and that any potential application of these rules to open contracts
could undermine the expectations that the parties had when entering
into the security-based swap.
---------------------------------------------------------------------------

    \302\ See id. See also Business Conduct Adopting Release, 81 FR
at 29969, in which the Commission stated that the business conduct
rules generally would not apply to any security-based swap entered
into prior to the compliance date of the rules, and generally would
apply to any security-based swap entered into after the compliance
date of these rules, including a new security-based swap that
results from an amendment or modification to a pre-existing
security-based swap.
    \303\ For purposes of the proposed guidance, the term ``open
contracts'' would have included any contract entered into by the SBS
Entity prior to the date on which an SBS Entity submits an
application for registration which the SBS Entity continues to hold
on its books and records and under which it may have continuing
obligations.
---------------------------------------------------------------------------

2. Commission Action
    The Commission is providing the guidance as proposed.\304\ Thus, a
nonresident SBS Entity's certification and opinion of counsel need not
address records relating to security-based swap transactions entered
into prior to the date on which a nonresident SBS Entity submits an
application for registration pursuant to Section 15F(b) of the Exchange
Act and the rules thereunder which the nonresident SBS Entity continues
to hold on its books and records and under which it may have continuing
obligations.
---------------------------------------------------------------------------

    \304\ The one commenter that addressed this issue indicated that
it supported this proposed guidance. See IIB/SIFMA letter at 24.
---------------------------------------------------------------------------

G. Memoranda of Understanding, Agreements, Protocols, or Other
Regulatory Arrangements With Foreign Financial Regulatory Authorities

1. Proposed Approach
    The Commission stated in the Proposing Release that firms have
indicated that while local laws or rules in some foreign jurisdictions
may prevent a nonresident SBS Entity from providing the Commission with
direct access to its books and records or submitting to onsite
inspections or examinations, in some cases the relevant foreign
financial regulatory authority may have entered into an MOU or other
arrangement with the Commission to facilitate Commission access to
records of nonresident SBS

Entities located in the jurisdiction.\305\ Those firms requested
guidance regarding whether the certification and opinion of counsel
submitted by a nonresident SBS Entity could rely on MOUs or other
arrangements foreign financial regulatory authorities may have entered
into with the Commission to facilitate Commission access to records at
the request of the SBS Entity.
---------------------------------------------------------------------------

    \305\ See Proposing Release, 84 FR at 24235-36 n. 201, citing
memoranda of meetings between Commission staff and market
intermediaries.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that it
preliminarily believes that it would be appropriate for the
certification and opinion of counsel to take into account whether the
relevant regulatory authority in the foreign jurisdiction has: (i)
Issued an approval, authorization, waiver or consent; or (ii) entered
into an MOU or other arrangement with the Commission facilitating
direct access to the books and records of SBS Entities located in that
jurisdiction, including the Commission's inspections and examinations
at the offices of SBS Entities located in that jurisdiction, provided
that such an approval, authorization, waiver, consent or MOU or
arrangement is necessary to address legal barriers to the Commission's
direct access to books and records of the SBS Entities in that
jurisdiction.\306\ However, the Commission noted that consideration of
such an approval or MOU would need to be consistent with the
Commission's registration program.
---------------------------------------------------------------------------

    \306\ Proposing Release, 84 FR at 24236.
---------------------------------------------------------------------------

    The Commission further stated in the Proposing Release that it
would be appropriate to take into consideration an MOU or other
arrangement that provided for consultation or cooperation with a
foreign regulatory authority in conducting onsite inspections and
examinations at the foreign offices of nonresident SBS Entities.\307\
The Commission further noted that it also believed it would be
consistent with its registration program if the Commission is required
to notify the relevant foreign regulatory authority of its intent to
conduct an onsite inspection or examination and staff from the foreign
regulatory authority can accompany the Commission when it visits the
foreign office of the nonresident SBS Entity.\308\ However, the
Commission indicated that it would not be consistent with its
interpretation of the requirement to rely on an MOU or other
arrangement if, whether by the terms of any relevant agreement, under
provisions of local law, or in light of prior practice, consultation or
cooperation with the foreign regulatory authority restricts the
Commission's ability to conduct timely inspections and examinations of
the books and records in the foreign office of the nonresident SBS
Entity.\309\
---------------------------------------------------------------------------

    \307\ Id.
    \308\ Id.
    \309\ Id.
---------------------------------------------------------------------------

2. Commission Action
    The commenters that addressed the issue supported the proposition
that the certification and opinion of counsel could take into account
MOUs with and others actions of the relevant foreign regulatory
authorities.\310\ In particular, commenters suggested that MOUs could
help to facilitate the needed access to books and records. One
commenter noted that ``some conflicts with blocking and secrecy laws
can be successfully addressed [with arrangements with home country
regulators], resulting in direct access to records,'' \311\ while
another recommended that the Commission allow the certification and
opinion to rely on MOUs and similar tools because ``the SEC may still
obtain personal data through MOUs and other similar tools, which are
permitted under GDPR.'' \312\ A third commenter stated that the
``Commission should address [. . .] conflicts with personal data
protection laws through MOUs with the appropriate foreign regulatory
agencies'' because the MOUs would provide the Commission with ``access
to protected personal data.'' \313\
---------------------------------------------------------------------------

    \310\ See EBF letter at 2-3; ISDA letter at 12; IIB/SIFMA letter
at 23-24.
    \311\ See EBF Letter at 2-3.
    \312\ See ISDA Letter at 12.
    \313\ See IIB/SIFMA Letter at 24.
---------------------------------------------------------------------------

    After consideration of these comments, the Commission is providing
guidance, consistent with the standard we are adopting in Rule 15Fb2-1,
as discussed above, that a nonresident SBS Entity's certification and
opinion of counsel may take into account whether the relevant
regulatory authority in a foreign jurisdiction has entered into a
memorandum of understanding, agreement, protocol, or other regulatory
arrangement providing the Commission with adequate assurances of (1)
prompt access to the books and records of the nonresident SBS Entity,
and (2) the ability of the nonresident SBS Entity to submit to onsite
inspection or examination by the Commission. The certification and
opinion of counsel may also take into account an applicant's
understanding of the general experience with the foreign jurisdiction's
application of the relevant local law or rule. Accordingly, if an
applicant reasonably believes that there is nothing in local law that
would interfere with the Commission's ability to examine the applicant,
the applicant may take into account that experience as well in making
the certification or obtaining the opinion of counsel. An applicant
could form a reasonable belief, for example, if it had been able to
provide access to Commission staff or other U.S. regulators without
difficulty in the past, and there have been no changes in local law
that would materially alter the circumstances surrounding the
applicant's past experience.
    Again consistent with the standard we are adopting in Rule 15Fb2-1,
the Commission believes that it is appropriate as well for a
nonresident SBS Entity's certification and opinion of counsel to take
into account a Commission determination granting substituted
compliance, in accordance with Rule 3a71-6(c)(3), to a jurisdiction in
which the SBS Entity maintains its covered books and records.

H. Requests for Substituted Compliance

1. Proposed Approach
    As noted in the Proposing Release, the guidance regarding the
certification and opinion of counsel requirements in Rule 15Fb2-4 also
would be relevant to Exchange Act Rule 3a71-6, which allows SBS
Entities to comply with certain requirements under Section 15F of the
Exchange Act through substituted compliance.\314\ Paragraph (c)(2)(ii)
of Rule 3a71-6 provides that substituted compliance requests by parties
or groups of parties--other than foreign financial regulatory
authorities--must include the certification and opinion of counsel
required in connection with SBS Entity registration as if such party
were subject to that requirement at the time of the request.\315\ By
contrast, substituted compliance requests submitted by foreign
regulatory authorities are not required to be accompanied by a
certification or opinion of counsel.\316\ Rather, foreign financial
regulatory authorities may make substituted compliance requests only if
they provide adequate assurances that no law or policy of any relevant
foreign jurisdiction would impede the ability of any entity that is
directly supervised by the foreign financial regulatory authority and
that may register with the Commission as an SBS Entity to provide the
Commission with prompt access to the entity's books or records, or to
submit to on-site inspection and examination by the

Commission.\317\ The Commission further explained in the Proposing
Release that the guidance outlined in Parts III.C.1, III.D.1, III.E.1,
III.F.1, and III.G.1 above regarding the application of the
certification and opinion of counsel requirements would inform the
Commission's assessment of any certification and opinion of counsel, or
assurances from a foreign financial regulatory authority, submitted in
connection with a substituted compliance request.\318\
---------------------------------------------------------------------------

    \314\ Exchange Act Rule 3a71-6; see also Proposing Release, 84
FR at 24233-34.
    \315\ Exchange Act Rule.3a71-6(c)(2)(ii).
    \316\ Exchange Act Rule 3a71-6(c)(3).
    \317\ Id.
    \318\ See Proposing Release, 84 FR at 24233 & n.206.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted the time needed to
consider substituted compliance requests and welcomed submission of
substituted compliance requests with respect to any of its final rules
for which substituted compliance is potentially available.\319\ The
Commission noted that it would consider all such requests, including
those submitted without a certification or opinion of counsel, though a
request by parties or groups of parties who are not foreign regulatory
authorities would not be considered complete until a certification and
opinion are filed.\320\ Accordingly, the Commission encouraged
potential applicants to begin the process of requesting substituted
compliance as soon as practicable.\321\ The Commission cautioned,
however, that this did not mean that the Commission would grant any
application for substituted compliance until any required certification
and opinion of counsel are filed.\322\
---------------------------------------------------------------------------

    \319\ See Proposing Release, 84 FR at 24233-34.
    \320\ See id. at 24234. For the avoidance of doubt, Rule 15Fb2-
1(d)(2) is not relevant to substituted compliance requests.
    \321\ See id.
    \322\ See id.
---------------------------------------------------------------------------

2. Commission Action
    The Commission continues to believe that the guidance outlined in
Parts III.C to III.G above regarding the scope and content of the
certification and opinion of counsel requirement in Rule 15Fb2-4 also
should be relevant to any certification and opinion of counsel from a
registrant or potential registrant pursuant to Exchange Act Rule 3a71-
6(c)(2)(ii) in connection with a substituted compliance request. The
certification and opinion of counsel required in connection with a
substituted compliance request submitted by a party or group of parties
other than a foreign financial regulatory authority are identical to
the certification and opinion of counsel required in connection with
SBS Entity registration.\323\
---------------------------------------------------------------------------

    \323\ See Exchange Act Rule 3a71-6(c)(2)(ii). Similarly, the
Commission continues to believe that relevant aspects of the
guidance outlined in Parts III.D to III.F above should inform the
Commission's assessment of whether a foreign financial regulatory
authority has provided the assurances required pursuant to Exchange
Act Rule 3a71-6(c)(3) in connection with a substituted compliance
request submitted by a foreign financial regulatory authority.
---------------------------------------------------------------------------

    Some commenters urged the Commission to revise Rule 3a71-6 so as to
eliminate the requirement for a certification and opinion (in the case
of substituted compliance requests made by parties or groups of parties
who are not foreign financial regulatory authorities) and for adequate
assurances (in the case of substituted compliance requests made by
foreign financial regulatory authorities).\324\ These commenters argued
that the Commission no longer needs this certification and opinion or
assurances, given the Commission's proposed 24-month grace period for
delivery of the certification and opinion required in connection with
registration of a non-resident SBS Entity, as discussed above in Part
III.B.\325\ Nevertheless, the certification, opinion of counsel, and
assurances required in connection with substituted compliance
applications remain relevant despite the Commission's adoption of
changes to Exchange Act Rule 15Fb2-1. These requirements serve to
assure the Commission regarding its ability to evaluate a registrant's
compliance with the federal securities laws. For any requirements for
which the Commission permits the use of substituted compliance,
compliance with the federal securities laws would be measured by
reference to the registrant's compliance with a foreign financial
regulatory system. Any impediments to the Commission's ability to
access a registrant's books and records thus could impede its ability
to evaluate the registrant's compliance with the foreign requirements.
Further, unlike in the context of SBS Entity registration, Exchange Act
Rule 3a71-6(a)(2)(ii) requires the Commission to enter into supervisory
and enforcement cooperation arrangements as a necessary component of
substituted compliance. In the substituted compliance context,
impediments to the Commission's ability to access a registrant's books
and records have the potential to impede effective cooperation with the
relevant foreign financial regulatory authority. As the Commission
noted when it proposed the substituted compliance framework, these
cooperation arrangements were intended to express the commitment of the
Commission and the foreign financial regulatory authority or
authorities to cooperate with each other to fulfill their respective
regulatory mandates.\326\ This commitment, as expressed through the
substituted compliance cooperation arrangement, is critical for the
Commission to be able to interpret, evaluate, and enforce requirements
for which substituted compliance is available. The Commission thus is
retaining the certification, opinion, and adequate assurances
requirements of Rule 3a71-6.
---------------------------------------------------------------------------

