reporting obligations (including pursuant to Regulation SBSR).'' The
Commission is proposing this requirement not only because of our
view that reporting arrangements should be clarified in advance, due
to the importance of ensuring that the transaction is reported
accurately and in a timely manner, but also because the inclusion of
such provision could potentially help to address an issue related to
how SDRs can verify the information that they receive, as discussed
in detail in Section I.E below.
---------------------------------------------------------------------------

    For purposes of Rule 15Fi-5(b)(2), all trade acknowledgements and
verifications of security-based swap transactions required under Rule
15Fi-2 would be deemed to be security-based swap trading relationship
documentation, as they often may contain one or more terms contemplated
by the policies and procedures required by proposed Rule 15Fi-5.
Further, the Commission understands that in some transactions, the
parties may choose to document their trading relationship by using a
stand-alone ``long-form confirmation'' that includes all of the terms
governing the relationship. The proposed rule is not intended to
interfere with this practice. Accordingly, we preliminarily believe
that the use of a ``long-form confirmation'' would comply with proposed
Rule 15Fi-5 so long as such document is: (1) In written form and
includes all of the elements of the trading relationship required under
the rule (whether by incorporating them by reference from a standard
master agreement or by expressly restating them in the confirmation)
and (2) executed prior to, or contemporaneously with, the execution of
each relevant security-based swap.
    The policies and procedures required by the proposed rule also
would require that the security-based swap trading relationship
documentation include credit support arrangements.\85\ Such credit
support would be required to contain, among other things and in
accordance with applicable requirements under regulations adopted by
the Commission or any prudential regulators,\86\ and without
limitation, the following:
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    \85\ See proposed Rule 15Fi-5(b)(3).
    \86\ See supra note 48.
---------------------------------------------------------------------------

     Initial and variation margin requirements, if any;
     types of assets that may be used as margin and asset
valuation haircuts, if any;
     investment and re-hypothecation terms for assets used as
margin for uncleared security-based swaps, if any; and
     custodial arrangements for margin assets, including
whether margin assets are to be segregated with an independent third
party, in accordance with Section 3E(f) of the Exchange Act, if
any.\87\
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    \87\ 15 U.S.C. 78c-5(f).
---------------------------------------------------------------------------

    As the Commission has previously explained, ensuring that uncleared
OTC derivatives transactions are appropriately collateralized was one
of the key elements of the Title VII reforms.\88\ Accordingly, we
preliminarily believe that policies and procedures requiring
counterparties to

clearly document the applicable processes and requirements for
calculating and exchanging margin in connection with a security-based
swap transaction is an important step in achieving this broader
regulatory objective.
---------------------------------------------------------------------------

    \88\ See supra Section I.B.1.
---------------------------------------------------------------------------

3. Proposed Rule 15Fi-5(b)(4): Documenting Valuation Methodologies
    As mentioned throughout this release, ensuring that security-based
swaps are accurately valued throughout the duration of a contract
should play an important role in protecting the integrity of the OTC
derivatives market, both at the level of an individual participant and
systemically across the broader financial market.\89\ Accordingly,
proposed Rule 15Fi-5(b)(4) would require that the applicable policies
and procedures provide that the relevant swap trading relationship
documentation between certain types of counterparties include written
documentation in which the parties agree on the process, which may
include any agreed upon methods, procedures, rules, and inputs, for
determining the value of each security-based swap at any time from
execution to the termination, maturity, or expiration of such security-
based swap for the purposes of complying with the margin requirements
under Section 15F(e) of the Exchange Act (and applicable
regulations),\90\ and the risk management requirements under Section
15F(j) of the Exchange Act (and applicable regulations).\91\ To the
maximum extent practicable, such valuations would need to be based on
recently-executed transactions, valuations provided by independent
third parties, or other objective criteria.\92\
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    \89\ See id.
    \90\ See 15 U.S.C. 78o-10(e). For the avoidance of doubt, the
requirements in proposed Rule 15Fi-5(b)(4) are intended to
facilitate agreement between an SBS Entity and its counterparty as
to how they will determine the value of a security-based swap in
order to, among other things, comply with the margin requirements
promulgated by either the Commission or, with respect to an SBS
Entity that is a bank, the applicable prudential regulator. These
requirements are not intended in any way to supersede those
underlying margin requirements.
    \91\ See 15 U.S.C. 78o-10(j).
    \92\ See proposed Rule 15Fi-5(b)(4)(i).
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    The requirements in proposed Rule 15Fi-5(b)(4) regarding valuation
methodology would apply to security-based swap trading relationship
documentation entered into between: (1) Two SBS Entities; (2) an SBS
Entity and a ``financial counterparty;'' and (3) an SBS Entity and any
other counterparty, if requested by such counterparty. Accordingly, we
are also proposing to amend Rule 15Fi-1 to add a definition of
``financial counterparty,'' which would include any counterparty that
is not an SBS Entity and that is one of the following:
     A swap dealer;
     a major swap participant;
     a commodity pool as defined in Section 1a(10) of the
Commodity Exchange Act (7 U.S.C. 1a(10));
     a private fund as defined in Section 202(a)(29) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a));
     an employee benefit plan as defined in paragraphs (3) and
(32) of Section 3 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1002); and
     a person predominantly engaged in activities that are in
the business of banking or, in activities that are financial in nature,
as defined in Section 4(k) of the Bank Holding Company Act of 1956 (12
U.S.C. 1843k).\93\
---------------------------------------------------------------------------

    \93\ See proposed Rule 15Fi-1(g). The corresponding definition
in CFTC Rule 23.500(e) is referred to as a ``financial entity.''. We
replaced the word ``entity'' with ``counterparty'' to avoid any
confusion due to the fact that there are other definitions of
``financial entity'' within the Exchange Act and its implementing
regulations. For example, term ``financial entity'' is used in
Section 3C(g) of the Exchange Act for purposes of the statutory
exception to the mandatory clearing requirement in Title VII. See 15
U.S.C. 78c-3(g)(3). Similarly, there is a definition of ``financial
entity'' in Rule 3a67-6 under the Exchange Act, which is used for
one of the tests for determining a person's status under the
definition of ``major security-based swap participant'' in Section
3(a)(67) of the Exchange Act. See 15 U.S.C. 78. Other than the
different titles, we do not believe that there are any substantive
differences between the CFTC's definition of ``financial entity''
and the proposed definition of ``financial counterparty.''
---------------------------------------------------------------------------

    Further, proposed Rule 15Fi-5(b)(4)(ii) has been designed to help
ensure that the required valuation documentation between SBS Entities
and their counterparties contains sufficient guidance and information
in the event of a problem with determining the value of a security-
based swap. Specifically, the documentation required by the applicable
policies and procedures must include either: (1) Alternative methods
for determining the value of the security-based swap for the purposes
of complying with proposed Rule 15Fi-5(b)(4) in the event of the
unavailability or other failure of any input required to value the
security-based swap for such purposes; or (2) a valuation dispute
resolution process by which the value of the security-based swap shall
be determined for the purposes of complying with the rule.\94\
---------------------------------------------------------------------------

    \94\ See proposed Rule 15Fi-5(b)(4)(ii).
---------------------------------------------------------------------------

    To the extent that the prescribed valuation documentation needs to
be updated, revised, or otherwise modified, proposed Rule 15Fi-
5(b)(4)(iv) provides that the parties may agree on changes or
procedures for modifying or amending such documentation at any
time.\95\ Finally, in recognition of the fact that valuation data and
methodologies often include, or may be based on, private information,
proposed Rule 15Fi-5(b)(4)(iii) makes clear that an SBS Entity is not
required to disclose to the counterparty confidential, proprietary
information about any model it may use to value a security-based swap.
---------------------------------------------------------------------------

    \95\ The text of CFTC Rule 23.504(b)(4)(iv), which is the
corresponding subsection under CFTC rules, provides that ``[t]he
parties may agree on changes or procedures for modifying or amending
the documentation required by this paragraph at any time.'' Proposed
Rule 15Fi-5(b)(4)(iv) does not contain the phrase ``required by this
paragraph.'' We view this to be solely a technical change and do not
intend for it to represent a substantive deviation from the
corresponding CFTC rule. Rather, the difference is intended to avoid
any suggestion that the parties could amend the underlying
requirements contained in proposed Rule 15Fi-5(b)(4).
---------------------------------------------------------------------------

4. Proposed Rule 15Fi-5(b)(5) and (6): Other Disclosure Requirements
    Proposed Rule 15Fi-5 also would require that the policies and
procedures governing the applicable trading relationship documentation
require an SBS Entity and its counterparty to disclose to each other
certain information regarding their legal and bankruptcy status, and to
include a statement regarding the status of a security-based swap if
accepted for clearing by a CCP. The first requirement relates to
whether the SBS Entity or its counterparty is subject to a particular
legal regime in the event of its failure, such as FDIC receivership for
banks or orderly liquidation for certain financial companies that meet
the requirements set forth in Title II of the Dodd-Frank Act.\96\ As
background, Title II of the Dodd-Frank Act provides for an alternative
insolvency regime for the ``orderly liquidation'' of large financial
companies,\97\ including broker-dealers,

that meet specified criteria (each a ``covered financial company'') as
set forth in Title II of the Dodd-Frank Act.\98\ If the covered
financial company is (1) a broker or dealer and (2) a member of the
Securities Investor Protection Corporation (``SIPC''), such ``covered
broker or dealer'' would be placed into an orderly liquidation
proceeding with the FDIC appointed as receiver.\99\ Because this
orderly liquidation process, which was modeled on the receivership
process used for failed banks, is different from the liquidation
regimes established under the Securities Investor Protection Act of
1970 \100\ or by the U.S. Bankruptcy Code,\101\ the Commission
preliminarily believes it to be appropriate to require counterparties
to a security-based swap transaction to disclose to each other whether
this alternative regime may potentially apply in the event of an
insolvency.
---------------------------------------------------------------------------

    \96\ See 12 U.S.C. 5382; 12 U.S.C. 5383.
    \97\ The term ``financial company'' is defined in 12 U.S.C.
5381(a)(11) to include any company (as defined in 12 U.S.C.
5381(a)(5)) that--
    (A) is incorporated or organized under any provision of Federal
law or the laws of any State;
    (B) is--
    (i) a bank holding company (as defined in 12 U.S.C. 1841(a));
    (ii) a nonbank financial company supervised by the Federal
Reserve Board;
    (iii) any company that is predominantly engaged in activities
that the Federal Reserve Board has determined are financial in
nature or incidental thereto for purposes of 12 U.S.C. 1843(k)
(other than a company described in clause (i) or (ii)); or
    (iv) any subsidiary of any company described in any of clauses
(i) through (iii) that is predominantly engaged in activities that
the Federal Reserve Board has determined are financial in nature or
incidental thereto for purposes of 12 U.S.C. 1843(k) (other than a
subsidiary that is an insured depository institution or an insurance
company); and
    (C) is not a Farm Credit System institution chartered under and
subject to the provisions of the Farm Credit Act of 1971, as amended
(12 U.S.C. 2001 et seq.), a governmental entity, or a regulated
entity, as defined under 12 U.S.C. 4502(20).
    \98\ Section 203 of the Dodd-Frank Act sets forth the process
for designating a financial company as a ``covered financial
company.'' In the case of a broker-dealer, or when a financial
company's largest U.S. subsidiary is a broker-dealer, Section
203(a)(1)(B) provides that the Federal Reserve Board and the
Commission (in each case subject to the approval of a two-thirds
majority of each agency's members), in consultation with the FDIC,
may, either on their own initiative or at the request of the
Secretary of the U.S. Treasury (``Secretary''), issue a written
orderly liquidation recommendation to the Secretary. See 12 U.S.C.
5383(a). Section 203(b) requires the Secretary (after consultation
with the President) to take action on the recommendation upon an
affirmative determination that, among other things, the failure of a
financial company would have serious adverse effects on financial
stability in the United States and that taking action under the
orderly liquidation authority with respect to that company would
avoid or mitigate such adverse effects. See 12 U.S.C. 5383(b).
    \99\ See 12 U.S.C. 5384. Section 205(a) of the Dodd-Frank Act
requires the FDIC, as the appointed receiver for any covered broker
or dealer, to appoint SIPC as trustee for the liquidation. See 12
U.S.C. 5385(a).
    \100\ 15 U.S.C. 78aaa et seq.
    \101\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Accordingly, proposed Rule 15Fi-5(b)(5) would require that each SBS
Entity's policies and procedures require that the security-based swap
trading relationship documentation contain a statement as to whether it
or its counterparty is an insured depository institution or financial
company. Further, the documentation also would need to contain a
statement that the orderly liquidation provisions of the Dodd-Frank Act
and the Federal Deposit Insurance Act \102\ may limit the rights of the
parties under their trading relationship documentation should either
party be deemed a ``covered financial company'' or is otherwise subject
to having the FDIC appointed as a receiver. The documentation would
further be required to state that such limitations relate to the right
of the non-covered party to terminate, liquidate, or net any security-
based swap by reason of the appointment of the FDIC as receiver,
notwithstanding the agreement of the parties in the security-based swap
trading relationship documentation, and of certain rights of the FDIC
to transfer security-based swaps of the covered party. Finally, the
policies and procedures would require that the trading relationship
documentation contain an agreement between the SBS Entity and its
counterparty to provide notice if either it or its counterparty becomes
or ceases to be an insured depository institution or a financial
company.\103\
---------------------------------------------------------------------------

