under procedures of the governing board to respond to an emergency
shall, if practicable, be filed with the Commission prior to
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than 24 hours after implementation. In addition, paragraph (a)(5)(ii)
would provide that any such submission be subject to the certification
and stay provisions of Rules 807(b) and (c), described below.
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    \130\ See Sec.  40.1(h) (defining ``emergency'' as ``any
occurrence or circumstance that, in the opinion of the governing
board of a registered entity, or a person or persons duly authorized
to issue such an opinion on behalf of the governing board of a
registered entity under circumstances and pursuant to procedures
that are specified by rule, requires immediate action and threatens
or may threaten such things as the fair and orderly trading in, or
the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and
payment of funds in connection with clearing and settlement by a
derivatives clearing organization''). The definition goes on to list
a series of circumstances that are deemed emergencies under the
definition. The Commission is adopting a definition of ``emergency''
in Rule 802 that is adapted from Sec.  40.1(h).
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    Paragraph (a)(6) of Proposed Rule 807, modeled on Sec.  40.6(a)(7),
would set out the required elements for a rule submission under Rule
807. These requirements would include a copy of the submission cover
sheet (in the case of a rule or rule amendment that responds to an
emergency, ``Emergency Rule Certification'' should be noted in the
description section of the submission cover sheet); the text of the
rule (in the case of a rule amendment, deletions and additions must be
indicated); the date of intended implementation; a certification by the
SBSEF that the rule complies with the SEA and the Commission's rules
thereunder; a concise explanation and analysis of the operation,
purpose, and effect of the proposed rule or rule amendment and its
compliance with applicable provisions of the SEA, including the Core
Principles relating to SBSEFs and the Commission's rules thereunder;
and a brief explanation of any substantive opposing views expressed to
the SBSEF by governing board or committee members, members of the
SBSEF, or market participants, that were not incorporated into the
rule, or a statement that no such opposing views were expressed.
Paragraph (a)(6)(vii) would also permit the SBSEF to include, as
appropriate, a request for confidential treatment pursuant to the
procedures provided in Rule 240.24b-2.\131\
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    \131\ Section 40.6(a)(7)(vii) directs the submitting entity to
follow the procedures in Sec.  40.8 when making a request for
confidential treatment, which in turn cross-references Sec.  145.9.
As noted previously, the Commission proposes instead to direct
filers to make any request for confidential treatment pursuant to
SEA Rule 24b-2. See supra note 51.
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    Paragraph (a)(7) of Proposed Rule 807, like Sec.  40.6(a)(8), would
require an SBSEF to provide, if requested by Commission staff,
additional evidence, information, or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the SBSEF's compliance with any of the requirements of the SEA or the
Commission's rules or policies thereunder.
    Paragraph (b) of Proposed Rule 807, modeled on Sec.  40.6(b), would
provide the Commission 10 business days to review the new rule or rule
amendment before it is deemed certified and can be made effective,
unless the Commission notifies the SBSEF during that ten-business-day
review period that it intends to issue a stay of the certification
under Rule 807(c).
    Paragraph (c)(1) of Proposed Rule 807, modeled on Sec.  40.6(c)(1),
would provide that the Commission may stay the certification of a new
rule or rule amendment by issuing a notification informing the SBSEF
that the Commission is staying the certification on the grounds that it
presents novel or complex issues that require additional time to
analyze, is accompanied by an inadequate explanation, or is potentially
inconsistent with the SEA or the Commission's rules thereunder. In
addition, paragraph (c)(1) affords the Commission an additional 90 days
from the date of the notification to conduct the review.
    Paragraph (c)(2) of Proposed Rule 807, modeled on Sec.  40.6(c)(2),
would require the Commission to provide a 30-day comment period within
the 90-day period in which the stay is in effect. The Commission would
be required to publish a notice of the 30-day comment period on the
Commission's internet website, and comments from the public could be
submitted as specified in that notice.
    Paragraph (c)(3) of Proposed Rule 807, modeled on Sec.  40.6(c)(3),
would provide that the new rule or rule amendment subject to the stay
shall become effective, pursuant to the certification, at the
expiration of the 90-day review period, unless the Commission withdraws
the stay prior to that time, or the Commission notifies the SBSEF
during the 90-day period that it objects to the proposed certification
on the grounds that the proposed rule or rule amendment is inconsistent
with the SEA or the Commission's rules thereunder.
    Paragraph (d) of Proposed Rule 807, modeled on Sec.  40.6(d), would
provide that certain kinds of rules or rule amendments may be put into
effect by an SBSEF without certification to the Commission if similar
enumerated conditions are met. Some would be subject to a Weekly
Notification of Rule Amendments, which is closely modeled on the CFTC
notification; others would not be subject to any notification
requirement.
    Under paragraph (d)(2) of Proposed Rule 807, the following types of
rules could be put into effect by an SBSEF without self-certification,
so long as they are disclosed on the Weekly Notification of Rule
Amendments:
     Non-substantive revisions. Corrections of typographical
errors, renumbering, periodic routine updates to identifying
information about the SBSEF, and other such non-substantive revisions
of a product's terms and conditions that have no effect on the economic
characteristics of the product;

     Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that total
$1.00 or more per contract, and are established by an independent third
party or are unrelated to delivery, trading, clearing, or dispute
resolution.
     Survey lists. Changes to lists of banks, brokers, dealers,
or other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
     Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
     Trading months. The initial listing of trading months,
which may qualify for implementation without notice, within the
currently established cycle of trading months; or
     Minimum tick. Reductions in the minimum price fluctuation
(or ``tick'').
    Under paragraph (d)(3)(ii) of Rule 807, the following types of
rules can be put into effect by an SBSEF without self-certification and
without having to be disclosed on the Weekly Notification of Rule
Amendments:
     Transfer of membership or ownership. Procedures and forms
for the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
     Administrative procedures. The organization and
administrative procedures of governing bodies such as a governing
board, officers, and committees, but not voting requirements, governing
board, or committee composition requirements or procedures, decision-
making procedures, use or disclosure of material non-public information
gained through the performance of official duties, or requirements
relating to conflicts of interest;
     Administration. The routine daily administration,
direction, and control of employees, requirements relating to gratuity
and similar funds, but not guaranty, reserves, or similar funds;
declaration of holidays; and changes to facilities housing the market,
trading floor, or trading area;
     Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules;
     Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs that are
less than $1.00 or relate to matters such as dues, badges,
telecommunication services, booth space, real-time quotations,
historical information, publications, software licenses, or other
matters that are administrative in nature.
     Trading months. The initial listing of trading months
which are within the currently established cycle of trading months.
    One commenter states that the CFTC's self-certification process has
been relied upon by CFTC registrants for most submissions, leaving
little that is reviewed or capable of challenge by market participants
or the CFTC unless it is inconsistent with the statute or CFTC
regulation.\132\ This commenter states that rulebook or contractual
changes can alter protections within Commission-regulated markets and
that the Commission should be able to object to any such change it
deems inconsistent with Commission policy, including considerations of
compliance costs and the impact on consumer protections, all of which
would be best informed by a requirement for public comment prior to
certification. Under the CFTC regime, the commenter states, there is no
formal process to allow market participants to object to a submission
for changes that are submitted for certification. Decisions to adopt or
modify rules by self-certification are typically made by the
registrant's board of directors or a board committee, this commenter
states, with market participants only learning of the rule after the
registrant has self-certified the rule or amendment. This commenter
supports an alternative approach in which the Commission can review all
material rule and contractual changes by SBSEFs, clearing agencies, SBS
data depositories, and exchanges. This commenter also recommends that
the Commission adopt a requirement for public comment for such changes.
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    \132\ See SIFMA AMG Letter, supra note 18, at 5-6. Another
commenter raised questions specifically about self-certification in
the context of a determination by an SBSEF that an SBS has been
``made available to trade.'' See MFA Letter, supra note 18, at 6.
This comment is discussed below in the context of made-available-to-
trade determinations under Rule 816(a). See infra section V.F.2.
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    Regulation SE will afford the Commission a sufficient mechanism to
assess new SBSEF rules and rule amendments for consistency with section
3D of the SEA, while also permitting SBSEFs to submit new rules and
rule amendments using a self-certification process closely aligned with
Sec.  40.6. The CFTC's procedures are well articulated and well
understood by SEFs, and closely harmonizing with these procedures
should yield comparable regulatory benefits while minimizing burdens on
SBSEFs. It is likely that certain rules of dually registered SEF/SBSEFs
will apply to member behavior generally--and not to one product market
(e.g., swaps or SBS) exclusively--and that these rules will thus have
to be filed with both the SEC and CFTC. Adding a default comment period
or otherwise altering the standard so that the Commission reviews all
material rule or contractual changes by SBSEFs, as requested by one
commenter,\133\ would significantly alter the timing of self-certified
SBSEF rules compared to their SEF equivalents. By contrast, closely
harmonizing the SEC's filing procedures and standards of review with
the CFTC's would allow dually registered entities to submit the same
(or substantially the same) filing to both agencies for review.
Moreover, if the Commission exercises its authority to stay the
effectiveness of a self-certified rule and seek public comment--i.e.,
with respect to a rule that is novel, complex, inadequately explained,
or potentially inconsistent with the SEA or the regulations thereunder,
including Regulation SE--market participants would be able to convey
their concerns regarding that rule to the Commission.
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    \133\ See SIFMA AMG Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    The specified types of SBSEF rules or rule amendments that may be
put into effect under Rule 807(d) without certification to the
Commission are appropriate because they are limited to the types of
rule changes described earlier in this section (e.g., administration),
which do not implicate significant protections to market participants,
including compliance costs and customer protection. Therefore, the
Commission has harmonized Rule 807(d) with Sec.  40.6(d) to allow such
filings to be made without self-certification or Commission review.
    Thus, it is not necessary to require SBSEFs to make a substantially
different type of filing to the SEC than to the CFTC for the same
underlying rule. For the reasons discussed above, the Commission is
adopting Rule 807 as proposed, with the exception of the proposed
Inline XBRL and EDGAR filing requirements, and with minor technical
modifications.\134\
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    \134\ See supra note 32. The Commission has also moved the word
``and'' from the end of paragraph (d)(3)(D) to the end of paragraph
(d)(3)(E)(2). As described in further detail in the discussion of
electronic filing systems and structured data, the Commission will
require all rule and product filings required by Rules 804 through
807 and 816 to be filed in unstructured format through EFFS, rather
than in Inline XBRL through EDGAR. See infra section XIII.A.

