disqualified personnel. If SBS Entities with disqualified personnel
compensate for potentially higher counterparty risks with, for example,
more attractive terms of security-based swaps, the alternative may
introduce disparities in access and cost of security-based swaps
available to foreign counterparties as compared to those available to
foreign branches of U.S. counterparties.
(b) Relief for Non-U.S.-Person SBS Entities With Respect to Non-U.S.
Personnel Transacting With Non-U.S. Counterparties and Foreign Branches
of U.S. Counterparties
    The Commission has considered a narrower alternative exclusion
limited to non-U.S.-person SBS Entities relying on non-U.S. personnel
in their transactions with foreign counterparties and foreign branches
of U.S. counterparties. The alternative exclusion would be subject to
the same limitation as the amendment, discussed above: An SBS Entity
would not be able to rely on the exclusion with respect to an
associated person currently subject to an order that prohibits such
person from participating in the U.S. financial markets, including the
securities or swap market, or foreign financial markets.
    Relative to the amendment, this alternative would broaden the
effective scope of application of the statutory prohibition and might
reduce ongoing compliance and counterparty risks for foreign
counterparties and foreign branches of U.S. counterparties. Under the
alternative, disqualified foreign personnel of U.S. SBS Entities would
be unable to transact without the costs and delays related to
applications for relief. This might decrease the number of disqualified
foreign personnel transacting in security-based swap markets and
seeking to associate with U.S. SBS Entities. Lower market participation
of disqualified personnel on behalf of U.S. SBS Entities in their
foreign transactions may reduce the costs of adverse selection and
increase foreign counterparty willingness to transact with U.S. SBS
Entities in security-based swaps.
    At the same time, it would result in a disparate competitive
standing between U.S. SBS Entities and non-U.S.-person SBS Entities as
they are competing for business with foreign counterparties and foreign
branches of U.S. counterparties. This alternative would allow
nonresident SBS Entities to enjoy flexibility in hiring, retaining, and
replacing non-U.S. personnel and in staffing foreign offices with
personnel engaged in transactions with foreign counterparties. However,
U.S. SBS Entities would be unable to rely on the exclusion and would
have to either replace an employee or apply under Rule of Practice 194,
incurring related costs and delays. To the degree that SBS Entities
pass along costs to their

counterparties, relative to the exclusion, this narrower alternative
may result in somewhat lower availability or worse terms of security-
based swaps and may somewhat reduce the choice of dealers for foreign
counterparties and foreign branches of U.S. counterparties.
    Further, under the alternative, foreign personnel of U.S. SBS
Entities would not have the same competitive standing as foreign
personnel of non-U.S. SBS Entities when engaging in business with the
same foreign counterparties. The Commission also notes that the
definition of a U.S. person is based on a natural person's residency in
the United States. As discussed above, excluding foreign personnel of
foreign SBS Entities creates incentives for all disqualified U.S.
personnel employed by foreign SBS Entities to be transferred to a
foreign office in order to legally become non-U.S. personnel eligible
for the alternative exclusion. Of course, the choice made by a non-U.S.
SBS Entity to transfer disqualified U.S. personnel abroad will reflect
the value of an employee's skills and expertise, costs to reputation
with counterparties, the number of positions being moved, and internal
organizational structures of a non-U.S. SBS Entity. However, SBS
Entities are commonly part of large financial groups with many domestic
and foreign regional offices. Therefore, many non-U.S. SBS Entities may
be able to relocate statutorily disqualified U.S. personnel to foreign
offices and rely on the exclusion.
    Under this alternative, however, disqualified personnel of U.S. SBS
Entities would be unable to relocate to a foreign office and rely on
the exclusion, adding to the competitive disparities between
disqualified personnel of U.S. and foreign SBS Entities transacting
with the same foreign counterparties. As a result, under the
alternative, statutorily disqualified personnel of U.S. SBS Entities
may seek employment with foreign SBS Entities and continue to transact
with the same foreign counterparties on behalf of non-U.S. SBS
Entities.
    The Commission continues to recognize that, due to adverse
selection costs and compliance risks related to hiring and retaining
disqualified persons, many SBS Entities may choose not to hire or may
fire and replace statutorily disqualified employees. However, this
incentive may be weaker with respect to personnel whose conduct giving
rise to disqualification occurred in jurisdictions where statutory
disqualification is not public information.
(c) Relief for Non-U.S. SBS Entities With Respect to Both U.S. and Non-
U.S. Personnel Transacting With Foreign Counterparties and Foreign
Branches of U.S. Counterparties
    The Commission has considered excluding from the statutory
prohibition both U.S. and foreign disqualified personnel, but limiting
the relief to non-U.S.-person SBS Entities transacting exclusively with
foreign counterparties or foreign branches of U.S. counterparties. The
alternative exclusion would be subject to the same limitation as the
amendment, discussed above: An SBS Entity would not be able to rely on
the exclusion with respect to an associated person currently subject to
an order that prohibits such person from participating in the U.S.
financial markets, including the securities or swap market, or foreign
financial markets.
    Under the alternative, non-U.S. SBS Entities would enjoy full
flexibility in hiring, retaining, and replacing personnel and in
staffing both U.S. and non-U.S. offices with personnel engaged in
transactions with foreign counterparties. To the degree that non-U.S.
SBS Entities pass along costs to their counterparties, this may result
in somewhat higher availability or improved terms of security-based
swaps for foreign counterparties. Further, under the alternative,
disqualified U.S. personnel would have the same competitive standing as
disqualified foreign personnel with similar skills and expertise
transacting on behalf of non-U.S. SBS Entities with the same foreign
counterparties. For example, disqualified U.S. personnel transacting
with foreign counterparties and foreign branches of U.S. counterparties
would not need to relocate to a foreign office of a foreign SBS Entity
to avail themselves of the exclusion.
    Relative to the Rule, this alternative would increase the
competitive gap between U.S. and non-U.S. SBS Entities in their ability
to hire, retain, and locate disqualified personnel as they compete for
business with foreign counterparties. To the degree that U.S. SBS
Entities may wish to begin or continue to associate with disqualified
personnel despite potential reputation costs, U.S. SBS Entities would
be required to apply with the Commission and disallow disqualified
personnel from effecting security-based swaps pending Commission
action. At the same time, foreign SBS Entities would be able to freely
hire and retain disqualified personnel in the U.S. and allow them to
engage in security-based swap transactions with foreign counterparties
and foreign branches of U.S. counterparties.
    As noted in the economic baseline, this alternative approach is
inconsistent with the relief from the CFTC's requirements that is
available to both U.S. and non-U.S. SBS Entities with respect to only
foreign personnel. Given expected extensive cross-registration and
active cross-market participation by counterparties, differential
treatment of disqualification may disrupt counterparty relationships
between the same dually registered SBS Entities transacting with the
same foreign counterparties in related markets.
    Under the alternative and relative to the amendment, disqualified
U.S. personnel of non-U.S. SBS Entities may enjoy better employment and
career outcomes, which may increase the number of disqualified
personnel transacting in security-based swap markets and seeking to
associate with SBS Entities. Greater market participation of
disqualified personnel on behalf of non-U.S. SBS Entities, particularly
in jurisdictions where conduct giving rise to disqualification is not
public or easily accessible information, may increase the costs of
adverse selection and decrease counterparty willingness to transact
with non-U.S. SBS Entities in security-based swaps. As a result, some
foreign counterparties may choose to move their transaction activity
from non-U.S. to U.S. SBS Entities.
    The magnitude of the above economic effects of the alternative
approach may be limited by three factors. First, many non-U.S. SBS
Entities may choose to locate personnel transacting with foreign
counterparties in foreign offices if most of their business is in
foreign underliers trading in foreign jurisdictions.\595\ As a result,
some non-U.S. SBS Entities may already locate personnel, including
statutorily disqualified personnel, dedicated to transacting with
foreign counterparties outside the United States.
---------------------------------------------------------------------------

    \595\ As discussed in Part VII.A.2.c, infra, we understand that
many market participants engaged in market-facing activity prefer to
use traders and manage risk for security-based swaps in the
jurisdiction where the underlying security is traded.
---------------------------------------------------------------------------

    Second, due to reputational and adverse selection costs and
compliance risks related to hiring and retaining disqualified persons,
many SBS Entities may choose not to hire, or may fire and replace
disqualified employees. The incentive to disassociate is strongest in
jurisdictions in which conduct giving rise to statutory
disqualification is public information (as in the U.S). As a result, it
is not clear how often non-U.S. SBS Entities would choose to hire or

continue to employ disqualified U.S. personnel even if they were able
to rely on an exclusion and avoid applying for relief under Rule of
Practice 194.
    Third, the primary difference between the adopted approach and the
alternative is in the treatment of U.S. SBS Entity personnel.
Specifically, under the amendment, U.S. SBS Entities may permit non-
U.S. personnel to transact with foreign counterparties and foreign
branches of U.S. counterparties, whereas under the alternative they may
not. With respect to non-U.S. SBS Entities, the amendment provides
relief for foreign personnel only; the alternative provides relief with
respect to both U.S. and foreign personnel. As discussed above, the
definition of a U.S. person in Rule 3a71-3(a)(4)(i)(A) under the
Exchange Act with respect to a natural person is based on residency in
the United States. Under the amendment, non-U.S. SBS Entities may be
able to simply transfer statutorily disqualified U.S. personnel
transacting with foreign counterparties to a foreign office in order to
become eligible for the exclusion. Of course, each non-U.S. SBS
Entity's choice to continue to employ disqualified U.S. personnel and
relocate them abroad would likely reflect the value of an employee's
skills and expertise, reputational costs of continued association, the
number of positions being moved, and internal organizational structures
of each entity, among others. However, non-U.S. SBS Entities are
commonly members of large financial groups with many domestic and
foreign regional offices, and such relocation is likely to be feasible
for some non-U.S. SBS Entities. As a result, depending on the ease and
costs of such relocation and the value of disqualified personnel to the
non-U.S. SBS Entity, the scope of this alternative with respect to non-
U.S. SBS Entities may be similar to the effective scope of the
exclusion with respect to non-U.S. SBS Entities.
(d) Relief for All SBS Entities With Respect to All Personnel
Transacting With Non-U.S. Counterparties and Foreign Branches of U.S.
Counterparties
    The Commission has considered an exclusion for both U.S. and
foreign SBS Entities with respect to all personnel transacting with
foreign counterparties and foreign branches of U.S. counterparties. The
alternative exclusion would be subject to the same limitation as the
amendment, discussed above: An SBS Entity would not be able to rely on
the exclusion with respect to an associated person currently subject to
an order that prohibits such person from participating in the U.S.
financial markets, including the securities or swap market, or foreign
financial markets.
    This alternative would allow both non-U.S. and U.S. SBS Entities to
enjoy full flexibility in hiring, retaining, and replacing personnel,
and in staffing both U.S. and non-U.S. offices with personnel engaged
in transacting with foreign counterparties and foreign branches of U.S.
counterparties. To the degree that SBS Entities currently pass along
costs to their counterparties or to the degree disqualified personnel
may have superior skills or expertise, this may benefit the terms of
security-based swaps and choice of dealers available to foreign
counterparties. Further, disqualified U.S. personnel would have the
same competitive standing as disqualified foreign personnel with
similar skills and expertise transacting on behalf of SBS Entities with
the same foreign counterparties.
    Relative to the exclusion, this alternative provides more relief
from the statutory prohibition and may, thus, increase ongoing
compliance and counterparty risks for foreign counterparties and
foreign branches of U.S counterparties. Since all disqualified
personnel of all SBS Entities transacting with foreign counterparties
and foreign branches of U.S. counterparties would be excluded from the
statutory prohibition, more disqualified personnel may seek to
associate with both U.S. and foreign SBS Entities and to transact with
foreign counterparties and foreign branches of U.S. counterparties.
However, as discussed elsewhere in this release and in the Rule of
Practice 194 Adopting Release, one of the key disincentives against
continued association with disqualified personnel may be reputational.
To the degree that information about the disqualifying conduct by U.S.
personnel may be public and institutional customers perceive
disqualification as increasing counterparty risk, counterparties may
move their business, and SBS Entities may simply replace disqualified
U.S. personnel. As a result, it is not clear that SBS Entities would
significantly increase their reliance on disqualified personnel in
transactions with foreign counterparties and foreign branches of U.S.
counterparties relative to the baseline or the adopted approach.
Nevertheless, to the degree that they may do so, greater market
participation of disqualified personnel may increase adverse selection
costs and decrease such counterparties' willingness to participate in
security-based swap markets.
    As noted above, a natural person's residency in the United States
is endogenous. As a result, any exclusion for foreign personnel, but
not U.S. personnel, transacting with foreign counterparties may result
in SBS Entities simply transferring disqualified U.S. personnel to a
foreign office. As the Commission recognized above, this decision by an
SBS Entity will reflect the uniqueness and value of an employee's
skills, expertise, and client relationships relative to the
reputational costs and compliance risks of continuing to employ
disqualified personnel and directs costs of personnel transfers.
However, SBS Entities that belong to large global financial groups are
less likely to be constrained by the location of disqualified personnel
whom they prefer to retain. As a result, the economic effects of this
alternative may be similar to those of the adopted approach.
(e) Relief for All SBS Entities With Respect to Non-U.S. Personnel
Effecting and Involved in Effecting Security-Based Swaps With U.S. and
Non-U.S. Counterparties
    The Commission has also considered alternatives excluding from the
statutory prohibition non-U.S. associated persons involved in effecting
security-based swaps with both U.S. and non-U.S. counterparties in
general, or under certain circumstances. For example, the Commission
has considered excluding from the statutory prohibition non-U.S.
associated persons involved in effecting security-based swaps with U.S.
counterparties, if such activity is limited in level or scope (e.g.,
collateral management).
    As discussed in the economic baseline above, security-based swap
markets are global and many SBS Entities actively participate across
U.S. and non-U.S. markets. Due to economies of scale and scope, some
SBS Entities may choose not to separate customer facing and/or
operational activities, such as collateral management and clearing,
related to security-based swaps with U.S. and non-U.S. counterparties.
To the degree that some SBS Entities rely on the same personnel across
their U.S. and non-U.S. business, they are currently unable to hire and
retain statutorily disqualified personnel absent relief by the
Commission. As discussed above, SBS Entities may face reputational
costs from retaining disqualified employees. To the degree that SBS
Entities would prefer to hire and retain certain disqualified employees
due to their superior expertise, skills, and abilities, and despite
such reputational costs, the alternative would provide beneficial
flexibility in personnel decisions

