[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Proposed Rules]
[Pages 30967-31281]
[FR Doc No: 2013-10835]

Vol. 78

Thursday,

No. 100

May 23, 2013

Part II

Securities and Exchange Commission

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17 CFR Parts 240, 242, and 249

Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation
SBSR and Certain Rules and Forms Relating to the Registration of
Security-Based Swap Dealers and Major Security-Based Swap Participants;
Proposed Rule

Federal Register / Vol. 78 , No. 100 / Thursday, May 23, 2013 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

[Release No. 34-69490; File Nos. S7-02-13; S7-34-10; S7-40-11]
RIN 3235-AL25

Cross-Border Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules; proposed interpretations.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is publishing for public comment proposed rules and
interpretive guidance to address the application of the provisions of
the Securities Exchange Act of 1934, as amended (``Exchange Act''),
that were added by Subtitle B of Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''), to
cross-border security-based swap activities. Our proposed rules and
interpretive guidance address the application of Subtitle B of Title
VII of the Dodd-Frank Act with respect to each of the major
registration categories covered by Title VII relating to market
intermediaries, participants, and infrastructures for security-based
swaps, and certain transaction-related requirements under Title VII in
connection with reporting and dissemination, clearing, and trade
execution for security-based swaps. In this connection, we are re-
proposing Regulation SBSR and certain rules and forms relating to the
registration of security-based swap dealers and major security-based
swap participants. The proposal also contains a proposed rule providing
an exception from the aggregation requirement, in the context of the
security-based swap dealer definition, for affiliated groups with a
registered security-based swap dealer. Moreover, the proposal addresses
the sharing of information and preservation of confidentiality with
respect to data collected and maintained by SDRs. In addition, the
Commission is proposing rules and interpretive guidance addressing the
policy and procedural framework under which the Commission would
consider permitting compliance with comparable regulatory requirements
in a foreign jurisdiction to substitute for compliance with
requirements of the Exchange Act, and the rules and regulations
thereunder, relating to security-based swaps (i.e., ``substituted
compliance''). Finally, the Commission is setting forth our view of the
scope of our authority, with respect to enforcement proceedings, under
Section 929P of the Dodd-Frank Act.

DATES: Submit comments on or before August 21, 2013.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-02-13, and File Numbers S7-34-10 (Regulation SBSR) and/
or S7-40-11 (registration of security-based swap dealers and major
security-based swap participants), as applicable, on the subject line;
or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-02-13, and File
Numbers S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration of
security-based swap dealers and major security-based swap
participants), as applicable. This file number should be included on
the subject line if email is used. To help us process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments also are available for Web
site viewing and printing in the Commission's Public Reference Room,
100 F Street NE., Washington, DC 20549, on official business days
between the hours of 10:00 a.m. and 3:00 p.m. All comments received
will be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Matthew A. Daigler, Senior Special
Counsel, at<PHONE_NUMBER>, Wenchi Hu, Senior Special Counsel, at 202-
551-6268, Richard E. Grant, Special Counsel, at<PHONE_NUMBER>, or
Richard Gabbert, Special Counsel, at<PHONE_NUMBER>, Office of
Derivatives Policy, Division of Trading and Markets, regarding
security-based swap dealers and major security-based swap participants;
Jeffrey Mooney, Assistant Director, Matthew Landon, Senior Special
Counsel, or Stephanie Park, Special Counsel, Office of Clearance and
Settlement, Division of Trading and Markets, at<PHONE_NUMBER>, regarding
security-based swap clearing agencies, security-based swap data
repositories, and the security-based swap clearing requirement; David
Michehl, Senior Counsel, Office of Market Supervision, Division of
Trading and Markets, at<PHONE_NUMBER>, regarding security-based swap
reporting; Leah Mesfin, Special Counsel, at<PHONE_NUMBER>, or Michael P.
Bradley, Special Counsel, at<PHONE_NUMBER>, Office of Market
Supervision, Division of Trading and Markets, regarding the trade
execution requirement and swap execution facilities; Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing new rules and
interpretive guidance under the Exchange Act relating to the
application of Subtitle B of Title VII of the Dodd-Frank Act to cross-
border activities and re-proposing Regulation SBSR and certain rules
and forms relating to the registration of security-based swap dealers
and major security-based swap participants.
    The Commission is proposing the following rules under the Exchange
Act: Rule 0-13 (Substituted Compliance Request Procedure); Rule 3a67-10
(Foreign Major Security-Based Swap Participants); Rule 3a71-3 (Cross-
Border Security-Based Swap Dealing Activity); Rule 3a71-4 (Exception
from Aggregation for Affiliated Groups with Registered Security-Based
Swap Dealers); Rule 3a71-5 (Substituted Compliance for Foreign
Security-Based Swap Dealers); Rule 3Ca-3 (Application of the Mandatory
Clearing Requirement to Cross-Border Security-Based Swap Transactions);
Rule 3Ch-1 (Application of the Mandatory Trade Execution Requirement to
Cross-Border Security-Based Swap Transactions); Rule 3Ch-2 (Substituted
Compliance for Mandatory Trade Execution); Rule 13n-4(d) (Exemption
from the Indemnification Requirement); Rule 13n-12 (Exemption from
Requirements Governing Security-Based Swap Data Repositories for
Certain Non-U.S. Persons); Rule 18a-4(e) (Segregation Requirements for
Foreign Security-Based Swap Dealers); and Rule 18a-4(f) (Segregation
Requirements for Foreign Major

Security-Based Swap Participants). The Commission also is re-proposing
the following rules and forms: 17 CFR 242.900-242.911 (Regulation SBSR)
(RIN 3235-AK80) and 17 CFR 249.1600 (Form SBSE), 249.1600a (Form SBSE-
A), and 249.1600b (Form SBSE-BD) (RIN 3235-AL05).

Table of Contents

I. Background
    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
    B. Overview of the Cross-Border Proposal
    C. Consultation and Coordination
    D. Substituted Compliance
    E. Conclusion
II. Overview of the Security-Based Swap Market and the Legal and
Policy Principles Guiding the Commission's Approach to the
Application of Title VII to Cross-Border Activities
    A. Overview of the Security-Based Swap Market
    1. Global Nature of the Security-Based Swap Market
    2. Dealing Structures
    (a) U.S. Bank Dealer
    (b) U.S. Non-Bank Dealer
    (c) Foreign Subsidiary Guaranteed by a U.S. Person
    (d) Foreign-Based Dealer
    i. Direct Dealing
    ii. Intermediation in the United States
    3. Clearing Practices
    4. Reporting Practices
    5. Trade Execution Practices
    6. Broad Economic Considerations of Cross-Border Security-Based
Swaps
    (a) Major Economic Considerations
    (b) Global Nature and Interconnectedness of the Security-Based
Swap Market
    (c) Central Clearing
    (d) Security-Based Swap Data Reporting
    B. Scope of Title VII's Application to Cross-Border Security-
Based Swap Activity
    1. Commenters' Views
    2. Scope of Application of Title VII in the Cross-Border Context
    (a) Overview and General Approach
    (b) Territorial Approach to Application of Title VII Security-
Based Swap Dealer Registration Requirements
    (c) Application of Other Title VII Requirements to Registered
Entities
    (d) Application of Title VII Regulatory Requirements to
Transactions of Foreign Entities Receiving Guarantees From U.S.
Persons
    (e) Regulations Necessary or Appropriate To Prevent Evasion of
Title VII
    C. Principles Guiding Proposed Approach to Applying Title VII in
the Cross-Border Context
    D. Conclusion
III. Security-Based Swap Dealers
    A. Introduction
    B. Registration Requirement
    1. Introduction
    2. Background Discussion Regarding the Registration of Foreign
Brokers and Dealers
    3. Comment Summary
    (a) Market Participants
    (b) Foreign Regulators
    4. Application of the De Minimis Exception to Cross-Border
Security-Based Swap Dealing Activity
    (a) Meaning of the Term ``Person'' in the Security-Based Swap
Dealer Definition
    (b) Proposed Rule
    5. Proposed Definition of ``U.S. Person''
    (a) Introduction
    (b) Discussion
    i. Natural Persons
    ii. Corporations, Organizations, Trusts, and Other Legal Persons
    iii. Accounts of U.S. Persons
    iv. International Organizations
    (c) Conclusion
    6. Proposed Definition of ``Transaction Conducted Within the
United States''
    7. Proposed Treatment of Transactions With Foreign Branches of
U.S. Banks
    8. Proposed Rule Regarding Aggregation of Affiliate Positions
    9. Treatment of Inter-Affiliate and Guaranteed Transactions
    10. Comparison With Definition of ``U.S. Person'' in Regulation
S
    C. Regulation of Security-Based Swap Dealers in Title VII
    1. Introduction
    2. Comment Summary
    3. Title VII Requirements Applicable to Security-Based Swap
Dealers
    (a) Transaction-Level Requirements
    i. External Business Conduct Standards
    ii. Segregation of Assets
    (b) Entity-Level Requirements
    i. Capital
    ii. Margin
    iii. Risk Management
    iv. Recordkeeping and Reporting
    v. Internal System and Controls
    vi. Diligent Supervision
    vii. Conflicts of Interest
    viii. Chief Compliance Officer
    ix. Inspection and Examination
    x. Licensing Requirements and Statutory Disqualification
    4. Application of Certain Transaction-Level Requirements
    (a) Proposed Rule
    (b) Discussion
    i. External Business Conduct Standards
    a. Foreign Security-Based Swap Dealers
    b. U.S. Security-Based Swap Dealers
    ii. Segregation Requirements
    a. Foreign Security-Based Swap Dealers
    b. Non-Cleared Security-Based Swaps
    c. Cleared Security-Based Swaps
    d. Disclosure
    5. Application of Entity-Level Rules
    (a) Introduction
    (b) Proposed Approach
    D. Intermediation
    1. Introduction
    2. Comment Summary
    3. Discussion
    E. Registration Application Re-Proposal
    1. Introduction
    2. Discussion
IV. Major Security-Based Swap Participants
    A. Introduction
    B. Comment Summary
    C. Proposed Approach
    1. In General
    2. Guarantees
    (a) Guarantees Provided by U.S. Persons to Non-U.S. Persons
    (b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and
Guarantees Provided by Non-U.S. Persons to Non-U.S. Persons
    (c) Limited Circumstances Where Attribution of Guaranteed
Security-Based Swap Positions Does Not Apply
    (d) Operational Compliance
    3. Foreign Public Sector Financial Institutions (FPSFIs)
    D. Title VII Requirements Applicable to Major Security-Based
Swap Participants
    1. Transaction-Level Requirements Related to Customer Protection
    (a) Overview
    (b) Proposed Rules
    2. Entity-Level Requirements
    3. Substituted Compliance
V. Security-Based Swap Clearing Agencies
    A. Introduction
    B. Proposed Title VII Approach
    1. Clearing Agency Registration
    (a) Clearing Agencies Acting as CCPs
    (b) Proposed Interpretive Guidance
    2. Exemption From Registration Under Section 17A(k)
    3. Application of Alternative Standards to Certain Registrants
VI. Security-Based Swap Data Repositories
    A. Introduction
    B. Application of the SDR Requirements in the Cross-Border
Context
    1. Introduction
    2. Comment Summary
    3. Proposed Approach
    (a) U.S. Persons Performing SDR Functions Are Required To
Register With the Commission
    (b) Interpretive Guidance and Exemption for Non-U.S. Persons
That Perform the Functions of an SDR Within the United States
    C. Relevant Authorities' Access to Security-Based Swap
Information and the Indemnification Requirement
    1. Information Sharing Under Sections 21 and 24 of the Exchange
Act
    2. Comment Summary
    3. Proposed Guidance and Exemptive Relief
    (a) Notification Requirement
    (b) Determination of Appropriate Regulators
    (c) Option for Exemptive Relief From the Indemnification
Requirement
    i. Impact of the Indemnification Requirement
    ii. Proposed Rule 13n-4(d): Indemnification Exemption
VII. Security-Based Swap Execution Facilities
    A. Introduction
    B. Registration of Foreign Security-Based Swap Markets
    C. Registration Exemption for Foreign Security-Based Swap
Markets
VIII. Regulation SBSR--Regulatory Reporting and Public Dissemination
of Security-Based Swap Information
    A. Background
    B. Modifications to the Definition of ``U.S. Person''
    C. Additional Modifications to Scope of Regulation SBSR
    1. Revisions to Proposed Rule 908(a)
    2. Revisions to Proposed Rule 908(b)