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E. Submission Cover Sheet and Instructions

    In proposed new Sec.  249.2002, the Commission proposed to require
that an SBSEF use a submission cover sheet in conjunction with filings
submitted pursuant to Rules 804 through 807, 809, and 816. The cover
sheet and the instructions therein are modeled on the cover sheet and
instructions used by SEFs in conjunction with their analogous filings
with the CFTC.\135\
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    \135\ The CFTC cover sheet and instructions, found in appendix D
to part 40 of the CFTC's rules, are designed for rule and product
filings from a wider range of registered entities than just SEFs,
and thus include entries that are omitted from the Commission's
proposed adaptation.
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    The same cover sheet and instructions would be used for a new rule,
rule amendment, or new product filing, with the SBSEF checking the
appropriate box to indicate which of these types the filing represents.
The SBSEF would also be required to check boxes to indicate whether the
submission was seeking approval by the Commission or whether it was
being filed as a certification by the SBSEF; and to identify the
specific provision in the Commission's rules pursuant to which the
filing was being submitted. The submission cover sheet also includes a
box that the SBSEF would check if it intends to submit a request for a
joint interpretation from the Commission and the CFTC regarding whether
the product is a swap, an SBS, or mixed swap pursuant to SEA Rule 3a68-
2.\136\ Finally, the cover sheet includes a check box by which an SBSEF
can indicate that it is requesting confidential treatment of materials
in the submission.
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    \136\ Rule 809 provides that a product filing will be stayed or
tolled, as applicable, if such a request for a joint interpretation
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
---------------------------------------------------------------------------

    The cover sheet divides the rule and rule amendment filings into
two categories: one for general rules of the SBSEF and the other for
rules relating to the terms and conditions of a product. Additional
boxes would need to be checked if a filing under the terms-and-
conditions category concerned specifically a determination by the SBSEF
that a particular SBS was now to be considered ``made available to
trade'' (or ``MAT''); \137\ or if the filing concerned the delisting of
an SBS with no open interest.\138\ The cover sheet would need to be
used in conjunction with the weekly notifications that SBSEFs would be
required to file pursuant to Rule 807(d) for certain changes that do
not need to be approved or certified, as discussed above.
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    \137\ Rule 809 provides that a product filing will be stayed or
tolled, as applicable, if such a request for a joint interpretation
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
    \138\ See supra note 128.
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    Paragraph (a) of the submission cover sheet instructions provides
that a properly completed submission cover sheet must accompany all
rule and product submissions filed electronically with the Commission
by an SBSEF using the Electronic Form Filing System (EFFS).\139\ Per
paragraph (a), a properly completed submission cover sheet would
include: (1) the name and platform ID of the SBSEF; \140\ (2) the date
of the filing; (3) an indication as to whether the filing is a new
rule, rule amendment, or new product; (4) for rule filings, the rule
number(s) being adopted or, in the case of rule amendments, the number
of the rule(s) being modified; and (4) for rule or rule amendment
filings, a description of the new rule or rule amendment, including a
discussion of its expected impact on the SBSEF, its members, and the
overall market. The instructions state that the narrative should
describe the substance of the submission with enough specificity to
characterize all material aspects of the filing.
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    \139\ The Electronic Form Filing System (EFFS) is a secure, web-
based system used for filing Forms 19b-4, 19b-7, and SCI. The system
also supports pre-filings of certain types of Form 19b-4 filings.
EFFS is used for form filing by SROs, including national securities
exchanges, national securities associations, clearing agencies, and
Systems Compliance Integrity (SCI) entities, including SCI SROs, SCI
alternative trading systems, plan processors, and exempt clearing
agencies subject to Automation Review Policy. See https://www.sec.gov/tm/electronic-form-filing-system-resources.
    \140\ ``Platform ID'' is a term utilized in Regulation SBSR, 17
CFR 242.900 et seq., and means the unique identification code
assigned to a platform on which an SBS is executed. See 17 CFR
242.900(w). The term ``platform'' includes an SBSEF. See Rule
900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule
903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform
ID an identifier issued by an internationally recognized standards-
setting system (``IRSS'') if the IRSS meets enumerated criteria and
has therefore been recognized by the Commission pursuant to Rule
903(a). This identification requirement stems from a registered
SBSEF's status as a ``participant'' of a registered SBSDR under Rule
900(u), 17 CFR 242.900(u), because the term ``participant'' includes
a ``platform,'' as defined in Rule 900(v), 17 CFR 242.900(v), that
incurs reporting duties under Rule 901(a), 17 CFR 242.901(a).
Currently, the Global Legal Entity Identifier System (``GLEIS'') is
the only IRSS that has been recognized by the Commission under Rule
903(a). See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 74244 (Feb. 11,
2015), 80 FR 14563, 14631-32 (Mar. 19, 2015) (``Regulation SBSR
Adopting Release I''). Therefore, Legal Entity Identifiers
(``LEIs'') issued through the GLEIS are currently the only allowable
platform IDs that may be used by registered SBSEFs.
---------------------------------------------------------------------------

    Paragraph (b) of the submission cover sheet instructions states
that a submission must comply with all applicable filing requirements
for proposed rules, rule amendments, or products, and that the filing
of the submission cover sheet does not obviate the SBSEF's
responsibility to comply with applicable filing requirements.
    Paragraph (c) of the submission cover sheet states that checking
the box marked ``confidential treatment requested'' does not obviate
the submitter's responsibility to comply with all applicable
requirements for requesting confidential treatment under SEA Rule 24b-2
and does not substitute for notice or full compliance with such
requirements.
    One commenter states that the submission cover sheet and
instructions for SBSEF filings should harmonize with those of the
CFTC.\141\ This commenter states that entities currently registered
with the CFTC as SEFs will be able to seamlessly enact the necessary
steps for required SEC filings because of their familiarity with the
CFTC's filing process. This commenter also states that any identifiers
regarded as necessary should be included on the cover sheet.
---------------------------------------------------------------------------

    \141\ See Letter from J.T. (May 26, 2022). In section XIII.B,
infra, the Commission discusses the use of identifiers, such as the
LEI.
---------------------------------------------------------------------------

    The Commission agrees that the use of a submission cover sheet that
is harmonized with that required for CFTC filings by SEFs is likely to
facilitate the filing process for SBSEFs that are also registered as
SEFs. For this reason, the proposed submission coversheet is harmonized
with the CFTC's, with differences only in the details specific to the
rules and processes of the SEC. The Commission contemplates providing
for electronic completion (as well as submission) of the cover sheet
and attachment of the submissions required by Rules 804, 805, 806, 807,
and 809, and intends to advise affected persons regarding its use by
public announcement in advance of the effective date of these
rules.\142\
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    \142\ Below in section XIII.A, the Commission addresses the
requirements to use the EDGAR system and Inline XBRL for
submissions.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting 17 CFR
249.2002 as proposed, but is renumbering it as 17 CFR 249.1702 under
new subpart R (``Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities''), and is also adopting the submission
cover sheet and instructions as proposed with the exception of the
proposed Inline

XBRL and EDGAR filing requirements.\143\
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    \143\ See id.
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F. Rule 808--Availability of Public Information

    Proposed Rule 808 is closely modeled on Sec.  40.8 of the CFTC's
rules.\144\ Proposed Rule 808(a) would provide that certain parts of an
application to register as an SBSEF would be made publicly available on
the Commission's website, unless confidential treatment is obtained
pursuant to SEA Rule 24b-2. Specifically, Proposed Rule 808(a) would
make the following parts of a Form SBSEF publicly available: the (i)
transmittal letter and first part of the application cover sheet; (ii)
Exhibit C; (iii) Exhibit G; (iv) Exhibit L; and (v) Exhibit M.\145\
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    \144\ Section 40.8 of the CFTC's rules is entitled
``Availability of public information.''
    \145\ Section 40.8(a) does not provide a list of the exhibits
required to be made public, but rather refers to a general
description of items required to be made public. For purposes of
clarity and ease of reference, however, the Commission proposed to
list the specific corresponding exhibits in Rule 808 that would be
made publicly available. Exhibit C would require a narrative that
sets forth the fitness standards for the governing board and its
composition; Exhibit G would require a copy of the corporate
governance documents for the applicant; Exhibit L would require a
narrative and any other form of documentation that describes the
manner in which the applicant is able to comply with each core
principle; and Exhibit M would require a copy of the applicant's
proposed rules and any technical manuals, guides, or other
instructions for members.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 808, adapted from Sec.  40.8(c),
would provide that the Commission shall make publicly available on its
website, unless confidential treatment is obtained pursuant to SEA Rule
24b-2,\146\ an SBSEF's filing of new products pursuant to the self-
certification procedures of Rule 804, new products for Commission
review and approval pursuant to Rule 805, new rules and rule amendments
for Commission review and approval pursuant to Rule 806, and new rules
and rule amendments pursuant to the self-certification procedures of
Rule 807. Paragraph (c), adapted from Sec.  40.8(d), would provide that
the terms and conditions of a product submitted to the Commission
pursuant to any of Rules 804 through 807 shall be made publicly
available at the time of submission unless confidential treatment is
obtained pursuant to SEA Rule 24b-2.
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    \146\ An application for confidential treatment shall contain,
among other things, a statement of the grounds of objection
referring to, and containing an analysis of, the applicable
exemption(s) from disclosure under the Freedom of Information Act,
and a justification of the period of time for which confidential
treatment is sought. See 17 CFR 240.24b-2(b)(2)(ii).
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    The Commission received one comment on Proposed Rule 808. This
commenter states that the Commission should not allow requests for
confidential treatment and that these requests are currently abused and
result in little information being made available to the public.\147\ A
blanket prohibition on requesting confidential treatment would not be
appropriate, however, because each request for confidential treatment
should be addressed on its particular facts and circumstances.
Moreover, as the Commission stated in the Proposing Release, ``it is
not necessary or appropriate to establish and utilize one set of
procedures to handle confidential treatment requests made by SBSEFs
while utilizing a different set of procedures for other persons who
request confidential treatment from the Commission under the SEA.''
\148\ The Commission anticipates that while SBSEFs may request
confidential treatment for their filings pursuant to existing SEA Rule
24-2, the items enumerated in Rule 808 are not of the type that
typically would constitute confidential information. Finally, it is
appropriate to adopt a rule that is adapted from Sec.  40.8, because
Rule 808 will apply to submissions made under Rules 804-807, which are,
as discussed above, also based on provisions of the CFTC's rules for
SEFs. Therefore, the Commission is adopting Rule 808 as proposed.
---------------------------------------------------------------------------

    \147\ See Keeney Letter, supra note 95.
    \148\ Proposing Release, supra note 1, 87 FR at 28880 n.50.
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G. Rule 809--Staying of Certification and Tolling of Review Period
Pending Jurisdictional Determination

    Section 718 of the Dodd-Frank Act, entitled ``Determining Status of
Novel Derivative Products,'' sets forth a mechanism for addressing a
situation in which a person wishes to list or trade a novel derivative
product that may have elements of both securities and contracts of sale
of a commodity for future delivery (or options on such contracts or
options on commodities)--i.e., a situation in which it is unclear
whether the product in question is a security under the jurisdiction of
the SEC or a future under the jurisdiction of the CFTC. Section 718(a)
provides that the SEC or the CFTC may request that the other agency
issue a determination as to the classification of that product, and
section 718(b) provides that the CFTC and SEC may petition for judicial
review of any such determination.\149\
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    \149\ Section 40.12 of the CFTC's rules is entitled ``Staying of
certification and tolling of review period pending jurisdictional
determination'' and reflects the process described in section 718 of
the Dodd-Frank Act. Section 40.12 provides that if a SEF (among
other registered entities) certifies, submits for approval, or
otherwise files a proposal to list or trade such a novel derivative
product, the product certification shall be stayed or the approval
review period shall be tolled until a final determination order is
issued under section 718.
---------------------------------------------------------------------------

    As described in the Proposing Release, Proposed Rule 809 is loosely
modeled on Sec.  40.12, but modified to focus on the products and
jurisdictional issues that are more likely to be relevant to
SBSEFs.\150\ Paragraph (a) of Proposed Rule 809, modeled on Sec.
40.12(b), would provide that a product certification made by an SBSEF
pursuant to Rule 804 shall be stayed, or the review period for a
product that has been submitted for Commission approval by an SBSEF
pursuant to Rule 805 shall be tolled, upon request for a joint
interpretation of whether the product is a swap, SBS, or mixed swap
made pursuant to Rule 3a68-2 under the SEA \151\ by the SBSEF, the SEC,
or the CFTC. Paragraph (b) is modeled on Sec.  40.12(b)(1) and would
require the SEC to provide the SBSEF with a written notice of the stay
or tolling pending issuance of a joint interpretation by the SEC and
CFTC. Paragraph (c) is modeled on Sec.  40.12(b)(2) and would provide
that the stay shall be withdrawn, or the approval review period shall
resume, if a joint interpretation finding that the SEC has jurisdiction
over the product is issued.
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    \150\ As noted in the Proposing Release, an SBSEF might seek to
list a product where it is unclear whether the product is a swap or
an SBS. See Proposing Release, supra note 1, 87 FR at 28890.
    \151\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Proposed Rule 809.
While section 718 of the Dodd-Frank Act addresses situations where it
is unclear whether a product is a security or a future, the SEC and the
CFTC have adopted separate rules--SEA Rule 3a68-2 and 17 CFR 1.8,
respectively--governing requests for interpretation regarding a product
that might be an SBS, a swap, or a mixed swap. It is appropriate for
Regulation SE to include a mechanism for the staying or tolling of a
filing by an SBSEF when it is unclear whether the product is a swap or
an SBS, and it would be appropriate for Rule 809 to reflect the process
set forth in SEA Rule 3a68-2. Tailoring, as proposed, the scope of Rule
809, in relation to Sec.  40.12, appropriately addresses the
jurisdictional questions that are likely to arise from a product listed
by an SBSEF.\152\ Therefore, the Commission is adopting Rule 809 as
proposed.
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    \152\ The objective of Rule 809 is consistent with the objective
of Sec.  40.12: to provide for a stay or tolling of a product filing
where it is unclear whether the product is under the jurisdiction of
the SEC or the CFTC.