without necessitating an SBS Entity to completely separate the
operational side of their U.S and non-U.S. businesses (and more
flexibility relative to the amendment). Some of these benefits may flow
through to counterparties in the form of more efficient execution of
security-based swaps and related services, or better price and non-
price terms.
    To the degree that statutory disqualification of associated persons
may increase compliance and counterparty risks, the alternative may
involve greater risks to U.S. counterparties of SBS Entities relative
to the amendment. The Commission continues to note that the scope of
conduct that gives rise to statutory disqualification is broad and
includes conduct that is not related to investments or financial
markets. Moreover, the security-based swap market is an institutional
one, and conduct that gives rise to statutory disqualification in the
U.S. is generally public. U.S. counterparties that believe statutory
disqualification is a meaningful signal of quality may vote with their
feet and choose to transact with non-disqualified personnel or SBS
Entities that do not rely on disqualified personnel.
    The alternative would provide broader relief compared to CFTC's
requirements in swap markets and would not result in a harmonized
regulatory regime with respect to statutory disqualification.
Importantly, the full costs and benefits of an alternative that
provides broader relief from the statutory prohibition in security-
based swaps compared to the relief available in swap markets may not be
realized. Specifically, to the degree that market participants transact
across swap and security-based swap markets with the same SBS Entity
counterparties, SBS Entities may continue to rely on the same personnel
who are allowed to effect or be involved in both swaps and security-
based swap transactions.
(f) Relief With Respect to Certain Non-U.S. Middle- and Back-Office
Associated Persons
    As discussed above, the Commission has considered two alternatives
that would exclude certain non-U.S. middle- or back-office associated
persons from the scope of the statutory disqualification prohibition in
Section 15F(b)(6).\596\ The first alternative would exclude non-U.S.
associated persons involved in drafting and negotiating master
agreements and confirmations and managing collateral for the SBS Entity
from the statutory prohibition. The second alternative would be broader
and also exclude from the statutory prohibition associated persons
involved in structuring or supervisory functions, leaving only sales
and trading persons considered ``involved in effecting'' security-based
swaps and subject to the statutory prohibition.
---------------------------------------------------------------------------

    \596\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA
letter at 3, 16.
    \597\ See European Commission email.
    \598\ Range of associated persons if global SBS associated
persons are taken into account, with broad definition and accounting
for back office.
    \599\ Remaining range of associated persons after accounting for
potential reduction of this number when removing personnel with no
U.S. person contacts.
    \600\ This figure represents an estimate of ``only those
associated persons authorized to communicate directly with U.S.
persons.''
    \601\ Remaining range of associated persons after accounting for
potential further reduction of the number by excluding back office
functions.
    \602\ Remaining range of associated persons after accounting for
potential further reduction by focusing exclusively on personnel
with sales or trader mandates for derivatives.
    \603\ This figure represents the response ``approx. 100 if
limited to US-focused associated persons.''
    \604\ This figure represents the response ``estimated 700 SBS
associated persons for front-office personnel only, and when
removing all back-office functions (comparable to the CFTC
associated person approach).''

                                Table 4--Estimates of Associated Persons Affected by the Proposal and Alternatives \597\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Estimate                              Bank 1          Bank 2          Bank 3          Bank 4          Bank 5          Bank 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline \598\..........................................           3,750     2,150-2,250           2,100           2,100           1,340          >6,800
Proposal \599\..........................................           1,125     1,350-1,400         700-800     \600\ 1,680         650-750          >1,000
Alternative 1 \601\.....................................             875             850         100-200             n.a             560             700
Alternative 2 \602\.....................................             288             750       \603\ 100       \604\ 700             n.a             n.a
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 5--Percentage Reduction in Associated Persons Based on Data Provided by 6 Market Participants \605\
----------------------------------------------------------------------------------------------------------------
                 Panel A. Reduction Relative to the Market Participant Estimates of the Baseline
-----------------------------------------------------------------------------------------------------------------
                            Estimate                                Average (%)     Minimum (%)     Maximum (%)
----------------------------------------------------------------------------------------------------------------
Proposal........................................................              54              20              85
Alternative 1...................................................              76              58              93
Alternative 2...................................................              80              66              95
----------------------------------------------------------------------------------------------------------------
Panel B. Reduction Relative to the Market Participant Estimates of the Proposal
----------------------------------------------------------------------------------------------------------------
Alternative 1...................................................              38              20              80
Alternative 2...................................................              66              45              87
----------------------------------------------------------------------------------------------------------------

    Based on estimates summarized in Tables 4 and 5 above, the first
alternative may reduce the scope of application of the statutory
prohibition with respect to associated persons by an average of 76%
relative to baseline estimates in the survey, with a range of estimates
between 58% and 93%. The second alternative may reduce the scope of
application of the statutory prohibition with respect to associated
persons by an average of 80% relative to

baseline estimates in the survey, with a range of estimates between 66%
and 95%. In contrast, by adopting the proposed approach, as discussed
above, the Commission estimates that the final amendments may reduce
the scope of application of the statutory prohibition by approximately
54%, with a range of estimates between 20% and 85%.
---------------------------------------------------------------------------

    \605\ See European Commission email. Where a market participant
provided a range, the percentage reduction was calculated using a
midpoint of that range. When a market participant provided an
estimate using ``over,'' the percentage reduction assumed the figure
was exactly as reported, which may under-estimate the magnitude of
the reduction relative to baseline.
---------------------------------------------------------------------------

    Relative to the final approach, both alternatives excluding certain
non-U.S. middle- and back-office employees may provide SBS Entities
with further flexibility with respect to hiring and retaining
disqualified personnel who may have valuable expertise and skills in
their security-based swap business with U.S. and non-U.S.
counterparties. These alternatives may also involve greater benefits
for disqualified persons who may enjoy improved labor market outcomes
and a greater likelihood of being hired and retained by SBS Entities in
their middle and back-office functions. Such an alternative may also
more closely harmonize the treatment of statutory disqualification
across tightly linked swap and security-based swap markets.\606\
---------------------------------------------------------------------------

    \606\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter
at 16; see also Part V, supra.
---------------------------------------------------------------------------

    However, the Commission continues to recognize that, relative to
the final approach, and to the degree that statutory disqualification
may act as a signal of quality of an associated person, these
alternatives may further increase compliance and counterparty risks,
including to U.S. counterparties. As discussed in Part IV.B above, the
conduct of a variety of middle- and back-office activities beyond
solicitations or sales of security-based swaps--activities such as
collateral management in connection with security-based swaps--may
directly impact the risks and returns of counterparties on security-
based swaps. These alternatives may also increase the incentives of
U.S. and non-U.S. SBS Entities to move their non-U.S. disqualified
personnel into middle- and back-office functions and may result in
competitive disadvantages between U.S. and non-U.S. disqualified
persons in front- and middle- and back-office functions.
    The costs and benefits of these alternatives relative to the final
approach are likely to be attenuated by two important considerations.
First, as discussed above, the security-based swap market is an
institutional one. To the degree that institutional counterparties may
view statutory disqualification as a meaningful signal of quality, SBS
Entities may still choose to disassociate from disqualified personnel
in middle- and back-office functions to reduce reputational costs.
While dealer concentration may reduce the effectiveness of this market
discipline, market concentration is itself endogenous. As a result, the
benefits of this alternative to SBS Entities and disqualified personnel
as well as the potential risks to counterparties may be dampened.
Second, under the alternatives, as under the final approach, the
Commission would continue to be able, in appropriate cases, to
institute proceedings under Exchange Act Section 15F(l)(3) to determine
whether the Commission should censure, place limitations on the
activities or functions of such person, suspend for a period not
exceeding 12 months, or bar such person from being associated with an
SBS Entity.\607\ However, the Commission reiterates that the conduct of
middle- and back-office activities may impact the risks and returns of
counterparties and that, as estimated in Table 4, these alternatives
may result in a further narrowing of the scope of the statutory
prohibition relative to the final approach.
---------------------------------------------------------------------------

    \607\ See 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

D. Certification, Opinion of Counsel, and Employee Questionnaires

    In addition, the Commission is adopting certain amendments to
registration Rule 15Fb2-1, and modifications to the requirement to
obtain employee questionnaires under Rules 18a-5(a)(10) and (b)(8).
1. Amendments to Rule 15Fb2-1
    As the Commission stated in the Registration Adopting Release, the
Commission's access to books and records and the ability to inspect and
examine registered SBS Entities facilitates Commission oversight of
security-based swap markets.\608\ To the degree that the certification
and opinion of counsel requirements of Rule 15Fb2-4 provide assurances
regarding the Commission's ability to oversee and inspect and examine
nonresident SBS Entities, the baseline certification and opinion of
counsel requirements may reduce counterparty and compliance risks and
adverse selection.
---------------------------------------------------------------------------