    D. Modifications to ``Reporting Party'' Rules and Assigning Duty
To Report
    E. Other Technical and Conforming Changes
    F. Cross-Border Inter-Affiliate Transactions
    G. Foreign Privacy Laws versus Duty To Report Counterparty ID
    H. Foreign Public Sector Financial Institutions
    I. Summary and Additional Request for Comment
IX. Mandatory Security-Based Swap Clearing Requirement
    A. Introduction
    B. Summary of Comments
    C. Application of Title VII Mandatory Clearing Requirements to
Cross-Border Transactions
    1. Statutory Framework
    2. Proposed Rule
    3. Discussion
    (a) Security-Based Swap Transactions Involving U.S. Persons or
Non-U.S. Persons Receiving Guarantees From U.S. Persons
    i. Proposed Rule
    ii. Proposed Exception for Certain Transactions Involving
Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    (b) Transactions Conducted Within the United States
    i. Proposed Rule
    ii. Proposed Exception for Transactions Conducted Within the
United States by Certain Non-U.S. Persons
X. Mandatory Security-Based Swap Trade Execution Requirement
    A. Introduction
    B. Application of the Mandatory Trade Execution Requirement to
Cross-Border Transactions
    1. Statutory Framework
    2. Proposed Rule
    3. Discussion
    (a) Security-Based Swap Transactions Involving U.S. Persons or
Non-U.S. Persons Receiving Guarantees From U.S. Persons
    i. Proposed Rule
    ii. Proposed Exception for Certain Transactions Involving
Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    (b) Transactions Conducted Within the United States
    i. Proposed Rule
    ii. Proposed Exception for Transactions Conducted Within the
United States by Certain Non-U.S. Persons
XI. Substituted Compliance
    A. Introduction
    B. Process for Making Substituted Compliance Requests
    C. Security-Based Swap Dealer Requirements
    1. Proposed Rule--Commission Substituted Compliance
Determinations
    2. Discussion
    D. Regulatory Reporting and Public Dissemination
    1. General
    2. Security-Based Swaps Eligible and Not Eligible for
Substituted Compliance
    3. Requests for Substituted Compliance
    4. Findings Necessary for Substituted Compliance
    5. Modification or Withdrawal of Substituted Compliance Order
    6. Regulatory Reporting and Public Dissemination Considered
Together in the Commission's Analysis of Substituted Compliance
    E. Clearing Requirement
    F. Trade Execution Requirement
XII. Antifraud Authority
XIII. General Request for Comment
    A. General Comments
    B. Consistency With CFTC's Cross-Border Approach
XIV. Paperwork Reduction Act
    A. Introduction
    B. Re-Proposal of Form SBSE, Form SBSE-A, and Form SBSE-BD
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    (a) Paperwork Burden Associated With Filing Application Forms
    (b) Paperwork Burden Associated With Amending Schedule F
    (c) Paperwork Burden Associated With Amending Application Forms
    5. Request for Comment on Paperwork Burden Estimates
    C. Disclosures by Certain Foreign Security-Based Swap Dealers
and Major Security-Based Swap Participants
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting Burdens
    5. Request for Comment on Paperwork Burden Estimates
    D. Reliance on Counterparty Representations Regarding Activity
Within the United States
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    5. Request for Comment on Paperwork Burden Estimates
    E. Requests for Cross-Border Substituted Compliance
Determinations
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    (a) Proposed Rule 3a71-5
    (b) Re-Proposed Rule 242.908(c)(2)(ii) of Regulation SBSR
    (c) Proposed Rule 3Ch-2(c)
    F. Reporting and Dissemination of Security-Based Swap
Information
    1. Background on the Re-Proposed Rules
    2. Modifications to ``Reporting Party'' Rules
    (a) Summary of Collection of Information
    (b) Proposed Use of Information
    (c) Respondents
    (d) Total Initial and Annual Reporting and Recordkeeping Burdens
    i. Baseline Burdens
    ii. Re-Proposed Burdens
    iii. Summary of Re-Proposed Burdens
    iv. Recordkeeping Requirements
    (e) Collection of Information Is Mandatory
    (f) Confidentiality
    3. Rules 902, 905, 906, 907, and 909
    (a) Rule 902
    (b) Rule 905
    (c) Rule 906
    (d) Rule 907
    (e) Rule 909
    i. Impact of Re-Proposed Rules 902, 905, 906, 907, and 909 on
the Commission's PRA Analysis
    4. Rules 900, 903, 908, 910, and 911
    (a) Modification of the Definition of ``U.S. Person''
    (b) Rule 903
    (c) Re-Proposed Rules 908(a) and 908(b)
    (d) Rule 910
    (e) Rule 911
    G. Request for Comments by the Commission and Director of OMB
XV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview
    2. Current Security-Based Swap Market
    (a) Security-Based Swap Market Participants
    (b) Levels of Security-Based Swap Trading Activity
    (c) Market Participant Domiciles
    (d) Level of Current Cross-Border Activity in Single-Name CDS
    (e) Levels of Security-Based Swap Clearing
    C. Analysis of Potential Effects on Efficiency, Competition, and
Capital Formation
    1. Introduction
    2. Competition
    (a) Security-Based Swap Dealers
    (b) Security-Based Swap Market Infrastructure Requirements
    i. Registration of Clearing Agencies, SDRs and SB SEFs
    ii. Application of Mandatory Clearing, Public Dissemination,
Regulatory Reporting, and Trade Execution Requirements in the Cross-
Border Context
    3. Efficiency
    4. Capital Formation
    D. Economic Analysis of Proposed Rules Regarding ``Security-
Based Swap Dealers'' and ``Major Security-Based Swap Participants''
    1. Programmatic Costs and Benefits
    (a) Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants
    (b) Security-Based Swap Dealers--De Minimis Exception
    (c) Major Security-Based Swap Participants--``Substantial
Position'' and ``Substantial Counterparty Exposure'' Thresholds
    2. Assessment Costs
    (a) Security-Based Swap Dealers--De Minimis Exception
    (b) Major Security-Based Swap Participants--``Substantial
Position'' and ``Substantial Counterparty Exposure'' Thresholds
    3. Alternatives Considered
    (a) De Minimis Exception
    i. Alternatives to the Proposed Definition of U.S. Person
    ii. Alternatives to the Proposed Rule Regarding Application of
the De Minimis Exception

    a. Calculation of U.S. Persons' Transactions for De Minimis
Exception
    b. Calculation of Non-U.S. Persons' Transactions for De Minimis
Exception (Including Transactions Conducted Within the United
States)
    iii. Aggregation of Affiliate Dealing Activity
    (b) Major Security-Based Swap Participants
    E. Economic Analysis of the Proposed Application of the Entity-
Level and Transaction-Level Requirements to Security-Based Swap
Dealers and Major Security-Based Swap Participants
    1. Entity-Level Requirements
    2. Transaction-Level Requirements
    (a) Proposed Rule 3a71-3(c)--Application of Customer Protection
Requirements
    i. Programmatic Benefits and Costs
    ii. Assessment Costs
    iii. Alternatives
    (b) Proposed Rule 18a-4(e)--Application of Segregation
Requirements
    i. Programmatic Benefits and Costs
    a. Pre-Dodd Frank Segregation Practice
    b. Benefits of the Segregation Requirements
    c. Costs of the Segregation Requirements
    d. Costs and Benefits of Proposed Rules 18a-4(e)(1) and (2)
Regarding Application of Segregation Requirements to Foreign
Security-Based Swap Dealers
    e. Costs and Benefits of Proposed Rule 18a-4(e)(3) Regarding
Disclosures
    ii. Assessment Costs
    F. Economic Analysis of Application of Rules Governing Security-
Based Swap Clearing in Cross-Border Context
    1. Programmatic Benefits and Costs Associated With the Clearing
Agency Registration
    (a) Proposed Interpretive Guidance Regarding Clearing Agency
Registration
    (b) Proposed Exemption of Foreign Clearing Agency From
Registration
    (c) Programmatic Effects of Alternative Standards
    2. Programmatic Benefits and Costs Associated With the Mandatory
Clearing Requirement of Section 3C(a)(1) of the Exchange Act
    (a) Programmatic Effects of the Mandatory Clearing Requirement
    (b) Programmatic Benefits and Costs of the Mandatory Clearing
Requirement
    3. Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    (a) Programmatic Effect of Proposed Rule 3Ca-3
    (b) Programmatic Benefits and Costs of Proposed Rule 3Ca-3
    (c) Alternatives
    (d) Assessment Costs
    G. The Economic Analysis of Application of Rules Governing
Security-Based Swap Trading in the Cross-Border Context
    1. Programmatic Benefits and Costs of the Proposed Application
of the Registration Requirements of Section 3D of the Exchange Act
to Foreign Security-Based Swap Markets
    (a) Programmatic Benefits
    (b) Programmatic Costs
    (c) Alternatives
    2. Programmatic Benefits and Costs of the Potential Availability
of Exemptive Relief to Foreign Security-Based Swap Markets
    (a) Programmatic Benefits
    (b) Programmatic Costs
    (c) Alternatives
    (d) Assessment Costs
    3. Programmatic Benefits and Costs Associated With the Mandatory
Trade Execution Requirement of Section 3C(h) of the Exchange Act
    (a) Programmatic Effect of the Statutory Mandatory Trade
Execution Requirement
    (b) Programmatic Benefits of the Statutory Mandatory Trade
Execution Requirement
    (c) Programmatic Costs of the Statutory Mandatory Trade
Execution Requirement
    4. Programmatic Benefits and Costs of Proposed Rule 3Ch-1
Regarding Application of the Mandatory Trade Execution Requirement
in Cross-Border Context
    (a) Programmatic Effect of Proposed Rule 3Ch-1
    (b) Programmatic Benefits and Costs of Proposed Rule 3Ch-1
    H. Application of Rules Governing Security-Based Swap Data
Repositories in Cross-Border Context
    1. Benefits and Costs Associated With Application of the SDR
Requirements in the Cross-Border Context
    (a) Benefits of Proposed Approach to SDR Requirements
    i. Programmatic Benefits of Proposed Guidance Regarding
Registration
    ii. Programmatic Benefits of the SDR Exemption
    (b) Costs of Proposed Approach to SDR Requirements
    i. Programmatic Costs of the Commission's Proposed Approach
    ii. Assessment Costs
    (c) Alternative to Proposed Approach
    2. Relevant Authorities' Access to Security-Based Swap
Information and the Indemnification Requirement
    (a) Benefits and Costs of Relevant Authorities' Access to
Security-Based Swap Data Under the Dodd-Frank Act
    i. Benefits of Relevant Authorities' Access to Security-Based
Swap Data
    ii. Costs of Relevant Authorities' Access to Security-Based Swap
Data
    (b) Benefits and Costs of Proposed Guidance and Exemptive Rule
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the Indemnification Requirement
    (c) Alternatives to Proposed Guidance and Exemptive Relief
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the Indemnification Requirement
    3. Economic Analysis of the Re-Proposal of Regulation SBSR
    (a) Modifications to ``Reporting Party'' Rules and
Jurisdictional Reach of Regulation SBSR--Re-Proposed Rules 901(a)
and 908(a)
    i. Initial Proposal
    a. Programmatic Benefits of Initial Proposal
    b. Programmatic Costs of Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits
    b. Programmatic Costs
    (b) Proposed Modification of the Definition of ``U.S. Person''
    (c) Revisions to Proposed Rule 908(b)
    i. Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits
    b. Programmatic Costs
    (d) Other Technical Revisions in Re-Proposed Regulation SBSR
    (e) Aggregate Total Quantifiable Costs
    I. Economic Analysis of Substituted Compliance
    1. Programmatic Benefits and Costs
    2. Alternatives
    3. Assessment Costs
    J. General Request for Comments
XVI. Consideration of Impact on the Economy
XVII. Regulatory Flexibility Act Certification
Statutory Basis and Text of Proposed Rules
Appendix A: Application of Subtitle B of Title VII in the Cross-
Border Context
    Table I--Registered U.S. Security-Based Swap Dealers
    Table II--Registered Non-U.S. Security-Based Swap Dealer with
U.S. Guarantee
    Table III--Unregistered Non-U.S. Dealer (or Market Participant)
With U.S. Guarantee
    Table IV--Registered Non-U.S. Security-Based Swap Dealer Without
U.S. Guarantee
    Table V--Unregistered Non-U.S. Dealer (or Market Participant)
Without U.S. Guarantee
Appendix B: Registration of Security-Based Swap Dealers
Appendix C: Re-Proposal of Registration Forms
Appendix D: List of Commenters