    \102\ 12 U.S.C. 1811 et seq.
    \103\ Specifically, proposed Rule 15Fi-5(b)(5) would require
that an SBS Entity's policies and procedures require that the
applicable security-based swap trading relationship documentation
contain:
    (A) A statement of whether the SBS Entity is an insured
depository institution (as defined in 12 U.S.C. 1813) or a financial
company (as defined in Section 201(a)(11) of the Dodd-Frank Act, 12
U.S.C. 5381(a)(11));
    (B) A statement of whether the counterparty is an insured
depository institution or financial company;
    (C) A statement that in the event either the SBS Entity or its
counterparty becomes a covered financial company (as defined in 12
U.S.C. 5381(a)(8)) or is an insured depository institution for which
the FDIC has been appointed as a receiver (the ``covered party''),
certain limitations under Title II of the Dodd-Frank Act or the
Federal Deposit Insurance Act may apply to the right of the non-
covered party to terminate, liquidate, or net any security-based
swap by reason of the appointment of the FDIC as receiver,
notwithstanding the agreement of the parties in the security-based
swap trading relationship documentation, and that the FDIC may have
certain rights to transfer security-based swaps of the covered party
under Section 210(c)(9)(A) of the Dodd-Frank Act, 12 U.S.C.
5390(c)(9)(A), or 12 U.S.C. 1821(e)(9)(A); and
    (D) An agreement between the SBS Entity and its counterparty to
provide notice if either it or its counterparty becomes or ceases to
be an insured depository institution or a financial company.
---------------------------------------------------------------------------

    Second, the policies and procures required pursuant to proposed
Rule 15Fi-5(b)(6) would require the security-based swap trading
relationship documentation of each SBS Entity disclose certain
information regarding the status of a security-based swap accepted for
clearing by a clearing agency. Specifically, such documentation would
need to contain a notice that, upon acceptance of a security-based swap
by a clearing agency:
     The original security-based swap is extinguished;
     The original security-based swap is replaced by equal and
opposite security-based swaps with the clearing agency; and
     All terms of the security-based swap shall conform to the
product specifications of the cleared security-based swap established
under the clearing agency's rules.
    The Commission preliminarily believes that this disclosure should
provide important information to counterparties regarding the effects
of clearing a trade at a clearing agency and clarify the status of the
contract following its acceptance and novation at the clearing agency.
5. Proposed Rule 15Fi-5(c): Audit of Security-Based Swap Trading
Relationship Documentation
    Proposed Rule 15Fi-5(c) would require each SBS Entity to have an
independent auditor conduct periodic audits sufficient to identify any
material weakness in its documentation policies and procedures required
by the rule. The proposal also would require that a record of the
results of each audit be retained for a period of three years after the
conclusion of the audit.\104\ The Commission preliminarily believes
that requiring periodic audits of a firm's security-based swap trading
relationship documentation is consistent with sound risk mitigation
practices and is designed to reduce the prevalence of discrepancies
during the course of these transactions. This proposed requirement
differs slightly from CFTC Rule 23.504(c), which references an
independent ``internal or external'' auditor.\105\
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    \104\ The three year holding period for these records is
contained in the applicable recordkeeping, reporting, and
notification requirements for SBS Entities, as opposed to in
proposed Rule 15Fi-5(c) itself.
    \105\ See 17 CFR 23.504(c). In the Commission's experience
overseeing accounting and auditing standards in the context of
certain disclosure requirements under the federal securities laws,
an internal auditor typically reports to the management of the
applicable entity, which would be inconsistent with the Commission's
auditor independence rules. See Rule 2-01(c)(2) of Regulation S-X
(Employment Relationships). 17 CFR 210.2-01(c). At the same time, we
are not foreclosing the possibility that there could be alternative
structures to the typical ``internal'' auditor employment
relationship that could, if structured properly, not be inconsistent
with the Commission's auditor independence rules and request comment
below identifying and describing such potential structures.

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

6. Exceptions to the Trading Relationship Documentation Requirements
    Proposed Rule 15Fi-5(a)(1) would establish three different
exceptions from the basic requirement that each SBS Entity establish,
maintain, and follow written policies and procedures reasonably
designed to ensure that it executes written security-based swap trading
relationship documentation with each of its counterparties prior to, or
contemporaneously with, executing a security-based swap with any
counterparty. First, proposed Rule 15Fi-5(a)(1)(i) would provide an
exception for security-based swaps executed prior to the date on which
an SBS Entity is required to be in compliance with the documentation
rule. Although the Commission recognizes the significant risk
mitigation benefits associated with ensuring that all transactions are
supported by comprehensive and accurate documentation, we also
understand that it may be impractical to require SBS Entities to have
policies and procedures to bring existing transactions into compliance
with these proposed rules, particularly when weighing any potential
benefits of doing so against the potential costs. Accordingly, we
preliminarily believe that those transactions should be excepted from
the proposed documentation requirements.\106\
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    \106\ As discussed in detail in Section I.F.1 of this release,
the Commission also is proposing amendments to Rule 17a-4 and to
proposed Rule 18a-6 that would, among other things, require SBS
Entities to retain all security-based swap trading relationship
documentation with counterparties required to be created under
proposed Rule 15Fi-5. Because security-based swaps executed prior to
the date on which an SBS Entity is required to be in compliance with
proposed Rule 15Fi-5 would be exempt from the underlying
documentation requirement, any trading relationship documentation
voluntarily entered into in respect of those transactions would not
be deemed to have been created pursuant to proposed Rule 15Fi-5.
---------------------------------------------------------------------------

    To the extent that an SBS Entity maintains an existing security-
based swap portfolio with a counterparty that pre-dates the compliance
date, proposed Rule 15F-5(a)(1)(i) would provide an exception from the
documentation requirements only with respect to those existing
transactions. This means that the SBS Entity would not be in violation
of Rule 15Fi-5 solely as a result of having policies and procedures
that do not require such SBS Entity to have executed written security-
based swap trading relationship documentation with any counterparty
with respect to those existing transactions, or if the existing
documentation that it maintains with the counterparty does not
otherwise comply with the requirements of the rule. However, if the SBS
Entity enters into new security-based swap transactions with the
counterparty, the exception would not apply to those new trades, even
if trading relationship documentation already existed. Under those
circumstances, the SBS Entity's policies and procedures would be need
to be reasonably designed to ensure that the existing documentation
complies with the proposed rule before using it as the basis to enter
into any new security-based swaps with that counterparty.
    Second, proposed Rule 15Fi-5(a)(1)(ii) would provide an exception
for any ``clearing transaction'' which, pursuant to existing Rule 15Fi-
1(c), is defined as a security-based swap that has a clearing agency as
a direct counterparty.\107\ This exception is intended to recognize the
fact that once a security-based swap is cleared, the transaction is
governed primarily by the terms of the agreements in effect between the
clearing member and the clearing agency (as well as between the
clearing member and its customer, if applicable).
---------------------------------------------------------------------------

    \107\ See supra note 58 and accompanying text.
---------------------------------------------------------------------------

    Finally, proposed Rule 15Fi-5(a)(1)(iii) would provide an exception
for security-based swaps executed anonymously on a national securities
exchange or a security-based swap execution facility (``SBSEF''),
provided that:
     Such security-based swaps are intended to be cleared and
are actually submitted for clearing to a clearing agency;
     All terms of such security-based swaps conform to the
rules of the clearing agency; and
     Upon acceptance of such security-based swap by the
clearing agency: (1) The original security-based swap is extinguished;
(2) the original security-based swap is replaced by equal and opposite
security-based swaps with the clearing agency; and (3) all terms of the
security-based swap shall conform to the product specifications of the
cleared security-based swap established under the clearing agency's
rules.
    The exception in proposed Rule 15Fi-5(a)(1)(iii) is intended to
recognize the fact that the documentation requirements may be largely
impossible to comply with in the context of cleared anonymous
transactions by virtue of the fact that, by definition, the parties to
these transactions would not know the identity their counterparties.
Therefore, trading relationship documentation with any such
counterparty would be unnecessary and impractical.
    The exception provided for in proposed Rule 15Fi-5(a)(1)(iii) is
limited--and therefore distinguishable from the exception for cleared
security-based swap transactions--in one important respect to account
for instances where a transaction is not accepted for clearing
following its submission. For example, an SBS Entity may enter into a
security-based swap transaction on an anonymous basis on a national
securities exchange or an SBSEF, fully intending for the transaction to
be submitted to, and cleared by, a clearing agency. In some cases, the
transaction may be rejected by the clearing agency for reasons which
the SBS Entity did not know (or had no reasonable basis to know) prior
to its submission, such as possible operational or clerical errors or
if one of the clearing members unintentionally exceeded its clearing
limits. If a bilateral transaction continues to exist between the two
counterparties (who would no longer be unknown to each other), written
trading relationship documentation governing that transaction might not
exist between them.
    Under those circumstances, the Commission preliminarily believes
that the objectives of Rule 15Fi-5 would not be satisfied if the SBS
Entity and its counterparty did not ultimately have written agreement
on the terms of the remaining security-based swap transaction. At the
same time, however, because the transaction was initially entered into
on an anonymous basis, the two sides might need additional time to
agree to the terms of the trading relationship documentation,
particularly if they previously had not engaged in any other
transactions. Accordingly, the Commission is proposing that if an SBS
Entity that is relying on the exception in proposed Rule 15Fi-
5(a)(1)(iii) subsequently receives notice that the relevant security-
based swap transaction has not been accepted for clearing by a clearing
agency, the applicable policies and procedures would need to require
that the SBS Entity be in compliance with the requirements of proposed
Rule 15Fi-5 in all respects promptly after receipt of such notice.\108\
---------------------------------------------------------------------------

    \108\ The provisions in proposed Rule 15Fi-5(a)(iii) to account
for cleared anonymous transactions that are submitted for clearing,
but ultimately not accepted, are not included in CFTC Rule 23.504.
We have included this provision to account for situations when an
SBS Entity could be otherwise deemed to be not in compliance with
proposed Rule 15Fi-5 due to a transaction being rejected for
clearing for reasons which the SBS Entity did not know (or have a
reasonable basis to know) prior to when the transaction was
submitted to the clearing agency.
---------------------------------------------------------------------------

