swap to include those transactions in their de minimis calculations. In
the Cross-Border Adopting Release, we rejected the suggestion that
``the location of risk alone should . . . determine the scope of an
appropriate territorial application of every Title VII requirement,''
including the application of the ``security-based swap dealer''
definition.\144\ In doing so, we stated that ``neither the statutory
definition of `security-based swap dealer,' our subsequent further
definition of the term pursuant to section 712(d) of the Dodd-Frank
Act, nor the regulatory requirements applicable to security-based swap
dealers focus solely on risk to the U.S. financial system.'' \145\ And
we have noted that the definition of ``security-based swap dealer''
focuses on a person's activity, not solely on the amount of risk
created by that activity.\146\ Accordingly, we do not believe that
security-based swap dealing activity must create counterparty credit
risk in the United States for there to be a ``nexus'' sufficient to
warrant security-based swap dealer registration.\147\
---------------------------------------------------------------------------

    \143\ Cf. ISDA Letter at 6, note 11.
    \144\ Cross-Border Adopting Release, 79 FR 47287-88.
    \145\ Id. at 47288. We have also stated that security-based swap
dealer regulation may be warranted either to promote market
stability and transparency in light of the role that these dealers
occupy in the security-based swap market or to address concerns
raised by the nature of the interactions between such dealers and
their counterparties. See Intermediary Definitions Adopting Release,
77 FR 30617.
    \146\ See Cross-Border Proposing Release, 78 FR 30988 (noting
our view that the statutory provisions suggest that our focus should
be not ``solely on the risk these entities pose to the financial
markets'' but also on whether regulation is warranted due to the
nature of their interactions with counterparties or in order to
promote market stability and transparency, given the role these
persons play in the security-based swap market). See Intermediary
Definitions Adopting Release, 77 FR 30612. Indeed, we expressly
contrasted this focus of the ``security-based swap dealer''
definition with the focus of the ``major security-based swap
participant'' definition, which is focused on ``the market impacts
and risks associated with a person's . . . security-based swap
positions.'' Id. at 30661.
    \147\ See note 140, supra.
---------------------------------------------------------------------------

    As we have previously noted, Exchange Act section 3(a)(71)(A)
identifies specific activities that bring a person within the
definition of ``security-based swap dealer'': (1) Holding oneself out
as a dealer in security-based swaps, (2) making a market in security-
based swaps; (3) regularly entering into security-based swaps with
counterparties as an ordinary course of business for one's own account;
or (4) engaging in any activity causing oneself to be commonly known in
the trade as a dealer in security-based swaps.\148\ We have further
interpreted this definition to apply to persons engaged in indicia of
dealing activity, including, among other things, providing liquidity to
market professionals, providing advice in connection with security-
based swaps, having regular clientele and actively soliciting clients,
and using interdealer brokers.\149\ Neither the statutory definition of
``security-based swap dealer'' nor our further definition of that term
turns primarily on the presence of risk or on the purchase or sale of
any security, including a security-based swap.\150\ Accordingly, we
disagree with the view that the ``de minimis threshold is based on the
aggregate notional size of security-based swaps'' and that this
suggests that ``the de minimis threshold is concerned with the risk
posed to the entity, not the extent of involvement by the entity.''
\151\ The de minimis exception relates to the volume of dealing
activity and not to specifically risk-related factors, such as the
notional volume of positions held by the dealer.\152\
---------------------------------------------------------------------------

    \148\ See Exchange Act section 3(a)(71)(A), 15 U.S.C.
78c(a)(71)(A).
    \149\ See Intermediary Definitions Adopting Release, 77 FR
30617-18. As we stated in the Cross-Border Adopting Release, when
the statutory text does not describe the relevant activity with
specificity or provides for further Commission interpretation of
statutory terms or requirements, our territorial analysis may
require us to identify through interpretation of the statutory text
the specific activity that is relevant under the statute or to
incorporate prior interpretations of the relevant statutory text.
See Cross-Border Adopting Release, 79 FR 47287.
    \150\ See Exchange Act section 3(a)(71)(A), 15 U.S.C.
78c(a)(71)(A); Intermediary Definitions Adopting Release, 77 FR
30617-18.
    \151\ See note 141, supra (citing SIFMA/FSR Letter). Cf.
Intermediary Definitions Adopting Release, 77 FR 30620 (noting the
focus of the ``security-based swap dealer'' definition on dealing
activity).
    \152\ See Exchange Act section 3(a)(71)(D), 15 U.S.C.
78c(a)(71)(D) (providing that the Commission ``shall exempt from
designation as a security-based swap dealer an entity that engages
in a de minimis quantity of security-based swap dealing''); Exchange
Act rule 3a71-2 (establishing transaction-based notional thresholds
for the security-based swap dealer de minimis exception).
---------------------------------------------------------------------------

    Accordingly, the fact that the counterparty credit risk from a
transaction between two non-U.S. persons, which are not conduit
affiliates and where neither counterparty has a right of recourse
against a U.S. person under the security-based swap, exists largely
outside the United States is not determinative under our territorial
analysis as to whether a sufficient ``nexus'' exists to require a non-
U.S. person to count the transaction toward its de minimis threshold.
The appropriate analysis, in our view, also considers whether a non-
U.S. person in such a transaction is engaged, in the United States, in
any of the activities set forth in the statutory definition or in our
further definition of ``security-based swap dealer.'' \153\ If it is so
engaged, it is appropriate under a territorial approach to require the
non-U.S. person to include such transactions in its security-based swap
dealer de minimis threshold calculations and, if those security-based
swaps (together with any other security-based swaps it is required to
include in its threshold calculations) exceed the de minimis threshold,
to register as a security-based swap dealer.\154\
---------------------------------------------------------------------------

    \153\ See, e.g., Intermediary Definitions Adopting Release, 77
FR 30612 (noting the focus of the ``security-based swap dealer''
definition on dealing activity).
    \154\ See Cross-Border Adopting Release, 79 FR 47286-92
(describing the Commission's territorial approach). In light of the
foregoing analysis, we believe that the statutory prohibition on
application of Title VII requirements to persons that ``transact[] a
business in security-based swaps without the jurisdiction of the
United States'' has no bearing on the final rule. See Exchange Act
section 30(c). Under this rule, a non-U.S. person must include a
transaction with another non-U.S. person in its dealer de minimis
threshold calculations only when, in connection with its dealing
activity, it arranges, negotiates, or executes a security-based swap
using its personnel (or personnel of its agent) located in the
United States. See Exchange Act rule 3a71-3(b)(1)(iii)(C). The final
rule, accordingly, would not impose requirements on non-U.S. persons
that are ``transacting a business in security-based swaps without
the jurisdiction of the United States'' for purposes of section
30(c).
---------------------------------------------------------------------------

    As we stated in the U.S. Activity Proposing Release, this analysis
applies regardless of whether the non-U.S. person engages in dealing
activity (as described in the statutory definition and in our further
definition of ``security-

based swap dealer'') in the United States using its own personnel or
using the personnel of an agent acting on its behalf.\155\ As described
above, persons engaged in security-based swap dealing activity
routinely do so both directly and through their agents, including as
part of an integrated dealing business. Indeed, our further definition
of ``security-based swap dealer'' specifically identifies the use of
interdealer brokers as one of several indicia of security-based swap
dealing activity, and engaging an interdealer broker as agent or
sending a trade to such a broker generally would be dealing
activity.\156\ To the extent that this activity is directed to a broker
in the United States, the non-U.S. person is engaged in dealing
activity in the United States.\157\ Accordingly, a non-U.S. person that
reaches into the United States by engaging an agent (including an
interdealer broker) to perform dealing activity on its behalf is itself
engaged, at least in part, in dealing activity in the United States. It
is therefore consistent with our territorial approach to require the
non-U.S. person to include transactions arising out of those activities
in its own de minimis threshold calculations.\158\
---------------------------------------------------------------------------

    \155\ See U.S. Activity Proposing Release, 80 FR 27465.
    \156\ See Exchange Act rule 3a71-1(a) (defining ``security-based
swap dealer''); Intermediary Definitions Adopting Release, 77 FR
30617-18 (providing guidance to ``further clarify the scope of the
security-based swap dealer definition'').
    \157\ More generally, we believe that the routine use by dealers
of the structures described in this discussion suggests that a
person may engage in dealing activity through an agent in a manner
very similar to engaging in such activity through its own branch or
office. Cf. Exchange Act section 3(a)(71)(A) (defining ``security-
based swap dealer''); Intermediary Definitions Adopting Release, 77
FR 30617-18 (further defining ``security-based swap dealer'').
    \158\ Our treatment of activity performed by an agent on behalf
of a non-U.S. person in connection with its dealing activity does
not apply Title VII to persons that are ``transact[ing] a business
in security-based swaps without the jurisdiction of the United
States,'' within the meaning of section 30(c) of the Exchange Act.
See note 154, supra. An approach that treated a non-U.S. person
dealer that used an agent, whether affiliated or unaffiliated, in
the United States to carry out some or all of its dealing business
with non-U.S. persons as transacting a business in security-based
swaps without jurisdiction of the United States, would, in our view,
reflect an understanding of what it means to conduct a security-
based swap business within the jurisdiction of the United States
that is divorced from the definition of ``security-based swap
dealer,'' from Title VII's statutory objectives, and from the
various structures that non-U.S. persons use to engage in security-
based swap dealing activity. But in any event we also believe that
this final rule is necessary or appropriate as a prophylactic
measure to help prevent the evasion of the provision of the Exchange
Act that were added to the Dodd-Frank Act, and thus would help
prevent the relevant purposes of the Dodd-Frank Act from being
undermined. See Cross-Border Adopting Release, 79 FR 47291-92
(interpreting anti-evasion provisions of Exchange Act section
30(c)). Without this rule, non-U.S. persons could simply carry on a
dealing business within the United States with other non-U.S.
persons through agents and remain outside of the application of the
dealer requirements of Title VII, as described more fully in the
following sections.
---------------------------------------------------------------------------

2. Policy Concerns Associated With Security-Based Swap Dealing Activity
in the United States
    Requiring transactions that, in connection with a non-U.S. person's
dealing activity, are arranged, negotiated, or executed by personnel
located in the United States to be counted toward the non-U.S. person's
security-based swap dealer de minimis threshold is also consistent with
the policy objectives of Title VII dealer regulation. Some commenters
interpreted the primary, or even the sole, goal of Title VII dealer
regulation as risk mitigation, generally arguing that no policy
rationale warranted requiring non-U.S. persons to count transactions
with other non-U.S. persons based on their activity in the United
States.\159\ One commenter specifically urged us not to adopt the
proposed rule, arguing that application of U.S. requirements to these
transactions should ``be tailored to address only the specific policy
considerations raised by use of U.S. personnel,'' such as certain
concerns related to counterparty protection.\160\
---------------------------------------------------------------------------

    \159\ See SIFMA/FSR Letter at 5 (``[S]uch transactions between
non-U.S. persons . . . do not have a sufficient nexus to the United
States to be included in a determination of whether a non-U.S.
entity should need to register with the Commission.''); IIB Letter
at 5 (arguing that the Commission's policy interests in such
transactions are more limited than in transactions involving a U.S.
person and that ``[i]t is not necessary for one of the parties to
register with the Commission as an SBSD for the Commission to
address these more limited policy objectives.''); ISDA Letter at 5
(``In the absence of risks to the U.S. financial system and U.S.
counterparties, the Commission has not identified any benefit
associated with regulating SBS transactions between non-U.S.
persons.'') (emphasis added). Several commenters argued that the
location of personnel involved in a transaction on behalf of a non-
U.S.-person dealer is not particularly relevant to the policy
considerations addressed by security-based swap dealer registration
and accordingly should not ``form the sole basis for requiring''
firms to register as security-based swap dealers and to comply with
the Title VII rules. See, e.g., ISDA Letter at 4.
    \160\ See IIB Letter at 3.
---------------------------------------------------------------------------

    We believe that these characterizations of the policy objectives of
Title VII are incomplete. Although it is true that mitigating
counterparty and operational risks--which we have acknowledged lie
primarily outside the United States in these transactions \161\--is an
important objective of the Title VII dealer requirements, these
requirements also advance other important policy objectives of
security-based swap dealer regulation under Title VII, including
enhancing counterparty protections and market integrity, increasing
transparency, and mitigating risk to participants in the financial
markets and the U.S. financial system more broadly.\162\
---------------------------------------------------------------------------