    \608\ See Registration Adopting Release, 80 FR at 48972.
---------------------------------------------------------------------------

    However, certain nonresident entities may lack clarity concerning
the scope of the certification and opinion of counsel requirements and
their ability to comply. Specifically, the recent passage of the GDPR,
as well as the potential exit of the United Kingdom from the European
Union may create significant uncertainty for market participants
currently intermediating large volumes of security-based swaps
regarding their ability to comply with the certification and opinion of
counsel requirements, as well as the background check recordkeeping
requirements discussed below.
    The Commission estimates that nonresident SBS Entities currently
intermediating approximately 59.8% of all security-based swap notional
are subject to foreign privacy and secrecy laws, blocking statutes, and
other legal barriers that make it difficult or create uncertainty about
their ability to provide certification and opinion of counsel and/or to
be subject to inspections and examinations by the Commission.\609\ Such
nonresident SBS entities may be less likely to apply or may become
unable to register as SBS Entities when compliance with SBS Entity
registration rules is required.\610\ As a result, some nonresident SBS
Entities currently intermediating large volumes of security-based swap
transactions may cease transaction activity or be forced to relocate
certain operations, books, and records. This may result in disruptions
to valuable counterparty relationships or increased costs to
counterparties (to the degree that nonresident SBS Entities may pass
along the costs of such restructuring in

the form of higher transaction costs or less attractive security-based
swaps). In addition, depending on whether and which SBS Entities step
in to intermediate the newly available market share, there may be
significant competitive effects.
---------------------------------------------------------------------------

    \609\ Since we expect a large number of U.S. SBS Entities will
have dually registered as Swap Entities, to inform our analysis we
considered foreign jurisdictions where CFTC staff previously
provided no-action relief for trade repository reporting
requirements as they apply to swap dealers (available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/15-01.pdf). This estimate was also informed by a legal analysis of the
EU General Data Protection Regulation, foreign blocking statutes,
bank secrecy and employment laws, jurisdiction specific privacy
laws, and other legal barriers that may inhibit compliance with
regulatory requirements. These jurisdictions were matched to the
domicile classifications of TIW accounts likely to trigger
requirements to register with the Commission as SBS Entities when
compliance with registration requirements becomes effective, using
2017 DTCC-TIW data. If foreign jurisdictions amend their data
privacy and blocking laws, provide guidance, or enter into
international agreements that would facilitate compliance with
Commission SBS Entity registration requirements before compliance
with SBS Entity registration rules becomes effective, or if SBS
Entities choose to restructure their operations and/or relocate
their books and records to other jurisdictions (for example, in
response to the potential exit of the U.K. from the E.U. or GDPR
restrictions), this figure may over- or under-estimate the security-
based swap market share impacted by the guidance.
    \610\ The BIS estimates that as of year-end 2017, the total
gross market value outstanding in single-name credit default swaps,
in multi-name credit default swap instruments, and in equity
forwards and swaps totaled $501 billion. If the amendment affects
even 0.02% of the market, the economic impact of the amendment may
exceed $100 million. See BIS, Semi-annual OTC derivatives statistics
at December 2017, Table 10.1, available at https://www.bis.org/statistics/d10_1.pdf (accessed May 18, 2018).
---------------------------------------------------------------------------

(a) Costs, Benefits, and Effects on Efficiency, Competition, and
Capital Formation
    The Commission is cognizant of the fact that SBS Entity
Registration rules and other elements of the Title VII regime will
apply to an active market. As analyzed in the economic baseline, the
Commission recognizes that security-based swap markets involve
extensive cross-border activity, and nonresident SBS Entities
intermediate a large percentage of security-based swaps. The Commission
believes that the nonresident SBS entities that may face uncertainty
about their ability to comply with certification and opinion of counsel
requirements and are likely to utilize conditional registration are
those SBS Entities located in jurisdictions with foreign privacy and
secrecy laws, blocking statutes, and other legal barriers described
above.
    Conditional registration may provide SBS Entities currently active
in security-based swap markets with beneficial flexibility and time to
relocate some of their operations and/or books and records around the
constraints of foreign privacy and secrecy laws, blocking statutes, and
other legal barriers, without disrupting ongoing counterparty
relationships and market activity. In addition, conditional
registration may facilitate smooth functioning of active security-based
swap markets as compliance with the Commission's Title VII rules
becomes required, may benefit both SBS Entities and counterparties by
preserving SBS Entity-counterparty relationships, and may enhance
efficiency and capital formation in security-based swaps.
    However, conditional registration may reduce the assurances of the
certification and opinion of counsel regarding the Commission's ability
to inspect and examine some SBS Entities during the 24-month period. In
addition, 24 months may not be sufficient for the more complex SBS
Entities to relocate and restructure their security-based swap market
activity outside the reach of foreign privacy and secrecy laws,
blocking statutes, and other legal barriers, particularly as foreign
laws, statutes and legal barriers evolve. Thus, under the amendment
there may still be a risk of disruptions to counterparty relationships
and market activity if conditionally registered SBS Entities having
large market shares, and transacting with hundreds and thousands of
counterparties, are unable to meet the certification and opinion of
counsel requirements within the 24-month period.
    Moreover, counterparties that may rely on the Commission's ability
to inspect and examine a registered SBS Entity as a signal of higher
quality may reduce their participation in security-based swap markets,
which may increase adverse selection. Alternatively, they may vote with
their feet and shift business from conditionally registered SBS
Entities to non-conditionally registered SBS Entities. This may enhance
competition between conditionally registered and non-conditionally
registered SBS Entities and may create a market incentive for
conditionally registered SBS Entities to provide the certification and
opinion of counsel.
(b) Alternatives Considered
    The Commission considered alternative approaches. Specifically, the
Commission considered adopting some, but not other, aspects of the
above relief. For example, the Commission considered shortening the
conditional registration period (e.g., to 12 or 18 months). Relative to
the final approach, these alternatives would provide less relief and
greater uncertainty to nonresident entities that may seek to register
with the Commission as an SBS Entity, which may increase the likelihood
of disruptions of counterparty relationships and risks of adverse
effects on market activity in security-based swaps. At the same time,
these alternatives may increase the scope, strength, and/or timeliness
of the certification and opinion of counsel requirement, which may give
the Commission further assurances regarding its ability to oversee
security-based swap activity of nonresident entities applying for
registration. Importantly, regardless of the certification and opinion
of counsel requirement, all nonresident SBS Entities would continue to
have independent ongoing obligations to provide the Commission with
access to their books and records and to permit on-site inspections and
examinations.
    The Commission has considered an alternative under which all
conditionally registered SBS Entities would be required to provide
disclosures to U.S. counterparties or to all counterparties regarding
their conditional registration. Such disclosures may help inform
counterparties regarding the conditional registration status of SBS
Entities with which they may wish to transact. To the degree that
counterparties may consider conditional registration as a signal of
lower quality or may seek to build long-term relationships with non-
conditionally registered SBS Entity counterparties, and to the degree
such counterparties are otherwise uninformed about SBS Entities'
registration status, this alternative may facilitate more efficient
counterparty selection. The alternative may also create reputational
incentives for conditionally registered SBS Entities to provide the
requisite certification and opinion of counsel to the Commission, to
the degree that some counterparties may interpret conditional
registration as a signal of reduced quality.
    However, such disclosure requirements would involve burdens on SBS
Entities related to the preparation and production of such disclosures.
Related costs may be partly or fully passed along to SBS Entities'
counterparties in the form of more expensive security-based swaps. As
noted above, the Commission believes that nonresident SBS Entities most
likely to utilize conditional registration are those SBS Entities that
face uncertainty regarding their ability to comply with certification
and opinion of counsel requirements due to privacy and secrecy laws,
blocking statutes, and other legal barriers in their foreign
jurisdictions. Based on the analysis of 2017 TIW data, the Commission
estimates that there are approximately 9,611 unique relationships
(pairs of counterparties and accounts likely to trigger SBS Entity
registration requirements with registered office locations in
jurisdictions with foreign privacy and secrecy laws, blocking statutes,
and other legal barriers) or approximately 72.6% of all unique dealer-
counterparty pairs active in security-based swap market that may become
subject to the disclosure requirement.\611\ Limiting such disclosure
requirements to relationships between dealer accounts in jurisdictions
with foreign privacy and secrecy laws, blocking statutes, and other
legal barriers and U.S. non-dealer counterparties may affect 4,322
unique dealer-U.S. counterparty relationships.

Since many of the dealer accounts belong to large financial groups, the
Commission can also use the domicile of the parent organization to
categorize dealers at the level of the financial group (at the firm-
level) instead of at the level of the dealer (at the account-level).
Using this more conservative approach, there may be 779 unique dealer-
counterparty ties (or 25.7% of all ties) that may be affected by
foreign privacy and secrecy laws, blocking statutes, and other legal
barriers and the alternative disclosure requirement. The Commission
also notes that, as a baseline matter, SBS Entity registration forms
are public and the Commission may, in the course of Commission
business, publish a list of registered SBS Entities and note the
conditional registration status of such entities on the Commission's
public website.
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    \611\ This estimate includes unique dealer-counterparty pairs
where the counterparty is another dealer. Excluding dealer-dealer
pairs reduces the estimate by 279, with an estimate of 9,332 unique
pairs between non-dealer counterparties and dealer accounts with
registered office locations in jurisdictions with foreign privacy
and secrecy laws, blocking statutes, and other legal barriers (or
approximately 70.5% of all unique dealer-counterparty pairs).
---------------------------------------------------------------------------

    The Commission has also considered alternatives providing further
relief to SBS Entities with respect to the certification and opinion of
counsel requirements. For example, the Commission has also considered
lengthening the conditional registration period (to, e.g., 5 or 10
years) in recognition of the fact that some SBS Entities may be unable
to provide the requisite certification and opinion of counsel within a
24-month grace period.\612\ The Commission also considered eliminating
the opinion of counsel requirement and providing carve-outs from the
certification for competing blocking, privacy, or secrecy laws, similar
to the relief available in swap markets.\613\ The Commission could also
have eliminated the opinion of counsel requirement and changed the
certification to allow a senior officer to certify, based on reasonable
due diligence, that the SBS Entity will provide access to its U.S.
business-related books and records to the Commission upon request.\614\
Finally, the Commission has also considered eliminating the
certification and opinion of counsel requirement as a whole.\615\
---------------------------------------------------------------------------

    \612\ See ISDA letter at 10 n.21.
    \613\ See IIB/SIFMA letter at 20; Credit Suisse/UBS letter at 2;
ISDA letter at 10.
    \614\ Id.
    \615\ See, e.g., EBF letter at 2; ISDA letter at 10; Credit
Suisse/UBS letter at 2.
---------------------------------------------------------------------------