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H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and
by Dormant SBSEFs

    Proposed Rule 810 is closely modeled on Sec.  37.4 of the CFTC's
rules and would provide a process whereby a not-yet-registered SBSEF or
a dormant SBSEF could submit product filings. Specifically, Proposed
Rule 810 would provide that an applicant for registration as an SBSEF
may submit an SBS's terms and conditions prior to listing the product
as part of its application for registration and that any such terms and
conditions or rules submitted as part of an SBSEF's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the SBSEF's order of registration.
Similarly, any SBS terms and conditions or rules submitted as part of
an application to reinstate the registration of a dormant SBSEF would
be considered for approval by the Commission at the time the Commission
approves the reinstatement of registration of the dormant SBSEF.
    The Commission did not receive any comments on Proposed Rule 810
and is adopting Rule 810 as proposed, for the reasons stated in the
Proposing Release.

V. Miscellaneous Requirements

    Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous
requirements on SEFs, and the Commission proposed to impose similar
requirements on SBSEFs in Rules 811 to 817 of Regulation SE.

A. Rule 811--Information Relating to SBSEF Compliance

1. Harmonization With Sec.  37.5
    Paragraphs (a) to (c) of Proposed Rule 811 are modeled on Sec.
37.5, which is entitled ``Information regarding swap execution facility
compliance.'' Paragraph (a) of Proposed Rule 811 is closely modeled on
Sec.  37.5(a) and would provide that, upon the Commission's request, an
SBSEF shall file with the Commission information related to its
business as an SBSEF in the form and manner, and within the timeframe,
specified by the Commission. Paragraph (b) is closely modeled on Sec.
37.5(b) and would provide that, upon the Commission's request, an SBSEF
shall file with the Commission a written demonstration, containing
supporting data, information, and documents, that it is in compliance
with one or more Core Principles or with its other obligations under
the SEA or the Commission's rules thereunder, as the Commission
specifies in its request. Also, under Proposed Rule 811(b), the SBSEF
would be required to file such written demonstration in the form and
manner, and within the timeframe, specified by the Commission.
    Paragraph (c)(1) of Proposed Rule 811 is closely modeled on Sec.
37.5(c)(1) and would provide that an SBSEF shall file with the
Commission a notification of any transaction involving the direct or
indirect transfer of 50% or more of the equity interest in the SBSEF.
Also, under Proposed Rule 811(c)(1), the Commission could, upon
receiving such a notification, request supporting documentation of the
transaction. Paragraph (c)(2) is closely modeled on Sec.  37.5(c)(2)
and would provide that the equity interest transfer notice shall be
filed with the Commission in a form and manner specified by the
Commission at the earliest possible time, but in no event later than
the open of business 10 business days following the date upon which the
SBSEF enters into a firm obligation to transfer the equity Interest.
Paragraph (c)(3) is closely modeled on Sec.  37.5(c)(3) and would
provide that, notwithstanding the foregoing, if any aspect of an equity
interest transfer requires an SBSEF to file a rule, the SBSEF shall
comply with the applicable rule filing requirements of Rule 806 or Rule
807.
    Paragraph (c)(4) of Proposed Rule 811 is closely modeled on Sec.
37.5(c)(4) and would provide that, upon a transfer of an equity
interest of 50% or more in an SBSEF, the SBSEF shall file with the
Commission, in a form and manner specified by the Commission, a
certification that the SBSEF meets all of the requirements of section
3D of the SEA and the Commission rules thereunder, no later than two
business days following the date on which the equity interest of 50% or
more was acquired.
    The Commission did not receive any comments on Rule 811(a) to (c).
It is appropriate for Regulation SE to include provisions requiring an
SBSEF to provide the Commission with the information described above.
Information about an SBSEF's business as an SBSEF and transfers of 50%
or more of its equity would promote understanding of its operations and
ownership, which should facilitate oversight of the SBSEF. Therefore,
the Commission is clarifying, as proposed, that, similar to the CFTC,
it may request such information from an SBSEF. In addition, as
anticipated in the Proposing Release, should questions about compliance
arise, the Commission should be able to obtain from an SBSEF supporting
data, information, and documents that the SBSEF is in compliance with
relevant obligations under the SEA, and the rule provides for this. By
modeling its proposed requirements on existing CFTC rules, the
Commission seeks to obtain comparable regulatory benefits while
imposing only marginal additional burdens on dually registered entities
that are already subject to similar obligations.
    The Commission is changing the phrase ``a transfer of an equity
interest of 50 percent or more in a security-based swap execution
facility'' in paragraph (c)(4) to ``an equity transfer described in
paragraph (c)(1) of this section'' because the text of paragraph (c)(4)
should be modified to parallel the text of paragraphs (c)(2) and
(c)(3). For these reasons, the Commission is adopting Rule 811(a) to
(c) as proposed, with the change described to paragraph (c)(4).
2. Harmonization With Sec.  1.60
    Paragraph (d) of Proposed Rule 811 is not modeled on Sec.  37.5,
but rather on Sec.  1.60 of the CFTC's rules, which is entitled
``Pending legal proceedings.'' Because it is conceptually similar to
Sec.  37.5 in that it would require another type of information
relevant to the regulatory oversight of a SEF, the Commission proposed
to adapt this provision into Rule 811.\153\
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    \153\ Section 1.60 requires a SEF (among other entities) to
provide the CFTC with copies of any legal proceeding to which it is
a party, or to which its property or assets is subject. Paragraph
(d) of Rule 811 would adapt paragraphs (a), (c), and (e) of Sec.
1.60 to apply to SBSEFs. Paragraphs (b) and (d) of Sec.  1.60 apply
to futures commission merchants and do not appear germane to SEFs or
SBSEFs. Therefore, the Commission is not adapting these paragraphs
into Rule 811(d).
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    Paragraph (d)(1) of Proposed Rule 811 is closely modeled on Sec.
1.60(a) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding to which the SBSEF is a party or to which its
property or assets are subject. Paragraph (d)(2) is closely modeled on
Sec.  1.60(c) and would provide that an SBSEF shall submit to the
Commission a copy of the complaint, any dispositive or partially
dispositive decision, any notice of appeal filed concerning such
decision, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
officer, director, or other official of the SBSEF from conduct in such
person's capacity as an official of the SBSEF and alleging violations
of the SEA or any rule, regulation, or order thereunder; the

constitution, bylaws, or rules of the SBSEF; or the applicable
provisions of state law relating to the duties of officers, directors,
or other officials of business organizations.
    Paragraph (d)(3) of Proposed Rule 811 is loosely modeled on Sec.
1.60(e) and would provide that documents required by Rule 811(d) to be
submitted to the Commission shall be submitted electronically in a form
and manner specified by the Commission within 10 days after the
initiation of the legal proceedings to which they relate, after the
date of issuance, or after receipt by the SBSEF of the notice of
appeal, as the case may be.
    Paragraph (d)(4) of Proposed Rule 811 is closely modeled on the
final two sentences of Sec.  1.60(e) and would provide that, for
purposes of Rule 811(d), a ``material legal proceeding'' includes but
is not limited to actions involving alleged violations of the SEA or
the Commission rules thereunder, and that a legal proceeding is not
``material'' for the purposes of Rule 811 if the proceeding is not in a
Federal or State court or if the Commission is a party.
    The Commission did not receive any comments on Proposed Rule 811(d)
and is adopting Rule 811(d) as proposed, for the reasons stated in the
Proposing Release.

B. Rule 812--Enforceability

    Proposed Rule 812 generally is modeled on Sec.  37.6. Paragraph (a)
of Rule 812, which is based on Sec.  37.6(a)(1), and would provide that
a transaction on or pursuant to the rules of an SBSEF cannot be
invalidated as a result of a violation by the SBSEF of section 3D of
the SEA or the Commission's rules thereunder.\154\ An SBS executed on
an SBSEF should not be invalidated by the SBSEF's violation of any of
the securities laws, given that swaps executed on SEFs are afforded the
same legal certainty under Sec.  37.6(a).
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    \154\ The Commission is not adapting into Rule 812 paragraphs
(a)(2) and (a)(3) of Sec.  37.6, which provide that a transaction on
a SEF may not be invalidated by CFTC proceedings that alter or
supplement SEF rules, terms, and conditions, because the Commission
has no authority in the SEA analogous to the CFTC's authority under
section 8a(7) of the CEA to conduct such proceedings. See supra note
93 and accompanying text. See also Proposing Release, supra note 1,
87 FR at 28893 n.90.
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    Paragraph (b) of Proposed Rule 812 is modeled on the first sentence
of Sec.  37.6(b), which requires a SEF to provide each counterparty to
a transaction that is entered into on or pursuant to the rules of the
SEF with a written record of all of the terms of the transaction which
shall legally supersede any previous agreement.\155\ Proposed Rule
812(b) differs, however, in that it would provide that an SBSEF shall,
as soon as technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms.
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    \155\ Furthermore, under Sec.  37.6(b), the confirmation of all
terms of the transaction must take place at the same time as
execution, provided that specific customer identifiers for accounts
included in bunched orders need not be included in confirmations if
certain conditions are met.
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    One commenter agrees that Rule 812 should be modeled on Sec.  37.6
and states that, like Sec.  37.6, Rule 812 should require the SBSEF to
confirm ``all the terms of the transaction,'' rather than being
limited, as proposed, to ``all of the terms that were agreed to on the
facility.'' \156\ This commenter states that Rule 812 as proposed may
cause issues with clearing SBS because SBS clearing agencies will
likely require SBSEFs to represent that any transaction executed on the
SBSEF is final and irrevocable (as CFTC-registered clearing agencies
require for SEFs). Since Rule 812 only requires an SBSEF confirmation
to be limited in scope to ``all of the terms that were agreed to on the
facility,'' this commenter states the SBSEF would not necessarily know
any terms agreed upon by counterparties outside the SBSEF, and
therefore could not represent to the clearing agency that the
transaction is ``final and irrevocable,'' which would be a roadblock
for straight-through processing and full adoption of clearing for
SBS.\157\ This commenter states that, to address this issue, SBSEFs
should have the ability to prohibit trading relationship documentation
or enablements for cleared SBS transactions executed on an SBSEF, which
are prohibited for CFTC-registered SEFs in accordance with the CFTC's
2013 Staff Impartial Access Guidance,\158\ and that Rule 812 should
require that the SBSEF confirm ``all of the terms of the transaction.''
\159\
---------------------------------------------------------------------------

    \156\ See Bloomberg Letter, supra note 18, at 4, 12-13.
    \157\ See infra section VI.F (discussing, among other things,
straight-through processing).
    \158\ See CFTC Division of Clearing and Risk, Division of Market
Oversight, and Division of Swap Dealer and Intermediary Oversight,
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities (Nov. 14, 2013), available at<EMAIL_ADDRESS>    \159\ See Bloomberg Letter, supra note 18, at 4, 12-13.
---------------------------------------------------------------------------

    Another commenter, however, states that it is not practical or cost
effective for an SBSEF to collect, review, and store each free-standing
agreement underlying an SBS transaction entered into between numerous
counterparties.\160\ This commenter states that the CFTC has not
required SEFs to comply with the requirements of 37.6(b) since 2014,
when staff no-action relief was issued due to the impracticability of
compliance.\161\ Thus, this commenter supports the proposal in Rule 812
to require an SBSEF to provide a written record of all the terms of the
transaction that were agreed to on an SBSEF, which shall legally
supersede any previous agreement regarding such terms.
---------------------------------------------------------------------------

    \160\ See ICE Letter, supra note 18, at 5.
    \161\ See id. (citing CFTC Division of Market Oversight, Staff
No-Action Position Regarding SEF Confirmations and Recordkeeping
Requirements under Certain Provisions Included in Regulations
37.6(b) and 45.2, Letter No. 14-108 (Aug. 18, 2014), available at
https://www.cftc.gov/csl/14-108/download).
---------------------------------------------------------------------------