    The Commission notes that whether a contract that has not been
accepted for

clearing by a clearing agency continues to exist may depend on the
rules of the particular SBSEF, national securities exchange, or
clearing agency, or the agreement of the counterparties. If the end
result is that a security-based swap continues to exist despite being
rejected by the clearing agency, then the policies and procedures would
need to require that the SBS Entity be in compliance with the
requirements of Rule 15Fi-5 with respect to that transaction. If the
rejection from clearing results in a termination or voiding of the
original security-based swap, then there is no security-based swap for
which it is necessary to comply with Rule 15Fi-5.
7. Comments Requested
    The Commission generally requests comments on all aspects of
Proposed Rule 15Fi-5 (and any related definitions). In addition, the
Commission requests comments on the following specific issues:
     Do commenters agree with the scope of the proposed
exception from the trading relationship documentation requirements in
proposed Rule 15Fi-5 for clearing transactions? Why or why not? Because
the definition of ``clearing transactions'' only includes transactions
cleared at a clearing agency registered with the Commission pursuant to
Section 17A of the Exchange Act, security-based swaps cleared at a
foreign clearing agency that is not registered with the Commission
would not be deemed to be ``cleared'' for these purposes, and would
therefore be subject to proposed Rule 15Fi-5. Should the Commission
modify the scope of the exception for cleared security-based swaps,
such as by including transactions that are cleared at a clearing agency
that is not registered with the Commission pursuant to Section 17A of
the Exchange Act, whether because of an applicable exemption from
registration or because Exchange Act does not cover the activities of
the clearing agency? Why or why not?
     Do commenters agree with the proposed exception from the
trading relationship documentation requirements for security-based
swaps executed anonymously on a national securities exchange or an
SBSEF? Is it sufficiently comprehensive? Why or why not? The proposed
exception also provides that if a security-based swap executed
anonymously on a platform is subsequently rejected for clearing, the
SBS Entity would then be required to come into compliance with the
documentation requirements ``promptly'' after receipt of the notice of
rejection. Do you agree with this approach? Why or why not? Should the
Commission define or provide an interpretation of the word ``promptly''
for these purposes or, as an alternative, specify a fixed period of
time in the rule text in which SBS Entities would be required to comply
with proposed Rule 15Fi-5? Why or why not and, if so, how much time
should be provided?
     Are there any current industry practices that relate to
how counterparties to swaps and security-based swaps treat transactions
executed anonymously on a trading platform, but subsequently rejected
for clearing? If any such practices exist, please describe them,
including with regard to the length of time that it typically takes to
document these transactions, if they remain in effect.
     With respect to any Swap Entity that could potentially
register with the Commission as an SBS Entity, would the documentation
protocols (or any other applicable documentation) already in existence
with respect to CFTC Rule 23.504 satisfy the requirements in proposed
Rule 15Fi-5? Why or why not? Should proposed Rule 15Fi-5 be modified to
account for the way that market participants have designed their
existing protocols (or any other applicable documentation) to be
compliant with the CFTC's rules? Why or why not? For the purposes of
compliance with the proposed documentation rules, should the Commission
allow compliance with the CFTC's parallel documentation rules for some
period of time to allow dual SEC-CFTC registrants to conform their
existing documentation protocols (or any other applicable
documentation) following the adoption of proposed Rule 15Fi-5? If so,
on what factors should that reliance be conditioned and how long of a
compliance period should be provided? In the alternative, should the
Commission delay compliance with, or establish phased compliance
deadlines for, some or all of these requirements? Please explain the
nature of any compliance challenges (including any additional
documentation requirements), and the basis for any suggested compliance
period.
     As previously noted, proposed Rule 15Fi-5 has been
designed to be as consistent as possible with CFTC Rule 23.504, which
imposes trading relationship documentation requirements on Swap
Entities, in order to avoid requiring dual SEC-CFTC registrants to
incur additional systems or compliance costs due to differences between
the two agencies' approaches. To the extent that any such differences
remain, should the Commission consider, for any firm dually-registered
as both an SBS Entity and Swap Entity (regardless of whether such firm
is also registered with the Commission as a broker-dealer or with the
CFTC as a futures commission merchant), permitting such firm to comply
with proposed Rule 15Fi-5 on an ongoing basis by complying with CFTC
Rule 23.504, as if such rule applied to security-based swaps? If so,
what conditions, if any, should be placed on such reliance?
     In addition to the exceptions set forth in the proposed
rule, are there other types of security-based swaps that should not be
subject to the underlying trading relationship documentation
requirements?
     Should the Commission require that the policies and
procedures governing the required written security-based swap trading
relationship documentation be approved by a senior officer of the SBS
Entity, as is currently contemplated pursuant to proposed Rule 15Fi-5?
Why or why not? As an alternative to requiring action by a senior
officer, should such approval come instead from the governing body of
the SBS Entity? Why or why not? As an additional alternative, should
the Commission consider requiring approval of those policies and
procedures by someone below the senior officer level? If so, who within
an SBS Entity should approve them?
     For purposes of the requirement that a senior officer
approve the policies and procedures required by proposed Rule 15Fi-5,
the Commission has preliminarily interpreted the term ``senior
officer'' as covering only the most senior executives in the
organization, such as a firm's chief executive officer, chief financial
officer, chief legal officer, chief compliance officer, president, or
other person at a similar level. Do commenters agree with such
interpretation? Why or why not? Does the proposed interpretation create
any differences with respect to the manner in which Swap Entities are
required to comply with CFTC Rule 23.504(a)(2), which uses the term
``senior management''? Should the explanation included in the
Commission's proposed interpretation instead be included in the rule
text?
     Proposed Rule 15Fi-5 does not contain a comprehensive list
of all of the terms that should be addressed in the required security-
based swap trading relationship documentation. Rather, it provides that
the documentation must include ``all terms governing the trading
relationship'' between the SBS Entity and its counterparty and also
contains a non-exclusive list of terms that must be

included. Do commenters agree with that approach? Why or why not?
Should the Commission consider modifying the list of terms specifically
identified in proposed Rule 15Fi-5(b)(1)?
     Should the Commission provide any additional specificity
and/or guidance as it relates to one or more of the terms identified in
proposed Rule 15Fi-5(b)(1) as required to be included in the trading
relationship documentation? For example, should the rule specify the
types of payment obligation terms that should be addressed in the
documentation? Are there any particular details regarding potential
events of default or termination events that should be specified in the
documentation? Should the information requirements regarding the terms
of the credit support arrangements between the two parties be modified
in any way? In each case, why or why not and what additional details or
guidance should be provided?
     Proposed Rule 15Fi-5(b)(1) requires that the security-
based swap trading relationship documentation that SBS Entities execute
with the counterparties include terms addressing dispute resolution.
Should the Commission provide any additional specificity with respect
to this proposed requirement, including by identifying what particular
aspects of the dispute resolution process should be addressed in the
documentation? For example, should the documentation include specific
requirements regarding the methods for identifying, recording, and
monitoring disputes? Should the terms governing dispute resolution
identify specific time periods applicable to the process? Are there
particular aspects regarding communications between the counterparties
that should be specified in connection with the terms related to
dispute resolution, such as the method for providing notice of a
potential or actual dispute? In each case, why or why not, and what
additional details or guidance should be provided?
     Proposed Rule 15Fi-5(b)(4) would require SBS Entities to
include in their security-based swap trading relationship documentation
with certain counterparties written agreement on the terms for valuing
security-based swaps for the purposes of complying with the margin and
risk management requirements. Do you agree with the scope of that
requirement? Why or why not? Should these requirements apply to an SBS
Entity's transactions with all counterparties, including non-financial
counterparties, without regard to whether they are requested? Why or
why not? Is there any additional information that should be included in
this requirement, or should any of the proposed requirements be
modified or deleted? Do the provisions related to valuation
discrepancies provide a sufficient basis for helping to ensure that
disputes related to the value of a security-based swap are resolved in
as efficient a manner as possible, or should any changes be made to
these requirements? Should the requirements regarding valuation be
modified in any way to account for the use of internal and/or
proprietary inputs and models? In each case, why or why not, and how
and why should the proposed rule be modified?
     Are the protections in the proposed rule regarding the
treatment of confidential, proprietary information in connection with
the required valuation agreement sufficient to meet the needs of both
the party providing the information and the party receiving it? If not,
how should the proposal be revised to address any such concerns?
     In addition to the terms governing the valuation agreement
in proposed Rule 15Fi-5(b)(4), are there any other requirements that
should be limited to, or modified for, certain types of counterparties
(e.g., financial counterparties)? If so, which ones, and what
particular requirements should apply?
     Do the disclosure requirements in paragraphs (5) and (6)
of proposed Rule 15Fi-5(b), as they relate to the ``insured depository
institution'' or ``financial company'' status of the SBS Entity or its
counterparty and to the status of a security-based swap accepted for
clearing, respectively, provide useful and relevant information to
counterparties to security-based swaps? Why or why not? Should any
other disclosure requirements be modified or deleted? If so, which ones
and how? Should any additional disclosure requirements be added to the
proposed rule? If so, what should be added and why?
     Do commenters agree with the scope of the proposed
definition of ``financial counterparty'' in proposed Rule 15Fi-1(g),
which is used for determining when the required security-based swap
trading relationship documentation would need to include the valuation
methodology set forth in proposed Rule 15Fi-5(b)(4)? Should that
definition be expanded to include other types of financial entities,
such as SEC-registered broker-dealers, investment companies, or
investment advisers? If so, which types of entities should be added to
the definition and why?
     Do commenters agree with the proposed requirements related
to the performance of periodic audits of the SBS Entity's security-
based swap relationship documentation, as set forth in proposed Rule
15Fi-5(c)? Why or why not? If not, how should they be clarified? Should
the Commission provide any additional specificity regarding what
constitutes ``independence'' for these purposes? If so, how should that
standard be measured and evaluated? For example, the Commission has
extensive experience with respect to determining what constitutes
``independence'' in the context of accountants that audit and review
financial statements and prepare attestation reports filed with the
Commission, including in connection with rules adopted pursuant to
Title II of the Sarbanes-Oxley Act of 2002. Should the Commission
consider leveraging particular aspects of that experience in connection
with refining the requirements in proposed Rule 15Fi-5(c)? If so,
please explain.
     Are there any circumstances under which an internal
auditor could be considered to be ``independent'' for purposes of
proposed Rule 15Fi-5(c)? If so, please explain. If not, should the
Commission consider eliminating the requirement that the auditor be
independent in order to allow for internal audits of the SBS Entity's
security-based swap relationship documentation? If so, are there
particular conditions that should be included in the requirement in
order to maintain the integrity of the audit process?
     Should the person performing the audit of the SBS Entity's
security-based swap relationship documentation pursuant to proposed
Rule 15Fi-5(c) be subject to any qualification requirements, such as
the requirement to be registered with the Public Company Accounting
Oversight Board (``PCAOB'')? If so, which qualifications should be
required and why? If not, should proposed Rule 15Fi-5(c) be clarified
to state explicitly that PCAOB registration is not a condition of the
rule?
     Should SBS dealers and major SBS participants be treated
the same for purposes of the portfolio reconciliation requirements in
proposed Rule 15Fi-5? Why or why not?