    Relative to the final approach, these alternatives may provide more
relief and greater certainty to nonresident entities that may seek to
register with the Commission as an SBS Entity. As a result, these
alternatives may further decrease the likelihood of disruptions of
counterparty relationships and risks of adverse effects on market
activity in security-based swaps. These alternatives would further
reduce or eliminate certification and opinion of counsel burdens,
related uncertainty, and liability risk. At the same time, as discussed
in prior sections, the Commission continues to believe that access to
books and records and the ability to inspect and examine registered SBS
Entities facilitates Commission oversight of security-based swap
markets. These alternatives may limit the scope of assurances provided
to the Commission by SBS Entity applicants regarding the Commission's
ability to inspect and examine SBS Entities. To the degree that some
nonresident SBS Entities may be unable to provide certification or
opinion of counsel due to their inability to become subject to
Commission inspections and examinations (as a result of, for example,
foreign privacy and secrecy laws, blocking statutes, and other legal
barriers), these alternatives may reduce the extent of Commission
inspections and examinations. Importantly, under the final approach as
well as under these alternatives, all nonresident SBS Entities would
continue to have independent ongoing obligations to provide the
Commission with access to their books and records and to permit onsite
inspections and examinations.
2. Modifications to Rules 18a-5(a)(10) and (b)(8)
(a) Costs, Benefits, and Effects on Efficiency, Competition, and
Capital Formation
    The questionnaire requirement is intended to support Commission
oversight and entity compliance with the substantive requirements of
Rule 15Fb6 regarding statutory disqualification. The modifications to
Rule 18a-5: i) eliminate the questionnaire requirement with respect to
associated persons excluded from the statutory prohibition; and ii)
modify the questionnaire requirement with respect to associated persons
if local law in the jurisdiction where the associated person is located
would prohibit the SBS Entity from collecting certain data otherwise
required under Rule 18a-5. As discussed above, the Commission received
comments supporting the proposed modifications to Rule 18a-5.\616\ The
Commission continues to believe that these modifications are unlikely
to adversely affect Commission oversight of SBS Entity compliance with
the statutory prohibition since those associated persons are already
excluded from the statutory prohibition. In addition, the modifications
relating to local law still require the SBS Entity to collect those
data elements generally required under Rule 18a-5 that the SBS Entity
is not prohibited from collecting under local law. At the same time,
the modifications may involve modest reductions to corresponding
paperwork burdens. The Commission continues to believe that, to the
degree that SBS Entities may pass along these burdens to
counterparties, the modifications may also result in some benefits to
counterparties of these SBS Entities.
---------------------------------------------------------------------------

    \616\ See EBF letter at 6-7; IIB/SIFMA letter at 30.
---------------------------------------------------------------------------

    As discussed in Part VII.B, the Commission estimates that the
addition of paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) to Rule 18a-5
would reduce initial costs associated with Rule 18a-5 by $49,491 and
ongoing costs by $61,335.\617\ Therefore, the cost savings to SBS
Entities and counterparties from this modification are likely to be
modest.
---------------------------------------------------------------------------

    \617\ Initial cost reduction for all stand-alone and bank SBS
Entities reduction: (117 x Attorney at $423 per hour) = $49,491.
Ongoing cost reduction for all stand-alone and bank SBS Entities
reduction: (145 x Attorney at $423 per hour) = $61,335.
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission is modifying, by
adding paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B), the questionnaire
requirement with respect to non-U.S. associated persons of SBS Entities
if the receipt of that information, or the creation or maintenance of
records reflecting that information, would result in a violation of
applicable law in the jurisdiction in which the associated person is
employed or located. The primary intended benefit of this modification
is to enable certain nonresident SBS Entities to continue
intermediating transactions with their counterparties. Specifically,
due to the existence of foreign privacy and secrecy laws, blocking
statutes, and other legal barriers, the tailoring of the questionnaire
requirement can enable more nonresident market participants to register
as SBS Entities without a potentially costly relocation or business
restructuring of certain operations and records to jurisdictions
outside the reach of such laws. This may also reduce costs for
counterparties (as nonresident SBS Entities may pass along related
costs to counterparties in the form of more expensive security-based
swaps) and may preserve valuable counterparty relationships.
    In addition, this modification may also involve some modest burden
reductions. As discussed in Part VII.B, the modification to add
paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5 is expected
to decrease the initial costs associated with Rule 18a-5 by

$24,534 and ongoing costs by $30,879.\618\ In aggregate, as estimated
in Part VIII.B, under both modifications, initial and ongoing costs of
all stand-alone and bank SBS Entities related to complying with Rule
18a-5 are estimated at $215,730 and $269,874 respectively.\619\
---------------------------------------------------------------------------

    \618\ Initial cost reduction for all stand-alone and bank SBS
Entities reduction: (58 x Attorney at $423 per hour) = $24,534.
Ongoing cost reduction for all stand-alone and bank SBS Entities
reduction: (73 x Attorney at $423 per hour) = $30,879.
    \619\ Initial costs for all stand-alone and bank SBS Entities
reduction under the modifications to Rule 18a-5(a)(10) and (b)(8):
((700-127-63) x Attorney at $423 per hour) = $215,730.
    Ongoing costs for all stand-alone and bank SBS Entities
reduction: ((875-158-79) x Attorney at $423 per hour) = $269,874.
---------------------------------------------------------------------------

    The Commission continues to recognize that certain recordkeeping
requirements may facilitate compliance and Commission oversight of SBS
Entities. In adopting a tailored questionnaire requirement with respect
to non-U.S. associated persons, the Commission has considered the value
of such recordkeeping for compliance with Rule 15Fb6-2 and related
oversight, as well as the costs and potential disruptions to
counterparty relationships and market activity that may result when
foreign jurisdictions do not allow nonresident SBS Entities to receive,
create, or maintain such records. Importantly, as discussed above, the
Commission continues to note that the tailoring of the requirement in
(a)(10)(iii)(B) and (b)(8)(iii)(B) does not eliminate or affect the
scope of all SBS Entities' ongoing obligations to comply with Section
15F(b)(6) of the Exchange Act and Rule 15Fb6-2, with respect to every
associated person that effects or is involved in effecting security-
based swaps and is not subject to an exclusion from the statutory
disqualification prohibition in Section 15F(b)(6) of the Exchange Act.
    Finally, the adopted approach involves a disparate treatment of
broker-dealer SBS Entities and stand-alone and bank SBS Entities. Based
on an analysis of 2017 TIW data and filings with the Commission, out of
50 participants likely to register with the Commission as security-
based swap dealers, the Commission estimates that 16 market
participants have already registered with the Commission as broker-
dealers; 9 market participants will be stand-alone security-based swap
dealers, and up to 25 participants will be bank security-based swap
dealers.\620\
---------------------------------------------------------------------------

    \620\ We note that these figures are based on current market
activity in security-based swaps. We are unable to quantify the
number of market participants currently expected to register as
broker-dealer, bank, or stand-alone security-based swap dealers that
may choose to restructure their U.S. security-based swap market
participation in response to the pending substantive requirements of
Title VII, such as capital and margin requirements.
---------------------------------------------------------------------------

    Under the modifications, SBS Entities that are not stand-alone or
bank SBS Entities would be required to make and keep current a
questionnaire or application for employment for associated persons with
respect to whom the broker-dealer SBS Entity is excluded from the
prohibition in Exchange Act 15F(b)(6), incurring corresponding
compliance burdens, albeit modest, estimated above. In addition, to the
extent that some SBS Entities that are not stand-alone or bank SBS
Entities are heavily reliant on employees in jurisdictions with foreign
privacy and secrecy laws, blocking statutes, and other legal barriers
in their security-based swap business, they may be unable to comply
with the employee questionnaire requirement and register with the
Commission. These SBS Entities would be unable to register without a
relocation or restructuring of various records and or operations,
involving costs for such SBS Entities--costs that may be passed along
to counterparties or disrupt existing counterparty relationships. This
may reduce the competitive standing of SBS Entities cross-registered as
broker-dealers and their employees in certain foreign jurisdictions and
improve the competitive standing of stand-alone and bank SBS Entities
and their employees in foreign data privacy jurisdictions.
    Broker-dealer SBS Entities are already subject to a questionnaire
requirement under Rule 17a-3(a)(12). The Commission believes that such
entities are making and keeping current employment questionnaires and
applications for all of their associated persons in their normal course
of business. In addition, the Commission believes that such SBS
Entities have already structured their security-based swap business in
a manner that would enable them to comply with this requirement without
disrupting transaction activity or ongoing counterparty relationships.
The sunk cost nature of such structuring of broker-dealers' security-
based swap business may partly mitigate the above competitive effects.
(b) Alternatives Considered
    The Commission has considered an alternative approach, which would
provide the same relief (by also amending Rule 17a-3(a)(12) and
providing the same relief to broker-dealer SBS Entities) with respect
to: (i) Exemption based on the non-U.S. associated SBS Entity's
exclusion from the prohibition under Section 15F(b); and (ii) exemption
based on local law.
    The alternative would benefit a greater number of SBS Entities and
counterparties by extending the relief (with its benefits discussed
above) to all SBS Entities in their security-based swap business.
Moreover, the alternative would eliminate the competitive disparities
between broker-dealer and stand-alone and bank SBS Entities discussed
above.
    However, the Commission continues to recognize that recordkeeping
requirements are essential to the inspection and examination process
and facilitate effective oversight of the markets the Commission
regulates. Importantly, as discussed above, broker-dealer SBS Entities
are already subject to a questionnaire requirement under Rule 17a-
3(a)(12). The Commission believes that broker-dealer SBS Entities have
already located and structured their security-based swap business in a
way that would allow them to comply with the questionnaire requirement.
At the same time, the Commission understands that stand-alone and bank
SBS Entities active in security-based swap markets are not currently
subject to similar recordkeeping requirements and that the
questionnaire requirement, as adopted, may require these entities to
relocate their security-based swap business and staff to other
jurisdictions. This may disrupt counterparty relationships and ongoing
business transactions between stand-alone and bank SBS Entities and
their customers.
    The Commission also understands that broker-dealer SBS Entities are
routinely making and keeping current employment questionnaires and
applications for all of their associated persons, which may reduce the
benefits of the above alternative. However, if such baseline behavior
of broker-dealer SBS Entities is a result of Rule 17a-3 currently in
effect and not of compliance practices optimal for each broker-dealer
SBS Entity, the alternative may reduce burdens \621\ and provide
beneficial flexibility in recordkeeping practices for broker-dealer SBS
Entities with respect to associated persons excluded from the statutory
prohibition. The Commission continues to note that the recordkeeping
requirement in Rule 18a-5 is intended to support substantive
obligations with respect to statutory disqualification and that such
substantive obligations would no longer

exist with respect to associated persons of broker-dealer SBS Entities
effecting or involved in effecting security-based swaps and exempt from
the statutory prohibition under, for instance, Rule of Practice
194(c)(2).
---------------------------------------------------------------------------

    \621\ As acknowledged above, the overall burdens of compliance
with Rule 18a-5 are relatively modest; however, fixed costs may be
more significant for smaller entities.
---------------------------------------------------------------------------

VII. Paperwork Reduction Act

    Certain provisions of the amendments to Exchange Act Rules 3a71-3
and 18a-5 contain ``collection of information'' \622\ requirements
within the meaning of the Paperwork Reduction Act of 1995 (``PRA'').
The Commission published notice requesting comment on the collection of
information requirements \623\ and submitted the proposed collections
of information to the Office of Management and Budget (``OMB'') for
review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The
Commission's earlier PRA assessments have been revised to reflect the
modifications to the rule amendments from those that were proposed, as
well as additional information and data now available to the
Commission. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
---------------------------------------------------------------------------

    \622\ 44 U.S.C. 3502(3).
    \623\ See Proposing Release, 84 FR at 24288-89.
---------------------------------------------------------------------------

    The title of the new collection of information associated with the
amendments to Rule 3a71-3 is ``Rule 3a71-3(d)--Conditional Exception
from De Minimis Counting Requirement in Connection with Certain
Transactions Arranged, Negotiated, or Executed in the United States,''
OMB Control Number 3235-0771.\624\ The title and OMB control number for
the collection of information the Commission is proposing to modify is
``Rule 18a-5--Records to be made by certain security-based swap dealers
and major security-based swap participants,'' OMB Control Number 3235-
0745.
---------------------------------------------------------------------------

    \624\ This new collection of information is distinct from an
existing collection of information related to Exchange Act Rule
3a71-3(c), which provides an exception from the application of
certain business conduct requirements in connection with a security-
based swap dealer's ``foreign business.'' See generally Business
Conduct Adopting Release, 81 FR at 30082.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on the
collection of information requirements contained therein, as well as
the accuracy of the Commission's related estimates and statements
regarding the associated costs and burdens of the proposed rules. The
Commission did not receive any comments on these matters. The
Commission continues to believe that the methodology used for
calculating the burdens set forth in the Proposing Release is
appropriate. However, where noted, certain estimates have been
modified, as necessary, to conform to the adopted rules and to reflect
the most recent data available to the Commission. Other than these
changes, the Commission's estimates remain unchanged from those in the
Proposing Release.

