1a(47). Insurance policies are typically not subject to individual
negotiation. Additionally, the average insurance purchaser may not
qualify as an ECP. See CEA section 1a(18)(A)(xi), 7 U.S.C.
1a(18)(A)(xi).
    \1285\ An individual is considered an ECP if the individual
``has amounts invested on a discretionary basis, the aggregate of
which is in excess of--(i) $10,000,000; or (ii) $5,000,000 and who
enters into the agreement, contract, or transaction in order to
manage the risk associated with an asset owned or liability
incurred, or reasonable likely to be owned or incurred, by the
individual.'' CEA section 1a(18)(A)(xi), 7 U.S.C. 1a(18)(A)(xi).
    \1286\ See section 5(e) of the Securities Act, 15 U.S.C. 77e(d).
    \1287\ See CEA section 2(e), 7 U.S.C. 2(e), and section 6(l) of
the Exchange Act, 15 U.S.C. 78f(l).
    \1288\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, corrected at 77 FR 3590 (regarding swap
dealers and major swap participants); SB Swap Participant Proposing
Release, supra note 1239, (regarding SBS dealers and MSBSPs).
---------------------------------------------------------------------------

    The rules adopted in this release provide continuity in the
regulatory treatment of agreements, contracts, and transactions that
are insurance and fall outside the swap and security-based swap
definitions. Market participants will be able to continue to rely on
their existing understanding of insurance laws and regulations to
engage in business activities relating to the insurance agreements,
contracts, and transactions that satisfy the Insurance Safe Harbor or
Insurance Grandfather.
(ii) Assessment Costs
    Market participants will need to assess whether a particular
agreement, contract, or transaction satisfies the Insurance Safe Harbor
or Insurance Grandfather, prior to execution, but no later than when
the parties offer to enter into the agreement, contract, or
transaction. If such agreement, contract, or transaction satisfies
rules 3a69-1 under the Exchange Act, it would fall outside the swap and
security-based swap definitions. If such agreement, contract, or
transaction does not satisfy the Insurance Safe Harbor or Insurance
Grandfather, it would need to be analyzed based upon its own facts and
circumstances in order to determine whether it falls within or outside
the swap or security-based swap definition. For agreements, contracts,
or transactions entered into subsequent to the effective date of such
rule, this analysis will have to be performed prior to execution but no
later than when the parties offer to enter into the agreement,
contract, or transaction to customers to ensure compliance with Title
VII. Incurring these assessment costs with respect to these agreements,
contracts, or transactions would not have been required in most cases
prior to Title VII for two primary reasons. First, as security-based
swaps were not regulated prior to Title VII, there was no need to
determine whether an agreement, contract or transaction fell within or
outside the definition of security-based swap agreement in the CFMA.
Second, the need for parties to assess individual types of insurance
for purposes of determining whether the Federal securities laws apply
would be limited because, as previously stated, typically,

insurance has not been regulated under the Federal securities laws,
although variable life insurance and annuities are securities and are
regulated under the Federal securities laws.\1289\
---------------------------------------------------------------------------

    \1289\ See supra note 1283.
---------------------------------------------------------------------------

    The SEC believes that rule 3a69-1 under the Exchange Act reduces
the assessment costs that would otherwise exist without these rules.
Without rule 3a69-1 under the Exchange Act, market participants would
still need to assess whether or not the agreement, contract, or
transaction they are offering falls within the swap or security-based
swap definition. More time and effort would likely be spent on the
assessment because of lack of any safe harbor or grandfather to rely
on. Without rule 3a69-1 under the Exchange Act, market participants may
feel the need to request joint interpretations from the Commissions
before they invest resources in insurance business, even with respect
to agreements, contracts, or transactions that would otherwise meet the
Insurance Safe Harbor or Insurance Grandfather.
    The SEC recognizes that the assessment costs associated with rule
3a69-1 under the Exchange Act may include costs related to obtaining
legal advice on whether an agreement, contract, or transaction meets
the requirements of the Insurance Safe Harbor or Insurance Grandfather.
The SEC has sought to minimize the costs of this analysis by adopting
an approach that incorporates the characteristics of traditional
insurance into the straightforward Product Test and Provider Test, as
described in the discussions of relevant rules above.
    The SEC believes there will be minimal assessment costs for parties
to determine whether an agreement, contract, or transaction is among
those specifically enumerated in rule 3a69-1 under the Exchange Act
\1290\ or that falls within the Insurance Grandfather.\1291\
---------------------------------------------------------------------------