    It is appropriate to require an SBSEF to inform counterparties as
soon as technologically practicable after they have effected a trade on
or pursuant to the rules of the SBSEF, and to provide them with a
written record of the terms to which they have agreed to on the SBSEF.
With respect to uncleared SBS, it would be impractical for an SBSEF to
be aware of, or responsible for, confirming terms of an SBS that were
agreed to off the SBSEF's trading platform, such as terms contained in
a credit support agreement between the two counterparties to an
uncleared SBS. Thus, the Commission is not including in Rule 812 a
requirement that the SBSEF provide a written record of any such
terms.\162\
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    \162\ Section 37.6(b) requires a SEF to provide a written record
of ``all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction.'' In the adopting release for the final part 37 rules,
the CFTC explained that, with respect to uncleared swaps, a SEF
could satisfy this requirement by incorporating by reference terms
set forth in agreements previously negotiated by the counterparties,
provided that such agreements had been submitted to the SEF ahead of
execution. See 2013 CFTC Final SEF Rules Release, supra note 9, 78
FR at 33491 n.195. The CFTC staff has taken a no-action position
with respect to the confirmation requirements for uncleared swaps in
response to assertions by industry participants that it is
impracticable for a SEF to satisfy the written confirmation
requirements by incorporating by reference terms from previously
negotiated agreements between the counterparties if the SEF must
receive copies of such agreements prior to execution. See CFTC No
Action Letter 17-17 (Mar. 24, 2017) (issued by the CFTC's Division
of Market Oversight). In the no-action letter, the CFTC staff stated
that it was continuing to assess confirmation requirements,
including establishing a permanent solution to the issues raised.
Given these circumstances, it is appropriate to require an SBSEF to
provide counterparties with a written record of only those terms
that are agreed to on the SBSEF. Additionally, the CFTC recently
issued a notice of proposed rulemaking to adopt a rule codifying the
no-action position, which would enable SEFs to incorporate such
terms by reference in an uncleared swap confirmation without being
required to obtain the underlying, previously negotiated agreements.
See CFTC, Swap Confirmation Requirements for Swap Execution
Facilities (Notice of Proposed Rulemaking), 88 FR 58145, 58147 (Aug.
25, 2023). The CFTC has not yet taken action on this proposal.

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

    In response to the comment that Proposed Rule 812 may cause issues
with clearing because the rule requires SBSEFs to confirm only the
terms of an SBS transaction ``that were agreed to on the facility,''
additional terms in trading relationship documents or enablements are
unlikely to hinder the acceptance by a clearing agency of SBS that are
intended to be cleared or might inhibit impartial access to trading of
cleared SBS on an SBSEF. First, a cleared SBS would be a standardized
product, the complete terms of which would be known to the SBSEF,
agreed to by the counterparties trading that SBS on the SBSEF, and
capable of being confirmed to the parties in writing by the SBSEF, as
well as represented to the clearing agency by the SBSEF as ``final and
irrevocable.'' Thus, all the terms of the cleared transaction are
confirmed when executed on the SBSEF. And second, Proposed Rule 819(c)
would require that an SBSEF provide impartial access to its market and
market services,\163\ and it would not be consistent with an SBSEF's
impartial access obligations to permit members to incorporate
additional terms for a cleared SBS in trading relationship
documentation, enablement documentation, or elsewhere, or to otherwise
permit improper discrimination with respect to trading in cleared SBS
against SBSEF members who have a direct or indirect clearing
relationship with the clearing agency for a given SBS.
---------------------------------------------------------------------------

    \163\ See infra section VI.B.3 (discussing the impartial access
requirements of Rule 819(c)).
---------------------------------------------------------------------------

    Therefore, for the foregoing reasons, the Commission is adopting
Rule 812 as proposed.

C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes

    Proposed Rule 813 is modeled on Sec.  37.7, and would provide that
an SBSEF shall not use, for business or marketing purposes, any
proprietary data or personal information that it collects or receives
from or on behalf of any person for the purpose of fulfilling its
regulatory obligations. An SBSEF would be able to use such data or
information for business or marketing purposes if the person consents,
but the SBSEF would not be able to condition access to the SBSEF on the
person's providing such consent. Finally, Proposed Rule 813 would
provide that an SBSEF, where necessary for regulatory purposes, may
share such data or information with another SBSEF or a national
securities exchange.
    The Commission did not receive any comments on Proposed Rule 813
and is adopting Rule 813 as proposed, for the reasons stated in the
Proposing Release.

D. Rule 814--Entity Operating Both a National Securities Exchange and
an SBSEF

    Proposed Rule 814 is modeled on Sec.  37.8. Paragraph (a) of
Proposed Rule 814 would provide that an entity intending to operate
both a national securities exchange and an SBSEF shall separately
register the two facilities pursuant to section 6 of the SEA and Rule
803 under the SEA. Paragraph (b), although consistent with Sec.
37.8(b), draws its specific language from section 3D(c) of the
SEA,\164\ which contemplates that a single entity may operate both a
national securities exchange and an SBSEF. Paragraph (b) of Proposed
Rule 814 would provide that a national securities exchange shall, to
the extent that the exchange also operates an SBSEF and uses the same
electronic trade execution system for listing and executing trades of
SBS on or through the exchange and the facility, identify whether
electronic trading of SBS is taking place on or through the national
securities exchange or the SBSEF.
---------------------------------------------------------------------------

    \164\ 15 U.S.C. 78c-4(c).
---------------------------------------------------------------------------

    Two commenters state that the key requirements applicable to SBSEFs
should also apply to SBS exchanges to create a level regulatory
environment and avoid encouraging regulatory arbitrage.\165\ One of the
commenters specifically identifies trading protocols, impartial access,
limits on pre-execution communication, and straight-through processing
as important aspects of SBSEF regulation that should also apply to SBS
exchanges.\166\ Another commenter states that more detailed rules are
needed to address the separation of SBSEFs from SBS exchanges in order
to avoid the aggregation of power in the financial markets and to
clearly separate the roles of an entity operating both an SBSEF and an
SBS exchange.\167\
---------------------------------------------------------------------------

    \165\ See Citadel Letter, supra note 18, at 17; MFA Letter,
supra note 18, at 14.
    \166\ See Citadel Letter, supra note 18, at 17.
    \167\ See Keeney Letter, supra note 95.
---------------------------------------------------------------------------

    The comment suggesting that requirements for SBSEFs should be
applied to SBS exchanges is outside the scope of this rulemaking, which
is designed to set forth requirements for SBSEFs, not exchanges.
    Additionally, more detailed rules are not necessary to separate the
roles of an entity operating both an SBSEF and an SBS exchange. Each
entity would be required to make rule or new product submissions to the
Commission under a separate set of rules--Rules 804 to 807 for SBSEFs,
and Rule 19b-4 for national securities exchanges--making it clear which
rules will apply on which platform. Also, Rule 814(b)--which requires
that a national securities exchange that also operates an SBSEF
identify the platform on which an SBS transaction occurs--will provide
further clarity to the market about the roles of an entity operating
both an SBSEF and an SBS exchange. Further, the ability of an entity to
operate both an SBSEF and an SBS exchange is unlikely to lead to the
aggregation of power in the financial markets, because allowing for a
variety of SBS trading platforms and ownership models should promote
competition in the market for SBS trading.
    It is appropriate for proposed Regulation SE to include a rule that
clarifies the registration status of an entity that operates both an
exchange and an SBSEF, and that broadly parallels Sec.  37.8.
Therefore, for the reasons discussed above, the Commission is adopting
Rule 814 as proposed.

E. Rule 815--Methods of Execution for Required and Permitted
Transactions

1. Rule 815(a)
(a) Background
    The Dodd-Frank Act provides that if the Commission makes a
mandatory clearing determination regarding an SBS, such SBS becomes
subject to mandatory trade execution if at least one exchange or SBSEF
makes the product ``available to trade.'' \168\ The Dodd-Frank Act does
not require, however, that all SBS be subject to mandatory clearing or
mandatory trade execution, and it does not impose any execution
requirements for transactions in an SBS unless the SBS is subject to
mandatory clearing and it has been made available to trade. Section
37.9 of the CFTC's rules addresses these issues for SEFs using the
concepts of ``Required Transactions'' and ``Permitted Transactions,''
and the Commission proposed Rule 815 of Regulation SE to adapt Sec.
37.9 for

SBSEFs. Rule 815(a)(1) defines ``Required Transaction'' as ``any
transaction involving a security-based swap that is subject to the
trade execution requirement in section 3C(h) of the Act.''
---------------------------------------------------------------------------

    \168\ See 15 U.S.C. 78c-3(a)(1) (mandatory clearing for SBS) and
78c-3(h) (trade execution for SBS). See also infra section V.F.3
(discussing the six factors that an SBSEF shall consider, as
appropriate, before making an SBS ``available to trade'').
---------------------------------------------------------------------------

(b) Methods of Execution for Required Transactions
(i) Background
    Proposed Rule 815(a)(2) would require that, except for block trades
or the exceptions described in paragraph (d) or (e) of the rule and
discussed below,\169\ the mandatory execution methods for a Required
Transaction would be either: (a) an order book or (b) an RFQ system in
conjunction with an order book, and the rule permits the SBSEF to use
any means of interstate commerce for providing these execution
methods.\170\
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    \169\ See infra section V.E.3.
    \170\ Proposed Rule 815(a)(2)(ii) would provide that any means
of interstate commerce includes, but is not limited to, the mail,
internet, email, and telephone, provided that the chosen execution
method satisfies the requirements for order books in 17 CFR
242.800(x) or in paragraph (a)(3) of Rule 815.
---------------------------------------------------------------------------

    Proposed Rule 815(a)(3) would define an RFQ system as ``a trading
system or platform in which a market participant transmits a request
for a quote to buy or sell a specific instrument to no less than three
market participants in the trading system or platform, to which all
such market participants may respond'' and would specify other
requirements for an RFQ system to be recognized as such under the rule.
The three market participants to which the RFQ is addressed could not
be affiliates of or controlled by the requester and cannot be
affiliates of or controlled by each other. The proposed rule would also
provide that an SBSEF that offers an RFQ system in connection with a
Required Transaction must have the following functionalities: (i) at
the same time that the requester receives the first responsive bid or
offer, the SBSEF must communicate to the requester any firm bid or
offer pertaining to the same SBS resting on any of the SBSEF's order
books; (ii) the SBSEF must provide the requester with the ability to
execute against those firm resting bids or offers along with any
responsive orders; and (iii) the SBSEF must ensure that its trading
protocols provide each of its members with equal priority in receiving
requests for quotes and in transmitting and displaying for execution
responsive orders. The requirements of Proposed Rule 815(a)(3) are
referred to as the ``RFQ-to-3 requirement.''
(ii) Comments on the RFQ-to-3 Requirement
    The Commission received comments on the proposed RFQ-to-3
requirement in Proposed Rule 815(a)(3).\171\ One commenter suggests
that the Commission expand the permitted modes of SBS execution for
swaps mandated for trading on SBSEFs in order to provide for a less
prescriptive, more principles-based approach that balances
transparency, competition, and liquidity through a flexible set of
rules and states that any means of execution that provides sufficient
pre-trade price transparency and preserves competition should be
available.\172\ This commenter, while supporting general harmonization
between the Commission's and the CFTC's rules on trading protocols and
methods of execution, argues that the Commission's rule also needs to
balance harmonization with the need to reflect the unique and sensitive
liquidity conditions that exist in SBS markets.
---------------------------------------------------------------------------

    \171\ See ISDA-SIFMA Letter, supra note 18, at 5-6; SIFMA AMG
Letter, supra note 18, at 8-9.
    \172\ See SIFMA AMG Letter, supra note 18, at 8.
---------------------------------------------------------------------------