    \161\ See U.S. Activity Proposing Release, 80 FR 27481.
    \162\ See note 145, supra. These policy objectives reflect the
goals of Title VII of the Dodd-Frank Act, which established a
statutory framework to reduce risk, increase transparency, and
promote market integrity within the financial system. See
Intermediary Definitions Adopting Release, 77 FR 30596.
---------------------------------------------------------------------------

    We believe that not requiring non-U.S. persons to count these
trades toward their de minimis thresholds would significantly impair
the effectiveness of the Title VII dealer framework in advancing these
objectives. As noted above, financial groups engaged in security-based
swap dealing activity may structure their business in many different
ways.\163\ Many non-U.S. persons engaged in dealing activity in the
United States do so through an affiliated or unaffiliated agent in the
United States and, under currently existing rules, are not required,
absent a guarantee, to include transactions arising from such activity
in their dealer de minimis calculations if the counterparty is also a
non-U.S. person. Some financial groups also use U.S. persons to book
such transactions, but even U.S.-based financial groups may opt to book
their security-based swap transactions in non-U.S. persons in response
to regulation or to competitive disparities between U.S. persons and
non-U.S. persons.
---------------------------------------------------------------------------

    \163\ See Sections II.A.2.d and II.B, supra.
---------------------------------------------------------------------------

    Given these dynamics, failure to require non-U.S. persons to count
the transactions encompassed by the final rule toward the dealer de
minimis thresholds, even though doing so is entirely consistent with
our territorial approach, would permit financial groups that have a
security-based swap dealing business to avoid registering non-U.S.
persons that engage in security-based swap dealing activity in the
United States. As long as a non-U.S. person limited its dealing
activity with U.S. persons to levels below the dealer de minimis
thresholds, it could enter into an unlimited number of transactions
connected with its dealing activity in the United States without being
required to register as a security-based swap dealer.
    Subjecting the transactions of certain dealers engaged in dealing
activity in the United States, but not others, to the Title VII dealer
requirements would undermine each of the policy objectives

described above. Under currently existing rules, a significant
proportion of activity in the security-based swap market that is
carried out within the United States--particularly as financial groups
respond to the competitive pressures discussed in more detail below--
likely would involve counterparties that are not subject to our
regulations or oversight. Dealers accounting for significant volumes of
security-based swap dealing activity in the United States--and together
potentially accounting for a significant majority of all security-based
swap activity in the United States--would not be subject to Title VII
recordkeeping and reporting requirements, which would significantly
impede our ability to monitor the market for manipulative and abusive
conduct on the part of dealers or other market participants. Similarly,
these dealers would not be subject to the Title VII business conduct
requirements with respect to any of their transactions, which could
significantly impair market integrity or raise other concerns, as
counterparties seeking to enter into transactions with dealers through
those dealers' personnel located in the United States would not receive
the full range of disclosures and other protections provided by Title
VII. And these firms would not be subject to Title VII capital, margin,
or segregation requirements. These requirements are intended to play a
key role in mitigating the potential for financial contagion to spread
to participants in the U.S. security-based swap market and to the U.S.
financial system more generally by mitigating the risk of firm failure.
    Subjecting only a limited subset of transactions involving activity
in the United States to Title VII dealer requirements would also likely
produce competitive disparities and exacerbate market fragmentation,
which would not only further undermine the policy objectives just
described but also create potentially significant market distortions.
Competitive disparities would arise as financial groups that use non-
U.S.-person dealers to carry out their dealing business in the United
States find themselves able to exit the Title VII regulatory regime
without exiting the U.S. market with respect to their security-based
swap dealing business with non-U.S.-person counterparties (including
non-U.S.-person dealers). These dealers likely would incur fewer costs
related to their dealing activity in the United States than U.S.-person
dealers transacting with the same counterparties, and non-U.S. person
counterparties likely would also find that they incur lower costs and
obtain better pricing by entering into security-based swaps with non-
U.S. dealers that are not required to register as security-based swap
dealers. U.S.-person dealers would be at a further disadvantage as
financial groups that carry out a significant proportion of their
security-based swap dealing activity in the United States through non-
registered dealers cross-subsidize the dealing activity of their
affiliated registered security-based swap dealers that engage in
dealing activity with U.S.-person counterparties, permitting financial
groups that have shifted a significant proportion of their dealing
activity to non-U.S.-person dealers to offer even U.S.-person
counterparties better pricing than financial groups that have not made
this shift are able to provide.
    These competitive pressures would provide a strong incentive for
financial groups to book transactions with non-U.S. person
counterparties (including with other dealers) in non-U.S.-person
affiliates of those financial groups.\164\ Eventually, both U.S. and
foreign financial groups may restructure their business in a way that
would permit them to do the vast majority of their security-based swap
dealing activity--including a significant majority of that activity
that they continue to carry out using personnel located in the United
States--outside the Title VII framework.
---------------------------------------------------------------------------

    \164\ See Section II.B, supra (discussing relationship between
the scope of Title VII regulations and likely competitive
disparities between different types of dealers). See also Charles
Levinson, ``U.S. banks moved billions in trades beyond CFTC's
reach,'' Reuters (August 21, 2015), available at: http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821.
---------------------------------------------------------------------------

    This potential response to competitive disparities demonstrates the
``nexus'' between the regulatory concerns addressed by the Title VII
security-based swap dealer regulatory framework and our final rule. As
already noted, the security-based swap market is a highly concentrated
market in which dealers play a central role.\165\ Absent the amendment
to rule 3a71-3(b), restructuring could lead to a market where the
largest dealers representing a significant majority of security-based
swap activity in the United States would not be required to register as
security-based swap dealers or comply with Title VII dealer
requirements because they would limit their transactions to other non-
U.S.-person dealers (some affiliated with U.S.-based financial groups)
and non-U.S. persons that are not dealers. In other words, the
commenters' suggested approach potentially would permit hundreds of
billions of dollars in annual notional transaction activity (including
most or all of the interdealer business in security-based swaps with
U.S. underliers), representing two-thirds or more of all security-based
swap transactions that currently involve U.S. counterparties or U.S.
activity, to be carried out, at least in part, within the United States
without being subject to Title VII dealer regulation, much as if Title
VII had never been enacted.\166\ Thus, while we acknowledge the
potential for this rule to increase the number of security-based swap
dealers from the number that would be required to register under
currently existing rules,\167\ we believe that it will mitigate these
competitive disparities and help ensure the ability of the Title VII
dealer requirements to advance the regulatory objectives described
above.
---------------------------------------------------------------------------

    \165\ See Section II.B, supra.
    \166\ See Section II.A.3, supra. For this reason, we do not
agree with the commenters that suggested that we should not require
a firm to register as a security-based swap dealer solely on the
basis that it has transactions with non-U.S. persons arising out of
dealing activity in the United States that exceed the dealer de
minimis threshold. See ISDA Letter at 4; SIFMA/FSR Letter at 5; IIB
Letter at 4-5. The overwhelming majority of transactions captured by
this rule are likely to be transactions carried out by non-U.S.
persons whose dealing activity likely exceeds the de minimis
threshold by at least an order of magnitude.
    \167\ The available data and analysis suggest that all entities
that will exceed the de minimis threshold for credit default swaps
under Exchange Act rule 3a71-3(b), as amended by this release, will
already exceed the threshold by virtue of the transactions they are
required to count under Exchange Act rule 3a71-3(b) as adopted in
June 2014. However, as we describe more fully below, we acknowledge
the potential for a change in the number of registrants based on a
number of factors. See Section V.B, infra.
---------------------------------------------------------------------------

    We further expect that the rule will be essential to reducing the
likelihood of significant market fragmentation that would impair the
liquidity available to, and increase costs for, U.S. market
participants. As we have noted above, if a majority of security-based
swap dealing activity in the United States, including most or all
interdealer activity in the United States, is carried out by non-U.S.
persons that are not subject to Title VII dealer regulation, the market
is likely to fragment into two pools. The larger pool likely would
consist of transactions that are carried out by unregistered non-U.S.-
person dealers with non-U.S.-person counterparties, including the
largest dealers in the security-based swap market, while the smaller
pool likely would be limited to U.S.-person counterparties and
registered dealers that do business exclusively with those U.S.-person
counterparties (and that may or may not themselves be U.S. persons). In
other words, absent these rules, U.S. market participants likely would
find

themselves confined to a shallower liquidity pool with worse pricing
than would be available to non-U.S. persons, even though those non-U.S.
persons likely would themselves be using personnel, or facing dealers
using personnel, located in the United States to arrange, negotiate, or
execute similar transactions.
    Finally, as we have noted, a significant proportion of the dealing
activity that is likely to be captured by this rule is actually carried
out by foreign affiliates of U.S. financial groups.\168\ Given the
significant volumes arising from the U.S. dealing activity of such
foreign affiliates and the potential reputational effect that an
affiliate's failure can have on other affiliates in the same corporate
group, this activity may pose a risk of contagion to the U.S. financial
markets, as we have already discussed above.\169\ We previously
acknowledged these concerns in explaining why we were not proposing to
impose the clearing requirement on these transactions in the U.S.
Activity Proposing Release, noting our view that other regulatory
provisions, including Title VII margin requirements, were better suited
to address the risk of spillovers and contagion arising from these
affiliate relationships.\170\ But it is important to note that, as the
market develops, many of those foreign affiliates may be required to
register as security-based swap dealers and to comply with the Title
VII margin requirements only because they arrange, negotiate, or
execute transactions in connection with their dealing activity using
personnel located in the United States.\171\ The final rule ensures
that these affiliates, to the extent that they are engaged in such
activity at levels above the relevant dealer de minimis threshold, are
in fact required to register and comply with these requirements, which
should mitigate the risks described above.\172\
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    \168\ See Section II.A.3, supra.
    \169\ See Section II.B, supra.
    \170\ See U.S. Activity Proposing Release, 80 FR 27482. See also
note 115, supra (noting the importance of these issues in our
consideration of rules for the security-based swap market).
    \171\ See U.S. Activity Proposing Release, 80 FR 27482. This is
particularly likely if most or all of the interdealer activity is
carried out by non-U.S. persons using personnel located in the
United States.
    \172\ For these reasons, we do not agree with those commenters
that suggested that our proposed approach was inconsistent with our
determination not to propose to subject transactions to the
mandatory clearing requirement solely on the basis of U.S. activity.
See SIFMA/FSR Letter at 5-6; IIB Letter at 13-14. See also Citadel
Letter at 6-7 (arguing that the Commission's assertion that the
risks of transactions involving U.S. activity reside primarily
offshore is inconsistent with other Commission rulemakings, namely
the Volcker Rule, and the statutory interpretation adopted by the
CFTC).
---------------------------------------------------------------------------

    Subjecting non-U.S. persons that engage in security-based swap
dealing activity in the United States \173\ at levels above the dealer
de minimis threshold to capital and margin requirements also should
help reduce the likelihood of firm failure and the likelihood that that
the failure of a firm engaged in dealing activity in the United States
might adversely affect not only its counterparties (which may include
other firms engaged in security-based swap dealing activity in the
United States) but also other participants in that market.\174\ The
amendments being adopted today should also, in a manner consistent with
our territorial approach, reduce gaps in the application of these types
of requirements to global firms that are engaged in security-based swap
dealing activity.\175\
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    \173\ See Section IV.B.1, supra (describing territorial
application of the dealer definition); Cross-Border Adopting
Release, 79 FR 47287-88 (same).
    \174\ See Section II.B, supra (discussing the potential that a
liquidity shock resulting from the failure of a non-U.S.-person
dealer engaged in dealing activity in the United States might
propagate risks to, and adversely affect the stability of, U.S.
persons also active in those market centers and to the U.S.
financial system more broadly). See also Capital, Margin, and
Segregation Proposing Release, 77 FR 70222 (noting that the
``failure of a stand-alone SBSD could have a broader adverse impact
on a larger number of market participants, including customers and
counterparties'' and that the proposed capital requirements ``are
meant to account for this potential broader impact on market
participants''); id. at 70304 (describing the primary benefit of the
proposed capital and margin requirements as reducing the probability
of the failure of a security-based swap dealer, noting that such a
default ``could have adverse spillover or contagion effects that
could create instability for the financial markets more
generally'').
    \175\ Certain other Title VII dealer requirements may similarly
help to mitigate these types of risks. For example, the risk
management provision requires a security-based swap dealer to have
systems in place to manage its exposure to risks arising from its
security-based swap dealing activity. See Exchange Act section
15F(j)(2). See also Capital, Margin, and Segregation Proposing
Release, 77 FR 70213. In that release, the Commission proposed to
(1) amend Rule 15c3-1 by adding a new paragraph (a)(10)(ii); (2) add
new Rule 18a-1(g) and; (3) add new Rule 18a-2(c) which, taken
together, generally would require each nonbank security-based swap
dealer and major security-based swap participant to comply with
existing Rule 15c3-4 (except for certain specified provisions of
that rule), as if it were an OTC derivatives dealer. Rule 15c3-4
currently requires each person subject to the rule to ``establish,
document, and maintain a system of internal risk management controls
to assist it in managing the risks associated with its business
activities, including market, credit, leverage, liquidity, legal,
and operational risks.'' 17 CFR 240.15c3-4.
---------------------------------------------------------------------------