    \1290\ See supra part II.B.1.
    \1291\ See supra part II.B.1.c).
---------------------------------------------------------------------------

    With respect to rule 3a69-1 under the Exchange Act, the SEC
believes that at least some market participants are likely to seek
legal counsel for interpretation of various aspects of the rule,
particularly when structuring new or novel insurance products. The
costs associated with obtaining such legal counsel would vary depending
on the relevant facts and circumstances, including the complexity of
the agreement, contract, or transaction and whether an interpretation
from the Commissions is requested. The SEC believes that the range of
costs to undertake the legal analysis required to determine whether the
Insurance Safe Harbor or Insurance Grandfather applies to an agreement,
contract, or transaction will range from $378 to $27,000, with $27,000
representing a reasonable estimate of the upper end of the range of the
costs.\1292\
---------------------------------------------------------------------------

    \1292\ The average cost incurred by market participants in
connection with assessing whether an agreement, contract, or
transaction is a swap or security-based swap is based on the
estimated amount of time that staff believes will be required for
both in-house counsel and outside counsel to apply rule 3a69-1.
Staff estimates that some agreements, contracts, or transactions
will clearly satisfy the Insurance Safe Harbor, Insurance
Grandfather and an in-house attorney, without the assistance of
outside counsel, will be able to make a determination in one hour.
Based upon data from SIFMA's Management & Professional Earnings in
the Securities Industry 2011 (modified by SEC staff to account for
an 1800-hour-work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead), staff estimates
that the average national hourly rate for an in-house counsel is
$378. If an agreement, contract, or transaction is more complex, the
SEC estimates the analysis will require approximately 30 hours of
in-house counsel time and 40 hours of outside counsel time. The SEC
estimates the costs for outside legal services to be $400 per hour.
This is based on an estimated $400 per hour cost for outside legal
services. This is the same estimate used by the SEC for these
services in the release involving Exemptions for Security-Based
Swaps Issued By Certain Clearing Agencies, Release No. 33-9308 (Mar.
30, 2012), 77 FR 20536 (Apr. 5, 2012). Accordingly, on the high end
of the range the SEC estimates the cost to be $27,340 ($11,340
(based on 30 hours of in-house counsel time x $378) + $16,000 (based
on 40 hours of outside counsel x $400). This estimate is rounded by
two significant digits to avoid the impression of false precision of
the estimate.
---------------------------------------------------------------------------

(iii) Alternatives
    The SEC could have determined to not further define the terms
``swap'' and ``security-based swap'' to address the status of
traditional insurance products. If the Commissions did not further
define the terms ``swap'' and ``security-based swap'' to address the
status of traditional insurance products by adopting the Insurance Safe
Harbor or the Insurance Grandfather certain insurance providers would
have treated their insurance products as swaps or security-based swap,
thereby incurring programmatic costs that would otherwise be avoidable.
Other insurance providers could misinterpret the application of the
definition of swap to certain agreements, contracts, or transactions to
determine that they fall outside such definition of swap or security-
based swap, in which case the amount of Title VII programmatic benefits
and costs with respect to such products may potentially decrease. As
stated above, without rule 3a69-1 under the Exchange Act, there also
would be higher assessment costs to determine whether an agreement,
contract, or transaction falls within or outside the swap or security-
based swap definition.\1293\
---------------------------------------------------------------------------

    \1293\ See supra part XI.A.4(a)(ii).
---------------------------------------------------------------------------

    The Commissions received several comments in support of
alternatives to rule 3a69-1 under the Exchange Act as proposed.\1294\
The alternatives suggested by commenters include:
---------------------------------------------------------------------------

    \1294\ See supra part II.B.1.d), for a discussion of each of the
proposed alternatives.
---------------------------------------------------------------------------

     A test based on whether the agreement, contract, or
transaction is subject to regulation as insurance by the insurance
commissioner of the applicable state(s).\1295\
---------------------------------------------------------------------------

    \1295\ See ACLI Letter; AFGI Letter; AIA Letter; MetLife Letter
and Travelers Letter.
---------------------------------------------------------------------------

     A test based on the application of section 3(a)(8) of the
Securities Act \1296\ to the agreement, contract, or transaction.\1297\
---------------------------------------------------------------------------

