[Federal Register Volume 85, Number 23 (Tuesday, February 4, 2020)]
[Rules and Regulations]
[Pages 6359-6417]
[FR Doc No: 2019-27762]

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-87782; File No. S7-28-18]
RIN 3235-AL83

Risk Mitigation Techniques for Uncleared Security-Based Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting final rules requiring the application of
specific risk mitigation techniques to portfolios of uncleared
security-based swaps. In particular, these final rules establish
requirements for each registered security-based swap dealer (``SBS
dealer'') and each registered major security-based swap participant
(``major SBS participant'') (each SBS dealer and each major SBS
participant hereafter referred to as an ``SBS Entity'' and together
referred to as ``SBS Entities'') with respect to, among other things,
reconciling outstanding security-based swaps with applicable
counterparties on a periodic basis, engaging in certain forms of
portfolio compression exercises, as appropriate, and executing written
security-based swap trading relationship documentation with each of its
counterparties prior to, or contemporaneously with, executing a
security-based swap transaction. In addition, the Commission is issuing
an interpretation addressing the application of the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements to cross-border security-based swap
activities and is amending its regulations to address the potential
availability of substituted compliance in connection with those
requirements. Lastly, the final rules include corresponding amendments
to the recordkeeping, reporting, and notification requirements
applicable to SBS Entities.

DATES:
    Effective Date: These final rules and rule amendments are effective
April 6, 2020.
    Compliance Date: The compliance date is discussed in Section V of
this adopting release.

FOR FURTHER INFORMATION CONTACT: Carol McGee, Assistant Director, or
Andrew Bernstein, Senior Special Counsel, at<PHONE_NUMBER>, Office of
Derivatives Policy, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-8010.

SUPPLEMENTARY INFORMATION: The Commission is adopting the following new
rules:
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    \1\ 15 U.S.C. 78a et seq.

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           Commission reference                CFR citation (17 CFR)
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Securities Exchange Act of 1934
 (``Exchange Act''): \1\
  Rule 15Fi-3............................  Sec.   240.15Fi-3.
  Rule 15Fi-4............................  Sec.   240.15Fi-4.
  Rule 15Fi-5............................  Sec.   240.15Fi-5.
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    The Commission also is adopting amendments to:

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           Commission reference                CFR citation (17 CFR)
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Exchange Act:
  Rule 3a71-6............................  Sec.   240.3a71-6.
  Rule 15Fi-1............................  Sec.   240.15Fi-1.
  Rule 17a-3.............................  Sec.   240.17a-3.
  Rule 17a-4.............................  Sec.   240.17a-4.
  Rule 18a-5.............................  Sec.   240.18a-5.
  Rule 18a-6.............................  Sec.   240.18a-6.
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Table of Contents

I. Background
II. Discussion of Final Rules
    A. Rule 15Fi-3: Portfolio Reconciliation
    1. Scope of the Portfolio Reconciliation Requirements
    2. Rule 15Fi-3(a): Portfolio Reconciliation With Other SBS
Entities
    3. Rule 15Fi-3(a): Resolution of Discrepancies With Other SBS
Entities
    4. Rule 15Fi-3(b): Portfolio Reconciliation With Other
Counterparties
    5. Reporting of Valuation Disputes
    6. Application of Rule 15Fi-3 to Cleared Security-Based Swaps
    B. Rule 15Fi-4: Portfolio Compression
    1. Scope of Rule 15Fi-4--Portfolio Compression Exercises
    2. Scope of Rule 15Fi-4--Bilateral Offset
    3. Application of Rule 15Fi-4 to Cleared Security-Based Swaps
    C. Rule 15Fi-5: Trading Relationship Documentation
    1. Scope of Rule 15Fi-5
    2. Rule 15Fi-5(b)(4): Documenting Valuation Methodologies
    3. Rule 15Fi-5(b)(5) and (6): Other Disclosure Requirements
    4. Rule 15Fi-5(c): Audit of Security-Based Swap Trading
Relationship Documentation
    5. Exceptions to the Trading Relationship Documentation
Requirements
    D. Amendments to Recordkeeping Rules
III. Cross-Border Application of Rules 15Fi-3, 15Fi-4, and 15Fi-5
    A. Background on the Cross-Border Application of Title VII
Requirements
    B. Final Cross-Border Interpretation
IV. Availability of Substituted Compliance for Rules 15Fi-3 Through
15Fi-5
    A. Existing Substituted Compliance Rule
    B. Amendments to Rule 3a71-6
    1. Basis for Substituted Compliance in Connection With the
Portfolio Reconciliation, Portfolio Compression, and Trading
Relationship Documentation Requirements
    2. Comparability Criteria, and Consideration of Related
Requirements
V. Explanation of Dates
    A. Effective Date
    B. Compliance Date
    C. Application to Substituted Compliance
VI. Paperwork Reduction Act
    A. Summary of Collections of Information
    1. Rule 15Fi-3: Portfolio Reconciliation
    2. Rule 15Fi-4: Portfolio Compression
    3. Rule 15Fi-5: Written Trading Relationship Documentation
    4. Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books and
Records Requirements
    5. Amendment to Rule 3a71-6: Substituted Compliance
    B. Use of Information
    1. Rule 15Fi-3: Portfolio Reconciliation
    2. Rule 15Fi-4: Portfolio Compression
    3. Rule 15Fi-5: Written Trading Relationship Documentation
    4. Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books and
Records Requirements
    5. Amendment to Rule 3a71-6: Substituted Compliance
    C. Respondents
    D. Total Annual Recordkeeping Burden
    1. Portfolio Reconciliation Activities Generally
    2. Establishing, Maintaining, and Enforcing Written Policies and
Procedures
    3. Reporting of Certain Valuation Disputes
    4. Rule 15Fi-4: Portfolio Compression
    5. Rule 15Fi-5: Written Trading Relationship Documentation
    6. Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books and
Records Requirements
    7. Amendment to Rule 3a71-6: Substituted Compliance
    E. Collection of Information is Mandatory
    F. Confidentiality
VII. Economic Analysis
    A. Broad Economic Considerations
    B. Economic Baseline
    1. Security-Based Swap Market Activity and Participants
    a. Available Data From the Security-Based Swap Market
    b. Affected SBS Entities
    c. Other Market Participants
    d. Outstanding Positions
    2. Current Portfolio Reconciliation Practices
    3. Current Portfolio Compression Practices
    4. Current Trading Relationship Documentation Practices
    C. Economic Costs and Benefits, Including Impact on Efficiency,
Competition, and Capital Formation
    1. Effects on Efficiency, Competition, and Capital Formation
    a. Broad Market Effects
    b. Substituted Compliance
    2. Portfolio Reconciliation
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    3. Portfolio Compression
    a. Requirements
    b. Benefits

    c. Costs
    d. Alternatives
    4. Trading Relationship Documentation
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    5. Recordkeeping Requirements
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    6. Cross-Border Application of Rules 15Fi-3 Through 15Fi-5
    a. Requirements
    b. Benefits
    c. Costs
VIII. Regulatory Flexibility Act Certification
IX. Other Matters

I. Background

    Section 15F(i)(1) of the Exchange Act, as added by Section 764(a)
of Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''),\2\ requires each SBS Entity to
conform with such standards as may be prescribed by the Commission, by
rule or regulation, that relate to timely and accurate confirmation,
processing, netting, documentation, and valuation of all security-based
swaps.\3\ Section 15F(i)(2) of the Exchange Act provides that the
Commission shall adopt rules governing documentation standards for SBS
Entities.\4\
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise
indicated, references to ``Title VII'' in this release are to
Subtitle B of Title VII of the Dodd-Frank Act.
    \3\ 15 U.S.C. 78o-10(i)(1).
    \4\ 15 U.S.C. 78o-10(i)(2).
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    In June 2016, the Commission adopted rules requiring SBS Entities
to provide trade acknowledgments and to verify those trade
acknowledgments with their counterparties to security-based swap
transactions.\5\ At the time, however, the Commission had not proposed
rules concerning other documentation requirements, such as portfolio
reconciliation, portfolio compression, or trading relationship
documentation. By contrast, in 2012 the Commodity Futures Trading
Commission (``CFTC'') implemented rules setting forth standards for the
timely and accurate confirmation of swaps, as well as addressing the
reconciliation and compression of swap portfolios and setting forth
requirements for documenting the swap trading relationship between swap
dealers or major swap participants (each swap dealer and each major
swap participant hereafter referred to as a ``Swap Entity'' and
together referred to as ``Swap Entities'') and their counterparties.\6\
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    \5\ See Trade Acknowledgment and Verification of Security-Based
Swap Transactions, Exchange Act Release No. 78011 (June 8, 2016), 81
FR 39807 (June 17, 2016) (``Trade Acknowledgment and Verification
Adopting Release'').
    \6\ See Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation
Requirements for Swap Dealers and Major Swap Participants, 77 FR
55904 (Sept. 11, 2012) (``CFTC Risk Mitigation Adopting Release'').
Other jurisdictions, such as the European Commission (``EC'') and
Republic of Singapore, have implemented similar measures. See
Commission Delegated Regulation (European Union (EU)) No. 149/2013
(Dec. 18, 2012) supplementing Regulation (EU) No. 648/2012 of the
European Parliament and of the Council with regard to regulatory
technical standards on indirect clearing arrangements, the clearing
obligation, the public register, access to a trading venue, non-
financial counterparties, and risk mitigation techniques for over-
the-counter (``OTC'') derivatives contracts not cleared by a central
counterparty (Feb. 23, 2013), available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0011:0024:en:PDF; and Monetary
Authority of Singapore, Guidelines on Risk Mitigation Requirements
for Non-Centrally Cleared Over-The-Counter Derivatives Contracts,
(published on Apr. 25, 2019), available at: https://www.mas.gov.sg/regulation/guidelines/guidelines-on-risk-mitigation-requirements-for-non-centrally-cleared-otc-derivatives-contracts. Regulatory
authorities in other jurisdictions (e.g., the Hong Kong Monetary
Authority) have also proposed requirements similar to those adopted
by the CFTC and the EC. In addition, the Canadian Securities
Administrators (``CSA'') published a consultation paper in 2016
proposing a requirement that financial institutions enter into a
written agreement documenting the material terms and conditions of
any non-centrally cleared derivative, including standards related to
the maintenance, review, and contents of that documentation. See CSA
Consultation Paper 95-401--Margin and Collateral Requirements for
Non-Centrally Cleared Derivatives (Jul. 7, 2016), available at:
http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20160707_95-401_collateral-requirements-cleared-derivatives.pdf.
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    Accordingly, on December 19, 2018, the Commission proposed Rules
15Fi-3, 15Fi-4, and 15Fi-5, which would establish requirements
applicable to SBS Entities addressing, among other things, reconciling
and compressing portfolios of uncleared security-based swaps and
executing written trading relationship documentation with each
counterparty prior to or contemporaneously with executing an uncleared
security-based swap.\7\ As the Commission explained in the Trade
Acknowledgement and Verification Adopting Release, the process of
confirming the terms of a transaction is essential for SBS Entities
``to effectively measure and manage market and credit risk.'' \8\ In
particular, ``a backlog of unconfirmed trades could hinder the
settlement process, particularly if errors go undetected or a
counterparty disputes the terms of a transaction.'' \9\ Such
disruptions or breakdowns in the settlement process resulting from
unconfirmed trades could, in turn, lead to broader market instability
in the case of a credit event involving a reference entity on which
many different counterparties have, in the aggregate, a large notional
outstanding exposure.\10\
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    \7\ See Risk Mitigation Techniques for Uncleared Security-Based
Swaps, Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614
(Feb. 15, 2019) (``Proposing Release'').
    \8\ See Proposing Release, 84 FR at 4616 (citing Trade
Acknowledgement and Verification Adopting Release, 81 FR at 39833).
    \9\ Id.
    \10\ Id.
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    In this regard, portfolio reconciliation addresses many of these
same issues, but unlike the confirmation process, which occurs at the
outset of a transaction, reconciliation operates throughout the life of
the transaction. If a discrepancy is not identified during the trade
acknowledgement and verification process, such discrepancy could still
be identified during a subsequent reconciliation exercise. Furthermore,
even if a security-based swap transaction is accurately confirmed by
both parties during the trade acknowledgement and verification process,
reconciliation would help to identify any discrepancies in terms that
do not remain constant throughout the life of a trade.
    Accordingly, portfolio reconciliation serves as an important
mechanism for promoting risk mitigation by requiring security-based
swap counterparties to have established processes for identifying and
resolving discrepancies involving key terms of their transactions. To
illustrate this point, if a term necessary for calculating the market
value of a security-based swap is not accurately confirmed during the
trade acknowledgment and verification process, due for example to some
form of systems or human error, that discrepancy could lead to
complications at various points throughout the life of the transaction,
which could become particularly problematic if it remains undetected
until the parties are required to perform on their obligations.\11\
Thus, portfolio reconciliation could help to mitigate the possibility
of a discrepancy unexpectedly affecting performance under the security-
based swap