    \324\ See EBF letter at 5-6 (arguing that the Commission no
longer requires assurances regarding access to substituted
compliance users' books and records given the Commission's proposal
to permit a delay in the delivery of the certification and opinion
of counsel required in connection with SBS Entity registration);
IIB/SIFMA letter at 25 (arguing that the certification, opinion of
counsel and assurances requirements served only to prevent the
Commission from having to consider substituted compliance requests
from a jurisdiction with legal barriers that prevent access to
registrants' books and records); ISDA letter at 14-15 (arguing that
the issues that would warrant delaying delivery of the certification
and opinion of counsel required in connection with SBS Entity
registration also would impede delivery of a certification and
opinion of counsel in connection with substituted compliance
requests).
    \325\ See EBF letter at 5-6; IIB/SIFMA letter at 25; ISDA letter
at 14-15.
    \326\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968, 31088 (May 23, 2013) (``Cross-Border Proposing
Release'').
---------------------------------------------------------------------------

    Commenters also argued that, if the Commission is unable to issue
final substituted compliance determinations ahead of the compliance
date for registration of SBS Entities, the Commission should issue
temporary substituted compliance determinations for the same foreign
requirements for which the CFTC has issued comparability determinations
and related no-action relief regarding certain swap dealer
requirements.\327\ One commenter further suggested that all requests
for substituted compliance submitted at least six months before the
compliance date for SBS Entity registration and not adjudicated before
that date should be deemed granted until 18 months after the Commission
completes its review.\328\ As discussed below in Part X.B, the
Commission has considered commenters' concerns regarding the time
needed to plan for SBS Entity registration, and is providing potential
registrants more than 18 additional months to prepare for the
compliance date for SBS Entity

registration. The Commission believes that this time period also is
sufficient for it to complete consideration of substituted compliance
applications, and thus aims to complete consideration of timely
substituted compliance applications in advance of the compliance date
for SBS Entity registration. To achieve that goal, the Commission
welcomes requests for substituted compliance ahead of the compliance
date for SBS Entity registration, including those submitted without a
certification or opinion of counsel, and encourages potential
applicants to begin the process of requesting substituted compliance as
soon as practicable.\329\ The Commission expects to work closely with
applicants for substituted compliance, including both potential
registrants and relevant foreign financial regulatory authorities.
Because the Commission does not expect its consideration of timely
substituted compliance applications to be delayed beyond the compliance
date for SBS Entity registration, the Commission believes it
unnecessary to adopt a framework for provisional substituted
compliance. Should the Commission determine that, despite diligent
efforts of the staff, potential registrants, and authorities, it
requires additional time to complete consideration of a substituted
compliance application, appropriate relief tailored to specific
circumstances may be considered.
---------------------------------------------------------------------------

    \327\ See EBF letter at 6; IIB/SIFMA letter at 32; ISDA letter
at 15; Credit Suisse/UBS letter at 2-3.
    \328\ See IIB/SIFMA letter at 32.
    \329\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43957.
---------------------------------------------------------------------------

I. Other

    Rule 15Fb2-4(c)(2) requires a nonresident SBS Entity to re-certify
within 90 days after any changes in the legal or regulatory framework
that would impact the ability of the SBS Entity to provide, or the
manner in which it would provide prompt access to its books and
records, or would impact the ability of the Commission to inspect and
examine the SBS Entity. The SBS Entity would be required as well to
submit a revised opinion of counsel describing how, as a matter of law,
the SBS Entity will continue to meet its obligations. Commenters have
identified concerns with the rule as drafted, and provided thoughtful
suggestions regarding steps the Commission could take to address the
underlying concern of ensuring the Commission's continued prompt access
to books and records and the ability of the SBS Entity to submit to
onsite inspection and examination by the Commission.\330\ In this
regard, the Commission will continue to remain available to provide
assistance regarding issues that may arise in connection with the SBS
Entity's obligation to update its certification and opinion of counsel
upon changes in the relevant foreign laws.
---------------------------------------------------------------------------

    \330\ See IIB/SIFMA at 26-27. Among other things, IIB/SIFMA
suggests that the Commission should clarify what would constitute a
reasonable approach for a nonresident security-based swap dealer to
identify changes in the laws covered by its certification and
opinion of counsel, and that the nonresident security-based swap
dealer conduct its review of applicable law in connection with the
compliance review that would take place in connection with annual
reports of the Chief Compliance Office under Exchange Act Rule 15Fk-
1(c). Under this approach, a nonresident security-based swap dealer
would be required to notify the Commission of any issue within 90
days of the annual review and in connection with such notice, to
propose a plan for addressing the issue.
---------------------------------------------------------------------------

IV. Amendment to Commission Rule of Practice 194

A. Proposed Approach

    Commission Rule of Practice 194 \331\ governs the process by which
SBS Entities may apply to the Commission for relief from the statutory
disqualification prohibition set forth in Section 15F(b)(6) of the
Exchange Act.\332\ As outlined in the proposal, the Commission proposed
new paragraph (c)(2) of Rule of Practice 194 to both (1) address
concerns raised by commenters before and after the Commission adopted
its SBS Entity registration rules relating to the application of the
prohibition in Exchange Act Section 15F(b)(6) to associated persons of
SBS Entities who are not U.S. persons and who do not interact with U.S.
persons,\333\ and (2) to harmonize the Commission's rules more closely
with the CFTC's approach to statutory disqualification as it applies to
the activities of non-U.S. associated persons.\334\ As proposed,
paragraph (c)(2) of Rule of Practice 194 would provide an exclusion,
subject to certain limitations, from the statutory disqualification
prohibition in Section 15F(b)(6) of the Exchange Act for an SBS Entity
with respect to an associated person who is a natural person who (1) is
not a U.S. person and (2) does not effect and is not involved in
effecting security-based swap transactions with or for counterparties
that are U.S. persons, other than a security-based swap transaction
conducted through a foreign branch of a counterparty that is a U.S.
person.\335\
---------------------------------------------------------------------------

    \331\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons To Effect or Be Involved in Effecting Security-
Based Swaps,'' Exchange Act Release No. 84858 (Dec. 19, 2018), 84 FR
4906-47. (Feb. 19, 2019) (``Rule of Practice 194 Adopting
Release'').
    \332\ See 15 U.S.C. 78o-10(b)(6)), which provides that,
``[e]xcept to the extent otherwise specifically provided by rule,
regulation, or order of the Commission, it shall be unlawful for a
security-based swap dealer or a major security-based swap
participant to permit any person associated with a security-based
swap dealer or a major security-based swap participant who is
subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of the security-based swap
dealer or major security-based swap participant, if the security-
based swap dealer or major security-based swap participant knew, or
in the exercise of reasonable care should have known, of the
statutory disqualification.''
    \333\ See Proposing Release, 84 FR at 24238 n.235.
    \334\ See id. at 24238-39.
    \335\ See id. at 24238-42, 24290.
---------------------------------------------------------------------------

    The Commission also proposed that an SBS Entity would not be able
to avail itself of the exclusion from the prohibition in Exchange Act
Section 15F(b)(6) set forth in proposed paragraph (c)(2) with respect
to an associated person if that associated person is currently subject
to an order described in subparagraphs (A) and (B) of Section 3(a)(39)
of the Exchange Act,\336\ with the limitation that an order by a
foreign financial regulatory authority described in subparagraphs
(B)(i) and (B)(iii) of Section 3(a)(39) shall only apply to orders by a
foreign financial regulatory authority in the jurisdiction where the
associated person is employed or located.\337\
---------------------------------------------------------------------------

    \336\ Generally, Exchange Act Section 3(a)(39) defines the
circumstances that would subject a person to a statutory
disqualification with respect to membership or participation in, or
association with a member of, an SRO. See 15 U.S.C. 78c(a)(39).
    \337\ See Proposing Release, 84 FR at 24238-42, 24290.
---------------------------------------------------------------------------

B. Commission Action

    In soliciting comments on proposed new paragraph (c)(2), the
Commission noted that in the Registration Adopting Release, the
Commission included an interpretation of the scope of the phrase
``involved in effecting security-based swaps,'' as that phrase is used
in Exchange Act Section 15F(b)(6).\338\ The Commission stated in the
Registration Adopting Release that the term ``involved in effecting
security-based swaps'' generally means engaged in functions necessary
to facilitate the SBS Entity's security-based swap business, including,
but not limited to the following activities: (1) Drafting and
negotiating master agreements and confirmations; (2) recommending
security-based swap transactions to counterparties; (3) being involved
in executing security-based swap transactions on a trading desk; (4)
pricing security-based swap positions; (5) managing collateral for the
SBS Entity; and (6) directly supervising

persons engaged in the above-described activities.\339\ The Commission
requested comment on whether, based on the above-mentioned
interpretation: (1) There are additional categories of non-U.S.
associated persons of an SBS Entity that should be excluded from the
statutory disqualification prohibition in Section 15F(b)(6); and, (2)
if so, to describe the functions carried out by such non-U.S.
associated persons of an SBS Entity and why commenters believe those
functions do not present the types of concerns addressed by the
prohibition on associating with a statutorily disqualified person.\340\
---------------------------------------------------------------------------

    \338\ See id. at 24242 (Question 7).
    \339\ See id. at 24242, n. 268 (citing Registration Adopting
Release, 80 FR at 48974, 48976); see also id. at 24213, n. 61.
    \340\ See id. at 24242.
---------------------------------------------------------------------------

    Certain commenters addressed proposed Rule of Practice 194(c)(2)
specifically.\341\ Although all such commenters supported proposed Rule
of Practice 194(c)(2), these commenters also expressed that the scope
of non-U.S. associated persons subject to the Commission's statutory
disqualification prohibition and questionnaire recordkeeping
requirement is still overly broad.\342\ These commenters requested that
the Commission further narrow the scope of non-U.S. persons subject to
these requirements to include only non-U.S. front-office associated
persons who solicit or accept security-based swaps with U.S. persons or
who supervise such persons and, in turn, to exclude non-U.S. middle- or
back-office associated persons.\343\ In general, the commenters state
that including middle- and back-office functions within the scope of
the statutory disqualification provision would sweep in numerous
additional associated persons as compared to the CFTC's approach to the
parallel statutory disqualification provision under the CEA.\344\ These
commenters suggest that, by modifying proposed Rule of Practice
194(c)(2) to more closely track the CEA definition of ``associated
person of a swap dealer or major swap participant,'' \345\ the
Commission could exclude non-U.S. middle- or back-office associated
persons from the statutory disqualification prohibition and thus the
questionnaire recordkeeping requirement.\346\ They state that this
approach would more closely harmonize the Commission's statutory
disqualification prohibition with the CFTC's approach to its analogous
statutory disqualification prohibition.\347\
---------------------------------------------------------------------------