    \1296\ 15 U.S.C. 77c(a)(8).
    \1297\ See ACLI Letter at 7; AFGI Letter at 3; CAI Letter at 21-
25 and Nationwide Letter at 4.
---------------------------------------------------------------------------

     Various alternative tests that add (or exclude)
requirements to the Product Test and the Provider Test.\1298\
---------------------------------------------------------------------------

    \1298\ See ACLI Letter; AIA Letter; Nationwide Letter and NAIC
Letter.
---------------------------------------------------------------------------

    The Commissions have considered each of these alternatives proposed
by commenters and are adopting the final rule as discussed above.\1299\
The Commissions are not adopting the specific alternative tests as
proposed by commenters. In considering each of these alternatives, the
SEC has taken into account the costs and benefits associated with each
alternative.
---------------------------------------------------------------------------

    \1299\ See supra part II.B.1.
---------------------------------------------------------------------------

    In the SEC's view, as discussed above,\1300\ because these
alternative tests do not adequately distinguish traditional insurance
products from Title VII instruments, they could result in an over-
inclusive Insurance Safe Harbor or Insurance Grandfather and fail to
include in the Title VII regulatory regime agreements, contracts, and
transactions that Congress intended to be regulated as swaps or
security-based swaps.\1301\ Therefore, the programmatic benefits of the
Title VII regime would not be fully realized if any of the alternatives
were adopted.
---------------------------------------------------------------------------

    \1300\ See supra part II.B.1.d).
    \1301\ For a more detailed discussion of the comments, including
those that suggested alternatives, and the Commissions' response,
see supra part II.B.1.d).
---------------------------------------------------------------------------

(b) Narrow-Based Security Index Rules (Rules 3a68-1a, 3a68-1b, and
3a68-3(a) Under the Exchange Act)
(i) Programmatic Costs and Benefits
    As previously stated, Title VII created a jurisdictional division
between the CFTC and the SEC. The CFTC has jurisdiction over swaps,
whereas the SEC has jurisdiction over security-based

swaps. In most instances it is clear based on a plain reading of the
statute whether a Title VII instrument is a swap or security-based swap
(e.g., a CDS referencing a single security or issuer is a security-
based swap).\1302\ In other instances, such as index CDS, whether a
Title VII instrument is a swap or security-based swap depends on
whether such instrument is based on a ``narrow-based security index''
or events relating to ``issuers of securities in a narrow-based
security index''.\1303\ The Commissions are adopting rules 3a68-1a and
3a68-1b under the Exchange Act to further define the terms ``issuers of
securities in a narrow-based security index'' and ``narrow-based
security index'' for purposes of analyzing CDS.\1304\ Additionally, the
Commissions are adopting rule 3a68-3(a) under the Exchange Act to
define narrow-based security index, except as otherwise provided in
rules 3a68-1a and 3a68-1b, consistent with the statutory definition set
forth in section 3(a)(55) of the Exchange Act and the rules,
regulations and orders of the SEC thereunder.
---------------------------------------------------------------------------

    \1302\ See section 3(a)(68)(A)(II) of the Exchange Act, 15
U.S.C. 78c(a)(68)(A)(II).
    \1303\ See section 3(a)(68)(A)(I) and (III) of the Exchange Act,
15 U.S.C. 78c(a)(68)(A)(I) and (III).
    \1304\ See supra part III.G.3.b).
---------------------------------------------------------------------------

    As discussed above, there are programmatic costs and benefits that
flow from being a Title VII instrument.\1305\ The overall programmatic
costs and benefits flowing from an agreement, contract, or transaction
being a swap or a security-based swap may be impacted by the
similarities and differences in the Commissions' regulatory programs
for swaps and security-based swaps. Generally, the Title VII regulatory
regimes of the CFTC and SEC are expected to be broadly similar and
complementary. Title VII requires the SEC and the CFTC to consult and
coordinate for the purposes of assuring regulatory consistency and
comparability with respect to rules adopted and orders issued pursuant
to Title VII to the extent possible.\1306\ Title VII provides that the
Commissions should treat functionally or economically similar products
or entities in a similar manner in such rules or orders, but does not
require identical rules.\1307\ The Commissions may, therefore, diverge
substantively on certain rulemakings. In certain areas, the SEC
believes it may be appropriate for Title VII's application to security-
based swaps to be different from its application to the swaps that will
be regulated by the CFTC, as the relevant products, entities and market
themselves are different, or because the relevant statutory provisions
are different. The SEC believes, however, that the programmatic costs
and benefits (which will be discussed in subsequent releases adopting
substantive rules) that will flow from the application of rules under
either jurisdiction as a result of applying rules 3a68-1a, 3a68-1b, and
3a68-3(a) under the Exchange Act are expected to be broadly similar and
complementary.
---------------------------------------------------------------------------