A. Amendment to Rule 3a71-3

1. Summary of the Collection of Information \625\
---------------------------------------------------------------------------

    \625\ Because the amendment to Rule 3a71-3 would require the use
of a registered entity in connection with the transactions at issue,
the amendment also would implicate collections of information
associated with security-based swap dealer and/or broker status
(apart from the collections associated with the specific conditions
of the exception). Separate collections of information address the
registration of security-based swap dealers and/or brokers, as well
as the requirements associated with those registered entities as a
matter of course, including recordkeeping requirements applicable to
such registered entities. The separate collections of information
associated with requirements of general applicability for registered
security-based swap dealers and/or brokers are not addressed as part
of this rulemaking, and instead are addressed by the collections of
information associated with those separate requirements.
---------------------------------------------------------------------------

(a) Notification of Limited Title VII Applicability
    The exception to Rule 3a71-3 is conditioned in part on the
registered entity engaged in arranging, negotiating, or executing
activity in the United States notifying the counterparties of the non-
U.S. person relying on the exception, contemporaneously with and in the
same manner as the arranging, negotiating, or executing activity, that
the non-U.S. person is not registered with the Commission as a
security-based swap dealer, and that certain Exchange Act provisions or
rules addressing the regulation of security-based swaps would not be
applicable in connection with the transaction.\626\ As discussed in
Part II.C.4, the Commission is adopting an alternative means of
satisfying this notification condition. As amended, the condition
allows a single disclosure to cover all subsequent arranging,
negotiating, or executing activity of a registered entity that has no
customer relationship with the counterparty. This notification
condition applies only when the identity of the counterparty is known
to the registered entity at a reasonably sufficient time prior to the
execution of the transaction to permit the disclosure.\627\
---------------------------------------------------------------------------

    \626\ See Exchange Act Rule 3a71-3(d)(1)(iv).
    \627\ See id.
---------------------------------------------------------------------------

(b) Business Conduct-Related Conditions
    The exception to Rule 3a71-3 is conditioned in part on the
registered entity that engages in arranging, negotiating, or executing
activity in the United States in connection with the transactions at
issue complying with certain security-based swap dealer business
conduct requirements related to disclosure of material risks,
characteristics, incentives, and conflicts of interest; suitability of
recommendations; and fair and balanced communications. The registered
entity must comply with these requirements as if the counterparty to
the non-U.S. person relying on the exception also were a counterparty
to that registered entity and, if the registered entity is a broker not
registered as a security-based swap dealer, also as if it were a
registered security-based swap dealer.\628\ Each of those underlying
business conduct requirements itself is associated with a collection of
information.\629\ The Commission is adopting the disclosure condition
and the communications condition as proposed, and is adopting an
alternative method to satisfy the counterparty-specific prong of the
suitability condition. First, the registered entity could ensure that
it has a reasonable basis to believe that the recommended security-
based swap or strategy involving a security-based swap is suitable for
the counterparty, as required by Rule 15Fh-3(f)(1). Alternatively, if
the registered entity reasonably determines that the counterparty to
whom it recommends a security-based swap or trading strategy involving
a security-based swap is an ``institutional counterparty'' as defined
in Rule 15Fh-3(f)(4), the registered entity instead may disclose to the
counterparty that it is not undertaking to assess the suitability of
the security-based swap or trading strategy involving a security-based
swap for the counterparty.
---------------------------------------------------------------------------

    \628\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(1)-(3).
    \629\ See Business Conduct Adopting Release, 81 FR at 30083-85
(discussing collections of information regarding security-based swap
dealer requirement for disclosure of information regarding material
risks, characteristics, incentives and conflicts of interest,
suitability of recommendations, and fair and balanced
communications).
---------------------------------------------------------------------------

(c) Trade Acknowledgment and Verification Condition
    The exception to Rule 3a71-3 is conditioned in part on the
registered entity that engages in arranging, negotiating, or executing
activity in the United States in connection with the

transactions at issue complying with trade acknowledgment and
verification requirements. These requirements themselves are associated
with collections of information.\630\ The registered entity must comply
with these requirements as if the counterparty to the non-U.S. person
relying on the exception also were a counterparty to that registered
entity and, if the registered entity is a broker not registered as a
security-based swap dealer, also as if it were a registered security-
based swap dealer.\631\
---------------------------------------------------------------------------

    \630\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39829-30 (discussing collections of information
regarding security-based swap dealers requirement for trade
acknowledgment and verification).
    \631\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B)(4).
---------------------------------------------------------------------------

(d) Portfolio Reconciliation Condition
    The Commission proposed that the exception to Rule 3a71-3 be
conditioned in part on registered entity that engages in arranging,
negotiating, or executing activity in the United States in connection
with the transactions at issue complying with certain portfolio
reconciliation requirements.\632\ As discussed in Part II.C.2, the
Commission is persuaded by comments that the burdens of compliance with
the proposed condition would outweigh its benefits, and is not adopting
the condition.
---------------------------------------------------------------------------

    \632\ See proposed Exchange Act Rule 3a71-3(d)(1)(ii)(B)(5).
---------------------------------------------------------------------------

(e) Recordkeeping Condition
    The exception to Rule 3a71-3 is conditioned in part on the
registered entity engaged in arranging, negotiating, or executing
activity in the United States obtaining from the non-U.S. person
relying on the exception, and maintaining for not less than three years
following the activity subject to the exception, the first two years in
an easily accessible place, trading relationship documentation
involving the counterparty to the transaction.\633\
---------------------------------------------------------------------------

    \633\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(3).
    In addition, the exception is conditioned in part on the
registered entity creating and maintaining books and records
relating to the transactions subject to this exception that are
required, as applicable, by Rules 17a-3 and 17a-4, or Rules 18a-5
and 18a-6, including books and records relating to: Disclosure of
risks, characteristics, incentives, and conflicts; assessment of
suitability; fair and balanced communications; and trade
acknowledgment and verification. See Exchange Act Rule 3a71-
3(d)(1)(iii)(B) (requiring creation and maintenance of books and
records relating to the requirements specified in proposed paragraph
(d)(1)(ii)(B)).
    Because that part of the condition subsumes the collection of
information that the Commission would expect to be associated with
the final rules adopting those security-based swap dealer books and
records requirements, it does not constitute a separate collection
of information attributable to this exception. See note 624, supra.
---------------------------------------------------------------------------

(f) Consent to Service Condition
    The exception to Rule 3a71-3 is conditioned in part on the
registered entity engaged in arranging, negotiating, or executing
activity in the United States obtaining from the non-U.S. person
relying on the exception, and maintaining for not less than three years
following the activity subject to the exception, the first two years in
an easily accessible place, written consent to service of process for
any civil action brought by or proceeding before the Commission,
providing that process may be served on the non-U.S. person by service
on the registered entity in the manner set forth in the registered
entity's current Form BD, SBSE, SBSE-A or SBSE-BD, as applicable.\634\
---------------------------------------------------------------------------

    \634\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(4).
---------------------------------------------------------------------------

(g) ``Listed Jurisdiction'' Condition
    The exception to Rule 3a71-3 is conditioned in part on the non-U.S.
person relying on the exception being subject to the margin and capital
requirements of a ``listed jurisdiction.'' \635\ The Commission may
issue an order designating a jurisdiction on its own initiative or in
response to applications by persons that may rely on the exception, or
by foreign financial authorities, which must be filed pursuant to the
procedures set forth in Exchange Act Rule 0-13.\636\
---------------------------------------------------------------------------

    \635\ See Exchange Act Rule 3a71-3(d)(1)(v).
    \636\ See Exchange Act Rule 3a71-3(d)(2)(i).
---------------------------------------------------------------------------

(h) Risk Management Control System Condition
    The exception to Rule 3a71-3 is conditioned in part on certain
registered entities engaged in arranging, negotiating, or executing
activity in the United States complying with portions of Exchange Act
Rule 15c3-4 even though they would not otherwise be required to do
so.\637\ Rule 15c3-4 requires the establishment of an internal risk
management control system and involves each entity documenting,
recording, and maintaining its system of internal risk management
controls.
---------------------------------------------------------------------------

    \637\ See Exchange Act Rule 3a71-3(d)(1)(i)(B)(2) (requiring
compliance with Exchange Act Rule 15c3-1(a)(10)), which in turn
requires compliance with portions of Exchange Act Rule 15c3-4, when
the registered entity is a broker not approved to use models to
compute deductions for market or credit risk). A broker not approved
to use models to compute deductions for market or credit risk is not
subject to Rule 15c3-4 unless it is also a security-based swap
dealer or an OTC derivatives dealer. The condition to the exception
requiring such brokers to comply with Rule 15c3-1(a)(10) thus
imposes a new requirement to comply with portions of Rule 15c3-4.
Other registered entities--brokers who are approved to use models,
non-model brokers who are dually registered as a security-based swap
dealer or an OTC derivatives dealer, and stand-alone security-based
swap dealers--are already required to comply with Rule 15c3-4. See
Exchange Act Rule 15c3-1(a)(7) (requiring brokers approved to use
models to comply with portions of Exchange Act Rule 15c3-4);
Exchange Act Rule 15c3-1(a)(10) (requiring brokers not approved to
use models who are dually registered as security-based swap dealers
to comply with portions of Exchange Act Rule 15c3-4); Exchange Act
Rule 15c3-4 (requiring compliance by OTC derivatives dealers);
Exchange Act Rule 18a-1(f) (requiring security-based swap dealers to
comply with portions of Exchange Act Rule 15c3-4).
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(i) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
    The use of the exception to Rule 3a71-3 for covered inter-dealer
security-based swaps is conditioned in part on the registered entity
engaged in arranging, negotiating, or executing activity in the United
States complying with a number of requirements: (1) Filing with the
Commission a notice that its associated persons may conduct
``arranging, negotiating, or executing'' activity in the United States;
and (2) obtaining from the non-U.S. person relying on the exception,
and maintaining, documentation regarding such non-U.S. person's
compliance with the inter-dealer threshold.
2. Use of Information
(a) Notification of Limited Title VII Applicability
    The notification condition is intended to help guard against
counterparties reasonably presuming that the involvement of U.S.
personnel in an arranging, negotiating, or executing capacity as part
of the transaction would be accompanied by the safeguards associated
with Title VII security-based swap dealer regulation applying to the
non-U.S. person.
(b) Business Conduct-Related Conditions
    The use of the information associated with the business conduct
condition is the same as the use of information associated with the
currently extant security-based swap dealer business conduct
requirements. These conditions apply the existing requirements to
transactions that, without the exception to Rule 3a71-3, would have
counted against the de minimis threshold and could have caused the non-
U.S. entity relying on the exception to register as a security-based
swap dealer and comply with similar or more stringent business conduct
requirements. The condition requiring the registered entity to comply
with requirements for the disclosure of risks, characteristics,
incentives, and conflicts will assist the counterparty in assessing the
transaction by providing it