    Stating that an RFQ-to-3 requirement for Required Transactions that
are SBSs means something completely different than for swaps, this
commenter urges the Commission to consider a lower RFQ threshold given
the nature of the SBS market. This commenter states that, in some
cases, for an asset manager to seek three quotes would effectively
require the asset manager to contact many of the primary price makers
in the SBS market, as there simply are not the same number of liquidity
providers, particularly for less liquid, more thinly traded SBSs, as
the number of participants, the trading volume, and the depth of market
liquidity are very different in the SBS market. The commenter suggests
that requesting quotes from two participants, for example, would allow
the asset manager to retain some control over the information
disseminated about its interest to the market while preserving the
statute's ``multiple to multiple'' definition requirement.\173\
---------------------------------------------------------------------------

    \173\ See id. at 9.
---------------------------------------------------------------------------

    Another commenter also urges the Commission to consider an
alternative approach to the proposed RFQ-to-3 requirement, and to
provide a ``phased-in compliance'' with the required methods of
execution, whereby a MAT SBS product may be executed on an SBSEF via
any method of execution until such time as it is determined through
notice and comment that an appropriate level of liquidity exists to
enable an order book or RFQ-to-3 system.\174\ This commenter states
that, considering the lack of liquidity in SBS products, pre-trade
transparency via the proposed RFQ-to-3 requirement could negatively
impact liquidity provision for end-users. The commenter states that, if
clients are required to ``show their hand to three liquidity
providers,'' it may lead to information leakage and an inability to
hedge the clients' risks through the SBS markets.\175\ The commenter
asserts that this is particularly so given that there are a relatively
small number of active dealers for many SBS products, stating that,
based on DTCC \176\ data on credit SBS for the top 700 issuers, there
are on average 2.7 dealers, and 400 of the top 700 issuers have fewer
than three active dealers per month.\177\
---------------------------------------------------------------------------

    \174\ See ISDA-SIFMA Letter, supra note 18, at 5-6.
    \175\ Id. at 6.
    \176\ ``DTCC'' refers to the Depository Trust and Clearing
Corporation.
    \177\ See ISDA-SIFMA Letter, supra note 18, at 6.
---------------------------------------------------------------------------

    This commenter further argues that an RFQ-to-3 requirement would be
problematic for SBS equities, where the current execution processes are
very different from their swaps counterpart. The commenter states that
clients in SBSs typically ask their preferred dealer to execute shares
in SBS at market price (or some other pricing structure), the dealer
then purchases the shares directly for hedging purposes, and the dealer
then executes the swap at the end of the day with the client at an
average market price.\178\ The commenter states that, in this case, the
dealer's interaction is more akin to a broker than a dealer
counterparty, and that these trading practices would not be possible on
an RFQ-to-3 or order book system. In addition, the commenter states
that it has ``compared the credit swaps activity that occurred on-venue
back in 2012 before the CFTC trade execution requirement kicked in,
with the credit SBS activity that occurs on-venue today'' and asserts
that the results suggest ``that the swaps market was much more ready
for the implementation of the trade execution requirement than the SBS
market is today.'' \179\ This commenter states that, ``[a]bsent a
phased-in implementation approach, the SBS market could suffer from
significant disruptions.'' \180\
---------------------------------------------------------------------------

    \178\ The commenter also stipulates that at the onset of the
relationship, clients will negotiate a grid with dealers where
certain short/long benchmarks and spreads are agreed for equity
issuers on a jurisdictional or other basis. See ISDA-SIFMA Letter,
supra note 18, at 6.
    \179\ Id.
    \180\ Id.
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    While the Commission acknowledges that there are differences
between the liquidity in the SBS market and the

swaps market, the process required before the execution requirement
would apply to an SBS will reduce the risk of ``substantial
disruptions.'' The required methods of execution would be applied to an
SBS only to the extent that it is subject to the clearing mandate and
has been ``made available to trade.'' Before making an SBS subject to
the clearing mandate, the Commission would be able to take into account
a number of factors, including the existence of significant outstanding
notional exposures, trading liquidity, and the adequacy of pricing
data.\181\
---------------------------------------------------------------------------

    \181\ See SEA section 3C(b)(4)(i), 15 U.S.C. 78c-3(b)(4)(i). See
also SEA section 3C(b)(4)(ii) through (v), 15 U.S.C. 78c-3(b)(4)(ii)
through (v) (discussing other factors that the Commission would be
required to take into account when making a mandatory clearing
determination).
---------------------------------------------------------------------------

    Further, to make an SBS ``available to trade,'' an SBSEF would,
under Proposed Rule 816(a)(1),\182\ have to make a filing with the
Commission under Rule 806 or Rule 807--both of which would allow the
Commission to find that a filing was not consistent with the
requirements of the SEA or Regulation SE.\183\ Moreover, the SBSEF's
filing would, under Proposed Rule 816(b), have to address, as
appropriate, a number of relevant factors, including whether there are
ready and willing buyers and sellers; the frequency or size of
transactions; the trading volume; the number and types of market
participants; the bid/ask spread; and the usual number of resting firm
or indicative bids and offers. Similarly, a national securities
exchange that wished to make an SBS ``available to trade'' would have
to file a rule change under Rule 19b-4,\184\ and that proposed rule
change would be subject to Commission review for compliance with the
requirements of the SEA, which requires that the rules of a national
securities exchange, among other things, promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market and a national market system, protect investors
and the public interest, and not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
SEA.\185\ Thus, before an SBS becomes subject to the trade execution
requirement, the Commission would have had multiple opportunities to
consider the trading characteristics of that SBS.
---------------------------------------------------------------------------

    \182\ See infra section V.F.2.
    \183\ See supra sections IV.A and B.
    \184\ 17 CFR 240.19b-4.
    \185\ See Section 6(b)(5) and (8) of the SEA, 15 U.S.C.
78f(b)(5) and (8).
---------------------------------------------------------------------------

    Additionally, most, if not all, SBSEFs are likely to be dually
registered with the CFTC as SEFs, and that most, if not all, market
participants in the SBS market will be participants in the swaps
market. The Commission remains concerned that different or additive
requirements--particularly for the key concept of a ``Required
Transaction''--could introduce complexity and confusion if one set of
trading protocols applied to Required Transactions for swaps but
different protocols--different from ones that have been understood and
utilized for many years--applied to Required Transactions for SBS
transactions.
    Thus, it is not appropriate to modify the requirement that a
qualifying RFQ system under Proposed Rule 815(c) transmit a request for
a quote to no fewer than three market participants in the trading
system or platform. The question whether sufficient liquidity exists in
the market for a given SBS to trade RFQ-to-3 can be addressed when the
SBS is subject to the clearing mandate and when a national securities
exchange or SBSEF seeks to make that SBS available to trade. Until that
time, SBSs would be Permitted Transactions on SBSEFs and thus could be
traded using other methods of execution, thus avoiding any potential
disruptions to liquidity in the SBS markets.
(iii) RFQ Functionalities
    The Commission also received two comment letters on the
functionalities required for RFQ systems under Proposed Rule
815(a)(3).\186\ Both commenters suggest that the proposed rule be
amended to require an SBSEF to communicate any firm bid or offer
pertaining to the same instrument resting on any of the SBSEF's trading
systems or protocols, not just firm bids or offers on the SBSEF's order
book.\187\ One of the commenters argues that, in practice, order books
continue to be infrequently used on SEFs that offer RFQ systems and
that, therefore, the same interaction requirement on SEFs has had
little impact.\188\ The commenter cites, for example, that ``request
for stream'' trading protocols, which allow liquidity providers to
stream firm prices, are not required to be communicated to clients
sending an RFQ.
---------------------------------------------------------------------------

    \186\ See Citadel Letter, supra note 18, at 13-14; MFA Letter,
supra note 18, at 8.
    \187\ See Citadel Letter, supra note 18, at 13; MFA Letter,
supra note 18, at 8. Rule 813(a)(3)(i) requires an SBSEF to
communicate to the requester any firm bid or offer pertaining to the
same instrument resting on any of the SBSEF's order books.
    \188\ See Citadel Letter, supra note 18, at 13; see also MFA
Letter, supra note 18, at 8 (also referencing the request-for-stream
protocol).
---------------------------------------------------------------------------

    This commenter also suggests that the proposed rule should be
modified to ensure that the RFQ requester has the ability to execute
against all of the prices provided in connection with an RFQ on the
same screen. The commenter argues that this will prevent an SBSEF from
requiring the RFQ requester to click through multiple screens in order
to execute against firm prices, which, the commenter argues, serves to
disadvantage those prices versus other prices provided in response to
an RFQ.\189\ Finally, the commenter recommends that the requirements of
Rule 815(a)(3) be modified to apply to all SBS transactions on an
SBSEF, not solely Required Transactions, as they argued that this will
help ensure that market participants transacting on SBSEFs are always
provided with the necessary transparency to achieve the most favorable
execution possible.\190\
---------------------------------------------------------------------------

    \189\ See Citadel Letter, supra note 18, at 13-14.
    \190\ See id. at 14.
---------------------------------------------------------------------------

    The other commenter also urges the Commission to modify the
requirement to ensure that the SBSEF communicates to the requester any
firm prices available on the SBSEF, in addition to resting firm bids or
quotes on the SBSEFs order book(s), and that they make this
functionality available for Permitted Transactions as well.\191\ In the
commenter's view, this approach is necessary in order to ensure the
availability of quotes for SBS transactions that will be essential to
maintaining liquidity and promoting open and equitable participation in
the markets.
---------------------------------------------------------------------------

    \191\ See MFA Letter, supra note 18, at 8.
---------------------------------------------------------------------------

    As previously noted, given that most if not all SBSEFs will be
dually registered as SEFs, there is a public interest in harmonizing
its requirements for trading protocols with those of the CFTC.\192\ The
commenters' suggestions to apply the proposed interaction requirement
to all trading systems and protocols on the SBSEF would be a deviation
from the CFTC's requirements for SEFs that would likely introduce
operational and compliance challenges created by having different
standards. This would undercut the Commission's goal of minimizing
operational and compliance burdens by seeking to harmonize requirements
between SEFs and SBSEFs. For instance, the commenters' suggestions to
apply the order interaction requirement to all transactions on the
SBSEF, not only Required Transactions, or to require that firm interest
outside the SBSEF's order

book be communicated in response to RFQs, would be a significant
deviation from the CFTC's method-of-execution requirements and would
have wide ramifications for the SBS markets, particularly in view of
the liquidity and information leakage concerns that other commenters
expressed elsewhere regarding the less liquid and thinly traded SBS
products that may trade on an SBSEF.\193\ As a result, applying such
requirements to Permitted Transactions, which the CFTC does not do,
would be likely to have the undesirable effect of discouraging market
participants from voluntarily executing Permitted Transactions on
SBSEFs, which would lessen market transparency and would not provide
greater opportunities for market participants to interact with trading
interest not subject to the trade execution requirement. Further, it is
not necessary for the Commission to mandate the technical details of
how the SBSEF displays responses to RFQs to its members. Rule 819(c),
discussed below,\194\ requires SBSEFs to provide all ECPs and
independent software vendors with impartial access market and market
services, and this requirement is sufficient to address a situation in
which an SBSEF designed its RFQ responses to systematically
disadvantage certain market participants or types of market
participants.
---------------------------------------------------------------------------

    \192\ See supra section I.
    \193\ See supra note 175 and accompanying text.
    \194\ See infra section VI.B.3.
---------------------------------------------------------------------------

(c) Block-Trade Exception
(i) General Treatment of Block Trades
    Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF
to specify trading procedures to be used in entering and executing
orders on the facility, including block trades.\195\ The CFTC
implemented this provision by excepting block trades from the required
execution methods in Sec.  37.9(a)(2).\196\ Proposed Rule 815(a)(2)
would also exclude block trades from the required execution methods
using language closely modeled on Sec.  37.9(a)(2). Specifically,
Proposed Rule 815(a)(2)(i) would apply required methods of execution to
``[e]ach Required Transaction that is not a block trade.'' \197\
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78c-4(d)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
    \196\ That rule cross-references Sec.  43.2, which defines the
term ``block trade'' for purposes of public dissemination of swap
transactions.
    \197\ See Proposed Rule 815(a)(2)(i) (emphasis added).
---------------------------------------------------------------------------