    \1305\ See supra part XI.A.3.
    \1306\ See section 712(a)(1) and (a)(2) of the Dodd-Frank Act.
    \1307\ See section 712(a)(7)(A) and (B) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    In addition, since Title VII specifically provides that security-
based swaps are securities and grants the SEC the exclusive authority
to regulate security-based swaps (other than as to mixed swaps for
which the SEC shares jurisdiction with the CFTC), in adopting rules
3a68-1a, 3a68-1b, and 3a68-3(a) under the Exchange Act to further
define the terms ``narrow-based security index,'' and ``issuers of
securities in a narrow-based security index'', the SEC is mindful of
the programmatic costs and benefits specifically associated with
security-based swaps falling under the Federal securities laws regime
and being regulated by the SEC. These programmatic benefits include,
for example, the applicability of the Securities Act registration,
disclosure, and civil liability scheme, as well as the SEC's authority
to take action to protect investors and prevent fraud and market
manipulation. These benefits could in some cases have corresponding
costs associated with the application of the Securities Act related to
registration, disclosure and civil liability scheme and the
registration, disclosure and liability provisions of the Exchange Act.
For example, if an issuer of an underlying security enters into a
security-based swap it will have to comply with the Securities Act
registration requirements both for the security-based swap and the
underlying security unless an exemption from registration is available.
As another example, if market participants wish to sell security-based
swaps to non-ECPs they will have to comply with the registration
requirements of the Securities Act. Any person that would be required
to comply with the registration requirements of the Securities Act with
respect to security-based swaps will incur the costs of such
registration, including legal and accounting costs. Additionally, such
person will become subject to the periodic reporting requirements of
the Exchange Act, unless already subject to such requirements, and
incur the costs associated with such Exchange Act periodic reporting.
(ii) Assessment Costs
    Market participants will need to ascertain whether an agreement,
contract or transaction based on an index is a swap or a security-based
swap, prior to execution, but no later than when the parties offer to
enter into it, according to the criteria set forth in the definitions
of the terms ``narrow-based security index'' and ``issuers of
securities in a narrow-based security index.'' The SEC expects that
this assessment will be made each time an index is considered to be
used or created for purposes of transactions based on such index, and
each time the material terms of the index on which the agreement,
contract, or transaction is based are amended or modified.\1308\ These
assessment costs with respect to agreements, contracts, or transactions
based on indexes did not arise prior to the enactment of Title VII. The
SEC believes that such assessment costs may vary depending on the
composition of the index that may underlie agreement, contract, or
transaction. For example, the number of components in an index may
impact the assessment costs because of the need to determine whether
the index's components satisfy the various tests within the rule.
However, once such assessment is performed and the narrow-based or
broad-based characteristics have been established with respect to an
index, unless the characteristic of such index changes, any market
participants engaging in agreements, contracts, or transactions
referencing such index would not need to incur any material assessment
costs, other than to confirm that the index has not changed in a way
that would change its classification from narrow-based to broad-based
or vice versa.
---------------------------------------------------------------------------

    \1308\ See generally supra part III.G.
---------------------------------------------------------------------------

    Although the assessment cost associated with rules 3a68-1a, 3a68-
1b, and 3a68-3(a) under the Exchange Act may vary, the SEC estimates
that costs associated with undertaking the determination of whether an
agreement, contract or transaction based on an index is a swap or
security-based swap will range from $378 to $20,000.\1309\ The

SEC believes that some agreements, contracts, or transactions based on
an established index would not need the assistance of outside counsel,
and a determination can be made in one hour. If an agreement, contract,
or transaction is more complex, the SEC estimates the analysis will
require approximately 20 hours of in-house counsel time and 30 hours of
outside counsel time. Accordingly, if an agreement, contract or
transaction is based on a newly structured customized index or basket
to suit a particular investment or hedging need, the SEC estimates that
the assessment may be at or close to the upper end of the estimated
range, as part of the structuring of such customized index or
basket.\1310\
---------------------------------------------------------------------------

