
requiring central clearing of OTC derivatives, requiring post-trade
reporting of transaction data for regulatory purposes and public
dissemination of anonymized versions of such data, establishing or
enhancing capital requirements for non-centrally cleared OTC
derivatives transactions, and establishing or enhancing margin and
other risk mitigation requirements for non-centrally cleared OTC
derivatives transactions. The rules being adopted in this release will
affect a person's obligations with respect to post-trade reporting of
transaction data for public dissemination and regulatory purposes under
Regulation SBSR.
    Foreign jurisdictions have been actively implementing regulations
of the OTC derivatives markets. Regulatory transaction reporting
requirements are in force in a number of jurisdictions, including the
European Union, Hong Kong SAR, Japan, Australia, Brazil, Canada, China,
India, Indonesia, South Korea, Mexico, Russia, Saudi Arabia, and
Singapore; other jurisdictions are in the process of proposing
legislation and rules to implement these requirements.\71\ The CFTC,
the 13 Canadian provinces and territories, the European Union, and
Japan have adopted requirements to publicly disseminate transaction-
level data about OTC derivatives transactions. In addition, a number of
foreign jurisdictions have initiated the process of implementing margin
and other risk mitigation requirements for non-centrally cleared OTC
derivatives transactions.\72\ Several jurisdictions have also taken
steps to implement the Basel III recommendations governing capital
requirements for financial entities, which include enhanced capital
charges for non-centrally cleared OTC derivatives transactions.\73\
There

has been limited progress in moving OTC derivatives onto organized
trading platforms among G20 countries. The CFTC mandated the trading of
certain interest rate swaps and index CDS on CFTC-regulated SEFs in
2014. Japan implemented a similar requirement for a subset of Yen-
denominated interest rate swaps in September 2015. The European Union
has adopted legislation that addresses trading OTC derivatives on
regulated trading platforms, but has not mandated specific OTC
derivatives to trade on these platforms. This legislation also should
promote post-trade public transparency in OTC derivatives markets by
requiring the price, volume, and time of derivatives transactions
conducted on these regulated trading platforms to be made public in as
close to real time as technically possible.\74\
---------------------------------------------------------------------------

    \71\ See Financial Stability Board, OTC Derivatives Market
Reforms Tenth Progress Report on Implementation (November 2015),
available at http://www.fsb.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016). The
Financial Stability Board's report on a peer review of trade
reporting confirmed that most Financial Stability Board member
jurisdictions have trade reporting requirements in place. See
Financial Stability Board, Thematic Review on OTC Derivatives Trade
Reporting (November 2015), available at http://www.fsb.org/wp-content/uploads/Peer-review-on-trade-reporting.pdf (last visited on
May 25, 2016).
    \72\ In November 2015, the Financial Stability Board reported
that 12 member jurisdictions participating in its tenth progress
report on OTC derivatives market reforms had in force a legislative
framework or other authority to require exchange of margin for non-
centrally cleared transactions and had published implementing
standards or requirements for consultation or proposal. A further 11
member jurisdictions had a legislative framework or other authority
in force or published for consultation or proposal. See Financial
Stability Board, OTC Derivatives Market Reforms Tenth Progress
Report on Implementation (November 2015), available at http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016).
    \73\ In November 2015, the Financial Stability Board reported
that 18 member jurisdictions participating in its tenth progress
report on OTC derivatives market reforms had in force standards or
requirements covering more than 90% of transactions that require
enhanced capital charges for non-centrally cleared transactions. A
further three member jurisdictions had a legislative framework or
other authority in force and had adopted implementing standards or
requirements that were not yet in force. An additional three member
jurisdictions had a legislative framework or other authority in
force or published for consultation or proposal. See Financial
Stability Board, OTC Derivatives Market Reforms Tenth Progress
Report on Implementation (November 2015), available at http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016).
    \74\ See Regulation (EU) No 600/2014 of the European Parliament
and of the Council of 15 May 2014 on markets in financial
instruments and amending Regulation (EU) no 648/2012), available at:
http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014R0600&from=EN (last visited on May 25, 2016).
---------------------------------------------------------------------------

B. Economic Considerations

    In the Regulation SBSR Adopting Release, the Commission highlighted
certain overarching effects on the security-based swap market that it
believes will result from the adoption of Regulation SBSR. These
benefits could include, generally, improved market quality, improved
risk management, greater efficiency, and improved oversight by the
Commission and other relevant authorities.\75\ Regulation SBSR requires
market participants to make infrastructure investments in order to
report security-based swap transactions to registered SDRs, and for
SDRs to make infrastructure investments to receive and store that
transaction data and to publicly disseminate transaction data in a
manner required by Rule 902 of Regulation SBSR.
---------------------------------------------------------------------------

    \75\ See Regulation SBSR Adopting Release, 80 FR at 14699-705.
---------------------------------------------------------------------------