E. Verification of Transaction Data by SDRs

    In light of certain of the rules we are proposing today, the
Commission believes it to be an appropriate time to revisit and request
comment on an issue previously identified in connection with the rules
applicable to the registration and ongoing regulation of SDRs. As
background, Section 13(n) of the

Exchange Act establishes a regulatory regime for the operation of and
governance of SDRs.\109\ Among other things, Section 13(n)(5)(B)
requires each registered SDR to ``confirm with both counterparties to
the security-based swap the accuracy of the data that was submitted.''
\110\ On February 15, 2015, the Commission adopted Rules 13n-1 to 13n-
12, which govern the SDR registration process, duties, and core
principles.\111\ Among other core principles governing the registration
and ongoing obligations of SDRs, Rule 13n-4(b)(3) implements the
statutory requirement set forth in Section 13(n)(5)(B) by requiring
SDRs to confirm, as prescribed in Rule 13n-5, with both counterparties
to the security-based swap the accuracy of the data that was
submitted.\112\
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    \109\ Section 3(a)(75) of the Exchange Act defines the term
``security-based swap data repository'' to mean ``any person that
collects and maintains information or records with respect to
transactions or positions in, or the terms and conditions of,
security-based swaps entered into by third parties for the purpose
of providing a centralized recordkeeping facility for security-based
swaps.'' 15 U.S.C. 78c(a)(75).
    \110\ See 15 U.S.C. 78m(n)(5).
    \111\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14437 (Mar. 19, 2015) (``SDR Adopting Release'').
    \112\ See 17 CFR 240.13n-4(b)(3).
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    As part of the process of implementing the SDR rules, at least one
former SDR applicant expressed reservations and concerns about the
burdens of requiring SDRs to reach out to counterparties who are not
its members to verify accuracy of the data.\113\ The Commission
understands these concerns and the difficulty SDRs could face when
attempting to contact counterparties to a security-based swap
transaction with whom the SDR has no existing relationship. At the same
time, however, the Commission also recognizes the importance of
ensuring that the security-based swap data reported to an SDR is
complete and accurate.
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    \113\ See, e.g., Letter from Michael C. Bodson, President and
Chief Executive Officer, The Depository Trust & Clearing
Corporation, and Larry E. Thompson, Chairman, DTCC Data Repository
(U.S.) LLC (``DDR''), Managing Director and Vice Chairman, The
Depository Trust & Clearing Corporation, dated Sept. 22, 2017,
regarding DDR's application for registration as an SDR (withdrawn on
Mar. 27, 2018), available at: https://www.sec.gov/comments/sbsdr-2016-02/sbsdr201602-2590214-161092.pdf (noting the difficulty an SDR
faces with respect to outreach to the non-reporting side of a
security-based swap when that non-reporting counterparty is not a
member of an SDR and proposing that Section 13(n)(5)(B) and
corresponding Rule 13n-4(b)(3) be interpreted as requiring SDRs to
confirm the accuracy of the security[hyphen]based swap solely with
counterparties who are its members).
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    Accordingly, the Commission preliminarily believes that certain
provisions in proposed Rules 15Fi-3 and 15Fi-5, if adopted and taken
together, could be relevant to SDRs in seeking to meet their
obligations under Section 13(n)(5)(B) and Rule 13n-4(b)(3). As we
explained in connection with adopting the SDR rules, SDRs may be able
to reasonably rely on certain third parties to address the accuracy of
the transaction data.\114\ For example, the Commission previously
stated that if an SDR develops reasonable policies and procedures that
rely on confirmations completed by another entity, such as a third-
party confirmation provider, as long as such reliance is reasonable the
SDR could use such confirmation to fulfill its obligations under
certain SDR rules.\115\ Because the two relevant provisions that we are
proposing today generally relate to the obligation of SBS Entities to
take certain steps in the reconciliation and documentation processes
related specifically to the reporting of the relevant security-based
swap data to an SDR, including by clarifying the reporting obligations
of the counterparties, the Commission believes that, like the previous
example, these measures, taken together, could provide an SDR with a
set of factors to assess the reasonableness of relying on an SBS
Entity's ability to independently provide the definitive report of a
given security-based swap position, thereby providing a basis for the
SDR to satisfy its statutory and regulatory obligations to verify the
accuracy of the reported data when the SBS Entity's counterparty is not
a member of the SDR. The Commission requests comment on whether this
preliminary analysis is accurate.
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    \114\ Cf. SDR Adopting Release, 80 FR at 14491.
    \115\ See id.
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1. Reconciliation of Terms Submitted to an SDR
    As described above in Section I.B.2, the definition of ``material
terms'' in proposed Rule 15Fi-1(i), which identifies the information
that SBS Entities would be required to reconcile with their
counterparties, differs based on whether a security-based swap
transaction had previously been included in a security-based swap
portfolio for purposes of the portfolio reconciliation requirements in
proposed Rule 15Fi-3. With respect to any security-based swap that has
not yet been reconciled as part of, a security-based swap portfolio,
``material terms'' would be defined to mean each term that is required
to be reported to a registered SDR under Rule 901 under the Exchange
Act.\116\ With respect to all other security-based swaps within a
security-based swap portfolio, the definition of ``material terms''
would exclude any term that is not relevant to the ongoing rights and
obligations of the parties and the valuation of the security-based
swap.
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    \116\ See proposed Rule 15Fi-1(i)(1) (referencing 17 CFR
242.901).
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    As we also previously noted in Section I.B.2, the Commission
preliminarily believes that there are potential benefits, both to SBS
Entities and potentially to the security-based swap market as a whole,
of requiring firms to initially reconcile all of the information
required to be reported to an SDR. Specifically, doing so helps to
ensure that the data reported to an SDR, and ultimately disseminated to
the public, is accurate and complete. Section 13(n)(5)(B) of the
Exchange Act and Rule 13n-4(b)(3) are both intended to accomplish the
same objective of transparency regarding complete and accurate
security-based swap data. Accordingly, like the previous example
involving the third-party confirmation process, it may be appropriate
to allow an SDR to meet its obligations by reasonably relying on an SBS
Entity. Such reliance could be based, at least in part, on that fact
that the SBS Entity would be subject to the portfolio reconciliation
requirements in proposed Rule 15Fi-3 using the proposed definition of
``material terms'' in Rule 15Fi-1(i), were it to be adopted, to
initially reconcile all of the terms of a transaction required to be
reported to an SDR or the Commission pursuant to Rule 901, particularly
in cases when the SBS Entity's counterparty is not onboarded to the
SDR.\117\ The Commission seeks comment on whether this preliminary
analysis is accurate.
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    \117\ The Commission also notes that Rule 905(a) of Regulation
SBSR, which was adopted in 2015, generally imposes a duty to correct
on any counterparty to a security-based swap (or any other person
having a duty to report the security-based swap) that discovers an
error in the information reported with respect to that security-
based swap. See 17 CFR 242.905(a). Accordingly, if any discrepancies
are identified in the course of satisfying the portfolio
reconciliation requirements contained in proposed Rule 15F-3 that
resulted in incorrect information having been reported to an SDR,
then the SBS Entity would be required to follow the procedures set
forth in Rule 905(a) to correct any erroneous information with the
SDR.
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2. Documentation of Regulatory Reporting Obligations
    As discussed above in Section I.D, proposed Rule 15Fi-5 would
require each SBS Entity to establish, maintain, and follow written
policies and procedures reasonably designed to ensure that it executes
written security-

based swap trading relationship documentation with each of its
counterparties prior to, or contemporaneously with, executing a
security-based swap with any counterparty. Paragraph (b)(1) of that
rule requires that the trading relationship documentation be in writing
and also sets forth the minimum set of items that must be addressed by
the documentation including, among other things, the allocation of any
applicable regulatory reporting obligations (including pursuant to
Regulation SBSR).\118\
---------------------------------------------------------------------------

    \118\ See 17 CFR 242.901(a).
---------------------------------------------------------------------------

    Rule 901(a) of Regulation SBSR establishes a ``reporting
hierarchy'' that specifies which counterparty to a security-based swap
has the duty to report the transaction. Where possible, the rule
assigns the reporting duty to the side that is registered with the
Commission as an SBS Entity. Thus, if only one of the counterparties to
a security-based swap transaction is an SBS Entity, then such SBS
Entity will be the reporting side. In addition, if one counterparty to
a security-based swap transaction is an SBS dealer and the other is a
major SBS participant, the SBS dealer will be the reporting side.
However, if both counterparties to a security-based swap transaction
are SBS dealers (or both are major SBS participants), the sides are
required to select the reporting side. The selection of the reporting
side is an example of the type of ``applicable reporting obligation''
that proposed Rule 15Fi-5(b)(1) would cover.
    Accordingly, the Commission preliminarily believes that requiring
SBS Entities to address any applicable regulatory reporting obligations
in the written trading relationship documentation that it executes with
their counterparties also could be relevant to SDRs in seeking to meet
their obligations under Section 13(n)(5)(B) and Rule 13n-4(b)(3). For
example, to the extent that only one counterparty to a security-based
swap is an SBS Entity, the trading relationship documentation could be
used to memorialize the fact that the SBS Entity is the reporting party
for purposes of Rule 901(a), and that such SBS Entity will be
responsible for verifying the accuracy of each security-based swap
transaction with the SDR.
3. Comments Requested
    The Commission generally requests comments on the issues described
above. In addition, the Commission requests comments on the following
specific issues:
     Do you agree with the analysis described above,
particularly as to how parts of proposed Rules 15Fi-3 (including the
definition of ``material terms'' in proposed Rule 15Fi-1(i)) and 15Fi-5
could help address the concerns raised by former SDR applicants with
respect to their obligations, pursuant to Section 13(n)(5)(B) of the
Exchange Act and Rule 13n-4(b)(3), to confirm with both counterparties
to a security-based swap the accuracy of the data that was submitted to
the SDR?
    [cir] Specifically, do those aspects of the proposed rules provide
a sufficient basis, in whole or in part, for an SDR to assess whether
it can reasonably rely on a SBS Entity's verification of transaction
data as the basis to meet the requirements of Section 13(n)(5)(B) and
Rule 13n-4(b)(3)? Why or why not?
    [cir] If not, should the Commission provide an exemption from the
verification requirements described above to SDRs that reasonably rely
on SBS Entities? Why or why not? If so, what specific terms and
conditions should be included in such exemption and why?
    [cir] Are there other regulatory actions the Commission should
consider to address the issue? If so, which ones and why?
     Should any aspect of the proposed analysis be modified in
any way to account for other situations that may not be fully addressed
here? If so, how and why? For example, would an SDR be able to
reasonably rely on an SBS Entity to independently provide the
definitive report of a given security-based swap position for both
counterparties in situations when the SBS Entity is acting as agent for
one of the two counterparties and is not itself a counterparty? Why or
why not, and how should the analysis be revised to address that
situation?

F. Recordkeeping Requirements

1. Proposed Amendments to Recordkeeping Rules
    The Commission also is proposing rule amendments that would modify
certain proposed requirements contained in its April 2014 release
proposing rules for the recordkeeping, reporting, and notification
requirements applicable to SBS Entities.\119\ Those rule amendments
would require each SBS Entity to make and keep current information
relevant to each portfolio reconciliation and portfolio compression
exercise in which it participates, and to retain a record of each
valuation dispute notification required pursuant to proposed Rule 15Fi-
3(c), all security-based swap trading relationship documentation
required to be created under proposed Rule 15Fi-5, a record of the
results of each audit of the SBS Entity's security-based swap trading
relationship documentation policies and procedures, as required
pursuant to proposed Rule 15Fi-5(c), and each policy and procedure
created pursuant to proposed Rules 15Fi-3 through 15Fi-5.
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    \119\ See supra note 2. Although we are proposing books and
records requirements that would be additive to an existing proposal,
we are not re-opening the comment period for the entirety of the SBS
Books and Records Proposing Release. Rather, our request for comment
in this section is limited solely to the recordkeeping requirements
related to the rules we are proposing today.
---------------------------------------------------------------------------

    Specifically, the Commission is proposing to amend: (1) Existing
Rule 17a-3 under the Exchange Act, which applies to SBS Entities that
are also registered with the Commission as broker-dealers under Section
15(b) of the Exchange Act (``broker-dealer SBS Entities''), and (2)
proposed Rule 18a-5 under the Exchange Act, which applies to SBS
Entities that are not also registered with the Commission as broker-
dealers under Section 15(b) of the Exchange Act (``stand-alone and bank
SBS Entities''). These proposed amendments would require each SBS
Entity to make and keep current records of each security-based swap
portfolio reconciliation, whether conducted pursuant to proposed Rule
15Fi-3 or otherwise,\120\ a copy of each valuation dispute notification
required to be provided to the Commission pursuant to proposed
Rule15Fi-3(c),\121\ and a record of each bilateral offset and each
bilateral portfolio compression exercise or multilateral portfolio
compression exercise in which it participates, whether conducted
pursuant to proposed Rule 15Fi-4 or otherwise.\122\
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    \120\ See proposed amendments to Rules 17a-3(a)(31)(i), 18a-
5(a)(18)(i), and 18a-5(b)(14)(i).
    \121\ See proposed amendments to Rules 17a-3(a)(31)(ii), 18a-
5(a)(18)(ii), and 18a-5(b)(14)(ii).
    \122\ See proposed amendments to Rules 17a-3(a)(31)(iii), 18a-
5(a)(18)(iii), and 18a-5(b)(14)(iii).
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    With respect to the reconciliation requirement, the proposed rules
would require that these records include the dates of the security-
based swap portfolio reconciliation, the number of portfolio
reconciliation discrepancies, the number of security-based swap
valuation disputes (including the time-to-resolution of each valuation
dispute and the age of outstanding valuation disputes, categorized by
transaction and counterparty), and the name of the third-party entity
performing the security-based swap portfolio

reconciliation, if any.\123\ With respect to the valuation notification
requirement, the proposed rules would require the retention of each
notification required to be provided to the Commission pursuant to
proposed Rule 15Fi-3(c).\124\ With respect to compression, the proposed
rules would require that these records include the dates of the offset
or compression, the security-based swaps included in the offset or
compression, the identity of the counterparties participating in the
offset or compression, the results of the compression, and the name of
the third-party entity performing the offset or compression, if
any.\125\ The Commission preliminarily believes that requiring SBS
Entities to make and retain such records will, among other things,
promote compliance with proposed Rules 15Fi-3 and 15Fi-4, assist SBS
Entities in the event that they need to resolve problems that relate to
a previous reconciliation or compression, and assist Commission
examiners in reviewing compliance with those rules.
---------------------------------------------------------------------------