I. Background

    The global nature of the security-based swap market highlights the
critical importance of addressing the application of the Title VII of
the Dodd-Frank Act \1\ (``Title VII'') to cross-border activities.\2\
The Commission has received numerous inquiries and comments from market
participants, foreign regulators, and other interested parties
concerning how Title VII and the Commission's implementing regulations
thereunder will apply to the cross-border activities of U.S. and non-
U.S. market participants. To respond to these inquiries and comments,
the Commission is providing our preliminary views on the application of
Title VII to cross-border security-based swap activities \3\ and non-
U.S. persons

that act in capacities regulated under the Dodd-Frank Act in the
proposed rules and interpretations discussed below.
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Unless otherwise indicated, references to Title VII of the
Dodd-Frank Act in this release are to Subtitle B of Title VII.
    \3\ Generally, in this release, the application of Title VII to
``cross-border activities'' refers to the application of Title VII
to a security-based swap transaction involving (i) A U.S. person and
a non-U.S. person, (ii) two non-U.S. persons where one or both are
located within the United States, or (iii) two non-U.S. persons
conducting a security-based swap transaction that otherwise occurs
in relevant part within the United States, including by negotiating
the terms of the security-based swap transaction within the United
States or where performance of one or both counterparties under the
security-based swap is guaranteed by a U.S. person.
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A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    The Dodd-Frank Act was enacted, among other reasons, to promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\4\ The 2008 financial crisis
highlighted significant issues in the over-the-counter (``OTC'')
derivatives markets, which have experienced dramatic growth in recent
years \5\ and are capable of affecting significant sectors of the U.S.
economy.\6\ Title VII of the Dodd-Frank Act provides for a
comprehensive new regulatory framework for swaps and security-based
swaps, including by: (i) Providing for the registration and
comprehensive regulation of swap dealers, security-based swap dealers,
major swap participants, and major security-based swap participants;
(ii) imposing clearing and trade execution requirements on swaps and
security-based swaps, subject to certain exceptions; (iii) creating
recordkeeping and real-time reporting regimes and public dissemination;
and (iv) enhancing the rulemaking and enforcement authorities of the
Commission and the Commodity Futures Trading Commission (``CFTC'').\7\
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    \4\ The Dodd-Frank Act was enacted ``[t]o promote the financial
stability of the United States by improving accountability and
transparency in the financial system, to end `too big to fail', to
protect the American taxpayer by ending bailouts, to protect
consumers from abusive financial services practices, and for other
purposes.'' Public Law 111-203, Preamble.
    \5\ From their beginnings in the early 1980s, the notional value
of these markets grew to approximately $650 trillion globally by the
end of 2011. See Bank for International Settlements, Statistical
Release: OTC Derivatives Statistics at End-December 2011 (May 2012)
at 1, available at:  http://www.bis.org/publ/otc_hy1205.pdf.
    \6\ See Section II.A.6(b), infra.
    \7\ See Public Law 111-203 sections 701-774.
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    Specifically, the Dodd-Frank Act provides that the CFTC will
regulate ``swaps,'' the Commission will regulate ``security-based
swaps,'' \8\ and both the CFTC and the Commission (together, the
``Commissions'') will regulate ``mixed swaps.'' \9\ Title VII also
amends the Exchange Act to include many specific provisions governing
security-based swaps that could apply to cross-border security-based
swap transactions and to non-U.S. persons who act in capacities
regulated under the Dodd-Frank Act.\10\ These provisions primarily
relate to Commission oversight of security-based swap dealers,\11\
major security-based

swap participants,\12\ security-based swap data repositories
(``SDRs''),\13\ security-based swap clearing agencies,\14\ security-
based swap execution facilities (``SB SEFs''),\15\ and mandatory
security-based swap reporting and dissemination,\16\ clearing,\17\ and
trade execution.\18\
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    \8\ The definition of ``security'' in both the Exchange Act and
the Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et
seq., was amended by the Dodd-Frank Act to include security-based
swaps. Public Law 111-203, Section 761(a)(2) (inserting ``security-
based swap'' after ``security future'' in Section 3(a)(10) of the
Exchange Act, 15 U.S.C. 78c(a)(10)) and Section 768(a)(1) (inserting
``security-based swap'' after ``security future'' in Section 2(a)(1)
of the Securities Act, 15 U.S.C. 77b(a)(1)). The revision of the
Exchange Act's definition of ``security'' raises, among other
things, issues related to the definition of ``broker'' in Section
3(a)(4) of the Exchange Act, 15 U.S.C. 78c(a)(4), the definition of
``dealer'' in Section 3(a)(5) of the Exchange Act, 15 U.S.C.
78c(a)(5), the exchange registration requirements in Sections 5 and
6 of the Exchange Act, 15 U.S.C. 78e and 78f, respectively, and the
requirement in Section 12 of the Exchange Act that securities be
registered before a transaction is effected on a national securities
exchange. See 15 U.S.C. 78l(a). The Securities Act requires that any
offer and sale of a security must either be registered under the
Securities Act (see Section 5 of the Securities Act, 15 U.S.C. 77e)
or made pursuant to an exemption from registration (see, e.g.,
Sections 3 and 4 of the Securities Act, 15 U.S.C. 77c and 77d,
respectively). In addition, the Securities Act requires that any
offer to sell, offer to buy or purchase or sell a security-based
swap to any person who is not an eligible contract participant
(``ECP'') must be registered under the Securities Act. See Section
5(e) of the Securities Act, 15 U.S.C. 77e(e). Because of the
statutory language of Section 5(e), exemptions from this requirement
in Sections 3 and 4 of the Securities Act are not available. This
release does not address the requirements under Section 5 of the
Securities Act.
    The Commission adopted interim final rules that provide
exemptions from certain provisions of the Securities Act, the
Exchange Act, and the Trust Indenture Act of 1939 (``Trust Indenture
Act''), 15 U.S.C. 77aaa et seq., for those security-based swaps that
prior to July 16, 2011 were ``security-based swap agreements'' and
are defined as ``securities'' under the Securities Act and the
Exchange Act as of July 16, 2011 due solely to the provisions of
Title VII of the Dodd-Frank Act. See Exemptions for Security-Based
Swaps, Securities Act Release No. 9231 (July 1, 2011), 76 FR 40605
(July 11, 2011); see also Extension of Exemptions for Security-Based
Swaps, Securities Act Release No. 9383 (Jan. 29, 2013), 78 FR 7654
(Feb. 4, 2013). The Commission also issued temporary exemptions
under the Exchange Act regarding certain issues raised by the
inclusion of security-based swaps in the definition of ``security.''
See Order Extending Temporary Exemptions Under the Securities
Exchange Act of 1934 in Connection With the Revision of the
Definition of ``Security'' To Encompass Security-Based Swaps, and
Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013),
78 FR 10218 (Feb. 13, 2013); see also Order Granting Temporary
Exemptions Under the Securities Exchange Act of 1934 in Connection
With the Pending Revision of the Definition of ``Security'' To
Encompass Security-Based Swaps, and Request for Comment, Exchange
Act Release No. 64795 (July 1, 2011) 76 FR 39927 (July 7, 2011).
    \9\ In addition, the Dodd-Frank Act adds to the Commodity
Exchange Act (``CEA'') and Exchange Act definitions of the terms
``swap dealer,'' ``security-based swap dealer,'' ``major swap
participant,'' and ``major security-based swap participant,'' and
amends the CEA definition of the term ``eligible contract
participant.'' These terms are defined in Sections 721 and 761 of
the Dodd-Frank Act and, with respect to the term ``eligible contract
participant,'' in Section 1a(18) of the CEA, 7 U.S.C. 1a(18), as
redesignated and amended by Section 721 of the Dodd-Frank Act.
Section 712(d)(1) of the Dodd-Frank Act provides that the CFTC and
the Commission, in consultation with the Board of Governors of the
Federal Reserve System, shall jointly further define the terms
``swap,'' ``security-based swap,'' ``swap dealer,'' ``security-based
swap dealer,'' ``major swap participant,'' ``major security-based
swap participant,'' ``eligible contract participant,'' and
``security-based swap agreement.'' Further, Section 721(c) of the
Dodd-Frank Act requires the CFTC to adopt a rule to further define
the terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and
``eligible contract participant,'' and Section 761(b)(3) of the
Dodd-Frank Act permits the Commission to adopt a rule to further
define the terms ``security-based swap,'' ``security-based swap
dealer,'' ``major security-based swap participant,'' and ``eligible
contract participant,'' with regard to security-based swaps, for the
purpose of including transactions and entities that have been
structured to evade Title VII or the amendments made by Title VII.
    The Commission and the CFTC jointly adopted rules and
interpretive guidance further defining the terms ``swap,''
``security-based swap,'' and ``security-based swap agreement,'' and
regulations regarding mixed swaps. See Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR
48208 (Aug. 13, 2012) (``Product Definitions Adopting Release'').
The Commission and the CFTC also jointly adopted rules further
defining the terms ``swap dealer,'' ``security-based swap dealer,''
``major swap participant,'' ``major security-based swap
participant,'' and ``eligible contract participant.'' See Further
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,''
``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' Exchange Act
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012)
(``Intermediary Definitions Adopting Release'').
    \10\ The provisions of the Exchange Act relating to security-
based swaps that were enacted by Title VII also are referred to
herein as ``Title VII requirements'' or ``requirements in Title
VII.''
    \11\ See Section 764(a) of the Dodd-Frank Act. The Commission,
jointly with the CFTC, adopted rules further defining the term
``security-based swap dealer.'' See Intermediary Definitions
Adopting Release, 77 FR 30596.
    The Commission has proposed rules regarding the registration and
substantive requirements for security-based swap dealers and major
security-based swap participants. See Proposed Rules Governing
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, Exchange Act Release No. 68071
(Oct. 18, 2012) 77 FR 70214 (Nov. 23, 2012) (``Capital, Margin, and
Segregation Proposing Release''); Registration of Security-Based
Swap Dealers and Major Security-Based Swap Participants, Exchange
Act Release No. 65543 (Oct. 12, 2011) (RIN 3235-AL05), 76 FR 65784
(Oct. 24, 2011) (``Registration Proposing Release''); Business
Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 64766
(June 29, 2011), 76 FR 42396 (July 18, 2011) (``External Business
Conduct Standards Proposing Release''); and Trade Acknowledgment and
Verification of Security-Based Swap Transactions, Exchange Act
Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011)
(``Trade Acknowledgment Proposing Release''). The Commission has not
yet proposed rules governing the recordkeeping, reporting, and
notification requirements for security-based swap dealers and major
security-based swap dealers pursuant to Section 15F(f) of the
Exchange Act, 15 U.S.C. 78o-10(f), as added by Section 764(a) of the
Dodd-Frank Act.
    \12\ See Section 764(a) of the Dodd-Frank Act. The Commission,
jointly with the CFTC, adopted rules further defining the term
``major security-based swap participant.'' See Intermediary
Definitions Adopting Release, 77 FR 30596. In a number of releases,
the Commission also has proposed rules regarding the registration
and substantive requirements for major security-based swap
participants. See note 11, supra.
    \13\ See Section 763(i) of the Dodd-Frank Act. The Commission
has proposed rules regarding the registration and regulation of
SDRs. See Security-Based Swap Data Repository Registration, Duties,
and Core Principles, Exchange Act Release No. 63347 (Nov. 19, 2010),
75 FR 77306 (Dec. 10, 2010), corrected at 75 FR 79320 (Dec. 20,
2010) and 76 FR 2287 (Jan. 13, 2011) (``SDR Proposing Release'').
    \14\ See Section 763(b) of the Dodd-Frank Act. The Commission
adopted rules regarding the standards for risk management practices
and operations of registered clearing agencies, including security-
based swap clearing agencies. See Clearing Agency Standards,
Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2,
2012) (``Clearing Agency Standards Adopting Release'').
    \15\ See Section 763(c) of the Dodd-Frank Act. The Commission
has proposed rules regarding the registration and regulation of SB
SEFs. See Registration and Regulation of Security-Based Swap
Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011),
76 FR 10948 (Feb. 29, 2011) (``SB SEF Proposing Release'').
    \16\ See Sections 763 and 766 of the Dodd-Frank Act. The
Commission has proposed rules on trade reporting, data elements, and
real-time public reporting for security-based swaps. See Regulation
SBSR--Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 63346 (Nov. 19, 2010) (RIN
3235-AK80), 75 FR 75208 (Dec. 2, 2010) (``Regulation SBSR Proposing
Release'').
    \17\ See Section 763(b) of the Dodd-Frank Act. The Commission
has proposed or adopted rules relating to the end-user clearing
exception and the process for submitting for review of security-
based swaps for mandatory clearing. See Process for Submissions for
Review of Security-Based Swaps for Mandatory Clearing and Notice
Filing Requirements for Clearing Agencies; Technical Amendments to
Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, Exchange Act Release No. 67286 (June 28, 2012), 77 FR
41602 (July 13, 2012) (``Clearing Procedures Adopting Release'');
End-User Exception to Mandatory Clearing of Security-Based Swaps
(Corrected), Exchange Act Release No. 63556 (Dec. 15, 2010), 75 FR
79992 (Dec. 21, 2010) (``End-User Exception Proposing Release'').
    \18\ See Section 763(b) of the Dodd-Frank Act.
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B. Overview of the Cross-Border Proposal