    \341\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA
letter at 3, 16; see also email from Tilman Lueder, Head of
Securities Markets Unit, European Commission, dated Sept. 10, 2019
(``European Commission email'') (providing estimates from six
unspecified EBF member firms on the number of associated persons
potentially impacted under four possible scenarios, including
adopting Rule of Practice 194(c)(2) as proposed or with further
modifications to exclude certain middle- or back-office functions).
    \342\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA
letter at 3, 16.
    \343\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA
letter at 3, 16.
    \344\ See EBF letter at 6; IIB/SIFMA letter at 5, 30; ISDA
letter at 3, 16. CEA Section 4s(b)(6) parallels the statutory
disqualification prohibition under Exchange Act Section 15F(b)(6).
See 7 U.S.C. 6s(b)(6); see also CFTC Regulation 23.22 (promulgating
the statutory disqualification prohibition in CEA Section 4s(b)(6)
under the CFTC's regulations).
    \345\ 7 U.S.C Sec.  1a(4) (with respect to the CEA, ``[t]he term
`associated person of a swap dealer or major swap participant' means
a person who is associated with a swap dealer or major swap
participant as a partner, officer, employee, or agent (or any person
occupying a similar status or performing similar functions), in any
capacity that involves (i) the solicitation or acceptance of swaps;
or (ii) the supervision of any person or persons so engaged''); see
also 17 CFR 1.3 (CEA Regulation defining associated person of a swap
dealer or major swap participant).
    \346\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter
at 16.
    \347\ See EBF letter at 6; IIB/SIFMA letter at 30; ISDA letter
at 16.
---------------------------------------------------------------------------

    For example, one commenter argues that including middle- and back-
office functions within the scope of the statutory disqualification
provision would sweep in ``a great number of additional persons . . .
because financial institutions tend not to organize those functions to
be focused on a single jurisdiction such as the United States (e.g.,
when negotiating global master agreements), but rather serve the entire
swap business holistically, and which tend to be harder to canvas under
home country laws, given that they have no trading authority.'' \348\
Similarly, another commenter argues that, with respect to these middle-
or back-office associated persons, ``[t]heir discretion is frequently
constrained in respects that make the potential for bad acts that could
harm counterparties very limited, not only through detailed procedures
but also multiple layers of controls.'' \349\ According to that
commenter, while the benefits of subjecting these middle- or back-
office associated persons to the statutory disqualification requirement
in Section 15F(b)(6) would be relatively low, the costs of extending
this requirement to these associated persons, on the other hand, would
be quite high.\350\ This same commenter also states that the number of
associated persons implicated by the Commission's current
interpretation would be ``significant,'' that many of them would be
located outside the United States, and that these associated persons
frequently perform functions for a broad range of products not limited
to security-based swaps.\351\
---------------------------------------------------------------------------

    \348\ EBF Letter at 6.
    \349\ IIB/SIFMA Letter at 30; see also id. (also suggesting that
if the Commission does not adopt the commenter's recommendation, the
Commission should instead adopt an exclusion for associated persons
``who neither engage in these front office functions nor exercise
managerial or other discretionary, supervisory authority over the''
security-based swap business of an SBS Dealer in order to be
consistent with FINRA's approach to operations professionals as
provided in FINRA Rule 1220(b)(3)).
    \350\ See id. This commenter did not provide supporting data
regarding the magnitude of these purported benefits or costs.
    \351\ Id. This commenter did not provide supporting data
regarding the number of associated persons impacted by its
recommendation.
---------------------------------------------------------------------------

    In response to the proposal, European Commission staff asked
certain EBF members to provide estimates of the number of associated
persons that may be potentially impacted under four different
scenarios: (Scenario 1) if proposed Rule of Practice 194(c)(2) is not
adopted (i.e., the status quo without proposed paragraph (c)(2));
(Scenario 2) if proposed Rule of Practice 194(c)(2) is adopted, as
proposed, without modification; (Scenario 3) if proposed Rule of
Practice 194(c)(2) is adopted, as proposed, but modified to also
exclude associated persons involved in drafting and negotiating master
agreements and confirmations and managing collateral for the SBS
Entity; and (Scenario 4) if proposed Rule of Practice 194(c)(2) is
adopted, as proposed, but modified to exclude all associated persons
identified in Scenario 3, as well as associated persons involved in
structuring or supervisory functions (i.e., only sales and trading
associated persons would be considered ``involved in effecting''
security-based swap transactions).\352\ European Commission staff
provided estimates from six unspecified EBF member firms, which show
that adopting the amendment as proposed may reduce the number of
associated persons impacted by the statutory prohibition by
approximately 54%, with a range of estimates between 20% and 85%, as
well as further reductions in the number of associated persons impacted
by the prohibition for Scenarios 3 and 4, which are discussed
below.\353\
---------------------------------------------------------------------------

    \352\ See European Commission email.
    \353\ See id.
---------------------------------------------------------------------------

    After considering the commenters' views, the Commission is adopting
Rule of Practice 194(c)(2) as proposed. As a threshold matter, in
response to the commenters' general suggestion that the Commission
modify proposed Rule of Practice 194(c)(2) to more closely track the
CEA definition of ``associated person of a swap dealer or major swap

participant,'' \354\ it is important to note that Exchange Act Section
3(a)(70) generally defines the term ``persons associated with'' an SBS
Entity more broadly than the CEA defines associated person of a swap
dealer or major swap participant.\355\ The Exchange Act definition
includes, among other persons, any employee of an SBS Entity,\356\
while the CEA definition is limited to persons acting in any capacity
that involves the solicitation or acceptance of swaps or the
supervision of any person or persons so engaged.\357\ However, the
Exchange Act definition generally excludes persons performing functions
that are solely clerical or ministerial, which would include middle- or
back-office associated persons of SBS Entities solely performing such
functions.\358\
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    \354\ See note 345, supra.
    \355\ Compare 15 U.S.C. 78c(a)(70) with 7 U.S.C Sec.  1a(4).
    \356\ See 15 U.S.C. 78c(a)(70).
    \357\ See 7 U.S.C Sec.  1a(4).
    \358\ See 15 U.S.C. 78c(a)(70)(B).
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    Additionally, while the Commission adopted an exclusion for
associated person entities in Rule of Practice 194(c)(1),\359\ the
Commission continues to believe that replacing an associated person
that is a natural person that is effecting or involved in effecting
security-based swap transactions because of a statutory
disqualification would not create the same practical issues and
possible market disruption as moving the services, such as cash and
collateral management services, provided by an associated person entity
to another entity.\360\ Further, the Commission is not revising its
prior interpretation of the scope of the phrase ``involved in effecting
security-based swaps,'' as it is used in Exchange Act Section
15F(b)(6), by adopting the modifications to the proposal recommended by
commenters.\361\ Revising the Commission's prior interpretation to
either carve out all \362\ or some \363\ middle- or back-office
functions would be inconsistent with the Commission's analogous
interpretation of the term ``effecting transactions'' in the context of
securities transactions.\364\ As the Commission explained, effecting
transactions in securities includes more than just executing trades or
forwarding orders for execution.\365\ Generally, effecting securities
transactions also can include, for example, participating in the
transactions through a number of activities such as screening potential
participants in a transaction for creditworthiness, facilitating the
execution of a transaction, and handling customer funds and
securities.\366\
---------------------------------------------------------------------------

    \359\ See 17 CFR 201.194(c).
    \360\ See Rule of Practice 194 Adopting Release, at 4911; see
also Applications by Security-Based Swap Dealers or Major Security-
Based Swap Participants for Statutorily Disqualified Associated
Persons To Effect or Be Involved in Effecting Security-Based Swaps,
Exchange Act Release No. 75612 (Aug. 5, 2015), 80 FR 51684, 51695
(Aug. 25, 2015) (proposing release).
    \361\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA
letter at 3, 16.
    \362\ See EBF letter at 6; IIB/SIFMA letter at 5, 29-30; ISDA
letter at 3, 16.
    \363\ See European Commission email (suggesting in Scenario 3,
outlined above, excluding associated persons involved in drafting
and negotiating master agreements and confirmations and managing
collateral for the SBS Entity).
    \364\ See Registration Adopting Release, 80 FR at 48976, n. 99
(citing, for example, Definition of Terms in and Specific Exemptions
for Banks, Savings Associations, and Savings Banks Under Sections
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange
Act Release No. 44291 (May 11, 2001), 66 FR 27760, 27772-73 (May 18,
2001)).
    \365\ See id.
    \366\ See id. The Commission notes that we are not addressing
broker-dealer registration here. As a general matter, broker-dealer
registration will depend on the specific facts and circumstances of
each particular situation.
---------------------------------------------------------------------------

    Moreover, revising the Commission's interpretation as these
commenters suggest would narrow the scope of the term ``involved in
effecting'' such that it would have the same meaning as the term
``effect.'' However, as the Commission observed in the Registration
Adopting Release, the statutory provision on disqualification in
Section 15F(b)(6) of the Exchange Act includes the phrase ``involved in
effecting,'' separately and in addition to ``effecting.'' \367\ The
Commission stated previously that it understands that the inclusion of
two separate terms in Section 15F(b)(6) to mean that the terms have
different meanings, and that the term ``involved in effecting''
includes a broader range of activities than simply ``effecting''
security-based swap transactions.\368\ Accordingly, the Commission
explained that ``it would be inappropriate to focus solely on the
persons that effect transactions and not also on those that are
involved more broadly in these key aspects of the process necessary to
facilitate transactions, because persons involved in these key aspects
of the process have the ability, through their conduct (intentional or
unintentional), to increase risks to investors, counterparties and the
markets.'' \369\
---------------------------------------------------------------------------

    \367\ See Registration Adopting Release, 80 FR at 48976.
    \368\ See id.
    \369\ See id.
---------------------------------------------------------------------------

    In addition, if any of the modifications recommended by these
commenters are adopted, it would create an inconsistent application of
the statutory prohibition for associated persons involved in effecting
security-based swap transactions with or for counterparties that are
U.S. persons. That inconsistency would result in certain associated
persons being excluded from the statutory prohibition--even though they
are involved in the security-based swap market in the United States--
simply because those persons are located outside the United States and
their firms have organized their back-offices to service the entire
swap and security-based swap business irrespective of jurisdiction.
    As discussed in Part VI.C below, this inconsistency may result in
competitive disparities between U.S. and non-U.S. statutorily
disqualified persons in middle- and back-office functions. Indeed,
based on the estimates provided to the European Commission by EBF
member firms, the potential for competitive disadvantage is not
trivial. For example, and as outlined in Part VI.C, two of the
alternative scenarios provided by EBF member firms may reduce the scope
of application of the statutory prohibition with respect to non-U.S.
associated persons--even though they may be involved in the security-
based swap market in the United States--by an average of 38%, for
Scenario 3 relative to the proposal (with estimates ranging between 20%
and 80% for Scenario 3), and by an average of 66% for Scenario 4
relative to the proposal (with estimates ranging of between 45% and 87%
for Scenario 4).\370\
---------------------------------------------------------------------------

    \370\ See Part VI.C.3.f (Table 4, Panel B, of the Economic
Analysis).
---------------------------------------------------------------------------

    We also note that, even without the modification recommended by
these commenters, the amendments to Rule 18a-5 as adopted, which are
discussed below,\371\ will reduce the burden on firms with respect to
the questionnaire requirements for non-U.S. associated persons. For
example, subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-
5, as adopted, provide that a questionnaire or application for
employment executed by an associated person who is not a U.S. person
need not include all of the information described in paragraphs
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5,
unless the SBS Entity (1) is required to obtain such information under
applicable law in the jurisdiction in which the associated person is
employed or located or (2) obtains such information in conducting a
background check that is customary for such firms in that jurisdiction,
and the creation or

maintenance of records reflecting that information would not result in
a violation of applicable law in the jurisdiction in which the
associated person is employed or located.\372\
---------------------------------------------------------------------------

    \371\ See generally Part V.
    \372\ See id. As discussed below, these subparagraphs would
apply to an associated person who is not a U.S. person (as defined
in Exchange Act Rule 3a71-3(a)(4)(i)(A)) that effects or is involved
in effecting security-based swaps transactions on behalf of an SBS
Entity with certain U.S persons.
---------------------------------------------------------------------------