    We note that one commenter suggested that our amendments should
exclude dealing activity by a non-U.S. person that ``is part of or
supports a business that is primarily based outside the United
States.'' \176\ However, we do not believe that the fact that dealing
activity is part of or supports a business primarily based outside the
United States is relevant to the concerns described above regarding
regulatory effectiveness, competitive disparities, market
fragmentation, or contagion. Non-U.S.-person dealers, whose business
may be characterized as ``primarily based outside the United States,''
account for a significant volume of transactions in North American
single-name CDS and may be expected to raise these concerns, even when
``the bilateral, executory credit risk'' in the transaction is borne by
two non-U.S. persons.\177\
---------------------------------------------------------------------------

    \176\ ISDA Letter at 3.
    \177\ See Section II.B, supra. Cf. IIB Letter at 8 (stating that
the Commission's rationale for taking an approach different from
broker-dealer regulation to regulate persons engaged in security-
based swap activity does not hold where, among other things, ``the
bilateral, executory credit risk inherent in [security-based
swaps]'' is not borne by a U.S. counterparty).
---------------------------------------------------------------------------

3. Existing Regulatory Frameworks and Security-Based Swap Dealer
Regulation
    Several commenters suggested that we need not rely on Title VII
dealer regulation at all to address regulatory concerns arising from
dealing activity carried out by non-U.S. persons using personnel
located in the United States.\178\ According to these commenters, the
existing U.S. and foreign requirements (including broker-dealer
regulation, and anti-fraud and anti-manipulation provisions) provide us
with the tools needed to address what, in their view, are the primary
regulatory concerns raised by this dealing activity, and using these
tools would ``essentially sever[ ] the nexus between the dealer
counterparty and the U.S. market,'' \179\ eliminating the need to
include the transaction in a firm's dealer de minimis threshold
calculations.\180\
---------------------------------------------------------------------------

    \178\ See, e.g., IIB Letter at 5, 8; ISDA Letter at 8; SIFMA/FSR
Letter at 6; HSBC Letter at 2-3.
    \179\ SIFMA/FSR Letter at 7-8.
    \180\ See, e.g., IIB Letter at 4, 5, 6, 8; ISDA Letter at 8-9
(arguing that the Commission could reasonably limit the impact of
the proposal on market participants by ``leveraging the existing
components of the SEC's regulatory program,'' specifically
identifying the Commission's existing regime that applies to broker-
dealers and pointing out that cleared transactions are subject to
regulations in other jurisdictions). One commenter argued that
``[t]o the extent the Commission is concerned about conduct of non-
registered dealers, it has more targeted tools at its disposal,
including existing antifraud and anti-manipulation provisions and
broker-dealer regulatory obligations applicable to registered
agents.'' SIFMA/FSR Letter at 6.
---------------------------------------------------------------------------

    Because they view the concerns potentially raised by this activity
as relating primarily to counterparty protection concerns and because
registered broker-dealers are already

subject to customer protection requirements, these commenters argued
that adding security-based swap dealer requirements would simply
duplicate protections already available under existing law or impose
requirements that address concerns (such as counterparty credit risk)
that arise only outside the United States.\181\ Because the Exchange
Act defines security-based swaps as securities,\182\ they asserted that
an agent acting on behalf of a non-U.S. person that is engaged in
security-based swap dealing activity generally would be required to
register as a broker \183\ and could be required to comply with
relevant Exchange Act and FINRA requirements with respect to the
security-based swap transactions that it intermediates.\184\ Some
commenters argued that sales practice and recordkeeping rules
applicable to registered U.S. security-based swap dealers and broker-
dealers that intermediate these transactions would adequately address
the key policy interests that underlie the requirement to count U.S.
activity towards the de minimis thresholds.\185\ Another commenter
suggested that this approach would be consistent with our historical
approach to cross-border issues in cash markets, which provides an
exemption from registration for foreign broker-dealers that use a
registered broker-dealer to intermediate transactions on their
behalf.\186\ One commenter argued that such an approach would help
ensure consistency in rules applicable to cash and derivatives markets,
``reduce the incentives for regulatory arbitrage,'' and help mitigate
compliance costs that would arise from ``applying different
registration standards to activity in economically comparable
instruments.'' \187\
---------------------------------------------------------------------------

    \181\ See, e.g., IIB Letter at 6, 17. Commenters argued that
permitting the personnel of non-U.S.-person dealers, or their
agents, located in the United States to rely on existing regulatory
requirements would be more efficient as these personnel could comply
with a uniform set of requirements with respect to all of their
business, whether in securities or in security-based swap
transactions, on their own account or in their capacity as an
intermediary for a non-U.S. person. See ISDA Letter at 9 (citing
anti-fraud provisions of Securities Act section 17(a) and the fraud
prohibitions in Rule 10b-5); IIB Letter at 6, 8, 17 (stating that
broker-dealer and FINRA rules, including sales practice, books and
records, and examination and inspection requirements, will apply to
broker-dealers arranging, negotiating, and executing security-based
swaps on behalf of non-U.S.-person dealers and arguing that applying
only broker-dealer rules would avoid unnecessary duplication).
    \182\ See also U.S. Activity Proposing Release, 80 FR 27470
n.198 (noting that Title VII of the Dodd-Frank Act amended the
Exchange Act definition of ``security'' to encompass security-based
swaps); Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10)
(defining ``security'') as revised by section 761(a)(2) of the Dodd-
Frank Act.
    \183\ See Exchange Act section 3(a)(4) (defining ``broker'').
    \184\ See, e.g., note 181, supra (citing IIB Letter).
    We have granted temporary exemptive relief from compliance with
certain provisions of the Exchange Act in connection with the Dodd-
Frank Act's amendment of the definition of ``security'' in order
generally to maintain the status quo during the implementation
process for the Dodd-Frank Act. See Order Granting Temporary
Exemptions under the Securities Exchange Act of 1934 in Connection
with the Pending Revisions of the Definition of ``Security'' to
Encompass Security-Based Swaps, Exchange Act Release No. 64795 (July
1, 2011), 76 FR 39927 (July 7, 2011) (``Exchange Act Exemptive
Order''). Among other things, this relief granted temporary
exemptions specific to security-based swap activities by registered
brokers and dealers. See id. at 39-44. In February 2014, we extended
the expiration dates (1) for exemptions that are generally not
directly related to specific security-based swap rulemakings until
the earlier of such time that we issue an order or rule determining
whether any continuing exemptive relief is appropriate for security-
based swap activities with respect to any of the Exchange Act
provisions or until three years following the effective date of that
order; and (2) for exemptions that are directly related to specific
security-based swap rulemakings, until the compliance date for the
relevant security-based swap rulemaking. See Order Extending
Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Revision of the Definition of ``Security'' to
Encompass Security-Based Swaps, and Request for Comment, Exchange
Act Release No. 71485 (February 5, 2014), 79 FR 7731 (February 10,
2014).
    FINRA also adopted a rule, FINRA Rule 0180 (Application of Rules
to Security-Based Swaps), which temporarily limits the application
of certain FINRA rules with respect to security-based swaps. On
January 4, 2016, FINRA filed a proposed rule change, which was
effective upon receipt by the Commission, extending the expiration
date of FINRA Rule 0180 to February 11, 2017. See Self-Regulatory
Organizations; Financial Industry Regulatory Authority, Inc.; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change to
Extend the Expiration Date of FINRA Rule 0180 (Application of Rules
to Security-Based Swaps), Exchange Act Release No.76850 (January 7,
2016).
    \185\ See HSBC Letter at 2-3 (stating that relevant U.S.
personnel would already be subject to U.S. security-based swap
dealer or broker-dealer regulation, ``including extensive sales
practice and recordkeeping rules'' and suggesting that the
Commission could require certain non-U.S. person subsidiaries to
provide access to books and records in a manner similar to Rule 15a-
6(a)(3) applicable to foreign broker-dealers); ISDA Letter at 3
(requesting that, if the Commission adopts the proposed U.S.
activity test, it minimize the impact by relying on certain already
existing requirements on registered broker-dealers, such as
recordkeeping); IIB Letter at 7. See also ISDA Letter at 6 (stating
that the proposal would regulate these transactions ``solely on the
basis of some de minimis level of U.S. nexus during the initial
stage of the transaction''); id. at 9 (describing how existing rules
would address regulatory concerns).
    \186\ See ISDA Letter at 6, 8 (arguing that ``the Commission
already possesses a range of regulatory tools (such as books and
records requirements and direct regulation of U.S.-based
intermediaries) that it can use to satisfy its important regulatory
interests in protecting against issues such as fraud and
manipulation'').
    \187\ IIB Letter at 7. This commenter stated that such an
approach ``also would be consistent with Congress' decision to
define [security-based swaps] as a type of security.'' See id. To
the extent that a firm uses a U.S. person to intermediate a
security-based swap transaction, that U.S. person may be required to
register as a broker and comply with relevant broker requirements,
but nothing in the statute suggests that the regulation of the
broker under the Exchange Act affects the Title VII obligations of
the non-U.S.-person dealer that uses the U.S. broker--perhaps as
part of an integrated dealing business--to engage in dealing
activity within the United States under the comprehensive Title VII
regulatory framework for security-based swap dealers.
---------------------------------------------------------------------------

    We recognize that some parallels exist between the Title VII dealer
framework and the broker-dealer regime; we also recognize that there is
at least a possibility of duplication between some of the requirements
that would apply to the non-U.S.-person dealer's security-based swap
transactions if it is required to register as a security-based swap
dealer, the requirements that likely would apply to the registered
broker-dealer whose personnel arrange, negotiate, or execute the
relevant security-based swap transactions, and some requirements that
may apply to the foreign security-based swap dealer under foreign law.
However, as we discussed at some length in the U.S. Activity Proposing
Release in response to similar comments, we do not believe it
appropriate to except non-U.S.-person dealers from this requirement
merely because some transactions of some non-U.S.-person dealers could
be subject to broker-dealer or other requirements that could duplicate
some of the security-based swap dealer requirements.\188\
---------------------------------------------------------------------------

    \188\ See U.S. Activity Proposing Release, 80 FR 27470-71.
---------------------------------------------------------------------------

    As we noted in that release, this type of approach has two
significant weaknesses. First, the definition of ``broker'' includes a
number of exceptions for banks, including U.S. branches of foreign
banks, that are engaged in certain activities, and these exceptions may
be used by non-U.S.-person dealers to engage in market-facing activity
in the United States in connection with their dealing activity in
security-based swaps.\189\ Second, broker-dealer regulation of the
agent operating in the United States on behalf of the non-U.S.-person
dealer would not address all of the concerns raised by non-U.S. persons
engaged in this activity, as described above.\190\

Accordingly, while we recognized that the statutory framework provides
for the regulation of brokers that intermediate security-based swap
transactions,\191\ we preliminarily took the position that this
provision neither warrants nor compels the adoption of an exception
from the Title VII regime governing security-based swap dealers.\192\
---------------------------------------------------------------------------