    With limited exceptions, the Commission has not proposed specific
provisions of rules or forms or provided guidance regarding the
application of Title VII to cross-border activities.\19\ Rather than
addressing these issues in a piecemeal fashion through the various
substantive rulemaking proposals implementing Title VII, the Commission
instead is addressing the application of Title VII to cross-border
activities holistically in a single proposing release.\20\ This
approach provides market participants, foreign regulators, and other
interested parties with an opportunity to consider, as an integrated
whole, the Commission's proposed approach to the application of Title
VII to cross-border security-based swap activities and non-U.S. persons
that act in capacities regulated under the Dodd-Frank Act.\21\
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    \19\ The Commission has proposed a rule addressing the
application of the security-based swap trade reporting requirement
to cross-border transactions and to non-U.S. persons. See Regulation
SBSR Proposing Release, 75 FR 75239-40, as discussed in Section
VIII, infra. The Commission also has proposed rules imposing special
requirements on ``nonresident security-based swap dealers,''
``nonresident major security-based swap participants,'' ``non-
resident swap data repositories,'' and ``non-resident SB SEFs.'' See
Registration Proposing Release, 76 FR 65799-801, as discussed in
Section III.E, infra; SDR Proposing Release, 75 FR 77310, as
discussed in Section VI, infra; and SB SEF Proposing Release, 76 FR
11000-3, as discussed in Section VII, infra.
    \20\ Tables reflecting the Commission's proposed approach as it
would apply to security-based swap transactions between different
types of entities are included in this release as Appendix A. Each
table focuses on a specific type of security-based swap dealing
entity or market participant and sets out the Title VII requirements
that would apply to such person under different transaction
scenarios.
    \21\ Cf. CFTC Proposed Interpretive Guidance and Policy
Statement, Cross-Border Application of Certain Swaps Provisions of
the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) (``CFTC
Cross-Border Proposal''); Exemptive Order Regarding Compliance with
Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (``CFTC
Proposed Cross-Border Exemptive Order''); Final Exemptive Order
Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan.
7, 2013) (``Final CFTC Cross-Border Exemptive Order''); Further
Proposed Guidance Regarding Compliance With Certain Swap
Regulations, 78 FR 909 (Jan. 7, 2013) (``CFTC Further Proposed
Guidance''). In Section XIII.B below, we solicit general comment on
the differences between our proposed approach and the CFTC's
proposed approach.
---------------------------------------------------------------------------

    After providing an overview of the security-based swap market, the
Commission's preliminary views on the scope of application of Title VII
to cross-border security-based swap activity, and the legal and policy
principles guiding the Commission's approach to the application of
Title VII to cross-border activities in Section II, we set forth our
proposed approach in the subsequent sections of the release.
    In Sections III and IV, we propose rules and interpretive guidance
regarding the registration and regulation of security-based swap
dealers and major security-based swap participants, including the
treatment of foreign branches of U.S. banks and the provision of
guarantees in the cross-border context. In connection with this, we are
re-proposing the following rules and forms: 17 CFR 249.1600 (Form
SBSE), 249.1600a (Form SBSE-A), and 249.1600b (Form SBSE-BD).\22\
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    \22\ See Registration Proposing Release, 76 FR 65784, as
discussed in Section III.E, infra.
---------------------------------------------------------------------------

    In Sections V-VII, we propose rules and interpretive guidance
regarding the registration of security-based swap clearing agencies,
SDRs, and SB SEFs, as well as discuss generally under what
circumstances the Commission would consider granting exemptions from
registration for these infrastructures. To facilitate relevant
authorities' access to security-based swap data collected and
maintained by Commission-registered SDRs, the Commission also is
proposing interpretive guidance to specify how SDRs may comply with the
notification requirement in the Exchange Act and specifying how the
Commission proposes to determine whether a relevant authority is
appropriate for purposes of receiving security-based swap data from an
SDR.\23\ In addition, the Commission is proposing a tailored exemption
from the indemnification requirement in the Exchange Act.\24\
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    \23\ See Section VI.C, infra.
    \24\ Id.
---------------------------------------------------------------------------

    In Sections VIII-X, we propose rules and interpretive guidance
regarding the application of Title VII to cross-border activities with
respect to certain transactional requirements in connection with
reporting and dissemination, clearing, and trade execution for
security-based swaps. As discussed further below, these requirements
apply to persons independent of their registration status. In
connection with this, we are re-proposing the following rules: 17 CFR
242.900-242.911 (Regulation SBSR).\25\
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    \25\ See Regulation SBSR Proposing Release, 75 FR 75208, as
discussed in Section VIII, infra.
---------------------------------------------------------------------------

    In Section XI, we set forth a proposed policy and procedural
framework under which we would consider permitting compliance with
comparable regulatory requirements in a foreign jurisdiction to
substitute for compliance with certain requirements of the Exchange
Act, and the rules and regulations thereunder, relating to security-
based swaps (i.e., ``substituted compliance'').\26\ Generally speaking,
the Commission is proposing a policy and procedural framework that
would allow for the possibility of substituted compliance in
recognition of

the potential, in a market as global as the security-based swap market,
for market participants who engage in cross-border security-based swap
activity to be subject to conflicting or duplicative compliance
obligations.\27\ In addition, the Commission is proposing a rule that
would set forth procedures for requesting a substituted compliance
determination.
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    \26\ See Section XI, infra. As discussed in Section XI, in
permitting substituted compliance, the Commission might use
different procedural approaches depending on the different
substantive requirements that are the subject of the substituted
compliance determinations. See also note 27, infra.
    \27\ Separately, in Sections V-VII below, the Commission also
discusses generally when we would consider exempting non-resident
security-based swap clearing agencies and SB SEFs that are subject
to comparable, comprehensive supervision and regulation in their
home countries, and certain SDRs that are non-U.S. persons, from
certain obligations under the Exchange Act, including the
requirement to register.
---------------------------------------------------------------------------

    In Section XII, the Commission sets forth our view of the scope of
our authority, with respect to enforcement proceedings, under Section
929P of the Dodd-Frank Act.\28\ Section XIII sets forth a general
request for comment, including request for comment on the consistency
of our proposed approach with the CFTC's proposed approach to applying
the provisions of the CEA that were enacted by Title VII in the cross-
border context.
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    \28\ The rules, forms, and interpretive guidance proposed herein
and discussed in Sections II-XI below relate solely to the
applicability of the registration (and the attendant substantive
regulation) and reporting and dissemination, clearing, and trade
execution requirements in Title VII, and are not intended to limit
or address the cross-border reach or extraterritorial application of
the antifraud or other provisions of the federal securities laws.
---------------------------------------------------------------------------

    Finally, in Section XIV, the Commission addresses the Paperwork
Reduction Act, and Section XV provides an economic analysis of the
proposed approach, including a discussion of the associated costs and
benefits of the proposals discussed in Sections III-XI, as well as a
discussion of issues related to efficiency, competition, and capital
formation.
    Because this release is directly related to security-based swap
data reporting and dissemination, clearing, and trade execution, as
well as the regulation of various persons required to register as a
result of amendments made to the Exchange Act by Title VII, we
anticipate that some of the rules, forms, and interpretive guidance
proposed herein, and comments received thereon, will be addressed in
the adopting releases relating to the impacted substantive rules. In
some areas, we may decide to address comments received on the proposals
contained in this release by adopting rules in a separate
rulemaking.\29\
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    \29\ The Commission is not addressing in this release issues
relating to compliance dates of final rules adopted pursuant to
amendments made to the Exchange Act by Title VII. Compliance issues,
including compliance dates, will be addressed in connection with the
various Title VII final rules. See Statement of General Policy on
the Sequencing of the Compliance Dates for Final Rules Applicable to
Security-Based Swaps Adopted Pursuant to the Securities Exchange Act
of 1934 and the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Exchange Act Release No. 67177 (June 11, 2012), 77
FR 35625 (June 14, 2012) (``Implementation Policy Statement''). See
also Reopening of Comment Periods for Certain Rulemaking Releases
and Policy Statement Applicable to Security-Based Swaps Proposed
Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Exchange Act Release
No. 34-69491 (May 1, 2013).
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C. Consultation and Coordination

    As discussed more fully below, a number of market participants,
foreign regulators, and other interested parties have already provided
their views on the application of Title VII to cross-border activities
through both written comment letters to the Commission and/or the CFTC
and meetings with Commissioners and Commission staff.\30\ The
Commission has taken the commenters' views expressed thus far into
consideration in developing these proposed rules, forms, and
interpretive guidance.\31\ In addition, in developing this proposal,
the Commission has, in compliance with Sections 712(a)(2)\32\ and
752(a)\33\ of the Dodd-Frank Act, consulted and coordinated with the
CFTC, the prudential regulators,\34\ and foreign regulatory
authorities.
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    \30\ The views expressed in comment letters and meetings are
collectively referred to as the views of ``commenters.'' See
Appendix D for a list of commenters referred to in this release and
the location of their comment letters on the Commission's (or the
CFTC's) Web site.
    \31\ In addition, the Commission and the CFTC held a joint
public roundtable regarding the application of Title VII to cross-
border activities. See Joint Public Roundtable on International
Issues Relating to the Implementation of Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Exchange Act Release
No. 64939 (July 21, 2011), 76 FR 44507 (July 26, 2011).
    \32\ Section 712(a)(2) of the Dodd-Frank Act states, in part,
that ``the Securities and Exchange Commission shall consult and
coordinate to the extent possible with the Commodity Futures Trading
Commission and the prudential regulators for the purposes of
assuring regulatory consistency and comparability, to the extent
possible.''
    \33\ Section 752(a) of the Dodd-Frank Act states, in part, that
``[i]n order to promote effective and consistent global regulation
of swaps and security-based swaps, the Commodity Futures Trading
Commission, the Securities and Exchange Commission, and the
prudential regulators (as that term is defined in Section 1a(39) of
the Commodity Exchange Act), as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.''
    \34\ The term ``prudential regulator'' is defined in Section
1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is
incorporated by reference in Section 3(a)(74) of the Exchange Act,
15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of
Governors of the Federal Reserve System (``Federal Reserve Board''),
the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Farm Credit Administration, or the
Federal Housing Finance Agency (collectively, the ``prudential
regulators'') is the ``prudential regulator'' of a security-based
swap dealer if the entity is directly supervised by that agency.
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    Efforts to regulate the swaps market are underway not only in the
United States but also abroad. In 2009, leaders of the Group of 20
(``G20'')--whose membership includes the United States, 18 other
countries, and the European Union (``EU'')--called for global
improvements in the functioning, transparency, and regulatory oversight
of OTC derivatives markets. Specifically, the G20 leaders declared
that:

[a]ll standardised OTC derivative contracts should be traded on
exchanges or electronic trading platforms, where appropriate, and
cleared through central counterparties by end-2012 at the latest.
OTC derivative contracts should be reported to trade repositories.
Non-centrally cleared contracts should be subject to higher capital
requirements. We ask the [Financial Stability Board] and its
relevant members to assess regularly implementation and whether it
is sufficient to improve transparency in the derivatives markets,
mitigate systemic risk and protect against market abuse.\35\
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    \35\ G20 Meeting, Pittsburgh, United States, September 25, 2009,
available at: http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

In subsequent summits, the G20 leaders have reiterated their commitment
to OTC derivatives regulatory reform.\36\ The Commission has
participated in numerous bilateral and multilateral discussions with
foreign regulatory authorities addressing the regulation of OTC
derivatives.\37\ Through these

discussions and our participation in various international task forces
and working groups,\38\ we have gathered information about foreign
regulatory reform efforts and have discussed the possibility of
conflicts and gaps, as well as inconsistencies and duplications,
between U.S. and foreign regulatory regimes. We have taken these
discussions into consideration in developing these proposed rules,
forms, and interpretations.
---------------------------------------------------------------------------

    \36\ For example, on June 18-19, 2012, the leaders of the G20
convened in Los Cabos, Mexico, and reaffirmed their commitments with
respect to the regulation of the OTC derivatives markets. See the
G20 Leaders Declaration (June 2012), para. 39, available at: http://www.g20.org/documents/.
    \37\ Senior representatives of OTC derivatives market regulators
from G20 jurisdictions have met on a number of occasions to discuss
international coordination of OTC derivatives regulations. See,
e.g., Joint Press Statement of Leaders on Operating Principles and
Areas of Exploration in the Regulation of the Cross-Border OTC
Derivatives Market (Dec. 4, 2012), available at: http://www.sec.gov/news/press/2012/2012-251.htm; Joint Statement on Regulation of OTC
Derivatives Markets (May 7, 2012), available at: http://www.sec.gov/news/press/2012/2012-85.htm; and Joint Statement on Regulation of
OTC Derivatives Markets (Dec. 9, 2011), available at: http://www.sec.gov/news/press/2011/2011-260.htm . See also Financial
Stability Board (``FSB''), OTC Derivatives Market Reforms, Fifth
Progress Report on Implementation (April 15, 2013) (``FSB Progress
Report April 2013''), at 47, available at: http://www.financialstabilityboard.org/publications/r_130415.pdf (noting
that SEC staff has regularly consulted its counterparts in other
jurisdictions to discuss and compare approaches to the application
of Title VII of the Dodd-Frank Act in cross-border contexts); FSB
Progress Report April 2013 at 5 and 45-46 (discussing meetings of
the group of market regulators ``to identify and explore ways to
address issues and uncertainties in the application of rules in a
cross-border context, including options to address identified
conflicts, inconsistencies, and duplication.'').
    \38\ The Commission participates in the FSB's Working Group on
OTC Derivatives Regulation (``ODWG''), both on its own behalf and as
the representative of the International Organization of Securities
Commissions (``IOSCO''), which is co-chair of the ODWG. The
Commission also serves as one of the co-chairs of the IOSCO Task
Force on OTC Derivatives Regulation.
---------------------------------------------------------------------------