    \123\ See proposed amendments to Rules 17a-3(a)(31)(i), 18a-
5(a)(18)(i), and 18a-5(b)(14)(i).
    \124\ See proposed amendments to Rules 17a-3(a)(31)(ii), 18a-
5(a)(18)(ii), and 18a-5(b)(14)(ii).
    \125\ See proposed amendments to Rules 17a-3(a)(31)(iii), 18a-
5(a)(18)(iii), and 18a-5(b)(14)(iii).
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    In addition, the Commission is proposing to amend (1) existing Rule
17a-4 under the Exchange Act, which requires each applicable broker-
dealer, including broker-dealer SBS Entities, to preserve certain
records if the broker-dealer makes or receives the type of record and
(2) proposed Rule 18a-6 under the Exchange Act, which imposes parallel
preservation requirements on stand-alone and bank SBS Entities. In
particular, the proposed amendments to Rule 17a-4 and to proposed Rule
18a-6 would require SBS Entities to retain all of the records required
to be made and kept under the proposed amendments to Rule 17a-3 and
proposed Rule 18a-5 for at least three years, the first two years in an
easily accessible place.\126\ The proposed amendments also would
require each SBS Entity to retain the following:
---------------------------------------------------------------------------

    \126\ See proposed amendments to Rules 17a-4(b)(1), 18a-
6(b)(1)(i), and 18a-6(b)(2)(i).
---------------------------------------------------------------------------

     the written policies and procedures required pursuant to
proposed Rules 15Fi-3 through 15Fi-5 until three years after
termination of the use of the policies and procedures; \127\
---------------------------------------------------------------------------

    \127\ See proposed amendments to Rules 17a-4(e)(10) and 18a-
6(d)(4).
---------------------------------------------------------------------------

     each written agreement with counterparties on the terms of
portfolio reconciliation with those counterparties as required to be
created under proposed Rules 15Fi-3(a)(1) and (b)(1) until three years
after the termination of the agreement and all transactions governed
thereby; \128\
---------------------------------------------------------------------------

    \128\ See proposed amendments to Rules 17a-4(e)(11)(i) and 18a-
6(d)(5)(i).
---------------------------------------------------------------------------

     security-based swap trading relationship documentation
with counterparties required to be created under proposed Rule 15Fi-5
until three years after the termination of such documentation and all
transactions governed thereby; \129\ and
---------------------------------------------------------------------------

    \129\ See proposed amendments to Rules 17a-4(e)(11)(ii) and 18a-
6(d)(5)(ii).
---------------------------------------------------------------------------

     a record of the results of each audit required to be
performed pursuant to proposed Rule 15Fi-5(c) until three years after
the completion of the audit.\130\
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    \130\ See proposed amendments to Rules 17a-4(e)(11)(iii) and
18a-6(d)(5)(iii).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring the retention
of the above records in accordance with the applicable rules will help
ensure that those records are retained in a manner that would allow
them to be readily accessible for Commission examiners.
2. Comments Requested
    The Commission generally requests comments on all aspects of the
proposed amendments to Rules 17a-3 and 17a-4 and to proposed Rules 18a-
5, and 18a-6. In addition, the Commission requests comments on the
following specific issues:
     Has the Commission provided sufficient guidance regarding
the scope of the proposed recordkeeping amendments? Are there aspects
of the proposed amendments for which the Commission should consider
providing additional guidance? If so, please explain.
     How do the types of records that would need to be made and
kept current under Rule 17a-3 and proposed Rule 18a-5, in each case as
proposed to be amended in this release, align with the types of records
that a futures commission merchant or a swap dealer is required to make
pursuant to CFTC regulations?

II. Cross-Border Application of Rules 15Fi-3 Through 15Fi-5.

A. Background on the Cross-Border Application of Title VII Requirements

    In 2013, the Commission proposed rules and interpretive guidance to
address the cross-border application of Title VII, including
requirements applicable to SBS Entities.\131\ In that proposal, the
Commission preliminarily interpreted the Title VII requirements
associated with registration to apply generally to the activities of
registered entities.\132\ The Commission further proposed a taxonomy to
classify requirements under Section 15F of the Exchange Act as applying
at either the transaction-level or at the entity-level.\133\ The
Commission took the preliminary view that transaction-level
requirements under Section 15F of the Exchange Act are those that
primarily focus on protecting counterparties to security-based swap
transactions by requiring SBS dealers to, among other things, provide
certain disclosures to counterparties, adhere to certain standards of
business conduct, and segregate customer funds, securities, and other
assets.\134\
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    \131\ 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 (May 23, 2013) (``Cross-Border Proposing
Release'') (discussing joint rulemaking to further define various
Title VII terms).
    \132\ See id. at 30986 (``We are proposing to apply the Title
VII requirements associated with registration (including, among
others, capital and margin requirements and external business
conduct requirements) to the activities of registered entities to
the extent we have determined that doing so advances the purposes of
Title VII.'') (footnotes omitted).
    \133\ See id. at 31009-10.
    \134\ Id.
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    In contrast to transaction-level requirements, the Commission
preliminarily took the view that entity-level requirements under
Section 15F of the Exchange Act are those that are expected to play a
role in ensuring the safety and soundness of the entity and thus relate
to the SBS Entity as a whole.\135\ Entity-level requirements include
capital and margin requirements, as well as other requirements relating
to a firm's identification and management of its risk exposure, such as
the requirements in Section 15F(i) of the Exchange Act, which provides
the statutory basis for the rules the Commission is proposing in this
release.\136\ Because these requirements relate to the entire entity,
the Commission proposed to apply them to SBS Entities on a firm-wide
basis, without exception.\137\
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    \135\ See id. at 31011.
    \136\ See id. at 31011-16 (addressing the classification of
capital and margin requirements, as well as of the documentation
standard requirements of Section 15F(i) of the Exchange Act and
other risk management requirements applicable to SBS dealers).
    \137\ See id. at 31011, 31024-25. See also id. at 31035
(applying the analysis to major SBS participants). In reaching this
conclusion, the Commission explained that it ``preliminarily
believes that entity-level requirements are core requirements of the
Commission's responsibility to ensure the safety and soundness of
registered security-based swap dealers,'' and that ``it would not be
consistent with this mandate to provide a blanket exclusion to
foreign security-based swap dealers from entity-level requirements
applicable to such entities.'' Id. at 31024 (footnotes omitted). The
Commission further expressed the preliminary view that concerns
regarding the application of entity-level requirements to foreign
SBS dealers would largely be addressed through the proposed approach
to substituted compliance. See id.

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

    The Commission first applied this taxonomy with respect to the
rules adopted pursuant to Section 15F(i) of the Exchange Act in 2016
when we adopted rules to implement business conduct standards for SBS
Entities.\138\ The Commission subsequently determined that the trade
acknowledgment and verification rules would apply at the entity-
level.\139\ The Commission has not, however, proposed or adopted a
cross-border interpretation with respect to the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements that we are now proposing.
---------------------------------------------------------------------------

    \138\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Release No.
77617 (Apr. 14, 2016), 81 FR 29960, 30061-69 (May 13, 2016)
(``Business Conduct Standards Adopting Release''). Under this
framework, rules relating to diligent supervision pursuant to
Section 15F(h)(1)(B), those relating to the chief compliance officer
under Section 15F(k) of the Exchange Act, and those relating to
certain risk management requirements under Section 15F(j) of the
Exchange Act were determined to be entity-level requirements that
apply to an SBS Entity's business with foreign counterparties to the
same extent that they apply to the SBS dealer's or major SBS
participant's U.S. business. The remaining rules were determined to
apply at the transaction-level.
    \139\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39826.
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B. Proposed Cross-Border Interpretation

    Consistent with its approach in both the Cross-Border Proposing
Release and the Trade Acknowledgement and Verification Adopting
Release, the Commission believes that the requirements being proposed
in this release pursuant to Section 15F(i) of the Exchange Act--as they
relate to portfolio reconciliation, portfolio compression, and trading
relationship documentation--should be treated as entity-level
requirements that apply to an SBS Entity's entire security-based swap
business without exception, including in connection with any security-
based swap business it conducts with foreign counterparties.
    The Commission preliminarily believes that the requirements
referenced above play an important role in addressing risks to the SBS
Entity as a whole, including risks related to the entity's safety and
soundness. As we have noted throughout this release in connection with
describing each of the proposed rules, providing SBS Entities and their
counterparties to security-based swap transactions with the ability to
identify and resolve discrepancies involving key terms of their
transactions--which is a key consideration underpinning both the
proposed portfolio reconciliation and trading relationship
documentation requirements--serves as an important mechanism for
allowing SBS Entities and their counterparties to manage their internal
risks.\140\ Similarly, portfolio compression is intended to help SBS
Entities and their counterparties in security-based swap transactions
manage their post-trade risks in a number of important ways, including
by eliminating redundant uncleared derivatives transactions (as
measured both by the number of contracts and total notional value) and
potentially reducing a market participant's credit risk to its direct
counterparties, including by eliminating all outstanding transactions
with some counterparties, without affecting the market participant's
overall economic position.\141\
---------------------------------------------------------------------------

    \140\ See supra note 14 and accompanying text.
    \141\ See supra notes 62-63 and accompanying text.
---------------------------------------------------------------------------

    An alternative approach that does not require an SBS Entity to take
steps to manage its internal risk using portfolio reconciliation,
compression, or standards governing trading relationship documentation
could be expected to contribute to operational risk and legal
uncertainty throughout the firm's entire security-based swap business,
affecting the entity's business as a whole, and not merely specific
security-based swap transactions. For example, as we have previously
noted, inaccurate or incomplete trading relationship documentation
could lead to, among other things, a collateral dispute between the
counterparties to a security-based swap transaction. The larger the
dispute, even if confined to a single counterparty, the greater the
risk that an SBS Entity could experience liquidity problems on a
firmwide basis.
    Moreover, to the extent that these risks affect the safety and
soundness of the SBS Entity, they also may affect the firm's
counterparties and the functioning of the broader security-based swap
market. Continuing with the previous example, if a collateral dispute
with a foreign counterparty creates liquidity issues throughout an SBS
Entity, the firm could experience difficulty making payments or posting
collateral to its other counterparties, which may include U.S. persons.
Accordingly, the Commission preliminarily believes that it is
appropriate to apply the proposed requirements to the entirety of an
SBS Entity's security-based swap business.\142\
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    \142\ We recognize that the CFTC has taken a different position
with regard to corresponding requirements pursuant to the CEA,
classifying them as what the CFTC has termed ``Category A''
transaction-level requirements. See CFTC Interpretive Guidance and
Policy Statement Regarding Compliance With Certain Swap Regulations,
78 FR 45292, 45334 (Jul. 26, 2013).
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C. Comments Requested

    The Commission generally requests comments on its interpretative
guidance regarding the cross-border application of Proposed Rules15Fi-3
through 15Fi-5. In addition, the Commission requests comments on the
following specific issues:
     Does the proposed approach appropriately treat the
proposed portfolio reconciliation, portfolio compression, and trading
relationship documentation requirements as entity-level requirements
applicable to the entire business conducted by foreign SBS Entities? If
not, please identify any particular aspects of those proposed rules
that should not be applied to a foreign SBS Entity, or applied only to
specific transactions, and explain how such an approach would be
consistent with the goals of Title VII.
     Should the Commission apply the same cross-border approach
to the application of the proposed portfolio reconciliation, portfolio
compression, and trading relationship documentation requirements for
both SBS dealers and major SBS participants? If you believe that the
approach should vary based on the type of SBS Entity involved, please
describe how the cross-border approach for SBS dealers should differ
from the cross-border approach for major SBS participants, and explain
the justification for any potential differences in approach.
     What types of conflicts might a foreign SBS Entity face if
subjected to the proposed portfolio reconciliation, portfolio
compression, and trading relationship documentation requirements in
more than one jurisdiction? In what situations would compliance with
more than one of these requirements be difficult or impossible?
     As an alternative to treating the proposed requirements as
entity-level requirements, should the Commission instead follow the
approach taken by the CFTC and treat the proposed portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements (or some combination of the three) as
transaction-level requirements? If so, to which cross-border security-
based swap

transactions should these requirements apply and why? Please describe
how these requirements would apply differently if classified as
transaction-level requirements instead of as entity-level requirements.
Please also describe any practical challenges that would be presented
by classifying them differently from the CFTC.