    Finally, and most importantly, the Commission believes that the
modification recommended by these commenters would undermine important
investor protections provided by the statutory disqualification
provision in Section 15F(b)(6) of the Exchange Act. As the Commission
noted in the Rule of Practice 194 Adopting Release, Exchange Act
Section 15F(b)(6) is designed to limit the potential that associated
persons who have engaged in certain types of ``bad acts'' will be able
to negatively affect the security-based swap market and the
participants in that market.\373\ The Commission has also stated that
it is concerned principally with those transactions that appear likely
to affect the integrity of the security-based swap market in the United
States and the U.S. financial markets more generally or that raise
concerns about the protection of participants in those markets.\374\
The Commission has also noted that the risk of fraud and other
misconduct may be increased and the counterparty protection benefits of
the disqualification provision may be reduced if, for instance, persons
involved in structuring security-based swaps, facilitating execution,
or handling customer funds and securities are excepted from the
statutory disqualification provision.\375\ For example, and as also
discussed in Part VII.D below, allowing statutorily disqualified
associated persons to manage the collateral for an SBS Entity in
connection with security-based swap transactions with or for
counterparties that are U.S. persons may give rise to higher compliance
and counterparty risks to U.S. counterparties and, thus, the U.S.
security-based swap market.\376\
---------------------------------------------------------------------------

    \373\ See Rule of Practice 194 Adopting Release, 84 FR at 4909.
    \374\ See Proposing Release, 84 FR at 24215 n. 79 (citing
Business Conduct Adopting Release, 81 FR at 30065); see also id. at
24235, 24240 (discussing the same).
    \375\ See Registration Adopting Release, 80 FR at 49011.
    \376\ See, e.g., id. at 48976.
---------------------------------------------------------------------------

    The data outlined by the Commission in the Rule of Practice 194
Adopting Release suggests that, based on analogous disqualification
review processes in swap and broker-dealer settings, individuals
engaged in misconduct are more likely to engage in repeated
misconduct.\377\ Similarly, the Commission noted that, although there
is a dearth of evidence of misconduct in swap and security-based swap
markets, the Commission recognizes research in other settings
reflecting that: (1) Past misconduct may predict future misconduct
risk; (2) markets may penalize some disclosed misconduct, and (3)
market participants engaging in misconduct generally suffer
reputational costs.\378\ As a result, the Commission believes that the
statutory disqualification and the inability to continue associating
with SBS Entities may create disincentives for engaging in misconduct.
---------------------------------------------------------------------------

    \377\ See Rule of Practice 194 Adopting Release, 84 FR at 4928-
33.
    \378\ See id. at 4923.
---------------------------------------------------------------------------

    Accordingly, for the reasons discussed above, the Commission is
adopting Rule of Practice 194(c)(2) as proposed.

V. Modifications to Rule 18a-5

A. Proposed Approach

    In the Proposing Release the Commission proposed to modify proposed
Rule 18a-5.\379\ Exchange Act 18a-5 was originally proposed in the
Recordkeeping and Reporting Proposing Release, which proposed
recordkeeping, reporting, and notification requirements applicable to
SBS Entities, securities count requirements applicable to certain SBS
Entities, and additional recordkeeping requirements applicable to
broker-dealers to account for their security-based swap and swap
activities.\380\ Rule 18a-5 has since been adopted.\381\ As described
in the Recordkeeping and Reporting Proposing Release, the Commission
originally proposed Exchange Act Rule 18a-5 (patterned after Exchange
Act Rule 17a-3, the recordkeeping rule for registered broker-dealers),
to establish recordkeeping standards for stand-alone and bank SBS
Entities.\382\ As adopted, paragraphs (a)(10) and (b)(8) of Rule 18a-5
require that a stand-alone or bank SBS Entity, respectively, make and
keep current a questionnaire or application for employment for each
associated person who effects or is involved in effecting security-
based swaps on the SBS Entity's behalf.\383\ Rule 18a-5 requires that
the questionnaire or application for employment include the associated
person's identifying information, business affiliations for the past
ten years, relevant disciplinary history, relevant criminal record, and
place of business, among other things.\384\
---------------------------------------------------------------------------

    \379\ See Proposing Release, 84 FR at 24242.
    \380\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers; Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 91958 (Ap. 13, 2014), 79 FR at
25205 (May 2, 2014) ``Recordkeeping and Reporting Proposing
Release'').
    \381\ See Recordkeeping and Reporting Adopting Release.
    \382\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25205
    \383\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68558 (``these associated person recordkeeping requirements apply to
natural persons and not to legal entities that may be associated
persons.'').
    \384\ See Exchange Act Rule 18a-5(a)(10) and (b)(8),
Recordkeeping and Reporting Adopting Release, 84 FR at 68558.
---------------------------------------------------------------------------

    Based on comments received in response to the Recordkeeping and
Reporting Proposing Release and the Cross-Border Proposing Release, the
Commission proposed, in the Proposing Release, to modify proposed Rule
18a-5 to provide flexibility with respect to the questionnaire
requirement as applied to certain associated persons of both stand-
alone and bank SBS Entities.\385\ Thus, the Commission proposed to
modify proposed Rule 18a-5 by adding two subparagraphs to provide
separate exemptions under both paragraph (a)(10) and paragraph (b)(8).
---------------------------------------------------------------------------

    \385\ See Proposing Release, 84 FR at 24242.
---------------------------------------------------------------------------

1. Exemption Based on the Exclusion From the Prohibition Under Section
15F(b)(6)
    As described in the Proposing Release, the questionnaire
requirement is intended to serve as a basis for a background check of
the associated person to verify that the person is not subject to
statutory disqualification under Section 15(b)(6) of the Exchange Act,
and so to support the certification required under Rule 15Fb6-2(b). The
addition of subparagraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) would
provide that a stand-alone or bank SBS Entity is not required to make
and keep current a questionnaire or application for employment with
respect to an associated person if the stand-alone or bank SBS Entity
is excluded from the prohibition in Section 15F(b)(6) of the Exchange
Act with respect to that associated person. These proposed
modifications were designed to complement the Commission's proposed
amendments to Rule of Practice 194, which would have provided an
exclusion from the prohibition in Section 15F(b)(6) of the Exchange Act
with respect to an associated person who is not a U.S. person and does
not effect and is not involved in effecting security-based

swap transactions with or for counterparties that are U.S. persons,
other than a security-based swap transaction conducted through a
foreign branch of a counterparty that is a U.S. person, subject to
certain conditions.
    As a result, under proposed subparagraphs (a)(10)(iii)(A) and
(b)(8)(iii)(A), a stand-alone or bank SBS Entity generally would not be
required to obtain the questionnaire or application for employment,
otherwise required by Rule 18a-5, with respect to any associated person
who is not a U.S. person and who does not effect and is not involved in
effecting security-based swap transactions with or for counterparties
that are U.S. persons (other than a security-based swap transaction
conducted through a foreign branch of a counterparty that is a U.S.
person), subject to certain conditions. More specifically, proposed
subparagraphs (a)(10)(iii)(A) and (b)(8)(iii)(A) would have provided
that a stand-alone or bank SBS Entity would not be required to make and
keep current a questionnaire or application for employment with respect
to any associated person if the SBS Entity is excluded from the
prohibition in Exchange Act 15F(b)(6) with respect to that associated
person.
2. Exemption Based on Local Law
    The Commission also proposed to modify Rule 18a-5 by adding
subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to address situations
where the law of a non-U.S. jurisdiction in which an associated person
is employed or located may prohibit a stand-alone or bank SBS Entity
from receiving, creating or maintaining a record of any of the
information mandated by the questionnaire requirement. These
subparagraphs would apply to an associated person who is not a U.S.
person (as defined in Exchange Act Rule 3a71-3(a)(4)(i)(A)),\386\ and
who effects or is involved in effecting security-based swaps
transactions on behalf of an SBS Entity. As proposed, the addition of
subparagraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5 would
have permitted the exclusion of certain information mandated by the
questionnaire requirement with respect to those associated persons if
the receipt of that information, or the creation or maintenance of
records reflecting such information, would result in a violation of
applicable law in the jurisdiction in which the associated person is
employed or located.\387\ As explained in the Proposing Release, rather
than fully excluding these associated persons from the questionnaire
requirement, the exclusion would provide that the stand-alone or bank
SBS Entity need not record information mandated by the questionnaire
requirement with respect to such associated persons if the receipt of
that information, or the creation or maintenance of records reflecting
such information, would result in a violation of applicable law in the
jurisdiction in which the associated person is employed or
located.\388\
---------------------------------------------------------------------------

    \386\ Exchange Act Rule 3a71-3(a)(4)(i)(A) defines the term U.S.
person to mean, with respect to natural persons, ``a natural person
resident in the United States.''
    \387\ The SBS Entity would still need to record, on the
questionnaire or application, information that would not violate
local law (an associated person's name, address, etc.).
    \388\ To the extent an nonresident SBS Entity is able to rely on
either paragraph (a)(10)(iii)(A) or (b)(8)(iii)(A) with respect to a
particular associated person, the Commission explained that firm
would not need to also rely on the relief provided under
(a)(10)(iii)(B) or (b)(8)(iii)(B) because the firm would be exempt
from the questionnaire requirement with respect to that associated
person. See Proposing Release, 84 FR at 24243, n.281.
---------------------------------------------------------------------------

    The Commission explained that this proposed change was designed to
address commenters' concerns, and would provide stand-alone and bank
SBS Entities with flexibility to not record information that might
result in a violation of the law in the jurisdiction in which the
associated person is employed or located, while continuing to require
that they record information not restricted by the law in that
jurisdiction. In addition, the Commission stated that stand-alone and
bank SBS Entities should still make and keep current information
included in the questionnaire requirement that would not result in a
violation of local law.

B. Commission Action

    The Commission solicited comment on all aspects of these proposed
modifications to Rule 18a-5. Two commenters wrote in support of this
proposed rule change.\389\ One commenter requested that the Commission
further clarify that, in performing reasonable due diligence, SBS
Entities are not expected to take actions that would violate applicable
privacy laws in the jurisdiction where the associated person is located
or employed.\390\
---------------------------------------------------------------------------

    \389\ See EBF letter at 6-7; IIB/SIFMA letter at 30.
    \390\ See EBF letter at 7.
---------------------------------------------------------------------------

    For the reasons discussed in the proposal,\391\ and after
consideration of the comments, the Commission is adopting these new
subparagraphs to Rule 18a-5, but is modifying subparagraphs
(a)(10)(iii)(B) and (b)(8)(iii)(B) to provide that a questionnaire or
application for employment executed by an associated person who is not
a U.S. person need not include the information described in paragraphs
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5,
unless the SBS Entity (1) is required to obtain such information under
applicable law in the jurisdiction in which the associated person is
employed or located or (2) obtains such information in conducting a
background check that is customary for such firms in that jurisdiction,
and the creation or maintenance of records reflecting that information
would not result in a violation of applicable law in the jurisdiction
in which the associated person is employed or located. We modified
these paragraphs to provide greater clarity as to what information,
generally required by 18a-5(a)(10)(i) and (b)(8)(i), an SBS Entity
could exclude from an employee's questionnaire or application.
---------------------------------------------------------------------------

    \391\ See Proposing Release, 84 FR at 24243-4.
---------------------------------------------------------------------------

    Every SBS Entity must still comply with Section 15F(b)(6) of the
Exchange Act and Rule 15Fb6-2 with respect to every associated person
who effects or is involved in effecting security-based swaps on behalf
of the SBS Entity absent an exclusion from the statutory
disqualification prohibition in Section 15F(b)(6) of the Exchange Act,
in which case, as set forth in subparagraphs (a)(10)(iii)(A) and
(b)(8)(iii)(A), the SBS Entity is not required to make and keep current
a questionnaire or application for employment executed by an associated
person. The questionnaire requirement is, in part, designed to serve as
a basis for a background check of the associated person who is a
natural person and who effects or is involved in effecting security-
based swap transactions on the SBS Entity's behalf to verify that the
person is not subject to statutory disqualification. As we explained in
the Registration Adopting Release, the rules do not specify what steps
an SBS Entity should take to perform a background check.\392\ While the
required employment questionnaire or application includes a significant
amount of information that can be helpful to determine whether an
associated person may be subject to a statutory disqualification, we
believe financial institutions already take steps to verify the
background of their employees.\393\ Firms have flexibility in the
manner in which they perform background checks, as long as those checks
provide them with sufficient comfort to certify that none of the SBS