    In addition, the Commission and the CFTC have conducted staff
studies to assess developments in OTC derivatives regulation abroad. As
directed by Congress in Section 719(c) of the Dodd-Frank Act, on
January 31, 2012, the Commission and the CFTC jointly submitted to
Congress a ``Joint Report on International Swap Regulation'' (``Swap
Report'').\39\ The Swap Report discussed swap and security-based swap
regulation and clearinghouse regulation in the Americas, Asia, and the
European Union, and identified similarities and differences in
jurisdictions' approaches to areas of regulation, as well as other
areas of regulation that could be harmonized. The Swap Report also
identified major clearinghouses, clearing members, and regulators in
each geographic area and described the major contracts (including
clearing volumes and notional values), methods for clearing swaps, and
the systems used for setting margin in each geographic area.\40\
---------------------------------------------------------------------------

    \39\ See CFTC and SEC, Joint Report on International Swap
Regulation (Jan. 31, 2012), available at: http://www.sec.gov/news/studies/2012/sec-cftc-intlswapreg.pdf.
    \40\ In addition, Commission and CFTC staff submitted a joint
study to Congress on the feasibility of requiring the derivatives
industry to adopt standardized computer-readable algorithmic
descriptions which may be used to describe complex and standardized
financial derivatives. See Joint Study on the Feasibility of
Mandating Algorithmic Descriptions for Derivatives: A Study by the
Staff of the Securities and Exchange Commission and the Commodity
Futures Trading Commission as Required by Section 719(c) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Apr. 7,
2011), available at: http://www.sec.gov/news/studies/2011/719b-study.pdf. In preparing this report, Commission and CFTC staff
coordinated extensively with international financial institutions
and foreign regulators.
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D. Substituted Compliance

    As noted above, we recognize the potential, in a market as global
as the security-based swap market, that market participants who engage
in cross-border security-based swap activity may be subject to
conflicting or duplicative compliance obligations. To address this
possibility, we are proposing a ``substituted compliance'' framework
under which we would consider permitting compliance with requirements
in a foreign\41\ regulatory system to substitute for compliance with
certain requirements of the Exchange Act relating to security-based
swaps, provided that the corresponding requirements in the foreign
regulatory system are comparable to the relevant provisions of the
Exchange Act.\42\ The availability of substituted compliance should
reduce the likelihood that market participants would be subject to
potentially conflicting or duplicative sets of rules.
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    \41\ In this release, the term ``foreign'' is used
interchangeably with the term ``non-U.S.'' See, e.g., note 372,
infra (discussing the definition of ``foreign security-based swap
dealer'').
    \42\ See Section XI, infra.
---------------------------------------------------------------------------

    As discussed more fully below, the Commission would perform
comparability analysis and make substituted compliance determinations
with respect to four separate categories of requirements.\43\ If, for
example, a foreign regulatory system achieves comparable regulatory
outcomes in three out of the four categories, then the Commission would
permit substituted compliance with respect to those three categories of
comparable requirements, but not for the one, non-comparable category
for which comparable regulatory outcomes are not achieved. In other
words, we are not proposing an ``all-or-nothing'' approach. In
addition, in making comparability determinations within each category
of requirements, the Commission is proposing to take a holistic
approach; that is, we would ultimately focus on regulatory outcomes
rather than a rule-by-rule comparison. Substituted compliance therefore
should accept differences between regulatory regimes when those
differences nevertheless accomplish comparable regulatory outcomes.
---------------------------------------------------------------------------

    \43\ Specifically, the Commission is proposing to make
substituted compliance determinations with respect to the following
categories of requirements: (i) Requirements applicable to
registered security-based swap dealers in Section 15F of the
Exchange Act and the rules and regulations thereunder; (ii)
requirements relating to regulatory reporting and public
dissemination of security-based swaps; (iii) requirements relating
to clearing for security-based swaps; and (iv) requirements relating
to trade execution for security-based swaps. See Section XI, infra.
---------------------------------------------------------------------------

E. Conclusion

    In proposing these rules, forms, and interpretations, the
Commission is mindful that the security-based swap market is global in
nature and developed prior to the enactment of the Dodd-Frank Act.\44\
There are challenges involved in imposing a comprehensive regulatory
regime on existing markets, particularly ones that have not been
subject to the particular regulation that the Dodd-Frank Act provides.
Any rules and interpretive guidance we adopt governing the application
of Title VII to cross-border activities could significantly affect the
global security-based swap market. As discussed further below, to the
extent practicable and consistent with our statutory mandate,\45\ the
Commission has proposed these rules and interpretations with the intent
to achieve the regulatory benefits intended by the Dodd-Frank Act and
to facilitate a well-functioning global security-based swap market,
including by taking into account the impact these proposed rules and
interpretations will have on counterparty protection, transparency,
systemic risk, liquidity, efficiency, and competition in the market. In
addition, the Commission is mindful of the fact that the application of
Title VII to cross-border activities raises issues of potential
conflict or overlap with foreign regulatory regimes. Furthermore, the
Commission is attentive to the fact that a number of registrants may be
registered with both us and the CFTC.\46\
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    \44\ See Section II, infra.
    \45\ See Section II.C, infra (discussing the principles guiding
proposed approach to applying Title VII in the cross-border
context).
    \46\ All references in this release to an entity that is
``registered'' indicate an entity that is registered with the
Commission, unless otherwise indicated.
---------------------------------------------------------------------------

    The rules and interpretations proposed today represent the
Commission's preliminary views regarding the application of Title VII
to cross-border security-based swap activities and to non-U.S. persons
who act in capacities regulated under the Dodd-Frank Act. We note that
these proposed rules and interpretations are tailored to the unique
circumstances of the security-based swap market, and as such would not
necessarily be appropriate to apply to the Commission's regulation of
traditional securities markets. We also recognize that there are a
number of possible alternative approaches to applying Title VII in the
cross-border context. Accordingly, the Commission invites public
comment regarding all aspects of

the proposed approach, including each proposed rule and interpretation
contained herein, and potential alternative approaches. In particular,
data and comment from market participants and other interested parties
with respect to the likely effect of each proposed rule and
interpretation regarding application of a specific Title VII
requirement, and the effect of such proposed application in the
aggregate, will be particularly useful to the Commission in evaluating
possible modifications to the proposal and understanding the
consequences of the substantive rules that have not yet been adopted
under Title VII.

II. Overview of the Security-Based Swap Market and the Legal and Policy
Principles Guiding the Commission's Approach to the Application of
Title VII to Cross-Border Activities

    In this section, the Commission provides a general overview of the
security-based swap market that informs our proposed implementation of
Title VII, including a description of the various dealing structures
used by U.S.-based and foreign-based entities to conduct their
security-based swap businesses, and existing clearing, reporting, and
trade execution practices. We also discuss the Commission's preliminary
views on the scope of application of Title VII and the principles
guiding our proposed approach to applying Title VII in the cross-border
context.

A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based Swap Market
    The security-based swap market is a global market.\47\ Security-
based swap business currently takes place across national borders, with
agreements negotiated and executed between counterparties often in
different jurisdictions (and at times booked and risk-managed in still
other jurisdictions).\48\
---------------------------------------------------------------------------

    \47\ See, e.g., IIB Letter at 1 (noting the ``truly global
nature of the OTC derivatives market''); Cleary Letter IV at 2
(noting that swaps and security-based swaps trade in a ``unique
global market''); Soci[eacute]t[eacute] G[eacute]n[eacute]rale
Letter II at 2 (noting the ``global nature of the derivatives
business''); see also Bank of International Settlements (``BIS''),
Committee on the Global Financial System, No. 46, The macro
financial implications of alternative configurations for access to
central counterparties in OTC derivatives markets (Nov. 2011) at 1,
available at: http://www.bis.org/publ/cgfs46.pdf (referring to the
``globalized nature of the market, in which a significant proportion
of OTC derivatives trading is undertaken across borders'').
    \48\ See, e.g., SIFMA Letter I at 2.
---------------------------------------------------------------------------

    The global nature of the security-based swap market is evidenced by
the data available to the Commission.\49\ Based on market data in the
Depository Trust and Clearing Corporation's Trade Information Warehouse
(``DTCC-TIW''),\50\ viewed from the perspective of the domiciles of the
counterparties booking credit default swap (``CDS'') transactions,
approximately 49% of U.S. single-name CDS transactions in 2011 were
cross-border transactions between a U.S.-domiciled \51\ counterparty
and a foreign-domiciled counterparty \52\ and an additional 44% of such
CDS transactions were between two foreign-domiciled counterparties.\53\
Thus, approximately 7% of the U.S. single-name CDS transactions in 2011
were between two U.S.-domiciled counterparties.\54\ These statistics
indicate that cross-border transactions are the norm, not the
exception, in the security-based swap market.\55\ Accordingly, the
question of how the Commission is implementing Title VII with respect
to security-based swaps will, to a large extent, be affected by how the
Commission applies Title VII to the cross-border transactions that are
the majority of security-based swaps.
---------------------------------------------------------------------------

    \49\ See Section XV.B, infra (discussing in detail the global
nature of the security-based swap market).
    \50\ The information was made available to the Commission in
accordance with the agreement between DTCC-TIW and the OTC
Derivatives Regulatory Forum (``ODRF'').
    \51\ The domicile classifications in DTCC-TIW are based on the
market participants' own reporting and may not have been verified.
Prior to enactment of the Dodd-Frank Act, funds and accounts did not
formally report their domicile to DTCC-TIW because there was no
systematic requirement to do so. After enactment of the Dodd-Frank
Act, the DTCC-TIW has collected the registered office location of
the account or fund. This information is self-reported on a
voluntary basis. It is possible that some market participants may
misclassify their domicile status because the databases in DTCC-TIW
do not assign a unique legal entity identifier to each separate
entity. Notwithstanding this limitation, we believe that the cross-
border and foreign activity presented in the analysis by the
Commission's Division of Risk, Strategy, and Financial Innovation
demonstrates the nature of the CDS market. See Section XV.B.2.c,
infra.
    \52\ DTCC-TIW classified a foreign branch or foreign subsidiary
of a U.S. domiciled entity as foreign-domiciled. Therefore, CDS
transactions with a foreign-domiciled counterparty include CDS
transactions with a foreign branch or foreign subsidiary of a U.S.-
domiciled entity as counterparty.
    \53\ Put another way, in 2011, a vast majority (approximately
93%) of U.S. single-name CDS transactions directly involved at least
one foreign-domiciled counterparty. This observation is based on the
data compiled by the Commission's Division of Risk, Strategy, and
Financial Innovation on single-name CDS transactions with U.S.
reference entities from the DTCC-TIW between January 1, 2011, and
December 31, 2011. See Section XV.B.2.d, infra.
    \54\ Id.
    \55\ We note, however, that, in addition to classifying
transactions between a U.S. counterparty and a foreign branch of a
U.S. bank as a cross-border transaction (see note 51, supra), these
statistics characterize as cross-border transactions those in which
all or substantially all of the activity takes place in the United
States and all or much of the risk of the transactions ultimately is
borne by U.S. persons.
---------------------------------------------------------------------------

2. Dealing Structures
    Dealers use a variety of business models and legal structures to
conduct security-based swap dealing business \56\ with counterparties
in jurisdictions all around the world.\57\ Commenters have indicated
that both U.S.-based and foreign-based entities use certain dealing
structures for a variety of legal, tax, strategic, and business reasons
that often pre-date the enactment of the Dodd-Frank Act.\58\ Among the
reasons cited for the variety of dealing structures is the desire of
counterparties to reduce risk and enhance credit protection based on
the particular characteristics of each entity's business.\59\
---------------------------------------------------------------------------

