person be subject to? What obligations should the U.S. security-based
swap dealer be subject to with respect to such intermediated
transactions, particularly with respect to capital, margin, and
segregation requirements? How would this approach deal with risk
concerns, especially with any security-based swaps not subject to
clearing?
     Should the proposed rule follow an approach modeled on
Rule 15a-6(a)(4)(i), which would permit non-U.S. persons to conduct
security-based swap dealing activity within the United States without
registering with the Commission if those transactions were with a
registered U.S. security-based swap dealer? If so, what conditions, if
any, should the Commission impose on such an exception?
     Should non-U.S. persons acting in a dealing capacity be
required to count transactions entered into with registered security-
based swap dealers toward their de minimis threshold? Why or why not?
If non-U.S. persons are not required to count security-based swap
transactions, conducted in a dealing capacity, with registered
security-based swap dealers, should U.S. persons be required to count
security-based swap transactions, conducted in a dealing capacity, with
registered security-based swap dealers? If not, why not? If so, why?
     The CFTC has proposed an interpretation that would require
a non-U.S. person to consider the aggregate notional value of its swap
dealing transactions (or any swap dealing transactions of its
affiliates under common control) where the non-U.S. person's
obligations are guaranteed by a U.S. person.\270\ Should the proposed
rule require a non-U.S. person whose security-based swap transactions
are guaranteed by a U.S. person to count all of its security-based swap
dealing transactions that are guaranteed by a U.S. person toward the de
minimis threshold, even if they are not entered into with U.S. persons
or otherwise conducted within the United States?
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    \270\ See CFTC Cross-Border Proposal, 77 FR 41221.
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     Should the proposed rule require counting against the de
minimis threshold the notional amount of a non-U.S. person's
transactions entered into in its dealing capacity within the United
States or with a U.S. person? Should a non-U.S. person be required
instead to aggregate the total worldwide notional amount of its
security-based swap transactions entered into in a dealing capacity,
regardless of the geographic location of the dealing activity or the
counterparty's status as a U.S. person if it engages in any dealing
transactions with U.S. persons? Why or why not?
     What circumstances, if any, would justify requiring a non-
U.S. person to register with the Commission if its dealing activity
arising from its transactions with non-U.S. persons outside the United
States would exceed the de minimis threshold if it had been conducted
within the United States or with U.S. persons but the non-U.S. person
enters into transactions within the United States or with U.S. persons
solely in a non-dealing capacity?
     What circumstances would justify following a different
territorial approach that would treat transactions connected with the
dealing activity conducted by a U.S. person through its foreign
locations with non-U.S. persons as outside the United States and not
required to be counted against such U.S. person's de minimis threshold?
     Does the Commission's proposed approach adequately address
the concerns of FPSFIs? Is our understanding of the security-based swap
activity of FPSFIs accurate? If not, please explain.
     What would be the market impact of the proposed approach
to apply the de minimis exception in the cross-border context? How
would the proposed application of the de minimis

exception to U.S. persons and non-U.S. persons affect the
competitiveness of U.S. entities in the global marketplace (both in the
United States as well as in foreign jurisdictions)? Would the proposed
approach place any market participants at a competitive disadvantage or
advantage? If so, please explain. Would the proposed approach be a more
general burden on competition? If so, please explain. What other
measures should the Commission consider to implement the de minimis
exception? What would be the market impacts and competitiveness effects
of alternatives to the proposed approach discussed in this release?
5. Proposed Definition of ``U.S. Person''
Introduction
    The proposed rule defining ``U.S. person'' would identify a
person's status as a U.S. person for purposes of applying the
calculation for the de minimis exception in the cross-border
context.\271\ The proposed definition of U.S. person generally follows
an approach to defining U.S. person similar to that used by the
Commission in other contexts.\272\ Specifically, the proposed rule
would define U.S. person to mean any of the following:
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    \271\ Proposed Rule 3a71-3(a)(7) under the Exchange Act. The
definition of ``U.S. person'' also is used in other proposed rules
and interpretive guidance discussed below. See Sections IV-XI,
infra.
    \272\ See, e.g., Regulation S Adopting Release, 55 FR 18308
(``The Regulation adopted today is based on a territorial approach
to Section 5 of the Securities Act.''). Although the proposed rule
generally follows the same approach as Regulation S, the Commission
preliminarily believes that it is necessary to depart from
Regulation S in certain respects. See Section III.B.10, infra
(comparing the proposed definition of ``U.S.'' person with the
definition of ``U.S. person'' in Regulation S). Notably, neither the
Exchange Act nor Rule 15a-6 contains a definition of U.S. person.
    The proposed definition of U.S. person is similar to the
definition of U.S. person that the CFTC staff provided its October
12, 2012 no-action letter. See Time-Limited No-Action Relief: Swaps
Only With Certain Persons to be Included in Calculation of Aggregate
Gross Notional Amount for Purposes of Swap Dealer De Minimis
Exception and Calculation of Whether a Person is a Major Swap
Participant (Oct. 12, 2012), available at<EMAIL_ADDRESS>see also
Final CFTC Cross-Border Exemptive Order, 78 FR 862 (indicating that
for purposes of its temporary conditional relief the CFTC is taking
a similar approach to the U.S. person definition as that set forth
in the October 12, 2012 no-action letter).
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     Any natural person resident in the United States;
     Any partnership, corporation, trust, or other legal person
organized or incorporated under the laws of the United States \273\ or
having its principal place of business in the United States; or
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    \273\ Proposed Rule 3a71-3(a)(9) under the Exchange Act defines
``United States'' as ``the United States of America, its territories
and possessions, any States of the United States, and the District
of Columbia.''
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     Any account (whether discretionary or non-discretionary)
of a U.S. person.\274\
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    \274\ Proposed Rule 3a71-3(a)(7)(i) under the Exchange Act.

The proposed rule also would provide that the term ``U.S. person''
would not include the following international organizations: The
International Monetary Fund (``IMF''), the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies and pension plans, and any other similar
international organizations, their agencies and pension plans.\275\
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    \275\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
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    We preliminarily believe that the proposed definition of U.S.
person would achieve three objectives necessary to effective
application of Title VII in the cross-border context. First, it would
identify those types of individuals or entities that, by virtue of
their location within the United States or their legal or other
relationship with the United States, are likely to impact the U.S.
market even if they transact with security-based swap dealers that are
not U.S. persons.\276\ Second, it would identify those types of
individuals or entities that, by virtue of their location within the
United States or their legal or other relationship with the United
States, are part of the U.S. security-based swap market and should
receive the protections of Title VII. Third, it would permit us to
identify dealing entities that most likely would be active in the U.S.
security-based swap market and whose dealing activity most likely would
pose a risk to the U.S. financial system by virtue of their
counterparties' resident or domicile status.
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    \276\ As noted in Section II.A.3 above, the security-based swap
transactions of U.S. persons give rise to ongoing liability that is
borne by a person located within the United States and thus are
likely to pose the types of financial stability risks to U.S.
financial system that Title VII was intended to address. The
security-based swap activity of U.S. persons occurs, at least in
part, within the United States.
---------------------------------------------------------------------------

    Because of the nature of the risks posed by security-based swaps,
which are borne by the entire corporate entity even if the transaction
is entered into by a specific trading desk, office, or branch of such
entity, consistent with the Commission's approach to the meaning of
``person'' in the security-based swap dealer definition, as discussed
above, we are proposing to define the term ``U.S. person'' to include
the entire entity, including its branches and offices that may be
located in a foreign jurisdiction.\277\ Thus, under this approach, the
term ``U.S. person'' would be interpreted to include any foreign
trading desk, office, or branch of an entity that is organized under
U.S. law or whose principal place of business is located in the United
States.\278\
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    \277\ See Section III.B.4(a), supra.
    \278\ Id.
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(b) Discussion
i. Natural Persons
    Under the proposed rule, any natural person resident in the United
States would be a U.S. person, regardless of that individual's
citizenship status.\279\ Individuals resident abroad, on the other
hand, would not be treated as U.S. persons, even if they possess U.S.
citizenship.\280\ We preliminarily believe that natural persons
residing within the United States who engage in security-based swap
transactions may raise the types of concerns intended to be addressed
by Title VII, including those related to transparency and customer
protection.\281\ We also note that this approach is generally
consistent with the approach we have taken in prior rulemakings
relating to the cross-border application of certain similar regulatory
requirements.\282\ Moreover, any risk to such person arising from its
security-based swap activity may manifest itself most directly within
the United States, where a significant portion of its commercial and
legal relationships exist because that is where its residency is
(unlike a U.S. citizen resident abroad).
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    \279\ Proposed Rule 3a71-3(a)(7)(i)(A) under the Exchange Act.
    \280\ This proposed approach to treating natural persons as U.S.
persons based on residency, rather than citizenship, differs from
the proposed approach to legal entities, such as partnerships and
corporations, discussed below.
    \281\ See note 4, supra.
    \282\ See Rule 15a-6 Adopting Release, 54 FR 30017 (providing
that foreign broker-dealers soliciting U.S. investors abroad
generally would not be subject to registration requirements with the
Commission).
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ii. Corporations, Organizations, Trusts, and Other Legal Persons
    Under the proposed rule, any partnership, corporation, trust, or
other legal person organized or incorporated under the laws of the
United States \283\ or having as its principal place of business in the
United States would be a U.S. person.\284\ We have previously looked to
an entity's place of

organization or incorporation to determine whether it is a U.S. person
in adopting rules under the federal securities laws,\285\ and we
preliminarily believe that it is also appropriate to do so in the
context of Title VII. We preliminarily believe that the decision of a
corporation, trustee, or other entity to organize under the laws of the
United States indicates a degree of involvement in the U.S. economy or
legal system that warrants ensuring that its security-based swap
activity is subject to the requirements of Title VII.\286\
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    \283\ Proposed Rule 3a71-3(a)(9) under the Exchange Act
(defining ``United States'').
    \284\ Proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange Act.
    \285\ See Regulation S Adopting Release, 55 FR 18316.
    \286\ Under this prong of the proposed rule, ``special
entities,'' as defined in Section 15F(h)(2)(C) of the Exchange Act,
would be U.S. persons because they are legal persons organized under
the laws of the United States. Section 15F(h)(2)(C) of the Exchange
Act defines the term ``special entity'' as ``(i) a Federal agency;
(ii) a State, State agency, city, county, municipality, or other
political subdivision of a State; (iii) any employee benefit plan,
as defined in Section 3 of the Employee Retirement Income Security
Act of 1974, 29 U.S.C. 1002; (iv) any governmental plan, as defined
in Section 3 of the Employee Retirement Income Security Act of 1974,
29 U.S.C. 1002; or (v) any endowment, including an endowment that is
an organization described in Section 501(c)(3) of the Internal
Revenue Code of 1986.'' 15 U.S.C. 78o-10(h)(2)(C).
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    Similarly, we believe that the proposed definition should ensure
that Title VII applies to entities that are organized or incorporated
in a jurisdiction outside the United States if they have their
principal place of business in the United States.\287\ Any risk to such
entities arising from their security-based swap activity is likely to
manifest itself most directly within the United States, where a
significant portion of their commercial and legal relationships would
be likely to exist. Moreover, focusing exclusively on whether an entity
is organized or incorporated in the United States could encourage some
entities that are currently organized or incorporated in the United
States to incorporate in a non-U.S. jurisdiction to avoid the costs of
complying with Title VII while maintaining their principal place of
business--and thus in all likelihood, the risks arising from their
security-based swap transactions--within the United States. To prevent
this possibility, we are proposing to define ``U.S. person'' to include
entities that are organized or incorporated abroad but have their
principal place of business within the United States.\288\
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    \287\ For example, a business may be incorporated under the laws
of a foreign jurisdiction but nonetheless have its business
operations, including its home office, in the United States.
    \288\ As discussed in Section III.B.6 below, the Commission also
is proposing to require non-U.S. persons that conduct security-based
swap transactions within the United States, in a dealing capacity,
to count such transactions toward their de minimis threshold. In
addition, the Commission is proposing to subject security-based swap
transactions that are conducted within the United States to certain
transaction-level requirements in Title VII in connection with
reporting and dissemination, clearing, and trade execution. See
Sections VIII-X, infra.
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    An entity's status as a U.S. person under the proposed rule would
be determined at the legal entity-level and thus apply to the entire
legal entity, including any foreign operations that are part of the
U.S. legal entity.\289\ Consistent with this entity-level approach, a
foreign branch, agency, or office of a U.S. person would be treated as
a U.S. person under the proposed definition.\290\ As the Commission
noted in proposing Regulation SBSR, ``[b]ecause a branch or office has
no separate legal existence under corporate law, the branch or office
would be an integral part of the U.S. person itself.'' \291\ In other
words, because a branch or office is merely an extension of the head
office, not a separately incorporated or organized legal entity, we
preliminarily believe that it lacks the legal independence to be
considered a non-U.S. person for purposes of Title VII if its head
office is a U.S. person. We preliminarily believe a wholesale exclusion
from the requirements of Title VII for a foreign branch, agency, or
office of a U.S. person is not warranted with respect to its security-
based swap transactions because the legal obligations and economic
risks associated with the transactions directly affect a U.S. person,
of which the branch, agency, or office is merely a part.
---------------------------------------------------------------------------