transaction by increasing the likelihood that the parties are and
remain in agreement with respect to all material terms.\12\
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    \11\ See Summary of OTC Commitments, Attachment to the July 31,
2008 letter from the Operations Management Group to Timothy
Geithner, President, Federal Reserve Bank of New York (``FRBNY''),
available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2008/CommitmentSummaryTable.pdf (``Positive
affirmation of trade economics is a key risk mitigation technique
for OTC derivatives because it assures that each counterparty's risk
management systems accurately reflect the economic details of trades
that have not yet been matched.''). Although this specific
commitment was made in the context of the trade affirmation process,
we believe that the same basic principle supports the need to
reconcile terms throughout the life of a trade, even if a term is
accurately reflected in a firm's system as a result of the
affirmation process, particularly in the case of terms that do not
remain constant during the life of a trade.
    \12\ See Proposing Release, 84 FR at 4616.
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    Portfolio reconciliation is especially relevant with respect to
terms used to perform a valuation of the financial instrument.
Specifically, unresolved discrepancies regarding the value of a
security-based swap can lead to, among other things, difficulties in
the application of any processes that depend on the valuation being
accurate, such as determining the amount of margin that must be posted
or collected during the life of a security-based swap transaction. In
the aggregate, such errors and other complications could result in
significant uncollateralized exposure in the uncleared security-based
swap markets (or, alternatively, potentially inefficient
overcollateralization).\13\
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    \13\ See id.
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    In addition, valuation discrepancies identified during
reconciliation could help to identify problems with one or both of the
counterparties' internal valuation systems and models, or possibly even
with a firm's internal controls. For example, in a report analyzing
federal assistance to American International Group, Inc. (``AIG'')
following the events of September 2008, the General Accountability
Office (``GAO'') noted that in structuring this relief one of the many
open issues the FRBNY had to address was the number of collateral
disputes AIG had with its counterparties.\14\ GAO further explained
that ``[t]o the extent that lower valuations (more CDO value lost)
produced greater collateral postings, counterparties had an interest in
seeking lower valuations. Similarly, to the extent that higher
valuations (less CDO value lost) meant smaller collateral postings, AIG
had an interest in seeking higher valuations.'' \15\
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    \14\ See GAO, Financial Crisis: Review of Federal Reserve System
Financial Assistance to American International Group, Inc., GAO-11-
616 (Sept. 2011), available at: http://www.gao.gov/assets/590/585560.pdf (``According to information we reviewed, on a
[collateralized debt obligation (``CDO'')] portfolio of $71 billion
. . ., AIG and its counterparties had valuation differences totaling
$4.3 billion. Among a group of 15 counterparties, 9 had valued their
assets differently than AIG.'').
    \15\ Id. at 82.
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    Portfolio compression is another process that should help SBS
Entities better manage their outstanding security-based swap
transactions, albeit in a different way. Portfolio compression
generally refers to a post-trade processing exercise that allows two or
more market participants to eliminate redundant derivatives
transactions within their portfolios in a manner that does not change
their net exposure. Compression exercises typically take place in
``cycles,'' whereby each participating counterparty designates
particular contracts within its portfolio as being eligible for
compression and specifies its risk tolerances with respect to the
composition of its derivatives portfolio following completion of the
cycle.\16\ Following an analysis of the submitted contracts,
counterparties may be provided with the option of terminating or
modifying those contracts and replacing them with a smaller number of
substantially similar contracts. In most cases, the gross notional
value of the position is reduced, although the counterparty's net
exposure, represented by the replacement and remaining contracts,
typically remains the same.\17\
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    \16\ See, e.g., ISDA Study, Interest Rate Swaps Compression: A
Progress Report, (Feb. 2012), available at: http://www2.isda.org/attachment/NDAzMw==/IRS%20compression%20progress%20report%20-%20Feb%202012.pdf.
    \17\ In 2011, the Commission issued an order granting temporary
exemptions from the requirement to register as a clearing agency
under Section 17A of the Exchange Act for entities providing certain
clearing services for security-based swaps including, among other
things, tear-up and compression services. That order contains
general descriptions of the portfolio compression process, based on
discussions between Commission staff and market participants prior
to the issuance of the exemptive order. See Order Pursuant to
Section 36 of the Securities Exchange Act of 1934 Granting Temporary
Exemptions from Clearing Agency Registration Requirements under
Section 17A(b) of the Exchange Act for Entities Providing Certain
Clearing Services for Security-Based Swaps, Exchange Act Release No.
64796 (Jul. 1, 2011), 76 FR 39963 (Jul. 7, 2011) (``Clearing
Services Exemptive Order'').
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    By reducing the total number of open contracts, portfolio
compression is intended to help market participants manage their post-
trade risks in a number of important ways. For example, two or more
counterparties that are active in the OTC derivatives markets might
have built up positions in the same (or comparable) products that, when
analyzed at the portfolio level across all applicable counterparties,
offset each other. Eliminating these offsetting and redundant uncleared
derivatives transactions through compression--as measured both by the
number of contracts and the total notional value--reduces a market
participant's gross exposure to its direct counterparties, including by
eliminating all exposure to certain counterparties.\18\ Reducing the
total number of outstanding contracts within a derivatives portfolio
also provides important operational benefits and efficiencies for
market participants in that there are fewer open contracts to manage,
maintain, and settle, resulting in fewer opportunities for processing
errors, failures, or other problems that could develop throughout the
lifecycle of a transaction.\19\ Accordingly, the Commission believes
that the use of portfolio compression by SBS Entities, where
appropriate (and to the extent that such activity is not already
occurring), should provide important processing improvements consistent
with the overall framework of Section 15F(i) of the Exchange Act.\20\
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    \18\ See Darrell Duffie, Ada Li, and Theo Lubke, Policy
Perspectives of OTC Derivatives Market Infrastructure, FRBNY Staff
Report No. 424, dated Jan. 2010, as revised Mar. 2010, available at:
http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``FRBNY
OTC Derivatives Report'') (``In some types of derivatives that are
not cleared, major market participants tend to build offsetting
positions with different counterparties, long with one set of
counterparties, and short with the others. In many cases, these
offsetting positions are redundant. They serve no useful business
purpose and create counterparty risk. Market participants should
continue to engage in regular market-wide portfolio compression
exercises in order to eliminate these redundant positions.''). See
also, John Kiff, et al., Credit Derivatives: Systemic Risks and
Policy Options, IMF Working Paper No. 254 (Nov. 2009), available at:
http://www.imf.org/external/pubs/ft/wp/2009/wp09254.pdf
(``Multilateral netting, typically operationalized via `tear-up' or
`compression' operations that eliminate redundant contracts, reduces
both individual and system counterparty credit risk.'').
    \19\ See Portfolio compression platform launched to reduce CDS
operational risk, Hedgeweek (Sept. 8, 2008) (explaining that a
portfolio compression platform ``reduces operational risk while
leaving market risk profiles unchanged,'' which is achieved ``by
terminating existing trades and replacing them with a smaller number
of new replacement trades that carry the same risk profile and cash
flows as the initial portfolio but have less capital exposure'').
    \20\ See 15 U.S.C. 78o-10(i).
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    Finally, just as portfolio reconciliation is designed to allow
counterparties to manage their internal risks by better ensuring
agreement with respect to the material terms and valuation of the
transaction (and thereby avoiding complications at various points
throughout the life of the transaction), requiring each SBS Entity to
document the terms of the trading relationship with each of its
counterparties before executing a new security-based swap transaction
should promote sound collateral and risk management practices by
enhancing transparency and legal certainty regarding each party's
rights and obligations under the transaction. This, in turn, should
help to reduce counterparty credit risk and promote certainty regarding
the agreed-upon valuation and other material terms of a security-based
swap.\21\ Having

adequate written documentation prior to, or contemporaneously with,
executing a security-based swap should also facilitate the ability of
the counterparties to engage in portfolio reconciliation in an
efficient and cost-effective manner.
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    \21\ See, e.g., Sylvie A. Durham, Terminating Derivatives
Transactions: Risk Mitigation and Close-Out Netting Sec.  8:1 (Nov.
2010) (``[L]egal contractual provisions are the foundation on which
the rights and obligations of the parties are based, and sound
collateral and risk management practices may be ineffective if the
legal rights of the parties are not clearly set forth.'').
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    In consideration of the above, the Commission proposed new Rules
15Fi-3, 15Fi-4, and 15Fi-5 under the Exchange Act.\22\ As proposed,
Rule 15Fi-3 generally would have required SBS Entities, in connection
with uncleared security-based swaps, to (1) engage in portfolio
reconciliation with counterparties who are SBS Entities and (2)
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that they engage in portfolio
reconciliation with counterparties who are not SBS Entities. In both
cases, the frequency of the portfolio reconciliation is based on the
number of outstanding transactions with the applicable counterparty. In
addition, proposed Rule 15Fi-4 would have required SBS Entities to
establish, maintain, and follow written policies and procedures related
to periodic bilateral and multilateral compression of uncleared
security-based swaps, as well as periodic offset of uncleared security-
based swaps. Finally, proposed Rule 15Fi-5 would have established
certain requirements for SBS Entities related to the use of written
trading relationship documentation in connection with their uncleared
security-based swap transactions.
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    \22\ Unless otherwise noted, all references to rules without an
accompanying statutory reference are to rules adopted under the
Exchange Act.
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    The Commission is adopting Rules 15Fi-3 through 15Fi-5, largely as
proposed.\23\ In developing this rulemaking, both at proposal and
adoption, we have consulted and coordinated with the CFTC, the
prudential regulators,\24\ and foreign regulatory authorities in
accordance with the consultation mandate of the Dodd-Frank Act.\25\ We
also have consulted and coordinated with foreign regulatory authorities
through Commission staff participation in numerous bilateral and
multilateral discussions with foreign regulatory authorities addressing
the regulation of OTC derivatives.\26\ Through these multilateral and
bilateral discussions, and Commission staff's participation in various
international task forces and working groups, we have gathered
information about foreign regulatory reform efforts and their effect
on, and relationship with, the U.S. regulatory regime. The Commission
has taken, and will continue to take, these discussions into
consideration in developing rules, forms, and interpretations for
implementing Title VII of the Dodd-Frank Act.
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    \23\ As described in greater detail below, the Commission is
making three changes to the proposal. First, we are adopting a
single definition of ``material terms'' for purposes of the
portfolio reconciliation requirements in Rule 15Fi-3 that is
generally consistent with the definition used in the corresponding
CFTC rule. This is in contrast to the proposed bifurcated
definition. See infra Section II.A.1. Second, Rule 15Fi-5, unlike in
the proposal, does not require an SBS Entity's written trading
relationship documentation to address the allocation of any
applicable regulatory reporting obligations. See infra Section
II.C.1. Both of those changes involve provisions that were included
in the proposal as part of a request for comment on how such
provisions could potentially help address how a security-based swap
data repository (``SDR'') may satisfy its obligation to verify the
terms of each security-based swap with both counterparties to the
transaction. See Proposing Release at 4633-4635. Finally, the
Commission is modifying the scope of the exception for uncleared
security-based swaps in each of Rules 15Fi-3, 15Fi-4, and 15Fi-5 to
include (1) security-based swaps that are, directly or indirectly,
submitted to and cleared by a clearing agency (as opposed to
limiting it to security-based swaps that have a clearing agency as a
direct counterparty) and (2) security-based swaps that are cleared
by a clearing agency that the Commission has exempted from
registration by rule or order pursuant to Section 17A of the
Exchange Act (as opposed to limiting it to security-based swaps
cleared at a registered clearing agency). See infra Sections II.A.6,
II.B.3, and II.C.5.
    \24\ For purposes of this statement, the term ``prudential
regulator'' is defined in Section 1a(39) of the Commodity Exchange
Act (``CEA''), 7 U.S.C. 1a(39), and that definition is incorporated
by reference into Section 3(a)(74) of the Exchange Act, 15 U.S.C.
78c(a)(74). Pursuant to that definition, the Board of Governors of
the Federal Reserve System (``Federal Reserve Board''), the Office
of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation (``FDIC''), the Farm Credit Administration, or the
Federal Housing Finance Agency (collectively, the ``prudential
regulators'') is the ``prudential regulator'' of an SBS Entity if
the entity is directly supervised by that regulator. Separately, we
are adopting a definition of ``prudential regulator,'' to be used
for purposes of the new portfolio reconciliation and trading
relationship documentation requirements. See infra note 73. That new
definition also references Section 3(a)(74) of the Exchange Act and
includes the same list of agencies as noted above.
    \25\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.''
    In addition, Section 752(a) of the Dodd-Frank Act provides, in
part, that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.''
    \26\ Staff participates in a number of international standard-
setting bodies and workstreams working on OTC derivatives reforms.
For example, Commission staff participated in the International
Organization of Securities Commissions' (``IOSCO'') preparation of a
report regarding risk mitigation standards for non-centrally cleared
OTC derivatives. See Risk Mitigation Standards for Non-centrally
Cleared OTC Derivatives (Jan. 28, 2015), available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD469.pdf. IOSCO developed
those standards in consultation with the Basel Committee on Banking
Supervision (``BCBS'') and the Committee on Payments and Market
Infrastructures.
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    Finally, the Commission continues to recognize that the CFTC rules
pertaining to portfolio reconciliation, portfolio compression, and
written trading relationship documentation have been in effect since
2012, and that any SBS Entity that also is registered with the CFTC as
a Swap Entity will already have incurred systems and compliance costs
in connection with the corresponding CFTC requirements. Accordingly, we
have endeavored throughout this rulemaking to harmonize the final rules
with the existing CFTC rules wherever possible. There are, however, a
very limited number of provisions where we continue to believe it is
appropriate to diverge from a particular aspect of the CFTC rules. Each
of those differences is described below, along with an explanation of
the Commission's reasons for adopting the different approach. To the
extent that no such substantive difference is described, it is because
we have not identified any such differences or identified only
technical differences.