    The amendments to Regulation SBSR being adopted today will, among
other things, impose certain requirements on the platforms,\76\
registered clearing agencies, and registered SDRs that constitute
infrastructure for the security-based swap market and provide services
to counterparties who participate in security-based swap transactions.
The adopted amendments and the guidance provided will affect the manner
in which these infrastructure providers compete with one another and
exercise market power over security-based swap counterparties. In turn,
there will be implications for the security-based swap counterparties
who utilize these infrastructure providers and the security-based swap
market generally.
---------------------------------------------------------------------------

    \76\ A platform is a national securities exchange or security-
based swap execution facility that is registered or exempt from
registration. See Rule 900(v), 17 CFR 242.900(v).
---------------------------------------------------------------------------

    In addition, the Commission is adopting regulatory reporting and
public dissemination requirements under Regulation SBSR for certain
types of cross-border security-based swaps not currently addressed in
Regulation SBSR. Subjecting additional types of security-based swaps to
regulatory reporting and public dissemination will affect the overall
costs and benefits associated with Regulation SBSR and have
implications for transparency, competition, and liquidity provision in
the security-based swap market.
1. Security-Based Swap Market Infrastructure
    Title VII requires the Commission to create a new regulatory regime
for the security-based swap market that, among other things, includes
trade execution, central clearing, and reporting requirements aimed at
increasing transparency and customer protection as well as mitigating
the risk of financial contagion.\77\ These new requirements, once
implemented, might require market participants, who may have previously
engaged in bilateral transaction activity without any need to engage
third-party service providers, to interface with platforms, registered
clearing agencies, and registered SDRs.
---------------------------------------------------------------------------

    \77\ See Cross-Border Adopting Release, 79 FR at 47285.
---------------------------------------------------------------------------

    As a general matter, rules that require regulated parties to obtain
services can have a material impact on the prices of those services in
the absence of a competitive market for those services. In particular,
if service providers are monopolists or otherwise have market power,
requiring market participants to obtain their services can potentially
allow the service providers to increase the profits that they earn from
providing the required services.\78\ Because Title VII requires the
Commission to implement rules requiring market participants to use the
services provided by platforms,\79\ registered clearing agencies,\80\
and registered SDRs,\81\ these requirements could reduce the
sensitivity of demand to changes in prices or quality of the services
of firms that create and develop security-based swap market
infrastructure. As such, should security-based swap infrastructure
providers-such as platforms, registered clearing agencies, and
registered SDRs-enjoy market power, they might be able to change their
prices or service quality without a significant effect on demand for
their services. In turn, these changes in prices or quality could have
negative effects on activity in the security-based swap market.
---------------------------------------------------------------------------

    \78\ These effects, as they relate specifically to the rules and
amendments, as well as alternative approaches, are discussed in
Section XIII, infra.
    \79\ See 15 U.S.C. 78c-3(h)(1).
    \80\ See 15 U.S.C. 78c-3(a)(1).
    \81\ See 15 U.S.C. 78m(m)(1)(G).
---------------------------------------------------------------------------

    As discussed in Section XIII, infra, the amendments to Regulation
SBSR being adopted today could have an impact on the level of
competition among suppliers of trade reporting services and affect the
relative bargaining power of suppliers and consumers in determining the
prices of those services. In particular, when the supply of trade
reporting services is concentrated among a small number of firms,
consumers of these services have few alternative suppliers from which
to choose. Such an outcome could limit the incentives to produce more
efficient trade reporting processes and services and could, in certain
circumstances, result in less security-based swap transaction activity
than would otherwise be optimal. In the case of security-based swap
transaction activity, welfare losses could result from higher costs to
counterparties for hedging financial or commercial risks.
2. Competition Among Security-Based Swap Infrastructure Providers
    As noted above, the Commission recognizes how regulatory
requirements may affect the demand for services provided by platforms,
registered clearing agencies, and SDRs, and, in turn, the ability of
these entities to exercise their market power. The Commission's
economic analysis of the amendments adopted today considers how the
competitive landscape for platforms, registered clearing agencies, and
registered SDRs might affect the market power of these entities and
hence the level and allocation of costs related to regulatory
requirements. Some of the factors that may influence this competitive
landscape have to do with the nature of trade reporting and are
unrelated to regulation, while others

may be a result of, or influenced by, the rules that the Commission is
adopting in this release. To the extent that the adopted rules inhibit
competition among infrastructure providers, they could result in fees
charged to counterparties that deviate from the underlying costs of
providing services.
    As a general matter, trade execution, clearing, and reporting
services are likely to be concentrated among a small number of
providers. For example, SDRs and clearing agencies must make
significant infrastructure and human capital investments to enter their
respective markets, but once these start-up costs are incurred, the
addition of data management by SDRs or transaction clearing services by
clearing agencies is likely to occur at low marginal costs. As a
result, the per-transaction cost to provide infrastructure services
quickly falls for SDRs and clearing agencies as their customer base
grows, because they are able to amortize the fixed costs associated
with serving counterparties over a larger number of transactions. These
economies of scale would be expected to favor incumbent service
providers who can leverage their market position to discourage entry by
potential new competitors that face significant fixed costs to enter
the market. As a result, the markets for clearing services and SDR
services are likely to be dominated by a small number of firms that
each have large market share, which is borne out in the current
security-based swap market.\82\
---------------------------------------------------------------------------