III. Availability of Substituted Compliance for Rules 15Fi-3 Through
15Fi-5

A. Existing Substituted Compliance Rule

    In 2016, the Commission adopted Rule 3a71-6 under the Exchange Act
to provide that non-U.S. SBS Entities could satisfy applicable business
conduct requirements under Section 15F by complying with comparable
regulatory requirements of a foreign jurisdiction, subject to certain
conditions. The rule in part provides that the Commission shall not
make a determination providing for substituted compliance unless the
Commission determines, among other things, that the foreign regulatory
requirements are comparable to otherwise applicable requirements.\143\
In adopting that substituted compliance rule, the Commission addressed
a range of issues and concerns that commenters had raised in response
to the substituted compliance proposal that was set forth in the Cross-
Border Proposing Release.
---------------------------------------------------------------------------

    \143\ See Business Conduct Standards Adopting Release, 81 FR at
30074.
---------------------------------------------------------------------------

    When the Commission adopted this substituted compliance rule that
solely addressed the business conduct rules, it stated that it expected
to assess the potential availability of substituted compliance in
connection with other requirements when the Commission considers final
rules to implement those requirements.\144\ Consistent with that
statement, the Commission subsequently amended Rule 3a71-6 in the Trade
Acknowledgment and Verification Adopting Release to provide SBS
Entities with the potential to avail themselves of substituted
compliance to satisfy the Title VII trade acknowledgment and
verification requirements.\145\
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    \144\ The Commission first addressed the potential for allowing
market participants to satisfy certain Title VII requirements by
complying with comparable foreign rules as a substitute in 2013 as
part of the Cross-Border Proposing Release. Pursuant to that
release, the Commission proposed making substituted compliance
potentially available in connection with the requirements applicable
to SBS dealers pursuant to Section 15F of the Exchange Act, other
than the registration requirements applicable to dealers. See Cross-
Border Proposing Release, 78 FR at 31088, 31207-08 (proposed Rule
3a71-5).
    \145\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39827-28.
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B. Proposed Amendment to Rule 3a71-6

    The Commission is proposing to further amend Rule 3a71-6 to provide
SBS Entities that are not U.S. persons (as defined in Rule 3a71-3(a)(4)
of the Exchange Act) with the potential to avail themselves of
substituted compliance to satisfy the Title VII portfolio compression,
portfolio reconciliation, and trading relationship documentation
requirements. In proposing to amend the rule, the Commission has
preliminarily concluded that the principles associated with substituted
compliance, as previously adopted in connection with both the business
conduct requirements and the trade acknowledgement and verification
requirements, in large part should similarly apply to the portfolio
compression, portfolio reconciliation, and trading relationship
documentation requirements we are proposing today. Accordingly, except
as discussed below, the proposed substituted compliance rule would
apply to the portfolio compression, portfolio reconciliation, and
trading relationship documentation requirements in the same manner as
it already applies to the business conduct requirements and the trade
acknowledgement and verification requirements.\146\
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    \146\ The discussions in the Business Conduct Standards Adopting
Release, including those regarding consideration of supervisory and
enforcement practices (see id. at 30079), regarding certain multi-
jurisdictional issues (see id. at 30079-80), and regarding
application procedures (see id. at 30080-81) are applicable to the
proposed portfolio compression, portfolio reconciliation, and
trading relationship documentation requirements.
---------------------------------------------------------------------------

1. Basis for Substituted Compliance in Connection With the Portfolio
Reconciliation, Portfolio Compression, and Trading Relationship
Documentation Requirements
    In light of the global nature of the security-based swap market and
the prevalence of cross-border transactions within that market, there
is the potential that the application of the Title VII portfolio
compression, portfolio reconciliation, and trading relationship
documentation requirements may lead to requirements that are
duplicative of, or in conflict with, applicable foreign requirements,
even when the two sets of requirements implement similar goals and lead
to similar results. Those results have the potential to disrupt
existing business relationships and, more generally, to reduce
competition and market efficiency.\147\
---------------------------------------------------------------------------

    \147\ See generally Business Conduct Standards Adopting Release,
81 FR at 30073-74 (addressing the basis for making substituted
compliance available in the context of the business conduct
requirements).
---------------------------------------------------------------------------

    To address those effects, the Commission preliminarily believes
that under certain circumstances it may be appropriate to allow the
possibility of substituted compliance, whereby market participants may
satisfy the proposed portfolio compression, portfolio reconciliation,
and trading relationship documentation requirements by complying with
comparable foreign requirements. Allowing for the possibility of
substituted compliance in this manner may be expected to help achieve
the benefits of those particular risk mitigation requirements--helping
to curb legal uncertainty and reduce credit and operational risk for
participants in security-based swap transactions and in the broader
market--in a way that helps avoid regulatory conflict and minimizes
duplication, thereby promoting market efficiency, enhancing
competition, and contributing to the overall functioning of the global
security-based swap market. Accordingly, the Commission is proposing to
amend paragraph (d) of Rule 3a71-6 to identify the portfolio
compression, portfolio reconciliation, and trading relationship
documentation requirements of Title VII as being potentially eligible
for substituted compliance.\148\
---------------------------------------------------------------------------

    \148\ Paragraph (a)(1) of the rule provides that the Commission
may, conditionally or unconditionally, by order, make a
determination with respect to a foreign financial regulatory system
that compliance with specified requirements under the foreign
financial system by an SBS dealer and/or by a registered major SBS
swap participant, or class thereof, may satisfy the corresponding
requirements identified in paragraph (d) of the rule that would
otherwise apply.
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2. Comparability Criteria, and Consideration of Related Requirements
    As discussed when we first adopted Rule 3a71-6--and reiterated when
we amended the rule pursuant to the Trade Acknowledgement and
Verification Adopting Release--the Commission will endeavor to take a
holistic approach in determining the comparability of foreign
requirements for substituted compliance purposes, focusing on
regulatory outcomes as a whole, rather than on a requirement-by-
requirement comparison.\149\ Under the proposed rule, the Commission's
comparability assessments associated with the

portfolio compression, portfolio reconciliation, and trading
relationship documentation rules accordingly will consider whether, in
the Commission's view, the foreign regulatory system achieves
regulatory outcomes that are comparable to the regulatory outcomes
associated with those Exchange Act requirements.
---------------------------------------------------------------------------

    \149\ See Business Conduct Standards Adopting Release, 81 FR at
30078-79. See also Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39828.
---------------------------------------------------------------------------

    Proposed new paragraph (d)(4) of Rule 3a71-6 would also provide
that prior to making a substituted compliance determination in
connection with the portfolio reconciliation, portfolio compression,
and trading relationship documentation requirements, the Commission
intends to consider whether the requirements of the foreign financial
regulatory system, the duties imposed by the foreign financial
regulatory system, and the information that is required to be provided
to counterparties pursuant to the requirements of the foreign financial
regulatory system, are comparable to those required pursuant to the
applicable Exchange Act provisions.
    In application, the Commission may determine to conduct its
comparability analyses regarding the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements in conjunction with comparability analyses regarding other
Exchange Act requirements that, like the requirements we are proposing
today, promote risk mitigation in connection with SBS Entities.
Accordingly, depending on the applicable facts and circumstances, the
comparability assessment associated with the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements may constitute part of a broader assessment of Exchange
Act risk mitigation requirements, and the applicable comparability
decisions may be made at the level of those risk mitigation
requirements as a whole.\150\
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    \150\ We have not proposed rules making substituted compliance
available specifically with respect to the amendments we are
proposing to proposed Rules 18a-5 and 18a-6, which specify the
recordkeeping, reporting, and notification requirements applicable
to SBS Entities. Rather, to the extent that substituted compliance
is made available with respect to those rules, we would anticipate
that any determination made with respect to the comparability of the
foreign financial regulatory system would address all aspects of the
Commission recordkeeping, reporting, and notification requirements
for SBS Entities including any amendments that we ultimately adopt
with respect to the portfolio reconciliation, portfolio compression,
and trading relationship document requirements.
---------------------------------------------------------------------------

3. Comments Requested
    The Commission generally requests comments on all aspects of the
proposed amendment to Rule 3a71-6. In addition, the Commission requests
comments on the following specific issues:
     Should the Commission provide SBS Entities with the
potential to avail themselves of substituted compliance to satisfy the
Title VII portfolio reconciliation, portfolio compression, and trading
relationship requirements? Why or why not? If you believe that
substituted compliance should not be available with respect to these
requirements, how would you distinguish this policy decision from the
Commission's previous determination to make substituted compliance
potentially available with respect to other Title VII requirements
(i.e., the business conduct rules and the trade acknowledgment and
verification rules)?
     Do commenters agree with the scope and language of the
proposed amendment to Rule 3a71-6? Why or why not? Are there aspects of
the scope of the proposed rule for which the Commission should consider
providing additional guidance? If so, what additional guidance should
be provided and why?
     Are the items identified in the proposed amendment to Rule
3a71-6 as factors the Commission will consider prior to making a
substituted compliance determination in connection with the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements appropriate? Why or why not? Should any of
those items be modified or deleted? Should additional considerations be
added? If so, please explain.

IV. General Request for Comment

    We request and encourage any interested person to submit comments
regarding the proposed rules, specific issues discussed in this
release, and other matters that may have an effect on the proposed
rules. With regard to any comments, we note that such comments are of
particular assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
In addition, we would appreciate any comments related to the
comparability of the rules we are proposing today and the corresponding
CFTC rules already in effect, including whether certain aspects of the
proposed rules should be modified to more fully conform to the CFTC's
rules. In comparing the two sets of rules, commenters are encouraged to
identify any areas where the proposed rules may not be sufficiently
aligned with the corresponding CFTC rules, such that they could impose
unnecessary burdens (with respect to documentation or otherwise) on
persons likely to register with the Commission as SBS Entities who are
also registered with the CFTC as Swap Entities.

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \151\ imposes certain
requirements on federal agencies in connection with the conducting or
sponsoring of any ``collection of information.'' \152\ For example, 44
U.S.C. 3507(a)(1)(D) provides that before adopting (or revising) a
collection of information requirement, an agency must, among other
things, publish a notice in the Federal Register stating that the
agency has submitted the proposed collection of information to the
Office of Management and Budget (``OMB'') and setting forth certain
required information, including: (1) A title for the collection
information; (2) a summary of the collected information; (3) a brief
description of the need for the information and the proposed use of the
information; (4) a description of the likely respondents and proposed
frequency of response to the collection of information; (5) an estimate
of the paperwork burden that shall result from the collection of
information; and (6) notice that comments may be submitted to the
agency and director of OMB.\153\
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    \151\ 44 U.S.C. 3501 et seq.
    \152\ See 44 U.S.C. 3502(3).
    \153\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR
1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the PRA. The
Commission is submitting these collections of information to OMB for
review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid
control number.
    Specifically, proposed Rules 15Fi-3, 15Fi-4, and 15Fi-5 would
impose new collection of information requirements. The title of these
new collections of information is, collectively, ``Rules 15Fi-3--15Fi-
5--Risk Mitigation Techniques for Uncleared Security-Based Swaps.'' OMB
has not yet assigned a control number to these new collections of
information. In addition, the proposals to amend Rules 3a71-6, 17a-3
and 17a-4 would amend already-existing collection of information
requirements. Finally, the proposals to amend proposed Rules 18a-5 and
18a-6 would amend proposed collection of information requirements that
were previously submitted to OMB for review

in connection with the SBS Books and Records Proposing Release. The
titles and control numbers for these collections of information are as
follows:
    (1) Rule 17a-3--Records to be made by certain brokers and dealers
(OMB control number 3235-0033);
    (2) Rule 17a-4--Records to be preserved by certain brokers and
dealers (OMB control number 3235-0279);
    (3) Rule 18a-5--Records to be made by certain security-based swap
dealers and major security-based swap participants (OMB control number
3235-0745);
    (4) Rule 18a-6--Records to be preserved by certain security-based
swap dealers and major security-based swap participants (OMB control
number 3235-0751); and
    (5) Rule 3a71-6--Substituted Compliance for Foreign Security-Based
Swap Dealers (OMB control number 3235-0715).