    \289\ In principle, Regulation S looks to the location of the
branch rather than the jurisdiction in which the entity is organized
or incorporated in determining whether the branch is a U.S. person.
See 17 CFR 230.902(k)(1)(v) and (2)(v). Thus, under Regulation S,
the foreign branch of a U.S. bank is not treated as a U.S. person
while the U.S. branch of a foreign bank is treated as a U.S. person.
Under subsection (a)(7)(ii) of proposed Rule 3a71-3 under the
Exchange Act, the foreign branch of a U.S. bank would be treated as
part of a U.S. person. See Section III.B.10, infra (discussing the
proposed definition of ``U.S. person'' with the definition of ``U.S.
person'' in Regulation S).
    \290\ Proposed Rule 3a71-3(a)(7) under the Exchange Act.
    \291\ See Regulation SBSR Proposing Release, 75 FR 75240 (``The
Commission intends for this proposed definition [of U.S. person] to
include branches and offices of U.S. persons''). The Commission is
re-proposing Regulation SBSR in this release, including its
definition of U.S. person. See Section VIII, infra.
---------------------------------------------------------------------------

    Under the proposed definition, the status of an entity as a U.S.
person would have no bearing on whether separately incorporated or
organized legal entities in its affiliated corporate group are U.S.
persons. Accordingly, a foreign subsidiary of a U.S. person would not
be a U.S. person by virtue of its relationship with its U.S. parent.
Similarly, a foreign entity with a U.S. subsidiary would not be a U.S.
person simply by virtue of its relationship with its U.S.
subsidiary.\292\ The Commission preliminarily believes that it is
appropriate to treat each affiliate separately because of the distinct
legal status of each of the affiliates.\293\
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    \292\ See Section III.B.8, infra.
    \293\ But see Section III.B.8, infra (discussing the aggregation
of affiliate positions for purposes of the de minimis calculation).
---------------------------------------------------------------------------

iii. Accounts of U.S. Persons
    Consistent with the proposed definition's focus on the location of
the person bearing the actual risk arising from the security-based swap
transaction, the proposed definition of U.S. person would include any
accounts (whether discretionary or not) of U.S. persons.\294\ Such
accounts would be U.S. persons regardless of whether the entity at
which the account is held or maintained is a U.S. person. Conversely,
accounts of non-U.S. persons would not be U.S. persons solely because
they are held by a U.S. financial institution or other entity that is
itself a U.S. person.\295\ In our view, the purposes of Title VII
require that its provisions apply to the person that actually bears the
risks arising from the security-based swap transaction.\296\ For this
reason, we preliminarily believe that the status of accounts, wherever
located, should turn on whether any owner of the account is itself a
U.S. person,\297\ and not on the status of the fiduciary or other
person managing the account, the discretionary or non-discretionary
nature of the

account, or the status of the entity at which the account is held or
maintained.\298\ Thus any account of a U.S. person would be a U.S.
person for purposes of Title VII.
---------------------------------------------------------------------------

    \294\ Proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \295\ An account of a non-U.S. person and, therefore, not a
``U.S. person'' under proposed Rule 3a71-3(a)(7) under the Exchange
Act, may nevertheless engage in ``transactions conducted within the
United States,'' as defined in proposed Rule 3a71-3(a)(5) under the
Exchange Act. For example, if a non-U.S. person executes a security-
based swap from an office located in the United States that
security-based swap would be a ``transaction conducted within the
United States'' even though neither party would be a ``U.S.
person.'' Similarly, if a non-U.S. person solicits a counterparty
within the United States to enter into a security-based swap
transaction, that transaction would be a ``transaction conducted
within the United States,'' regardless of whether both
counterparties were non-U.S. persons. See Section III.B.6, infra.
    \296\ The same approach would apply to an account of a
partnership, corporation, trust, or other legal person (e.g., a fund
or a special-purpose investment vehicle) to enter into a security-
based swap. If the partnership, corporation, trust, or other legal
person were a U.S. person, the account would be a U.S. person.
    \297\ For purposes of this definition, the term ``account''
includes both discretionary accounts and non-discretionary accounts.
See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \298\ This proposed approach is consistent with the treatment of
managed accounts in the context of the major security-based swap
participant definition, whereby the swap or security-based swap
positions in client accounts managed by asset managers or investment
advisers are not attributed to such entities for purposes of the
major participant definitions, but rather are attributed to the
beneficial owners of such positions based on where the risk
associated with those positions ultimately lies. See Intermediary
Definitions Adopting Release, 77 FR 30690.
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iv. International Organizations
    In addition to identifying the persons that fall within the U.S.
person definition, the proposed rule also provides a list of specific
international organizations that do not fall within such
definition.\299\ This list includes ``the International Monetary Fund,
the International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African
Development Bank, the United Nations, and their agencies and pension
plans, and any other similar international organizations, their
agencies and pension plans.'' \300\ Although these organizations may
have headquarters in the United States, the Commission preliminarily
believes that most of their membership and financial activity are
outside the United States. Thus, based on the nature of these entities
as international organizations the Commission is proposing not to treat
them as U.S. persons for purposes of Title VII.\301\
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    \299\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
    \300\ Id.
    \301\ Regulation S also specifies that these international
organizations are not considered U.S. persons, but Regulation S also
considers affiliates of such organizations to be non-U.S. persons.
See 17 CFR 230.902(k)(2)(vi). The Commission is soliciting comment
on whether affiliates of such organizations should be treated as
non-U.S. persons under proposed Rule 3a71-3(a)(7) under the Exchange
Act. Currently, under the proposed rule, an affiliate of one of
these international organizations would have to separately consider
its U.S. person-status.
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(c) Conclusion
    In short, by following a territorial approach, the Commission
preliminarily believes that the proposed definition of U.S. person
describes the types of individuals and entities residing, organized, or
conducting business within the United States, and the types of accounts
that should be designated as U.S. persons for purposes of the proposed
rule regarding application of the de minimis exception to security-
based swap dealers.\302\
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    \302\ As discussed below, the proposed definition is used in
other proposed rules and interpretive guidance in the release. See
Sections IV-XI, infra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed
definition of ``U.S. person,'' including the following:
     Does the proposed definition of ``U.S. person''
appropriately address the concerns of security-based swap dealer
regulation under Title VII?
     Does the proposed definition appropriately identify all
individuals or entities that should be designated as U.S. persons? Is
the proposed definition too narrow or too broad? Why? Do the proposed
criteria for determining whether an entity is a U.S. person effectively
describe the types of counterparties that are relevant to identifying
the transactions a security-based swap dealer must count when
calculating its de minimis threshold for purposes of determining
whether it is required to register as a security-based swap dealer and
comply with the requirements of Title VII? Does the proposed definition
appropriately identify the types of entities that should be entitled to
the protections afforded to counterparties of security-based swap
dealers under Title VII?
     Does the proposed definition appropriately treat natural
persons residing in the United States as U.S. persons? Should certain
categories of persons residing in the United States be excluded from
the definition of U.S. person? Should certain categories of persons
(such as U.S. citizens or permanent residents) residing abroad be
included in the definition of U.S. person? Please explain why excluding
or including particular categories of natural persons would be
consistent with and further the objectives of dealer regulation under
Title VII.
     Is the proposed approach to the U.S. person status of
natural persons based on residency, rather than citizenship,
appropriate? In particular, is the proposed approach to natural
persons, which differs from the proposed approach to legal entities,
such as partnerships and corporations, appropriate in light of the fact
that, as the Commission understands, natural persons rarely enter into
security-based swaps?
     Does incorporation or organization under the laws of the
United States appropriately define the types of entities (both for-
profit and non-profit) that should be treated as U.S. persons under
Title VII? Is it appropriate to define an entity as a U.S. person if it
has its principal place of business in the United States, even if it is
incorporated or organized under the laws of a foreign jurisdiction? Why
or why not?
     Does the proposed rule adequately address the risk of
evasion or avoidance of Title VII requirements? Are there entities
incorporated or organized under foreign law that should be defined as a
U.S. person under the proposed rule that are not currently so defined?
For example, should an entity incorporated or organized under foreign
law but whose security-based swap transactions are guaranteed by a U.S.
person be defined as a U.S. person? Why or why not? Should a foreign
entity that conducts security-based swap dealing activity predominantly
with U.S. persons or within the United States be defined as a U.S.
person? If so, why?
     Is it appropriate to determine the U.S. person status of a
corporation or organization on an entity-wide basis? Why or why not?
Should foreign branches, offices, or agencies of U.S. persons be U.S.
persons? Why or why not? What distinguishes transactions mediated or
entered into by a foreign branch of a U.S. bank from transactions
entered into by the head office of such U.S. bank for purposes of Title
VII regulation?
     What, if any, competitive concerns would be raised by
defining foreign branches, offices, or agencies of U.S. persons as non-
U.S. persons? Please explain the mechanism of any competitive effects.
For example, would particular business structures become unworkable
under this approach and what would be the relevant impact? If so,
please explain possible alternatives and their relative
competitiveness.
     Should the proposed rule include within the definition of
U.S. person foreign affiliates of U.S. persons? Should other factors be
taken into account in determining the status of such affiliated
entities, such as, for example, whether performance on the security-
based swap obligations of the foreign entity is guaranteed by a U.S.
affiliate? Should a foreign entity with performance on its security-
based swap obligations guaranteed by a U.S. affiliate, where such
foreign entity's security-based swap dealing activity is conducted
predominantly or exclusively with non-U.S. persons, be included within
the definition of U.S. person? Why or why not?
     Should a foreign branch of a U.S. parent, including a
foreign branch of a U.S. bank, be included in the definition of ``U.S.
person'' for all purposes under Title VII? Why or why not?