    \82\ See supra Section II(A).
---------------------------------------------------------------------------

    Competition among registered clearing agencies and registered SDRs
could also be influenced by the fact that security-based swap market
participants incur up-front costs for each connection that they
establish with an SDR or clearing agency. If these costs are
sufficiently high, an SDR or clearing agency could establish itself as
an industry leader by ``locking-in'' customers who are unwilling or
unable to make a similar investment for establishing a connection with
a competitor.\83\ An SDR or clearing agency attempting to enter the
market or increase market share would have to provide services valuable
enough, or set fees low enough, to offset the costs of switching from a
competitor. In this way, costs to security-based swap market
participants of interfacing with market infrastructure could serve as a
barrier to entry for firms that would like to provide market
infrastructure services provided by SDRs and clearing agencies.
---------------------------------------------------------------------------

    \83\ See Joseph Farrell and Paul Klemperer, ``Coordination and
Lock-in: Competition with Switching Costs and Network Effects,'' in
Handbook of Industrial Organization, Mark Armstrong and Robert
Porter (ed.) (2007), at 1972. The authors describe how switching
costs affect entry, noting that, on one hand, ``switching costs
hamper forms of entry that must persuade customers to pay those
costs'' while, on the other hand, if incumbents must set a single
price for both new and old customers, a large incumbent might focus
on harvesting its existing customer base, ceding new customers to
the entrant. In this case, a competitive market outcome would be
characterized by prices for services that equal the marginal costs
associated with providing services to market participants. This is
because, in a competitive market with free entry and exit of firms,
a firm that charges a price that is higher than marginal cost would
lose sales to existing firms or entrants that are willing to provide
the same service at a lower price. Such price competition prevents
firms from charging prices that are above marginal costs.
---------------------------------------------------------------------------

    The rules adopted today might also influence the competitive
landscape for firms that provide security-based swap market
infrastructure. Fundamentally, requiring the reporting of security-
based swap transactions to SDRs creates an inelastic demand for
reporting services that would not be present if not for regulation.
This necessarily reduces a counterparty's ability to bargain with
infrastructure service providers over price or service because the
option of not reporting is unavailable. Moreover, infrastructure
requirements imposed by Title VII regulation will increase the fixed
costs of an SDR operating in the security-based swap market and
increase the barriers to entry into the market, potentially
discouraging firms from entering the market for SDR services. For
example, under Rule 907, as adopted, registered SDRs are required to
establish and maintain certain written policies and procedures. The
Commission estimated that this requirement will impose initial costs on
each registered SDR of approximately $12,250,000.\84\
---------------------------------------------------------------------------

    \84\ See Regulation SBSR Adopting Release, 80 FR at 14718, n.
1343.
---------------------------------------------------------------------------

    The rules adopted today might also affect the competitive landscape
by increasing the incentives for security-based swap infrastructure
service providers to integrate horizontally or vertically. As a general
matter, firms engage in horizontal integration when they expand their
product offerings to include similar goods and services or to acquire
competitors. For example, swap data repositories that presently serve
the swap market might horizontally integrate by offering similar
services in the security-based swap market. Firms vertically integrate
by entering into businesses that supply the market that they occupy
(``backward vertical integration'') or by entering into businesses that
they supply (``forward vertical integration'').
    As discussed in more detail in Section XIII(A), infra, while
adopting a reporting methodology that assigns reporting
responsibilities to registered clearing agencies, which will hold the
most complete and accurate information for cleared transactions, could
minimize potential data discrepancies and errors, rules that give
registered clearing agencies discretion over where to report
transaction data could provide incentives for registered clearing
agencies to create affiliate SDRs and compete with other registered
SDRs for post-trade reporting services. The cost to a clearing agency
of entering the market for SDR services is likely to be low, given that
many of the infrastructure requirements for entrant SDRs are shared by
clearing agencies. Clearing agencies already have the infrastructure
necessary for capturing transaction records from clearing members and
might be able to leverage that preexisting infrastructure to provide
services as an SDR at lower incremental cost than other new SDRs.
Because all clearing transactions, like all other security-based swaps,
must be reported to a registered SDR, there would be a set of
potentially captive transactions that clearing agencies could initially
use to vertically integrate into SDR services.\85\
---------------------------------------------------------------------------

    \85\ A registered clearing agency expanding to provide SDR
services is an example of forward vertical integration. In the
context of the rules adopted today, SDRs ``consume'' the data
supplied by registered clearing agencies. Clearing agencies engage
in forward vertical integration by creating or acquiring the SDRs
that consume the data that they produce as a result of their
clearing business.
---------------------------------------------------------------------------