II. Discussion of Final Rules

A. Rule 15Fi-3: Portfolio Reconciliation

1. Scope of the Portfolio Reconciliation Requirements
    As part of adopting Rule 15Fi-3, we also are amending existing Rule
15Fi-1 to add four new definitions. First, Rule 15Fi-1(l) defines
``portfolio reconciliation'' to mean any process by which the
counterparties to one or more uncleared security-based swaps:
     Exchange the material terms of all security-based swaps in
the security-based swap portfolio between the counterparties;
     Exchange each counterparty's valuation of each security-
based swap in the security-based swap portfolio between the
counterparties as of the close of business on the immediately preceding
business day; and
     Resolve any discrepancy in valuations or material
terms.\27\
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    \27\ The corresponding CFTC definition is in 17 CFR 23.500(i).
---------------------------------------------------------------------------

    Second, Rule 15Fi-1(o) defines the term ``security-based swap
portfolio'' to mean all security-based swaps currently in effect
between a particular SBS Entity

and a particular counterparty.\28\ Third, Rule 15Fi-1(q) defines
``valuation'' to mean the current market value or net present value of
a security-based swap.\29\ Finally, Rule 15Fi-1(i) defines ``material
terms'' to mean each term that is required to be reported to a
registered SDR or the Commission pursuant to 17 CFR 242.901 (Rule 901
under the Exchange Act); \30\ provided, however, that such definition
does not include any term that is not relevant to the ongoing rights
and obligations of the parties and the valuation of the security-based
swap.\31\
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    \28\ The corresponding CFTC definition is in 17 CFR 23.500(k).
    \29\ The corresponding CFTC definition is in 17 CFR 23.500(m).
    \30\ Rule 901 is part of Regulation SBSR, which governs the
reporting and publication of security-based swap transaction data.
See 17 CFR 242.900 to 242.909. Further, Section 3(a)(75) of the
Exchange Act defines the term ``security-based swap data
repository'' to mean ``any person that collects and maintains
information or records with respect to transactions or positions in,
or the terms and conditions of, security-based swaps entered into by
third parties for the purpose of providing a centralized
recordkeeping facility for security-based swaps.'' See 15 U.S.C.
78c(a)(75).
    \31\ The corresponding CFTC definition is in 17 CFR 23.500(g).
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    These definitions are intended to establish the scope of the
portfolio reconciliation requirements in Rule 15Fi-3, including by (1)
defining ``portfolio reconciliation,'' (2) defining the two categories
of information that must be exchanged during a reconciliation (i.e.,
the ``valuation'' and ``material terms'' of each relevant security-
based swap), and (3) identifying the specific transactions that are
included in a ``security-based swap portfolio'' between an SBS Entity
and each of its counterparties. Moreover, for consistency with the
corresponding CFTC rules applicable to Swap Entities, these four
definitions are substantively identical to the CFTC's corresponding
definitions, which we continue to believe are appropriately scoped for
purposes of Rule 15Fi-3.\32\
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    \32\ Because of differences between the Commission's and CFTC's
security-based swap and swap data reporting rules, the application
of the definition of ``material terms'' in Rule 15Fi-1(i) may differ
from the application of the corresponding CFTC definition. However,
in order to make the two definitions as substantively identical in
their application as possible, Rule 15Fi-1(i), as adopted, excludes
from that definition ``any term that is not relevant to the ongoing
rights and obligations of the parties and the valuation of the
security-based swap.'' See also infra notes 51-52 (describing the
Commission's recently issued policy statement on compliance with
Regulation SBSR).
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    The Commission received no comments on the proposed definitions of
``portfolio reconciliation,'' ``security-based swap portfolio,'' and
``valuation,'' each of which we are adopting as proposed. However, the
two comment letters we received both raised concerns with the proposed
definition of ``material terms.'' \33\ That proposed definition was
bifurcated, and depended on whether the relevant security-based swap
transaction had already been included in a security-based swap
portfolio and reconciled pursuant to proposed Rule 15Fi-3.\34\ With
respect to any security-based swap that had not yet been reconciled as
part of a security-based swap portfolio, the proposed definition of
``material terms'' included each term that is required to be reported
to a registered SDR pursuant to Rule 901 under the Exchange Act.\35\
With respect to all other security-based swaps within a security-based
swap portfolio, the proposed definition of ``material terms'' continued
to be based on the reporting requirements in Rule 901, but excluded any
term not relevant to the ongoing rights and obligations of the parties
and the valuation of the security-based swap.
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    \33\ See Letter dated April 16, 2019, from Steven Kennedy,
Global Head of Public Policy, the International Swaps and
Derivatives Association (``ISDA'') and Kyle Brandon, Managing
Director, Head of Derivatives Policy, the Securities Industry and
Financial Markets Association (``SIFMA'') (``ISDA/SIFMA Letter'');
see also Letter dated April 16, 2019, from Katherine Delp, Executive
Director, the Depository Trust & Clearing Corporation (``DTCC''), in
conjunction with its swap data repository, and Kara Dutta, General
Counsel, ICE Trade Vault (``DTCC/ICE Trade Vault Letter'').
    \34\ See Proposing Release at 4617-4618.
    \35\ Rule 901 (17 CFR 242.901) is part of Regulation SBSR, which
governs the reporting to registered SDRs of security-based swap data
and public dissemination by registered SDRs of a subset of that
data. See 17 CFR 242.900 to 242.909.
---------------------------------------------------------------------------

    In contrast to the proposed definition of ``material terms,'' the
CFTC's corresponding definition is not bifurcated and contains a list
of 24 data fields that are excluded from the definition (and therefore
excluded from the portfolio reconciliation requirements in CFTC Rule
Sec.  23.502) for all purposes. Those excluded fields include, among
others: (1) The status of either counterparty as a swap dealer, major
swap participant, financial entity, or U.S. person; (2) an indication
that the swap will be allocated and certain information regarding the
agent and the original swap; (3) an indication that the swap is a
multi-asset swap and a further indication of its primary and secondary
asset class; (4) an indication that the swap is a mixed swap and the
identification of any non-CFTC registered swap data repository to which
it is also reported (if applicable); (5) the block trade indicator,
execution timestamp, and timestamp for submission to a swap data
repository; (6) the clearing indicator and clearing venue; and (7)
certain information regarding the application of the end user exception
from mandatory clearing.\36\ When the CFTC amended its definition of
``material terms'' in 2016, it explained that ``the removal of these
terms from reconciliations would alleviate the burden of resolving
discrepancies in terms of a swap that are not relevant to the ongoing
rights and obligations of the parties and the valuation of the swap
without impairing the [CFTC]'s regulatory mission.'' \37\
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    \36\ See 17 CFR 23.500(g).
    \37\ See Definitions of ``Portfolio Reconciliation'' and
``Material Terms'' for Purposes of Swap Portfolio Reconciliation, 81
FR 27309 (May 6, 2016).
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    The Commission continues to believe that the data set submitted to
an SDR under Rule 901 is an appropriate starting point for determining
which terms should be reconciled pursuant to Rule 15Fi-3. This approach
is consistent with the one taken by the CFTC, which also defines
``material terms'' by reference to the information required to be
reported to a swap data repository, and reflects our continued belief
that one of the fundamental goals of the portfolio reconciliation
process is to help ensure that both counterparties to a security-based
swap are in agreement on all of the terms necessary for developing a
comprehensive understanding of each of their rights and obligations
under the security-based swap, and that they remain in such agreement
throughout the life of the transaction.\38\ To further that objective,
``portfolio reconciliation'' has been defined in part to include the
exchange of the ``material terms'' of all security-based swaps in the
security-based swap portfolio between the counterparties. Similarly, in
adopting Regulation SBSR, the Commission explained that the Title VII
regulatory reporting requirement ``is designed to allow the Commission
and other relevant authorities to have access to comprehensive
information about security-based swap activity in registered SDRs.''
\39\ The Commission therefore remains of the view that the terms that
must be reported to an SDR under Regulation SBSR are a good proxy for
identifying the ``material terms'' that should be subject to the
portfolio reconciliation requirements.
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    \38\ See Proposing Release, 84 FR at 4618.
    \39\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information; Final Rule, Exchange Act Release
No. 74244 (Feb. 11, 2015), 80 FR 14563, 14646 (Mar. 19, 2015)
(``Regulation SBSR Adopting Release'').
---------------------------------------------------------------------------

    The Commission also continues to believe that basing the definition
of ``material terms'' on what is required to be reported to an SDR
provides certainty for SBS Entities regarding what

information must be reconciled, which should in turn reduce the burdens
on those entities without lessening the benefits of the rule (which are
described earlier in this section and in the Economic Analysis section
below).\40\ Such an approach also is designed to allow affected
counterparties to leverage the same systems used for SDR reporting for
purposes of the portfolio reconciliation requirements, should such
synergies exist.
---------------------------------------------------------------------------

    \40\ See also Proposing Release, 84 FR at 4618.
---------------------------------------------------------------------------

    With respect to the proposed bifurcated definition of ``material
terms,'' such approach was part of a broader request for comment that
the Commission included in the Proposing Release to identify ways to
potentially resolve an issue previously identified in connection with
the rules applicable to the registration and ongoing regulation of
SDRs.\41\ Specifically, the proposed definition was intended to help
establish a basis by which registered SDRs could potentially comply
with the requirement in Section 13(n)(5)(B) of the Exchange Act and 17
CFR 240.13n-4(b)(3) (Rule 13n-4(b)(3)) thereunder that they ``confirm
with both counterparties to the security-based swap the accuracy of the
data that was submitted.'' \42\
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    \41\ For a more detailed discussion of this issue, including the
concerns raised by SDRs as to the difficulty of requiring them to
reach out to counterparties who are not their members to verify
accuracy of the data, see Proposing Release, 84 FR at 4633-35.
    \42\ See 15 U.S.C. 78m(n)(5) and Rule 13n-4(b)(3). The
Commission also included a provision in proposed Rule 15Fi-5(b)(1)
that was intended to serve the same purpose. See infra note 110-113
and accompanying text. Further, the Commission requested comment on
whether those two aspects of the proposal could provide a sufficient
basis, in whole or in part, for an SDR to assess whether it can
reasonably rely on a SBS Entity's verification of transaction data
as the basis to meet the verification requirements. See Proposing
Release, 84 FR at 4635.
---------------------------------------------------------------------------