    \189\ Compare Exchange Act section 3(a)(71) (defining
``security-based swap dealer'' with no exceptions for banks or
banking activities) with Exchange Act section 3(a)(4)(B) (creating
exception from broker definition for banks engaged in certain
activities) and Exchange Act section 3(a)(5)(C) (creating exception
from dealer definition for banks engaged in certain activities).
    \190\ See U.S. Activity Proposing Release, 80 FR 27466-67;
Section IV.B.2, supra (describing regulatory concerns raised by
security-based swap dealing activity, including risk, market
integrity and transparency, and counterparty protection).
    Regulation of the agent, whether as a broker-dealer or as a
security-based swap dealer, also does nothing to address concerns
about the potential spillover risk or contagion from the activity of
non-U.S.-person dealers--including affiliates of U.S.-based
financial groups--that are engaged in potentially significant
volumes of security-based swap activity in the United States. See
Section IV.B.2, supra.
    \191\ See U.S. Activity Proposing Release, 80 FR 27470 n.198
(noting that Title VII of the Dodd-Frank Act amended the Exchange
Act definition of ``security'' to encompass security-based swaps);
Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10) (defining
``security''), revised by section 761(a)(2) of the Dodd-Frank Act.
    \192\ See U.S. Activity Proposing Release, 80 FR 27470-471.
---------------------------------------------------------------------------

    In response to our preliminary determination, several commenters
suggested that, to the extent that the existing framework (including
the broker-dealer regulatory regime) does not fully address our
concerns, we could adopt an exception to the counting requirement
subject to certain conditions that would help ensure that the non-U.S.
person engaged in dealing activity is subject to requirements, whether
under domestic or foreign law, that are similar to those imposed on
security-based swap dealers by Title VII dealer requirements.\193\ For
example, one commenter suggested that the non-U.S.-person dealer not be
required to count any transaction entered into in a dealing capacity if
the U.S. personnel are (a) personnel of a registered broker-dealer; or
(b) personnel of a U.S. bank or U.S. branch of a foreign bank that, in
connection with the arranging, negotiating, or executing activity, (i)
complies with external business conduct requirements, (ii) maintains
related books and records, and (iii) provides the Commission with
access to such books and records and testimony of the relevant U.S.
personnel.\194\ Another commenter suggested that we except transactions
from the requirement that they be counted toward a non-U.S.-person
dealer's de minimis threshold if the non-U.S.-person dealer is ``(i) [
] an affiliate of the U.S.-located registered broker-dealer, (ii) [ ]
registered as a dealer in a local jurisdiction recognized by the
Commission as comparable, and/or (iii) [ ] located in a Basel-compliant
jurisdiction and subject to such capital requirements under its local
regime.'' \195\ In the commenters' view, this type of alternative
approach would leverage certain additional elements of domestic and
foreign law, avoiding the costs of registering foreign affiliates and
complying with potentially duplicative requirements, while achieving
similar regulatory objectives.\196\
---------------------------------------------------------------------------

    \193\ See IIB Letter at 8-10; SIFMA/FSR Letter at 8; ISDA Letter
at 9-10.
    \194\ See IIB Letter at 8-10. The commenter suggested that the
Commission could use its anti-evasion authority to require access to
books and records of the non-U.S.-person dealer and consent to
service of process and that it could ensure adequate capital
regulation of the non-U.S.-person dealer by requiring the non-U.S.-
person dealer to count these transactions toward the de minimis
exception if it is not supervised by a home country prudential
supervisor that is a member of the Basel Committee or located in a
G20 jurisdiction. See id. at 9. See also ISDA Letter at 8 (stating
that such an approach would be consistent with Exchange Act rule
15a-6, which provides an exemption from broker-dealer registration
on the condition that, among other things, the foreign broker or
dealer maintains books and records and makes them available to the
Commission upon request).
    \195\ See SIFMA/FSR Letter at 8. See also IIB Letter at 9
(suggesting that any exception could be conditioned on the non-U.S.
person being supervised by a home country prudential supervisor that
is either a member of the Basel Committee or located in a G-20
jurisdiction).
    \196\ See IIB Letter at 8-10; SIFMA/FSR Letter at 7-8.
---------------------------------------------------------------------------

    In offering these alternative approaches, commenters attempted to
encompass all structures that non-U.S.-person dealers use to engage in
dealing activity in the United States with non-U.S. counterparties and
address the full range of regulatory concerns raised by that activity.
But instead of a uniform set of comprehensive requirements using the
framework that Congress established in Title VII, they urged us to
develop an alternative approach that would cobble together existing
foreign and domestic regulations in an attempt to replicate--and, as we
discuss below, effectively replace--the statutory framework established
by Congress by using a combination of pre-Dodd Frank Act regulatory
authority, anti-fraud and anti-manipulation authority, anti-evasion
authority, and certain foreign requirements. After careful
consideration of these alternatives, we believe that such an approach
would undermine the policy objectives advanced by Title VII that we
describe above.\197\
---------------------------------------------------------------------------

    \197\ See Section IV.B.2, supra.
---------------------------------------------------------------------------

    As an initial matter, we believe that the approach suggested by
commenters is inconsistent with the comprehensive, uniform statutory
framework established by Congress for the regulation of security-based
swap dealers in Title VII. The statutory definition of ``security-based
swap dealer'' and the consequent regulatory requirements that apply to
such persons apply to any person that engages in relevant activity
above the dealer de minimis thresholds. The comprehensive scope of this
definition and of the related requirements differs from the broker-
dealer framework under the Exchange Act. Most significantly, as already
discussed, the broker-dealer framework does not apply to banks engaged
in certain activities, which may include a significant proportion of
security-based swap dealing activity. Title VII, on the other hand,
provides that both banks and non-banks--whether engaged in dealing
activity with other dealers or with non-dealers--are subject to the
same comprehensive regulatory framework, suggesting that the Title VII
security-based swap dealer framework is designed to establish a uniform
regulatory regime for all persons engaged in security-based swap
dealing activity at levels above the de minimis threshold, regardless
of the business structure that they use to carry out their business.
    Commenters argued that precedent for an approach that provides an
exception for trades intermediated by a registered broker-dealer exists
in the exemption available for foreign broker-dealers under Exchange
Act rule 15a-6.\198\ However, this comparison is inapposite. First, the
rule 15a-6(a)(3) exemption that commenters would have us follow \199\
permits a foreign broker-dealer to effect transactions in the United
States without being required to register only if the intermediating
broker under rule 15a-6 is itself a registered broker-dealer. In other
words, rule 15a-6(a)(3) exempts the foreign dealer only if its U.S.
intermediary is subject to the same regulatory regime that otherwise
would apply to the foreign broker-dealer absent the exemption. The
commenters, on the other hand, urged us to permit a non-U.S.-person
dealer engaged in security-based swap dealing activity in the United
States to substitute broker regulation (subject to certain conditions,
including compliance with certain foreign requirements) of the U.S.
intermediary for comprehensive Title VII security-based swap dealer
regulation of the non-U.S. person engaged in security-based swap
dealing activity.
---------------------------------------------------------------------------

    \198\ See IIB Letter at 7-8; ISDA Letter at 8-9; HSBC Letter at
3, note 3.
    \199\ See IIB Letter at 7-8; ISDA Letter at 8-9; HSBC Letter at
3, note 3.
---------------------------------------------------------------------------

    Second, an exception of this type likely would effectively supplant
Title VII dealer regulation for a majority of dealing activity carried
out in the United States, replacing it with a less effective
alternative cobbled together from other domestic and foreign
requirements. As described above, much

of the dealing activity carried out in the United States is currently
booked in non-U.S. persons, and the absence of a U.S. activity trigger
for de minimis threshold calculations would create a strong incentive
to move booking for all transactions with non-U.S. persons--including,
eventually, potentially all dealer-to-dealer transactions--to booking
entities that are themselves non-U.S. persons.\200\ Doing so would
permit all of this activity--potentially a significant majority of
security-based swap activity in the United States--to be regulated
under an alternative to Title VII. Thus, whereas the exemption under
Exchange Act rule 15a-6 permits a foreign broker-dealer to effect
transactions in the United States without being required to register if
the intermediating broker is subject to the same requirements that
would apply to the foreign broker-dealer absent the exemption, the
commenters' alternative would potentially enable most security-based
swap dealing activity in the United States to be regulated under an
entirely different regime from the comprehensive dealer regulatory
framework established by Congress.
---------------------------------------------------------------------------

    \200\ As already discussed, the security-based swap market is a
global market, and firms engaged in security-based swap dealing
activity can restructure their dealing business to ensure that
security-based swap transactions are not booked in U.S. persons. See
Section II.B, supra.
---------------------------------------------------------------------------

    One commenter argued that permitting personnel located in the
United States to comply with the requirements that apply to registered
broker-dealers would increase efficiency because such personnel would
be subject to a single set of regulatory compliance obligations with
respect to both their underlying securities transactions and
derivatives transactions.\201\ Another commenter argued that our
``generally favorable view of substituted compliance'' suggests that we
should be willing to refrain from adopting these amendments on the
basis that existing Exchange Act and FINRA requirements ``already
secure the regulatory aims sought to be provided by the SBS dealer
regime.'' \202\ However, banks engaged in certain activities, including
U.S. branches of foreign banks, are, as noted above, excepted from the
definition of ``broker'' and would not benefit from the efficiencies
described by commenters, whether they are required to register as
security-based swap dealers (because the exemption is not available to
them) or required to comply with broker-dealer requirements as a
condition of an exception, as suggested by one commenter.\203\ In
addition, while permitting reliance on broker-dealer requirements for
certain non-U.S.-person dealers may provide intra-firm efficiencies, it
is also likely to create unnecessary competitive disparities between
non-U.S.-person dealers that are eligible for the exception, on one
hand, and U.S. dealers and other non-U.S.-person dealers that are not
eligible.\204\ And to the extent that the commenters' concerns relate
to the difficulties in persuading non-U.S.-person counterparties to
make representations and accept disclosures pursuant to business
conduct requirements as proposed,\205\ reliance on broker-dealer
regulation is unlikely to eliminate these concerns, as it is likely
that similar requirements may apply under the Exchange Act or under
FINRA rules, following the termination of relevant exemptions.\206\ For
these reasons, we do not agree with commenters that existing
requirements in fact secure the same regulatory aims as those secured
by the Title VII dealer regulatory framework.\207\
---------------------------------------------------------------------------

    \201\ See IIB Letter at 7.
    \202\ See ISDA Letter at 9-10.
    \203\ See IIB Letter at 8-9.
    \204\ Indeed, we note that any exception from the uniform
application of the requirement that non-U.S.-person dealers that
engage in security-based swap dealing activity in the United States
include the resulting transactions in their dealer de minimis
threshold calculations is likely to create similar competitive
disparities and exacerbate market fragmentation in the manner
described in the previous section. See Section IV.B.2, supra. For
this reason, and the reasons given in note 190, supra, we do not
agree that compliance by the agent with either broker-dealer or
security-based swap dealer requirements would warrant an exception
from counting transactions under the U.S. Activity Test. Cf. note
185, supra (citing HSBC Letter at 3).
    \205\ See IIB Letter at 11; SIFMA/FSR Letter at 9. For example,
one commenter explained that a non-U.S. counterparty ``would be
surprised by any need to provide representations, agree to covenants
or fill out questionnaires designed to comply with U.S.
requirements'' that would only apply if U.S. personnel is used in a
subsequent transaction, particularly if such requirements differ
from any local requirements that are already applicable. IIB Letter
at 11.
    \206\ See note 184, supra.
    \207\ See notes 201-203, supra.
---------------------------------------------------------------------------

    Finally, many of the concerns expressed by commenters could be
mitigated by the availability of substituted compliance, which, as
proposed, may permit non-U.S.-person dealers to comply with comparable
foreign requirements as an alternative means of complying with certain
Title VII requirements.\208\ A person relying on substituted compliance
would remain subject to the applicable Exchange Act requirements, but
could comply with those requirements in an alternative fashion.\209\
---------------------------------------------------------------------------