     Should a majority-owned subsidiary of a U.S. parent,
regardless of whether the subsidiary has financial guarantees from the
U.S. parent, be included in the definition of ``U.S. person'' for
purposes of Title VII? Why or why not?
     Should an account of one U.S. person and one or more non-
U.S. persons be treated as a U.S. person? Should the Commission instead
establish a de minimis threshold amount or otherwise allows some U.S.
person ownership without triggering U.S. person status for the account?
If so, how?
     The CFTC has proposed a definition of U.S. person that
would include a legal entity that is directly or indirectly majority-
owned by one or more U.S. persons and in which such person(s) bears
unlimited responsibility for the obligations and liabilities of the
legal entity (other than a limited liability company or limited
liability partnership where partners have limited liability).\303\
Should the Commission adopt a similar approach? If so, why? How should
majority ownership be determined? Is majority ownership the appropriate
test? If not, should some other percentage test be used (e.g., 25% or
some other measure of control)? Are there operational or other
difficulties in implementing such an approach?
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    \303\ See CFTC Further Proposed Guidance, 78 FR 912.
---------------------------------------------------------------------------

     Should entities, whatever their place of domicile, that
guarantee the performance of U.S. person counterparties to security-
based swaps themselves be deemed U.S. persons? Why or why not? How
would treating such indirect counterparties to security-based swaps as
U.S. persons affect the application of Title VII rules?
     Is the proposed definition's focus on the status of the
person bearing the actual risk in the transaction (e.g., looking at the
status of the account owner rather than the person with authority to
direct the investment decisions) appropriate in determining whether the
person is a U.S. person?
     The CFTC has proposed a definition of U.S. person that
would include any pension plan for the employees, officers or
principals of a legal entity with its principal place of business
inside the United States. Should the Commission adopt a similar
approach? If so, what categories of entities would or would not be U.S.
persons when compared to the Commission's proposed approach? How is
including or excluding such entities, as applicable, from the
definition of U.S. person consistent with and in furtherance of the
objectives of Title VII?
     Does the proposed rule appropriately address the treatment
of certain international organizations with respect to the definition
of U.S. person? Should any or all of the organizations specifically
identified in the proposed rule be treated as U.S. persons? If so, why?
Are there other similarly situated international organizations that
should also be explicitly excluded from the U.S. person definition?
Should the affiliates of international organizations be treated as non-
U.S. persons, even if organized under U.S. law? If so, why? If not, why
not?
     Should the proposed definition expressly exclude from the
definition of U.S. person any other entity or category of entities? If
so, which ones and why?
     The CFTC has proposed a definition of U.S. person that
would include any commodity pool, pooled account, or collective
investment vehicle (whether or not it is organized or incorporated in
the United States) of which a majority ownership is held, directly or
indirectly, by a U.S. person. Should the Commission adopt a similar
definition that includes any investment fund, commodity pool, pooled
account, or collective investment vehicle of which a majority ownership
is held by one or more U.S. persons, even if such entity is not
incorporated or organized under the laws of the United States, or does
not have its principal place of business in the United States? If so,
why and how should majority ownership be determined? Is majority
ownership the appropriate test? If not, should some other percentage
test be used (e.g., 25% or some other measure of control)? Are there
operational or other difficulties in implementing such an approach?
     The CFTC has proposed a definition of U.S. person that
would include any commodity pool, pooled account, or collective
investment vehicle the operator of which would be required to register
as a commodity pool operator under the CEA.\304\ Should the Commission
adopt a similar definition that includes any investment fund, commodity
pool, pooled account, or collective investment vehicle the operator of
which would be required to register as a commodity pool operator under
the CEA or an investment adviser under the Investment Advisers Act of
1940 (``Investment Advisers Act'')? If so, why?
---------------------------------------------------------------------------

    \304\ See CFTC Cross-Border Proposal, 77 FR 41218.
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     Should the definition of U.S. person specifically address
the status of estates, which is specifically addressed in Regulation S?
\305\ If so, please explain the types of security-based swap
transaction such entities typically engage in and describe any problems
created by the proposed definition of U.S. person relative to the goals
of Title VII.
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    \305\ See Section III.B.10, infra (discussing the definition of
``U.S. person'' in Regulation S).
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     The CFTC has proposed a definition of U.S. person that
would include any estate or trust, the income of which is subject to
U.S. income tax regardless of source. Should the Commission adopt a
similar approach? If so, why?
     Should the Commission define the term ``principal place of
business'' for purposes of the proposed definition of ``U.S. person''?
If so, should the Commission define ``principal place of business'' as
the location of the personnel who direct, control, or coordinate the
security-based swap activities of the entity? \306\ If no, how should
the Commission define it?
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    \306\ This focus would be generally consistent with the focus of
the definition of ``principal office and place of business'' in the
Investment Advisers Act, where it is defined as ``the executive
office of the investment adviser from which the officers, partners,
or managers of the investment adviser direct, control, and
coordinate the activities of the investment adviser.'' 17 CFR
275.222-1(b).
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6. Proposed Definition of ``Transaction Conducted Within the United
States''
    We are proposing a definition of ``transaction conducted within the
United States'' to identify security-based swap transactions that
involve activities in the United States that the Commission
preliminarily believes would warrant requiring a non-U.S. person to
count such transactions toward its de minimis threshold in the
security-based swap dealer definition.\307\ Under the proposed rule,
``transaction conducted within the United States'' would be defined to
mean any ``security-based swap transaction that is solicited,
negotiated, executed, or booked within the United States, by or on
behalf of either counterparty to the transaction, regardless of the
location, domicile, or residence status of either counterparty

to the transaction.'' \308\ It would not, however, include a
transaction conducted through a foreign branch of a U.S. bank, for
reasons discussed below.\309\
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    \307\ Proposed Rule 3a71-3(a)(5) under the Exchange Act. The
proposed definition of ``transaction conducted within the United
States'' also is used in other places in the release in the context
of our proposed application of Title VII requirements in the cross-
border context. See Sections VIII-X, infra. The proposed definition
of ``transaction conducted within the United States,'' and related
discussion in this release, is not intended to apply outside of the
scope of the proposals set forth in this release, unless otherwise
indicated. Accordingly, it thus does not affect other rights or
obligations of parties under the Exchange Act or the federal
securities laws generally.
    \308\ Proposed Rule 3a71-3(a)(5)(i) under the Exchange Act. The
use of the term ``counterparty'' in the proposed rule is intended to
refer to the direct counterparty to the security-based swap
transaction, not a party that provides a guarantee on the
performance of the direct counterparty to the transaction. See
Section VIII.A, infra (distinguishing between direct and indirect
counterparties).
    \309\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act. See
proposed Rule 3a71-3(a)(4) under the Exchange Act (defining
``transaction conducted through a foreign branch''), as discussed in
Section III.B.7, infra.
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    As noted above, dealing activity is normally carried out through
interactions with counterparties or potential counterparties that
include solicitation, negotiation, execution, or booking of a security-
based swap.\310\ Engaging in any of these activities within the United
States, as part of dealing activity, would involve a level of
involvement in a security-based swap transaction that the Commission
believes should require such transaction to count toward a potential
security-based swap dealer's de minimis threshold. The proposed rule,
therefore, is designed to identify for market participants the key
aspects of a security-based swap transaction that the Commission
believes should trigger security-based swap dealer registration
requirements.
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    \310\ See Section II.B.2(b), supra. More generally,
solicitation, negotiation, execution, and booking are activities
that represent key stages in a potential or completed security-based
swap transaction. As discussed below, transactions conducted within
the United States, regardless of whether in a dealing or non-dealing
capacity, would generally be subject to requirements relating to
reporting and dissemination, clearing, and trade execution. See
Sections VIII-X, infra.
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    By contrast, we are not proposing to include either submitting a
transaction for clearing in the United States or reporting a
transaction to an SDR in the United States as activity that would cause
a transaction to be conducted within the United States under the
proposed rule, nor are we proposing to treat activities related to
collateral management (e.g., exchange of margin payments) that may
occur in the United States or involve U.S. banks or custodians as
activity conducted within the United States for these purposes. We
recognize that submission of a transaction for clearing to a CCP
located in the United States poses risk to the U.S. financial system,
and collateral management plays a vital role in an entity's financial
responsibility program and risk management. However, we preliminarily
believe that none of these activities, by themselves, involves
activities conducted between a potential dealer and its counterparty
that may be characterized as dealing activity, although clearing and
collateral management services may be offered in conjunction with
dealing activity.
    Under the rule adopted by the Commission, jointly with the CFTC, a
potential security-based swap dealer is required to consider the
security-based swap positions ``connected with'' the dealing activity
in which the potential dealer--or any other entity controlling,
controlled by or under common control with the potential dealer--
engages over the course of the immediately preceding 12 months (or
following the effective date of final rules implementing Section
3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68), if that period is
less than 12 months).\311\ By incorporating the definition of a
``transaction conducted within the United States'' into the proposed
rule applying the de minimis exception in the cross-border
context,\312\ the Commission is proposing that non-U.S. persons engaged
in cross-border dealing activity include in their de minimis
calculations any security-based swap transaction that is connected with
\313\ an entity's dealing activity with another non-U.S. person if a
U.S. branch or office of either counterparty, or an associated person
\314\ of either counterparty--including any affiliate and any
associated person of any affiliate, or a third party agent, located
within the United States--is directly involved in the transaction.
Thus, a non-U.S. person engaged in security-based swap dealing activity
would be required to count toward its de minimis threshold any dealing
transaction entered into with another non-U.S. person that was
conducted in the United States, whether the transaction falls within
the ``conducted within the United States'' definition through such non-
U.S. person's own activity (or that of an agent within the United
States), or that of its non-U.S. person counterparty (or such
counterparty's agent).\315\ Similarly, if any transaction connected
with a non-U.S. person's dealing activity is executed within the United
States, the non-U.S. person would be required to count that transaction
toward its de minimis threshold.\316\
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    \311\ See 17 CFR 240.3a71-2(a)(1).
    \312\ See proposed Rule 3a71-3(b) under the Exchange Act.
    \313\ The de minimis exception threshold is computed based on
the notional amount of an entity's security-based swap positions,
connected with its dealing activity, not transactions that are
merely solicited. See Intermediary Definitions Adopting Release, 77
FR 30630.
    \314\ See Section 3(a)(70) of the Exchange Act, 15 U.S.C.
78c(a)(70) (defining ``person associated with a security-based swap
dealer or major security-based swap participant''); see also note
472, infra.
    \315\ See Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \316\ See id.
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    We recognize that many of a non-U.S. person's transactions
conducted within the United States that arise out of its dealing
activity may also be transactions with U.S. persons, and thus would
already be counted for purposes of the de minimis threshold. However,
requiring non-U.S. persons to include in their de minimis calculations
only transactions with U.S. person counterparties would enable such
persons to engage in significant amounts of security-based swap dealing
activity within the United States without Commission oversight as a
security-based swap dealer, so long as the dealing activity were
limited to non-U.S. persons.\317\ This would be the case if the
potential dealer operated out of a branch, office, or affiliate, or
utilized a third-party agent acting on its behalf within the United
States, or merely directed its dealing activity to non-U.S. persons
that themselves operate out of the United States, either through
branches, office, or affiliates, or by utilizing third party
agents.\318\ The Commission preliminarily does not believe that this
would be consistent with the purposes of the Dodd-Frank Act, which is
intended, in part, to promote accountability and transparency in the
U.S. security-based swap market.\319\
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    \317\ Depending on the nature of the activity and the person
located in the United States engaging in the activity, such person
may need to register with the Commission as a broker-dealer under
Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
    \318\ The Commission is not distinguishing, for purposes of the
proposed rule, whether a potential dealer or its counterparty is
operating out of a branch, an office, an affiliate, or utilizes a
third-party agent to act on its behalf. We are, however, soliciting
comment on whether there is a basis for drawing distinctions in this
area and look forward to receiving commenters' views.
    \319\ See note 97, supra.
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    First, we preliminarily believe that when a non-U.S. person engages
in dealing activity with another non-U.S. person from within the United
States either through an agent, branch, or office, or otherwise engages
in security-based swap dealing activity within the United States (such
as by soliciting persons within the United States from outside the
United States), the solicitation, negotiation, or execution activity
that occurs within the United States constitutes dealing activity that
is described by the security-based swap dealer definition.\320\ This is
the case even where such transaction is