    In their joint comment letter, ISDA and SIFMA expressed strong
reservations to that proposed definition, noting that portfolio
reconciliation and trade reporting are two different processes
involving different systems and third party vendors, and that expanding
the reconciliation process to include non-economic data fields would
require the two associations' members to incur significant operational
and technological development costs and time, with no tangible benefit
for an SBS Entity's risk mitigation activity.\43\ Those commenters also
posited that requiring reconciliation of non-economic terms for
initial, but not subsequent, reconciliations would require further
operational and technological development to manage the portfolio
reconciliation process over the course of certain security-based swap
life-cycle events, and would impose on SBS Entities the ongoing burden
of maintaining three processes for portfolio reconciliation, one to
comply with the CFTC's rules, one for any security-based swap that has
not yet been included in a portfolio reconciliation, and one for all
other security-based swaps.\44\
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    \43\ See ISDA/SIFMA Letter.
    \44\ Id. ISDA and SIFMA also questioned ``the suitability of
this proposed shift in regulatory responsibility'' and noted that
counterparties that are not members of the SDR may also not be
involved in meaningful portfolio reconciliation processes.
---------------------------------------------------------------------------

    The DTCC and ICE Trade Vault expressed general support for
leveraging certain aspects of the proposed rules (including the
proposed bifurcated definition of ``material terms'') as a possible way
of resolving, at least in part, the SDR verification issue, but
suggested that those provisions would not provide SDRs with the
regulatory certainty necessary to rely on an SBS Entity's submission to
satisfy the SDR's verification obligation under Section 13(n)(5)(B) and
Rule 13n-4(b)(3).\45\ DTCC and ICE Trade Vault also noted their belief
that evaluating an SBS Entity for these purposes goes beyond the SDR's
proper role to store and report data, which would impose a burden on
the resources of an SDR outside the statutory requirements.\46\
Accordingly, those commenters concluded, reliance on the submissions by
or on behalf of an SBS Entity to provide the definitive report of a
given security-based swap is not a complete solution to the SDR
verification issue, regardless of whether the SBS Entity was subject to
a requirement that it initially reconcile with its counterparty all of
the terms required to be reported to the SDR.\47\
---------------------------------------------------------------------------

    \45\ See DTCC/ICE Trade Vault Letter.
    \46\ See id.
    \47\ See id.
---------------------------------------------------------------------------

    As an alternative to the approach set out in the Proposing Release,
DTCC and ICE Trade Vault requested that the Commission address the
issue through interpretive guidance or exemptive relief and make clear
that (1) the relief is permanent and (2) the scope of the relief is
broad enough to cover all submissions to the SDR not covered under an
approach applicable only to SBS Entity submissions.\48\ DTCC and ICE
Trade Vault did not, however, provide any additional information or
potential conditions to support their suggested approach.
---------------------------------------------------------------------------

    \48\ See id.
---------------------------------------------------------------------------

    After careful review and consideration of the comments received and
upon further consideration, the Commission is adopting a single, non-
bifurcated definition of ``material terms'' that better aligns with the
CFTC's corresponding definition. Specifically, and as described above,
Rule 15Fi-1(i) defines ``material terms'' to include each term that is
required to be reported to a registered SDR or the Commission pursuant
to Rule 901 under the Exchange Act; provided, however, that such
definition does not include any term that is not relevant to the
ongoing rights and obligations of the parties and the valuation of the
security-based swap. In light of the comments we received, which
indicated that the costs and burdens imposed on SBS Entities of
implementing the proposed bifurcated approach were not justified in
light of what commenters viewed as an incomplete and partial solution
to the SDR verification issue (absent the Commission providing
interpretive guidance or exemptive relief), the Commission believes
that it is appropriate and less burdensome for SBS Entities to
harmonize the definition of ``material terms'' in Rule 15Fi-1(i) with
the corresponding CFTC definition by not adopting the proposed
bifurcated approach.\49\
---------------------------------------------------------------------------

    \49\ As described above, DTCC and ICE requested that the
Commission address the issue of SDR verification through
interpretive guidance or exemptive relief. This release focuses on
specific documentation requirements related to risk mitigation
techniques. And while the Commission is not addressing the SDR
verification issue in this release, it may do so at a future date.
---------------------------------------------------------------------------

    In addition to expressing their opposition to the proposed
bifurcated approach to the definition of ``material terms,'' ISDA and
SIFMA also requested that the Commission (1) align its trade reporting
rules with those of the CFTC and (2) prescribe an enumerated list of
the ``terms that are not relevant to the ongoing rights and obligations
of the parties,'' and thus do not need to be reconciled in any
portfolio reconciliation process required by Rule 15Fi-3.\50\ The
Commission has carefully considered these comments and has determined
not to make either of the two requested changes to the definition. The
Commission believes that the comment about aligning the two agencies'
trade reporting rules is outside the scope of this rulemaking because,
although Rule 15Fi-3 references the reporting rules in order to
identify the terms that must be reconciled, the purpose of this
rulemaking is not to amend the underlying reporting requirements
themselves.\51\
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    \50\ See ISDA/SIFMA Letter.
    \51\ In addition, in a separate release adopting rules that
address the cross-border application of certain security-based swap
requirements the Commission also has issued a policy statement
regarding compliance with the rules for SDRs and Regulation SBSR
(``Regulation SBSR/SDR Policy Statement''). See Rule Amendments and
Guidance Addressing Cross-Border Application of Certain Security-
Based Swap Requirements. Exchange Act Release No. 87780 (Dec. 18,
2019) (``Cross-Border Amendments Adopting Release''). That policy
statement, which will be in effect for four years following the
first compliance date for Regulation SBSR, states that certain
specified actions with respect to the security-based swap reporting
rules will not provide a basis for a Commission enforcement action.
For example, one of the identified fact patterns includes a
situation where a person with a duty to report a data element of a
security-based swap transaction, as required by any provision of
Rules 901(c)(2)-(7) and 901(d) of Regulation SBSR, does not report
that data element because the CFTC's swap reporting rules in force
at the time of the transaction do not require that data element to
be reported. See id. During the pendency of the Regulation SBSR/SDR
Policy Statement, SBS Entities that elect to follow the CFTC's swap
reporting rules pursuant to the Regulation SBSR/SDR Policy Statement
also may look to the CFTC's reporting requirements with respect to
which terms are the ``material terms'' for purposes of complying
with the portfolio reconciliation requirements in Rule 15Fi-3.

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

    Moreover, although the Commission understands that there may be
benefits of providing an enumerated list of terms that are ``not
relevant to the ongoing rights and obligations of the parties and the
valuation of the security-based swap,'' we also note that Rule 901 of
Regulation SBSR, unlike the CFTC's swap data reporting rules, does not
contain a list of required data fields, but rather a requirement
setting forth broad categories of information that must be reported to
an SDR (or the Commission). Because Rule 901 is used to identify the
data elements that are considered to be ``material terms'' for purposes
of the portfolio reconciliation requirements in Rule 15Fi-3, the
application of the CFTC's portfolio reconciliation rules may differ
from the application of Rule 15Fi-3 due to differences in the operation
of the underlying reporting rules, as described above.\52\ However,
although the Commission is not providing a definitive list of excluded
data fields because of the underlying differences between Regulation
SBSR and the CFTC's swap data reporting rules, we would consider the
information required to be reported to an SDR pursuant to Rule 901 of
Regulation SBSR that corresponds to the 24 excluded fields in CFTC Rule
Sec.  23.500(g) to be not relevant to the ongoing rights and
obligations of the parties and the valuation of the security-based
swap, and therefore such information may appropriately be excluded from
the definition of ``material terms'' in Rule 15Fi-1(i) for purposes of
the portfolio reconciliation requirements in Rule 15Fi-3.\53\
---------------------------------------------------------------------------

    \52\ However, the Commission's position in the Regulation SBSR/
SDR Policy Statement could, by addressing compliance with certain
aspects of the CFTC's swap reporting rules (in lieu of Regulation
SBSR) for a period of four years following the compliance date for
SBSR, further alleviate any potential differences between Rule 15Fi-
3 and CFTC Sec.  23.502 that may flow from differences between the
two agencies' Title VII data reporting rules. For example, to the
extent that an SBS Entity reports security-based swap data to an SDR
based on the data fields set forth in CFTC's swap data reporting
rules in 17 CFR part 45, such SBS Entity would be able to identify
the exact data fields that may be excluded from the definition of
``material terms'' in Rule 15Fi-1(i), and therefore not subject to
the portfolio reconciliation requirements in Rule 15Fi-3. See id.
    \53\ See supra note 37 and accompanying text (explaining that in
2016 when the CFTC adopted amendments to Rule Sec.  23.500(g) to
exclude the 24 specific fields from the definition of ``material
terms,'' it described such terms as being ``not relevant to the
ongoing rights and obligations of the parties and the valuation of
the swap.'').
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2. Rule 15Fi-3(a): Portfolio Reconciliation With Other SBS Entities
    The particular portfolio reconciliation requirements in Rule 15Fi-3
that apply to a specific security-based swap portfolio will depend on
the type of counterparty with which the SBS Entity transacts. For
transactions between two SBS Entities, Rule 15Fi-3(a) requires the two
sides to engage in portfolio reconciliation at frequencies that are
based on the size of the security-based swap portfolio between the two
parties, expressed in ranges (or tiers). Under this tiered approach, if
the two SBS Entity counterparties maintain a security-based swap
portfolio that includes 500 or more security-based swaps, portfolio
reconciliation will need to occur once each business day for as long as
the portfolio exceeds this threshold. If a security-based swap
portfolio between two SBS Entities includes more than 50 but fewer than
500 security-based swaps on any business day during a week, portfolio
reconciliation will be required to occur on a weekly basis. For a
security-based swap portfolio between two SBS Entities that includes no
more than 50 security-based swaps at any time during the calendar
quarter, portfolio reconciliation will be required on a quarterly
basis.\54\
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    \54\ For the avoidance of doubt, if a security-based swap
portfolio between two SBS Entity counterparties crosses from one
threshold to another, both sides would be required to comply with
the relevant frequency requirements of Rule 15Fi-3(a) as of the date
the threshold is crossed. For example, if two SBS Entities that have
long maintained a portfolio of 50 or fewer security-based swaps (and
accordingly reconcile on a quarterly basis) exceed the 50
transaction threshold, the two sides would become subject to the
weekly reconciliation requirement as of the first day that the
portfolio exceeds 50 security-based swaps (or the daily
reconciliation requirement if the portfolio increases to 500 or more
security-based swaps). By contrast, if two SBS Entities that
maintain a security-based swap portfolio of more than 500
transactions subsequently fall below that threshold, they could
begin reconciling on a weekly basis as of the first business day
after the date on which they were able to verify that their
security-based swap portfolio has fallen below 500 transactions.
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    For the reasons noted in the Proposing Release, the Commission
continues to believe that the tiering of obligations, whereby the
frequency of the portfolio reconciliation is based on the number of
outstanding transactions with the applicable counterparty, represents a
reasonable attempt to calibrate the costs to the benefits expected from
reconciling a person's security-based swap portfolio at regular
intervals.\55\ Moreover, the CFTC has adopted rules that utilize
identical levels as Rule 15Fi-3(a), and the adoption by the Commission
of different thresholds could lead to additional costs and other
inefficiencies for SBS Entities that are also registered with the CFTC
as Swap Entities.\56\
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    \55\ See Proposing Release, 84 FR at 4619.
    \56\ When it adopted the same numerical thresholds in 2012, the
CFTC noted that the requirement to reconcile portfolios with 500 or
more swaps on a daily basis was consistent with the commitments made
by the OTC Derivatives Steering Group's 14 major dealers (``G-14
dealers'') in December 2008 as well as international regulatory
efforts underway at the time of the CFTC's release. See CFTC Risk
Mitigation Adopting Release, 77 FR at 55928, nn. 35 and 36. See also
Summary of OTC Commitments, Attachment to the June 2, 2009 letter
from G-14 dealers and certain buy-side participants to William C.
Dudley, President, FRBNY, available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2009/060209table.pdf
(committing, ``[b]y June 30, 2009, [to] execute daily collateralized
portfolio reconciliations for collateralized portfolios in excess of
500 trades between [Operations Management Group] dealers as detailed
in the December 31, 2008 Collateral Update letter''). See also
Attachment to the Mar. 31, 2011 letter from the G-14 dealers and
certain buy-side participants to William C. Dudley, President,
FRBNY, available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2011/SCL0331.pdf (``We commit to reduce the
threshold for routine portfolio reconciliation of collateralized
portfolios from those exceeding 1,000 transactions to those
exceeding 500 transactions starting June 30, 2011. These portfolios
will be reconciled at least monthly.'') (internal citation omitted).
---------------------------------------------------------------------------