Entity's employees who effect or are involved in effecting security-
based swaps on the SBS Entity's behalf is subject to a statutory
disqualification, except as specifically permitted by rule, regulation
or order of the Commission.\394\
---------------------------------------------------------------------------

    \392\ Registration Adopting Release, 80 FR at 48977.
    \393\ Id.
    \394\ Id.
---------------------------------------------------------------------------

    We further believe that such background checks conducted using
procedures that are either legally required or customary in the
relevant non-U.S. jurisdictions, as outlined above in new subparagraphs
(a)(10)(iii)(B) and (b)(8)(iii)(B) to Rule 18a-5,\395\ would constitute
reasonable due diligence on which a Chief Compliance Officer (or his or
her designee) \396\ could rely, in the absence of red flags that are in
the firm's possession, when signing the associated person certification
required by Rule 15Fb6-2.\397\
---------------------------------------------------------------------------

    \395\ Exchange Act Rule 18a-5 requires that SBS Entities
maintain records that provide a basis for assessing compliance with
the statutory disqualification prohibition set forth in Section
15F(b)(6) of the Exchange Act and related Exchange Act Rule 15Fb6-2.
See Recordkeeping and Reporting Adopting Release, 84 FR at 68558.
Accordingly, and as provided in new subparagraphs (a)(10)(iii)(B)
and (b)(8)(iii)(B) of Rule 18a-5, if an SBS Entity is (1) required
to obtain the information described in paragraphs (a)(10)(i)(A)
through (H) and (b)(8)(i)(A) through (H) under applicable law in the
jurisdiction in which the associated person is employed or located
or (2) obtains such information in conducting a background check
that is customary for such firms in that jurisdiction, Rule 18a-5
requires such SBS Entity to create and maintain a record reflecting
that information, unless 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.
    \396\ Exchange Act Rule 15Fb6-2(b) requires that a registrant's
Chief Compliance Officer ``or his or her designee'' must review and
sign the questionnaire or application for employment. While the
designee could be a person who reports directly to the Chief
Compliance Officer, the Chief Compliance Officer also could
designate a person such as a person in the registrant's Human
Resources or other, similar department.
    \397\ Exchange Act Rule 15Fb6-2(b) provides: ``(b) To support
the certification required by paragraph (a) of this section, the
security-based swap dealer's or major security-based swap
participant's Chief Compliance Officer, or his or her designee,
shall review and sign the questionnaire or application for
employment, which the security-based swap dealer or major security-
based swap participant is required to obtain pursuant to the
relevant recordkeeping rule applicable to such security-based swap
dealer or major security-based swap participant, executed by each
associated person who is a natural person and who effects or is
involved in effecting security based swaps on the security-based
swap dealer's or major security-based swap participant's behalf. The
questionnaire or application shall serve as a basis for a background
check of the associated person to verify that the person is not
subject to statutory disqualification.''
---------------------------------------------------------------------------

VI. Economic Analysis

    The Commission is mindful of the economic effects, including the
costs and benefits, of the adopted amendments and guidance. Section
3(f) of the Exchange Act provides that whenever the Commission is
engaged in rulemaking pursuant to the Exchange Act and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\398\ In addition,
Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact such rules
would have on competition.\399\ Exchange Act Section 23(a)(2) also
provides that the Commission shall not adopt any rule which would
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \398\ See 15 U.S.C. 78c(f).
    \399\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of the
adopted amendments, including the anticipated and estimated benefits
and costs of the amendments and their likely effects on efficiency,
competition, and capital formation. The Commission also discusses the
potential economic effects of certain alternatives to the approaches
taken in this release. The Commission is providing guidance and
interpretive positions in this release. Any comments on the substance
of the guidance and interpretations are discussed above.\400\ To the
extent that a regulated person would have acted differently than what
is provided in the interpretations, there may be economic consequences
attached to the rules as interpreted.
---------------------------------------------------------------------------

    \400\ See Parts II and III, supra.
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to
quantify. For example, the Commission cannot quantify the costs that
potentially could result from competitive disparities associated with
the exception to Rule 3a71-3 because these costs will depend, in part,
on foreign regulatory requirements applicable to non-U.S. entities.
This is because the extent to which a non-U.S. entity would need to
develop or modify systems to allow it and its majority-owned affiliate
to meet the conditions of the exception likely depends on the extent to
which the non-U.S. entity's local regulatory obligations differ from
analogous conditions of the exception. These potential costs could also
depend on the business decisions of non-U.S. persons that may avail
themselves of the exception. Furthermore, the likelihood of a non-U.S.
entity availing itself of the exception depends on whether the non-U.S.
entity is regulated in a listed jurisdiction, a determination that, in
turn, depends on the foreign regulatory regime. Also, in connection
with the amendments to Commission Rule of Practice 194, the Commission
has no data or information allowing us to quantify the number of
disqualified non-U.S. employees transacting with foreign counterparties
or foreign branches of U.S. counterparties on behalf of U.S. and non-
U.S. SBS Entities; the direct costs of relocating disqualified U.S.
personnel outside of the United States for U.S. and non-U.S. SBS
Entities; or reputational and compliance costs of U.S. and non-U.S. SBS
Entities from continuing to transact through disqualified non-U.S.
associated persons with foreign counterparties and foreign branches of
U.S. counterparties. Therefore, while the Commission has attempted to
quantify economic effects where possible, much of the discussion of
economic effects is qualitative in nature.

A. Baseline

    To assess the economic effects of the amendments, the Commission is
using as the baseline the security-based swap market as it exists at
the time of this release, including applicable rules the Commission has
already adopted, but excluding rules the Commission has proposed but
not yet finalized. The analysis includes the statutory provisions that
currently govern the security-based swap market pursuant to the Dodd-
Frank Act and rules adopted in the Intermediary Definitions Adopting
Release,\401\ the Cross-Border Adopting Release, the SDR Rules and Core
Principles Adopting Release,\402\ and the Rule of Practice 194 Adopting
Release.\403\ Additionally, the baseline includes rules that have been
adopted but for which compliance is not yet required, including the ANE
Adopting Release, Registration Adopting Release,\404\ Regulation SBSR
Amendments Adopting Release,\405\

Business Conduct Adopting Release,\406\ Capital, Margin, and
Segregation Adopting Release,\407\ and the Recordkeeping and Reporting
Adopting Release \408\ as these final rules--even if compliance is not
yet required--are part of the existing regulatory landscape that market
participants expect to govern their security-based swap activity. The
following sections discuss available data from the security-based swap
market, security-based swap market participants and dealing structures,
market-facing and non-market-facing activities of dealing entities,
security-based swap market activity, global regulatory efforts, other
markets and existing regulatory frameworks, estimates of persons that
may use the exception to Rule 3a71-3, estimates of persons for which
the Market Color Guidance may be relevant, statutory disqualification,
certification, opinion of counsel, and employee questionnaires.
---------------------------------------------------------------------------

    \401\ See Intermediary Definitions Adopting Release, 77 FR at
30596.
    \402\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14438 (Mar. 19, 2015) (``SDR Rules and Core
Principles Adopting Release'').
    \403\ See Rule of Practice 194 Adopting Release, 84 FR at 4906.
    \404\ See Registration Adopting Release, 80 FR 48964.
    \405\ See Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 78321 (Jul. 14, 2016), 81 FR
53546, 53590-91 (Aug. 12, 2016) (``Regulation SBSR Amendments
Adopting Release'').
    \406\ See Business Conduct Adopting Release.
    \407\ See Capital, Margin, and Segregation Adopting Release, 84
FR 43872.
    \408\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68550.
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1. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part,
by available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data limit the extent
to which it is possible to quantitatively characterize the market.\409\
The Commission's analysis of the current state of the security-based
swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2008 to 2017. The details of this
data set, including its limitations, have been discussed in a prior
release.\410\
---------------------------------------------------------------------------

    \409\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and knowledge and expertise of Commission staff.
    \410\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68623-24.
---------------------------------------------------------------------------

2. Security-Based Swap Market: Market Participants and Dealing
Structures
(a) Security-Based Swap Market Participants
    Activity in the security-based swap market is concentrated among a
relatively small number of entities that act as dealers in this market.
In addition to these entities, thousands of other participants appear
as counterparties to security-based swap contracts in the TIW sample,
and include, but are not limited to, investment companies, pension
funds, private (hedge) funds, sovereign entities, and industrial
companies. A discussion of security-based swap market participants can
be found in a prior release.\411\
---------------------------------------------------------------------------

    \411\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.
---------------------------------------------------------------------------

(b) Security-Based Swap Market Participant Domiciles
    The security-based swap market is global in nature with
participants from different countries transacting with one another. A
discussion of the domicile of security-based swap market participants
can be found in a prior release.\412\
---------------------------------------------------------------------------

    \412\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43972.
---------------------------------------------------------------------------

(c) Market Centers
    A market participant's domicile, however, does not necessarily
correspond to where it engages in security-based swap activity. In
particular, non-U.S. persons engaged in security-based swap dealing
activity operate in multiple market centers and carry out such activity
with counterparties around the world.\413\ Many market participants
that are engaged in dealing activity prefer to use traders and manage
risk for security-based swaps in the jurisdiction where the underlying
security is traded. Thus, although a significant amount of the dealing
activity in security-based swaps on U.S. reference entities involves
non-U.S. dealers, the Commission understands that these dealers tend to
carry out much of the security-based swap trading and related risk-
management activities in these security-based swaps within the United
States.\414\ Some dealers have explained that being able to centralize
their trading, sales, risk management, and other activities related to
U.S. reference entities in U.S. operations (even when the resulting
transaction is booked in a foreign entity) improves the efficiency of
their dealing business.
---------------------------------------------------------------------------

    \413\ See ANE Adopting Release, 81 FR at 8604 n.56.
    \414\ See id. n.58.
---------------------------------------------------------------------------

    Consistent with these operational concerns and the global nature of
the security-based swap market, the available data appear to confirm
that participants in this market are in fact active in market centers
around the globe. Although, as noted above, the available data do not
permit us to identify the location of personnel in a transaction, TIW
transaction records supplemented with legal entity location data
indicate that firms that are likely to be security-based swap dealers
operate out of branch locations in key market centers around the world,
including New York, London, Paris, Zurich, Tokyo, Hong Kong, Chicago,
Sydney, Toronto, Frankfurt, Singapore, and the Cayman Islands.\415\
---------------------------------------------------------------------------

    \415\ TIW transaction records contain a proxy for the domicile
of an entity, which may differ from branch locations, which are
separately identified in the transaction records. The legal entity
location data are from Avox.
---------------------------------------------------------------------------