A. Summary of Collections of Information

1. Proposed Rule 15Fi-3: Portfolio Reconciliation
    Proposed Rule 15Fi-3 generally would require SBS Entities to (1)
engage in periodic portfolio reconciliation activities with
counterparties who are also SBS Entities, and (2) establish, maintain,
and follow written policies and procedures reasonably designed to
ensure that they engage in periodic portfolio reconciliation with
counterparties who are not SBS Entities.\154\ Among other things,
proposed Rule 15Fi-3 would specify the requirements applicable to an
SBS Entity for purposes of engaging in portfolio reconciliation with
either type of counterparty (as well as the applicable definitions),
with regard to (1) the information that the two sides would be required
to exchange as part of the reconciliation process,\155\ (2) the
frequency by which an SBS Entity would be required to reconcile its
security-based swap portfolios with its counterparties,\156\ (3) the
required policies and procedures specifying the means and timeframes by
which an SBS Entity would be required to resolve discrepancies with
respect to either the valuation or a material term of a security-based
swap,\157\ and (4) the requirement that an SBS Entity agree in writing
with each of its counterparties on the terms of the portfolio
reconciliation, including agreement of the selection of any third-party
service provider.\158\ Finally, proposed Rule 15Fi-3(c) would require
an SBS Entity to promptly notify the Commission of any security-based
swap valuation dispute in excess of $20,000,000 (or its equivalent in
any other currency) if not resolved within: (1) Three business days, if
the dispute is with a counterparty that is an SBS Entity; or (2) five
business days, if the dispute is with a counterparty that is not an SBS
Entity.\159\
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    \154\ Proposed Rule 15Fi-3 would not apply to any security-based
swap that has a clearing agency as a direct counterparty.
    \155\ See supra Section I.B.2.
    \156\ See supra Sections I.B.3 and I.B.5.
    \157\ See supra Sections I.B.4 and I.B.5.
    \158\ See supra Sections I.B.3 and I.B.5.
    \159\ See supra Section I.B.6.
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2. Proposed Rule 15Fi-4: Portfolio Compression
    Proposed Rule 15Fi-4 would require SBS Entities to establish,
maintain, and follow written policies and procedures related to
bilateral offsetting of security-based swaps, and periodic bilateral
and multilateral compression exercises. Specifically, proposed Rules
15Fi-4(a)(2) and (3) would require each SBS Entity to establish,
maintain, and follow written policies and procedures for periodically
engaging in both bilateral portfolio compression exercises and
multilateral portfolio compression exercises, in each case when
appropriate, with each counterparty that is an SBS Entity.\160\
Similarly, proposed Rule 15Fi-4(a)(1) would require each SBS Entity to
establish, maintain, and follow written policies and procedures for
terminating each ``fully offsetting security-based swap'' that it
maintains with another SBS Entity in a timely fashion, when
appropriate.\161\ To the extent that an SBS Entity transacts with a
counterparty that is not an SBS Entity, proposed Rule 15Fi-4(b)
provides that such policies and procedures would only need to address
terminating each ``fully offsetting security-based swap'' or engaging
in a bilateral or multilateral portfolio compression exercise, when
appropriate and to the extent requested by any such counterparty.\162\
---------------------------------------------------------------------------

    \160\ See supra Section I.C.2.
    \161\ See supra Section I.C.3.
    \162\ See supra Section I.C.2 and I.C.3.
---------------------------------------------------------------------------

3. Proposed Rule 15Fi-5: Written Trading Relationship Documentation
    Proposed Rule 15Fi-5 would require that each SBS Entity enter into
written trading relationship documentation with each of its
counterparties, subject to certain exceptions, prior to, or
contemporaneously with, executing a security-based swap transaction, in
each case in the manner as provided for in the rule.\163\ The proposed
rule also requires that the trading relationship documentation include
(1) credit support arrangements addressing certain specified items
related to, among other things, margin haircuts, and custody of margin
assets \164\ and (2) agreements regarding the means by which the
counterparties would determine the value of each security-based
swap.\165\ The proposal also contains requirements for SBS Entities and
their counterparties to disclose to each other certain information
regarding their legal and bankruptcy status, and to include a statement
regarding the status of a security-based swap if accepted for clearing
by a CCP.\166\ Finally, the proposal would require each SBS Entity to
have an independent auditor conduct periodic audits sufficient to
identify any material weakness in its documentation policies and
procedures required by the rule.\167\
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    \163\ See supra Section I.D.2. The proposed rule would require
that the security-based swap trading relationship documentation
address, among other things, terms addressing payment obligations,
netting of payments, events of default or other termination events,
calculation and netting of obligations upon termination, transfer of
rights and obligations, allocation of any applicable regulatory
reporting obligations, governing law, valuation and dispute
resolution.
    \164\ See id.
    \165\ See supra Section I.D.3.
    \166\ See supra Section I.D.4.
    \167\ See supra Section I.D.5.
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4. Proposed Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books
and Records Requirements
    Rule 17a-3 requires a broker-dealer to make and keep current
certain records, and Rule 17a-4 requires a broker-dealer to preserve
certain records if it makes or receives them.\168\ The Commission is
proposing to amend these existing rules to account for the security-
based swap risk mitigation activities of broker-dealers, including
broker-dealer SBS Entities, by requiring the making and preserving of
any required records regarding portfolio reconciliation, bilateral
offsets, bilateral or multilateral portfolio compression, valuation
disputes, and written trading relationship documentation. With respect
to stand-alone SBS Entities, the Commission is proposing to amend
proposed Rules 18a-5 and 18a-6--which were first proposed in 2014 and
are themselves modeled on Rule 17a-3 and 17a-4--to account for these
same risk mitigation requirements.\169\
---------------------------------------------------------------------------

    \168\ 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \169\ See supra Section I.F.1.

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

5. Proposed Amendment to Rule 3a71-6: Substituted Compliance
    The proposed amendment to Rule 3a71-6 would permit non-U.S. SBS
Entities to comply with the proposed portfolio reconciliation,
portfolio compression, and written trading relationship documentation
requirements by following the comparable regulatory requirements of a
foreign financial regulatory system. Specifically, the proposal would
add proposed Rules 15Fi-3 through 15Fi-5 to the list of Commission
requirements eligible for a substituted compliance determination and
would set forth the standard by which the Commission would make such
determination.\170\
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    \170\ See supra Sections III.B.1 and III.B.2.
---------------------------------------------------------------------------

B. Proposed Use of Information

1. Proposed Rule 15Fi-3: Portfolio Reconciliation
    As previously noted, the Commission preliminarily believes that the
information shared by counterparties to a security-based swap
transaction periodically during the portfolio reconciliation process,
as contemplated by proposed Rule 15Fi-3, will play an important role in
assisting those counterparties in identifying and resolving
discrepancies involving key terms of their transactions on an ongoing
basis. This information also should allow those counterparties to
improve their management of internal risks related to the enforcement
of their rights and the performance of their obligations under a
security-based swap. For example, the information obtained and provided
in the course of portfolio reconciliation should help ensure that the
counterparties to a security-based swap are and remain in agreement
with respect to all material terms throughout the life of the
transaction, thereby mitigating the possibility that a discrepancy
could unexpectedly affect either side's ability to perform any or all
of its obligations under the contract, including those obligations
related to the posting of collateral. Moreover, requiring SBS Entities
to agree in writing with each of their counterparties on the terms of
the portfolio reconciliation (including, if applicable, agreement on
the selection of any third party service provider who may be performing
the reconciliation) should help to minimize any discrepancies regarding
the portfolio reconciliation process itself, thereby ensuring that it
operates in as efficient and cost-effective means possible. Finally,
the requirement to report certain unresolved valuation disputes to the
Commission should assist the Commission in identifying potential issues
with respect to an SBS Entity's internal valuation methodology and also
could serve as an indication of a widespread market disruption in cases
where the Commission receives a large number of such notices from
multiple firms.
2. Proposed Rule 15Fi-4: Portfolio Compression
    As previously discussed, the Commission preliminarily believes that
proposed Rule 15Fi-4 would help market participants by eliminating
redundant uncleared derivatives contracts, thereby potentially reducing
a market participant's credit risk to its direct counterparties,
including by eliminating all outstanding contracts with some
counterparties, without affecting the market participant's overall
economic position. In addition, we preliminarily believe that the
proposed collection of information is expected to lead to processing
improvements for market participants, as envisioned by Section 15F(i)
of the Exchange Act, by virtue of the fact that both SBS Entities and
their counterparties should ultimately have fewer trades to manage,
maintain, and settle, resulting in fewer opportunities for processing
errors, failures, or other problems that could develop throughout the
lifecycle of a transaction.
3. Proposed Rule 15Fi-5: Written Trading Relationship Documentation
    The Commission preliminarily believes that the information required
to be contained in the written trading relationship documentation
pursuant to proposed Rule 15Fi-5 should help ensure that each SBS
Entity mitigates risk with respect to its security-based swap portfolio
by, among other things, enhancing clarity and legal certainty from the
outset of a transaction regarding each party's rights and obligations.
This outcome should help to reduce exposure to, among other things,
counterparty credit risk and promote agreement regarding the proper
valuation and other material terms of a security-based swap.
4. Proposed Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books
and Records Requirements
    The Commission preliminarily expects that the information contained
in the records required to be made and kept pursuant to the proposed
amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6 would be used to
assist the Commission in conducting effective examinations and
oversight of SBS Entities. In addition, records regarding portfolio
reconciliation, bilateral offsets, bilateral or multilateral portfolio
compression, valuation disputes, and written trading relationship
documentation should help to provide SBS Entities and their
counterparties to security-based swaps with an ability to identify and
resolve discrepancies involving key terms of their transactions on an
ongoing basis, allowing for better management of internal risks related
to performance of obligations, valuation, margin obligations, internal
valuation systems and models, or internal controls.
5. Proposed Amendment to Rule 3a71-6: Substituted Compliance
    Under the proposed amendment to Rule 3a71-6 under the Exchange Act,
the Commission would use the information collected to evaluate requests
for substituted compliance with respect to the portfolio
reconciliation, portfolio compression, and written trading relationship
documentation requirements applicable to SBS Entities.