ultimately booked by the two non-U.S. entities outside the United
States. Second, most market participants, including non-U.S. persons,
entering into a security-based swap transaction with a security-based
swap dealer, particularly through personnel located in the United
States, could reasonably expect to be entitled to the customer
protections of Title VII because of Title VII's role in setting the
standards for the U.S. security-based swap market and the market
participant's decision to engage in a transaction within that
market.\321\ Given the Commission's responsibility in Title VII to
regulate the U.S. security-based swap market, as well as reasonable
market expectations and the risk of creating confusion among market
participants,\322\ we preliminarily do not believe that it is
appropriate to diverge from our traditional approach to the regulation
of broker-dealers by establishing a regulatory regime for the security-
based swap market that would allow non-U.S. persons to engage in
unregulated dealing activity within the United States, either when it
acts through U.S. branches, office, or agents or it solicits,
negotiates, or executes transactions with non-U.S. persons that
themselves are operating out of the United States.
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    \320\ See Section II.B.2(b), supra.
    \321\ The Commission previously has noted the role that the
location of the dealer plays in setting expectations regarding the
legal protections available in transactions with that dealer. See
Rule 15a-6 Adopting Release, 54 FR 30017 (noting that a U.S. citizen
residing abroad who seeks out transactions with foreign broker-
dealers would not generally expect U.S. securities laws to apply to
the transaction); Regulation S Adopting Release, 55 FR 18310 (noting
the expectation that a buyer outside the United States who purchases
securities offered outside the United States is aware that ``the
transaction is not subject to registration under the Securities
Act''). See also Cleary Letter IV at 17 (``As both Commissions have
consistently recognized in the past, the non-U.S. counterparty in .
. . transactions [with a non-U.S. branch or affiliate of a U.S.
person] conducted abroad have no expectation of protection under
U.S. law''); Davis Polk Letter II at 20 (``Finally, the non-U.S.
counterparty would not reasonably expect the swap [with a foreign
bank swap dealer] to be subject to Title VII's requirements'').
    \322\ See Rui Albequerque and Neng Wang, ``Agency Conflicts,
Investment and Asset Pricing,'' Journal of Finance, Vol. 63, No. 1
(2008) (discussing the effect of customer protection on prices) and
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and
Robert Vishny, ``Investor Protection and Corporate Valuation,''
Journal of Finance, Vol. 57, No. 3 (2002) (discussing the effect of
customer protection on prices).
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    Moreover, suppose non-U.S. persons were not required to register
when engaging in security-based swap dealing activity within the United
States with other non-U.S. persons. Non-U.S. persons seeking to
negotiate security-based swap transactions using personnel in the
United States may choose to enter into security-based swap transactions
with such unregistered non-U.S. persons rather than with a U.S. person
to avoid the application of Title VII. In this way, customers may
choose to forego the protections of Title VII in order to achieve
potential cost savings. This could limit the access of U.S. persons
engaged in dealing activity within the United States to non-U.S.
persons, as well as more generally limiting the ability of U.S. persons
to access liquidity in the security-based swap market. Accordingly, the
Commission is proposing that a non-U.S. person would be required to
count its security-based swap transactions conducted within the United
States (as well as its transactions with U.S. persons) that arise out
of its dealing activity to determine whether the notional amount of its
dealing transactions exceeds the de minimis threshold. This would have
the effect of subjecting both non-U.S. persons engaged in dealing
activity within the United States and U.S. persons engaged in dealing
activity within the United States to the same set of rules, thus
providing their counterparties the same set of protections.
    Finally, although the proposed rule reflects the importance of
ensuring that neither non-U.S. person counterparty is engaged in the
relevant activities within the United States for purposes of this
definition, we also recognize the operational difficulties that could
arise in investigating the activities of a counterparty to ensure
compliance with the rule. As a result, we are preliminarily proposing
to allow parties to rely on a representation received from a
counterparty indicating that a given transaction ``is not solicited,
negotiated, executed, or booked within the United States by or on
behalf of such counterparty.'' \323\ A party may rely on such a
representation by its counterparty unless the party knows that the
representation is not accurate.\324\ The Commission preliminarily
believes that this would address whatever operational difficulties
parties may have in determining whether or not their counterparty is
conducting a transaction within the United States.
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    \323\ Proposed Rule 3a71-3(a)(5)(iii) under the Exchange Act.
    \324\ Id. Cf. Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, Advisers Act Release No.
3222 (June 22, 2011), 76 FR 39646, 39676 (July 6, 2011) (``if an
adviser reasonably believes that an investor is not `in the United
States,' the adviser may treat the investor as not being `in the
United States'''). We are proposing to use a knowledge standard
rather than a reasonable belief standard with respect to
transactions conducted within the United States between non-U.S.
person counterparties due to the fact that this definition applies
to both counterparties to a transaction, thus each counterparty has
an incentive to ensure the accuracy of its representation. In
addition, the proposed ``actual knowledge'' standard and related
discussion in this release are not intended to apply outside the
scope of the proposals set forth in this release. Accordingly, it
does not affect the standard for reliance on representations with
respect to other rights or obligations of persons under the Exchange
Act or the federal securities law generally.
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule
regarding registration by non-U.S persons who engage in dealing
activity within the United States, including the following:
     Should non-U.S. persons be required to register by virtue
of engaging in security-based swap dealing activity within the United
States, even if none of this dealing activity is directed to, or
otherwise involves, U.S. persons? Why or why not?
     Does the proposed approach appropriately impose the dealer
registration requirement on non-U.S. persons based on their dealing
activities conducted within the United States? Should a non-U.S. person
be required to register as a security-based swap dealer if it enters
into, or offers to enter into, security-based swap transactions that
are transactions conducted within the United States if such non-U.S.
person's dealing activity is limited to its foreign business? What
about if the non-U.S. person engages in non-U.S. dealing activity, but
also enters into transactions with U.S. persons in a non-dealing
capacity?
     What, if any, market-transparency or counterparty-
protection issues would be likely to arise if non-U.S. persons were not
required to register if they engaged in dealing activity solely with
non-U.S. persons from within the United States?
     What, if any, competition issues would be likely to arise
if non-U.S. persons were not required to register if they engaged in
dealing activity solely with non-U.S. persons from within the United
States?
     Is the proposed approach toward determining whether
dealing activity is conducted within the United States appropriate?
Does the proposed rule identify appropriate factors in determining
whether a transaction has been conducted within the United States? If
not, what factors should be modified, removed, or added?
     Is the proposed identification of activities appropriate
in the context of determining whether a security-based swap is a
transaction conducted within

the United States? If not, which activities should the Commission
consider as key evidence of a transaction that is conducted within the
United States?
     Is direct participation by a branch, agency, office, or
associated person, including any affiliate and any associated person of
any affiliate, within the United States an appropriate element for
identifying whether a security-based swap transaction is a transaction
conducted within the United States? Are there functions routinely
performed by these entities that should not trigger a registration
requirement, even if performed within the United States?
     Is the direct participation of a third-party agent an
appropriate element for identifying whether a security-based swap
transaction is a transaction conducted within the United States? If
not, why not?
     From an operational perspective, what, if any, changes to
policies and procedures would be required to identify transactions
conducted within the United States under the proposed approach? What
changes would be required, for example, to monitor circumstances that
would prevent a party from relying on representations?
     Does the proposed rule appropriately identify the range of
security-based swap activities (i.e., solicitation, negotiation,
execution, and booking) that should be considered in determining
whether dealing activity is conducted within the United States? If not,
what activities should be excluded or included? Why?
     Should a transaction entered into by a non-U.S. person in
its capacity as a dealer be treated as dealing activity conducted
within the United States if it is executed on an SB SEF, submitted to
an SDR, or cleared by a security-based swap clearing agency physically
located within the United States, even if no other activity related to
the transaction were conducted within the United States?
     Should the Commission allow parties to rely on
representations from their counterparties regarding compliance with the
definition of ``transaction conducted within the United States''? Are
there alternatives to relying on representations to ensure compliance?
Should parties be required to exercise reasonable standards of care and
due diligence?
     Is the standard used for the proposed ability to rely on a
representation appropriate? Should another standard of knowledge be
used? If so, what standard would be more appropriate for this purpose?
     The CFTC has proposed an interpretation that does not
consider whether swap dealing activity is conducted inside or outside
the United States when determining whether the de minimis threshold is
met.\325\ Should the Commission adopt this approach? If yes, please
address the effect of both approaches on customer protection, market
transparency, competition, and capital formation in the U.S. security-
based swap market.
---------------------------------------------------------------------------

    \325\ See CFTC Cross-Border Proposal, 77 FR 41219-20.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach
to determining whether dealing activity occurred within the United
States? How would the proposed approach affect the competitiveness of
U.S. entities in the global marketplace (both in the United States as
well as in foreign jurisdictions)? Would the proposed approach place
any market participants at a competitive disadvantage or advantage? If
so, please explain. Would the proposed approach be a more general
burden on competition? If so, please explain. What other measures
should the Commission consider to implement the proposed approach? What
would be the market impacts and competitiveness effects of alternatives
to the proposed approach discussed in this release?
7. Proposed Treatment of Transactions With Foreign Branches of U.S.
Banks
    As noted above, under the proposed rule, a non-U.S. person would
not be required to count toward the de minimis threshold in the
security-based swap dealer definition its transactions with the foreign
branch of a U.S. bank.\326\ For purposes of this proposed approach, and
as described more fully below, ``foreign branch'' would be defined as
any branch of a U.S. bank if:
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    \326\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
Section 716 of the Dodd-Frank Act (commonly known as the ``Push-Out
Rule'') prohibits the provision of certain types of ``Federal
assistance'' to certain swap and security-based swap dealers and
major swap and security-based swap participants referred to as
``swaps entities,'' subject to certain exceptions. In addition,
Section 619 of the Dodd-Frank Act (commonly referred to as the
``Volcker Rule'') adds a new Section 13 to the Bank Holding Company
Act of 1956 (``BHC Act'') (to be codified at 12 U.S.C. 1851) that
generally prohibits any banking entity from engaging in proprietary
trading or from acquiring or retaining an ownership interest in,
sponsoring, or having certain relationships with a hedge fund or
private equity fund (``covered fund''), subject to certain
exemptions. See Prohibitions and Restrictions on Proprietary Trading
and Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, Exchange Act Release No. 66057 (Oct. 12,
2011), 76 FR 68846 (Nov. 7, 2011). Both the Push-Out Rule and the
Volcker Rule will potentially limit the ability of U.S. banks to
conduct security-based swap activity.
---------------------------------------------------------------------------

     The branch is located outside the United States;
     The branch operates for valid business reasons;
    and
     The branch is engaged in the business of banking and is
subject to substantive banking regulation in the jurisdiction where
located.\327\
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    \327\ Proposed Rule 3a-71-3(a)(1) under the Exchange Act. We are
not proposing to include ``agencies'' within the definition of
``foreign branch'' as such term is used in connection with our
treatment of transactions with foreign branches of U.S. banks. We
recognize that Regulation S groups agencies and branches together in
defining the term U.S. person. See 17 CFR 230.902(k)(1)(v), (2)(v).
However, as discussed in Section III.B.10 below, although certain
aspects of Regulation S may be useful in the context of security-
based swaps, Title VII and Regulation S are tailored to serve
different objectives. In particular, the common treatment of
agencies and branches under Regulation S does not compel us to
similarly group agencies and branches for purposes of our treatment
of transactions with foreign branches of U.S. banks given the fact
that the term ``agency'' does not have any operative meaning with
respect to the foreign operations of U.S. banks.
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We preliminarily believe that these factors are appropriate for
determining which entities fall within the definition of a foreign
branch for purposes of this proposed approach due to their focus on the
physical location of the branch and the nature of the branch's business
and regulation in a foreign jurisdiction. Requiring the branch to be
located outside the United States is consistent with the goal of the
proposed rule, which is to identify security-based swap activity that
is not conducted within the United States. Requiring the branch to be
operated for valid business purposes and to be engaged in the business
of banking and subject to substantive banking regulation in a foreign
jurisdiction is intended to help ensure that U.S. banks are not able to
take advantage of the proposed rule by setting up offshore operations
to evade the application of Title VII.
    In order for a transaction to be a ``transaction conducted through
a foreign branch,'' and therefore excluded from a non-U.S. person's de
minimis threshold calculation,\328\ the foreign branch must be the
named counterparty to the transaction \329\ and the transaction must
not be solicited, negotiated, or executed by a person within the United
States on behalf of the foreign branch or its counterparty.\330\ To the
extent that the transaction is conducted within the