    \1309\ The average cost incurred by market participants in
connection with assessing whether an agreement, contract, or
transaction is a swap or security-based swap is based on the
estimated amount of time that staff believes will be required for
both in-house counsel and outside counsel to apply the definition.
Staff estimates that the average national hourly rate for an in-
house counsel is $378 based on data from SIFMA's Management &
Professional Earnings in the Securities Industry 2011 (modified by
SEC staff to account for an 1800-hour-work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead). The SEC estimates the costs for outside legal services to
be $400 per hour. This is the same estimate used by the SEC for
these services in the release involving Exemptions for Security-
Based Swaps Issued By Certain Clearing Agencies, Release No. 33-9308
(Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012). Accordingly, on the
high end of the range the SEC estimates the cost to be $19,560
($7,560 (based on 20 hours of in-house counsel time x $378) +
$12,000 (based on 30 hours of outside counsel x $400). This estimate
is rounded by two significant digits to avoid the impression of
false precision of the estimate.
    \1310\ For example, the legal costs associated with the analysis
of whether an index or basket CDS is a swap or security-based swap
will include, among other things, analysis of the weighting of each
index or basket component, the aggregate weighting of any five non-
affiliated reference entities included in the index or basket,
whether a predominant percentage (by weighting) of the issuers
included in the index or basket satisfy the public information
availability test and whether any issuer included in the index or
basket with 5% or more weighting satisfies the public information
availability test.
---------------------------------------------------------------------------

(iii) Alternatives
    The Commissions received many comments on proposed rules 3a68-1a
and 3a68-1b and have incorporated many of the suggested alternatives
into the final rules and rejected, after careful consideration, other
suggested alternatives, as fully discussed in section III.G.3.b. The
policy choices made with respect to accepting or rejecting the
alternatives suggested by the commenters have been informed by the cost
and benefit considerations. In particular, as stated above, the SEC is
mindful of the programmatic costs and benefits specifically associated
with security-based swaps falling under the Federal securities laws
regime.\1311\
---------------------------------------------------------------------------

    \1311\ See supra part XI.4.(b)(i).
---------------------------------------------------------------------------

    One alternative to rules 3a68-1a and 3a68-1b is for the Commissions
to not further define the terms ``issuers of securities in a narrow-
based security index'' or ``narrow-based security index.'' The SEC
believes the assessment cost associated with determining whether an
index CDS is a swap or security-based swap would be greater in the
absence of rules 3a68-1a and 3a68-1b. Without these rules, market
participants would still need to analyze index components and it would
be difficult to apply the statutory language of ``issuer of securities
in a narrow-based security index'' in section 3(a)(68)(A)(ii)(III) of
the Exchange Act to index CDS, given that the existing statutory
definition of ``narrow-based security index'' and the past guidance are
focused on equity security indexes, volatility indexes and debt
security indexes, none of which are specifically tailored for index
CDS.\1312\ Absent rules 3a68-1a and 3a68-1b, it is very likely that
market participants would need to request interpretations from the
Commissions. Rules 3a68-1a and 3a68-1b provide tailored and objective
criteria, similar to the criteria used in the context of futures
contracts on volatility indexes and debt security indexes, to assist
market participants in determining whether an index CDS is based on
issuers of securities in a narrow-based security index.\1313\ These
rules will allow market participants to make determinations without
requesting interpretations from the Commissions and, therefore, should
reduce the assessment costs.
---------------------------------------------------------------------------

    \1312\ See supra part III.G.3.
    \1313\ Id.
---------------------------------------------------------------------------

    Commenters expressed concern associated with the public information
availability test and suggested that the public information
availability test not be incorporated into the final rule for various
reasons.\1314\ As discussed above \1315\, the Commissions are adopting
the public information availability test with some modifications.
---------------------------------------------------------------------------

    \1314\ See LSTA Letter (with respect to loans), Markit Letter,
ISDA Letter and SIFMA Letter.
    \1315\ See supra part III.G.3.b(iii).
---------------------------------------------------------------------------