    \56\ As used in this release, ``security-based swap dealing,''
``security-based swap dealing activity,'' ``dealing activity,'' and
related concepts have the meaning described in the Intermediary
Definitions Adopting Release, 77 FR 30596, unless otherwise
indicated in this release.
    \57\ See, e.g., Cleary Letter IV at 5; Davis Polk Letter I at 2-
3; IIB Letter at 7.
    \58\ See, e.g., Cleary Letter at 3.
    \59\ See, e.g., SIFMA Letter at 2.
---------------------------------------------------------------------------

    In this subsection, we describe certain dealing structures that
U.S.-based entities and foreign-based entities in the security-based
swap market might use. In each of these dealing structures, because the
booking entity is the counterparty to the security-based swap
transaction resulting from the dealing activity (i.e., the principal)
and bears the ongoing risk of performance on the transaction, we view
the booking entity, and not the intermediary that acts as an agent on
behalf of the booking entity to originate the transaction, as the
dealing entity.\60\
---------------------------------------------------------------------------

    \60\ See Intermediary Definitions Adopting Release, 77 FR 30617
n.264 (``A sales force, however, is not a prerequisite to a person
being a security-based swap dealer. For example, a person that
enters into security-based swaps in a dealing capacity can fall
within the dealer definition even if it uses an affiliated entity to
market and/or negotiate those security-based swaps (e.g., the person
is a booking entity).''). See also Section III.D, infra.
---------------------------------------------------------------------------

(a) U.S. Bank Dealer
    A U.S. bank holding company may use a U.S. subsidiary that is a
banking entity to deal directly with U.S. and foreign counterparties.
Such U.S. bank dealer may use a sales force in its U.S. home office to
originate security-based swap transactions in the United States and use
separate sales force in foreign branches to originate security-based
swap transactions with counterparties in foreign local markets.\61\ The
resulting security-based swap transactions may be

booked in the home office of the U.S. bank or in a foreign branch of
the bank.\62\
---------------------------------------------------------------------------

    \61\ See Sullivan & Cromwell Letter at 2.
    \62\ See id. at 3-4.
---------------------------------------------------------------------------

(b) U.S. Non-bank Dealer
    A U.S.-based holding company may use a non-bank subsidiary to
conduct security-based swap dealing activity in the U.S. market and
foreign local markets. The U.S. non-bank dealer may act as principal to
originate and book transactions in the United States and use a sales
force in the foreign local markets (e.g., salespersons employed by its
foreign affiliate) as agent to originate transactions on its behalf,
and then centrally book the resulting transactions in the U.S. non-bank
dealer. In some situations, such as where the holding company has rated
debt, but the U.S. non-bank dealer does not, the U.S. non-bank dealer's
performance under security-based swaps may be supported by a parental
guarantee provided by the holding company.\63\ The guarantee would
typically give counterparties to the U.S. non-bank dealer direct
recourse to the holding company for obligations owed by such non-bank
dealer under the security-based swaps as though the guarantor had
entered into the transactions directly with the counterparties.\64\
---------------------------------------------------------------------------

    \63\ See Cleary Letter IV at 10 (discussing a U.S. holding
company providing a guarantee of performance on the obligations of
its foreign swap dealing subsidiary).
    \64\ See Intermediary Definitions Adopting Release, 77 FR 30689.
See also Product Definitions Adopting Release, 77 FR 48227 (stating
that the Commission would consider issues involving cross-border
guarantees of security-based swaps in a separate release addressing
the application of Title VII in the cross-border context).
---------------------------------------------------------------------------

(c) Foreign Subsidiary Guaranteed by a U.S. Person
    A U.S.-based holding company also may conduct dealing activity in
both U.S. markets and foreign markets out of a foreign subsidiary.\65\
The foreign subsidiary may use a sales force in the United States
(e.g., salespersons employed by its U.S. affiliate) to originate
security-based swap transactions with counterparties in the U.S.
markets, or may directly solicit, negotiate, and execute security-based
swap transactions with counterparties in the U.S. markets from outside
the United States, and centrally book the resulting transactions
itself. The foreign subsidiary also may conduct security-based swap
dealing activity in various foreign markets using local salespersons as
agent to originate and centrally book the resulting security-based swap
transactions itself. In some situations, such as where the U.S.-based
holding company has rated debt, but the foreign subsidiary does not,
the foreign subsidiary's performance under security-based swaps may be
supported by a parental guarantee provided by the holding company.\66\
Such guarantee would typically give its counterparty direct recourse to
the U.S. parent acting as guarantor for obligations owed by such
foreign subsidiary under the security-based swaps. As a result, a
guarantee provided by a U.S. person of another person's obligations
owed under a security-based swap transaction poses the same degree of
risk to the United States as the risk posed by a transaction entered
into directly by such U.S. person.
---------------------------------------------------------------------------

    \65\ See, e.g., Sullivan & Cromwell Letter, at 3-4 (stating that
Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.
conduct swap activities overseas through subsidiaries of the bank
holding company, Edge Corporation subsidiaries of their U.S. banks
and non-U.S. branches of the bank); Cleary Letter IV at 10-11.
    \66\ See Cleary Letter IV at 10 (discussing a U.S. holding
company providing a guarantee of performance on the obligations of
its foreign swap dealing subsidiary).
---------------------------------------------------------------------------

    In circumstances where a foreign non-bank subsidiary of a U.S.
holding company has sufficient credit-worthiness and does not rely on a
U.S. parental guarantee to support its creditworthiness, the risk of
the security-based swaps entered into by the foreign subsidiary of a
U.S.-based holding company resides in the foreign subsidiary outside
the United States.
(d) Foreign-Based Dealer
i. Direct Dealing
    Foreign-based entities also may use a number of business models and
legal structures to conduct global security-based swap dealing activity
in both the U.S. and foreign markets. Like U.S. dealers, foreign
dealers may deal directly with U.S. counterparties and non-U.S.
counterparties without using any agents in the local market to
intermediate and book the resulting transactions in the foreign
entities themselves.\67\
---------------------------------------------------------------------------

    \67\ See Cleary Letter VI at 3, 13 (discussing direct dealing by
a foreign dealer from abroad); IIB Letter at 7.
---------------------------------------------------------------------------

ii. Intermediation in the United States
    Foreign dealers also may use local personnel with knowledge of and
expertise on the local markets to intermediate security-based swap
transactions in each local market, for instance, using salespersons in
the United States to originate security-based swaps in the U.S. market,
and either book the resulting transactions in an entity based in the
United States (such as a U.S. affiliate) or centrally book the
resulting transactions in a foreign central booking affiliate.\68\
---------------------------------------------------------------------------

    \68\ See Cleary Letter IV at 4, 21 (discussing the use of U.S.
affiliate to intermediate) and IIB Letter at 7.
---------------------------------------------------------------------------

    Intermediation activity within the United States on behalf of
foreign entities may occur in two principal legal structures.
    First, foreign dealers that are banking entities may conduct
dealing activity with U.S. counterparties out of their U.S. branches.
In this structure, a foreign banking entity may originate and book
transactions in its U.S. branch, or the U.S. branch may originate
transactions that are booked in the foreign home office.\69\
---------------------------------------------------------------------------

    \69\ See IIB Letter at 8.
---------------------------------------------------------------------------

    Second, both bank and non-bank foreign dealers may conduct dealing
activity out of their U.S. subsidiaries. The U.S. subsidiaries may act
as principal to originate and book security-based swaps in the United
States and enter into inter-affiliate back-to-back transactions with
the foreign central booking entity (usually the foreign parent) for
purposes of centralized booking and centralized risk management.\70\
The U.S. subsidiary also may act as agent to originate security-based
swaps in the United States on behalf of the foreign entity and the
resulting transactions would be booked in a centralized foreign booking
entity, usually the foreign parent. In some situations, such as where
the foreign-based entity has rated debt, but the U.S. subsidiary does
not, the U.S.-based subsidiary's performance under security-based swaps
that it enters into as principal may be supported by a parental
guarantee provided by the foreign-based entity.\71\
---------------------------------------------------------------------------

    \70\ See Cleary Letter IV at 10 (discussing inter-affiliate
transactions).
    \71\ See id. (discussing a non-U.S. holding company providing a
guarantee on the obligations of its U.S. swap dealing subsidiary).
---------------------------------------------------------------------------

    The transactions originated by the U.S. branch of a foreign bank or
a U.S. subsidiary of a foreign bank or non-bank entity may not be
limited to those with U.S. counterparties in the U.S. security-based
swap market. Foreign bank or non-bank entities may utilize their U.S.
branches or U.S. subsidiaries to conduct dealing activity with, for
instance, non-U.S. counterparties located in various jurisdictions
within the same region or same time zones, such as Canada or Latin
America, and centrally book the resulting transactions in the home
offices of the foreign entities themselves. For example, a Canadian
counterparty might enter into a security-based swap with a non-U.S.-
based dealer that solicits and negotiates the transaction out of a U.S
subsidiary

acting as agent but books the transaction itself outside the United
States.
3. Clearing Practices
    Prior to the enactment of the Dodd-Frank Act, there was no
provision in the Exchange Act or any other laws in the United States
for the mandatory clearing of OTC derivatives. Although initiatives
related to central clearing had been considered before 2008, the 2008
financial crisis brought a new focus on CDS as a source of systemic
risk and contributed to a more general recognition that central
clearing parties (``CCPs'') could play a role in helping to manage
bilateral counterparty credit risk in OTC CDS.\72\
---------------------------------------------------------------------------

    \72\ The President's Working Group on Financial Markets made the
central clearing of OTC derivatives a top policy objective in 2008.
See Policy Objectives for the OTC Derivatives Market (Nov. 14,
2008), available at: http://www.treasury.gov/resource-center/fin-mkts/Documents/policyobjectives.pdf; see also Policy Statement on
Financial Market Developments (Mar. 13, 2008), available at: http://www.law.du.edu/images/uploads/presidents-working-group.pdf; and
Progress Update on March Policy Statement on Financial Market
Developments (Oct. 2008), available at: http://www.treasury.gov/resource-center/fin-mkts/Documents/q4progress%20update.pdf.
---------------------------------------------------------------------------

    In November 2008, the Commission, in consultation and coordination
with the Federal Reserve Board and the CFTC, took steps to help
facilitate the prompt development of CCPs for OTC derivatives.\73\
Specifically, the Commission authorized the clearing of OTC security-
based swaps by permitting certain clearing agencies to clear CDS on a
temporary conditional basis.\74\ As the Commission and other regulatory
agencies monitored the activities of those clearing agencies, a
significant volume of interdealer OTC CDS transactions and a smaller
volume of dealer-to-non-dealer OTC CDS transactions were centrally
cleared on a voluntary basis.\75\ The level of voluntary clearing in
swaps and security-based swaps has steadily increased since that time.
Although the volume of interdealer CDS cleared to date is quite
large,\76\ many security-based swap transactions are still ineligible
for central clearing, and many transactions in security-based swaps
eligible for clearing at a CCP continue to settle bilaterally.
---------------------------------------------------------------------------

    \73\ On November 14, 2008, the Commission executed a Memorandum
of Understanding with the Board and the CFTC that established a
framework for consultation and information sharing on issues related
to central counterparties for the OTC derivatives market. See http://www.sec.gov/news/press/2008/2008-269.htm.
    \74\ The Commission authorized five entities to clear CDS. See
CDS clearing by ICE Clear Europe Limited, Exchange Act Release Nos.
60372 (July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr.
23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex
Clearing AG, Exchange Act Release Nos. 60373 (July 23, 2009), 74 FR
37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr.
29, 2010); CDS clearing by Chicago Mercantile Exchange Inc.,
Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar.
19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) and
61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010); CDS clearing by
ICE Clear Credit LLC (formerly ICE Trust US LLC), Exchange Act
Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009),
61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) and 61662 (Mar. 5,
2010), 75 FR 11589 (Mar. 11, 2010); Temporary CDS clearing by LIFFE
A&M and LCH.Clearnet Ltd., Exchange Act Release No. 59164 (Dec. 24,
2008), 74 FR 139 (Jan. 2, 2009) (``CDS Clearing Exemption Orders'').
    \75\ Voluntary CCP clearing grew out of a series of meetings
beginning in September 2005 hosted by the Federal Reserve Bank of
New York with major market participants and their domestic and
international supervisors for the purpose of discussing problems in
the processing of CDS, and related risk management and control
issues. See http://www.ny.frb.org/newsevents/news/markets/2005/an050915.html. In June 2008 the attendees agreed to an agenda for
improvement in the derivatives market infrastructure that included
``developing a central counterparty for credit default swaps that,
with a robust risk management regime, can help reduce systemic
risk.'' See http://www.ny.frb.org/newsevents/news/markets/2008/ma080609.html; see also https://www.theice.com/marketdata/reports/ReportCenter.shtml.
    \76\ As of April 19, 2012, ICE Clear Credit had cleared
approximately $15.6 trillion notional amount of CDS contracts based
on indices of securities and approximately $1.5 trillion notional
amount of CDS contracts based on individual reference entities or
securities. As of April 19, 2012, ICE Clear Europe had cleared
approximately [euro]7.2 trillion notional amount of CDS contracts
based on indices of securities and approximately [euro]1.2 trillion
notional amount of CDS contracts based on individual reference
entities or securities. See Clearing Agency Standards Adopting
Release, 77 FR 66236 n.184 (citing https://www.theice.com/marketdata/reports/ReportCenter.shtml).
---------------------------------------------------------------------------