    Entry into the SDR market by registered clearing agencies could
potentially lower the cost of SDR services if clearing agencies are
able to transmit data to an affiliated SDR at a lower cost relative to
transmitting the same data to an independent SDR. The Commission
believes that this is likely to be true for clearing transactions,
given that the clearing agency and the affiliated SDR would have
greater control over the reporting process relative to sending clearing
transaction data to an independent SDR. Even if registered clearing
agencies did not enter the market for SDR services, their ability to
pursue a vertical integration strategy could motivate incumbent SDRs to
offer competitive service models.
    However, the Commission recognizes that the entry of clearing-
agency-affiliated SDRs might not necessarily result in increased
competition among SDRs or result in lower costs for SDR services. In an
environment where registered clearing agencies with affiliated SDRs
have discretion to send their clearing transaction data to their

affiliates, security-based swap market participants who wish to submit
their transactions to clearing may have reduced ability to direct the
reporting of the clearing transaction to an independent SDR. As a
result, clearing-agency-affiliated SDRs would not directly compete with
independent SDRs on the basis of price or quality, because they inherit
their clearing agency affiliate's market share. This might allow
clearing agency incumbents to exercise market power through their
affiliated SDRs relative to independent SDRs.
3. Security-Based Swaps Trading by Non-U.S. Persons Within the United
States
    Several broad economic considerations have informed the
Commission's approach to identifying transactions between two non-U.S.
persons that should be subject to certain Title VII requirements. The
Commission has taken into account the potential impact that rules
already adopted as part of the Regulation SBSR Adopting Release might
have on competition between U.S. persons and non-U.S. persons when they
engage in security-based swap transactions with non-U.S. persons, along
with the implications of these competitive frictions for the ability of
market participants to obtain liquidity in a market that is
predominantly over-the-counter. In particular, competitive disparities
could arise between U.S. dealing entities and foreign dealing entities
\86\ using personnel located in a U.S. branch or office when serving
unregistered non-U.S. counterparties. In the absence of the rules
adopted today, U.S. dealing entities and their agents would bear the
costs associated with regulatory reporting and public dissemination
requirements when trading with unregistered non-U.S. counterparties,
while foreign dealing entities that use U.S.-based personnel to trade
with the same unregistered non-U.S. counterparties would not bear such
regulatory costs if these foreign dealing entities are not subject to
comparable regulatory requirements in their home jurisdictions. Thus,
these foreign dealing entities could offer liquidity at a lower cost to
unregistered non-U.S. persons thereby gaining a competitive advantage
over U.S. dealing entities.
---------------------------------------------------------------------------

    \86\ Throughout this release, a ``dealing entity'' refers to an
entity that engages in security-based swap dealing activity
regardless of whether the volume of such activity exceeds the de
minimis threshold established by the Commission that would cause the
entity to be a ``security-based swap dealer'' and thus require the
entity to register with the Commission as a security-based swap
dealer.
---------------------------------------------------------------------------

    Competitive disparities could also arise between U.S. persons and
non-U.S. persons that trade with foreign dealing entities that use U.S.
personnel to arrange, negotiate, or execute security-based swap
transactions.\87\ A transaction between an unregistered U.S. person and
a foreign dealing entity that uses U.S. personnel to arrange,
negotiate, or execute the transaction is subject to regulatory
reporting and public dissemination under existing Rule 908(a)(1)(i). In
the absence of newly adopted Rule 908(a)(1)(v), a transaction between
an unregistered non-U.S. person and the foreign dealing entity engaging
in ANE activity would not be subject to Regulation SBSR. This could
create a competitive advantage for unregistered non-U.S. persons over
similarly situated U.S. persons when unregistered non-U.S. persons
trade with foreign dealing entities that engage in ANE activity. Such a
foreign dealing entity might be able to offer liquidity to an
unregistered non-U.S. person at a lower price than to an unregistered
U.S. person, because the foreign dealing entity that is engaging in ANE
activity would not have to embed the potential costs of regulatory
reporting and public dissemination into the price offered to the
unregistered non-U.S. counterparty. By contrast, the price offered by
that foreign dealing entity to an unregistered U.S. counterparty likely
would reflect these additional costs.
---------------------------------------------------------------------------

    \87\ Throughout this release, a security-based swap transaction
involving a non-U.S.-person counterparty that, in connection with
its dealing activity, has arranged, negotiated, or executed using
its personnel located in a U.S. branch or office, or the personnel
of its agent located in a U.S. branch or office, is referred to as
an ``ANE transaction''; the arrangement, negotiation, and/or
execution of such a security-based swap by personnel of a non-U.S.
person located in a U.S. branch or office, or by the personnel of
its agent located in a U.S. branch or office are referred to as
``ANE activities'' or ``engaging in ANE activity''; and the
personnel located in the U.S. branch or office of the foreign
dealing entity, or (if applicable) the personnel of its agent
located in a U.S. branch or office, are referred to as ``U.S.
personnel.''
---------------------------------------------------------------------------

    The Commission acknowledges, however, that applying Title VII rules
based on the location of personnel who engage in relevant conduct could
provide incentives for these foreign dealing entities to restructure
their operations to avoid triggering requirements under Regulation
SBSR. For example, a foreign dealing entity could restrict its U.S.
personnel from intermediating transactions with non-U.S. persons or use
agents who are located outside the United States when engaging in
security-based swap transactions with non-U.S. persons.
    In addition, disparate treatment of transactions depending on
whether they are arranged, negotiated, or executed by personnel located
in a U.S. branch or office could create fragmentation among agents that
may seek to provide services to foreign dealing entities. To the extent
that using agents with personnel located in a U.S. branch or office
might result in regulatory costs being imposed on foreign dealing
entities, such entities might prefer and primarily use agents located
outside the United States, while U.S. dealers might continue to use
agents located in the United States.