    In addition to the requirements regarding the frequency of the
reconciliation, Rule 15Fi-3(a)(1) also requires SBS Entities to agree
in writing with each of their counterparties on the terms of the
portfolio reconciliation including, if applicable, agreement on the
selection of any third party service provider who may be performing the
reconciliation.\57\ In practice, an SBS

Entity could satisfy such requirement by including the terms governing
the portfolio reconciliation process in the written security-based swap
trading relationship documentation that the SBS Entity executes with
its counterparty pursuant to Rule 15Fi-5, as opposed to agreeing with
the counterparty on the terms of the reconciliation on a transaction-
by-transaction basis, which is likely to be significantly more
burdensome.\58\ This practice should help to ensure that portfolio
reconciliation begins without delay after execution of the transaction
and is designed to minimize the number of disagreements regarding the
portfolio reconciliation process itself.
---------------------------------------------------------------------------

    \57\ Rule 15Fi-3(a)(2) provides that portfolio reconciliation
may be performed either on a bilateral basis by the counterparties
or by a third party selected by the counterparties in accordance
with paragraph (a)(1) of the rule. The Commission notes that CFTC
Rule Sec.  23.502(a)(2), which is analogous to Rule 15Fi-3(a)(2),
uses the term ``qualified third party.'' When it adopted that
provision in 2012, the CFTC explained that it ``expects that parties
will determine if the third-party is qualified based on their own
policies.'' See CFTC Risk Mitigation Release, 77 FR at 55929. In
addition, the CFTC's portfolio reconciliation requirements for
transactions between Swap Entities and counterparties that are not
Swap Entities do not require the relevant third party to be
``qualified'' and, instead, provide that ``[t]he portfolio
reconciliation may be performed on a bilateral basis by the
counterparties or by one or more third parties selected by the
counterparties.'' See 17 CFR 23.502(b)(2) (emphasis added).
Accordingly, the Commission has decided not to refer to a
``qualified third party'' and, instead, uses the term ``third party
selected by the counterparties'' for purposes of Rule 15Fi-3(a)(2).
We believe that it is sufficient for our purposes to refer solely to
the fact that a third party has been selected.
    \58\ Specifically, once the two parties have agreed in writing
on the terms of the portfolio reconciliation for the first time, the
requirement could then be satisfied in connection with any new
security-based swap transaction executed by the two sides merely by
agreeing in writing to abide by the existing agreement regarding the
reconciliation process.
---------------------------------------------------------------------------

    Finally, the definition of ``business day'' for purposes of Rule
15Fi-3 (regardless of the status of the counterparty) includes ``any
day other than a Saturday, Sunday, or legal holiday.'' This definition,
which the Commission adopted in 2016 in connection with the trade
acknowledgement and verification requirements in Rule 15Fi-2, is not
being amended in this rulemaking.\59\ As explained in the Proposing
Release, we believe that the existing definition of ``business day''
has the benefit of providing market participants with the flexibility
to determine the holidays that are ``legal holidays'' for purposes of
the portfolio reconciliation requirements in Rule 15Fi-3, which should
be particularly useful given the cross-border nature of the OTC
derivatives market.\60\
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    \59\ Upon the effective date of these final rules, the
definition of ``business day'' currently in Rule 15Fi-1(a) will be
renumbered as Rule 15Fi-1(b).
    \60\ See Proposing Release, 84 FR at 4619 (describing the
rationale for relying on the existing definition of ``business day''
in Rule 15Fi-1 (as opposed to proposing a separate definition for
purposes of the portfolio reconciliation requirements) and comparing
that existing definition with the corresponding CFTC definition of
``business day'' in 17 CFR 1.3). As a reminder, SBS entities are
required to agree in writing with each of their counterparties on
the terms of the portfolio reconciliation pursuant to Rule 15Fi-
3(a)(1) (in the case of security-based swap portfolios with other
SBS Entities) and Rule 15Fi-3(b)(1) (in the case of security-based
swap portfolios with all other counterparties).
---------------------------------------------------------------------------

3. Rule 15Fi-3(a): Resolution of Discrepancies With Other SBS Entities
    Rule 15Fi-3(a) also requires each SBS Entity to take additional
actions in the event of a discrepancy with a counterparty that is an
SBS Entity. Specifically, Rule 15Fi-3(a)(4) requires the two SBS Entity
counterparties to resolve immediately any discrepancy in a material
term, whether identified directly as part of the portfolio
reconciliation or otherwise. For the reasons discussed in the Proposing
Release, we continue to believe that this timeframe is appropriate
given the ongoing nature of security-based swap transactions, as well
as the potential for disagreements between the counterparties regarding
the terms of a transaction to compound over the course of the security-
based swap transaction.\61\
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    \61\ See Proposing Release, 84 FR at 4619-20.
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    Also, and recognizing that valuation discrepancies could be
particularly difficult to resolve in a short period of time, Rule 15Fi-
3(a)(5) requires SBS Entities to have policies and procedures
reasonably designed to resolve a valuation discrepancy no later than
five business days from the date that it was discovered, which we
believe to be both a reasonable and appropriate amount of time to
resolve such discrepancies. As a condition to this requirement,
however, Rule 15Fi-3(a)(5) requires that each SBS Entity establish,
maintain, and follow written policies and procedures reasonably
designed to identify how it will comply with any variation margin
requirements under Section 15F(e) of the Exchange Act \62\ and any
related regulations pending resolution of the valuation discrepancy.
Although we understand the need to provide counterparties with
sufficient time to resolve valuation discrepancies, as reflected in the
five business day period provided to resolve them, we also believe it
to be important for those counterparties to take reasonable steps
during the pendency of the resolution to ensure that they are
continuing to manage their credit risk to each other by way of
exchanging variation margin.
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    \62\ 15 U.S.C. 78o-10(e).
---------------------------------------------------------------------------

    Further, Rule 15Fi-3(a)(5) provides that for purposes of the
requirement to resolve a valuation discrepancy within five business
days of it being identified, a difference between the lower valuation
and the higher valuation of less than 10% of the higher valuation need
not be deemed a discrepancy. This 10% threshold would apply on a
transaction-by-transaction basis and not on a portfolio level. As
discussed in greater detail in the Proposing Release, the Commission
believes that this buffer is designed to focus the internal resources
of both counterparties on the largest discrepancies.\63\ At the same
time, however, the Commission believes that, in most cases, prudent
risk mitigation of a firm's security-based swap portfolio and proper
governance over an entity's operations would involve ensuring that, at
least to a certain degree, most valuation discrepancies are ultimately
resolved.
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    \63\ See Proposing Release, 84 FR at 4620. For the avoidance of
doubt, an SBS Entity that identifies a valuation discrepancy in
excess of 10% would be in compliance with Rule 15Fi-3(a)(5) if it
resolves such discrepancy to a level below 10%, even if the entire
discrepancy is not completely eliminated. For example, an SBS Entity
would not be required to reduce an 11% valuation discrepancy down to
zero. Similarly, an SBS Entity with a 9% valuation discrepancy would
already be below the 10% threshold and would have no further
obligations under Rule 15Fi-3(a)(5).
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4. Rule 15Fi-3(b): Portfolio Reconciliation With Other Counterparties
    Rule 15Fi-3(b) establishes reconciliation requirements for
security-based swap portfolios between an SBS Entity and a counterparty
that is not an SBS Entity. Although there is some broad similarity
between Rule 15Fi-3(b) and the rules applicable to security-based swap
portfolios between two SBS Entities, we have taken a more streamlined
approach with respect to security-based swaps with non-SBS Entity
counterparties, similar to the CFTC's approach.\64\
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    \64\ For additional discussion of the Commission's rationale for
applying a more streamlined set of requirements in the case of a
security-based swap portfolio between an SBS Entity and a non-SBS
Entity counterparty, see Proposing Release, 84 FR at 4620.
---------------------------------------------------------------------------

    Pursuant to Rule 15Fi-3(b), each SBS Entity is required to
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it engages in portfolio
reconciliation with non-SBS Entity counterparties as set forth in the
rule.\65\ This policies and procedures requirement is in contrast to
Rule 15Fi-3(a), which expressly requires portfolio reconciliation with
respect to

transactions where both counterparties are SBS Entities. The policies
and procedures required by Rule 15Fi-3(b) will need to provide that the
portfolio reconciliation be performed no less frequently than: (1) Once
each calendar quarter for each security-based swap portfolio that
includes more than 100 security-based swaps at any time during the
calendar quarter and (2) once annually for each security-based swap
portfolio that includes no more than 100 security-based swaps at any
time during the calendar year. For the reasons noted in the Proposing
Release, the Commission continues to believe that basing the required
frequency of the portfolio reconciliation on the number of outstanding
transactions with the applicable counterparty represents a reasonable
attempt to calibrate the costs and benefits of reconciling a person's
security-based swap portfolio at regular intervals.\66\
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    \65\ Rule 15Fi-3(b) contains a slight deviation from
corresponding CFTC Rule Sec.  23.502(b) to eliminate language that
we believe to be redundant. We do not intend for such clarification
to signify any substantive differences between Rule 15Fi-3(b) and
CFTC Rule Sec.  23.502(b).
    \66\ See Proposing Release, 84 FR at 4620. Also, and similar to
the provisions governing portfolio reconciliation between two SBS
Entities, the CFTC has adopted rules with identical thresholds and
frequencies, and any divergence from those thresholds could lead to
additional costs and other inefficiencies for SBS Entities that are
also registered with the CFTC as Swap Entities. See supra note 56
(discussing how the CFTC arrived at setting the numerical thresholds
for the requirement to engage in portfolio reconciliation as between
two Swap Entities.).
---------------------------------------------------------------------------

    In addition, paragraph (b)(1) of Rule 15Fi-3 requires that the
applicable policies and procedures be reasonably designed to ensure
that each SBS Entity agrees in writing with each of its non-SBS Entity
counterparties on the terms of the portfolio reconciliation including,
if applicable, agreement on the selection of any third party service
provider who may be performing the reconciliation. Paragraph (b)(2)
provides that the portfolio reconciliation may be performed on a
bilateral basis by the counterparties or by one or more third parties
selected by the counterparties. To the extent that the counterparties
elect to use a third party to provide these services, the policies and
procedures should be reasonably designed to ensure that the SBS Entity
and its counterparty agree on the selection of that third party in
writing in accordance with the requirements set forth in Rule 15Fi-
3(b)(1).\67\
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    \67\ As noted in the discussion of the corresponding provision
in Rule 15Fi-3(a)(1), an SBS Entity could in practice satisfy such
requirement by including the terms governing the portfolio
reconciliation process in the written security-based swap trading
relationship documentation that it executes with its counterparty,
which, pursuant to Rule 15Fi-5, will need to be executed prior to,
or contemporaneously with, the two parties executing any new
security-based swap transaction. In addition, once the two parties
have agreed in writing on the terms of the portfolio reconciliation
for the first time, the requirement could then be satisfied in
connection with any new security-based swap transaction executed by
the two sides merely by agreeing in writing to abide by the existing
agreement regarding the reconciliation process. See supra notes 57
and 58 and accompanying text.
---------------------------------------------------------------------------