    Given these market characteristics and practices, participants in
the security-based swap market may bear the financial risk of a
security-based swap transaction in a location different from the
location where the transaction is arranged, negotiated, or executed, or
where economic decisions are made by managers on behalf of beneficial
owners. Market activity may also occur in a jurisdiction other than
where the market participant or its counterparty books the transaction.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a counterparty located in a
jurisdiction that is different from the market center or centers in
which it participates.
(d) Common Business Structures
    A non-U.S. person that engages in a global security-based swap
dealing business in multiple market centers may choose to structure its
dealing business in a number of different ways. This structure,
including where it books the transactions that constitute that business
and how it carries out market-facing activities that generate those
transactions, reflects a range of business and regulatory
considerations, which each non-U.S. person may weigh differently.
    A non-U.S. person may choose to book all of its security-based swap
transactions, regardless of where the transaction originated, in a
single, central booking entity. That entity generally retains the risk
associated with that transaction, but it also may lay off that risk to
another affiliate via a back-to-back transaction or an assignment of
the security-based swap.\416\ Alternatively, a non-U.S. person may book
security-based swaps arising from its dealing business in separate
affiliates, which may be located in the jurisdiction where it
originates the risk associated with the security-based swap, or,
alternatively, the jurisdiction where it manages that risk. Some non-
U.S. persons may book transactions originating in a particular region
to an affiliate established in a

jurisdiction located in that region.\417\ A non-U.S. person may choose
to book its security-based swap transactions in one jurisdiction in
part to avoid triggering regulatory requirements associated with
another jurisdiction.
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    \416\ See ANE Adopting Release, 81 FR at 8604.
    \417\ There is some indication that this booking structure is
becoming increasingly common in the market. See, e.g., Catherine
Contiguglia, ``Regional Swaps Booking Replacing Global Hubs,''
Risk.net, Sept. 4, 2015, http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Such a
development may be reflected in the increasing percentage of new
entrants that have a foreign domicile, as described above.
---------------------------------------------------------------------------

    Regardless of where a non-U.S. person determines to book its
security-based swaps arising out of its dealing activity, it is likely
to operate offices that perform sales or trading functions in one or
more market centers in other jurisdictions. Maintaining sales and
trading desks in global market centers permits the non-U.S. person to
deal with counterparties in that jurisdiction or in a specific
geographic region, or to ensure that it is able to provide liquidity to
counterparties in other jurisdictions,\418\ for example, when
counterparty's home financial markets are closed. A non-U.S. person
engaged in a security-based swap dealing business also may choose to
manage its trading book in particular reference entities or securities
primarily from a trading desk that can utilize local expertise in such
products or that can gain access to better liquidity, which may permit
it to more efficiently price such products or to otherwise compete more
effectively in the security-based swap market. Some non-U.S. persons
prefer to centralize risk management, pricing, and hedging for specific
products with the personnel responsible for carrying out the trading of
such products to mitigate operational risk associated with transactions
in those products.
---------------------------------------------------------------------------

    \418\ These offices may be branches or offices of the booking
entity itself, or branches or offices of an affiliated agent, such
as, in the United States, a registered broker-dealer.
---------------------------------------------------------------------------

    The non-U.S.-person affiliate that books these transactions may
carry out related market-facing activities, whether in its home
jurisdiction or in a foreign jurisdiction, using either its own
personnel or the personnel of an affiliated or unaffiliated agent. For
example, the non-U.S. person may determine that another of its
affiliates employs personnel who possess expertise in relevant products
or who have established sales relationships with key counterparties in
a foreign jurisdiction, making it more efficient to use the personnel
of the affiliate to engage in security-based swap market-facing
activity on its behalf in that jurisdiction. In these cases, the
affiliate that books these transactions and its affiliated agent may
operate as an integrated dealing business, each performing distinct
core functions in carrying out that business.
    Alternatively, the non-U.S.-person affiliate that books these
transactions may in some circumstances determine to engage the services
of an unaffiliated agent through which it can engage in market-facing
activity. For example, a non-U.S. person may determine that using an
interdealer broker may provide an efficient means of participating in
the interdealer market in its own, or in another, jurisdiction,
particularly if it is seeking to do so anonymously or to take a
position in products that trade relatively infrequently.\419\ A non-
U.S. person may also use unaffiliated agents that operate at its
direction. Such an arrangement may be particularly valuable in enabling
a non-U.S. person to service clients or access liquidity in
jurisdictions in which it has no security-based swap operations of its
own.
---------------------------------------------------------------------------

    \419\ The Commission understands that interdealer brokers may
provide voice or electronic trading services that, among other
things, permit dealers to take positions or hedge risks in a manner
that preserves their anonymity until the trade is executed. These
interdealer brokers also may play a particularly important role in
facilitating transactions in less liquid security-based swaps.
---------------------------------------------------------------------------

    The Commission understands that non-U.S.-person affiliates (whether
affiliated with U.S.-based non-U.S. persons or not) that are
established in foreign jurisdictions may use any of these structures to
engage in dealing activity in the United States, and that they may seek
to engage in dealing activity in the United States to transact with
both U.S.-person and non-U.S.-person counterparties. In transactions
with non-U.S.-person counterparties, these foreign affiliates may
affirmatively seek to engage in dealing activity in the United States
because the sales personnel of the non-U.S.-person dealer (or of its
agent) in the United States have existing relationships with
counterparties in other locations (such as Canada or Latin America) or
because the trading personnel of the non-U.S.-person dealer (or of its
agent) in the United States have the expertise to manage the trading
books for security-based swaps on U.S. reference securities or
entities. The Commission understands that some of these foreign
affiliates engage in dealing activity in the United States through
their personnel (or personnel of their affiliates) in part to ensure
that they are able to provide their own counterparties, or those of
non-U.S.-person affiliates in other jurisdictions, with access to
liquidity (often in non-U.S. reference entities) during U.S. business
hours, permitting them to meet client demand even when the home markets
are closed. In some cases, such as when seeking to transact with other
dealers through an interdealer broker, these foreign affiliates may
act, in a dealing capacity, in the United States through an
unaffiliated, third-party agent.
3. Market-Facing and Non-Market-Facing Activities
    As discussed in the Proposing Release, the activities of a
security-based swap dealer involve both market-facing activities and
non-market-facing activities.\420\ Market-facing activities would
include arranging, negotiating, or executing a security-based swap
transaction. The terms ``arrange'' and ``negotiate'' indicate market-
facing activity of sales or trading personnel in connection with a
particular transaction, including interactions with counterparties or
their agents. The term ``execute'' refers to the market-facing act
that, in connection with a particular transaction, causes the person to
become irrevocably bound under the security-based swap under applicable
law. Non-market-facing activities include processing trades and other
back-office activities; designing security-based swaps without engaging
in market-facing activity in connection with specific transactions;
preparing underlying documentation including negotiating master
agreements (as opposed to negotiating with the counterparty the
specific economic terms of a particular security-based swap
transaction); and clerical and ministerial tasks such as entering
executed transactions on a non-U.S. person's books.
---------------------------------------------------------------------------

    \420\ See Proposing Release, 84 FR at 24215.
---------------------------------------------------------------------------

4. Security-Based Swap Market Activity
    As already noted, firms that act as dealers play a central role in
the security-based swap market. These dealers transact with hundreds or
a thousand or more counterparties. A discussion of activity in the
security-based swap market is available in a prior release.\421\
---------------------------------------------------------------------------

    \421\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68625-27.
---------------------------------------------------------------------------

5. Global Regulatory Efforts
    The amendments and guidance relate to non-U.S.-person dealers that
may be subject to foreign regulations of their security-based swap
activities that are similar to regulations that may apply to them
pursuant to Title VII. A discussion

of foreign regulatory efforts, including margin and capital
requirements, is available in a prior release.\422\
---------------------------------------------------------------------------

    \422\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43979-80.
---------------------------------------------------------------------------

6. Other Markets and Existing Regulatory Frameworks
    The numerous financial markets are integrated, often attracting the
same market participants that trade across corporate bond, swap, and
security-based swap markets, among others. A discussion of other
markets and existing regulatory frameworks can be found in a prior
release.\423\
---------------------------------------------------------------------------

    \423\ See Rule of Practice 194 Adopting Release, 84 FR at 4927.
---------------------------------------------------------------------------

7. Estimates of Persons That May Use the Exception to Rule 3a71-3
    To analyze the economic effects of the exception to Rule 3a71-3,
the Commission has analyzed 2017 TIW data to identify persons that may
use the exception. The Commission believes that these persons fall into
several categories, which are discussed below.
(a) Non-U.S. Persons Seeking to Reduce Assessment Costs
    One category of persons that may use the exception are those non-
U.S. persons that may need to assess the amount of their market-facing
activity against the de minimis thresholds solely because of the
inclusion of security-based swap transactions between two non-U.S.
persons that are arranged, negotiated, or executed by personnel located
in the U.S. for the purposes of the de minimis threshold analysis.
These non-U.S. persons may have an incentive to rely on the exception
as a means of avoiding assessment \424\ and business restructuring if
the cost of compliance associated with the exception is less than
assessment costs and the costs of business restructuring. In the ANE
Adopting Release, the Commission provided an estimate of this category
of persons.\425\ However, in light of the reduction in security-based
swap market activity since the publication of the ANE Adopting
Release,\426\ the Commission believes that it would be appropriate to
update that estimate to more accurately identify the set of persons
that potentially may use the exception. Analyses of the 2017 TIW data
indicate that approximately five non-U.S. persons,\427\ beyond those
non-U.S. persons likely to incur assessment costs in connection with
the other cross-border counting rules that the Commission previously
had adopted in the Cross-Border Adopting Release,\428\ are likely to
exceed the $2 billion threshold \429\ the Commission has previously
employed to estimate the number of persons likely to incur assessment
costs under Exchange Act Rule 3a71-3(b). These non-U.S. persons may
have an incentive to rely on the exception as a means of avoiding
assessment if the cost of compliance associated with the exception is
less than the assessment costs.
---------------------------------------------------------------------------

    \424\ These non-U.S. persons may incur assessment costs to
determine whether their covered inter-dealer security-based swap
positions exceed the $50 billion cap (see Part II.C.1, supra).
However, these non-U.S. persons may not find it necessary to count
toward the $50 billion threshold if their total covered inter-dealer
security-based swap positions is less than $50 billion or they
restructure their security-based swap business to avoid engaging in
such covered positions. To the extent that this is true, it may
still benefit these non-U.S. persons to rely on the exception to
avoid assessing the amount of security-based swap transactions
between two non-U.S. persons that are arranged, negotiated, or
executed by personnel located in the U.S. for the purposes of the de
minimis threshold analysis.
    \425\ See ANE Adopting Release, 81 FR at 8627.
    \426\ See Part VI.A.4, supra.
    \427\ Adjustments to these statistics from the ANE Adopting
Release reflect further analysis of the TIW data. Cf. ANE Adopting
Release, 81 FR at 8627 (providing an estimate of 10 additional non-
U.S. persons based on 2014 TIW data).
    \428\ See Proposing Release, 84 FR at 24208 n.13.
    \429\ See ANE Adopting Release, 81 FR at 8626.
---------------------------------------------------------------------------

(b) Non-U.S. Persons Seeking To Avoid Security-Based Swap Dealer
Regulation
    Another category of persons that potentially may use the exception
are those non-U.S. persons whose dealing transaction volume would have
fallen below the $3 billion de minimis threshold if their transactions
with non-U.S. counterparties were not counted toward the de minimis
threshold under the current ``arranged, negotiated, or executed''
counting requirement, but absent the exception, would have dealing
transactions in excess of that threshold.\430\ Such non-U.S. persons
may choose to use the exception if they expect the compliance cost
associated with the exception to be lower than the compliance cost
associated with being subject to the full set of security-based swap
dealer regulation and the cost of business restructuring. The
Commission's analysis of 2017 TIW data indicates that there is one non-
U.S. person whose transaction volume would have fallen below the $3
billion de minimis threshold if that person's transactions with non-
U.S. counterparties were not counted toward the de minimis threshold
under the current ``arranged, negotiated, or executed'' counting
requirement.\431\
---------------------------------------------------------------------------

    \430\ The $3 billion threshold is being used to help identify
potential impacts of the exception. A phase-in threshold of $8
billion currently is in effect. See Exchange Act Rule 3a71-2(a)(1).
    \431\ The analysis begins by considering the single-name CDS
transactions of each of the non-U.S. persons against both U.S.-
person and non-U.S.-person counterparties. The Commission then
excluded transactions involving these non-U.S. persons and their
non-U.S. person counterparties. For this analysis, we assume that
all transactions between non-U.S. person dealers and non-U.S.
counterparties are arranged, negotiated, or executed using U.S.
personnel.
---------------------------------------------------------------------------