    \208\ See proposed Exchange Act Rule 3a71-5; Cross-Border
Proposing Release, 78 FR 31088. See also IIB Letter at 19 (noting
that significant modifications to existing compliance and risk
management systems in response to adoption of the U.S. Activity Test
``may prove unnecessary'' if foreign security-based swap dealers
``are ultimately able to rely on substituted compliance'').
    Although we did not directly address substituted compliance with
respect to security-based swap dealer requirements in the U.S.
Activity Proposing Release, we noted in that release that we had
previously proposed such an approach and continued to believe that
substituted compliance for such requirements would be the
appropriate means of addressing potential overlap or duplication in
their application, rather than forgoing regulation entirely. See
U.S. Activity Proposing Release, 80 FR 27471 and 27473 n.223. Cf.
ISDA Letter at 10 (expressing concern that the U.S. Activity
Proposing Release had proposed substituted compliance only with
respect to Regulation SBSR).
    \209\ See Cross-Border Proposing Release, 78 FR 31085. Under the
proposal, the Commission would not permit dealer requirements to be
satisfied by substituted compliance unless (i) the Commission
determined that the foreign regime's requirements were comparable to
the otherwise applicable requirements, after taking into account
such factors as the Commission determines are appropriate, including
the scope and objectives of the relevant foreign regulatory
requirements the effectiveness of the supervisory compliance program
administered, and the enforcement authority exercised by the foreign
financial regulatory authority in support of its oversight; and (ii)
the Commission has entered into a supervisory and enforcement
memorandum of understanding or other arrangement with the relevant
foreign financial regulatory authority or authorities. See proposed
Exchange Act Rule 3a71-5(a)(2)(i) and (ii); Cross-Border Proposing
Release, 78 FR 31086-88.
---------------------------------------------------------------------------

    In practice, however, we recognize that there will be limits to the
availability of substituted compliance. For example, it is possible
that substituted compliance may be permitted with regard to some
requirements and not others with respect to a particular jurisdiction.
For certain jurisdictions, moreover, substituted compliance may not be
available with respect to any requirements depending on our assessment
of the comparability of the relevant foreign requirements, as well as
the availability of supervisory and enforcement arrangements among the
Commission and relevant foreign financial regulatory authorities.
Although comparability assessments will focus on regulatory outcomes
rather than rule-by-rule comparisons, the assessments will require
inquiry regarding whether foreign regulatory requirements adequately
reflect the interests and protections associated with the particular
Title VII requirement. In some circumstances, such a conclusion may be
difficult to achieve.
    In the event that we are unable to determine that an entity may
satisfy certain Title VII requirements via substituted compliance, we
recognize that such persons may, as a result, be subject to
requirements that are duplicative of particular Title VII requirements.
While we recognize the

significance of such a result, in our view compliance with the Title
VII requirements is necessary to advance the policy objectives of Title
VII. This would be undermined by permitting non-U.S.-person dealers to
comply with their Title VII obligations by satisfying foreign
requirements, unless the alternative route provided by substituted
compliance has been made available.

C. Application of the Dealer De Minimis Exception to Non-U.S. Persons
Using Personnel Located in a U.S. Branch or Office to Arrange,
Negotiate, or Execute Security-Based Swap Transactions

    We are amending Exchange Act rule 3a71-3(b)(1)(iii) in a manner
generally consistent with our proposal. The final rule requires a non-
U.S. person engaged in security-based swap dealing activity to include
in its de minimis calculations any transactions connected with its
security-based swap dealing activity that it arranges, negotiates, or
executes using its personnel located in a U.S. branch or office, or
using personnel of its agent located in a U.S. branch or office.\210\
This approach reflects our view that it is reasonable to conclude that
a non-U.S. person that, in connection with its dealing activity,
engages in market-facing activity using personnel located in the United
States, is performing activities that fall within the statutory
definition of ``security-based swap dealer'' or our further definition
of that term, as described above, at least in part in the United
States.\211\
---------------------------------------------------------------------------

    \210\ See Exchange Act rule 3a71-3(b)(1)(iii)(C). Consistent
with our proposal, a person would be required to include in its de
minimis calculations only security-based swaps that, in connection
with its dealing activity, are arranged, negotiated, or executed by
personnel located in the United States. A non-U.S. person is not
required to include in this calculation transactions connected with
that person's dealing activity solely on the basis that they were
submitted for clearing in the United States, reported to a security-
based swap data repository in the United States, or because
activities related to collateral management of the transaction, such
as the exchange of margin, occurred within the United States. See
U.S. Activity Proposing Release, 80 FR 27467 n.166; 27468 n.180;
Cross-Border Proposing Release, 78 FR 31000. In our view, none of
these activities, by themselves, indicate that a non-U.S. person is
likely to raise the types of concerns addressed by Title VII
security-based swap dealer regulation.
    \211\ Non-U.S. persons engaged in security-based swap dealing
activity may include persons whose counterparties have legal
recourse against a U.S. person arising out of the security-based
swap transactions of the non-U.S. person or persons that are conduit
affiliates. Our Cross-Border Adopting Release finalized rules
providing that a non-U.S. person must include in its dealer de
minimis calculation transactions arising out of its dealing activity
with counterparties that are U.S. persons, or such transactions with
non-U.S. person counterparties if the non-U.S. person affiliate of
the non-U.S. person is a conduit affiliate or if its counterparty
has a right of recourse against a U.S.-person affiliate of the non-
U.S. person under the security-based swap, even if the non-U.S.
person is not engaging in dealing activity using personnel located
in the United States to arrange, negotiate, or execute the
transaction. See Exchange Act rules 3a71-3(a)(1), (b)(1)(ii), and
(b)(1)(iii)(B).
---------------------------------------------------------------------------

    This amendment reflects our further consideration of the issues
raised by non-U.S. persons engaged in this activity. We continue to
believe that requiring non-U.S. persons to include such transactions in
their de minimis threshold calculations will help to ensure that all
persons that engage in a significant level of relevant dealing
activity, including activity carried out through personnel located in a
U.S. branch or office, are required to register as security-based swap
dealers and to comply with relevant Title VII requirements applicable
to security-based swap dealers when the volume of that activity exceeds
the dealer de minimis threshold.\212\
---------------------------------------------------------------------------

    \212\ Several commenters urged the Commission to work with the
CFTC to harmonize the Commissions' approaches to cross-border and
other issues, arguing that no administrative or economic rationale
exists for different approaches. See Chris Barnard Letter at 2
(noting that the U.S. Activity Proposing Release differs in its
application of mandatory clearing and trade execution from the CFTC
and that, ideally, the SEC and CFTC should work together to create
one set of rules); ICI Global Letter at 3-4 (emphasizing the need
for coordination among regulators to determine the treatment of
cross-border transactions); MFA Letter at 2-4 (urging that the
Commission work with the CFTC and the prudential regulators to adopt
a single approach, particularly with respect to the definition of
``U.S. person''); SIFMA Sequencing Letter at 5 (requesting that the
Commission coordinate with the CFTC on cross-border rules generally
and on any rules governing U.S. activity in particular). One
commenter expressed concern about differences among cross-border
approaches proposed by U.S. regulators particularly in light of the
close relationship between the single-name CDS market and the index
CDS market, given that many market participants are active in both
markets. See MFA Letter at 3. We recognize the commenters' concerns
and continue to consult and coordinate with the CFTC and other
regulators to minimize differences in our Title VII rules, including
with respect to the issues addressed in this release.
    Another commenter specifically urged that the Commission's
proposed interpretation of ``arrange, negotiate, and execute'' be
applied consistently to the use of these terms in other contexts,
including the CFTC Staff Advisory and the Volcker Rule. See SIFMA/
FSR Letter at 2-4. The Commission adopted the Volcker Rule together
with the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the CFTC under a provision of the Dodd-
Frank Act separate from the provisions under which the rules
addressed in this release are being adopted. See Prohibitions and
Restrictions on Proprietary Trading and Certain Interests in, and
Relationships With, Hedge Funds and Private Equity Funds, Release
No. BHCA-1 (December 10, 2013), 79 FR 5535 (January 31, 2014)
(``Volcker Rule'').
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    Most commenters that expressed a view on the U.S. Activity Test set
forth in the U.S. Activity Proposing Release supported the changes made
from our initially proposed approach.\213\ Under that initial approach,
market participants would have been required to determine, in
connection with several different Title VII rules, whether a
transaction was a ``transaction conducted within the United States,''
and this determination would have required an analysis of the location
of relevant activity performed by either counterparty or its agent in
connection with that transaction.\214\ These commenters supported the
narrower approach set forth in our U.S. Activity Proposing Release,
which focused only on the location of relevant activity of a
counterparty acting in a dealing capacity in the transaction of such
counterparty's agent \215\ and limited relevant activity to ``market-
facing'' activity of that counterparty or the counterparty's
agent.\216\ One commenter stated that the modified approach created ``a
definable standard that will bring clarity to the application of
security-based swap requirements to security-based swap dealers, and is
appropriate and consistent with the expectations of the parties as to
when U.S. security-based swap requirements will apply.'' \217\
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    \213\ See ICI Letter at 1-2, 5; SIFMA/FSR Letter at 3; IIB
Letter at 2.
    \214\ See Cross-Border Proposing Release, 78 FR 30999.
    \215\ See ICI Global Letter at 1-2, 5 (stating that the modified
proposal would enable non-U.S. dealers to enter into transactions
with non-U.S. persons that may use a U.S. fund manager without
requiring the non-U.S. dealer to include the transaction in its de
minimis calculations).
    \216\ See IIB Letter at 17; SIFMA/FSR Letter at 3 (stating that
``market-facing focus is appropriate and consistent with the
expectations of the parties as to when U.S. regulations will
apply'').
    \217\ SIFMA/FSR Letter at 2-3 (stating also that the commenters
``strongly believe that the Commission has taken the correct
approach in focusing on market-facing activity of sales and trading
personnel in defining the `arrange, negotiate, or execute' nexus
that subjects security-based swap activity to the Commission's
regulations based on location of conduct'').
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    We have considered commenters' concerns about the potential costs
associated with the final rule, including the systems and monitoring
costs, as well as the likelihood of market fragmentation arising from
the full or partial exit of some dealing firms from the U.S.
market.\218\ As discussed above, however, we believe that imposing the
counting requirements on non-U.S.-person dealers engaged in such
transactions will advance important regulatory objectives.\219\
However, the