    Finally, Rule 15Fi-3(b)(4) requires each SBS Entity to establish,
maintain, and follow written procedures reasonably designed to resolve
any discrepancies in the valuation or a material term of each security-
based swap identified as part of a portfolio reconciliation or
otherwise with a non-SBS Entity counterparty in a timely fashion.\68\
We are not providing a fixed definition of ``timely fashion'' in the
context of resolving discrepancies with counterparties who are not SBS
Entities because such counterparties may vary considerably in terms of
their size, sophistication, and background. Although it may be possible
to resolve most valuation discrepancies with large hedge funds and
pension funds within the five-business-day period applicable to
transactions between two SBS Entities, that timeframe may be much more
challenging with respect to transactions with smaller buy-side
firms.\69\
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    \68\ Similar to the requirement for security-based swap
portfolios between two SBS Entities, Rule 15Fi-3(b)(4) provides that
a difference between the lower valuation and the higher valuation of
less than 10% of the higher valuation need not be deemed a
discrepancy. See supra note 63 and accompanying text (discussing the
10% threshold in the context of Rule 15Fi-3(a)(5)).
    \69\ See Proposing Release, 84 FR at 4621.
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5. Reporting of Valuation Disputes
    Rule 15Fi-3(c) requires each SBS Entity to promptly notify the
Commission of any security-based swap valuation dispute in excess of
$20,000,000 (or its equivalent in any other currency), at either the
transaction or portfolio level,\70\ if not resolved within: (1) Three
business days, if the dispute is with a counterparty that is an SBS
Entity; or (2) five business days, if the dispute is with a
counterparty that is not an SBS Entity.\71\ Such notification must be
in a form and manner acceptable to the Commission,\72\ and must be sent
to any applicable prudential regulator (i.e., in the case of any SBS
Entity that is also a bank).\73\
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    \70\ The language ``at either the transaction or portfolio
level'' is not included in CFTC Rule Sec.  23.502(c), which is the
corresponding requirement applicable to Swap Entities. The specific
requirements as to the operation of CFTC Rule Sec.  23.502(c) are
contained in the rules of the National Futures Association
(``NFA''), which the CFTC has authorized to, among other things,
receive and review notices of reportable swap valuation disputes.
See Performance of Certain Functions by the National Futures
Association Related to Notices of Swap Valuation Disputes Filed by
Swap Dealers and Major Swap Participants, 81 FR 3390 (Jan. 21,
2016).
    \71\ See Proposing Release, 84 FR at 4621 (discussing the
rationale for this notification provision, particularly as it
relates to the potential risks to the counterparties of a security-
based swap that could result from a lack of agreement on its
valuation).
    \72\ As explained in the Proposing Release, the requirement that
the notice be provided ``in a form and manner acceptable to the
Commission'' is intended to provide SBS Entities with flexibility to
determine the most efficient and cost-effective means of making such
submissions, so long as it is deemed to be acceptable by the
Commission. See Proposing Release, 84 FR at 4621, n. 47 and
accompanying text. At the same time, however, we also understand
that SBS Entities may prefer to have more specific direction as to
how to report these disputes to the Commission (and any applicable
prudential regulator). Accordingly, we requested comment on whether
we should establish a specific process for how SBS Entities would
need to provide notices of valuation disputes to the Commission
pursuant to proposed Rule 15Fi-3(c). We received no comments on this
aspect of the proposal, which we are adopting without modification.
    \73\ Additionally, the Commission is amending existing Rule
15Fi-1 to add the term ``prudential regulator,'' which includes the
Federal Reserve Board, the Office of the Comptroller of the
Currency, the FDIC, the Farm Credit Association, and the Federal
Housing Finance Agency, as applicable to the specific type of SBS
Entity. This definition, which is numbered as Rule 15Fi-1(m), has
the same meaning given to the term in Section 3(a)(74) of the
Exchange Act. See 15 U.S.C. 78c(a)(74).
---------------------------------------------------------------------------

    We also note that the CFTC has adopted a nearly identical
requirement with the same $20,000,000 threshold and timeframes, and
that adoption of the Commission of different requirements could lead to
additional costs and other inefficiencies for SBS Entities that are
also registered with the CFTC as Swap Entities.\74\ When the CFTC
adopted this requirement, it explained that ``the $20,000,000
materiality threshold for reporting is sufficiently high to eliminate
unnecessary `noise' from over-reporting, but not so high as to
eliminate reporting that the [CFTC] may find of regulatory value, such
as a large number of relatively small disputes that in aggregate could
provide the [CFTC] with information regarding a widespread market
disruption.'' \75\ We continue to concur with that justification, and

believe that these notifications could assist the Commission in
identifying potential issues with respect to an SBS Entity's internal
valuation methodology.\76\
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    \74\ See CFTC Risk Mitigation Adopting Release, 77 FR at 55914.
    \75\ Id. The CFTC has a nearly identical requirement in its Rule
Sec.  23.502(c), except that it also requires Swap Entities to send
such notices to the Commission when the dispute involves a swap that
is also a security-based swap agreement, of which a material term is
based on the price, yield, value, or volatility of any security or
any group or index of securities, or any interest therein. See 17
CFR 23.502(c) (citing the inclusion of security-based swap
agreements in the definition of ``swap'' in 7 U.S.C. 1a(47)(v)).
Because there is no corresponding inclusion of ``swap agreements''
in the definition of ``security-based swap agreement'' in Section
3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)), Rule 15Fi-3(c) does
not contain a requirement to provide notices of any security-based
swap valuation disputes to the CFTC.
    \76\ We are not providing a fixed definition of the term
``promptly'' in the context of when the SBS Entity would need to
provide the Commission of an applicable security-based swap
valuation dispute. Although we would expect that SBS Entities would
be able to provide these notices to the Commission as soon as the
disputes exceed the applicable timeframes (e.g., the beginning of
fourth business day in the case of a dispute between two SBS
Entities), we also understand that some notices may take longer to
prepare, such as in cases when the counterparties are unable to
agree even on the size of the dispute.
---------------------------------------------------------------------------

    Finally, in the Proposing Release, the Commission summarized the
NFA Interpretive Notice entitled, ``NFA Interpretive Notice to
Compliance Rule 2-49: Swap Valuation Dispute Filing Requirements''
(``NFA Interpretive Notice to Rule 2-49''), and requested comment on
whether any aspects of that notice should be incorporated directly into
proposed Rule 15Fi-3(c).\77\ Among other things, that interpretive
notice describes the types of disputes that would trigger a notice
requirement as well as requirements related to the timing and frequency
for providing notices of valuation disputes.\78\ In their letter, ISDA
and SIFMA suggested that incorporating NFA Interpretive Notice to Rule
2-49 into Rule 15Fi-3 could become problematic should the NFA update or
revise its guidance in the future, such that it would create
discrepancies between the two sets of requirements.\79\ ISDA and SIFMA
instead requested that the Commission put in place a process to ensure
that any NFA guidance applicable to Swap Entities with respect to the
CFTC's portfolio reconciliation requirements should also automatically
apply to SBS Entities with respect to the Commission's requirements in
Rule 15Fi-3(c), even when such NFA guidance is updated or changed.\80\
---------------------------------------------------------------------------

    \77\ See Proposing Release, 84 FR at 4621-22 (summarizing the
NFA Interpretive Notice to Rule 2-49). The NFA notice is available
at: https://www.nfa.futures.org/rulebook/rules.aspx?Section=9&RuleID=9072.
    \78\ See id.
    \79\ See ISDA/SIFMA Letter.
    \80\ See id.
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    After careful review and consideration, the Commission has
determined to incorporate one aspect of NFA Interpretive Guidance to
Rule 2-49 into Rule 15Fi-3(c). Specifically, we have modified the rule
to provide that SBS Entities are required to notify the Commission, in
a form and manner acceptable to the Commission, and any applicable
prudential regulator, if the amount of any security-based swap
valuation dispute that was the subject of a previous notice increases
or decreases by more than $20,000,000 (or its equivalent in any other
currency), at either the transaction or portfolio level. Such amended
notice shall be provided to the Commission and any applicable
prudential regulator no later than the last business day of the
calendar month in which the applicable security-based swap valuation
dispute increases or decreases by the applicable dispute amount.\81\
This change, which is consistent with NFA Interpretive Guidance to Rule
2-49,\82\ is intended to clarify that SBS Entities are not required to
file the same notice of a valuation dispute for each day the dispute
remains outstanding after the initial three- or five-business day
requirement, while also helping to ensure that the Commission is made
aware of significant changes to existing valuation disputes using the
same increments that Swap Entities are required to use when amending
swap valuation dispute notices pursuant to CFTC Rule Sec.  23.502(c)
(as administered by the NFA).\83\
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    \81\ The NFA requires amendments from Swap Entities to be filed
on the 15th (or the following business day if the 15th is a weekend
or holiday) and last business day of each month. To the extent that
an SBS Entity that also is registered with the CFTC as a Swap Entity
has existing systems in place to send out amendments on both the
15th (or the following business day if the 15th is a weekend or
holiday) and last business day of each month, the earlier filing
would of course satisfy the requirements of Rule 15Fi-3(c).
    \82\ Specifically, NFA Interpretive Guidance to Rule 2-49
provides that ``[Swap Entities] should not file a daily notice of a
previously reported dispute even if the valuation dispute amount
changes. [Swap Entities] are required, however, to notify NFA of
certain changes to the dispute amount on the 15th (or the following
business day if the 15th is a weekend or holiday) and last business
day of each month by amending any previously filed notice where the
dispute amount has increased in $20 million incremental bands. For
example, if a [Swap Entity] files a notice of a $30 million dispute,
an amended notice updating the dispute amount is required if that
dispute increases to $40 million or more and each subsequent $20
million increment (i.e., dispute amount increases to $60 million or
more, $80 million or more, etc.). [Swap Entities] are also required
to amend a previously filed notice to update the dispute amount if
the amount decreases at these $20 million increments. The
determination of whether an amended notice is required is based on
the dispute amount on the reporting date.''
    \83\ Among other things, NFA Interpretive Notice to Rule 2-49
requires Swap Entities to file termination notices of disputes that
are no longer reportable under CFTC Rule Sec.  23.502(c) on the 15th
(or the following business day if the 15th is a weekend or holiday)
and the last business day of the month based on the dispute amount
on the reporting date. See Proposing Release, 84 FR at 4621-22
(summarizing NFA Interpretive Notice to Rule 2-49). In addition, the
NFA issued another notice, entitled ``Effective date of Interpretive
Notice to NFA Compliance Rule 2-49: Swap Valuation Dispute Filing
Requirement'' which, among other things, requires that all swap
valuation disputes include: (1) The swap dealer's NFA ID and legal
entity identifier (``LEI''), (2) the dispute reportable date, (3)
the dispute type, (4) the dispute termination date, (5) the
receiver/payer, (6) the disputed amount, in U.S. Dollars (``USD''),
(7) the counterparty name, and (8) counterparty LEI or Privacy Law
Identifier. For initial and variation margin disputes, the swap
dealer is also required to provide (1) the unique swap identifier,
(2) the base currency notional amount, (3) the base currency code,
(4) the notional value USD equivalent, (5) the asset type, and (6)
the product type. For disputes where no collateral is exchange, NFA
Interpretive Notice to Rule 2-49 also requires Swap Entities to
include in the notice the credit support annex/netting agreement ID.
See Proposing Release, 84 FR at 4622, n. 57 (describing NFA Notice
to Members I-17-30, which incorporates NFA Notice to Members I-17-
30).
---------------------------------------------------------------------------

    The Commission has not incorporated any other provision of NFA
Interpretive Guidance to Rule 2-49 into Rule 15Fi-3(c) in order to
provide SBS Entities with the flexibility to submit the required
information to the Commission in a manner that is most efficient for
each SBS Entity.\84\ Finally, the Commission is not including in Rule
15Fi-3(c) a process to ensure that the NFA's guidance for Swap Entities
would also apply to the requirements in Rule 15Fi-3(c) for SBS
Entities, as requested by commenters. The Commission recognizes that
subsequent revisions to the NFA's guidance could potentially result in
divergences between the application of the Commission's requirements
regarding notices of valuation disputes and the corresponding CFTC
requirements (as administered by NFA). However, to the extent that
future changes to the NFA's requirements create divergences between
Rule 15Fi-3(c) and application of CFTC Rule Sec.  23.502(c), market
participants are encouraged to contact Commission staff to discuss such
divergences.
---------------------------------------------------------------------------

    \84\ As a general matter, we believe it likely that a notice
provided to the Commission with respect to a security-based swap
valuation dispute that is compliant with NFA Interpretive Guidance
to Rule 2-49 (but for the fact that such notice pertains to a
security-based swap) would also be compliant with 17 CFR 240.15F-
5(c) (Rule 15F-5(c)). SBS Entities that have questions about using a
system designed to accommodate the NFA guidance to comply with Rule
15Fi-5(c) are encouraged to contact Commission staff to discuss such
questions.
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6. Application of Rule 15Fi-3 to Cleared Security-Based Swaps
    As proposed, the portfolio reconciliation requirements in Rule
15Fi-3 would not have applied to a ``clearing transaction'' which,
pursuant to existing Rule 15Fi-1(c), is defined as a security-based
swap that has a clearing agency as a direct counterparty.\85\ As the

Commission explained in the Proposing Release, the exception reflected
the Commission's belief that the function of reconciling the terms of
cleared trades is more appropriately addressed by the rules governing a
clearing agency's risk management practices, as well as by the
documentation governing the relationship between a clearing agency and
its members.
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    \85\ Under existing Rule 15Fi-1(b) (which is renumbered as Rule
15Fi-1(c) under these final rules), the term ``clearing agency''
means a clearing agency registered with the Commission pursuant to
Section 17A of the Exchange Act and that provides central
counterparty services for security-based swap transactions.
---------------------------------------------------------------------------