III. Reporting by Registered Clearing Agencies

A. Background

    Section 13(m)(1)(F) of the Exchange Act \88\ provides that parties
to a security-based swap (including agents of parties to a security-
based swap) shall be responsible for reporting security-based swap
transaction information to the appropriate registered entity in a
timely manner as may be prescribed by the Commission. Section
13(m)(1)(G) of the Exchange Act \89\ provides that each security-based
swap (whether cleared or uncleared) shall be reported to a registered
SDR. Section 13A(a)(3) of the Exchange Act \90\ specifies the party
obligated to report a security-based swap that is not accepted for
clearing by any clearing agency or derivatives clearing organization.
To implement these statutory provisions, the Commission in February
2015 adopted Rule 901(a) of Regulation SBSR, which designates the
persons who must report all security-based swaps except: (1) Clearing
transactions; \91\ (2) security-based swaps that are executed on a
platform and that will be submitted to clearing; (3) transactions where
there is no U.S. person, registered security-based swap dealer, or
registered major security-based swap participant on either side; and
(4) transactions where there is no registered security-based swap
dealer or registered major security-based swap participant on either
side and there is a U.S. person on only one

side (``covered transactions''). This section addresses reporting
duties for clearing transactions--i.e., the security-based swaps in
category (1) above.\92\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78m(m)(1)(F).
    \89\ 15 U.S.C. 78m(m)(1)(G).
    \90\ 15 U.S.C. 78m-1(a)(3).
    \91\ Rule 900(g) defines ``clearing transaction'' as ``a
security-based swap that has a registered clearing agency as a
direct counterparty.'' This definition describes security-based
swaps that arise when a registered clearing agency accepts a
security-based swap for clearing as well as security-based swaps
that arise as part of a clearing agency's internal processes,
including those used to establish prices for cleared products and
those resulting from netting other clearing transactions of the same
product in the same account into a new open position. See Regulation
SBSR Adopting Release, 80 FR at 14599.
    \92\ Security-based swaps in category (2) are discussed in
Section IV, infra. Security-based swaps in categories (3) and (4)
are discussed in Section IX, infra.
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1. Clearing Process for Security-Based Swaps
    As discussed in the Regulation SBSR Adopting Release and the
Regulation SBSR Proposed Amendments Release, two models of clearing--an
agency model and a principal model--are currently used in the swap
markets.\93\ In the agency model, which predominates in the United
States, a swap that is submitted to clearing--typically referred to in
the industry as an ``alpha''--is, if accepted by the clearing agency,
terminated and replaced with two new swaps, known as the ``beta'' and
``gamma.'' One of the direct counterparties \94\ to the alpha becomes a
direct counterparty to the beta, the other direct counterparty to the
alpha becomes a direct counterparty to the gamma, and the clearing
agency becomes a direct counterparty to each of the beta and the
gamma.\95\ This release uses the terms ``alpha,'' ``beta,'' and
``gamma'' in the same way that the Commission understands they are used
in the agency model of clearing in the U.S. swap market. As noted in
the Regulation SBSR Adopting Release, an alpha is not a ``clearing
transaction'' under Regulation SBSR, even though it is submitted for
clearing, because it does not have a registered clearing agency as a
direct counterparty.\96\
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    \93\ See Regulation SBSR Adopting Release, 80 FR at 14599;
Regulation SBSR Proposed Amendments Release, 80 FR at 14742-43.
    \94\ Existing Rule 900(k) defines ``direct counterparty'' as ``a
person that is a primary obligor on a security-based swap.''
    \95\ If both direct counterparties to the alpha are clearing
members, the direct counterparties would submit the transaction to
the clearing agency directly and the resulting beta would be between
the clearing agency and one clearing member, and the gamma would be
between the clearing agency and the other clearing member. The
Commission understands, however, that, if the direct counterparties
to the alpha are a clearing member and a non-clearing member (a
``customer''), the customer's side of the trade would be submitted
for clearing by a clearing member acting on behalf of the customer.
When the clearing agency accepts the alpha for clearing, one of the
resulting swaps--in this case, assume the beta--would be between the
clearing agency and the customer, with the customer's clearing
member acting as guarantor for the customer's trade. The other
resulting swap--the gamma--would be between the clearing agency and
the clearing member that was a direct counterparty to the alpha.
See, e.g., Byungkwon Lim and Aaron J. Levy, ``Contractual Framework
for Cleared Derivatives: The Master Netting Agreement Between a
Clearing Customer Bank and a Central Counterparty,'' 10 Pratt's J.
of Bankr. Law 509, 515-517 (LexisNexis A.S. Pratt) (describing the
clearing model for swaps in the United States); LCH.Clearnet Letter
at 2 (generally concurring with the Commission's depiction of the
agency model of clearing).
    \96\ See 80 FR at 14599. This release does not address the
application of Section 5 of the Securities Act of 1933, 15 U.S.C.
77a et seq. (``Securities Act''), to security-based swap