final rule is intended to avoid unnecessary costs and complexity that
may make it difficult for market participants to comply with such
requirements. As we stated in connection with the proposed rule, this
approach reflects our recognition of commenters' concerns that our
initially proposed approach to ``transactions conducted within the
United States'' potentially could have imposed significant costs on,
and presented compliance challenges to, market participants.\220\ The
final rule should reduce the likelihood that personnel who are
incidentally within the United States will trigger the counting
requirement, and it will eliminate any need on the part of the non-
U.S.-person dealer either to monitor the location of relevant personnel
acting on behalf of its counterparty or to obtain relevant
representations regarding the location of the counterparty's or the
counterparty's agent's personnel from their counterparty on a
transaction-by-transaction basis.
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    \218\ See Sections V.A and V.B, infra (discussing comment
letters addressing costs, competition, and market fragmentation).
    \219\ See Section IV.B.2, supra. We recognize, as two commenters
argued, that it is possible that the final rule will result in
additional registrants and that this increase in the number of
security-based swap dealers will impose additional responsibilities
on the Commission and its staff. See IIB Letter at 7, 10; HSBC
Letter at 2. As discussed above, the final rule is intended to
subject to registration requirements only those firms whose activity
in the United States suggests that they raise the types of concerns
addressed by Title VII dealer regulation, and we believe that the
concern regarding Commission resources is not relevant, given that
the final rule appears reasonably tailored to achieve our policy
interests.
    \220\ See U.S. Activity Proposing Release, 80 FR 27468.
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    In the following subsections, we describe key elements of the
amendment to Exchange Act rule 3a71-3(b)(1)(iii) and address comments
received in response to the U.S. Activity Proposing Release that are of
particular relevance with respect to each element.
1. ``Arranging, Negotiating, or Executing'' a Security-Based Swap
Transaction
    Exchange Act rule 3a71-3(b)(1)(iii)(C) applies only to transactions
connected with a non-U.S. person's security-based swap dealing activity
that its personnel (or the personnel of an agent) located in the United
States arrange, negotiate, or execute. The final rule, accordingly,
would reach a narrower range of activity than did the initially
proposed rules that would have required a non-U.S.-person dealer to
count any ``transaction conducted within the United States'' \221\ that
it entered into in connection with its dealing activity.
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    \221\ As noted above, the initially proposed rule would have
required non-U.S. persons to include in their de minimis calculation
any ``transaction conducted within the United States'' related to
their dealing activity. See Cross-Border Proposing Release, 78 FR
30999-31000. Under that proposal, this term would have included any
transaction solicited, negotiated, executed, or booked, by either
party or either party's agent, within the United States. See id. at
30999.
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    Consistent with our preliminary views set forth in the U.S.
Activity Proposing Release, ``arrange'' and ``negotiate'' in the final
rule indicate market-facing activity of sales or trading personnel in
connection with a particular transaction, including interactions with
counterparties or their agents.\222\ ``Execute'' refers to the market-
facing act that, in connection with a particular transaction, causes
the person to become irrevocably bound under the security-based swap
under applicable law.\223\
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    \222\ See U.S. Activity Proposing Release, 80 FR 27467-68.
    Consistent with the approach taken to the final definition of
``transaction conducted through a foreign branch'' adopted in the
Cross-Border Adopting Release, the amendment includes ``arrange''
instead of ``solicit'' in recognition of the fact that a dealer, by
virtue of being commonly known in the trade as a dealer, may respond
to requests by counterparties to enter into dealing transactions, in
addition to actively seeking out such counterparties. See id. at
27467 n.173 (citing Cross-Border Adopting Release, 79 FR 47322
n.381; 15 U.S.C. 78c(a)(71)(A)(iv)).
    \223\ See U.S. Activity Proposing Release, 80 FR 27468.
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    As noted in the proposal, this limitation to market-facing activity
should enable market participants to identify the location of relevant
activity in a relatively efficient manner. The final rule requires a
market participant to focus on whether its sales or trading personnel
(or such personnel of its agent) located in the United States engage in
this market-facing activity in connection with a particular
transaction, not on where these or other personnel perform internal
functions (such as the processing of trades or other back-office
activities) in connection with that transaction. Accordingly, the
involvement of personnel located in a U.S. branch or office in a
transaction, where such personnel do not engage in market-facing
activities with respect to a specific transaction (such as a person who
designs the security-based swap but does not communicate with the
counterparty regarding the contract in connection with a specific
transaction and does not execute trades in the contract), and does not
direct these activities (as described below), does not fall within the
scope of the final rule.\224\ Similarly, the final rule also does not
include the preparation of underlying documentation for the
transaction, including negotiation of a master agreement and related
documentation, or performing ministerial or clerical tasks in
connection with the transaction as opposed to negotiating with the
counterparty the specific economic terms of a particular security-based
swap transaction.\225\
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    \224\ On the other hand, to the extent that personnel located in
a U.S. branch or office engage in market-facing activity normally
associated with sales and trading, the location of those personnel
would be relevant, even if the personnel are not formally designated
as sales persons or traders.
    \225\ Similarly, the final rule does not encompass a transaction
solely on the basis that a U.S.-based attorney is involved in
negotiations regarding the terms of the transaction.
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    The final rule also does not require persons engaged in dealing
activity to consider the location of personnel booking the transaction.
As we have noted elsewhere, the booking entity is the counterparty to a
transaction and bears the ongoing risk of performance on the
transaction,\226\ and the entity in which the transaction is booked is
the entity that may be required to include a transaction in its de
minimis threshold calculations.\227\ However, the ministerial task of
entering transactions on a non-U.S. person's books once the transaction
has been executed by market-facing personnel does not appear to involve
the type of market-facing activity that reflects an involvement in the
U.S. financial market that would indicate that the non-U.S. person may
be likely to raise the types of regulatory concerns addressed by the
Title VII dealer requirements, particularly if both counterparties to
the transaction are non-U.S. persons and all relevant market-facing
activity occurs outside the United States.\228\ On the other hand, a
non-U.S. person's market-facing activity in the United States suggests
the type of involvement in the U.S. security-based swap market that may
raise financial contagion, customer protection, market integrity, and
market transparency concerns, for the reasons described in detail
above,\229\ particularly when its

relevant dealing transactions exceed a de minimis threshold.
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    \226\ See Cross-Border Proposing Release, 78 FR 30976. See also
Intermediary Definitions Adopting Release, 77 FR 30617 n.264. For
further discussion of this issue, see note 244, infra.
    \227\ For example, if the transaction is booked in a U.S.
person, that U.S. person is a counterparty to the security-based
swap and is required to include the security-based swap in its own
de minimis calculation if the transaction is in connection with its
dealing activity, irrespective of whether the U.S. person used its
own personnel or an agent's personnel to carry out that dealing
activity. See Exchange Act rule 3a71-3(b)(1)(i).
    \228\ See Section IV.B.2, supra (describing concerns addressed
by the final rule, including uniform application of Title VII dealer
requirements, market integrity and fragmentation, and potential
channels of financial contagion arising from dealing activity in the
United States). See also U.S. Activity Proposing Release, 80 FR
27467 n.173 (stating our preliminary view that it is market-facing
activity, rather than the booking of the transaction, that raises
the types of concerns underlying our proposal of the U.S. Activity
Test).
    \229\ See note 162 and accompanying text, supra.
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    Finally, we note that, consistent with our proposal, ``arranging,''
``negotiating,'' and ``executing'' also include directing other
personnel to arrange, negotiate, or execute a particular security-based
swap. In other words, sales and trading personnel of a non-U.S. person
who are located in the United States cannot avoid application of this
rule by simply directing other personnel to carry out dealing activity,
and we would view personnel located in a U.S. branch or office who
direct personnel not located in the United States to arrange,
negotiate, or execute a security-based swap transaction as themselves
arranging, negotiating, or executing the transaction. Similarly,
personnel directing the arranging, negotiation, or execution of
security-based swaps include personnel located in a U.S. branch or
office that specify the trading strategy or techniques carried out
through algorithmic trading or automated electronic execution of
security-based swaps, even if the related server is located outside the
United States.\230\ Some commenters requested that certain requirements
not apply to transactions that involve U.S. activity if parties have no
reasonable basis to expect that Title VII regulations will apply, for
example, because the trade has been executed on an anonymous electronic
platform or in algorithmic/program driven trading, in which a
counterparty may have personnel in the U.S. but there is no human
contact within the U.S. related to the transaction.\231\ However, we do
not believe that it is appropriate to create a blanket exclusion for
these transactions from the de minimis counting requirement, as neither
algorithmic trading nor automated electronic execution of security-
based swaps eliminates the concerns addressed by Title VII dealer
regulation, which exist irrespective of the expectations of the
counterparty to a particular transaction.\232\
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    \230\ We would not view personnel responsible solely for coding
the algorithm as specifying the trading strategy or techniques
carried out through such trading or execution.
    \231\ See ISDA Letter at 7-8; SIFMA/FSR Letter at 7 (stating
that transactions should not be counted towards the de minimis
calculations if executed anonymously on an exchange and cleared, or
through algorithmic or program-driven trading); IIB Letter at 17-18
(same, noting that doing so could deter non-U.S. counterparties from
trading on those platforms).
    \232\ Cf. ISDA Letter at 5 (acknowledging that ``the
Commission's concern that electronic trading does not eliminate the
possibility of abusive or manipulative conduct'' and requesting
further clarification of the application of the proposed rule to
electronic trading).
---------------------------------------------------------------------------

2. ``Located in a U.S. Branch or Office''
    Exchange Act rule 3a71-3(b)(1)(iii)(C) applies only to transactions
connected with a non-U.S. person's security-based swap dealing activity
that are arranged, negotiated, or executed by personnel located in a
U.S. branch or office.\233\ Thus, on the one hand, we generally would
view the rule to require a non-U.S.-person dealer to include in its de
minimis calculations any transactions arranged, negotiated, or executed
in the United States by, for example, personnel assigned to, on an
ongoing or temporary basis, or regularly working in a U.S. branch or
office. On the other hand, we would not view the rule to require a non-
U.S.-person dealer to include in its de minimis calculations
transactions arranged, negotiated, or executed by personnel assigned to
a foreign office if such personnel are only incidentally in the United
States. For example, the amendment does not require a non-U.S. person
to include transactions that such personnel arrange, negotiate, or
execute while traveling in the United States to attend an educational
or industry conference.
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    \233\ As noted in Section IV.C.1, however, if personnel located
in a U.S. branch or office are arranging, negotiating, or executing
a particular security-based swap by directing personnel not located
in a U.S. branch or office to arrange, negotiate, or execute a
security-based swap transaction, we would view that transaction as
having been arranged, negotiated, or executed by the personnel
located in the United States.
---------------------------------------------------------------------------

    As we noted in our U.S. Activity Proposing Release, this element of
the final rule also should mitigate the burdens associated with
determining whether a particular transaction needs to be included in a
non-U.S. person's de minimis calculation.\234\ We acknowledge that the
final rule potentially would lead a market participant to perform a
trade-by-trade analysis to determine the location of relevant personnel
performing market-facing activity in connection with the transaction.
However, because the final rule encompasses a person's dealing activity
only when its personnel or personnel of its agent located in a U.S.
branch or office have arranged, negotiated, or executed the
transaction, a non-U.S. person performing this analysis should be able
to identify for purposes of ongoing compliance the specific sales and
trading personnel whose involvement in market-facing activity would
require a transaction to be included in its de minimis
calculation.\235\ Alternatively, such non-U.S. person may establish
policies and procedures that would facilitate compliance with this
final amendment by requiring transactions connected with its dealing
activity to be arranged, negotiated, and executed by personnel located
outside the United States.
---------------------------------------------------------------------------

    \234\ See U.S. Activity Proposing Release, 80 FR 27469.
    \235\ Based on our staff's discussions with market participants,
we continue to believe that persons engaged in dealing activity may
already identify personnel involved in market-facing activity with
respect to specific transactions in connection with regulatory
compliance policies and procedures and to facilitate compensation.
See id. at 27469 n.191.
     In addition, we believe that some market participants engaged
in both swap dealing and security-based swap dealing activity may
perform a similar analysis consistent with the CFTC Staff Advisory,
which sets forth the CFTC staff's view that Title VII requirements
apply to transactions arranged, negotiated, or executed in the
United States by, or on behalf of, swap dealers. See note 20, supra.
---------------------------------------------------------------------------

    Consistent with our proposed approach, the final rule applies to
security-based swap transactions that the non-U.S. person, in
connection with its dealing activity, arranges, negotiates, or
executes, using personnel located in a U.S. branch or office, even in
response to inquiries from a non-U.S.-person counterparty outside
business hours in the counterparty's jurisdiction. One commenter urged
us not to include such transactions in the U.S. Activity Test, arguing
that dealing activity carried out in the United States in response to
inquiries is generally occurring pursuant to ``product, credit and
market risk parameters'' set by management personnel outside the United
States and that the activity is not ``regular business'' because the
location of the activity is ``solely incidental to the hour of the day
when the non-U.S. counterparty desires to trade.'' \236\
---------------------------------------------------------------------------

    \236\ See IIB Letter at 18-19 (arguing that the dealing activity
of the U.S. personnel in the trade is solely based on the hour of
the day and thus incidental and that maintaining the proposed
approach would be difficult as it would require non-U.S. persons to
hire staff to work after-hours in the non-U.S. offices). See also
HSBC Letter at 2 (explaining that U.S. sales and trading personnel
may arrange, negotiate, or execute security-based swaps solely due
to time-zone differences).
---------------------------------------------------------------------------