(c) U.S. Dealing Entities Considering Changes to Booking Practices
    A third category of persons that potentially may use the exception
are those U.S. dealers that use U.S. personnel to arrange, negotiate,
or execute transactions with non-U.S. counterparties. Such dealers may
consider booking future transactions with non-U.S. counterparties to
their non-U.S. affiliates, while still using U.S. personnel to arrange,
negotiate, or execute such transactions. These U.S. dealers may have an
incentive to engage in such booking practices in order to utilize the
exception to the extent that they wish to continue using U.S. personnel
to arrange, negotiate, or execute transactions with non-U.S.
counterparties and the compliance cost associated with the exception is
less than the cost of compliance with Title VII requirements (if they
choose not to book transactions to avail themselves of the exception)
and the cost of business restructuring (if they choose to both book
transactions to their non-U.S. affiliates and also refrain from using
U.S. personnel to arrange, negotiate, or execute such
transactions).\432\ The Commission's analysis of 2017 TIW data
indicates that there are six U.S. dealers who transact with non-U.S.
counterparties, who are likely to register as security-based swap
dealers,\433\ and have non-U.S. affiliates that also transact in the
CDS market. To the extent that these U.S. dealers anticipate booking
future transactions with non-U.S. counterparties that are arranged,
negotiated, or executed by U.S. personnel to their non-U.S. affiliates,
the Commission believes that these U.S. dealers may potentially make
use of the exception.
---------------------------------------------------------------------------

    \432\ The Commission recognizes that this potential use of the
exception by U.S. dealing entities is distinct from the rationale
underlying the exception, which is to help avoid market
fragmentation and operational risks resulting from the relocation of
U.S. personnel by non-U.S. dealers. See Proposing Release, 84 FR at
24231. Nonetheless, such changes in booking practices by U.S.
dealing entities might be a consequence of the exception.
    \433\ To the extent that U.S. persons with transaction volumes
that are insufficient to trigger dealer registration potentially
might also make use of the exception, this estimate would be a lower
bound estimate of the number of U.S. persons that potentially may
make use of the exception.

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

(d) Additional Considerations and Summary
    The economic analysis of the exception depends, in part, on whether
non-U.S. persons that might make use of the exception have U.S.
affiliates that are likely to register as security-based swap dealers
or are registered broker-dealer affiliates.\434\ Of the six non-U.S.
persons discussed above,\435\ four have majority-owned affiliates that
are registered broker-dealers. Of the same six non-U.S. persons, one
has a majority-owned affiliate that is likely to register as a
security-based swap dealer. Of the six U.S. persons discussed above,
all have majority-owned affiliates that are registered broker-dealers,
and all have majority-owned affiliates that are likely to register as
security-based swap dealers. Of these 12 persons, eight are banks, and
three are affiliated with banks. These estimates are summarized in
Table 1 below. The Commission's analysis of the security-based swap
market \436\ indicates that these 12 persons transacted with 807 non-
U.S. counterparties, of which 558 participate in the swap markets and
249 do not.
---------------------------------------------------------------------------

    \434\ As discussed in Part VI.B.1, infra, non-U.S. persons that
already have an affiliated registered security-based swap dealer or
affiliated registered broker-dealer likely would use their existing
registered affiliates to rely on the exception rather than register
new entities. For these non-U.S. persons, the costs of complying
with the conditions associated with the exception likely would be
lower than the per-entity costs reported in Table 3, which are based
on the de novo formation of a security-based swap dealer or broker-
dealer.
    \435\ Calculated as the 5 non-U.S. persons seeking to reduce
assessment costs (see Part VI.A.7.a, supra) + 1 non-U.S. person
seeking to avoid security-based swap dealer regulation (see Part
VI.A.7.b, supra) = 6 non-U.S. persons.
    \436\ The analysis uses 2017 TIW data.

        Table 1--Affiliates of Persons That May Use the Exception
------------------------------------------------------------------------
  Persons identified in TIW data that may use
                 the exception                    Non-U.S.       U.S.
------------------------------------------------------------------------
Estimate......................................            6            6
Breakdown:
    Has majority-owned registered broker-                 4            6
     dealer affiliate.........................
    Has majority-owned affiliate likely to                1            6
     become registered security-based swap
     dealer...................................
    Is a bank.................................            4            4
    Is a bank affiliate.......................            1            2
------------------------------------------------------------------------

    In summary, the Commission's analysis of 2017 TIW data indicates
that 12 persons \437\ may make use of the exception. In light of the
uncertainty associated with this estimate \438\ and to account for
potential growth of the security-based swap market, and consistent with
the approach in the ANE Adopting Release, the Commission believes that
it is reasonable to increase this estimate by a factor of two.\439\ As
a result, the Commission estimates that up to 24 persons potentially
may make use of the exception. The Commission also doubles the number
of non-U.S. counterparties discussed above and estimates that persons
that may make use of the exception may transact with up to 1,614 non-
U.S. counterparties, of which 1,116 participate in the swap markets and
498 do not.\440\ In response to a commenter who noted the absence of an
estimate of the security-based swap transaction activity potentially
implicated by the exception,\441\ the Commission is providing an
estimate of the security-based swap transactions that the 24 persons
may engage in with non-U.S. counterparties. The Commission estimates
that these 24 persons may transact up to 97,894 security-based swap
transactions with an aggregate notional amount of $554 billion \442\
with the 1,614 non-U.S. counterparties. The Commission estimates that
these transactions make up between 4.7% and 13.1% \443\ of the U.S.
security-based swap market.
---------------------------------------------------------------------------

    \437\ Calculated as 5 non-U.S. persons seeking to reduce
assessment costs (see Part VI.A.7.a, supra) + 1 non-U.S. person
seeking to avoid security-based swap dealer regulation (see Part
VI.A.7.b, supra) + 6 U.S. persons considering changes to booking
practices (see Part VI.A.7.c, supra) = 12 persons.
    \438\ The estimate may be overinclusive, as it is unlikely that
all transactions between two non-U.S. persons are arranged,
negotiated, or executed by personnel located in a U.S. branch or
office; it may also be underinclusive, as our TIW data do not
include single-name CDS transactions between two non-U.S. entities
written on non-U.S. underliers, some of which may be arranged,
negotiated, or executed by personnel located in a U.S. branch or
office, or transactions on other types of security-based swaps
(including equity swaps) whether on U.S. or non-U.S. underliers. See
ANE Adopting Release, 81 FR at 8627.
    \439\ See id. The Commission does not believe increasing the
estimate by a factor of two is arbitrary, as suggested by a
commenter (see AFR letter at 4). The security-based swap market
could grow in the future such that the number of persons that may
use the exception could exceed the 12 persons that the Commission
estimated from the 2017 TIW data. Further, as discussed in note 438,
supra, there is uncertainty associated with the estimate of 12
persons due to limitations of the TIW data, which suggests that the
number of persons that may use the exception could exceed 12. In
light of these considerations and consistent with the approach in
the ANE Adopting Release, the Commission believes that it is
reasonable to increase the estimate by a factor of two.
    \440\ See Part VI.B.3.a, infra, where we use these estimates to
calculate certain costs associated with an additional alternative.
    \441\ See AFR letter at 4.
    \442\ The Commission estimates that the 12 persons identified in
the 2017 TIW data engaged in 48,947 single-name CDS transactions
with an aggregate notional amount of $277 billion with their non-
U.S. counterparties. To address potential growth in the market and
data related uncertainty, and consistent with the approach in the
ANE Adopting Release, the Commission has doubled the number of
transactions and aggregate notional amount to, respectively, 97,894
transactions and $554 billion. See Part VI.A.4, supra.
    \443\ In the 2017 TIW data, the Commission estimates that there
are 372,445 single-name CDS transactions with an aggregate notional
amount of $5,962 billion. To address potential growth in the market
and data related uncertainty, and consistent with the approach in
the ANE Adopting Release, the Commission estimates that there are
372,445 x 2 = 744,890 security-based swap transactions with an
aggregate notional amount of $5,962 billion x 2 = $11,924 billion in
the U.S. security-based swap market. In terms of transaction count,
the set of security-based swap transactions that may be subject to
the conditional exception makes up 97,894/744,890 x 100 = 13.1% of
the U.S. security-based swap market. In terms of aggregate notional
amount, this set of transactions makes up 554/11,924 x 100 = 4.7% of
the U.S. security-based swap market.
---------------------------------------------------------------------------

8. Statutory Disqualification
    In the Rule of Practice 194 Adopting Release, the Commission
analyzed, among others, data on the number of natural persons
associated with SBS Entities, applications for review under parallel
review processes, and relevant research on statutory disqualification.
In that release, the Commission estimated that SBS Entities may file up
to five applications per year with respect to their associated natural
persons. A more detailed discussion of these data and estimates can be
found in that release.\444\ If associated natural persons who become
statutorily disqualified are located outside of the U.S. and effect or
are involved in effecting transactions solely with foreign
counterparties and foreign branches of U.S. counterparties, the
amendment may decrease the number of these applications for relief and
corresponding direct costs.
---------------------------------------------------------------------------

    \444\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.

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

    The Commission has received comments \445\ concerning the potential
impact of the proposed approach on the number of associated persons
subject to the statutory prohibition relative to the baseline, as
summarized in Table 2 below.
---------------------------------------------------------------------------

    \445\ See European Commission email, summarized in Table 4 below
and showing that 6 market participants estimated that the proposal
may reduce the scope of associated persons within the statutory
prohibition by an average of approximately 54%, with a range of
estimates between 20% and 85%.

                      Table 2--Estimates of Associated Persons Affected by the Proposal 446
      [Panel A. Market Participant Estimates of the Number of Associated Persons Affected by the Proposal]
----------------------------------------------------------------------------------------------------------------
             Estimate                  Bank 1       Bank 2       Bank 3       Bank 4       Bank 5       Bank 6
----------------------------------------------------------------------------------------------------------------
Baseline \447\....................        3,750  2,150-2,250        2,100        2,100        1,340       >6,800
Proposal \448\....................        1,125  1,350-1,400      700-800  \449\ 1,680      650-750       >1,000
----------------------------------------------------------------------------------------------------------------

    [Panel B. Percentage Reduction in Associated Persons Based on Data Provided by 6 Market Participants] 450
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          Estimate               Average       Minimum       Maximum
----------------------------------------------------------------------------------------------------------------
Proposal....................          54%           20%           85%
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    In the proposing release, the Commission estimated that the
exclusion may reduce the number of applications under Rule of Practice
194 by between zero and two applications. As summarized in Panel B of
Table 2, the Commission has received estimates that the proposal may
reduce the scope of associated persons subject to the statutory
prohibition by an average of 54%, with a range of between 20% and 85%.
In the Rule 194 Adopting Release that forms part of this economic
baseline, the Commission estimated that there may be as many as 5
applications per year under Rule of Practice 194.\451\ Using the
estimate of 5 applications per year under the baseline and the above
range of between 20% and 85% reduction in the scope of natural persons
subject to the statutory prohibition relative to baseline, the
Commission now estimates that adopting the proposed approach may reduce
the number of applications under Rule of Practice 194 by between one
and four applications.\452\
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    \446\ See European Commission email.
    \447\ Range of associated persons if global SBS associated
persons are taken into account, with broad definition and accounting
for back office.
    \448\ Remaining range of associated persons after accounting for
potential reduction of this number when removing personnel with no
U.S. person contacts.
    \449\ This figure represents an estimate of ``only those
associated persons authorized to communicate directly with U.S.
persons.''
    \450\ 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.
    \451\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.
    \452\ This estimate is calculated as follows: 5 x 0.2 = 1
application; 5 x 0.85 = 4.25 or, approximately, 4 applications.
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9. Certification, Opinion of Counsel, and Employee Questionnaires
    As a baseline matter, SBS Entity Registration rules, including Rule
15Fb2-1 and the certification and opinion of counsel requirements in
Rule 15Fb2-4, have been adopted but compliance with registration rules
is not yet required.
    In addition, Rule 17a-3(a)(12) requires all broker-dealers,
including broker-dealers that may seek to register with the Commission
as SBS Entities, to make and keep current a questionnaire or
application for employment for each associated person. In the
Recordkeeping and Reporting Adopting Release, the Commission adopted a
parallel requirement, in Rule 18a-5, for stand-alone and bank SBS
Entities. The Commission is adopting modifications to Rule 18a-5(a)(10)
and Rule 18a-5(b)(8). Based on 2017 TIW data, of 22 non-U.S. persons
that may register with the Commission as security-based swap dealers,
the Commission estimates that approximately 12 security-based swap
dealers will be foreign banks and another 3 will be foreign stand-alone
security-based swap dealers that may be affected by these
modifications.