    Thus, the Commission's proposal to include an exception from the
required methods of execution for block trades in Regulation SE is
consistent with the approach taken by the CFTC. The purpose of having a
block-trade exception to the required methods of execution is to
balance the promotion of price competition and all-to-all trading
against the potential costs to market participants who wish to trade
large orders. Forcing a market participant who seeks liquidity to
expose a large order to an order book or to utilize RFQ-to-3 could
cause the market to move against the liquidity requester before it can
obtain an execution. Under the CFTC's rules, a block trade in a product
that is subject to mandatory trade execution may be traded on-SEF using
flexible means of execution on the SEF's non-order-book trading system
or platform, or away from a SEF's trading system or platform, provided
that it is executed pursuant to the SEF's rules and procedures. As
noted above, the Commission proposed a similar approach for block
trades on SBSEFs, excepting block trades from the required execution
methods of Proposed Rule 815(a)(2).
    The Commission received a number of comments on its proposal for a
block trade exception. Commenters generally support the inclusion of a
block trade exception from the Required Transaction requirement in Rule
815(a)(2).\198\
---------------------------------------------------------------------------

    \198\ See Bloomberg Letter, supra note 18, at 14; Citadel
Letter, supra note 18, at 9-10, ICI Letter, supra note 18, at 10-13;
SIFMA AMG Letter, supra note 18, at 9-10; ISDA-SIFMA Letter, supra
note 18, at 7-9; MFA Letter, supra note 18, at 5-6. Many of these
commenters raised questions about the proposed size of the block-
trade threshold. See infra section V.E.1(c).
---------------------------------------------------------------------------

    One commenter, supporting the Commission's harmonization with the
CFTC's approach to block trades by providing an exception for those
trades, states that a flexible block execution regime permits trading
of larger-sized transactions in a manner that incentivizes dealers to
provide liquidity and capital without creating market distortions.\199\
Another commenter asserts that exempting block trades from order book
and RFQ execution requirements is critical to the functioning of the
SBS markets, particularly to execute large trades without affecting
price.\200\ This commenter expresses concerns that, absent such an
exception, market participants would have difficulty executing, or
would be unable to execute, large bona fide trades, since they would be
required to do so only through the order book. This would increase the
cost of trading and hedging, the commenter says, which could reduce
participation in certain markets, resulting in less liquidity and
increased volatility.
---------------------------------------------------------------------------

    \199\ See SIFMA AMG Letter, supra note 18, at 10.
    \200\ See MFA Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    Another commenter states that the proposed exception for block
trades would provide important flexibility for market participants
executing SBS transactions of a significantly large size, and that
rules that facilitate swap block trades allow market participants, such
as regulated funds, to engage in large transactions while mitigating
the risks of information leakage and impairment of market
liquidity.\201\ Another commenter also supports the Commission's
proposal to align closely its approach to block trades with the
approach taken by the CFTC.\202\ This commenter agrees with the
Proposing Release's assessment that the block exception to the required
methods of execution balances the promotion of price competition and
all-to-all trading against the potential costs to the market
participants who wish to trade large orders, the importance of which
they note is more acute in the SBS market, which is a smaller and less
liquid market than the swaps market.
---------------------------------------------------------------------------

    \201\ See ICI Letter, supra note 18, at 10.
    \202\ See Bloomberg Letter, supra note 18, at 14.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that a block-trade
exception is appropriate, not only to maintain harmonization with the
CFTC regime for swaps but also to facilitate trading of SBS. This
approach, which is consistent with the approach of the CFTC for swaps,
will be especially important in the smaller, less liquid SBS markets if
and when a clearing determination has been made for one or more SBS. A
block-trade exception for SBSs subject to the trade-execution
requirement, provided that ``block trade'' is appropriately defined for
those SBSs, can help ensure that large trades are not significantly
more difficult and costly to execute because of the risks posed by
information leakage and the potential for adverse price movement, which
could significantly impair liquidity in the markets for those SBSs.
Therefore, the Commission is adopting Rule 815(a) as proposed, but is,
as discussed immediately below, modifying the proposal with respect to
the definition of ``block trade'' in Rule 802.
(ii) Block-Trade Definition for Credit SBS
    The Commission also proposed to align the regulatory text defining
``block trade'' in proposed Regulation SE with the CFTC's definition.
The proposed definition in Rule 802 of Regulation SE was based on the
four-pronged definition found in Sec.  43.2(a), but with one
modification. The third prong of the

CFTC definition characterizes a block trade in a particular swap as
having ``a notional or principal amount at or above the appropriate
minimum block size applicable to such swap.'' \203\
---------------------------------------------------------------------------

    \203\ Appendix F to the CFTC's part 43 divides swap asset
classes into a number of categories and sets forth a minimum block
size threshold to each category. SBSs are not within the CFTC's
jurisdiction, so the CFTC had not considered what an appropriate
minimum block size threshold would be for any SBS asset class. In
this respect, there was no CFTC-defined threshold for the Commission
to harmonize with, so the Commission proposed to establish a
threshold tailored specifically for the SBS market, see Proposing
Release, supra note 1, 87 FR at 28956, as discussed below.
---------------------------------------------------------------------------

    For the third prong of the ``block trade'' definition, the
Commission proposed that the SBS be based on a single credit instrument
(or issuer of credit instruments) or a narrow-based index of credit
instruments (or issuers of credit instruments) having a notional size
of $5 million or greater,\204\ considered the distribution of
transactions in the single-name CDS market \205\ and took into
consideration that FINRA applies a $5 million cap when disseminating
transaction reports of economically similar cash debt securities.\206\
---------------------------------------------------------------------------

    \204\ See Proposing Release, supra note 1, 87 FR at 28896.
    \205\ See id. at 28944.
    \206\ See id. at 28944 n.369.
---------------------------------------------------------------------------

    A number of commenters question the basis for the proposed $5
million block threshold size and advocate a variety of different
approaches to establishing the block size threshold for SBS products,
as alternatives to the proposed $5 million notional size block trade
threshold.\207\
---------------------------------------------------------------------------

    \207\ See Citadel Letter, supra note 18, at 9; ICI Letter, supra
note 18, at 10-12; MFA Letter, supra note 18, at 5-8; SIFMA AMG
Letter, supra note 18, at 10; ISDA-SIFMA Letter, supra note 18, at
7-9.
---------------------------------------------------------------------------

    One commenter presents data that it argues supports its assertion
that the block threshold for credit SBS should be recalibrated.\208\
The commenter recommends that the Commission first establish an
appropriate methodology to determine block thresholds based on current
market-wide data. This commenter states that, otherwise, the already
illiquid SBS market will be required to comply with an arbitrary,
``one-size-fits-all'' threshold amount that fails to consider the
unique levels of market liquidity and risk sensitivity of various
instruments. The commenter suggests that average daily volume (``ADV'')
is an appropriate indicator of liquidity levels because it represents a
measure of how much trading occurs in a given issuer across the market
as a whole, and that the lower the ADV, the lower the liquidity of the
product. Based on its analysis of ADV data for credit default swaps
(``CDS''), which it retrieved from the DTCC Trade Information
Warehouse, the commenter posits that liquidity in single-name CDS is
significantly lower than in broad-based CDS. Thus, the commenter
argues, it is not appropriate to mirror the block threshold for credit
SBS to the threshold for debt securities, when there are clear
differences in liquidity levels within the CDS market itself.
---------------------------------------------------------------------------

    \208\ See ISDA-SIFMA Letter, supra note 18, at 7-9.
---------------------------------------------------------------------------

    This commenter also asserts that the data reveal that liquidity in
single-name CDS is disproportionately concentrated in the most actively
traded issuers, which, the commenter contends, corroborates its
assertion that block thresholds should be calibrated at a more granular
level in order to reflect the different liquidity levels of credit SBS
products. The commenter cautions that, absent a data-based approach to
setting block thresholds for credit SBS instruments, the proposal runs
the risk that $5 million may be an inappropriately high threshold for
those products, which may widen bid/offer spreads, further reduce
liquidity, and force large-sized transactions to be publicly reported
with their full size, leaving the dealer that ``wins'' in the position
of risking the market moving against the dealer before the dealer is
able to adequately lay-off its exposure. This risk to the dealer, the
commenter asserts, could increase the costs of transacting with
immediacy substantially, leading to overall increased costs and time
delays in executing hedges, and adding to or taking down positions,
which would have a direct impact on clients and end-users, who will
ultimately bear the increased costs and inefficiencies when forced to
split large trades into smaller sizes for liquidity purposes. The
commenter states that these clients, end-users, and liquidity providers
may decide that it is more economical to exit the market entirely,
given that most of them do not trade in large volumes of SBS.\209\
---------------------------------------------------------------------------

    \209\ See id.
---------------------------------------------------------------------------

    The same commenter also states that, because ``the appropriate
block threshold depends on factors such as liquidity and risk
sensitivity[,] which can change over time, . . . the rules should
provide a formal adjustment mechanism that would allow market
participants to petition the Commission to temporarily change block
thresholds based on observed market conditions, or enable the
Commission's staff to do so, subject to a public comment process.''
\210\
---------------------------------------------------------------------------

    \210\ Id. at 9 n.23.
---------------------------------------------------------------------------

    Several commenters argue for establishing a range of block trade
threshold sizes, based on the product.\211\ One commenter recommends
that the Commission delay implementation of the required execution
methods until it considers its approach to block trades more
comprehensively.\212\ This commenter argues that calibrating
appropriate block threshold sizes for SBSs has significant implications
for market participants from both a pre- and a post-trade transparency
perspective. With respect to pre-trade transparency, the commenter
states that requiring a fund to disclose its trading interest in an SBS
of a large notional size to multiple participants--via an order book or
an RFQ system--would ``enable opportunistic market participants to
piece together information about the fund's holdings or investment
strategy and lead to frontrunning of those potential trades.'' \213\
With respect to post-trade transparency, the commenter states that
setting a block trade threshold that is too high would unnecessarily
limit the ability to report large-sized SBS transactions on a delay,
which would make it difficult for liquidity providers to hedge such
positions, leading to higher trading costs and less efficient trading
for funds and other market participants. The commenter also states that
the magnitude of these risks depends on, among other factors, an SBS's
liquidity profile. The commenter also states that having a single
threshold--across all applicable SBSs with respect to SBSEF trading and
for any additional future rulemaking related to post-trade public
reporting--does not adequately account for varying levels of liquidity
across different categories or types of SBSs. The commenter recommends
that, given the differences in liquidity across different SBSs, the
Commission should base its thresholds on more comprehensive transaction
data obtained pursuant to Regulation SBSR. The commenter asserts that
taking such a data-driven approach would allow the Commission to assess
the liquidity of different SBSs based on, for example, swap term,
underlying security, and other characteristics. The commenter also
argues that this would enable the Commission, similar to the CFTC, to
formulate different types or categories of

SBSs and propose differing block trade sizes that are more
appropriately tailored to the liquidity characteristics of each type or
group.
---------------------------------------------------------------------------

    \211\ See MFA Letter, supra note 18, at 7; ICI Letter, supra
note 18, at 11; SIFMA AMG Letter, supra note 18, at 10.
    \212\ See ICI Letter, supra note 18, at 11-12.
    \213\ Id. at 11.
---------------------------------------------------------------------------

    Another commenter states that the CFTC sets different minimum block
sizes for different categories of swaps and argues that the Commission
should similarly develop a more structured and tailored approach.\214\
The commenter expresses concerns that setting a miscalibrated block
size will likely limit the utility of the block trade exception,
thereby preventing many market participants from executing transactions
on SBSEFs. Another commenter recommends that the Commission adopt the
CFTC's approach for block trades based on a ``67 percent notional
amount calculation.'' \215\ That commenter also recommends that the
Commission reserve the ability to update block thresholds on a regular
basis to ensure they remain representative of current market
conditions.\216\ Another commenter states that the proposed block
threshold is not a result of any empirical analysis on the market
conditions for credit SBSs and suggested that, as the SBS market
develops and grows, it may become more appropriate for amendments to
the credit SBS threshold.\217\
---------------------------------------------------------------------------

    \214\ See MFA Letter, supra note 18, at 7.
    \215\ See Citadel Letter, supra note 18, at 9.
    \216\ See id. at 10.
    \217\ See SIFMA AMG Letter, supra note 18, at 10.
---------------------------------------------------------------------------