United States, as described in the immediately preceding section
(whether on behalf of the U.S. bank to which the branch belongs or of
the foreign counterparty), the non-U.S. person would be required to
count such transaction arising out of its dealing activity toward its
de minimis threshold for purposes of determining whether it is required
to register as a security-based swap dealer.\331\
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    \328\ Proposed Rules 3a71-3(b)(1)(ii) and (2)(ii) under the
Exchange Act.
    \329\ Proposed Rule 3a71-3(a)(4)(i)(A) under the Exchange Act.
    \330\ Proposed Rule 3a71-3(a)(4)(i)(B) under the Exchange Act.
    \331\ See Section III.B.6, supra.
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    We believe that counting transactions with a foreign branch toward
the de minimis threshold would be consistent with the view that a
foreign branch of a U.S. bank is part of a U.S. person within the
proposed definition.\332\ We also recognize that such transactions pose
risk to the U.S. financial system. At the same time, however, we
believe that imposing registration requirements on non-U.S. persons
solely by virtue of their transactions with foreign branches of U.S.
banks could limit the access of U.S. banks to non-U.S. counterparties
when they conduct their foreign security-based swap dealing activity
through foreign branches because non-U.S. persons may not be willing to
enter into transactions with them in order to avoid being required to
register as a security-based swap dealer.\333\ We have preliminary
concluded that not requiring such transactions to be counted toward the
foreign counterparty's de minimis threshold for purposes of the
security-based swap dealer registration requirement would minimize this
disparate treatment while ensuring that transactions involving foreign
branches of U.S. banks remain subject to certain Title VII requirements
(as described below).\334\
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    \332\ See Section III.B.5, supra.
    \333\ See, e.g., Sullivan and Cromwell Letter at 14 (``The
jurisdictional scope of the swaps entity definitions is critical to
the ability of U.S. banking organizations to maintain their
competitive position in foreign marketplaces. Imposing the
regulatory regime of Title VII on their Non-U.S. Operations would
place them at a disadvantage to their foreign bank competitors
because the Non-U.S. Operations would be subject to an additional
regulatory regime which their foreign competitors would not.'');
Cleary IV at 7 (``Subjecting such non-U.S. branches and affiliates
to U.S. requirements could effectively preclude them from, or
significantly increase the cost of, managing their risk in the local
financial markets, since local financial institutions may be
required to comply with Dodd-Frank to provide those services'').
    \334\ See Section III.C, infra. Provided the transaction is not
a transaction conducted within the United States under proposed Rule
3a71-3(a)(5) under the Exchange Act, the Commission also is not
proposing to require non-U.S. persons to count transactions with a
non-U.S. person toward their de minimis threshold even if the non-
U.S. person's performance on the security-based swap is guaranteed
by a U.S. person. See Section III.B.9, infra.
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    Finally, although the proposed rule reflects the importance of
ensuring that neither counterparty is operating from within the United
States for purposes of conducting a transaction through a foreign
branch, we also recognize the operational difficulties that could arise
in investigating the activities of a counterparty to ensure compliance
with the rule. As a result, we are proposing to allow parties to rely
on a representation received from a counterparty indicating that ``no
person within the United States is directly involved in soliciting,
negotiating, executing, or booking'' a given transaction on behalf of
the counterparty.\335\ A party may rely on such a representation by its
counterparty unless the party knows that the representation is not
accurate. The Commission preliminarily believes that this would address
whatever operational difficulties parties may have in determining
whether or not their counterparty is conducting a transaction conducted
through a foreign branch.
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    \335\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act; see
also Section III.B.6, supra.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed
treatment of transactions with foreign branches of U.S. persons for
purposes of the de minimis exception, including the following:
     Would the proposed approach reduce the effectiveness of
customer protections or any other provisions of Title VII? If so, how
should these concerns be balanced against the competitiveness concerns
identified as part of the rationale behind the proposed approach?
     Does the proposed approach appropriately address the
potential for disparate competitive impacts related to the application
of the de minimis exception to dealers operating out of foreign
branches? If not, how might the Commission more effectively address
these concerns?
     Does the proposed approach provide an advantage to U.S.
banks engaging in security-based swap dealing activity through foreign
branches? Are there competitiveness concerns raised by this approach
for entities (either banks or nonbanks) that do not utilize the branch
model? Are there competitiveness concerns for non-U.S. persons,
including non-U.S. persons whose performance under security-based swaps
is guaranteed by a U.S. person? If so, what are they?
     Should the Commission allow parties to rely on
representations from their counterparties regarding compliance with the
definition of ``transaction conducted through a foreign branch''?
Should the Commission separately allow parties to rely on
representations from their counterparties regarding status under the
``foreign branch'' definition?
     Is the standard used for the proposed ability to rely on a
representation appropriate? Should another standard of knowledge be
used? If so, what standard would be more appropriate for this purpose?
     Should the definition of a ``foreign branch'' be broadened
to include ``agencies'' of U.S. banks in addition to branches? If so,
what rationale justifies the inclusion of agencies? In particular, what
are the similarities (or differences) in the legal status and
regulatory treatment of the foreign branches and foreign agencies of
U.S. banks that would warrant similar treatment? How do foreign
agencies of U.S. banks differ from foreign offices of U.S. persons that
are not banks?
     How might the proposed approach to the foreign branches of
U.S. banks be impacted by the Volcker Rule and the Push-Out Rule? How
might security-based swap dealers alter their business practices in
response to the Volcker Rule and the Push-Out Rule? Should the proposed
approach to the foreign branches of U.S. banks be altered to account
for these changes to business practice?
     What would be the market impact of the proposed treatment
of transactions with foreign branches of U.S. banks? How would the
proposed approach affect the competitiveness of U.S. entities in the
global marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed approach place any market
participants at a competitive disadvantage or advantage? If so, please
explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the proposed approach? What would be
the market impacts and competitiveness effects of alternatives to the
proposed approach discussed in this release?
8. Proposed Rule Regarding Aggregation of Affiliate Positions
    One key issue related to our proposed approach to the de minimis
exception, both in the cross-border context and domestically, is the
aggregation of transactions connected with the dealing activity of an
affiliate. In the Intermediary Definitions Adopting Release, the
Commission and the CFTC

jointly stated that the notional thresholds in the de minimis exception
encompass swap and security-based swap dealing positions entered into
by an affiliate controlling, controlled by, or under common control
with the person at issue.\336\ The Commission and the CFTC further
noted that for these purposes, control would be interpreted to mean the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through
the ownership of voting securities, by contract or otherwise.\337\ This
aggregation of affiliate positions was deemed necessary to prevent
persons from avoiding dealer regulation by dividing up dealing activity
in excess of the notional thresholds among multiple affiliates.\338\
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    \336\ See Intermediary Definitions Adopting Release, 77 FR
30631; 17 CFR 240.3a71-2(a)(1).
    \337\ See Intermediary Definitions Adopting Release, 77 FR 30631
n.437.
    \338\ See Intermediary Definitions Adopting Release, 77 FR
30631.
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    The Commission is proposing a rule that would describe how this
aggregation requirement would apply to U.S. persons and non-U.S.
persons engaged in cross-border security-based swap dealing activity,
as well as to U.S. persons engaged in purely domestic
transactions.\339\ As set forth in the Intermediary Definitions
Adopting Release, the affiliate aggregation principle requires that a
person aggregate the entire security-based swap dealing activity of any
of its affiliates, without distinguishing whether the dealing positions
are entered into by U.S. person affiliates or non-U.S. person
affiliates, and without distinguishing whether the dealing positions
are entered into with U.S. persons or non-U.S. persons.\340\ The
proposed rule takes an approach that generally is consistent with the
affiliate aggregation interpretive guidance jointly adopted by the
Commission and the CFTC to require a person to aggregate all of the
security-based swap dealing positions entered into by its U.S. person
affiliates,\341\ except that it excludes from such aggregation the
positions of an affiliate that is a registered security-based swap
dealer, under certain conditions.\342\ The proposed rule also provides
that such aggregation must include any security-based swap transactions
of such person's non-U.S. person affiliates that would be required to
be counted by such affiliates toward their respective de minimis
thresholds in accordance with the proposed approach described above
(i.e., a non-U.S. person affiliate would be required to calculate its
security-based swap transactions connected with dealing activity
conducted with U.S. persons (other than foreign branches of U.S. banks)
or otherwise conducted within the United States).\343\
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    \339\ Proposed Rule 3a71-4 under the Exchange Act.
    \340\ See Intermediary Definitions Adopting Release, 77 FR 30631
n.438 (explaining that the Commission intended to address the
application of the aggregation principle to non-U.S. persons in a
separate release); 17 CFR 240.3a71-2(a)(1).
    \341\ Proposed Rule 3a71-3(b)(2)(i) under the Exchange Act. The
proposed rule also clarifies that only a person directly engaged in
dealing activity that is required to be counted toward such person's
de minimis threshold would be required to aggregate the dealing
activity of its affiliates.
    \342\ Proposed Rule 3a71-4 under the Exchange Act.
    \343\ See Section III.B.4(b), supra; see also proposed Rule
3a71-3(b)(2)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    The proposed rule similarly provides that the affiliate aggregation
principle also would apply to non-U.S. persons that engage in
transactions in a dealing capacity with U.S. persons (other than
foreign branches of U.S. banks) or otherwise within the United States.
In determining whether its dealing activity exceeds the de minimis
threshold, a non-U.S. person must aggregate the amount of its own
transactions connected with its dealing activity with U.S. persons
(other than foreign branches) or otherwise conducted within the United
States with the amount of any security-based swap transactions
connected with the dealing activity conducted by its affiliates,
whether U.S. persons or non-U.S. persons, that such affiliates would be
required to count toward their respective de minimis thresholds in
accordance with the proposed approach described above \344\ (other than
the transactions of affiliates that are registered security-based swap
dealers).\345\ Transactions of affiliates that are themselves non-U.S.
persons with other non-U.S. persons (or foreign branches of U.S. banks)
outside the United States would not need to be aggregated for purposes
of the de minimis exception.\346\
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    \344\ See Section III.B.4(b), supra. A U.S. person affiliate
would be required to calculate all of its security-based swap
transactions connected with its dealing activity and a non-U.S.-
person affiliate would be required to calculate its security-based
swap transactions connected with its dealing activity with U.S.
persons (other than foreign branches of U.S. banks) or otherwise
conducted within the United States.
    \345\ Proposed Rules 3a71-3(b)(2)(i) and (ii) and proposed Rule
3a71-4 under the Exchange Act.
    \346\ Id.
---------------------------------------------------------------------------