    The SEC believes there are many programmatic benefits associated
with the public information availability test. As noted above, the
public information availability test is intended as the substitute test
for the ADTV provision in the statutory narrow-based security index
definition.\1316\ The ADTV test is designed to take into account the
trading of equity securities and, because the listing standards for
equity securities require that the security be registered under the
Exchange Act, the issuer of the equity security will be subject to the
periodic reporting requirements of the Exchange Act. Due to the
specific provisions of the statutory ADTV test, the Commissions have
determined that the ADTV test is not a useful test for purposes of
determining whether an index of reference entities or debt securities
is a ``narrow-based security index'' because the components of the
index are either reference entities, which do not ``trade,'' or debt
instruments, which commonly are not listed, and, therefore, do not have
a significant trading volume.\1317\ Applying the ADTV test in the
existing statutory narrow-based security index definition would not
serve any purposes. However, the basis for such provision, that there
is sufficient trading in the securities, public information about, and
therefore market following of, the issuer of the securities, applies to
index CDS. As a substitute for such ADTV test, the SEC believes that
there should be public information available about a predominant
percentage of the reference entities included in the index, or, in the
case of an index CDS on an index of securities, about the issuers of
the securities or the securities underlying the index. The SEC believes
that this should reduce the likelihood that non-narrow-based indexes
referenced in index CDS, or the component securities, or the named
issuers of securities in that index would be used as a surrogate for
the reference entities securities without complying with the Federal
securities laws. In particular, the SEC believes that the public
information availability test should reduce the likelihood that the
index CDS could be used to circumvent the registration provisions of
the Securities Act and provisions of the Exchange Act through the use
of CDS based on such indexes, manipulate the reference entities
securities or the securities in the index and reduce the potential for
misuse of material non-public information through the use of CDS based
on such indexes.\1318\ If a CDS is based on an index that does not
satisfy the public information availability test,\1319\ such index CDS
will be a security-based swap and thus

subject to the Federal securities laws and the SEC's oversight.\1320\
---------------------------------------------------------------------------

    \1316\ Id.
    \1317\ Id.
    \1318\ Id.
    \1319\ So long as the effective notional amounts allocated to
reference entities or securities included in the index that satisfy
the public information availability test comprise at least 80
percent of the index's weighting, failure by a reference entity or
security included in the index to satisfy the public information
availability test would be disregarded if the effective notional
amounts allocated to that reference entity or security comprise less
than 5 percent of the index's weighting. See paragraph (b) of rules
1.3(zzz) and 1.3(aaaa) under the CEA and rule 3a68-1a and 3a68-1b
under the Exchange Act.
    \1320\ See id.
---------------------------------------------------------------------------

    Some commenters indicated that the determinations of public
availability of information would be costly but did not quantify such
costs or explain the difficulty in making an assessment of whether
information was publicly available.\1321\ The SEC recognizes that there
will be assessment costs associated with application of the public
information availability test. The SEC notes that the public
information availability test applies only for purposes of determining
whether an index is a ``narrow-based security index.'' The SEC would
expect that market participants would look to the index provider to
make the assessment or, if the index or basket is customized by the
market participant that the creator of the index would take into
account the public information availability of the index components in
creating the custom index or basket. As a result, while the SEC
recognizes that there will be costs in evaluating whether the index
components satisfy the tests, including the public information
availability test, the SEC believes that the index provider (or the
creator of the custom index or basket) would already be evaluating the
index components to determine whether the provider's index criteria
were satisfied and, as part of such evaluation, would be able to
ascertain whether the public information availability test is
satisfied.
---------------------------------------------------------------------------

    \1321\ See LSTA Letter (with respect to loans); and SIFMA Letter
---------------------------------------------------------------------------

    One commenter raised a specific concern about the assessment cost
relating to applying the public information availability test to
indexes of loans or borrowers and stated that unlike index of
securities, which are generally subject to national or exchange-based
reporting and disclosure regimes, a higher proportion of the components
of an index of loans or borrowers may not be registered securities or
reporting companies under the Exchange Act and therefore, this
commenter stated that it would be more difficult or costly to determine
whether an index of loans or borrowers meets the public information
availability test.\1322\ The SEC has modified the public information
availability test to expand the categories of instrument to be
aggregated for purposes of the outstanding indebtedness criterion and
to change the method of calculating affiliation for purposes of the
public information availability test. The SEC believes that these
modifications will mitigate the assessment costs that the commenter is
concerned about.\1323\
---------------------------------------------------------------------------

    \1322\ See July LSTA Letter. See also supra part
III.G.3(b)(iii).
    \1323\ See supra part III.G.3.b)iii).
---------------------------------------------------------------------------