with a better understanding of the expected performance of the
security-based swap, and provide additional transparency and insight
into pricing.\638\ The condition requiring the registered entity to
comply with requirements regarding the suitability of recommendations
will assist the registered entity in making appropriate
recommendations.\639\ The condition requiring the registered entity to
comply with fair and balanced communication requirements in part better
equip the counterparty to make more informed investment decisions.\640\
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    \638\ See Business Conduct Adopting Release, 81 FR at 30088.
    \639\ See id.
    \640\ See id.
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(c) Trade Acknowledgment and Verification Condition
    The use of the information associated with the trade acknowledgment
and verification condition is the same as the use of information
associated with the currently extant security-based swap dealer trade
acknowledgment and verification requirements. The condition applies the
existing requirements to transactions that, without the exception to
Rule 3a71-3, would have counted against the de minimis threshold and
could have caused the non-U.S. entity relying on the exception to
register as a security-based swap dealer and comply with the same trade
acknowledgment and verification requirements. In general, the trade
acknowledgment serves as a written record by which the counterparties
to the transaction may memorialize the terms of a transaction, and the
verification requirements ensure that the written record of the
transaction accurately reflects the terms of the transaction as
understood by the respective counterparties.\641\
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    \641\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39830.
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(d) Recordkeeping Condition
    The condition requiring the registered entity to obtain and
maintain trading relationship documentation involving the non-U.S.
person relying on the exception and its counterparty is intended to
help the Commission obtain a full view of the dealing activities
connected with transactions relying on the exception, including such
activities that occur in the non-U.S. person relying on the exception.
Absent such access, the Commission may be impeded in identifying fraud
and abuse in connection with transactions that have been arranged,
negotiated, or executed in the United States, where such fraud or abuse
may be apparent only in light of relevant information obtained from the
non-U.S. person relying on the exception or its associated persons.
(e) Consent to Service Condition
    The use of the consent to service condition is to facilitate the
Commission's ability to serve process on the non-U.S. person relying on
the exception, which in turn will assist the Commission in efficiently
taking action to address potential violations of the federal securities
laws in connection with the transactions at issue.
(f) ``Listed Jurisdiction'' Condition
    The use of information provided by applicants in connection with
``listed jurisdiction'' applications is to assist the Commission in
evaluating the effectiveness of the financial responsibility
requirements of jurisdictions regulating non-U.S. persons relying on
the exception. This condition is intended to help avoid creating an
incentive for persons engaged in a security-based swap dealing business
in the United States to book their transactions into entities that
solely are subject to the regulation of jurisdictions that do not
effectively require security-based swap dealers or comparable entities
to meet certain financial responsibility standards. Avoiding such an
incentive should help prevent creating an unwarranted competitive
advantage to non-U.S. persons that conduct security-based swap dealing
activity in the United States without being subject to strong financial
responsibility standards. The condition also is consistent with the
view that applying financial responsibility requirements to such
transactions between two non-U.S. persons can help mitigate the
potential for financial contagion to spread to U.S. market participants
and to the U.S. financial system more generally.
(g) Risk Management Control System Condition
    Compliance with Rule 15c3-4 by the registered entity engaged in
arranging, negotiating, or executing activity in the United States is
intended to promote the establishment and maintenance of an effective
risk management control system by such entities.
(h) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
    The use of information provided by applicants in connection with
the notice and compliance documentation requirements associated with
the use of the conditional exception for covered inter-dealer security-
based swaps is to assist the Commission in evaluating compliance with
the limitations on such use of the exception.
3. Respondents
    As discussed above, the Commission continues to estimate that up to
24 entities that engage in security-based swap dealing activity may
rely on the conditional exception from having to count dealing
transactions with non-U.S. counterparties against the de minimis
thresholds.\642\ To satisfy the exception, each of those up to 24
entities will make use of an affiliated registered entity that will be
required to comply with--and incur collections of information in
connection with--conditions related to compliance with certain Title
VII security-based swap dealer requirements related to business conduct
and trade acknowledgment and verification. Each of those up to 24
registered entities also will have to provide disclosures to
counterparties of the non-U.S. persons relying on the exception, to
obtain and maintain trading relationship documentation involving the
non-U.S. persons relying on the exception and their counterparties, and
to comply with the condition that the registered entity obtain from the
non-U.S. person a consent to service of process.
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    \642\ This estimate is based on data (see Part VI.A.7, supra)
indicating that: (1) Six U.S. entities are engaged in security-based
swap dealing activity above the de minimis thresholds may have the
incentive to book future security-based swaps with non-U.S.
counterparties into U.S. affiliates to make use of the proposed
exception in connection with those transactions. (2) One non-U.S.
entity would fall below the $3 billion de minimis threshold if its
transactions with non-U.S. counterparties were not counted. (3) The
``arranged, negotiated, or executed'' counting standard would result
in five additional non-U.S. entities incurring assessment costs in
connection with the de minimis exception.
    The analysis has doubled those numbers--to up to twelve U.S.
persons that may change its booking practices involving security-
based swaps to make use of the exception, plus up to twelve
additional non-U.S. persons--to address potential growth of the
security-based swap market and to account for uncertainty associated
with the availability of data, leading to the final estimate of 24
entities. See id.
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    The Commission estimates that up to 24 entities will make use of
the exception for covered inter-dealer security-based swaps. To satisfy
the exception, each of those up to 24 entities will make use of an
affiliated registered entity that will be required to comply with the
notice and compliance documentation requirements associated with the
use of the exception for covered inter-dealer security-based swaps.
    The Commission is unable to estimate how many of the 24 non-U.S.
relying entities will make use of a registered broker that is not
approved to use

models to compute deductions for market or credit risk, and is
therefore required to maintain minimum net capital equivalent to that
of a security-based swap dealer not approved to use models and
establish and maintain risk management control systems as if the entity
were a security-based swap dealer. For purposes of calculating burdens
associated with establishing and maintaining a risk management control
system, the Commission estimates that up to 24 non-U.S. relying
entities will make use, for purposes of the exception, of a registered
broker that is not approved to use models to compute deductions for
market or credit risk.
    Applications for listed jurisdiction determinations may be
submitted by the up to 24 non-U.S. persons that will rely on the
exception. In practice the Commission expects that the greater portion
of such listed jurisdiction applications will be submitted by foreign
financial authorities, given their expertise in connection with the
relevant financial responsibility requirements, information access
provisions, and supervisory and enforcement oversight with regard to
the financial responsibility requirements.\643\
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    \643\ As discussed below, the Commission estimates that three
non-U.S. persons will submit listed jurisdiction applications.
---------------------------------------------------------------------------

4. Total Annual Reporting and Recordkeeping Burdens (Summarized in
Table 6)
(a) Notification of Limited Title VII Applicability
    The Commission continues to estimate that up to 12 U.S. entities
may book transactions into their non-U.S. affiliates to make use of the
conditional exception and in the aggregate would annually engage in
nearly 76,000 security-based swap dealing transactions with non-U.S.
counterparties.\644\ Here--and in connection with the other two groups
addressed below--the analysis doubles that amount to estimate the
number of total notifications, recognizing that there will be
situations in which the registered entity engaged in arranging,
negotiating, or executing activity in the United States makes the
required notifications but a transaction does not result.\645\
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    \644\ Available data indicates that the six U.S. entities that
are engaged in security-based swap dealing activity above the de
minimis thresholds in the aggregate annually engage in 37,827
transactions with non-U.S. counterparties. To address potential
growth in the market and data-related uncertainty, the analysis
doubles that estimate to 75,654 transactions annually (and also
doubles the estimated number of entities).
    \645\ This produces an estimate of 151,308 (75,654 x 2) annual
disclosures pursuant to the condition.
---------------------------------------------------------------------------

    The Commission also continues to estimate that two non-U.S. persons
may fall below the de minimis thresholds due to the conditional
exception and in the aggregate would annually engage approximately
20,000 security-based swap dealing transactions with non-U.S.
counterparties,\646\ doubled here to account for notices that are not
followed by a transaction.\647\
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    \646\ Available data indicates that the one non-U.S. entity that
would fall below the de minimis thresholds due to the exception
annually engages in 10,064 transactions with non-U.S.
counterparties. To address potential growth in the market and data-
related uncertainty, the analysis doubles that estimate to 20,128
transactions annually (and also doubles the estimated number of
entities).
    \647\ This produces an estimate of 40,256 (20,128 x 2) annual
disclosures pursuant to the condition.
---------------------------------------------------------------------------

    The Commission further continues to estimate that an additional ten
non-U.S. entities may rely on the conditional exception and in the
aggregate would annually engage in approximately 2,100 security-based
swap dealing transactions, with non-U.S. persons, that may be subject
to the exception,\648\ doubled here to account for notices that are not
followed by a transaction.\649\
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    \648\ Available data indicates that would result in five
additional non-U.S. persons that would be expected to incur
assessment costs due to the ``arranged, negotiated, or executed''
counting standard engage in a total of 1,056 annual security-based
swap transactions with non-U.S. counterparties. To address potential
growth in the market and data-related uncertainty, the analysis
doubles that estimate to 2,112 transactions annually (and also
doubles the estimated number of entities).
    \649\ This produces an estimate of 4,224 (2,112 x 2) annual
disclosures pursuant to the condition.
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    In light of the limited contents of those notices, the Commission
continues to believe that each such notice on average would be expected
to take no more than five minutes. Accordingly, the Commission
continues to estimate that the 12 U.S. entities that may book
transactions into their non-U.S. affiliates to make use of the
conditional exception in the aggregate will annually spend a total of
approximately 12,609 hours to provide the notices required by the
conditions.\650\ The alternative means of satisfying this condition
through a single notice, discussed in Part II.C.4 above, does not alter
the burden estimates for these 12 U.S. entities because the single
disclosure is not available when the counterparty is a customer or
security-based swap counterparty of the registered entity, and it is
likely that the 12 U.S. entities described above would make use of the
exception with respect to ``arranging, negotiating, or executing''
activity for its own customers and counterparties. The Commission
further continues to estimate that the two non-U.S. entities that may
fall below the de minimis thresholds due to the exception in the
aggregate will annually spend a total of approximately 3,355 hours to
provide the disclosures required by the conditions,\651\ while the
other ten non-U.S. entities that may rely on the conditional exception
in the aggregate will annually spend a total of approximately 352 hours
to provide the disclosures required by the conditions.\652\ However,
the Commission is unable to estimate how many of these non-U.S.
entities would be able to rely on the single disclosure, and therefore,
for purposes of calculating reporting and recordkeeping burdens, the
Commission estimates that none of these entities would rely on the
single disclosure.
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    \650\ 151,308 aggregate annual disclosures x 5 minutes per
transaction. This averages to approximately 1,050.75 hours for each
of those 12 firms.
    \651\ 40,256 aggregate annual disclosures x 5 minutes per
transaction. This averages to approximately 1,677 hours for each of
those two firms.
    \652\ 4,224 aggregate annual disclosures x 5 minutes per
transaction. This averages to 35.2 hours for each of those ten
firms.
---------------------------------------------------------------------------

    The Commission also continues to believe that each of those 24
total entities would initially spend 100 hours and incur approximate
costs of $30,598 to develop policies and procedures to help ensure that
appropriate disclosures are provided.\653\
---------------------------------------------------------------------------

    \653\ Applied to the estimated 24 entities at issue here, this
would amount to 2,400 hours and $734,352.
    These estimates are based on prior estimates, made in connection
with the adoption of the ``arranged, negotiated, or executed''
counting standard, that non-U.S. persons would incur 100 hours and
$28,300 to establish policies and procedures to restrict
communications with U.S. personnel in connection with the non-U.S.
persons' dealing activity. See ANE Adopting Release, 81 FR at 8628.
That $28,300 estimate has been adjusted to $30,598 in current
dollars (28,300 x 1.0812).
---------------------------------------------------------------------------