transactions that are intended to be submitted to clearing (i.e.,
alphas, in the agency model of clearing). Rule 239 under the
Securities Act, 17 CFR 230.239, provides an exemption for certain
security-based swap transactions involving an eligible clearing
agency from all provisions of the Securities Act, other than anti-
fraud provisions of Section 17(a) of the Securities Act. This
exemption does not apply to security-based swap transactions not
involving an eligible clearing agency, including a transaction that
is intended to be submitted to clearing, 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. 33-9308 (March
30, 2012), 77 FR 20536 (April 5, 2012).
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2. Proposed Rules and General Summary of Comments
    In the Regulation SBSR Proposed Amendments Release, the Commission
proposed a new paragraph (a)(2)(i) of existing \97\ Rule 901(a), which
would designate a registered clearing agency as the reporting side for
all clearing transactions to which it is a counterparty. In its
capacity as the reporting side, the registered clearing agency would be
permitted to select the registered SDR to which it reports.\98\
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    \97\ Throughout this release, the Commission distinguishes
``existing'' provisions of Regulation SBSR--i.e., provisions of
Regulation SBSR that the Commission adopted in the Regulation SBSR
Adopting Release in February 2015--from provisions that the
Commission is adopting in this release.
    \98\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14746-47.
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    The Commission also proposed certain rules that would specify the
reporting requirements for life cycle events attendant to the clearing
process. The determination by a registered clearing agency of whether
or not to accept an alpha for clearing is a life cycle event of the
alpha.\99\ Existing paragraph (i) of Rule 901(e)(1) generally requires
the reporting side for a security-based swap to report a life cycle
event of that security-based swap, ``except that the reporting side
shall not report whether or not a security-based swap has been accepted
for clearing.'' Under existing Rule 901(e)(2), a life cycle event must
be reported ``to the entity to which the original security-based swap
transaction was reported.'' In the Regulation SBSR Proposed Amendments
Release, the Commission proposed a new paragraph (ii) of Rule 901(e)(1)
that would require a registered clearing agency to report to the
registered SDR that received or will receive the transaction report of
the alpha (the ``alpha SDR'') whether or not it has accepted an alpha
security-based swap for clearing.\100\ The Commission also proposed to
amend the definition of ``participant'' in existing Rule 900(u) to
include a registered clearing agency that is required to report whether
or not it accepts an alpha for clearing.\101\
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    \99\ See id., 80 FR at 14746, 14748. A life cycle event is, with
respect to a security-based swap, any event that would result in a
change in the information reported to a registered security-based
swap data repository under Rule 901(c), 901(d), or 901(i), including
an assignment or novation of the security-based swap; a partial or
full termination of the security-based swap; a change in the cash
flows originally reported; for a security-based swap that is not a
clearing transaction, any change to the title or date of any master
agreement, collateral agreement, margin agreement, or any other
agreement incorporated by reference into the security-based swap
contract; or a corporate action affecting a security or securities
on which the security-based swap is based (e.g., a merger, dividend,
stock split, or bankruptcy). Notwithstanding the above, a life cycle
event shall not include the scheduled expiration of the security-
based swap, a previously described and anticipated interest rate
adjustment (such as a quarterly interest rate adjustment), or other
event that does not result in any change to the contractual terms of
the security-based swap. See 17 CFR 242.900(q).
    \100\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14748.
    \101\ See id. at 14751.
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    If the registered clearing agency does not know the identity of the
alpha SDR, the registered clearing agency would be unable to report to
the alpha SDR whether or not it accepted the alpha transaction for
clearing, as required by proposed Rule 901(e)(1)(ii). Therefore, the
Commission proposed a new paragraph (3) of Rule 901(a), which would
require the platform or reporting side for a security-based swap that
has been submitted to clearing to promptly provide the relevant
registered clearing agency with the identity of the alpha SDR and the
transaction ID of the alpha transaction that will be or has been
submitted to clearing.\102\
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    \102\ See id. at 14748.
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    The Commission requested and received comment on a wide range of
issues related to these proposed amendments. Four commenters generally
supported the Commission's proposal to require the registered clearing
agency to report clearing transactions and to allow it to select the
SDR to which it reports.\103\ One of these commenters noted that a
clearing agency is ``the sole party who holds the complete and accurate
record of transactions and positions'' for clearing transactions.\104\
Another commenter