    We did, however, request comment on whether the scope of the
exception for cleared security-based swaps should be modified, such as
by including transactions that are cleared at a clearing agency that is
not registered with the Commission pursuant to Section 17A of the
Exchange Act, whether because of an applicable exemption from
registration or because the Exchange Act does not cover the activities
of the clearing agency. For example, security-based swaps cleared at a
foreign clearing agency that is not registered with the Commission
would not be deemed to be ``cleared'' for these purposes, and would
therefore be subject to Rule 15Fi-3. In their comment letter, ISDA and
SIFMA expressed broad general support for expanding the scope of the
transactions considered to be cleared for purposes of this exception,
and stated that they would consider such a change to be a
clarification, and not a deviation from the corresponding CFTC
rules.\86\
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    \86\ See ISDA/SIFMA Letter. Although ISDA and SIFMA made this
comment solely in connection with the portfolio compression
requirements in Rule 15Fi-4, we view this issue as applying equally
to the portfolio reconciliation requirements in Rule 15Fi-3 and the
trading relationship documentation requirements in Rule 15Fi-5. As a
result, the discussion that follows, including the change we are
making to the scope of the clearing transactions subject to the
clearing exception, applies to all three new rules.
---------------------------------------------------------------------------

    After careful review and consideration of the comments received and
upon further consideration, the Commission is making two changes to
Rule 15Fi-3(d). First, we are expanding the exception to include not
only security-based swaps that have a clearing agency as a direct
counterparty, but also those that are, directly or indirectly,
submitted to and cleared by a clearing agency. As the Commission
explained when it adopted the trade acknowledgment and verification
requirements, under the agency model of clearing, cleared security-
based swap transactions are new transactions created to replace a
bilateral transaction that was submitted to, and has been accepted for
clearing by, a clearing agency. Upon acceptance for clearing, the
clearing agency becomes the new direct counterparty to each of the
counterparties of the original bilateral transaction. Therefore, these
transactions (known colloquially as the ``beta'' and ``gamma'')
effectively mirror the original bilateral transaction (known as the
``alpha'') that was extinguished in the process of acceptance for
clearing.\87\
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    \87\ See Trade Acknowledgement and Verification Adopting
Release, 81 FR at 39820-21. In that release, the Commission also
noted that if both direct counterparties to the alpha transaction
are members of the clearing agency, the direct counterparties would
submit the transaction to the clearing agency directly and the
resulting beta transaction would be between the clearing agency and
one clearing member, and the gamma transaction would be between the
clearing agency and the other clearing member. However, if the
direct counterparties to the alpha transaction 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 transaction for clearing, one of the resulting
transactions--in this case, assume the beta transaction--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 transaction--the gamma transaction--would be between
the clearing agency and the clearing member that was a direct
counterparty to the alpha transaction. See id. (citing Regulation
SBSR Adopting Release, 80 FR 14563 at n. 292).
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    By virtue of relying on the current definition of ``clearing
transaction,'' which applies to the trade acknowledgment and
verification requirements in existing Rule 15Fi-2, the proposed
exception in Rule 15Fi-3(d) would have applied only to the ``beta'' and
``gamma'' transactions, and not to the original bilateral transaction
(i.e., the ``alpha''). Although the obligation to reconcile the
original bilateral security-based swap transaction would no longer
exist as soon as the transaction is novated to the clearing agency, the
Commission nevertheless believes that requiring the initial transaction
to be reconciled during the period between trade execution and novation
would be inconsistent with the approach taken by both the CFTC in its
portfolio reconciliation rules and by the Commission in 17 CFR 240.18a-
3 (Rule 18a-3), which sets forth the uncleared security-based swap
margin requirements for non-bank SBS Entities, and in 17 CFR 240.18a-4
(Rule 18a-4), which sets forth the segregation requirements for certain
SBS dealers.\88\
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    \88\ Rule 18a-3(b)(5) defines ``non-cleared security-based
swap'' as a security-based swap that is not, directly or indirectly,
submitted to and cleared by a clearing agency registered pursuant to
section 17A of the [Exchange] Act (15 U.S.C. 78q-1) or by a clearing
agency that the Commission has exempted from registration by rule or
order pursuant to section 17A of the [Exchange] Act (15 U.S.C.
78q1). See 17 CFR 240.18a-3(b)(5). Similarly, Rule 18a-4(a)(1)
defines ``cleared security-based swap'' as ``a security-based swap
that is, directly or indirectly, submitted to and cleared by a
clearing agency registered with the Commission pursuant to section
17A of the Act (15 U.S.C. 78q-1).'' See 17 CFR 240.18a-4(a)(1).
---------------------------------------------------------------------------

    For the reasons set forth above, the Commission is revising the
exception in Rule 15Fi-3(d) such that it includes those original
``alpha'' security-based swap transactions. This modification is
reflective of the fact that the original transaction, once submitted to
and cleared by a clearing agency, no longer exists. In addition, the
exception also will apply to security-based swap transactions cleared
by a clearing agency that the Commission has exempted from registration
by rule or order pursuant to Section 17A of the Exchange Act (in
addition to transactions cleared by a registered clearing agency). We
are making this change in response to commenters, as well as to better
align the operation of Rule 15Fi-3 with CFTC Rule Sec.  23.502 and the
Commission's security-based swap margin requirements in Rule 18a-3.\89\
Accordingly, Rule 15Fi-3(d) provides an exception from the portfolio
reconciliation requirements for any security-based swap that is,
directly or indirectly, submitted to and cleared by a clearing agency
registered pursuant to Section 17A of the Exchange Act or by a clearing
agency that the Commission has exempted from registration by rule or
order pursuant to Section 17A of the Exchange Act.\90\ Finally, the
Commission believes that the justifications for modifying the clearing
exception in Rule 15Fi-3 apply equally to the portfolio compression
requirements in Rule 15Fi-4 and to the trading relationship
documentation requirements in Rule 15Fi-5, and we

have made corresponding revisions to both of those rules.\91\
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    \89\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR
43872, 43919 (Aug. 22, 2019) (``Capital, Margin, and Segregation
Adopting Release'') (``[t]he language regarding exemption from
registration was added to the final rule to align the definition
more closely with the definitions used in the margin rules of the
CFTC and prudential regulators.'').
    \90\ These revisions have been incorporated directly into the
operative exception in Rule 15Fi-3(d), which no longer cross-
references to the existing definition of ``clearing transaction'' in
Rule 15Fi-1(d) (re-numbered from paragraph (c)). In addition, we
have amended the existing definition of ``clearing agency'' in Rule
15Fi-1(c) (re-numbered from paragraph (b)) to provide that it
applies only to the trade acknowledgement and verification
requirements in Rule 15Fi-2. That modification was necessary because
the trade acknowledgement and verification requirements in Rule
15Fi-2 contain an exception only for security-based swap
transactions cleared by a registered clearing agency, and not for
those transactions cleared by an exempted clearing agency (in
contrast to the clearing exceptions from the requirements in Rules
15Fi-3, 15Fi-4, and 15Fi-5).
    \91\ See infra Sections II.B.3 and II.C.5.
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B. Rule 15Fi-4: Portfolio Compression

1. Scope of Rule 15Fi-4--Portfolio Compression Exercises
    For purposes of Rule 15Fi-4, the phrase ``portfolio compression
exercise'' generally refers to an exercise by which security-based swap
counterparties wholly terminate or change the notional value of some or
all of the security-based swaps submitted by the counterparties for
inclusion in the portfolio compression exercise and, depending on the
methodology employed, replace the terminated security-based swaps with
other security-based swaps whose combined notional value (or some other
measure of risk) is less than the combined notional value (or some
other measure of risk) of the terminated security-based swaps in the
exercise.\92\ In order to incorporate that concept into these final
rules, we are amending existing Rule 15Fi-1 to incorporate definitions
for both ``bilateral portfolio compression exercise'' \93\ and
``multilateral portfolio compression exercise.'' \94\ These two
definitions are nearly identical, with the sole difference being that
the former applies to a portfolio compression exercise that includes
only two security-based swap counterparties, while the latter applies
to a portfolio compression exercise that includes more than two
security-based swap counterparties.\95\
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    \92\ The corresponding CFTC rule is 17 CFR 23.503. The structure
of the CFTC rule, including the subsections, mirrors the structure
of Rule 15Fi-4.
    \93\ The corresponding CFTC definition is in 17 CFR 23.500(b).
    \94\ The corresponding CFTC definition is in 17 CFR 23.500(h).
    \95\ As noted below in Section I.C.4, Rule 15Fi-4 is applicable
only to uncleared security-based swaps.
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    Pursuant to Rule 15Fi-4(a)(2) and (3), SBS Entities are required to
establish, maintain, and follow written policies and procedures for
periodically engaging in both bilateral portfolio compression exercises
and multilateral portfolio compression exercises, in each case when
appropriate, with any counterparties that are SBS Entities. To the
extent that an SBS Entity transacts with a counterparty that is not an
SBS Entity, Rule 15Fi-4(b) provides that the policies and procedures
required under the rule will need to provide that portfolio compression
exercises occur when appropriate and only to the extent requested by
any such counterparty.\96\
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    \96\ As we noted in discussing the portfolio reconciliation
requirements in Rule 15Fi-3, the Commission believes it appropriate
to impose more prescriptive requirements in cases where both
entities are subject to the SEC's requirements for registered
entities.
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    The definitions of ``bilateral portfolio compression exercise'' and
``multilateral portfolio compression exercise'' are designed to be
sufficiently broad as to provide market participants with maximum
flexibility when complying with Rule 15Fi-4, while also retaining the
key elements necessary to achieve the important risk-reducing benefits
discussed throughout this release--namely the reduction of counterparty
and operational risk achieved by terminating offsetting security-based
swap transactions. Accordingly, with one exception, the rule does not
include specific requirements as to the contents of the policies and
procedures created to comply with these rules.\97\ In addition, for
consistency with the rules applicable to Swap Entities, these
definitions are substantively identical to the CFTC's corresponding
definitions, which we continue to believe are appropriately scoped for
purposes of Rule 15Fi-4.
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    \97\ The one exception to this statement is the requirement in
Rules 15Fi-4(a)(2) and (a)(3) that such policies and procedures
address the evaluation of portfolio compression exercises that are
initiated, offered, or sponsored by any third party. The Commission
believes that the decision of which party to use (or not use) to
conduct a compression exercise is of critical importance to the
overall determination of whether to participate in compression.
Although the Commission takes no position with respect to the type
or identity of the party used to conduct a compression exercise, we
recognize that a number of parties are currently offering such
services, including third-party vendors and some self-regulatory
organizations (e.g., clearing agencies). The Commission also
understands that there may be some instances where compression could
be performed without the use of a third-party service provider.
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    The Commission recognizes that a decision to engage in a process
that could ultimately result in the termination or modification of
existing contracts, and the potential entry into new ones, should be
made in accordance with policies and procedures that are tailored to
the specific risks and operations of the relevant SBS Entity. Such
policies and procedures should, in the Commission's view, be permitted
to take into account the specific risk tolerances of the regulated
entity, including with respect to such areas as operational, funding,
liquidity, and credit risk, and also reflect the possibility that firms
may have legitimate business reasons for maintaining certain offsetting
security-based swap positions, even if in theory they could be
compressed.
    For example, the Commission understands that an SBS Entity might be
unable to participate in a particular portfolio compression exercise
that could result in it transacting with certain counterparties (e.g.,
because a counterparty poses an unacceptable level of credit risk), or
in certain types of transactions. To the extent that such limitations
exist and are reflected in the policies and procedures required
pursuant to Rules 15Fi-4(a) and (b), an SBS Entity will be in
compliance with those rules so long as it follows those policies and
procedures, even if it determines not to engage in a particular
compression exercise.
    Further, in comparing Rules 15Fi-4(a) and (b) with the analogous
rules adopted by the CFTC, we note three main differences, the first
two of which we believe to be minor and technical in nature. First,
CFTC Rule Sec.  23.503(a)(3)(i) requires that any policies and
procedures related to multilateral portfolio compression address, among
other things, participation in all multilateral portfolio compression
exercises required by CFTC regulation or order. Although the Commission
would expect that any comprehensive policy or procedure would, as a
matter of course, reflect any applicable laws and regulations expressly
mandating participation in certain types of portfolio compression
exercises, there is no comparable requirement in Rule 15Fi-4(a)(3).
    Second, CFTC Rule Sec.  23.503(a)(3)(ii) requires that any policies
and procedures related to multilateral portfolio compression exercises
evaluate, among other things, any services that are initiated, offered,
or sponsored by any third party.\98\ The CFTC did not, however, include
such a requirement in the corresponding provision related to policies
and procedures addressing bilateral portfolio compression
exercises.\99\ Although the inclusion of a specific requirement in the
rule should not be interpreted as creating an exhaustive list of what
we would expect SBS Entities to include in their policies and
procedures, we understand that bilateral portfolio compression services
are currently being offered by third-party vendors. Evaluating those
services would seem to be a natural part of the process of broadly
analyzing the applicability of bilateral compression in general.
Therefore, we have included a similar requirement in both Rules 15Fi-
4(a)(2) (policies and procedures regarding bilateral compression) and
15Fi-4(a)(3) (policies and procedures regarding multilateral
compression).\100\
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    \98\ See 17 CFR 23.503(a)(3)(ii).
    \99\ See 17 CFR 23.503(a)(2).
    \100\ The Commission received no comments on this particular
issue.