(b) Business Conduct-Related Conditions
    The Commission estimated the reporting and recordkeeping burdens
associated with the relevant security-based swap dealer business
conduct requirements under Title VII when it adopted those
requirements. The Commission continues to believe that those estimates
are instructive for calculating the per-entity reporting and
recordkeeping burdens associated with the business conduct-related
conditions, given that the conditions in effect would require
compliance with those business conduct requirements.
     Disclosures of material risks, characteristics, and
conflicts and

incentives. When the Commission earlier considered the compliance
burdens associated with those disclosure requirements (along with
clearing rights and daily mark disclosure requirements not applicable
under this exception),\654\ the Commission estimated that
implementation of those requirements: (i) Initially would require three
persons from trading and structuring, three persons from legal, two
persons from operations, and four persons from compliance, for 100
hours each; \655\ (ii) half of those persons would be required to spend
20 hours annually to re-evaluate and modify disclosures and systems
requirements; \656\ and (iii) those entities would require eight full-
time persons for six months of systems development, programming, and
testing,\657\ along with two full-time persons annually for maintenance
of this system.\658\
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    \654\ See Business Conduct Adopting Release, 81 FR at 30091-92.
In connection with those prior estimates, the Commission noted that
entities that are dually registered with the CFTC already provide
their counterparties with similar disclosures.
    \655\ Applied to the 24 entities at issue here, this would
amount to an aggregate initial burden of 28,800 hours (24 entities x
12 persons x 100 hours).
    \656\ Applied to the 24 entities at issue here, this would
amount to an aggregate annual burden of 2,880 hours (24 entities x 6
persons x 20 hours).
    \657\ Applied to the 24 entities at issue here, this would
amount to an aggregate initial burden of 192,000 hours (24 entities
x 8 persons x 1,000 hours).
    \658\ Applied to the 24 entities at issue here, this would
amount to an aggregate annual burden of 96,000 hours (24 entities x
2 persons x 2,000 hours).
    In adopting those disclosure requirements, the Commission also
incorporated an estimate of one hour per security-based swap for an
entity to evaluate whether more particularized disclosures are
necessary and to develop additional disclosures. See Business
Conduct Adopting Release, 81 FR at 30092. The Commission does not
believe that particular category of costs would be applicable in the
context of the transactions at issue here.
    Under the exception, the disclosure condition extends not only
to incentives and conflicts of the registered entity, but also
incentives and conflicts of its non-U.S. affiliate. The Commission
believes, however, that the existing burden estimates are sufficient
to account for this aspect of the disclosure, given that the two
entities' affiliation should facilitate the transfer of any relevant
incentive and conflict information for the registered entity to
convey.
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     Suitability of recommendations. When the Commission
previously analyzed the burdens associated with the security-based swap
dealer recommendation suitability requirement, it estimated that most
security-based swap dealers would obtain representations from
counterparties to comply with the institutional counterparty
suitability provisions of the requirement.\659\ The Commission further
particularly estimated: (i) That for security-based swap market
participants that also are swap market participants, most of the
requisite representations have been drafted for the swaps context, and
that to the extent that any modifications are necessary to adapt those
representations to the security-based swap context, each market
participant would require two hours to assess the need for
modifications and make any required modifications; \660\ and (ii) other
market participants (apart from special entities not relevant here)
would require five hours for each market participant to review and
agree to the relevant representations.\661\ The suitability condition
that the Commission is adopting lessens the institutional counterparty
suitability requirements, upon which this prior analysis was based, in
connection with transactions subject to the exception. Accordingly,
when complying with the institutional counterparty suitability
requirements, the registered entity does not have to obtain
representations or other information demonstrating that the
counterparty or its agent is capable of independently evaluating
investment risks with regard to the security-based swap or trading
strategy involving a security-based swap, nor must it obtain
representations that the counterparty or agent is exercising
independent judgment in evaluating the registered entity's
recommendations. To reflect this reduced reporting and recordkeeping
burden, the Commission estimates: (i) That for registered entities that
also are swap market participants, most of the requisite
representations have been drafted for the swaps context, and to the
extent that any modifications are necessary to adapt those
representations to the context of the suitability condition, each
market participant would require one hour \662\ to assess the need for
modifications and make any required modifications; \663\ and (ii) other
market participants (apart from special entities not relevant here)
would require two and a half hours \664\ for each market participant to
review and agree to the relevant representations.\665\
---------------------------------------------------------------------------

    \659\ See id. at 30092-93.
    \662\ The Commission previously estimated that, for security-
based swap market participants that also are swap market
participants, each market participant would require two hours
perform this task in connection with the more stringent suitability
requirements described above. See Business Conduct Adopting Release,
81 FR at 30092.
    \663\ Analysis of current data indicates that six U.S. entities
engaged in security-based swap dealing activity above the de minimis
thresholds in the aggregate have 161 unique non-U.S. counterparties
that are swap market participants, and 70 unique non-U.S.
counterparties that are not swap market participants. One non-U.S.
entity may fall below the de minimis threshold due to the exception
and has 391 unique non-U.S. counterparties that are swap market
participants, and 178 unique non-U.S. counterparties that are not
swap market participants. Five additional non-U.S. persons would be
expected to incur assessment costs in connection with the
``arranged, negotiated, or executed'' counting standard in the
aggregate have six unique non-U.S. counterparties that are swap
market participants, and one unique non-U.S. counterparty that is
not a swap market participant. Adding together those estimates and
then doubling them (in light of the uncertainty associated with the
estimate and to account for potential growth of the security-based
swap market) produces a total estimate of 1,116 unique non-U.S
counterparties that are swap market participants, and 498 that are
not. Only non-U.S. counterparties are relevant for purposes of this
analysis because the proposed exception does not address security-
based swap transactions involving U.S. person counterparties.
    Consistent with these assumptions, the potential burden
associated with such modifications in connection with the proposed
condition would amount to 1,116 hours (1,116 non-U.S. security-based
swap market participants that also are swap market participants x 1
hour).
    \664\ The Commission previously estimated that other market
participants would require five hours for each market participant to
perform this task in connection with the more stringent suitability
requirements described above. See Business Conduct Adopting Release,
81 FR at 30092.
    \665\ Consistent with the above assumptions, the burden
associated with such modifications in connection with the condition
would amount to 1,245 hours (498 non-U.S. security-based swap market
participants that are not also swap market participants x 2.5
hours).
---------------------------------------------------------------------------

     Fair and balanced communications. The Commission's earlier
analysis of the burdens associated with the fair and balanced
communications requirement \666\ took the view that each registered
entity would incur: (i) $6,000 in initial legal costs to draft or
review statements of potential opportunities and corresponding risks in
marketing materials; \667\ (ii) an additional initial six hours for
internal review of other communications such as emails and Bloomberg
messages; \668\ and (iii) $8,400 in initial legal costs associated with
marketing materials for more bespoke transactions.\669\
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    \666\ See Business Conduct Adopting Release, 81 FR at 30093.
    \667\ In connection with the exception, the potential burden
associated with such drafting or review would amount to $155,693 (24
entities x $6,000 x 1.0812 adjustment to current dollars).
    \668\ In connection with the exception, the potential burden
associated with such internal review would amount to 144 hours (24
entities x 6 hours).
    \669\ In connection with the exception, the potential burden
associated with such drafting or review would amount to $217,970 (24
entities x $8,400 x 1.0812 adjustment to current dollars).
     In adopting the fair and balanced communication requirement,
the Commission also incorporated an estimate of ongoing compliance
costs (associated with review of email communications sent to
counterparties) over the term of the security-based swap. See
Business Conduct Adopting Release, 81 FR at 30093. Those costs are
not incorporated into this estimate because the registered entity
that engaged in market-facing activity in the United States in
connection with the transactions at issue here would not be expected
to have ongoing communications with the counterparty to the
security-based swap.

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

(c) Trade Acknowledgment and Verification Condition
    The Commission estimated the reporting and recordkeeping burdens
associated with the trade acknowledgment and verification requirements
under Title VII when it adopted those requirements.\670\ The Commission
continues to believe that those estimates are instructive for
calculating the per-entity reporting and recordkeeping burdens
associated with the trade acknowledgment and verification condition,
given that the condition in effect would require compliance with that
trade acknowledgment and verification requirement by additional persons
and/or in additional circumstances.
---------------------------------------------------------------------------

    \670\ See id. at 39830-31.
---------------------------------------------------------------------------

    When the Commission earlier considered the compliance burdens
associated with the trade acknowledgment and verification requirements,
the Commission estimated that each applicable entity would incur: (i)
355 Hours initially to develop an internal order and trade management
system; \671\ (ii) 436 hours annually for day-to-day technical support,
as well as amortized annual burden associated with system or platform
upgrades and updates; \672\ (iii) 80 hours initially for the
preparation of written policies and procedures to obtain verification
of transaction terms; \673\ and (iv) 40 hours annually to maintain
those policies and procedures.\674\
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    \671\ In connection with the exception, the potential burden
associated with such system development would amount to 8,520 hours
(24 entities x 355 hours).
    \672\ In connection with the exception, the potential annual
burden associated with such support and updates would amount to
10,464 hours (24 entities x 436 hours).
    \673\ In connection with the exception, the potential burden
associated with such preparation would amount to 1,920 hours (24
entities x 80 hours).
    \674\ In connection with the exception, the potential annual
burden associated with such policies and procedures would amount to
960 hours (24 entities x 40 hours).
---------------------------------------------------------------------------

(d) Recordkeeping Condition
    To comply with the recordkeeping conditions relating to trading
relationship documentation, the registered entity and the non-U.S.
person relying on the exception jointly would need to develop policies
and procedures to provide for the identification of such records and
for their transfer to the registered affiliate. For each use of the
exception, the Commission continues to estimate that such policies and
procedures would impose a one-time initial burden of 20 hours.\675\
---------------------------------------------------------------------------

    \675\ Across the 24 potential uses of the exception, this would
amount to a total of 480 hours (24 entities x 20 hours).
---------------------------------------------------------------------------

    The Commission also continues to estimate that the non-U.S. person
relying on this exception also would need to expend two hours per week
to identify such records and to electronically convey the records to
its registered affiliate.\676\ The Commission further continues to
estimate that the registered affiliate would need to expend one hour
per week in connection with the receipt and maintenance of those
records and the records related to the consent to service condition
described below.\677\
---------------------------------------------------------------------------

    \676\ Across the 24 potential uses of the exception, this would
amount to a total of 2,496 hours annually (24 entities x 2 hours x
52 weeks).
    \677\ Across the 24 potential uses of the exception, this would
amount to a total of 1,248 hours annually (24 entities x 1 hour x 52
weeks).
     The recordkeeping condition also specifies that, for the
exception to be available, the registered entity must create and
maintain books and records as required by applicable rules,
including any books and records requirements relating to the
provisions specified in paragraph (d)(1)(ii)(B) (i.e., relating to
disclosure of risks, characteristics, incentives, and conflicts;
suitability; fair and balanced communications; and trade
acknowledgment and verification). Because that part of the condition
subsumes the collection of information that we would expect to be
associated with the final rules adopting those security-based swap
dealer books and records requirements, it does not constitute a
separate collection of information. See note 624, supra.
---------------------------------------------------------------------------

(e) Consent To Service Condition
    To comply with the condition that the affiliated registered entity
obtain from the non-U.S. person relying on the exception, and maintain
for not less than three years following the activity subject to the
exception, the first two years in an easily accessible place, written
consent to service of process for civil actions, one or the other of
those parties would have to draft such a consent or use an industry-
standard consent provision, and the registered entity must obtain that
consent from the non-U.S. person. The Commission continues to estimate
that the parties jointly must expend two hours in connection with
obtaining this consent.\678\ The burden associated with the registered
entity's maintenance of records related to the consent to service
condition are included in the Commission's estimate of the burden
associated with the registered entity's maintenance of records related
to the recordkeeping provisions.\679\
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    \678\ Across the 24 expected uses of the exception, this would
amount to a total of 48 hours (24 entities x 2 hours).
    \679\ See note 677, supra.
---------------------------------------------------------------------------