    Thus, the Commission's proposal would require aggregation of the
amount of dealing transactions of all affiliates, both U.S. persons and
non-U.S. persons, other than registered security-based swap dealers. We
believe that the Commission's proposed approach implements the de
minimis exception in a manner that is consistent with the Dodd-Frank
Act's focus on the U.S. security-based swap market.\347\ The proposed
approach reflects the fact that all of a U.S. affiliate's security-
based swap dealing transactions impact the U.S. financial system,
regardless of whether such entity's counterparties are located in the
United States or abroad. The same is not true of non-U.S. affiliates,
however, because the security-based swap transactions entered into by a
non-U.S. affiliate with other non-U.S. persons outside the United
States would not impact the U.S. financial system to the same extent as
transactions with U.S. persons. Thus, because the statutory focus is on
the U.S. security-based swap market, we preliminarily believe it is
appropriate to distinguish between U.S. and non-U.S. affiliates based
on the disparate impact of their security-based swap dealing
transactions on the U.S. financial system when determining which
dealing transactions should be aggregated for purposes of the de
minimis threshold. This further suggests that we should aggregate the
dealing positions of both U.S. and non-U.S. person affiliates that are
not already registered security-based swap dealers, in accordance with
the rule and guidance described in the following paragraph regarding
aggregation of the positions of registered dealers, with the goal of
capturing all dealing transactions that warrant imposing dealer
registration and regulation\348\ and minimizing the opportunity for a
person to evasively engage in large amounts of dealing activity.\349\
As a result, where the aggregate security-based swap dealing activity
of an affiliated group, calculated as described above, exceeds the de
minimis threshold, then each affiliate within such group that engages
in the security-based swap dealing activity included in such
aggregation calculation would be required to register with the
Commission as a security-based swap dealer, subject to the exception
described below.
---------------------------------------------------------------------------

    \347\ See Subtitle B of Title VII of the Dodd-Frank Act.
    \348\ See note 4, supra.
    \349\ See Intermediary Definitions Adopting Release, 77 FR
30631.
---------------------------------------------------------------------------

    The Commission also is proposing a rule to address the affiliate
aggregation of dealing positions for purposes of the de minimis
threshold where one or more affiliates within a corporate group are
registered with the Commission as

security-based swap dealers.\350\ Under the proposed approach, a person
calculating the amount of its security-based swap positions for
purposes of the de minimis threshold would not need to include in such
calculation the security-based swap transactions of an affiliate
controlling, controlled by, or under common control with the person if
such affiliate is registered with the Commission as a security-based
swap dealer.\351\ The application of this proposed rule would be
limited to circumstances where a person's security-based swap
activities are operationally independent from those of its registered
security-based swap dealer affiliate. For purposes of this proposed
rule, the security-based swap activities of two affiliates would be
considered operationally independent if the two affiliated persons
maintained separate sales and trading functions, operations (including
separate back offices), and risk management with respect to any
security-based swap dealing activity conducted by either affiliate that
is required to be counted against their respective de minimis
thresholds. If any of these functions were jointly administered by the
two affiliates, or were managed at a central location within the
affiliates' corporate group (e.g., at the entity serving as the central
booking entity) with respect to any security-based swap dealing
activity conducted by either affiliate that is required to be counted
against their respective de minimis thresholds, then an unregistered
person would not be able to exclude the security-based swap dealing
activities of its registered security-based swap dealer affiliate under
the proposed rule.
---------------------------------------------------------------------------

    \350\ Proposed Rule 3a71-4 under the Exchange Act.
    \351\ Id.
---------------------------------------------------------------------------

    Absent the proposed exclusion of the dealing positions of a
registered security-based swap dealer affiliate in the proposed rule,
any affiliate of a registered security-based swap dealer that engaged
in security-based swap dealing activity with U.S. persons or within the
United States would be required to aggregate the dealing positions of
the registered security-based swap dealer with its own dealing
positions for purposes of the de minimis threshold. Given that a
registered security-based swap dealer would presumably conduct relevant
security-based swap dealing positions in excess of the de minimis
threshold over the course of the immediately preceding 12 months, all
persons affiliated with a registered security-based swap dealer that
engaged in any level of security-based swap dealing activity that is
required to be counted against the de minimis threshold would
necessarily be required to register with the Commission as security-
based swap dealers because of the affiliate aggregation principle. We
preliminarily do not believe that this outcome would be consistent with
the statutory purpose of the de minimis exception, because it would
prevent all affiliates of a registered dealer from taking advantage of
the exception, even those engaged in a minimal amount of dealing
activity relevant to Title VII dealer registration and regulation. We
also do not believe that this scenario raises the concerns about
evasion that underlie the de minimis affiliate aggregation rule jointly
adopted by the Commission and the CFTC in the Intermediary Definitions
Adopting Release, given that this proposed rule would apply only where
a corporate group already included a registered dealer subject to
Commission oversight, and the dealing positions of all commonly
controlled unregistered affiliates in the corporate group would still
be aggregated for purposes of the de minimis threshold.\352\ For these
reasons, we believe that it is appropriate not to include the security-
based swap dealing positions of registered security-based swap dealers
in the de minimis calculations of their commonly controlled affiliates
provided that their security-based swap dealing activities that are
relevant to the de minimis calculation are operationally independent of
the registered security-based swap dealer affiliates.
---------------------------------------------------------------------------

    \352\ See Intermediary Definitions Adopting Release, 77 FR
30631.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed rule
regarding the aggregation of affiliate positions, including the
following:
     Should the Commission permit affiliated persons to exclude
the security-based swap dealing positions of affiliated registered
security-based swap dealers from their de minimis calculations, as
proposed? Why or why not?
     Would permitting affiliated entities to exclude the
security-based swap dealing positions of registered security-based swap
dealers from their de minimis calculations undermine any of the Title
VII protections associated with security-based swap dealer registration
and regulation? If so, please explain. Should the Commission further
explain what ``operationally independent'' means? If so, what should
the Commission consider?
     Should the Commission permit affiliated entities to
exclude the security-based swap dealing positions of operationally
independent affiliates from their de minimis calculations, even if such
affiliates are not registered security-based swap dealers?
     The CFTC has adopted temporary conditional relief that
would permit a non-U.S. person to exclude from its de minimis
calculation the security-based swap dealing positions of an affiliated
non-U.S. person that is registered as a swap dealer and not guaranteed
by a U.S. person with respect to its swap obligations.\353\ Should the
Commission adopt a similar interpretation to permit a non-U.S. person
(but not a U.S. person) to exclude the dealing positions of its
affiliated registered non-U.S. security-based swap dealer (but not the
dealing positions of its affiliated registered U.S. security-based swap
dealer)? Should the Commission condition such exclusion on the
affiliated registered security-based swap dealer not being guaranteed
by a U.S. person? If so, please describe the likely economic effects of
providing different exclusions from the affiliate aggregation principle
for U.S. and non-U.S. security-based swap dealers and how the
Commission should best address them.
---------------------------------------------------------------------------

    \353\ See Final CFTC Cross-Border Exemptive Order, 78 FR 868.
---------------------------------------------------------------------------

     The CFTC has also proposed an interpretation that would
permit non-U.S. persons engaged in dealing activity with U.S. persons
to aggregate the notional amounts of security-based swap dealing
transactions by their non-U.S. affiliates separately from any dealing
activity performed by their U.S. affiliates.\354\ Should the Commission
adopt a similar approach? If so, please explain how this approach is
consistent with the de minimis threshold and the rationale provided for
the affiliate aggregation principle in the Intermediaries Definitions
Adopting Release. In addition, please describe the likely economic
effects of providing an effectively higher de minimis threshold for
corporate groups that engage in dealing activity with U.S. persons or
within the United States through affiliates located in the United
States and in foreign jurisdictions.
---------------------------------------------------------------------------

    \354\ See CFTC Cross-Border Proposal, 77 FR 41219-20; see also
Final CFTC Cross-Border Exemptive Order, 78 FR 867-68 (providing
temporary conditional relief from the CFTC's de minimis aggregation
requirements).
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach
to aggregation of affiliate positions? How would the proposed approach
affect the competitiveness of U.S. entities in the global marketplace
(both in the United

States as well as in foreign jurisdictions)? Would the proposed
approach place any market participants at a competitive disadvantage or
advantage? If so, please explain. Would the proposed approach be a more
general burden on competition? If so, please explain. What other
measures should the Commission consider to implement the proposed
approach? What would be the market impacts and competitiveness effects
of alternatives to the proposed approach discussed in this release?
9. Treatment of Inter-Affiliate and Guaranteed Transactions
    Consistent with the approach taken in the Intermediary Definitions
Adopting Release, the Commission is proposing that cross-border
security-based swap transactions between majority-owned affiliates
would not need to be considered when determining whether a person is a
security-based swap dealer.\355\ Thus, a non-U.S. person engaged in
dealing activity outside the United States would not be required to
register as a security-based swap dealer simply by virtue of entering
into security-based swap transactions with its majority-owned U.S.
affiliate, even if such inter-affiliate security-based swaps were back-
to-back transactions (i.e., the foreign subsidiary was acting as a
``conduit'' for the U.S. person). Similarly, a U.S. person would not be
required to register as a security-based swap dealer as a result of
back-to-back transactions with a non-U.S. person subsidiary that acts
as a conduit for such U.S. person.\356\ Instead, as proposed, there
must be an independent basis for requiring a person to register as a
security-based swap dealer that is unrelated to its inter-affiliate
transactions.\357\
---------------------------------------------------------------------------

    \355\ See 17 CFR 240.3a71-1(d), as discussed in the Intermediary
Definitions Adopting Release, 77 FR 30624-25. For the purposes of
this rule, which was adopted in the Intermediary Definitions
Adopting Release, counterparties are considered majority-owned
affiliates if one party directly or indirectly owns a majority
interest in the other, or if a third party directly or indirectly
owns a majority interest in both, based on the right to vote or
direct the vote of a majority of a class of voting securities of an
entity, the power to sell or direct the sale of a majority of a
class of voting securities of an entity, or the right to receive
upon dissolution or the contribution of a majority of the capital of
a partnership. See 17 CFR 240.3a71-1(d)(2).
    \356\ This approach differs from the treatment of conduit
entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-
Border Proposal, a U.S. entity may be required to register as a swap
dealer as a result of its inter-affiliate swap transactions with an
affiliated foreign dealer if the foreign dealer is acting as a
conduit by transferring swaps to the U.S. entity through back-to-
back transactions. See CFTC Cross-Border Proposal, 77 FR 41222.
    \357\ Proposed Rule 3a71-4 under the Exchange Act.
---------------------------------------------------------------------------

    Furthermore, the Commission is proposing not to require a non-U.S.
person that receives a guarantee from a U.S. person of its performance
on security-based swaps with non-U.S. persons outside the United States
to count its dealing transactions with those non-U.S. persons toward
the de minimis threshold as a U.S. person would be required to do.\358\
We believe that the primary risk related to these transactions is the
risk posed to the United States via the guarantee from a U.S. person,
not the dealing activity occurring between two non-U.S. persons outside
the United States. As a result, we do not believe that the risk posed
by the existence of the U.S. guarantee would be better addressed
through requiring non-U.S. persons receiving such guarantees to
register with the Commission as security-based swap dealers. One way
that the accumulation of risk resulting from security-based swap
positions is addressed in Title VII is through the major security-based
swap participant registration category. We preliminarily believe that
the risk associated with guarantees by U.S. persons of the performance
on security-based swap obligations of non-U.S. persons may be best
addressed through the application of principles of attribution in the
major security-based swap participant definition described in the
Intermediary Definitions Adopting Release.\359\ We preliminarily
believe that use of the major security-based swap participant
definition to address the risks posed to the United States as a result
of guarantees by U.S. persons effectively deals with the specific
regulatory concerns posed by the risks these guarantees present to the
U.S. financial system and is consistent with the regulatory framework
set forth in the Dodd-Frank Act.\360\
---------------------------------------------------------------------------