    The SEC believes that the overall assessment costs of including a
public information availability test are justified in light of its
benefits of preventing the index CDS from being used as a surrogate for
the underlying securities or securities of the referenced issuer of
securities. This should, in turn, prevent circumvention of the
application of the Securities Act to index CDS transactions, and
prevent fraud, manipulation and misuse of material non-public
information.
    One commenter suggested replacing the public information
availability test with a volume trading test.\1324\ The Commissions are
not adopting a volume-trading test based on the CDS components of the
index or on the index itself, either as a replacement for the public
information availability test or as an alternative means of satisfying
it. A volume trading test based on CDS is not practicable to use to
determine the character of such index CDS because the character of the
index CDS would have to be determined prior to any transaction in the
Title VII Instrument. Given that there would be no trading volume at
the time such determination is made, the index CDS would fail a volume-
trading test in all cases \1325\ and the assessment costs incurred in
connection with such test would not serve any purpose. There also would
be assessment costs in determining how many transactions in the CDS
index or each CDS component of the index existed, and it is not
apparent that any such trade information is either publicly available
or verifiable at this time. In addition, the SEC also believes that a
volume test based either on the CDS components of the index or the CDS
index itself would not be an appropriate substitute for or an
alternative to a public information availability test with respect to
the referenced entity, issuer of securities, or underlying security
because such a volume-based test would not provide transparency on such
underlying entities, issuers of securities or securities.\1326\ The
volume of transactions in a particular CDS or the CDS index does not
relate to whether there is public information about the reference
entity or reference security underlying the CDS or CDS index.
Therefore, a volume-trading test would not achieve the programmatic
benefits described above with respect to the public information
availability test.
---------------------------------------------------------------------------

    \1324\ See Markit Letter.
    \1325\ See supra part III.G.3.b)iii).
    \1326\ Id.
---------------------------------------------------------------------------

    Similarly, the Commissions also rejected commenters' suggestion
that the presence of a third-party index provider would assure that
sufficient information is available regarding the index CDS itself
without the need for a public information availability test.\1327\ As
stated above, the public information availability test is intended to
assure the availability of information about the components of the
index, the underlying securities and issuers of the securities.\1328\
The existence of a third-party index provider does not imply any
greater likelihood that such public information is available.\1329\
Although the existence of a third-party index provider as a substitute
for the public information availability test would reduce assessment
costs of the market participants using such an index (other than the
index provider who must evaluate compliance with index criteria), the
SEC does not believe that the existence of the third party index
provider is a substitute for the public information availability test.
The SEC believes that the information a third-party index provider
makes available about the construction of an index, index rules,
components, and predetermined adjustments provides information only
about the index and is not a substitute for the public availability of
information about the issuers of the securities or the securities in
the index.\1330\ In addition, the SEC does not believe that the
existence of a third-party index provider indicates any likelihood that
such public information is available about the components of the index,
which the SEC believes is important to reduce the potential for
manipulation of the component securities of an index, or the named
issuers of securities in an index, the misuse of non-public information
about such an index, the component securities or the reference entities
and circumvention of other provisions of the Federal securities laws
through the use of CDS based on such an index.\1331\ Further, the SEC
notes that a third-party index provider may create customized indexes
at the behest of market participants, including as part of its regular
business and be paid by such market participants for its index

customization and creation services.\1332\ Accordingly, the SEC does
not believe that a third party index test is an appropriate alternative
for the public information availability test and the costs to market
participants is justified by the programmatic benefits such test
provides.\1333\
---------------------------------------------------------------------------

    \1327\ See ISDA Letter; and SIFMA Letter. Neither commenter
provided any analysis to explain how or whether a third-party index
provider would be able to provide information about the underlying
securities or issuers of securities in the index.
    \1328\ See supra part III.G.3.b)iii).
    \1329\ Id.
    \1330\ Id.
    \1331\ Id.
    \1332\ Id. See also Proposing Release at 29852.
    \1333\ Id.
---------------------------------------------------------------------------