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    Third, CFTC Rule Sec.  23.503(b), which is the corresponding CFTC
compression rule applicable to transactions with counterparties that
are not Swap Entities, does not contain the caveat that the compression
or offset covered by the applicable policies and procedures would only
need to occur ``when appropriate.'' By contrast, Rule 15Fi-4(b) does
contain such qualifier. In their comment letter, ISDA and SIFMA
expressed support for this approach, which we are adopting today as
proposed, and also requested that the Commission clarify in the final
rule that SBS Entities can always determine whether it is appropriate
to engage in such activity.\101\ Despite this divergence from the
approach previously adopted by the CFTC, we continue to be believe it
prudent to allow an SBS Entity to engage in bilateral offset or
compression exercises (to the extent requested by its non-SBS Entity
counterparty) only in circumstances when doing so was appropriate for
the SBS Entity in light of the particular facts and circumstances
involved. However, as we stated in the Proposing Release, the
discretion we intended to provide SBS Entities in connection with this
requirement should not be used by an SBS Entity arbitrarily not to
honor the request by its counterparty to engage in portfolio
compression.\102\
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    \101\ See ISDA/SIFMA Letter.
    \102\ See Proposing Release, 84 FR at 4625, n.70.
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    Finally, ISDA and SIFMA raised questions about the impact of Rule
15Fi-4 on existing counterparty documentation, noting that ``the
industry has a strong interest in not having to address any deviations
regarding the portfolio compression process (or other substantive areas
covered by industry standard documentation intended to achieve
compliance with CFTC swap rules) as this may trigger more detailed
review, explanation and negotiation between relevant counterparties,
which will be challenging, costly and time consuming without
commensurate benefit to regulatory oversight.'' Those commenters
further requested that, to the extent any differences remain between
the Commission's and CFTC's portfolio compression rules, the Commission
should allow, on an on-going basis, firms that qualify as both SBS
Entities and Swap Entities to comply with Rule 15Fi-4 by complying with
CFTC Rule Sec.  23.503 without any further conditions. The Commission
has carefully considered this comment and has concluded that such
action should not be necessary as we believe that any SBS Entity that
is in compliance with CFTC Rule Sec.  23.503 as it exists at this time
also will be in compliance with Rule 15Fi-4. As the Commission
previously stated, we believe that any differences between Rule 15Fi-4
and CFTC Sec.  23.503 are either technical in nature or provide SBS
Entities with greater flexibility as compared to Swap Entities (e.g.,
the inclusion of the phrase ``when appropriate'' in Rule 15Fi-4(b)).
2. Scope of Rule 15Fi-4--Bilateral Offset
    As we previously noted, the Commission does not believe it prudent
to suggest a preference as to the use of any particular type of
compression, or as to the type or identity of the party conducting the
exercise. Instead, we have crafted broad definitions of the terms
``bilateral portfolio compression exercise'' and ``multilateral
portfolio compression exercise'' in Rules 15Fi-1(a) and 15Fi-1(j),
respectively. In addition, the Commission recognizes that there may be
other ways for market participants to reduce the size of their
derivatives portfolios that may not be considered to be ``portfolio
compression exercises'' for purposes of those two definitions.
    In light of those considerations, Rule 15Fi-4(a)(1) requires each
SBS Entity to establish, maintain, and follow written policies and
procedures for terminating each ``fully offsetting security-based
swap'' that it maintains with another SBS Entity in a timely fashion,
when appropriate.\103\ To the extent that an SBS Entity transacts with
a counterparty that is not an SBS Entity, the requirements of Rule
15Fi-4(b) are identical to those in Rule 15Fi-4(a)(1), except that the
required policies and procedures only need to address engaging in
bilateral offset when appropriate and to the extent requested by the
counterparty. The Commission believes that by not adopting prescriptive
requirements as to the form of bilateral offset that would need to be
reflected in an SBS Entity's policies and procedures, the rules
regarding bilateral offset allow the counterparties flexibility in the
manner in which they undertake to reduce the size of their security-
based swap portfolios in light of each counterparty's unique risks and
operations.
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    \103\ The Commission also is amending existing Rule 15Fi-1 to
add, as paragraph (h), the term ``fully offsetting security-based
swaps,'' which is defined as ``security-based swaps of equivalent
terms where no net cash flow would be owed to either counterparty
after the offset of payment obligations thereunder.'' For
consistency with the rules applicable to Swap Entities, this
definition is substantively identical to the CFTC's corresponding
definition in 17 CFR 23.500(f), which we continue to believe is
appropriately scoped for purposes of Rule 15Fi-4.
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    The rules regarding bilateral offset also have been designed to
reflect the Commission's understanding that firms may have legitimate
business reasons for maintaining fully offsetting security-based swap
transactions that otherwise could be terminated. As such, Rules 15Fi-
4(a)(1) and (b) require a firm's policies and procedures to address the
termination of fully offsetting security-based swaps only ``when
appropriate.''
    Finally, for purposes of Rule 15Fi-4(a)(1), the Commission expects
to generally consider an SBS Entity to have terminated each fully
offsetting security-based swap in a ``timely fashion'' so long as (1)
termination of the offsetting security-based swaps occurs within a
period that is reasonable in light of the circumstances of each
particular transaction and (2) the relevant SBS Entity is otherwise in
compliance with its policies and procedures regarding bilateral offset.
3. Application of Rule 15Fi-4 to Cleared Security-Based Swaps
    As proposed, the portfolio compression requirements in Rule 15Fi-4
would not have applied to a ``clearing transaction'' which, pursuant to
existing Rule 15Fi-1(c), is defined as a security-based swap that has a
clearing agency as a direct counterparty.\104\ Notwithstanding this
provision, the Commission understands that portfolio compression is not
limited to uncleared swaps and that compression services may be offered
either by a clearing agency itself or by a third-party vendor that
works collaboratively with the clearing agency.\105\ Although the
Commission recognizes the risk-reducing benefits that could be realized
through the compression of cleared security-based swaps, we nonetheless
believe that the issue of whether and when compression should occur
within a clearing agency is best addressed by the rules governing the
clearing agency's risk management practices, as well as by the
documentation governing the

relationship between the clearing agency and its members.\106\
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    \104\ See supra note 85 and accompanying text.
    \105\ Notwithstanding the applicability of the requirements of
Rule 15Fi-4, the Commission reminds any third parties performing
compression or offset services to keep in mind any potential
requirements under other provisions of the securities laws. For
example, the Commission has stated that the provision of tear-up and
compression services for security-based swaps would qualify these
participants as clearing agencies and therefore trigger the
statutory requirement to register as clearing agencies pursuant to
Section 17A of the Exchange Act, absent exemptive relief (which the
Commission provided on a conditional temporary basis in July 2011).
See Clearing Services Exemptive Order, 76 FR at 39964.
    \106\ The corresponding CFTC rule is 17 CFR 23.503(c).
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    Accordingly, Rule 15Fi-4(c) provides an exception from the
portfolio compression requirements for any security-based swap that is,
directly or indirectly, submitted to and cleared by a clearing agency
registered pursuant to Section 17A of the Exchange Act or by a clearing
agency that the Commission has exempted from registration by rule or
order pursuant to Section 17A of the Exchange Act. This exception has
been modified from the proposal, as described in detail in Section
II.A.6.

C. Rule 15Fi-5: Trading Relationship Documentation

1. Scope of Rule 15Fi-5
    In light of the important risk mitigating factors described in
Section I of this release, the Commission is adopting Rule 15Fi-5,
which establishes certain requirements for SBS Entities related to the
use of written trading relationship documentation in connection with
their security-based swap transactions.\107\ Specifically, Rule 15Fi-
5(a)(2) requires each SBS Entity to establish, maintain, and follow
written policies and procedures reasonably designed to ensure that it
executes written security-based swap trading relationship documentation
with each of its counterparties prior to, or contemporaneously with,
executing a security-based swap with any counterparty.\108\ The rule
further requires that the policies and procedures required thereunder
be approved in writing by a senior officer of the SBS Entity, and that
a record of the approval be retained.\109\
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    \107\ The corresponding CFTC rule is 17 CFR 23.504. The
structure of the CFTC rule, including the subsections, mirrors the
structure of Rule 15Fi-5.
    \108\ Among other exceptions discussed below in Section II.C.5,
Rule 15Fi-5 does not apply to security-based swap that is directly
or indirectly, submitted to and cleared by a clearing agency
registered pursuant to Section 17A of the Exchange Act or by a
clearing agency that the Commission has exempted from registration
by rule or order pursuant to Section 17A of the Exchange Act.
    \109\ For purposes of this requirement, the Commission views the
term ``senior officer'' as covering only the most senior executives
in the organization, such as a firm's chief executive officer, chief
financial officer, chief legal officer, chief compliance officer,
president, or other person at a similar level. This approach is
similar to how the Commission has previously interpreted the term in
the context of other requirements applicable to SBS Entities. See
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48964, 48968 n. 29 (Aug.14, 2015) (``SBS
Entity Registration Adopting Release''). By contrast, CFTC Rule
Sec.  23.504 uses the term ``senior management,'' which is not
further defined in either CFTC Rules Sec.  23.500 or Sec.  23.504.
We view this difference as a clarification and do not believe that
it represents a substantive difference between the two sets of
rules.
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    Pursuant to Rule 15Fi-5(b)(1), the security-based swap trading
relationship documentation subject to the policies and procedures
requirement in Rule 15Fi-5(a)(2) must be in writing. Such documentation
also must include all terms governing the trading relationship between
the SBS Entity and its counterparty, including, without limitation,
terms addressing payment obligations, netting of payments, events of
default or other termination events, calculation and netting of
obligations upon termination, transfer of rights and obligations,
governing law, valuation, and dispute resolution.
    As proposed, Rule 15Fi-5(b)(1) also would have required that the
applicable policies and procedures provide that the trading
relationship documentation include terms governing ``applicable
regulatory reporting obligations (including pursuant to Regulation
SBSR).'' CFTC Rule Sec.  23.504 does not contain a comparable
provision. Nevertheless, the Commission included this requirement in
the proposal as a means to potentially help address the SDR
verification issue that is discussed in detail in Section II.A.1 above
and Section I.E. of the Proposing Release.\110\
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    \110\ See Proposing Release, 84 FR at 4633-35. The Commission
stated its view that clarifying the counterparties' reporting
arrangements in advance of a transaction generally should prove
beneficial to the OTC derivatives market due to the importance of
ensuring that a security-based swap transaction is reported
accurately and in a timely manner.
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    In their comment letter, ISDA and SIFMA expressed their view that
trading relationship documentation, such as ISDA Master Agreements,
including amendments effectuated by protocol or otherwise, are not the
appropriate place to memorialize regulatory reporting obligations and
should not address reporting obligations that go beyond what is
required under Regulation SBSR.\111\ ISDA and SIFMA also stated that
the proposed documentation requirement would have essentially mirrored
the reporting requirements in Regulation SBSR, including the reporting
hierarchy established by that rule, which would be duplicative,
burdensome and impose additional costs on SBS Entities, and that such
requirement also may not address the underlying SDR verification
issue.\112\
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    \111\ See ISDA/SIFMA Letter.
    \112\ See id. In particular, ISDA and SIFMA noted that the
proposed requirement could force institutions to ``re-paper.'' or