    We do not agree that these circumstances, including the fact that
the dealer's counterparty made the initial contact leading to the
transaction, are relevant in determining whether a transaction should
be included in a non-U.S. person's de minimis threshold calculations.
The focus of our U.S. Activity Test is on the location of the personnel
used to arrange, negotiate, or execute the security-based swap
transaction, as we continue to believe that a non-U.S. person that uses
sales or trading personnel located in a U.S. branch or office to engage
in market-facing activity in connection with its dealing activity, at
least to the extent that its relevant dealing activity exceeds the de
minimis threshold, is likely to

raise concerns addressed by Title VII dealer regulation.\237\ As noted
above, to the extent that personnel assigned to a foreign office are
themselves only incidentally present in the United States, we would not
view the final rule as encompassing any transactions that they arrange,
negotiate, or execute. But we do not believe that either the nature of
the initial contact made by the foreign counterparty or the fact that
parameters for the market-facing activity in the United States are
established by management personnel outside the United States mitigates
the concerns arising from a non-U.S. person that, in connection with
its dealing activity, uses personnel located in the United States to
arrange, negotiate, or execute a security-based swap.\238\ Accordingly,
we would view the final rule as encompassing transactions under such
circumstances to the extent that the personnel arranging, negotiating,
or executing the transaction on behalf of the non-U.S. person dealer
are located in a U.S. branch or office as described above.\239\
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    \237\ See Sections IV.B.2 and II.B, supra.
    \238\ Cf. note 222, supra (noting that the amendment includes
``arrange'' instead of ``solicit'' in recognition of the fact that a
dealer, by virtue of being commonly known in the trade as a dealer,
may respond to requests by counterparties to enter into dealing
transactions, in addition to actively seeking out such
counterparties).
    \239\ We also recognize that Exchange Act section 3(a)(71)(C)
excepts from the security-based swap dealer definition a person that
enters into security-based swaps for its own account, but not as a
part of regular business. However, we have previously interpreted
``regular business'' to focus on activities of a person that are
usual and normal in the person's course of business and identifiable
as a security-based swap dealing business. See Intermediary
Definitions Adopting Release, 77 FR 30610 (interpreting ``regular
business'' for purposes of the ``swap dealer'' definition). We do
not agree with the commenter that, because the non-U.S. person's use
of the personnel located in a U.S. branch or office is to
accommodate the non-U.S. person counterparty outside its local
market hours, the use of the trading or sales personnel located in a
U.S. branch or office is incidental and thus not ``regular
business'' of the non-U.S. person. Under our interpretation of
``regular business,'' it is important to consider whether the non-
U.S. person's usual and normal course of business is identifiable as
a security-based swap dealing business, not the frequency of or
reasons for using personnel located in a U.S. branch or office.
---------------------------------------------------------------------------

3. ``Personnel of Such Non-U.S. Person'' or ``Personnel of an Agent''
    Exchange Act rule 3a71-3(b)(1)(iii)(C) would apply to transactions
connected with a non-U.S. person's security-based swap dealing activity
that are arranged, negotiated, or executed by personnel located in a
U.S. branch or office, whether the non-U.S. person arranges,
negotiates, or executes the transaction directly using its own
personnel located in a U.S. branch or office, or does so using
personnel of an agent of such non-U.S. person, located in a U.S. branch
or office.
    As noted above, a non-U.S. person engaged in security-based swap
dealing activity with other non-U.S. persons, if it wishes to avail
itself of the expertise of sales, trading, and other personnel located
in a U.S. branch or office, may carry out that activity using its own
personnel located in a U.S. branch or office, or using the personnel of
its agent, located in a U.S. branch or office.\240\ We continue to
believe that the location of personnel carrying out market-facing
activity appears particularly relevant for identifying non-U.S. persons
that may raise the types of concerns described above,\241\ whether that
dealing activity is carried out by the non-U.S. person's personnel
located in a U.S. branch or office or on its behalf by the personnel of
its agent, located in a U.S. branch or office.\242\ Accordingly, the
final rule requires a non-U.S. person to include in its de minimis
calculations any transactions in connection with its security-based
swap dealing activity that are arranged, negotiated, or executed by
personnel of such person located in a U.S. branch or office, or by
personnel of its agent located in a U.S. branch or office.\243\ For the
reasons discussed in Section IV.B.3, above, the final rule does not
include any exception from the de minimis counting requirement for
security-based swap transactions that a non-U.S. person, in connection
with its dealing activity, arranges, negotiates, or executes using
personnel located in the United States.\244\
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    \240\ For purposes of Exchange Act rule 3a71-3(b)(1)(iii)(C), we
interpret the term ``personnel'' in a manner consistent with the
definition of ``associated person of a security-based swap dealer''
contained in section 3(a)(70) of the Exchange Act, 15 U.S.C.
78c(a)(70), regardless of whether such non-U.S. person or such non-
U.S. person's agent is itself a security-based swap dealer. This
definition is, in turn, substantially similar to the definition of
``associated person of a broker or dealer'' in section 3(a)(18) of
the Exchange Act, 15 U.S.C. 78c(a)(18). The definition in section
3(a)(18) is intended to encompass a broad range of relationships
that can be used by firms to engage in and effect securities
transactions, and is not dependent solely on whether a natural
person is technically an ``employee'' of the entity in question. See
Alexander C. Dill, Broker-Dealer Regulation Under the Securities
Exchange Act of 1934: The Case of Independent Contracting, 1994
Colum. Bus. L. Rev. 189, 211-213 (1994) (noting that the Securities
Act Amendments of 1964, which amended section 3(a)(18) of the
Exchange Act, ``rationalized and refined the concept of `control' by
firms over their sales force by introducing the concept of an
`associated person' of a broker-dealer.''). Accordingly, we expect
to consider whether a particular entity is able to control or
supervise the actions of an individual when determining whether the
individual is considered to be ``personnel'' of a U.S. branch,
office, or agent of a security-based swap dealer. This is
particularly relevant in the context of a financial group that
engages in a security-based swap dealing business, where personnel
of one affiliate may operate under the direction of, or in some
cases, report to personnel of another affiliate within the group.
See also Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and
Private Equity Funds, BHCA-1 (December 10, 2013), 59 FR 5535, 5591
(January 31, 2014) (explaining, in the context of adopting certain
provisions of what is commonly referred to as the Volcker Rule, that
the relevant ``trading desk'' of a banking entity ``may manage a
financial exposure that includes positions in different affiliated
legal entities'' and similarly ``may include employees working on
behalf of multiple affiliated legal entities or booking trades in
multiple affiliated entities'') (internal citations omitted).
    \241\ See Section IV.B, supra. One commenter urged the
Commission to return to its initially proposed approach, which would
have looked to the location of relevant activity of both
counterparties. Letter from Better Markets, dated July 13, 2015
(``Better Markets Letter''), at 3, 6. The commenter urged the
Commission to ``strengthen its proposal by requiring that if either
non-U.S. counterparty uses U.S.-based personnel, then the
transaction must be included within U.S./Foreign Personnel
Activity,'' explaining that the involvement of personnel in the
United States would be consistent with the Supreme Court's decision
in Morrison v. National Australia Bank, Ltd., 130 S. Ct. 2869, 2884
(2010) (``Morrison''), and that a counterparty engaged in dealing
activity can reasonably be required to consider the location of its
counterparty's activity, as well as its own). Id. at 3. Given the
structure of the security-based swap market and the concentration of
security-based swap dealing among a small group of firms, we believe
the final rule is appropriately tailored to capture the dealing
activity that is likely to raise the types of concerns addressed by
the Title VII dealer regime. See Section IV.B.2.
    \242\ We continue to believe that it is appropriate for the
final rule to take into account where personnel of the non-U.S.
person's agent are arranging, negotiating, or executing the
transaction on behalf of the non-U.S. person, regardless of whether
the agent is affiliated with the non-U.S. person, as security-based
swap dealing activity carried out through an unaffiliated agent is
likely to raise the same concerns as such activity carried out
through an affiliated agent.
    \243\ A non-U.S. person that uses a broker as its agent to
arrange, negotiate, or execute security-based swap transactions in
connection with that non-U.S. person's dealing activity would be
required to include those transactions in its own de minimis
calculations. We recognize that this approach may make certain
brokers less able to compete for the business of non-U.S.-person
dealers that would otherwise not be arranging, negotiating, or
executing transactions using personnel located in a U.S. branch or
office, but given the regulatory concerns such transactions may
raise, we think it is appropriate to require such transactions to be
included in the non-U.S. person's de minimis threshold calculations.
See Sections IV.B.2, IV.B.3, and II.B, supra.
    \244\ Consistent with our views expressed in prior releases, if
a financial group used one entity to perform the sales and trading
functions of its dealing business and another to book the resulting
transactions, we would ``view the booking entity, and not the
intermediary that acts as an agent on behalf of the booking entity
to originate the transaction, as the dealing entity.'' Cross-Border
Proposing Release, 78 FR 30976. See also Intermediary Definitions
Adopting Release, 77 FR 30617 n.264 (``A sales force, however, is
not a prerequisite to a person being a security-based swap dealer.
For example, a person that engages in dealing activity can fall
within the dealer definition even if it uses an affiliated entity to
market and/or negotiate those security-based swaps connected with
its dealing activity (e.g., the person is a booking entity).'').
    To the extent that the activities performed by the entity
performing the sales and trading functions involve arranging,
negotiating, or executing security-based swaps as agent for the
booking entity in connection with the booking entity's dealing
activity, this amendment treats the booking entity's transmission of
an order and instructions to the agent as part of the dealing
activity of the booking entity itself. As already noted, a person
engaged in these activities on behalf of the booking entity may
itself be subject to regulation as a broker under the Exchange Act.
See note 187, and accompanying discussion, supra.

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4. Exception for Transactions Involving Certain International
Organizations
    In response to the Cross-Border Proposing Release, certain
commenters raised concerns about the potential application of various
Title VII provisions to multilateral development banks (``MDBs''),
including the International Bank for Reconstruction and Development (or
the World Bank) and the International Finance Corporation.\245\ These
commenters argued that MDBs have absolute immunity under federal law
and should be excluded from regulation under Title VII entirely; in
addition, they argued that MDBs should be excluded from the definition
of U.S. person.\246\ In the Cross-Border Adopting Release, which
addressed the cross-border application of the ``security-based swap
dealer'' and ``major security-based swap participant'' definitions, we
took the position that such issues were outside the scope of the
release, as the source of any such immunities lies outside the Dodd-
Frank Act and the federal securities laws.\247\ However, we concluded
that their status as international organizations warranted excluding
them from the definition of ``U.S. person.'' \248\
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    \245\ See Cross-Border Adopting Release, 79 FR 47305-06, nn.
224, 225 (citing commenters expressing concern about application of
Title VII to certain MDBs).
    \246\ See id. at 47305-06.
    \247\ See id. at 47349.
    \248\ See id. at 47312-313; Exchange Act rule 3a71-3(a)(4)(iii)
(excluding certain international organizations from the definition
of U.S. person).
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    One commenter on the U.S. Activity Proposing Release objected to
the view set forth in the Cross-Border Adopting Release that the scope
of these entities' immunities was outside the scope of our prior
release, arguing that we had left unaddressed the effect of that
immunity on relevant statutory provisions and that we should have
entirely excluded MDBs from any obligation to register as a security-
based swap dealer or major security-based swap participant, as the CFTC
had done in the jointly adopted Intermediaries Definition Adopting
Release.\249\
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    \249\ See Letter from Sullivan and Cromwell, dated July 13, 2015
(``Sullivan and Cromwell Letter''), at 1-2.
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    As an initial matter, we reiterate our view that issues related to
the immunities of MDBs or other international organizations are outside
the scope of our Title VII rulemaking, given that the source of any
such immunities lies outside the scope of the Dodd-Frank Act and the
federal securities laws. We recognize that to the extent that an MDB or
other international organization believes that its security-based swap
activities fall within the scope of the immunities available to it
under U.S. law, the organization may decide not to register as either a
security-based swap dealer or a major security-based swap participant,
even if the volume of its transactions in these instruments exceed the
de minimis threshold.\250\ However, we are not, in adopting rules under
Title VII, expressing any views as to the immunities such entities may
possess generally under international or U.S. law.
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    \250\ The commenter noted that MDBs currently do not engage in
security-based swap transactions in volumes that would require them
to register either as security-based swap dealers or as major
security-based swap participants. See Sullivan and Cromwell Letter
at 2, note 5.
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    In any event, on further consideration, and consistent with the
considerations underlying the exclusion of certain international
organizations from the definition of U.S. person, the final rule
excepts the same international organizations, as defined in Exchange
Act rule 3a71-3(a)(4)(iii), from the requirement to count a security-
based swap transaction with another non-U.S. person toward their de
minimis thresholds when they use personnel located in the United States
to arrange, negotiate, or execute the transaction.\251\ Independent of
any immunities that may be applicable to these international
organizations, including MDBs, we do not believe that their dealing
activity with other non-U.S. persons should be included in any de
minimis calculations that such organizations may make.\252\
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    \251\ See Exchange Act rule 3a71-3(b)(1)(iii)(C).
    \252\ Cf. Cross-Border Adopting Release, 79 FR 47313
(determining that the MDBs' status as international organizations
warranted excluding them from the definition of ``U.S. person'').
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D. Availability of the Exception for Cleared Anonymous Transactions