    The Commission has considered the comments received and has
determined, for the reasons discussed below, not to adopt a definition
of ``block trade.'' While the Commission had proposed the single block
threshold for credit SBS based on its preliminary view that the block-
trade threshold applicable to an SBS trade should be consistent with
any reporting cap for that SBS trade, and any reporting cap applicable
to the cash markets for the securities,\218\ the Commission
acknowledges commenters' concerns that the proposed $5 million block-
trade threshold for all credit SBSs would not be sufficiently tailored
to the unique and varying trading and risk characteristics of the full
range of credit SBS, creating the potential for the adverse market
risks that commenters point out may arise from having a one-size-fits-
all block threshold.
---------------------------------------------------------------------------

    \218\ See 2019 Cross-Border Application of Certain Security-
Based Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85
FR 6270, 6347 (Feb. 4, 2020) (``2019 Cross-Border Adopting
Release'').
---------------------------------------------------------------------------

    Further, unless and until the Commission has made a clearing
determination for a given SBS and an SBSEF or a national securities
exchange has made that SBS ``available to trade,'' all transactions in
that SBS will be Permitted Transactions. On the effective date of
Regulation SE, and until the Commission has made a clearing
determination for an SBS, no SBSEF or national securities exchange will
be able to make that SBS ``available to trade.'' Consequently, there
could be no mandatory trading requirement and thus there are no
transactions to be excepted. Without a mandatory trading requirement, a
block-trade threshold, therefore, has no effect on the ability of
market participants to choose their preferred means of execution for
trades in that SBS. Unless and until the Commission has made a
mandatory clearing determination regarding an SBS, it is not necessary
to define a block-trade threshold for SBS, and it would be appropriate
for the Commission to identify a block-trade threshold in the future
after considering credit SBS transaction data and credit SBS markets at
that time. In addition, the Commission agrees with commenters that
additional consideration of credit SBS transaction data, including data
reported under Regulation SBSR, would help the Commission determine the
appropriate block threshold for credit SBS products, including whether
different thresholds should apply to different types or groups of SBS.
The Commission also agrees with commenters that the credit SBS markets
are likely to evolve over time and that analysis of market data
continues to be an important aspect of setting appropriate thresholds
for both block trades and credit SBS public trade reporting.\219\
---------------------------------------------------------------------------

    \219\ In adopting Regulation SBSR, the Commission directed its
staff to make reports in connection with the determination of block
thresholds and reporting delays for security-based swap transaction
data. See 17 CFR 242.901 (Appendix) (discussing the studies for the
determination of block thresholds and reporting delays); see also
Regulation SBSR Adopting Release I, supra note 140, 80 FR at 14625.
The Commission stated that it intends to use these reports to inform
its specification of the criteria for determining what constitutes a
large notional SBS transaction (i.e., block trade) for particular
markets and contracts; and the appropriate time delay for reporting
large notional SBS transactions to the public. See 17 CFR 242.901
(Appendix). The reports for each asset class are to be completed no
later than two years following the initiation of public
dissemination of security-based swap transaction data by the first
registered SDR in that asset class--in other words, the reports are
anticipated to be complete by Feb. 14, 2024--and then published for
comment in the Federal Register. See id.
---------------------------------------------------------------------------

    Therefore, the Commission is not adopting the proposed definition
of ``block trade'' under Proposed Rule 802, or any other block-trade
threshold.\220\ In conjunction with any mandatory clearing
determination by the Commission for SBS, or with any Commission
proposal to specify the criteria for determining what constitutes a
large notional SBS transaction for particular markets and contracts
with respect to trade reporting, the Commission will have the
opportunity to engage in rulemaking to propose a definition of ``block
trade'' for purposes of Regulation SE--and to solicit public comment on
Commission's proposal and its economic analysis of the proposed
definition--before it considers adopting a definition.
---------------------------------------------------------------------------

    \220\ Because the Commission is not adopting a definition of
``block trade'' at this time, it is also modifying other rules
within Regulation SE that reference block trades. See supra note 41.
---------------------------------------------------------------------------

    In response to the comment that the Commission should delay
implementation of the trade execution requirement until it has
considered block trades more comprehensively, unless and until the
Commission has made a clearing determination for a given SBS and an
SBSEF or a national securities exchange has made that SBS ``available
to trade,'' all transactions in that SBS will be Permitted
Transactions. Thus, it is not necessary to formally delay the
implementation of the trade execution requirement, because the
Commission will have the opportunity if and when it makes a clearing
determination for SBS--i.e., before any SBS transaction becomes a
Required Transaction--to address whether a block-trade threshold should
be set; what methodology should be used to determine that threshold;
and what that threshold would be. At that time, because amending Rule
802 to define ``block trade'' would entail notice-and-comment
rulemaking, market participants would have the opportunity to comment
on the Commission's proposed action.
    For the reasons discussed above, the Commission is not adopting the
definition of ``block trade'' in Rule 802 as proposed but is instead
adding a note to Rule 802 informing stakeholders the Commission has not
yet adopted a definition of ``block trade.'' \221\
---------------------------------------------------------------------------

    \221\ The Commission has corrected a cross-reference from
242.800(x) to 242.802.
---------------------------------------------------------------------------

(iii) Block-Trade Definition for Equity SBS
    In the Proposing Release, the Commission did not propose a
definition of ``block trade'' applicable to equity SBS. Accordingly, no
equity SBS would qualify for the exception to required means of
execution for block trades in Proposed Rule 815(a)(2).\222\
---------------------------------------------------------------------------

    \222\ As discussed in the Proposing Release, appendix F to part
43 of the CFTC's rules does not define a block trade for equity
swaps, and accordingly, no equity swap transaction could qualify for
the exception to the required means of execution for block trades
under Sec.  37.9(a)(2). See Proposing Release, supra note 1, 87 FR
at 28896.

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

    Several commenters submitted comment letters on the proposal to
exclude equity swaps from the proposed block-trade exception.\223\ One
commenter states that, in its view, the use of block trades for equity
SBS is at least as necessary as for credit SBS, due to the need to
customize the size of transactions and to obtain timely and efficient
executions.\224\ This commenter asserts that requiring equity SBS
trades to be executed only through the order book or RFQ system could
result in these trades having ``significant price impact'' on SBSEF
products, which would ultimately inhibit the ability of market
participants to efficiently arrange and execute large, customized
trades that are essential for market participants' risk management
activities.\225\ The commenter also asserts that this would
disincentivize market participants from using equity SBS for their
legitimate business purposes, including hedging, which could increase
volatility and reduce liquidity in equity SBS markets (as well as
underlying equity markets). The commenter also argues that excluding
equity SBS block trades would ultimately inhibit capital formation as
an inability to execute blocks in equity SBS would make it riskier,
more expensive, and more difficult to hedge, which would in turn
inhibit market participants from participating in offerings.
---------------------------------------------------------------------------

    \223\ See MFA Letter, supra note 18, at 6-7; ICI Letter, supra
note 18, at 12-13; ISDA-SIFMA Letter, supra note 18, at 9; SIFMA AMG
Letter, supra note 18, at 10.
    \224\ See MFA Letter, supra note 18, at 6-7.
    \225\ Id. at 6.
---------------------------------------------------------------------------

    This commenter further states that equity SBS are quite distinct
from CFTC equity swaps in ways that make it more critical to allow
block trades in equity SBS. Specifically, the commenter states that
since CFTC-regulated equity swaps are based on broad-based equity
indices, which reflect markets and not individual issuers, they are
used to assume or hedge exposure to the relevant market or sector
generally. By contrast, the commenter posits that equity SBS may
reference a single name and are therefore a preferred tool for hedging
exposure to specific equities, which makes them essential to capital
formation. The commenter also argues that markets for SBS on individual
equities will, in many cases, be less liquid than the markets for
broad-based equity index swaps, further necessitating the opportunity
for block trades.\226\
---------------------------------------------------------------------------

    \226\ See MFA Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    Another commenter also recommends that the Commission conduct
further analysis before determining block treatment for equity
SBSs.\227\ That commenter states that it previously disagreed with
CFTC's similar approach with respect to equity swaps. The commenter
argues that the Commission should undertake additional analysis to
demonstrate that the CFTC's justifications for its approach apply
equally to the categories or types of equity-based swaps specifically
under its jurisdiction, which include, for example, total return swaps
based on a single security or loan, or a narrow-based security index.
The commenter also recommends that the Commission determine whether
block treatment would be appropriate for equity-based SBSs in the pre-
trade transparency context. The commenter argues that similar to other
categories or types of large-sized SBSs that would qualify for block
treatment, flexible execution with respect to large-sized, equity-based
SBSs is important to avoid information leakage regarding a market
participant's investment strategies.
---------------------------------------------------------------------------

    \227\ See ICI Letter, supra note 18, at 12-13.
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    One commenter suggests that, if there is the ability to have
fungible, single-name total return swaps in equity products, and they
become subject to mandatory clearing in the future, that the commenter
would expect there to be appropriately calibrated block size thresholds
that are applied to those equity-based swaps.\228\ Another commenter
suggests that if an equity SBS product becomes subject to mandatory
trade execution, there should be an appropriate methodology for
establishing equity block thresholds.\229\
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    \228\ See SIFMA AMG Letter, supra note 18, at 10.
    \229\ See ISDA-SIFMA Letter, supra note 18, at 9.
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    While the Commission acknowledges commenters' concerns, the general
concerns expressed about the need for equity blocks lack specificity or
analysis regarding a particular definition of ``block trade'' for
equity SBS--whether a specific threshold or a methodology--that the
Commission could adopt. Commenters' concerns focus on the need to
customize the size of equity SBS transactions, to obtain timely and
efficient executions, and to avoid information leakage. And commenters
state that the lack of a block-trade exception could result in
significant price impact and inhibit the large, customized trades
essential for risk management and hedging, which would discourage
hedging, increase volatility and reduce liquidity in equity SBS markets
(as well as underlying equity markets), and ultimately inhibit capital
formation and participation in offerings.
    With respect to the stated need for certain parties to use an
equity SBS block-trade exception, a relevant consideration for the
Commission in determining whether to establish a block-size threshold
for equity SBSs, if and when it makes a clearing determination for
those SBSs, is whether establishing that block-trade threshold would
have the potential to create a situation where SBSEFs provide less
transparency than exists in the underlying cash equity markets or the
listed options markets. An inappropriate block-trade threshold for
equity SBSs could create incentives for market participants to favor
equity SBS markets over cash equities or listed options markets, either
of which may be used, in many cases, to achieve economically equivalent
trading objectives as strategies using equity SBS, and neither of which
provides for block-trade reporting delays. If transactions were to
migrate from cash equities or listed options markets to the SBS market,
this could lead to decreased market transparency and could potentially
undercut the goal of the Dodd-Frank Act to bring transparency to the
trading of SBS.\230\
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    \230\ See Proposing Release, supra note, 87 FR at 28894 (``The
legislative history of the Dodd-Frank Act indicates that exchange
trading is a mechanism to `provide pre- and post-trade transparency
for end users, market participants, and regulators.' '' S. Rep. No.
111-176, at 34 (2010)).
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    Additionally, as a general matter, it is important to harmonize the
treatment of equity SBS with the treatment of equity swaps. There is no
block-trade exception for equity swaps in the CFTC's rules, and the
Commission does not wish to create incentives for market participants
to trade equity SBS over swaps. And while a commenter states that
equity SBS are quite distinct from equity swaps, the treatment of
equity SBS transactions should be broadly consistent with the treatment
of transactions in the cash equities underlying them to avoid, as
discussed above, creating incentives for market participants to trade
equity SBS instead of the underlying cash instruments.
    For these reasons and those discussed above regarding credit
SBS,\231\ the Commission has determined not to adopt a definition of
``block trade'' in Rule 802. Thus, with respect to commenters'
concerns, until the Commission has made a clearing determination with
respect to equity SBS, equity SBS will be able to trade OTC, just as
their underlying cash equities can trade OTC. Moreover, before making a
clearing determination for an equity SBS--which would create

the circumstances in which equity SBS might be MAT and therefore
subject to the trade-execution requirement--the Commission would have
the opportunity to solicit and consider additional public comment on
the effect of such a determination, including comment with respect to
the concerns commenters have raised to date regarding, among other
things, timely and efficient executions, hedging, and capital
formation.
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    \231\ See supra section V.E.1(c)(ii).
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2. Rule 815(b)
    Paragraph (b) of Proposed Rule 815 would require a time delay for
certain orders being entered by a broker or dealer on an SBSEF's order
book. This provision would only apply to situations in which the broker
or dealer is seeking to trade against a customer order (a
``facilitation cross'') or to cross two customer orders (a ``customer
cross''), following some form of pre-arrangement or pre-negotiation of
such orders, and where the transaction is a Required Transaction.\232\
Under Proposed Rule 815(b)(1), an SBSEF would require that the broker
or dealer must expose one of the two orders in this transaction on the
SBSEF order book for a minimum time period of 15 seconds so that other
market participants have the opportunity to offer a better price than
the broker or dealer had intended for the cross. Proposed Rule
815(b)(2) would permit the SBSEF to adjust the time period of the
required delay based on the SBS's liquidity or other product-specific
considerations, provided that the time delay is a sufficient period of
time so that an order is exposed to the market and other market
participants have a meaningful opportunity to execute against the
order.
---------------------------------------------------------------------------