agreed, noting that alternative reporting workflows ``could require a
person who does not have information about [a] clearing transaction at
the time of its creation to report that transaction.'' \105\ The
commenter expressed the view that the Commission's proposal for
reporting clearing transactions ``is simple in that the same party in
each and every transaction will be the party with the reporting
requirement,'' and that this approach would eliminate confusion ``as to
who has the obligation to report the initial trades and different life-
cycle events.'' \106\ Two commenters expressed the view that clearing
agencies can leverage existing reporting processes and the existing
infrastructure that they have in place with market participants and
vendors to report clearing transactions.\107\ A third commenter
observed that requiring clearing agencies to report clearing
transactions would be ``efficient, cost effective and promote[ ] global
data consistency,'' because clearing agencies already report
transactions under swap data reporting rules established by the CFTC
and certain foreign jurisdictions, such as the European Union and
Canada.\108\
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    \103\ See LCH.Clearnet Letter at 3; Better Markets Letter at 2;
ISDA/SIFMA Letter at 24; ICE Letter at 1, 5.
    \104\ ICE Letter at 1, 3 (arguing that no person other than a
clearing agency has complete information about beta and gamma
security-based swaps and that the reporting hierarchy in Rule
901(a)(2)(ii) is not suitable for reporting clearing transactions).
    \105\ Better Markets Letter at 4.
    \106\ Id. at 2.
    \107\ See ICE Letter at 5; LCH.Clearnet Letter at 8.
    \108\ ISDA/SIFMA Letter at 24.
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    However, one commenter opposed assigning the reporting duty to the
registered clearing agency, arguing instead that the reporting side for
the alpha transaction should be the reporting side for any subsequent
clearing transactions.\109\ Another commenter expressed support for the
Commission's proposal to require registered clearing agencies to report
betas and gammas, but disagreed with the Commission's proposal to
permit registered clearing agencies to choose the registered SDR that
receives these reports.\110\
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    \109\ See Markit Letter at 2-3.
    \110\ See DTCC Letter at 5-6.
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B. Discussion and Final Rules

    After careful consideration of the comments, the Commission is
adopting paragraph (2)(i) of Rule 901(a) as proposed. As a result, a
registered clearing agency is the reporting side for all clearing
transactions to which it is a counterparty.\111\ In its capacity as the
reporting side, the registered clearing agency is permitted to select
the registered SDR to which it reports.
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    \111\ In its capacity as a reporting side, a registered clearing
agency must report all of the primary trade information and
secondary trade information required by existing Rules 901(c) and
901(d), respectively, for each security-based swap to which it is a
counterparty. See infra Section III(F) (discussing the UICs that a
registered clearing agency must report).
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    The Commission believes that, because a registered clearing agency
creates the clearing transactions to which it is a counterparty, the
registered clearing agency is in the best position to provide complete
and accurate information to a registered SDR about the clearing
transactions resulting from the security-based swaps that it clears.
Two commenters noted that swap clearing agencies currently report
clearing transactions to CFTC-registered swap data repositories, thus
evidencing their ability to report clearing transactions.\112\ The
Commission's determination to assign to registered clearing agencies
the duty to report clearing transactions should promote efficiency in
the reporting process under Regulation SBSR by leveraging these
existing workflows.
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    \112\ See ICE Letter at 5; LCH.Clearnet Letter at 8. The
Commission notes that the CFTC has adopted rules that would impose
reporting responsibilities on these clearing agencies similar to
those that the Commission is adopting today. See Amendments to Swap
Data Recordkeeping and Reporting Requirements for Cleared Swaps,
Final Rule, 80 FR 41736 (June 27, 2016).
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    In the Regulation SBSR Proposed Amendments Release, the Commission
considered three alternatives to requiring the clearing agency to
report clearing transactions: (1) Utilize the reporting hierarchy in
existing Rule 901(a)(2)(ii); (2) modify that reporting hierarchy to
place registered clearing agencies above other non-registered persons,
but below registered security-based swap dealers and major security-
based swap participants; and (3) require the reporting side of the
alpha to report both the beta and the gamma.\113\ The Commission
assessed each alternative and expressed the preliminary view that none
would be as efficient and reliable as assigning the reporting duty to
the registered clearing agency.\114\ The Commission noted that each of
the three alternatives could place the duty to report the clearing
transaction on a person who does not have information about the
clearing transaction at the time of its creation; to discharge its
duty, this person would have to obtain necessary transaction
information from the registered clearing agency or from a counterparty
to the registered clearing agency.\115\
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    \113\ See 80 FR at 14745-46.
    \114\ See id.
    \115\ See id., 80 FR at 14746.
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    One commenter urged the Commission to adopt Alternative 3--i.e., to
designate the reporting side for the alpha as the reporting side for
the beta and gamma.\116\ The commenter stated that the non-clearing-
agency counterparties to the beta and gamma will always obtain
information regarding their clearing transactions as a part of the
clearing process.\117\ The commenter suggested, therefore, that
Alternative 3 would not result in unnecessary data transfers prior to
reporting. In support of Alternative 3, the commenter noted that an
alpha counterparty could rely on a ``middleware reporting agent [who]
could perform all steps necessary to report an alpha transaction as
well as the associated beta and gamma security-based swaps in a matter
of seconds, while a clearing agency could, at best, perform only the
last two steps.'' \118\ Furthermore, while endorsing Alternative 3, the
commenter also believed that Alternatives 1 and 2 would be preferable
to the Commission's proposed approach.\119\
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    \116\ See Markit Letter at 13.
    \117\ See id. at 5, 13. The commenter stated that a clearing
agency ``must, as a matter of course, send the cleared SBS trade
record straight through to the sides of the trade or, if relevant,
any non-affiliated reporting side (e.g., the platform or reporting
agent). In other words, for the clearing agency to transmit a
message indicating that a trade has or has not been accepted for
clearing (a necessary last step to conclude cleared transactions
between the clearinghouse and the parties to the beta and gamma
trades) there is no `extra step.' '' Id. at 5.
    \118\ Id. at 7 (also stating that the interconnectedness of the
middleware provider makes it ``better able to ensure the accuracy of
trade records and the linkage between alpha, beta, and gamma trade
records'').
    \119\ See id. at 13 (``these other alternatives, relative to the
Proposal, encourage competition based on quality of service and cost
and the rule of reporting agents and are more likely to result in
outcomes whereby the same SDR will receive alpha, beta, and gamma
trades'').
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    Finally, the commenter suggested a fourth alternative to address
the concern of an alpha counterparty having to report a clearing
transaction to which it is not a counterparty. The commenter suggested
that ``the platform would remain the reporting side for all platform-
executed trades while for bilateral or off platform cleared
transactions, the reporting side would be the clearing agency. However,
the clearing agency would be required to submit beta and gamma trade
records to the alpha SDR (which would be determined by the alpha trade
reporting side and not the clearing agency).'' \120\
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    \120\ Id.
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    The Commission believes that assigning reporting duties for
clearing transactions to registered clearing agencies will be more
efficient and reliable than any of the alternatives discussed in the
Regulation SBSR Proposed Amendments Release or