    Voluntary clearing of security-based swaps in the United States is
currently limited to CDS products. Central clearing of security-based
swaps began in March 2009 for index CDS products, in December 2009 for
single-name corporate CDS products, and in November 2011 for single-
name sovereign CDS products. At present, there is no central clearing
in the United States for security-based swaps that are not CDS
products, such as those based on equity securities. The level of
clearing activity appears to have steadily increased as more CDS have
become eligible to be cleared.\77\
---------------------------------------------------------------------------

    \77\ See Section XV.B.2(e), infra.
---------------------------------------------------------------------------

4. Reporting Practices
    The OTC derivatives markets have historically been largely
opaque.\78\ With respect to CDS, for example, the Government
Accountability Office found in 2009 that ``comprehensive and consistent
data on the overall market have not been readily available,'' that
``authoritative information about the actual size of the CDS market is
generally not available,'' and that regulators currently are unable
``to monitor activities across the market.'' \79\ The reporting of
comprehensive OTC derivative transaction data to trade repositories is
intended to address the lack of transparency in this market, and as
such it was one of the G20 regulatory reform commitments previously
discussed.\80\
---------------------------------------------------------------------------

    \78\ See FSB, Implementing OTC Derivatives Market Reforms (Oct.
25, 2010) (``FSB October 2010 Report''), at 11, available at: http://www.financialstabilityboard.org/publications/r_101025.pdf.
    \79\ Government Accountability Office, ``Systemic Risk:
Regulatory Oversight and Recent Initiatives to Address Risk Posed by
Credit Default Swaps,'' GAO-09-397T (Mar. 2009), at 2, 5, 27,
available at: http://www.gao.gov/new.items/d09397t.pdf.
    \80\ See note 35 and accompanying text, supra. See also SDR
Proposing Release, 75 FR 77307 (``Under the Dodd-Frank Act, SDRs are
intended to play a key role in enhancing transparency in the
[security-based swap] market by retaining complete records of
[security-based swap] transactions, maintaining the integrity of
those records, and providing effective access to those records to
relevant authorities and the public in line with their respective
information needs. The enhanced transparency provided by an SDR is
important to help regulators and others monitor the build-up and
concentration of risk exposures in the [security-based swap] market.
Without an SDR, data on [security-based swap] transactions is
dispersed and not readily available to regulators and others.'').
---------------------------------------------------------------------------

    The first trade repositories were established in the mid-2000s.\81\
The development of trade repositories for different asset classes
accelerated following the 2009 G20 commitment in this area, and as
legislative and regulatory requirements began to be put in place. As of
the end of the first quarter of 2013, fourteen FSB member jurisdictions
had legislation in place either requiring reporting of OTC derivatives
contracts or authorizing regulators to implement such regulations.\82\
In addition, as of the date of publication of the FSB Progress Report
April 2013, eighteen trade repositories were either registered or in
the process of becoming registered and twelve were operational,
meaning, typically, that they were at least accepting transaction
reports from more than one asset class.\83\
---------------------------------------------------------------------------

    \81\ See Committee on Payment and Settlement Systems (``CPSS'')
and Technical Committee of IOSCO, Report on OTC Derivatives Data
Reporting and Aggregation Requirements (Jan. 2012), at 5, available
at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf (``CPSS-
IOSCO Data Report'').
    \82\ FSB Progress Report April 2013 at 19.
    \83\ Id. at 20-21, 63-65. Ten trade repositories were offering
trade reporting on interest rate derivatives transactions; eight
were offering trade reporting on commodity derivative transactions;
seven were offering trade reporting on equity derivatives
transactions; eight were offering trade reporting on foreign
exchange derivative transactions; and seven were offering trade
reporting on credit derivatives.
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    Prior to the Dodd-Frank Act, global trade repositories had been
established for credit, interest rate, and equity

derivatives.\84\ In addition, in June 2010, the OTC Derivatives
Regulators' Forum (``ODRF'') \85\ developed indicative guidance for
Warehouse Trust \86\ aiming to identify data that authorities would
expect to request from Warehouse Trust to carry out their mandates.\87\
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    \84\ Pursuant to initiatives led by the OTC Derivatives
Supervisors Group (``ODSG''), in 2009 the largest OTC derivatives
dealers at the global level committed to reporting all of their CDS
trades to a trade repository. At that time, a trade repository for
credit derivatives was already in existence and used by the
industry. To promote the development of trade repositories for all
interest rate and equity derivatives, in 2008 and 2009 ISDA sought
proposals for the creation of central trade repositories for these
asset classes. Two entities were selected to provide trade
repository functions for these asset classes. See FSB October 2010
Report at 44. The ODSG originated in 2005, when the Federal Reserve
Bank of New York (``New York Federal Reserve'') hosted a meeting
with representatives of major OTC derivatives market participants
and their domestic and international supervisors, including the
Commission, in order to address the emerging risks of inadequate
infrastructure for the rapidly growing market in credit derivatives.
The ODSG is chaired by the New York Federal Reserve.
    \85\ The ODRF, formed in January 2009, brings together
representatives from central banks, prudential supervisors, and
securities and market regulators to discuss issues of common
interest, regarding OTC derivatives central counterparties and trade
repositories. The ODRF's scope and focus include information
sharing/needs and oversight co-ordination and co-operation.
    \86\ The Warehouse Trust Company LLC (``Warehouse Trust'') today
provides certain post-trade processing services to DTCC-TIW. DTCC-
TIW provides a centralized electronic trade database for OTC credit
derivatives contracts.
    \87\ See FSB October 2010 Report at 63. Building on this work,
CPSS and IOSCO have published a consultation paper setting forth
more comprehensive guidance regarding trade repositories more
broadly. The paper provides guidance to authorities that supervise
trade repositories; regulators, supervisors, resolution authorities,
central banks, and other public-sector authorities (collectively,
``authorities'') that request OTC derivative data from trade
repositories; and trade repositories. This guidance concerns the
types of data to which authorities will typically require access and
possible approaches to addressing potential constraints and concerns
that may prevent effective access to such data. See CPSS and IOSCO,
Consultative Report on Authorities' Access to Trade Repository Data
(April 2013), available at: http://iosco.org/library/pubdocs/pdf/IOSCOPD408.pdf?v=1.
---------------------------------------------------------------------------

    Public availability of trade repository data varies globally and
has changed significantly over time. For example, since October 2008,
on a weekly basis, DTCC has published aggregated data via its Web
site.\88\ More generally, in a recent FSB survey, all trade
repositories that responded stated that they provide or intend to
provide, transaction data on OTC derivatives to the public. In some
cases and for some products, trading information is provided on a real-
time basis. Some trade repositories publicly disclose only aggregated,
end-of-day information.\89\
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    \88\ See CPSS-IOSCO Data Report at 45-46.
    \89\ See OTC Derivatives Market Reforms, Fourth Progress Report
on Implementation (Oct. 31, 2012) at 5, available at: http://www.financialstabilityboard.org/publications/r_121031a.pdf.
---------------------------------------------------------------------------

5. Trade Execution Practices
    Unlike the markets for cash equity securities and listed options,
the market for security-based swaps currently is characterized
generally by bilateral negotiation directly between two counterparties
in the OTC market and is largely decentralized; many instruments are
individually negotiated and often customized; and many security-based
swaps are not centrally cleared.\90\ The historical one-to-one nature
of trade negotiation in security-based swaps has fostered various types
of trading venues and execution practices, ranging among the following:
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    \90\ See SB SEF Proposing Release, 76 FR 10951.
---------------------------------------------------------------------------

Bilateral Negotiations
    ``Bilateral negotiation'' refers to the execution practice whereby
one party uses the telephone, email or other means of communication to
directly contact a potential counterparty to negotiate and execute a
security-based swap. In bilateral negotiation and execution, only the
two parties to the transaction are aware of the terms of the
negotiation and the final terms of the agreement.\91\
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    \91\ See id.
---------------------------------------------------------------------------

Single-Dealer RFQ Platforms
    A single-dealer request for quote (``RFQ'') platform refers to an
electronic trading platform where a dealer may post indicative quotes
for security-based swaps in various asset classes that the dealer is
willing to trade. Only the dealer's approved customers have access to
the platform. When a customer wishes to transact in a security-based
swap, the customer requests an executable quote, the dealer provides
one, and if the customer accepts the dealer's quote, the transaction is
executed electronically. This type of platform generally provides
indicative quotes on a pricing screen, but only from one dealer to its
customers.\92\
---------------------------------------------------------------------------

    \92\ See id. at 10951.
---------------------------------------------------------------------------

Multi-Dealer RFQ Platforms
    A multi-dealer RFQ electronic trading platform refers to a multi-
dealer RFQ system whereby a requester can send an RFQ to solicit quotes
on a certain security-based swap from multiple dealers at the same
time. After the RFQ is submitted, the recipients have a prescribed
amount of time in which to respond to the RFQ with a quote. Responses
to the RFQ are firm. The requestor then has the opportunity to review
the responses and accept the best quote. A multi-dealer RFQ platform
provides a certain amount of pricing information, depending on its
characteristics.\93\
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    \93\ For example, to the extent that a RFQ platform sets limits
on the number of dealers to whom a customer may send an RFQ, the
customer's pre-trade transparency is restricted to that number of
quotes it receives in response to its RFQ. See SB SEF Proposing
Release, 76 FR 10952.
---------------------------------------------------------------------------

Central Limit Order Books
    A central limit order book system or similar system refers to a
trading system in which firm bids and offers are posted for all
participants to see, with the identity of the parties withheld until a
transaction occurs. Bids and offers are then matched based on price-
time priority or other established parameters and trades are executed
accordingly. The quotes on a limit order book system are firm. In
general, a limit order book system provides greater pricing information
than the three platforms described above because all participants can
view bids and offers before placing their bids and offers.\94\
Currently, limit order books for the trading of security-based swaps in
the United States are utilized by inter-dealer brokers for dealer-to-
dealer transactions.
---------------------------------------------------------------------------

    \94\ See id.
---------------------------------------------------------------------------

Brokerage Trading
    ``Brokerage trading'' refers to an execution practice used by
brokers to execute security-based swaps on behalf of customers, often
in larger sized transactions. In such a system, a broker receives a
request from a customer (which may be a dealer) who seeks to execute a
specific type of security-based swap. The broker then interacts with
other customers (which may also be dealers) to fill the request and
execute the transaction. This model often is used by dealers that seek
to transact with other dealers through the use of an interdealer broker
as an intermediary. In this model, participants may or may not be able
to see bids and offers of other participants.\95\
---------------------------------------------------------------------------

    \95\ See id.
---------------------------------------------------------------------------

    These various trading venues and execution practices provide
different degrees of pre-trade pricing information and different levels
of access. The Commission currently does not have sufficient
information with respect to the volume of security-based swap
transactions executed across these different trading venues and
execution practices to evaluate the individual impact of such venues
and practices on

pricing information available in the security-based swap market.
6. Broad Economic Considerations of Cross-Border Security-Based Swaps
\96\
---------------------------------------------------------------------------

    \96\ See Section XV, infra (providing more detailed commentary
on the economic effects of the proposed rules, including supporting
citations).
---------------------------------------------------------------------------

    Our primary economic considerations for promulgating rules and
interpretations regarding the application of Title VII to cross-border
activities include the potential risks of security-based swaps to the
U.S. financial system \97\ that could affect financial stability, the
level of transparency and counterparty protection in the security-based
swap market, the costs to market participants, and the impact of such
rules and interpretations on liquidity, efficiency, and competition in
the market. Unlike most other securities transactions, a security-based
swap gives rise to ongoing obligations between transaction
counterparties during the life of the transaction. This means that each
counterparty to the transaction undertakes the obligation to perform
the security-based swap in accordance with its terms and bears the
counterparty credit risk and market risk until the transaction is
terminated.\98\ The cross-border rules ultimately adopted by the
Commission could materially impact the economic effects of the final
Title VII regulatory requirements.
---------------------------------------------------------------------------

    \97\ The Commission generally understands the ``U.S. financial
system'' to include the U.S. banking system and the U.S. financial
markets, including the U.S. security-based swap market, the
traditional securities markets (e.g., the debt and equity markets),
and the markets for other financial activities (e.g., lending).
    \98\ See Intermediary Definitions Adopting Release, 77 FR 30616-
17 (noting that ``the completion of a purchase or sale transaction''
in the secondary equity or debt markets ``can be expected to
terminate the mutual obligations of the parties,'' unlike security-
based swap transactions, which often give rise to ``an ongoing
obligation to exchange cash flows over the life of the agreement'').
---------------------------------------------------------------------------