C. Respondents

    Proposed Rules 15Fi-3 through 15Fi-5 and Rules 17a-3, 17a-4, 18a-5,
and 18a-6 would apply only to SBS Entities, each of which will be
registered with the Commission. In a number of prior releases,
including the release adopting the rules by which SBS Entities can
register (and withdraw from registration) with the Commission, we
estimated that approximately 50 entities may meet the definition of SBS
dealer, and up to five entities may meet the definition of major SBS
participant.\171\ The Commission continues to believe that these
estimates are appropriate. Thus, the Commission preliminarily believes
that approximately 55 entities will be required to register with the
Commission under either category, and will therefore be subject to
Rules 15Fi-3 through 15Fi-5.
---------------------------------------------------------------------------

    \171\ See SBS Entity Registration Adopting Release, 80 FR at
48990. See also Trade Acknowledgement and Verification Adopting
Release, 81 FR at 39830.
---------------------------------------------------------------------------

    With regard to the requirements under Rule 3a71-6, as proposed to
be amended, requests for a substituted compliance determination with
respect to the portfolio reconciliation, portfolio compression, and
written trading relationship documentation requirements may be filed by
foreign financial authorities, or by non-U.S. SBS Entities. Consistent
with prior estimates, the Commission expects that there may be
approximately 22 non-U.S. entities that may potentially register as SBS
dealers, out of approximately 50 total

entities that may register as SBS dealers.\172\
---------------------------------------------------------------------------

    \172\ See Application of the Title VII Security-Based Swap
Dealer De Minimis Counting Requirements to Activity in the United
States,'' Exchange Act Release No. 77104 (Feb. 10, 2016), 81 FR
8598, 8605 (Feb. 19, 2016) (``U.S. Activity Adopting Release''); see
also Business Conduct Standards Adopting Release, 81 FR at 30090.
---------------------------------------------------------------------------

    Potentially, all such non-U.S. SBS dealers, or some subset thereof,
may seek to rely on a substituted compliance determination in
connection with these portfolio reconciliation, portfolio compression,
and written trading relationship documentation requirements.\173\ In
practice, however, the Commission expects that the greater portion of
any such requests will be submitted by foreign financial authorities,
given their expertise in connection with the relevant substantive
requirements, and in connection with their supervisory and enforcement
oversight with regard to SBS dealers and their activities.
---------------------------------------------------------------------------

    \173\ Consistent with prior estimates, the Commission further
believes that there may up to five major SBS participants. See SBS
Entity Registration Adopting Release, 80 FR at 49000; see also
Business Conduct Standards Adopting Release, 81 FR at 30089. It is
possible that some subset of those entities will be non-U.S. major
SBS participants that will seek to rely on substituted compliance in
connection with the applicable portfolio reconciliation, portfolio
compression, and written trading relationship documentation
requirements.
---------------------------------------------------------------------------

D. Total Annual Recordkeeping Burden

1. Portfolio Reconciliation Activities Generally
    Under proposed Rule 15Fi-3(a), the approximately 55 respondent SBS
Entities would be required to reconcile security-based swap portfolios
with other SBS Entities on a daily, weekly, or quarterly basis,
depending upon the size of the portfolio. For purposes of this
requirement, the Commission preliminarily estimates that each SBS
Entity will engage in security-based swap transactions with
approximately one-third of the other 54 SBS Entities, meaning that an
SBS Entity will maintain security-based swap portfolios with
approximately 18 SBS Entities. Of this total, we preliminarily believe
that, on average, two SBS Entity counterparty portfolios will require
daily reconciliation (i.e., a portfolio consisting of 500 or more
uncleared security-based swaps), four SBS Entity counterparty
portfolios will require weekly reconciliation (i.e., a portfolio of
more than 50 but fewer than 500 uncleared security-based swaps), and
the remaining 12 SBS Entity counterparty portfolios will require
quarterly reconciliation (i.e. a portfolio of no more than 50 uncleared
security-based swaps).\174\ The Commission therefore estimates that
each SBS Entity will engage in an average of 760 portfolio
reconciliations with other SBS Entities per year.\175\
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    \174\ These estimates are consistent with those used by the CFTC
in connection with its portfolio reconciliation rule. See
Confirmation, Portfolio Reconciliation, and Portfolio Compression
Requirements for Swap Dealers and Major Swap Participants, 75 FR
81519, 81528 (Dec. 28, 2010).
    \175\ This estimate uses 252 business days for purposes of the
daily portfolio reconciliation requirement, which is consistent with
the definition of ``business day'' in proposed Rule 15Fi-1(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that each portfolio
reconciliation is likely to be conducted through an automated
process.\176\ As a result, we preliminarily believe that each
reconciliation will require an average of 30 minutes to complete in
total (which is the combined estimate for both counterparties),
regardless of the size of the security-based swap portfolio with the
applicable counterparty.\177\ Using these figures, the Commission
preliminarily estimates that compliance with proposed Rule 15Fi-3(a),
as it relates to engaging in portfolio reconciliation with other SBS
Entities, will impose an average annual burden of approximately 190
hours per year on each of the respondent 55 SBS Entities, for an
estimated average annual burden of 10,450 hours in the aggregate. These
calculations are summarized in PRA Table 1, below.
---------------------------------------------------------------------------

    \176\ The Commission recognizes that some respondents may choose
to engage a third-party vendor to conduct portfolio reconciliations.
For simplicity, however, the Commission's burden estimate is based
upon SBS Entities conducting these activities internally, without
the use of third-party vendors. The Commission welcomes comments on
this approach, including regarding the likelihood and cost of using
third-party providers.
    \177\ Because the 30 minute estimate is for the entire
reconciliation process, without respect to how that time is
allocated between the two parties, to avoid double-counting we have
divided it by one-half in the context of security-based swap
portfolios between two SBS Entities, resulting in an estimate of 15
minutes per reconciliation per counterparty for those portfolios.

             PRA Table 1--Proposed Rule 15i-3(a): Portfolio Reconciliations With Other SBS Entities
----------------------------------------------------------------------------------------------------------------
                                                                                Hourly burden
                                                                                per        Total annual
    Number of counterparties per respondent     Number of annual reconciliations  reconciliation  burden (hours)
                                                                                (hours)
----------------------------------------------------------------------------------------------------------------
2 (>=500 transactions)........................  252 (daily).....................             .25             126
4 (>50<500 transactions)......................  52 (weekly).....................             .25              52
12 (<=50 transactions)........................  4 (quarterly)...................             .25              12
                                                                                -------------------------------
    Total per respondent......................  ................................  ..............             190
                                                                                -------------------------------
    Total Aggregate Annual Burden for all 55    ................................  ..............          10,450
     respondents.
----------------------------------------------------------------------------------------------------------------

    In addition, proposed Rule 15Fi-3(b) would require each SBS Entity
to establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it engages in portfolio
reconciliation for all security-based swaps (other than security-based
swaps that will be cleared by a clearing agency) in which its
counterparty is not an SBS Entity.\178\ In calculating the burden of
performing the portfolio reconciliations required by these policies and
procedures, the Commission preliminarily estimates that (1) there are
currently 13,082 market participants in security-based swaps who will
not be required to register as SBS Entities,\179\ and (2) each SBS
Entity will have an average of approximately 350 of these non-SBS
Entity market participants as counterparties.\180\ Further, the
Commission preliminarily believes that reconciliations with these
parties will

be conducted on a quarterly basis for 10% of these portfolios (i.e.,
portfolios with more than 100 uncleared security-based swaps), and on
an annual basis for the remaining 90% of these portfolios (i.e.,
portfolios that do not involve 100 or more uncleared security-based
swaps).\181\
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    \178\ The Commission's estimate for the hourly burden for
preparing these policies and procedures is discussed below.
    \179\ In the Economic Analysis, the Commission estimates that
there are approximately 13,137 market participants in the security-
based swap market. See infra Section VI.B.1.c (Table 2). Subtracting
the estimated 55 SBS Entities from this figure results in an
estimated 13,082 non-SBS Entities.
    \180\ This estimate is based upon the assumption that each non-
SBS Entity market participant will do business with, on average,
between one or two SBS Entities and is calculated as follows:
((13,082 non-SBS Entity market participants/55 SBS Entities) x 1.5
SBS Entities per non-SBS market participants) = approximately 350
non-SBS Entity counterparties per SBS Entity.
    \181\ Accordingly, of the estimated 350 security-based swap
portfolios that an SBS Entity maintains with non-SBS Entities, 90%
(or 315) will require only one portfolio reconciliation each year,
and 10% (or 35) will require quarterly portfolio reconciliations,
resulting in a total of 455 portfolio reconciliations per SBS Entity
per year.
---------------------------------------------------------------------------

    The Commission further estimates that each portfolio reconciliation
between an SBS Entity and a non-SBS Entity will require an average of
30 minutes to complete (which is the combined estimate for both
counterparties).\182\ Using these figures, the Commission preliminarily
estimates that compliance with proposed Rule 15Fi-3(b), as it relates
to conducting portfolio reconciliations with non-SBS Entities, will
impose an annual hourly burden of approximately 227.5 hours per SBS
Entity, for an estimated average annual burden of approximately
12,512.5 hours in the aggregate for all 55 SBS Entity respondents.
These calculations are summarized in PRA Table 2, below.
---------------------------------------------------------------------------

    \182\ This figure is identical to the estimate used for
reconciliations between two SBS Entities (before dividing by one-
half to avoid double-counting) and is consistent with the estimate
used by the CFTC, which used an estimate of six minutes (or .10
hours) in connection with its portfolio reconciliation requirements.
See supra notes 174 and 177 and accompanying text.

              PRA Table 2--Proposed Rule 15i-3(b): Portfolio Reconciliations With Non-SBS Entities
----------------------------------------------------------------------------------------------------------------
                                                                                Hourly burden
    Number of counterparties per respondent     Number of annual reconciliations        per        Total annual
                                                                                reconciliation  burden (hours)
----------------------------------------------------------------------------------------------------------------
35 (>100 transactions)........................  4 (quarterly)...................              .5              70
315 (<=100 transactions)......................  1 (annual)......................              .5           157.5
                                                                                -------------------------------
    Total per respondent......................  ................................  ..............           227.5
                                                                                -------------------------------
    Total Aggregate Annual Burden for all 55    ................................  ..............        12,512.5
     respondents.
----------------------------------------------------------------------------------------------------------------

2. Establishing, Maintaining, and Enforcing Written Policies and
Procedures
    Proposed Rule 15Fi-3 also contains policies and procedures
requirements applicable to SBS Entities in connection with engaging in
portfolio reconciliation with both SBS Entities and other
counterparties. As the Commission explained in the Business Conduct
Standards Adopting Release, the Commission estimates that of the
estimated 55 persons that may register with the Commission as SBS
Entities, approximately 35 will be dually-registered with the CFTC as
Swap Entities.\183\ In addition, other than as expressly noted above in
Section I.B, the CFTC's adopted final rules on portfolio reconciliation
written policies and procedures are substantively identical to those
proposed by Rule 15Fi-3. Accordingly, these 35 dually-registered
entities are already required to establish, maintain, and follow
written policies and procedures as they relate to the reconciliation of
their swap portfolios, and these policies and procedures would be
expected to be largely consistent with those that would be required
with respect to their security-based swap portfolios. Assuming that
these existing policies and procedures would simply need to be amended
to apply to security-based swap transactions upon adoption of proposed
Rule 15Fi-3, we preliminarily estimate that the initial burden of
revising these policies and procedures would be one hour per
respondent, for an estimated one-time initial burden of 35 hours in the
aggregate. With respect to the remaining 20 SBS Entities that will not
be dually-registered with the CFTC, the Commission preliminarily
estimates, based on prior estimates in earlier Dodd-Frank rulemakings,
that these policies and procedures would require an average of 80 hours
per non-dually-registered respondent to initially prepare and
implement, for an estimated one-time initial burden of 1,600 hours in
the aggregate.\184\ Once these policies and procedures are established,
the Commission estimates that it will take an average of 40 hours
annually to revise and maintain these policies and procedures per
respondent (including both dually-registered and non-dually-registered
SBS Entities),\185\ for an estimated average annual burden of 2,200
hours in the aggregate for all 55 respondents.\186\
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    \183\ See Business Conduct Standards Adopting Release, 81 FR at
30098.
    \184\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 40 hours) + (Director of Compliance at 20 hours) +
(Deputy General Counsel at 20 hours))] = 80 hours per SBS Entity.
See Trade Acknowledgment and Verification Adopting Release, 81 FR at
39831 n. 242.
    \185\ Although dually-registered SBS Entities would technically
need to revise and maintain their policies and procedures to ensure
compliance with both the Commission's and CFTC's rules, we have
preliminarily decided to conservatively assume that all of the
estimated hours would be incurred in connection with compliance with
the collection of information associated with proposed Rule 15Fi-3.
    \186\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 20 hours) + (Director of Compliance at 10 hours) +
(General Counsel at 10 hours))] = 40 hours per SBS Entity. See Trade