B. Amendment to Rule 3a71-3

    This section discusses the potential costs and benefits associated
with the amendment to Rule 3a71-3 and the effects of the amendment on
efficiency, competition, and capital formation.
    Under the adopted alternative, each person that engages in
arranging, negotiating, and executing activity with non-U.S.
counterparties using affiliated U.S.-based personnel would have two
possible options for complying with the Commission's Title VII
regulations regarding the cross-border application of the ``security-
based swap dealer'' definition. The first option would be for the
persons to follow current security-based swap dealer counting
requirements without regard for the exception afforded by the
amendment. Specifically, a person could opt to incur the assessment
costs to determine (i) whether any portion of their security-based swap
transaction activities must be counted against the dealer de minimis
thresholds, and (ii) whether the total notional amount of relevant
transaction activities exceeds the de minimis threshold.\453\ If the
amount of its activities crosses the de minimis thresholds, then the
person would have to register as a security-based swap dealer and
become subject to Title VII security-based swap dealer requirements. A
person that chooses to comply in this manner would experience no
incremental economic effects under the exception as compared to the
baseline.
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    \453\ See Part II.A, supra.
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    The second option would be to rely on the exception afforded by the
amendment. Under the amendment, a person could register one entity as a
security-based swap dealer or broker-dealer \454\ to arrange,
negotiate, or execute transactions with non-U.S. counterparties on its
behalf using personnel located in a U.S. branch or office. Doing so
could allow it to avoid the direct regulation of itself (or multiple
affiliated entities) as a security-based swap dealer. A person that
chooses to use this exception and incur the associated costs to meet
the conditions of this exception, detailed below, likely would not
incur assessment costs with respect to

security-based swap transactions with non-U.S. counterparties that are
arranged, negotiated, or executed by personnel located in the United
States.
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    \454\ Registration may not be required if, as discussed in Part
VI.A.7, supra, persons who may take advantage of this exception
already have affiliates that are registered and choose to use these
registered entities to take advantage of the exception. See also
Part VI.B.1.a, infra.
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    As discussed above, the Commission believes that up to 24 \455\
persons potentially may use the exception to the extent that the
compliance costs associated with the exception are lower than the
compliance costs in the absence of the exception.
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    \455\ See Part VI.A.7, supra.
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1. Costs and Benefits of the Amendment
    The Commission believes that the amendment would provide increased
flexibility to security-based swap market participants to comply with
the Title VII framework while preserving their existing business
practices. This could reduce their compliance burdens, while supporting
the Title VII regime's benefit of mitigating risks in foreign security-
based swap markets that may flow into U.S. financial markets through
liquidity spillovers. The Commission also believes that the amendments
could reduce market fragmentation and associated distortions. At the
same time, and as detailed later in this section, the Commission
acknowledges that the amendment potentially limits certain other
programmatic benefits of the Title VII regime by excusing security-
based swap market participants that elect to use the exception from
some of the Title VII requirements that would otherwise apply to their
activity. The Commission believes that the amendment will result in
compliance costs for persons that elect to use the exception, as
described below. However, the Commission expects that persons will
elect to incur those costs only where it would be less costly than
either complying with the Title VII framework or restructuring to avoid
using U.S. personnel to arrange, negotiate, or execute transactions
with non-U.S. counterparties.
(a) Costs and Benefits for Persons That May Use the Amendment
    The primary benefit of the amendment is that it would permit a
person further flexibility to opt into a Title VII compliance framework
that is compatible with its existing business practices. While the
registered U.S. person would be the entity adhering to most of the
conditions set forth in the amendment and the non-U.S. person would be
responsible for complying with some of the other conditions,\456\ for
the purposes of this analysis, the Commission assumes that the costs of
complying with these conditions will be passed on to the non-U.S.-
person affiliate. In the absence of the amendment, a non-U.S. person
could incur the cost of registering as a security-based swap dealer,
and a financial group may incur the cost of registering at least one
security-based swap dealer \457\ due to the ``arranged, negotiated, or
executed'' counting test. The non-U.S. person or group accordingly
would incur the cost necessary for compliance with the full set of
security-based swap dealer requirements by one or more registered
security-based swap dealers. These burdens, contingent on exceeding the
de minimis threshold, are in addition to the assessment costs that the
non-U.S. person would incur to identify and count relevant market-
facing activity toward the de minimis threshold.
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    \456\ See, e.g., Exchange Act Rule 3a71-3(d)(1)(iii)(A).
    \457\ The available data limit the Commission's ability to
discern the multiple different legal entities each of which engages
in security-based swap market-facing activity at levels above the de
minimis thresholds because the way in which non-U.S. persons
organize their dealing business may not align with the way their
transaction volumes are accounted for in TIW. In particular, it is
possible that some of the 10 non-U.S. persons identified in the TIW
data as potential registrants aggregate transaction volumes of
multiple non-U.S.-person dealers. In such cases, the exclusion of
transactions between these non-U.S.-person dealers and non-U.S.
counterparties from the de minimis calculations may result in
multiple non-U.S.-person dealers no longer meeting the de minimis
threshold.
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    As discussed in the ANE Adopting Release, such a non-U.S. person
could respond to these costs by restructuring its security-based swap
business to avoid using U.S. personnel to arrange, negotiate, or
execute transactions with non-U.S. counterparties. Such a strategy
would allow the non-U.S. person to avoid counting transactions between
the non-U.S. person and its non-U.S. counterparties toward the non-U.S.
person's de minimis threshold. In addition to reducing the likelihood
of incurring the programmatic costs associated with the full set of
security-based swap dealer requirements under Title VII, this response
to current requirements could reduce the assessment costs associated
with counting transactions toward the de minimis threshold and fully
abrogate the need to identify transactions with non-U.S. counterparties
that involve U.S. personnel.\458\
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    \458\ In 2016, the Commission estimated a cost of $410,000 per
entity to establish systems to identify market-facing activity
arranged, negotiated, or executed using U.S. personnel and $6,500
per entity per year for training, compliance and verification costs.
See ANE Adopting Release, 81 FR at 8627. Adjusted for inflation,
these amounts are respectively approximately $443,292 and $7,028 in
2019 dollars. Unless otherwise stated, cost estimates in Part VI of
this release are adjusted for CPI inflation using data from the
Bureau of Labor Statistics through June 2019, where applicable.
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    However, the Commission also noted in the ANE Adopting Release that
restructuring is itself costly. To reduce the costs of assessment and
potential dealer registration, a non-U.S. person may need to incur
costs to ensure that U.S. personnel are not involved in arranging,
negotiating, or executing transactions with non-U.S. counterparties.
The Commission was able to quantify some, but not all of the costs of
restructuring in the ANE Adopting Release.\459\ As discussed above in
Part VI.A.2.d, non-U.S. persons may make their location decisions based
on business considerations such as maintaining 24-hour operations or
the value of local market expertise. Thus, restructuring business lines
or relocating personnel (or the activities performed by U.S. personnel)
to avoid the United States could result in less efficient operations
for non-U.S. persons active in the security-based swap market.
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    \459\ In 2016, the Commission estimated it would cost
approximately $28,300 per entity to establish policies and
procedures to restrict communication between personnel located in
the United States employed by non-U.S. persons or their agents, and
other personnel involved in market-facing activity. See ANE Adopting
Release, 81 FR at 8628. Adjusted for inflation, this is
approximately $30,598. The foregoing is one of the ways in which a
non-U.S. person might choose to restructure its business activities.
Other restructuring methods, such as the relocation of U.S.
personnel to locations outside the United States, potentially would
be more costly.
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    The exception would benefit non-U.S. persons by offering them an
alternative to costly relocation or restructuring that would still
permit them to avoid some of the costs associated with assessing their
market-facing activity while also reducing the likelihood that their
market-facing activity crosses the de minimis threshold. As discussed
in detail below, the availability of the exception would be conditioned
on the use of a registered entity and compliance with certain Title VII
requirements designed to protect counterparties but not all Title VII
requirements. To the extent that the costs of compliance with these
conditions are lower than the compliance costs in the absence of the
amendment and the costs of business restructuring, the exception could
reduce the regulatory cost burden for the non-U.S. person or group.
    The Commission recognizes that U.S.-based dealing entities may use
the exception by booking transactions with non-U.S. counterparties into
non-U.S. affiliates, thereby avoiding the application of the full set
of security-based swap dealer requirements to those transactions and
the associated security-

based swaps.\460\ As discussed further in Part VI.B.1.b below, U.S.-
based dealing entities that use the conditional exception in this
manner may benefit by incurring lower compliance costs when providing
liquidity to non-U.S. counterparties.
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    \460\ See Parts II.C and VI.A.7, supra.
    \461\ Certain cost estimates presented in this section differ
from those presented in the Proposing Release (see Proposing
Release, 84 FR at 24255-61). There are a number of reasons for such
differences. First, the Commission now adjusts for inflation through
June 2019, whereas in the Proposing Release, the Commission adjusted
for inflation through the end of 2018 (see note 458, supra). Second,
the Commission now uses data through the end of 2018 to estimate the
capital requirement for the registered entity, whereas in the
Proposing Release, the Commission used data through the first
quarter of 2018. Third, the Commission has revised the cost
estimates associated with the suitability condition to reflect (a)
the number of non-U.S. counterparties presented in Part VII.A.4 note
663, infra, and (b) modifications to the suitability condition as
discussed in Part II.C.2, supra, and Part VII.A.4, infra. Fourth,
the Commission has removed the costs associated with the proposed
portfolio reconciliation requirement, which the Commission is not
adopting. Fifth, the Commission has revised the cost associated with
the capital requirement for the registered entity if it is a
registered broker, in light of modifications discussed in Part
II.C.1, supra.
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    The Commission's designation of a listed jurisdiction by order
could signal to non-U.S. counterparties that a non-U.S. person was
subject to a regulatory regime that, at a minimum, is consistent with
the public interest in terms of financial responsibility requirements,
the jurisdiction's supervisory compliance program, the enforcement
authority in connection with those requirements, and other factors the
Commission may consider. This process potentially provides a
certification benefit to non-U.S. persons availing themselves of the
exception by demonstrating to non-U.S. counterparties the applicability
of regulatory requirements that would be in the public interest.
    Table 3 summarizes the quantifiable costs the Commission estimates
non-U.S. persons could incur as a result of the conditions associated
with the exception. The per-entity cost estimates assume the de novo
formation of a security-based swap dealer or broker-dealer. The
Commission expects that these are likely upper bounds for per-entity
costs for two reasons. First, non-U.S. persons may already be regulated
by jurisdictions with similar requirements and, as a consequence of
foreign regulatory requirements, may already have established
infrastructure, policies, and procedures that would facilitate meeting
the conditions of the exception. For example, a non-U.S. person
regulated by a jurisdiction with similar trade acknowledgment and
verification requirements would likely already have an order management
system in place capable of complying with Rule 15Fi-2, making
development of a novel system for the purpose of taking advantage of
the exception unnecessary. Second, non-U.S. persons that already have
an affiliated registered security-based swap dealer or registered
broker-dealer likely would use their existing registered affiliates to
rely on the exception rather than register new entities.

                                 Table 3--Estimates of Quantifiable Costs Associated With Amendment to Rule 3a71-3 \461\
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