    \232\ The Commission has modified the text of Rule 815(b)(1) to
specify that the requirements in this provision only apply with
regards to Required Transactions.
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    The Commission received comments on the provisions regarding the
prearrangement or pre-negotiation of trades in Proposed Rule
815(b).\233\ One commenter requests that the Commission address the
extent to which market participants may utilize ``pre-execution
communications'' when trading on an SBSEF, noting that the CFTC has
specified that such communications may occur pursuant to a SEF's rules
that have been certified or approved by the CFTC.\234\ This commenter
urges the Commission to align its rules to those of the CFTC in this
respect, given that pre-execution communication is a standard market
practice that investment advisers use to guard against information
leakage and obtain fair pricing for large-sized trades and packaged
transactions, among other types of transactions, on behalf of funds and
other clients.
---------------------------------------------------------------------------

    \233\ See Citadel Letter, supra note 18, at 14-15; ICI Letter,
supra note 18, at 13-14.
    \234\ See ICI Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------

    Another commenter, arguing that the Proposing Release and the CFTC
rules are silent with respect to the permissibility of pre-arrangement
on RFQ systems, urges the Commission to require SBSEF rulebooks to
prohibit the pre-arrangement of Required Transactions, arguing that it
is important that pre-trade transparency and the RFQ-to-3 requirement
not be undermined through bilateral pre-arrangement of a Required
Transaction followed by a directed RFQ that merely formalizes the
transaction.\235\
---------------------------------------------------------------------------

    \235\ See Citadel Letter, supra note 18, at 15.
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    The Commission agrees with the comment that it should view pre-
execution communications in a way that is consistent with CFTC guidance
on this matter.\236\ The CFTC has viewed pre-execution communications
as communications between market participants to discern interest in
the execution of a transaction prior to the exposure of the market
participants' orders (e.g., price, size, and other terms) to the market
and has stated that such communications include discussion of the size,
side of market, or price of an SBS order or a potentially forthcoming
order.\237\ Consistent with the CFTC's approach, the Commission is
generally of the view that the terms ``pre-negotiation'' and ``pre-
arrangement'' within the meaning of Rule 802(b) should ordinarily be
understood to include all communications between market participants to
discern interest in the execution of a transaction prior to the
exposure of the market participants' orders (e.g., price, size, and
other terms) to the market, including discussion of the size, side of
market, or price of an SBS order, or a potentially forthcoming order.
---------------------------------------------------------------------------

    \236\ See ICI Letter, supra note 18, at 13-14.
    \237\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR
at 33503.
---------------------------------------------------------------------------

    Additionally, while the CFTC has acknowledged that pre-execution
communications may be permitted by a SEF, it has stated that any SEF
that allows pre-execution communications must adopt rules regarding
such communications that have been certified to or approved by the
CFTC.\238\ Consistent with this view, the rulebook of an SBSEF
generally should address, with clarity, the application of the terms
``pre-arrangement'' and ``pre-negotiation'' in Rule 802(b) so that
market participants will know what types of pre-execution
communications are covered by the rule. An SBSEF's rules in this regard
must, of course, also comply with the other provisions of the SEA and
the rules thereunder, including the impartial access requirement of
Rule 819(c).\239\
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    \238\ See id.
    \239\ See infra section VI.B.3.
---------------------------------------------------------------------------

    With respect to the comment that the Commission should ban pre-
arrangement or pre-negotiation of RFQ trades on an SBSEF, while the
CFTC regulation is silent regarding the permissibility of pre-
arrangement on RFQ systems, the CFTC's adopting release with respect to
its SEF rules expressly contemplates the permissible pre-arrangement of
trades executed via RFQ.\240\ Moreover, the CFTC explained in its
adopting release that it refrained from requiring a time delay for
Required Transactions entered into RFQ systems because the requirement
to send an RFQ to three other market participants already provides pre-
trade price transparency.\241\ Thus, the CFTC has acknowledged that
pre-arranged Required Transactions may be submitted into a SEF's RFQ
system, and without a time delay.
---------------------------------------------------------------------------

    \240\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR
at 33504.
    \241\ See id.
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    The Commission recognizes that, as one of the commenters also
states, pre-execution communications are a standard practice for many
participants in the SBS market, and that to prohibit them entirely
would be a major departure from the CFTC's approach and could have
significant negative ramifications on the ability of market
participants to effect their SBS transactions. Accordingly, and to
maintain harmonization with the CFTC's treatment of pre-arrangement and
pre-negotiation of swaps transactions, the Commission is not modifying
Rule 815(b) to prohibit the use of pre-arrangement or pre-negotiation
with respect to SBS transactions via RFQ or to impose a time delay
before any such SBS can be executed via RFQ.
    One of the commenters also requests that the Commission require
SBSEFs to provide periodic regulatory reporting around pre-arranged
trading on their platforms, including reporting the percentage of pre-
arranged orders for which other SBSEF participants step in to join the
trade, and that it also require an SBSEF to demonstrate that it offers
a bona fide order book in order for the SBSEF to permit the execution
of pre-arranged orders (such as a minimum

level of trading activity on the order book or a minimum percentage of
pre-arranged orders where pricing is improved as a result of other
SBSEF participants stepping in).\242\
---------------------------------------------------------------------------

    \242\ See Citadel Letter, supra note 18, at 14-15.
---------------------------------------------------------------------------

    The suggested reporting requirements or ``bona fide order book''
standard, however, would exceed what SEFs are required to do under the
CFTC rules. The Commission is concerned that different or additive
requirements to the key concept of an order book, such as whether that
order book is ``bona fide,'' could introduce complexity and confusion
if one set of trading protocols applied to Required Transactions for
swaps but different protocols--different from ones that have been
understood and utilized for many years--applied to Required
Transactions for SBS transactions. Moreover, the commenter's proposed
reporting requirements--such as a minimum percentage of pre-arranged
orders where pricing is improved as a result of other SBSEF
participants stepping in--appear to be primarily relevant to an
evaluation of a particular SBSEF has met the standard for having a
``bona fide'' order book. Accordingly, because the added complexity and
costs associated with imposing the ``bona fide'' order book standard
have not been justified, it is not appropriate to adopt the proposed
regulatory reporting requirement suggested by the commenter with
respect to cross-trading.
    For the reasons discussed above, the Commission is adopting Rule
815(b) as proposed, with a clarifying change to the rule text to
reiterate that the requirement applies only to Required
Transactions.\243\
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    \243\ The heading of the proposed rule text already indicated
that it was a ``Time delay requirement for Required Transactions on
an order book.'' The rule text has been modified only to add ``With
regard to Required Transactions,'' at the beginning of the rule
text, to reiterate the parameters indicated in the title and to
clarify its application.
---------------------------------------------------------------------------

3. Rule 815(c)
    Proposed Rule 815(c) is modeled on Sec.  37.9(c) of the CFTC's
rules and would define a ``Permitted Transaction'' as a transaction not
involving an SBS that is subject to the mandatory trade execution
requirement. This rule provides that an SBSEF may offer any method of
execution for Permitted Transactions.
    The Commission did not receive any comments on the definition of
Permitted Transactions \244\ and is adopting Rule 815(c) as proposed,
for the reasons discussed in the Proposing Release.
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    \244\ As discussed above, one commenter recommends that the
requirements of Rule 815(a)(3) be modified to apply to all SBS
transactions on an SBSEF, which would include Permitted
Transactions. See supra note 190 and accompanying text (describing
and discussing that comment).
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4. Rule 815(d)
    Paragraph (d) of Sec.  37.9 provides an exception for package
transactions that allows for flexible methods of execution for what
would otherwise be Required Transactions. The Commission proposed to
include similar exceptions in Proposed Rule 815(d). Proposed Rule
815(d)(1) would define ``package transaction'' as two or more component
transactions executed between two or more counterparties where at least
one component is a Required Transaction, execution of each component is
contingent upon the execution of all other components, and the
component transactions are priced or quoted together as one economic
transaction with simultaneous (or near-simultaneous) execution of all
components. Proposed Rule 815(d)(2) would provide that a Required
Transaction that is executed as a component of a package transaction
that includes a component SBS that is subject exclusively to the
Commission's jurisdiction, but is not subject to mandatory clearing,
may be executed on an SBSEF using any method of execution as if it were
a Permitted Transaction.
    Proposed Rule 815(d)(3) would provide that a Required Transaction
that is executed as a component of a package transaction that includes
a component that is not an SBS may be executed on an SBSEF using any
method of execution as if it were a Permitted Transaction. Proposed
Rule 815(d)(3) would further state that this general exception, which
allows flexible means of execution for certain package transactions,
shall not apply to a Required Transaction that is executed as a
component of a package transaction in which all other non-SBS
components are U.S. Treasury securities; a Required Transaction that is
executed as a component of a package transaction in which all other
non-SBS components are contracts for the purchase or sale of a
commodity for future delivery; a Required Transaction that is executed
as a component of a package transaction in which all other non-SBS
components are agency mortgage-backed securities; or a Required
Transaction that is executed as a component of a package transaction
that includes a component transaction that is the issuance of a bond in
a primary market.
    The Commission received comments on the proposed exception for
packaged transactions.\245\ Several commenters support the Commission's
proposal.\246\ One commenter supports the proposal to harmonize with
the CFTC rules, but suggested modifications to the proposed rule
text.\247\ First, the commenter suggests that Rule 815(d)(2) be
modified so that the package-transaction exception is not available if
the other SBS in the package is either subject to the clearing
requirement or intended to be cleared. This commenter states that,
because the scope of any future clearing requirement for SBSs is
unclear, there may be significant trading activity in packages
containing SBSs that are intended to be cleared, but not subject to the
clearing requirement, and the commenter states that, for purposes of
the package transaction exception, SBS that are cleared, whether by
mandate or intention, should be treated the same. This commenter also
recommends that Rule 815(d)(3) be modified to clarify that the
exception would not apply to package transactions where all of the
other components are swaps subject to the CFTC's trade execution
requirement. The commenter states that this modification would prevent
evasion for packages containing only SBSs and swaps that are subject to
trade execution requirements on the Commission and the CFTC side,
respectively.\248\
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    \245\ See Bloomberg Letter, supra note 18, at 14, Citadel
Letter, supra note 18, at 12-13, and ISDA-SIFMA Letter, supra note
18, at 9-10.
    \246\ See Bloomberg Letter, supra note 18, at 14 and ISDA-SIFMA
Letter, supra note 18, at 9-10.
    \247\ See Citadel Letter, supra note 18, at 12-13.
    \248\ See id.
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    Another commenter, while agreeing that it is appropriate to treat
package transactions differently from outright, single-legged
transactions, suggests that the Commission take a different approach
from that of the CFTC, stating that the current state of the CFTC's
rules reflect the culmination of a phased implementation approach
developed over time via no-action letters.\249\ That commenter argues
that it would be better for the Commission to tailor its rules for
packaged transactions to address the particular market dynamics
relevant to the SBS market instead of the swaps market. The commenter