    \358\ This approach differs from the treatment of guaranteed
entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-
Border Proposal, a non-U.S. person that receives a guarantee from a
U.S. person would be required to count all of its swap dealing
transactions against the de minimis threshold. See CFTC Cross-Border
Proposal, 77 FR 41221.
    \359\ See Intermediary Definitions Adopting Release, 77 FR
30688-89; Section V.C.2(a), infra.
    \360\ See, e.g., Section IV, infra; see also Bank Holding
Company Act of 1956 (12 U.S.C. 1841, et seq.); Title I of the Dodd-
Frank Act (concerning regulation of certain nonbank financial
companies and bank holding companies that pose a threat to the
financial stability of the United States).
---------------------------------------------------------------------------

    The Commission also is proposing not to require a foreign dealer to
count security-based swap transactions with non-U.S. persons that
receive guarantees from U.S. persons toward the de minimis threshold.
The Commission notes that, in many respects, the risk created for U.S.
persons and the U.S. financial system in these transactions is the same
as the risk posed if the U.S. person who provides the guarantee had
entered into transactions directly with non-U.S. persons. The U.S.
guarantor would be held responsible to settle those obligations, thus
maintaining similar liability as though the U.S. person had entered
into security-based swap transactions directly with a non-U.S person.
The Commission preliminarily believes that the risk posed to the U.S.
markets by non-U.S. persons engaged in dealing activity with non-U.S.
persons outside the United States whose performance under security-
based swaps is guaranteed by a U.S. person can be best addressed
through the major security-based swap participant definition and
requirements applicable to major security-based swap participants, as
the risks to the United States appear to arise only from the resulting
positions and not the dealing activity as such.
    Finally, as discussed below, the Commission is proposing to subject
a security-based swap transaction between two non-U.S. persons where at
least one of the persons receives a guarantee on the performance of its
obligations from a U.S. person to the regulatory reporting requirement
(but not, in some cases, to real-time public reporting).\361\ If the
proposed approach is adopted, the Commission would gain an
understanding of market developments in this area as a result of the
proposed de minimis exception.
---------------------------------------------------------------------------

    \361\ See Section VIII, infra. Under proposed Regulation SBSR,
inter-affiliate transactions would be subject to reporting and
dissemination requirements. See id.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed
treatment of inter-affiliate and guaranteed transactions, including the
following:
     Should the Commission revise our proposed approach to
inter-affiliate transactions to require those transactions to be
considered when determining whether a person is a security-based swap
dealer? If so, why?
     If the Commission determines not to exclude inter-
affiliate transactions from security-based swap dealing activity in the
cross-border context, how could such a decision be reconciled with the
exclusion for inter-affiliate transactions provided in the Intermediary
Definitions Adopting Release? Should the Commission and the CFTC
jointly reconsider the approach to inter-affiliate transactions
provided in the Intermediary Definitions Adopting Release?

     Should the Commission require the registration of non-U.S.
dealers that receive guarantees on the performance of their security-
based swap obligations from U.S. persons based on their transactions
with non-U.S. persons as well as U.S. persons? Why or why not? Should
the U.S. guarantor be viewed as engaging indirectly in dealing activity
through its affiliate and, therefore, required to register as a
security-based swap dealer if the security-based swap transactions in
connection with its dealing activity exceed the de minimis threshold?
Should there be a concern that the U.S. guarantor is using the non-US
affiliate to evade the requirements of Title VII?
     Does the proposed approach to guarantees effectively
address concerns related to the risk posed to the U.S. financial system
resulting from guarantees by U.S. persons of security-based swap
dealing activity by non-U.S. persons?
     Are there competitiveness concerns related to the proposed
approach to guarantees with regard to U.S. entities that engage in non-
U.S. security-based swap dealing activity through business models that
do not rely on guarantees of non-U.S. persons, such as those that
operate through foreign branches?
     The CFTC has proposed an interpretation that would subject
an entity that operates a ``central booking system'' where swaps are
booked into a single legal entity, to any applicable swap dealer
registration requirement as if it had entered into such swaps directly,
irrespective of whether such entity is a U.S. person or whether the
booking entity is a counterparty to the swap or enters into the swap
indirectly through a back-to-back swap or other arrangement with its
affiliate or subsidiary.\362\ Should the Commission adopt a similar
approach? If so, please describe how such a decision could be
reconciled with the exclusion for inter-affiliate transactions provided
in the Intermediary Definitions Adopting Release.
---------------------------------------------------------------------------

    \362\ See CFTC Cross-Border Proposal, 77 FR 41221-22.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach
to inter-affiliate and guaranteed transactions? How would the
application of the proposed approach affect the competitiveness of U.S.
entities in the global marketplace (both in the United States as well
as in foreign jurisdictions)? Would the proposed approach place any
market participants at a competitive disadvantage or advantage? If so,
please explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the proposed approach? What would be
the market impacts and competitiveness effects of alternatives to the
proposed approach discussed in this release?
10. Comparison With Definition of ``U.S. Person'' in Regulation S
    In proposing an entity-based approach to the definition of a U.S.
person, we have declined to follow the suggestions by some commenters
that we adopt the definition of ``U.S. person'' used in Regulation S,
which among other things expressly excludes from the definition of
``U.S. person'' agencies or branches of U.S. persons located outside
the United States.\363\ Although we recognize that the Regulation S
definition of U.S. person has the advantage of familiarity for many
market participants, Regulation S addresses specific policy concerns
that are different from those addressed by Title VII.\364\
Specifically, the definition of U.S. person in Regulation S was adopted
in the context of providing an ``issuer safe harbor'' from the
registration requirements of Section 5 of the Securities Act, which was
intended ``to ensure that the [unregistered] securities offered
[abroad] come to rest offshore.'' \365\ In that context, providing a
safe harbor based in part on the location of the person, branch, or
office making the investment decision is consistent with the goals of
that regulatory framework, which include protecting the integrity of
the registration requirements applicable to securities publicly offered
in the United States under the Securities Act. The Regulation S
definition of ``U.S. person'' reflects this policy judgment.
---------------------------------------------------------------------------

    \363\ See, e.g., Cleary Letter IV at 2 (``The Agencies should
adopt a consistent definition of `U.S. person' based on SEC
Regulation S for purposes of analyzing whether a transaction
involving one or more such persons may be subject to the provisions
of Dodd-Frank.''); Davis Polk I at 6 n.6 (``We propose that the term
`U.S. counterparty' be defined in the same way as the term `U.S.
person' in Rule 902(k) of the SEC's Regulation S under the
Securities Act, 17 CFR 230.902(k). This established definition is
familiar to countless financial market professionals. Following the
`U.S. person' definition in Regulation S, rather than creating an
entirely new definition, would avoid confusion and also provide
consistency of application and legal certainty for a financial
institution that offers a security and a swap to the same customer,
which is common.''); SIFMA Letter I at 5 (``To determine whether a
party to a swap is a `U.S. person,' the Commissions should rely on
the existing definition of that term contained in Rule 902(k) of the
SEC's Regulation S. This established, workable definition is
familiar to regulators and market participants alike, and would
provide legal certainty. It is noteworthy that the Regulation S
definition of U.S. person does not include non-U.S. affiliates of
U.S. persons or non-U.S. branches of a U.S. bank and generally
excludes collective investment vehicles established outside the
United States with U.S. investors.'') (footnotes omitted); see also
Section III.B.5(c), supra.
    \364\ See 17 CFR 230.901(k); see also Regulation S Adopting
Release, 55 FR 18306.
    \365\ Regulation S Adopting Release, 55 FR 18307.
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    We preliminarily believe that the definition of U.S. person in
Title VII should encompass, for example, not only a person that has its
place of residence or legal organization within the United States, but
also its principal place of business within the United States, as the
security-based swap activities of such entities are likely to manifest
themselves most directly within the United States, where the majority
of their commercial, legal, and financial relationships would be likely
to exist because that is where their business principally occurs.\366\
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    \366\ See proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange
Act; Section III.B.5(b)ii, supra.
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    Similarly, we preliminarily believe that the definition of U.S.
person in Title VII should include accounts of a U.S. person,
regardless of whether the account is a discretionary account or is held
by a dealer or other person that is not resident in the United States,
because the U.S. person bears the direct risk of transactions in the
account, regardless of where the investment decision is made.\367\
Moreover, we are proposing that an entity's U.S.-person status would
apply to the entity as a whole, since the risks related to the concerns
of Title VII are borne by the entire entity and not just by the
specific business unit (or branch or office) engaged in security-based
swap activity.\368\ With its exclusions for certain foreign branches
and agencies of U.S. persons from the definition of ``U.S. person,''
Regulation S would not address the entity-wide nature of the risks that
Title VII seeks to address.\369\
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    \367\ See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange
Act; Section III.B.5(b)iii, supra.
    \368\ See Section III.B.5(a), supra.
    \369\ Under Regulation S, the foreign branch of a U.S. bank is
not treated as a U.S. person while the U.S. branch of a foreign bank
is treated as a U.S. person. By contrast, under proposed Rule 3a71-
3(a)(7)(i)(B) under the Exchange Act, the foreign branch of a U.S.
bank would be treated as part of a U.S. person while the U.S. branch
of a foreign bank would be treated as a non-U.S. person.
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    The Commission preliminarily believes that adopting the definition
of ``U.S. person'' in Regulation S without significant modifications
would not achieve the goals of Title VII. As discussed above, we are
instead proposing a definition of U.S. person that focuses primarily on
the location of the person bearing the direct risk of the transaction.
Regulation S, with its focus on the person making the investment
decision (rather than the person actually

bearing the risk), would not necessarily capture the entity that
actually bears the risks arising from security-based swap transactions
that Title VII seeks to address.\370\
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    \370\ Rather than creating a U.S. person definition specifically
tailored to Title VII, the Commission could have proposed a modified
version of Regulation S. However, significantly modifying the
definition of ``U.S. person'' in Regulation S to accommodate the
objectives of Title VII would largely eliminate the benefits
associated with adopting a consistent and well-established
regulatory standard.
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    In light of the specific objectives of Title VII, the Commission
preliminarily believes that a definition of U.S. person specifically
tailored to the regulatory objectives it is meant to serve, as
described above, is appropriate.\371\
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    \371\ See Section III.B.3(b)(4), infra. The Commission notes
that it took a different approach to the definition of U.S. person
and activity in the United States in connection with the
Commission's exemption from registration for foreign private
advisers. See Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, Advisers Act Release No
3222, 76 FR 39646 (July 6, 2011) (the ``Foreign Private Adviser
Exemption''). The Foreign Private Adviser Exemption defines certain
terms in the statutory definition of ``foreign private adviser''
(added by Section 402 of the Dodd-Frank Act and codified at section
202(a)(30) of the Investment Advisers Act) by incorporating the
definition of a ``U.S. person'' and ``United States'' under
Regulation S. As discussed in this subsection, the Commission
preliminarily believes that it would be inappropriate to follow the
approach in Regulation S in its entirety with respect to the cross-
border regulation of security-based swaps, although it may be
appropriate in the context of the Foreign Private Adviser Exemption
given the similar policy objectives with Regulation S.
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Request for Comment
    The Commission requests comment on all aspects of the proposed
definition of U.S. person, including the following:
     Should the Commission adopt the definition of U.S. person
in Regulation S? If so, how should the Commission reconcile the
objectives of Title VII with the objectives that Regulation S is meant
to serve?
     Should the Commission include all U.S. citizens in the
definition of U.S. person, regardless of a person's residence or
domicile?
     Should the Commission include within the definition of
U.S. person entities and accounts where the discretion to enter into
security-based swaps resides with a U.S. person? To what extent would
this approach produce a result that differs from the current approach
reflected in the proposed rule and the definitions of ``security-based
swap dealer'' and ``major security-based swap participant''?