(f) ``Listed Jurisdiction'' Condition
    The Commission continues to believe that burden estimates
associated with applications for substituted compliance determinations
are instructive with regard to the burdens that would be associated
with applications by market participants in connection with ``listed
jurisdiction'' status.\680\
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    \680\ Notwithstanding the substantive differences between the
standards associated with listed jurisdiction determinations and
substituted compliance assessments, see Part II.C.5, supra, the two
sets of applications will be submitted pursuant to Rule 0-13 and may
be expected to address certain analogous elements.
---------------------------------------------------------------------------

    When the Commission initially adopted Rules 0-13 and 3a71-6,
providing for substituted compliance in connection with security-based
swap dealer business conduct requirements, the Commission concluded
that the ``great majority'' of substituted compliance applications
would be submitted by foreign authorities, and that ``very few''
applications would be submitted by SBS Entities, and the Commission
concluded that three such registered entities would submit substituted
compliance applications.\681\ The Commission further estimated that the
one-time paperwork burden associated with preparing and submitting all
three substituted compliance requests in connection with those
requirements would be approximately 240 hours, plus $240,000 for the
services of outside professionals.\682\ The Commission subsequently
relied on those estimates in connection with the paperwork burdens
associated with amendments to Rule 3a71-6 related to trade
acknowledgment and verification.\683\
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    \681\ See Business Conduct Adopting Release, 81 FR at 30097.
    \682\ This was based on the estimate that each request would
require approximately 80 hours of in-house counsel time, plus
$80,000 for the services of outside professionals (based on 200
hours of outside time x $400/hour). See id.
    \683\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39832.
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    The Commission similarly believes that the majority of ``listed
jurisdiction'' applications would be made by foreign authorities rather
than by the up to 24 non-U.S. persons that potentially would rely on
the exception. Consistent with the estimates in connection with the
substituted compliance rule, moreover, the Commission estimates that
three non-U.S. persons that seek to rely on the exception would file
listed jurisdiction applications, and that in the aggregate those three
persons would incur initial paperwork burdens, associated with
preparing and submitting the requests, of approximately 240 hours, plus
$259,488 for the services of outside

professionals (incorporating an eight percent addition to reflect
current dollars).
(g) Risk Management Control System Condition
    The Commission estimated the burdens associated with compliance
with the Rule 15c3-4 requirement to establish an internal risk
management control system when it adopted those requirements for
entities dually registered as a brokers or dealer and as a security-
based swap dealer.\684\ The Commission believes that those estimates
are instructive for calculating the per-entity burdens associated with
the creation of an internal risk management control system.
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    \684\ See Capital, Margin, and Segregation Adopting Release, 84
FR 43963.
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    The Commission staff estimates that the requirement to comply with
Rule 15c3-4 will result in one-time and annual hour burdens to the
registered entity. The Commission staff estimates that the average
amount of time an entity will spend implementing its risk management
control system will be 2,000 hours, resulting in an industry-wide one-
time hour burden of 48,000 hours across the 24 registered entities not
already subject to Rule 15c3-4.\685\ In implementing its policies and
procedures, the registered entity is required to document and record
its system of internal risk management controls. The Commission staff
estimates that each of these 24 registered entities will spend
approximately 250 hours per year reviewing and updating their risk
management control systems to comply with Rule 15c3-4, resulting in an
industry-wide annual hour burden of approximately 6,000 hours.\686\
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    \685\ 24 registered entities x 2,000 hours = 48,000 hours.
    \686\ 24 registered entities x 250 hours = 6,000 hours.
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    The registered entities engaged in arranging, negotiating, or
executing activity in the United States may incur start-up costs to
comply with the provisions of Rule 15c3-4, including information
technology costs. The Commission estimates that a registered entity
will incur an average of approximately $16,000 for initial hardware and
software expenses, while the average ongoing cost will be approximately
$20,500 per registered entity, for a total industry-wide initial cost
of $384,000 and an ongoing cost of $492,000 per year.\687\
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    \687\ 24 registered entities x $16,000 = $384,000; 24 registered
entities x $20,500 = $492,000.
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(h) Conditions Associated With the Use of Exception for Covered Inter-
Dealer Security-Based Swaps
     Filing Notice with the Commission. The Commission
estimates that the notice requirement associated with the use of the
conditional exception for covered inter-dealer security-based swaps
will result in annual hour burdens to registered entities. The
Commission estimates each registered entity will file one notice with
the Commission. In addition, the Commission estimates that it will take
a registered entity approximately 30 minutes to file this notice,
resulting in an industry-wide annual hour burden of 12 hours.\688\
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    \688\ Across the 24 potential uses of the exception, this would
amount to a total of 12 hours (24 entities x \1/2\ hours). The
estimate is based on a notice requirement associated with the
alternative compliance mechanism outlined in Rule 18a-10. See
Capital, Margin, and Segregation Adopting Release, 84 FR 43967.
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     Creating, Obtaining, and Maintaining Threshold Compliance
Documentation. To comply with the condition that the affiliated
registered entity obtain from the non-U.S. person, and maintain, copies
of documentation regarding such non-U.S. person's compliance with the
inter-dealer threshold, the registered entity and the non-U.S. person
jointly would need to develop policies and procedures to provide for
the creation of such records and for their transfer to and maintenance
by the registered affiliate. For each use of the exception, the
Commission estimates that such policies and procedures would impose a
one-time initial burden of 20 hours.\689\
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    \689\ Across the 24 potential uses of the exception, this would
amount to a total of 480 hours (24 entities x 20 hours).
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    The Commission also estimates that the non-U.S. person relying on
this exception also would need to expend two hours per week to create
such records and to electronically convey the records to its registered
affiliate.\690\ The Commission further estimates that the registered
affiliate would need to expend one hour per week in connection with the
receipt and maintenance of those records.\691\
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    \690\ Across the 24 potential uses of the exception, this would
amount to a total of 2,496 hours annually (24 entities x 2 hours x
52 weeks).
    \691\ Across the 24 potential uses of the exception, this would
amount to a total of 1,248 hours annually (24 entities x 1 hour x 52
weeks).

                                       Table 6--Rule 3a71-3 Amendment--Summary of Paperwork Reduction Act Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Initial burden                                             Annual burden
             Burden type             -------------------------------------------------------------------------------------------------------------------
                                                Per-firm                    Aggregate                     Per-firm                    Aggregate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Disclosure of limited Title VII
 applicability: *
    disclosure by 12 U.S. dealing     ...........................  ...........................  1,050.75 hr................  12,609 hr.
     entities (A).
    disclosure by 2 non-U.S. dealing  ...........................  ...........................  1,677.3 hr.................  3,355 hr.
     entities (B).
    disclosure by other non-U.S.      ...........................  ...........................  35.2 hr....................  352 hr.
     entities (C).
    related policies and procedures.  100 hr.....................  2,400 hr...................
    (same)..........................  $30,598....................  $734,352...................
Disclosure of risks, characteristics
 et al:
    structuring, legal, operations,   1,200 hr...................  28,800 hr.                                                ...........................
     compliance.
    re-evaluation and modification..  ...........................  ...........................  120 hr.....................  2,880 hr.
    systems development,              8,000 hr...................  192,000 hr.                                               ...........................
     programming, testing.
    system maintenance..............  ...........................  ...........................  4,000 hr...................  96,000 hr.
Suitability:
    reps. by participants also in     1 hr.......................  1,116 hr.                                                 ...........................
     swap market.
    representations by other          2.5 hr.....................  1,245 hr.                                                 ...........................
     counterparties.
Fair and balanced communications:
    statement drafting..............  $6,487.2...................  $155,693.                                                 ...........................
    additional internal review......  6 hr.......................  144 hr.                                                   ...........................
    legal costs.....................  $9082......................  $217,970.                                                 ...........................
Trade acknowledgment and
 verification:
    internal order and trade mgt.     355 hr.....................  8,520 hr.                                                 ...........................
     systems.
    daily tech. support/amortized     ...........................  ...........................  436 hr                       10,464 hr.
     upgrades.
    initial preparation of policies   80 hr......................  1,920 hr.                                                 ...........................
     and procedures.
    maintenance of policies and       ...........................  ...........................  40 hr......................  960 hr.
     procedures.

Copies of trading relationship
 documentation:
    joint development of policies/    20 hr......................  480 hr.                                                   ...........................
     procedures.
    non-US entity identification and  ...........................  ...........................  104 hr.....................  2,496 hr.
     conveyance.
    registered entity receipt and     ...........................  ...........................  52 hr......................  1,248 hr.
     maintenance.
Consent to service of process:
    joint drafting/transfer to        2 hr.......................  48 hr.                                                    ...........................
     registered entity.
``Listed jurisdiction''
 applications:
    applications by non-regulators..  80 hr......................  240 hr.                                                   ...........................
    (same)..........................  $86,496....................  $259,488.                                                 ...........................
Notice of ANE activity filed with     \1/2\ hr...................  12 hr.                                                    ...........................
 the Commission.
Compliance with inter-dealer
 threshold documentation:
    joint development of policies/    20 hr......................  480 hr.                                                   ...........................
     procedures.
    non-US entity creation and        ...........................  ...........................  104 hr.....................  2,496 hr.
     conveyance.
    registered entity receipt and     ...........................  ...........................  52 hr......................  1,248 hr.
     maintenance.
Risk mgmt. control systems:
    establishment of the systems....  2,000 hr...................  48,000 hr.                                                ...........................
    maintenance and review of the     ...........................  ...........................  250 hr.....................  6,000 hr.
     systems.
    information technology costs....  $16,000....................  $384,000...................  $20,500....................  $492,000.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* (A) Twelve U.S. dealing entities may book future security-based swaps with non-U.S. counterparties into non-U.S. affiliates. (B) Two non-U.S. entities
  may fall below the de minimis threshold if ``arranged, negotiated, or executed'' transactions are not counted. (C) Ten additional non-U.S. entities
  may make use of the exception to avoid incurring assessment costs in connection with the ``arranged, negotiated, or executed'' de minimis test.

5. Collection of Information Is Mandatory
    The collections of information associated with the amendments to
Rule 3a71-3 are mandatory to the availability of the exception.
6. Confidentiality
    Any disclosures to be provided in connection with the arranging,
negotiating, or executing activity of a registered entity in compliance
with the requirements of the exception would be provided to the non-
U.S. counterparties of the non-U.S. person relying on this exception;
therefore, the Commission would not typically receive confidential
information as a result of this collection of information. To the
extent that the Commission receives records related to such disclosures
from a registered entity through the Commission's examination and
oversight program, or through an investigation, or some other means,
such information would be kept confidential, subject to the provisions
of applicable law.
7. Retention Period of Recordkeeping Requirements
    By virtue of being registered as a security-based swap dealer and/
or as a broker, the entity engaged in market facing conduct in the
United States will be required to retain the records and information
required under the amendment to Rule 3a71-3 for the retention periods
specified in Exchange Act Rules 17a-4 and 18a-6, as applicable.\692\
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    \692\ The registered entity would have to create and/or maintain
certain records in connection with the following conditions:
Disclosure of limited Title VII applicability; business conduct;
trade acknowledgment and verification; obtaining and maintaining
relationship documentation and questionnaires; and consent to
service of process.
    The conditions do not require the non-U.S. person relying on the
exception to make or retain any particular types of records
(although that non-U.S. person will be required to convey certain
documentation to its registered affiliate).
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B. Amendments to Rule 18a-5