(a) Major Economic Considerations
    In determining how Title VII requirements should apply to persons
and transactions in the cross-border context, the Commission is aware
of the potentially significant trade-offs inherent in our policy
decisions. For example, it is possible that counterparties excluded
from the Title VII regulatory framework would not, among other things,
receive the same level of counterparty protection or impartial access
to trading venues and information as those included in the Title VII
regulatory framework. However, it is also possible that market
participants excluded from the Title VII regulatory framework would
face lower regulatory burdens and lower compliance costs associated
with their security-based swap activity. Further, it is possible that
these trade-offs could alter the incentives for individuals to
participate in the security-based swap market, which may impact the
overall market, affecting its liquidity, as well as its efficiency and
the competitive dynamics among participants. In addition, we also
recognize that regulators in other jurisdictions are currently engaged
in implementing their own regulatory reforms of the OTC derivatives
markets and that our proposed application of Title VII to cross-border
activities may affect the policy decisions of these other regulators as
they seek to address potential conflicts or duplication in the
regulatory requirements that apply to market participants under their
authority. In proposing our rules and interpretations in this release,
the Commission has considered the benefits of the Title VII regulatory
framework, including counterparty protection and access to information,
as well as the costs of compliance, taking into account the potential
impact of the rules and interpretations on liquidity, efficiency, and
competition in the security-based swap market.
    Moreover, the costs and benefits of various Title VII substantive
requirements may not be the same for each individual market
participant, depending on the role it plays, the market function it
performs, and the activity it engages in in the security-based swap
market. For example, Title VII requirements for security-based swap
dealers and major security-based swap participants may impose
significant costs on persons falling within the definitions of
security-based swap dealer and major security-based swap participant
that are not borne by other market participants. The costs of these
requirements may provide economic incentive for some market
participants falling within the definitions of security-based swap
dealer and major security-based swap participant to restructure their
security-based swap business to operate wholly outside of the Title VII
regulatory framework, exiting the security-based swap market in the
United States and not transacting with U.S. persons. Conversely,
certain Title VII requirements may promote financial stability and
increase market participants' confidence in entering into security-
based swap transactions.
(b) Global Nature and Interconnectedness of the Security-Based Swap
Market
    In considering the proposed approach to the application of the
Title VII requirements, the Commission has been informed by the
analysis of current market activity described in this release,\99\
including the extent of cross-border trading activity in the security-
based swap market.\100\ The security-based swap transactions between
U.S.- and non-U.S. domiciled market participants provide conduits of
risk into the U.S. financial system, which could affect the safety and
soundness of the U.S. financial system. Similarly, such transactions
also provide conduits for liquidity into the U.S. financial system. As
a consequence, changes to incentives or costs that result from the
application of U.S. regulatory requirements may have effects on the
liquidity of the global market, as well as its efficiency and
competitive dynamics.
---------------------------------------------------------------------------

    \99\ See Section II.A, supra, and Section XV.B.2, infra.
    \100\ For example, review of the DTCC-TIW single-name CDS
transactions executed in 2011 reveals that approximately 49% of the
U.S. single-name CDS transactions were between one U.S.-domiciled
counterparty and one foreign-domiciled counterparty, and 44% of such
transactions were between two foreign-domiciled counterparties. See
Section II.A.1, supra, and Section XV.B.2(d), infra.
---------------------------------------------------------------------------

    With respect to conduits of risk, one area of particular concern in
the current security-based swap market is the risks that arise when a
large market participant becomes financially distressed, including the
potential for sequential counterparty failure. A default by one or more
security-based swap dealers or major security-based swap participants
could produce spillovers or contagion by reducing the willingness and/
or ability of market participants to extend credit to each other, and
thus could substantially reduce liquidity and valuations for particular
types of financial instruments.\101\
---------------------------------------------------------------------------

    \101\ See, e.g., Markus K. Brunnermeier and Lasse Heje Pedersen,
``Market Liquidity and Funding Liquidity,'' Rev. Financ. Stud.
(2009); Denis Gromb and Dimitri Vayanos, ``A Model of Financial
Market Liquidity,'' Journal of the European Economic Association
(2010).
---------------------------------------------------------------------------

    The experience of American International Group, Inc. (``AIG''), a
Delaware corporation based in New York, and its subsidiary, AIG
Financial Products Corp. (``AIG FP''), a Delaware corporation based in
Connecticut, during and after the 2008 financial crisis both
illustrates spillovers and contagion arising from security-based swap
transactions and demonstrates how cross-border transactions could
contribute to the destabilization of the

U.S. financial system if the security-based swap market were not
adequately regulated.\102\ AIG FP sold extensive amounts of credit
protection in the form of CDS in the years leading up to the
crisis,\103\ largely on the strength of AIG's AAA rating; AIG FP's
obligations were guaranteed by its parent AIG.\104\ AIG FP's CDS
business reflected the global nature of the security-based swap market
because, although both AIG and AIG FP were headquartered in the United
States, much of AIG FP's CDS business was run out of its London
office,\105\ and AIG FP sold credit protection to counterparties both
within the United States and around the world.\106\
---------------------------------------------------------------------------

    \102\ More generally, the Lehman Brothers Holding Inc.
bankruptcy offers an example of how risk can spread across
affiliated entities of multinational financial institutions. See
Lehman Brothers International (Europe) in Administration, Joint
Administrators' Progress Report for the Period 15 September 2008 to
14 March 2009 (Apr. 14, 2009), available at: http://www.pwc.co.uk/assets/pdf/lbie-progress-report-140409.pdf (``The global nature of
the Lehman business with highly integrated, trading and non-trading
relationships across the group led to a complex series of inter-
company positions being outstanding at the date of Administration.
There are over 300 debtor and creditor balances between LBIE and its
affiliates representing $10.5B of receivables and $11.0B of payables
as at 15 September 2008.'').
    \103\ In 2007, AIG FP's CDS portfolio reached a peak of $527
billion. Congressional Oversight Panel, June Oversight Report, ``The
AIG Rescue, Its Impact on Markets, and the Government's Exit
Strategy,'' June 2010, at 23, available at: http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf (``AIG
Report'').
    \104\ See Intermediary Definitions Adopting Release, 77 FR 30689
n.1133 (``AIGFP's obligations were guaranteed by its highly-rated
parent company . . . an arrangement that facilitated easy money via
much lower interest rates from the public markets, but ultimately
made it difficult to isolate AIGFP from its parent, with disastrous
consequences'') (quoting AIG Report at 20).
    \105\ See AIG Report at 18.
    \106\ See Office of the Special Inspector General for the
Troubled Asset Relief Program, Factors Affecting Efforts to Limit
Payments to AIG Counterparties, at 20 (Nov. 17, 2009) (listing AIG
FP's CDS counterparties, including a variety of U.S. and foreign
financial institutions), available at: http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf.
---------------------------------------------------------------------------

    As the subprime mortgage market in the United States collapsed, the
ongoing obligations borne by AIG FP and, through its guarantees, its
parent AIG, arising from AIG FP's CDS transactions produced losses that
threatened to overwhelm both AIG FP and AIG. The Federal Reserve Bank
of New York established a credit facility to prevent AIG from
collapsing. These funds were later supplemented by financial support
from the U.S. Treasury and the Federal Reserve, resulting in over $180
billion in financial assistance.\107\
---------------------------------------------------------------------------

    \107\ See AIG Report at 2.
---------------------------------------------------------------------------

    As we discuss in more detail below, security-based swap market
regulators need to take into account the spillover and contagion effect
of security-based swap risk to avoid overburdening the financial
system. One way to mitigate the spillover effect of a firm failure is
to impose capital standards that take into account the security-based
swap risk the firm undertakes while allowing flexibility in how it
conducts security-based swap business.\108\ At the same time, the
Commission is mindful that the application of Title VII prudential
requirements such as capital and margin impose costs on market
participants that could provide economic incentives to restructure or
separate their security-based swap activity according to geographical
or jurisdictional regions, or to engage in less security-based swap
activity, which may reduce the liquidity or efficiency of the overall
market.\109\
---------------------------------------------------------------------------

    \108\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70218.
    \109\ See id. at 70303-06.
---------------------------------------------------------------------------

    There are circumstances where risk generated by security-based
swaps may reside in the United States while conduits of such risk
(e.g., security-based swap transactions or persons engaged in security-
based swap transactions) could take place or reside outside the United
States or outside the scope of application of the Title VII
requirements. In these instances, the Commission has considered the
nature of the risk, the magnitude of the risk, and the existence of
other financial regulations, such as regulation of systemically
important financial institutions in Title I and Title II of the Dodd-
Frank Act and banking regulations.
    The Commission is mindful that the same interconnectedness in the
security-based swap market that may provide conduits for risk also may
mean that changes to incentives or costs caused by the application of
U.S. regulatory requirements may have effects on the liquidity of the
global market, as well as its efficiency and competitive dynamics. As
described below in Section XV.C, there are a myriad of paths for
liquidity as well as risk to move throughout the financial system in
this interconnected market. In addition, differences in regulatory
requirements between the United States and non-U.S. jurisdictions may
also impact markets by changing the competitive dynamics currently at
play in the interconnected global market. For example, as articulated
in Section XV.C, some potential responses by market participants to the
proposed rules and interpretations in this release may result in
lessened competition in the security-based swap market within the
United States. Among other considerations, some entities may determine
that the compliance costs arising from the requirements of Title VII
warrant exiting the security-based swap market in the United States and
not transacting with U.S. persons. These exits could result in higher
spreads and affect the ability and willingness of end users to engage
in security-based swaps.
(c) Central Clearing
    Many of the bilateral counterparty credit risks associated with
security-based swaps can be mitigated by central clearing. Central
clearing of security-based swaps provides a mechanism for market
participants to engage in security-based swap activity without having
to assess the creditworthiness of each counterparty. Clearing of
security-based swaps shifts the counterparty risk from individual
counterparties to CCPs whose members collectively share the default
risk of all members.\110\ Central clearing also requires consistent
application of mark-to-market pricing and margin requirements, which
standardizes the settling of payment or collateral delivery resulting
from market movements and minimizes the risk of clearing member
defaults.\111\
---------------------------------------------------------------------------

    \110\ See, e.g., Darrell Duffie and Haoxiang Zhu, ``Does a
Central Clearing Counterparty Reduce Counterparty Risk?'' Stanford
University, Working Paper (2010), available at: http://
www.stanford.edu/~duffie/DuffieZhu.pdf; Nout Wellink, ``Mitigating
systemic risk in OTC derivatives markets,'' Banque de France,
Financial Stability Review, No. 14--Derivatives--Financial
innovation and stability (July 2010), available at: http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf.
    \111\ See Christopher Culp, ``OTC-Cleared Derivative: Benefits,
Costs, and Implications of the Dodd-Frank Wall Street Reform and
Consumer Protection Act,'' Journal of Applied Finance No. 2 (2010),
available at: http://www.rmcsinc.com/articles/OTCCleared.pdf.
---------------------------------------------------------------------------

    However, central clearing may also pose risk to financial systems.
Because a CCP necessarily concentrates a large number of otherwise
bilateral contracts into a single location, a CCP could itself become
systemically important.\112\

While a loss by any single member in excess of its margin posted with
the CCP is likely to be absorbed by the CCP's risk capital structure,
correlated losses among many members, such as those which occurred
among many asset classes during the 2008 financial crisis, could
diminish the effectiveness of the risk mutualization structure of a
CCP. Its failure could create financial instability through its members
if the members, as residual obligors to the default related losses are
unable to absorb the resulting financial impact. Such an outcome could
lead to failure among CCP member counterparties, particularly when
obligations are sizable, which may be the case if the members are
themselves systemically important.
---------------------------------------------------------------------------

    \112\ The Financial Stability Oversight Council (``FSOC'') can
designate a CCP as systemically important under Section 804 of the
Dodd-Frank Act. See, e.g., Craig Pirrong, ``Mutualization of Default
Risk, Fungibility, and Moral Hazard: The Economics of Default Risk
Sharing in Cleared and Bilateral Markets,'' University of Houston,
Working Paper (2010), available at: http://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf (``[c]learing of
OTC derivatives has been touted as an essential component of reforms
designed to prevent a repeat of the financial crisis. A back-to-
basics analysis of the economics of clearing suggests that such
claims are overstated, and that traditional OTC mechanisms may be
more efficient for some instruments and some counterparties.'').
---------------------------------------------------------------------------

    Certain aspects of Title VII are intended to reduce the risk of CCP
failure by promoting sound risk management practices among registered
clearing agencies, while also providing open access to market