C. Regulation of Security-Based Swap Dealers in Title VII

I. Introduction
    To help address the potential effects of registration, and
attendant regulatory requirements, on foreign security-based swap
dealers \372\ with global security-based swap businesses and U.S.
security-based swap dealers \373\ that engage in security-based swap
dealing activity through foreign branches that also may be subject to
registration or regulation in foreign jurisdictions, the Commission is
proposing not to apply the external business conduct standards and
segregation requirements in Title VII to the Foreign Business \374\ of
such registered foreign security-based swap dealers and registered U.S.
security-based swap dealers that engage in dealing activity through
foreign branches with non-U.S. persons and foreign branches of U.S.
banks.\375\ In addition, while we are not proposing a rule to limit the
application of entity-level requirements in Title VII to foreign
security-based swap dealers, we are proposing to establish a policy and
procedural framework under which the Commission would permit
substituted compliance in some circumstances by registered foreign
security-based swap dealers with certain Title VII requirements
specifically applicable to security-based swap dealers.\376\
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    \372\ Proposed Rule 3a71-3(a)(8) under the Exchange Act defines
``U.S. security-based swap dealer'' as a security-based swap dealer,
as defined in Section 3(a)(71) of the Exchange Act, 15 U.S.C.
78c(a)(71), and the rules and regulations thereunder, that is a U.S.
person, as defined in proposed Rule 3a71-3(a)(7) under the Exchange
Act. Proposed Rule 3a71-3(a)(3) under the Exchange Act defines
``foreign security-based swap dealer'' as a security-based swap
dealer, as defined in Section 3(a)(71) of the Exchange Act, and the
rules and regulations thereunder, that is not a U.S. security-based
swap dealer.
    \373\ See note 372, supra.
    \374\ As discussed below, proposed Rule 3a71-3(a)(2) under the
Exchange Act defines ``Foreign Business'' as meaning the security-
based swap transactions of foreign security-based swap dealers and
U.S. security-based swap dealers ``other than the U.S. Business of
such entities.'' ``U.S. Business'' is defined in proposed Rule 3a71-
3(a)(6) under the Exchange Act, with respect to a foreign security-
based swap dealer, as (i) any transaction entered into, or offered
to be entered into, by or on behalf of such foreign security-based
swap dealer, with a U.S. person (other than with a foreign branch);
or (ii) any transaction conducted within the United States; and,
with respect to a U.S. security-based swap dealer, as any
transaction by or on behalf of such U.S. security-based swap dealer,
wherever entered into or offered to be entered into, other than a
transaction conducted through a foreign branch, as defined in
proposed Rule 3a71-3(a)(4), with a non-U.S. person or another
foreign branch. See Section III.C.4, infra.
    \375\ Proposed Rule 3a71-3(b) under the Exchange Act.
    \376\ Proposed Rule 3a71-5 under the Exchange Act, as discussed
in Section XI, infra.
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    In the following sections, we discuss the views of commenters,
describe the transaction-level and entity-level requirements
specifically applicable to security-based swap dealers in Title VII,
and discuss the proposed application of transaction-level and entity-
level requirements to registered security-based swap dealers in the
cross-border context.
2. Comment Summary
    Various foreign dealers expressed their views about the application
of the Dodd-Frank Act requirements to their derivatives businesses. A
number of them expressed concern that if the Commission applies
security-based swap dealer regulations, not only to entities conducting
business from within the United States, but also to foreign-domiciled
entities, it could effectively prevent foreign dealers from, among
other things, managing their global security-based swap business out of
a centralized booking entity (i.e., the entity that acts as principal--
the named counterparty--to a security-based swap transaction), which
they maintain has many advantages for foreign dealers and their
clients, including more efficient counterparty netting, greater
transparency, greater financial counterparty financial strength, and
operational efficiencies.\377\ One commenter cautioned that if the
regulations lead foreign dealers to create ``fragmented booking
structures'' to avoid duplicative and conflicting regulatory regimes,
it could harm U.S. consumers through increased transaction costs with
foreign dealers.\378\
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    \377\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale
Letter I at 3 (``Overall, the advantages of carrying out Swap
transactions in and with a foreign bank with a consolidated booking
structure help control risk significantly . . . . We believe it
would be sensible for the Commissions to craft regulations that do
not discourage foreign banks such as SG from registering as Swap
Dealers.''); Davis Polk Letter I at 2, 5 (``We believe operating and
managing a global swaps business out of a single booking entity
presents many advantages from the perspective of foreign banks,
customers and supervisors.'').
    \378\ See ISDA Letter I at 10 (warning that ``U.S.
counterparties will . . . face increased costs and decreased
liquidity if U.S. regulation forces non-U.S. SDs to create
fragmented booking structures to avoid duplicative and conflicting
regulatory regimes'').
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    Many commenters suggested that to preserve a registration framework
that would allow foreign dealers to continue to book their global
security-based swap business out of a central non-U.S. entity, the
Commission should use our limited designation authority under the Dodd-
Frank Act's swap dealer definition to designate and regulate only
specific activities and particular branches or agencies of foreign
banks that transact

with U.S. customers, without subjecting the whole entity or its other
branches to regulation.\379\
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    \379\ See, e.g., IIB Letter at 11 (pointing out that Section
3(a)(71) of the Exchange Act, as amended by the Dodd-Frank Act,
provides for limited designation as a security-based swap dealer
``for a single type or single class . . . of activities, and not for
other types, classes, of . . . activities,'' and recommending that
the Commissions designate as a Swap Dealer only the particular U.S.
or non-U.S. branch or agency of the foreign bank involved in the
execution of swaps with U.S. customers''); Rabobank Letter at 2
(recommending that to preserve ``the benefits of the centralized
booking model, a non-U.S. branch of a foreign bank should register
as a swap dealer solely with respect to its swap dealing activities
with U.S. persons. Under this scenario, Title VII's transaction-
level rules would apply only to the non-U.S. branch's swap dealing
activities with U.S. persons and would not apply to its other
activities or to the swap activities of other parts of the foreign
bank'').
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    In addition, various commenters suggested a variety of operational
models through which foreign dealers could operate in the U.S.
security-based swap market, generally premising the proposed
registration and regulatory regime on the notion that home country
supervision should apply to entity-level regulations (e.g., capital,
risk management, and conflicts of interest), while Title VII
transaction-level regulations should apply only to security-based swaps
involving a U.S. counterparty.\380\ A number of commenters emphasized
that transaction-level requirements should not apply to security-based
swaps entered into between foreign counterparties.\381\ Other
commenters remarked that if the Commission regulates both the U.S.-
facing business (i.e., transactions with U.S. persons) and the foreign-
facing business (i.e., transactions with non-U.S. persons) of U.S.
security-based swap dealers, but only the U.S.-facing business of
foreign security-based swap dealers, then U.S. firms would be at a
competitive disadvantage vis-[agrave]-vis their foreign counterparts
with respect to transactions with foreign counterparties.\382\
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    \380\ See, e.g., Davis Polk Letter II at 4-20 (recommending
reliance on comprehensive home country requirements such as capital,
margin, conflicts of interest, risk management, and limited
recordkeeping requirements for entity-level regulations if certain
standards are met, and recommending the application of Title VII
transaction-level rules to a swap dealer's swap dealing activities
with U.S. persons).
    \381\ See, e.g., Sullivan & Cromwell Letter at 14-15 (asserting
that subjecting foreign entities to transaction-level requirements
on foreign transactions would likely lead to a competitive
disadvantage, because other foreign ``banking organizations that are
not so burdened by such dual and potentially conflicting
requirements would be able to provide a wider range of services . .
., which may cause customers to migrate away from'' those foreign
operations, which would limit their ability to manage, transfer, and
reduce systemic risk).
    \382\ See, e.g., SIFMA Letter I at 11 (remarking that ``U.S.
swap dealers also may be at a competitive disadvantage relative to
non-U.S. entities if U.S. swap dealers must comply with U.S. rules
when dealing with a non-U.S. counterparty in a jurisdiction that
does not have similar rules, for example, if the foreign rules do
not mandate margin requirements for non-cleared swaps'').
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    Several commenters further expressed concern that a requirement for
foreign persons to register with the Commission as security-based swap
dealers could be particularly problematic in the case of capital
requirements, where foreign security-based swap dealers already would
be subject to their home country's prudential requirements. These
commenters favored deferring to foreign regulators the regulation and
supervision of entity-level requirements when a foreign security-based
swap dealer is subject to comprehensive and comparable home country
regulation.\383\ One commenter recommended a comparability standard
whereby the Federal Reserve and the Commission determine comparability
even when a home country regulator does not require margin for non-
cleared security-based swaps, if the home country's capital regime
takes into account functionally equivalent capital charges.\384\
Several commenters recommended that, for monitoring purposes, U.S.
regulators could rely on information-sharing arrangements with home
regulators regarding foreign swap transactions and activities.\385\ A
few commenters argued that U.S. regulators should not have examination
authority over foreign swap transactions and activities located outside
the United States, and suggested that the Commissions obtain any
necessary information about U.S. swap transactions and activities from
U.S. affiliates of the foreign security-based swap dealer.\386\
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    \383\ See, e.g., Financial Services Roundtable Letter at 25
(suggesting that the Commissions should defer to foreign prudential
regulators with regard to entity-level requirements such as capital
and margin, when they are deemed consistent with U.S. standards);
Davis Polk Letter I at 3-4 (emphasizing the importance of relying on
home country regulation for entity-level rules such as capital,
margin, conflicts of interest, risk management, and limited
recordkeeping requirements).
    \384\ See Davis Polk Letter II at 13-15 (recommending a
comparability standard that ``focuses on the similarities in
regulatory objectives as opposed to identity of technical rules,''
whereby the Federal Reserve, as the prudential regulator, could
determine comparability even when a home country regulator does not
require margin for non-cleared swaps, if ``the capital regime in
such home country is determined to take account appropriately of
unmargined or undermargined swaps by imposing additional capital
charges'').
    \385\ See, e.g., Davis Polk Letter I at 9 (stating that
``[w]here information is required from the foreign bank swap dealer,
U.S. regulators should seek to rely upon regulatory examinations by
home country regulators, and information sharing arrangements'').
    \386\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale
Letter I at 12 (recommending that a foreign dealer based outside the
U.S. with no U.S. nexus ``should be `ring-fenced' and outside the
scope of the Commissions' examination and regulatory authority,''
but allowing for a limited examination of a foreign bank's U.S.
facing business concerning its clearing, trade execution, and
capital rules, through its U.S. domiciled agent who ``would
facilitate this examination by making all necessary information
available directly to the Commissions'').
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3. Title VII Requirements Applicable to Security-Based Swap Dealers
    Certain Title VII requirements specifically applicable to security-
based swap dealers apply at a transaction level, that is, to security-
based swap transactions with specific counterparties. Examples of
transaction-level requirements in Title VII principally include
requirements relating to external business conduct standards such as
the requirement that a security-based swap dealer or major security-
based swap participant verify that any counterparty meets the
eligibility standards for an eligible contract participant \387\ and
requirements relating to segregation of assets held as collateral in
security-based swap transactions.\388\ Other requirements apply to
security-based swap dealers at an entity level, that is, to the dealing
entity as a whole. Examples of entity-level requirements include, among
others, requirements relating to capital,\389\ risk management
procedures,\390\ recordkeeping and reporting,\391\ supervision,\392\
and designation of a chief compliance officer.\393\ Some requirements
can be considered both entity-level and transaction-level requirements.
For instance, the margin requirement in Section 15F(e) of the Exchange
Act can be considered both an entity-level requirement because margin
affects the financial soundness of an entity and a transaction-level
requirement because margin calculation is based on particular
transactions (i.e., an entity