    Under Exchange Act rule 3a71-5, a non-U.S. person, other than a
conduit affiliate, is not required to include in its de minimis
calculation transactions that are entered into anonymously on an
execution facility or national securities exchange and are cleared
through a clearing agency.\253\ This rule mitigates the likelihood that
market participants will find themselves in a position where they are
required to determine the treatment of the transaction under the de
minimis exception in circumstances where the information necessary to
that determination (e.g., the U.S.-person status of the counterparty)
is unavailable to them.\254\ In addition, this exception should reduce
the likelihood that execution facilities outside the United States will
exclude U.S. market participants to prevent a non-U.S. market
participant from potentially being required to register as a security-
based swap dealer based on information unavailable to the non-U.S.
market participant at the time of the transaction.\255\
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    \253\ See Exchange Act rule 3a71-5.
    \254\ See Cross-Border Adopting Release, 79 FR 47325 n.412.
    \255\ See id. at 47325.
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    As we noted in the U.S. Activity Proposing Release, neither risk
arises under the revised approach to transactions that are arranged,
negotiated, or executed by personnel located in the United States that
was proposed in that release.\256\ Accordingly, we proposed to amend
rule 3a71-5 by adding new paragraph (c) to make this exception
unavailable to transactions that non-U.S. persons would be required to
count under proposed Exchange Act rule 3a71-3(b)(1)(iii)(C). Several
commenters have urged us to exclude from this modified approach
transactions that are traded on an electronic exchange or platform,
whether registered or not, or that are cleared through a clearing
agency located outside the United States, as such transactions do not
create risk in the United States and such a rule would interfere with
access to such platforms.\257\
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    \256\ See U.S. Activity Proposing Release, 80 FR 27472-73.
    \257\ See ISDA Letter at 3, 8 (stating that transactions cleared
outside the United States should not be subject to Title VII, as
they ``are subject to regulatory oversight in the clearing
jurisdiction and are subject to reporting and recordkeeping
requirements in that jurisdiction''); IIB Letter at 17-18
(explaining that non-U.S. counterparties trading on a platform may
not know that their non-U.S. dealer counterparty is using U.S.
personnel and therefore would not expect or want such trades to be
subject to sales practice and reporting requirements, so they may be
deterred from trading on the platforms or the platform may prohibit
access by U.S. personnel). See also SIFMA/FSR Letter at 7 (stating
that transactions should not be counted towards the de minimis
calculations if executed anonymously on an exchange and cleared).
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    However, as we have noted already, to the extent that personnel
located in the

United States are arranging, negotiating, or executing a security-based
swap transaction, the fact that a transaction is traded on a platform
or exchange does not eliminate the regulatory concerns that would
warrant applying Title VII dealer regulation to the extent the non-U.S.
person's dealing activity exceeds the de minimis thresholds: Dealing
activity carried out by personnel located in the United States on
behalf of a non-U.S. person, whether in over-the-counter markets or on
a platform, may raise the risk of financial contagion and may present
counterparty protection, market integrity, and transparency
concerns.\258\ Moreover, although we recognize that clearing a
security-based swap transaction can be expected to reduce operational
and counterparty credit risks, we do not believe it entirely addresses
these other regulatory concerns.
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    \258\ See Section IV.B.2, supra.
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    Indeed, we note that a significant proportion of the interdealer
market consists of cleared transactions, which suggests that the
exception urged by commenters may lead to a similar result as is likely
under a broker-dealer exception to the counting requirement described
above, namely a shift of a significant portion of the interdealer
market to foreign clearing agencies, taking that part of the market
entirely outside the Title VII dealer framework even though the dealing
activity continues to occur in the United States.\259\ In addition, we
note that nothing in Title VII suggests that clearing a transaction
should except a dealer from the requirement to include it in the
dealer's de minimis calculations.
---------------------------------------------------------------------------

    \259\ See Section IV.B.2, supra.
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    Because excepting such transactions could leave significant volumes
of dealing activity carried out by non-U.S. persons in the United
States outside the scope of Title VII dealer regulation and undermine
the effectiveness of that regulatory framework to address the risks
created by such activity, we are adopting Exchange Act rule 3a71-5(c)
as proposed, with technical edits to clarify that the rule's exclusion
applies to the exceptions in both Exchange Act rules 3a71-5(a) and (b).
Accordingly, under the final rule, to the extent that a non-U.S. person
is required to count a transaction under Exchange Act rule 3a71-
3(b)(1)(iii)(C), it must count the trade toward its de minimis
threshold, even if the trade is executed anonymously on a platform and
cleared.\260\
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    \260\ The final rule should also help avoid competitive
disparities that could arise if a non-U.S. person could avail itself
of this exception even when arranging, negotiating, or executing a
transaction in connection with its dealing activity using personnel
located in a U.S. branch or office.
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V. Economic Analysis

    We are sensitive to the economic consequences and effects,
including costs and benefits, of our rules. In the following economic
analysis, we identify and consider the assessment costs and
programmatic costs and benefits of the rules we are now adopting, as
well as the likely effects of the rules on efficiency, competition, and
capital formation. We also discuss the potential economic effects of
certain alternatives to the approach taken by the final rules. Our
analysis addresses several issues that are particularly relevant to the
security-based swap market--including the market's global nature, the
concentration of dealing activity, and the ease with which dealers can
relocate their operations to different jurisdictions--and has informed
the policy choices we have described throughout this release.

A. Assessment Costs

    Several commenters argued that the proposed rule would impose
significant costs on market participants, including costs related to
identifying transactions that needed to be counted toward the de
minimis thresholds.\261\ We recognize that under the final rules non-
U.S. persons will incur costs to assess whether their activities must
be counted against the dealer de minimis thresholds and subjected to
Title VII dealer requirements.\262\ The analysis of assessment costs in
the U.S. Activity Proposing Release accounted for these costs, and we
continue to believe that the final rule represents a reasonable
approach that mitigates the burden to market participants while
applying the Title VII dealer framework to non-U.S. persons that are
likely to raise the types of concerns that framework seeks to
address.\263\
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    \261\ One commenter stated that these costs ``would include the
establishment and maintenance of compliance systems, controls,
policies and procedures that track and control the interactions of
U.S. personnel with non-U.S. counterparties across a wide range of
communication media, including telephone, chat, instant messaging
and electronic trading platforms.'' See IIB Letter at 3. Another
commenter stated that the global nature of the security-based swap
market means that participants will arrange, negotiate, and execute
security-based swap transactions in multiple jurisdictions, meaning
that ``elements of a single [security-based swap] transaction may
take place in different parts of the world, which may often make it
difficult, or even impossible to determine what, if any, activity
has taken place in the United States.'' See ISDA Letter at 5. See
also HSBC Letter at 2 (stating that establishing a robust control
framework for tracking these transactions would present challenges).
    \262\ We refer to these costs as ``assessment costs.'' See
Intermediary Definitions Adopting Release, 77 FR 30722.
    \263\ The amendments the Commission is adopting do not make
substantive or material modifications to any collection of
information requirements as defined by the Paperwork Reduction Act
of 1995, as amended.
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    As in the U.S. Activity Proposing Release, we first estimate the
likely increase in the number of entities that are likely to incur
costs associated with the de minimis analyses because the final rule
requires additional transactions to be included in these
calculations.\264\ We then consider the effect on assessment costs
associated with building, operating, and maintaining systems to
identify security-based swap activity that non-U.S. persons would be
required to count toward their de minimis thresholds under Exchange Act
rules 3a71-3(b)(1)(iii)(C) and 3a71-5(c).
---------------------------------------------------------------------------

    \264\ Cf. HSBC Letter at 2 (noting that even firms that are not
required to register as security-based swap dealers as a result of
the final rule could face significant costs and challenges
associated with performing the de minimis analysis).
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1. Costs Associated With Increase in Number of Firms Performing
Analysis
    We have previously assumed that any non-U.S. person that annually
enters into more than $2 billion, in notional value, of security-based
swap transactions that would count toward its de minimis threshold
would be likely to incur assessment costs under Exchange Act rule 3a71-
3(b).\265\ Under Exchange Act rules 3a71-3(b)(1)(iii)(C) and 3a71-5(c),
these non-U.S. persons would likely also incur assessment costs in
connection with their transactions with other non-U.S. persons if they
use personnel located in a U.S. branch or office to arrange, negotiate,
or execute the transactions.
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    \265\ See U.S. Activity Proposing Release 80 FR 27490; Cross-
Border Adopting Release, 79 FR 47331.
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    As we have previously noted, the TIW transaction data do not permit
us to determine whether particular transactions were arranged,
negotiated, or executed by personnel located in the United States.\266\
However, as discussed above, it appears that many dealers prefer to use
personnel located in the United States to arrange, negotiate, or
execute transactions in security-based swaps on U.S. reference
entities.\267\ Accordingly, we believe that we can estimate the
increase in the number of firms that would incur assessment costs in
connection with determining the location of relevant activity involving
single-name CDS, by assuming that all

transactions by non-U.S. person \268\ dealers with other non-U.S.
persons on U.S. reference entities are arranged, negotiated, or
executed by personnel located in the United States.
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    \266\ See Section II.A.1, supra.
    \267\ See, e.g., Section II.A.2.c, supra.
    \268\ We note that TIW's definitions of U.S. and non-U.S.
entities do not necessarily correspond to the definition of U.S.
person under Exchange Act rule 3a71-3(a)(4). See note 39, supra.
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    Under these assumptions, we can estimate that a total of
approximately 10 additional non-U.S. persons,\269\ beyond those already
incorporated into baseline estimates, that are likely to exceed the $2
billion threshold we have previously employed under Exchange Act rule
3a71-3(b), as amended, and to incur assessment costs associated with
the de minimis exception based on 2014 TIW transactions data. We
acknowledge, however, that this estimate reflects some uncertainty: On
one hand, it may be overinclusive, as it is unlikely that all such
transactions are arranged, negotiated, or executed by personnel located
in a U.S. branch or office; it may also be underinclusive, as our TIW
data do not include single-name CDS transactions between two non-U.S.
entities written on non-U.S. underliers, some of which may be arranged,
negotiated, or executed by personnel located in a U.S. branch or
office, or transactions on other types of security-based swaps
(including equity swaps) whether on U.S. or non-U.S. underliers.\270\
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    \269\ Adjustments to these statistics from the proposal reflect
further analysis of the TIW data. Cf. U.S. Activity Proposing
Release 80 FR 27491 (providing an estimate of 15 additional entities
that would be non-U.S. persons).
    \270\ Although the total gross notional for equity swaps is
significantly smaller than credit default swaps, some number of
market participants may incur assessment costs as a result of their
equity swap activity.
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    In light of this uncertainty and to account for potential growth in
the security-based swap market, we believe that it is reasonable to
increase this estimate by a factor of two. As a result, our estimate
for the purposes of analysis is that the rules being adopted today will
increase the number of non-U.S. persons likely to incur any assessment
costs in connection with the de minimis exception by 20. In addition to
the assessment costs directly connected with determining where
personnel who arrange, negotiate, or execute a security-based swap
transaction are located, as described more fully below, these 20
persons would also be required to perform the analyses, and incur the
assessment costs, associated with the dealer de minimis rules adopted
in the Cross-Border Adopting Release.\271\
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    \271\ See Cross-Border Adopting Release, 79 FR 47331-33.
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2. Costs Associated With Determining the Location of Relevant Personnel
Who Arrange, Negotiate, or Execute a Transaction
    In addition, these 20 non-U.S. persons, as well as the 114 persons
that are likely to incur assessment costs in connection with the rules
adopted in the Cross-Border Adopting Release,\272\ will incur costs to
identify transactions that they are required to include in their de
minimis thresholds under Exchange Act rules 3a71-3(b)(1)(iii)(C) and
3a71-5(c). We note that our final rule should mitigate the concerns of
some commenters regarding the costs associated with the use of the
defined term ``transactions conducted within the United States'' as
originally proposed in the Cross-Border Proposing Release.\273\ In
particular, by focusing on the location of relevant personnel of only
the dealer (or of its agent), this approach should eliminate the need
for non-U.S. persons that engage in dealing activity to assess whether