raised by the commenter. Because each of these alternatives could
assign the reporting duty to a person who does not have information
about the clearing transaction at the time of its creation, the person
with the reporting duty would have to rely on the clearing agency,
directly or indirectly, to provide it with the information to be
reported:
     Alternative 1 would be to utilize the existing reporting
hierarchy in Regulation SBSR. Since a registered clearing agency is not
a registered security-based swap dealer or registered major security-
based swap participant, it would occupy the lowest rung in the
hierarchy. Therefore, in any clearing transaction between a registered
clearing agency and a registered security-based swap dealer or
registered major security-based swap participant, the registered
security-based swap dealer or registered major security-based swap
participant would incur the reporting duty. However, the registered
security-based swap dealer or registered major security-based swap
participant would be dependent on the registered clearing agency to
supply the information that must be reported.\121\
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    \121\ For any clearing transaction between a registered clearing
agency and a non-registered person that is not guaranteed by a
registered security-based swap dealer or registered major security-
based swap participant, the reporting hierarchy in existing Rule
901(a)(2)(i) would require the sides to select the reporting side.
In these circumstances, it is likely that the counterparties would
select the registered clearing agency as the reporting side for the
clearing transactions. Assigning the duty to report clearing
transactions directly to the clearing agency is consistent with the
Commission's objective of minimizing the possibility that the
reporting obligation would be imposed on a non-registered
counterparty. See Regulation SBSR Adopting Release, 80 FR at 14598.
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     Alternative 2 is similar to Alternative 1 in that the
registered security-based swap dealer or registered major security-
based swap participant with the reporting duty would be dependent on
the registered clearing agency to supply the information that would be
reported.
     Alternative 3 would designate the reporting side for the
alpha as the reporting side for the beta and gamma. Under this
alternative, the alpha reporting side would need to obtain information
from the clearing agency to report its own clearing transaction. The
alpha reporting side also would need to obtain, either from the non-
reporting side or from the registered clearing agency, information
about the clearing transaction of the alpha's non-reporting side. The
Commission believes that Alternative 3 would be difficult to implement
operationally and could create confidentiality concerns, because it
does not offer a mechanism for reporting of subsequent clearing
positions created by the registered clearing agency in the account of
the non-reporting side of the alpha.\122\
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    \122\ Assume, under Alternative 3, that P and Q execute a
security-based swap (S1) and submit it to a registered clearing
agency (CA). P is the reporting side of the S1 alpha. When CA
accepts the alpha for clearing, P would then have to report the beta
between P and CA and the gamma between Q and CA (gamma1). Further
assume that Q executes a second transaction (S2) in the same product
as S1 with R, and that R is the reporting side for S2. If CA accepts
S2 for clearing, R then must report the beta between R and CA and
the gamma between Q and CA (gamma2). In its next netting cycle, CA
nets together gamma1 and gamma2 to create a new security-based swap
representing the net open position (NOP) of Q in that product. Under