    As more fully discussed above in section III.G.3.b.iii, in
considering other alternatives, including whether to revise or maintain
the public information availability test, the SEC has consistently
considered the programmatic benefits described above and the importance
of assuring that there is information available with respect to the
issuers of securities constituting a predominant percentage of an index
on which a CDS is based if such index is not going to be considered a
``narrow-based security index.''
(c) Swaps on Certain Futures Contracts on Foreign Sovereign Debt (Rule
3a68-5 Under the Exchange Act)
(i) Programmatic Benefits and Costs
    Rule 3a68-5 provides that a Title VII instrument that is based on
qualifying foreign futures contracts on debt securities of one of the
21 enumerated foreign governments is a swap and not a security-based
swap if the Title VII instrument satisfies certain conditions.\1334\
This rule is intended to prevent such Title VII instruments from being
used to circumvent both the conditions of rule 3a12-8 and the Federal
securities laws protections underlying such conditions.\1335\ The
conditions provided in rule 3a68-5 are intended to address these
concerns. As discussed above, certain of the qualifying foreign futures
contracts on the debt securities of one of the 21 enumerated foreign
governments that satisfy the conditions of rule 3a12-8 trade with
significant volume through foreign trading venues.\1336\ Treating Title
VII Instruments on such qualifying foreign futures contracts, subject
to the conditions provided in rule 3a68-5, as swaps and not security-
based swaps would not raise the concerns that such swaps could be used
to circumvent rule 3a12-8, the Federal securities laws concerns that
such conditions are intended to protect, or allow circumvention of the
provisions of the Securities Act applicable to security-based swaps
(including those applicable to security-based swaps entered into by
issuer of securities underlie such security-based swaps, their
affiliates, or underwriters of their securities).\1337\ There are
certain programmatic costs associated with the rule that market
participants will need to be cognizant of. For example, although rule
3a12-8 allows qualifying foreign futures to be physically settled
outside the United States, the conditions of rule 3a68-5 require that
the swap be cash settled in order to be a swap and not a security-based
swap. This has the potential cost of not permitting settlement on the
same terms as the qualifying foreign future. However, the SEC believes
that, as with other Title VII Instruments, if the Title VII Instrument
can be physically settled with securities, it will be a security-based
swap. The other condition in rule 3a68-5 that may impact the
characterization of the Title VII Instrument is that the Title VII
Instrument cannot be entered into by the foreign government, its
affiliates, or an underwriter of its securities. This condition is
intended to preserve the programmatic benefit of the application of the
Securities Act to transactions in Title VII Instruments entered into by
issuers of securities, their affiliates and underwriters. Moreover, the
final rule provides consistent treatment of qualifying foreign futures
contracts on the debt securities of the 21 enumerated foreign
governments and Title VII instruments based on such futures contracts
on the debt securities of the 21 enumerated foreign governments, which
will allow instruments to trade through designated contract markets.
---------------------------------------------------------------------------

    \1334\ See supra part III.E.
    \1335\ See supra note 717 and accompanying text.
    \1336\ Id.
    \1337\ Id.
---------------------------------------------------------------------------

(ii) Assessment Costs
    The SEC believes that the assessment cost associated with
determining whether a swap on certain futures contracts on foreign
government securities constitute a swap or security-based swap under
rule 3a68-5 should be minimal. Currently, qualifying foreign futures
contracts on debt securities of the 21 enumerated foreign governments
are traded on exchanges or boards of trade. Market participants may
look at the exchange or board of trade listing to determine what they
are. Therefore, the assessment, in accordance with the rule, would
primarily focus on whether such swap itself is traded on or through a
board of trade; whether the swap is cash-settled; whether the futures
is traded on a board of trade; whether any security used to determine
the cash settlement amount are not registered under the Securities Act
or the subject of any American depositary receipt registered under the
Securities Act; and whether the swap is entered into by the foreign
government issuing the debt securities upon which the qualifying
futures contract is based or referenced, an affiliate of such foreign
government or an underwriter of such foreign government securities. All
of these determinations may be readily ascertained by the parties
entering into the agreement, contract, or transaction. Therefore, the
assessment costs associated with rule 3a68-5 under the Exchange Act
should be nominal because parties should be able to make assessments
under rule 3a68-5 in less than an hour.
(d) Tolerance and Grace Period for Swaps and Security-Based Swaps
Traded on Regulated Trading Platforms (Rule 3a68-3 Under the Exchange
Act)
(i) Programmatic Benefits and Costs
    In addition to defining narrow-based security index consistent with
the statutory definition set forth in section 3(a)(55) of the Exchange
Act and the rules, regulations and orders of the SEC thereunder, Rule
3a68-3 under the Exchange Act establishes a tolerance and grace period
for swaps and security-based swaps to address the treatment of indexes
that migrate from broad-based to narrow-based or narrow-based to broad-
based, so that market participants will know which regulatory
jurisdiction will apply to such Title VII instruments.\1338\
---------------------------------------------------------------------------

    \1338\ See supra part III.G.5.
---------------------------------------------------------------------------

    There are programmatic costs and benefits associated with tolerance
and grace periods. Because swaps may only trade on designated contract
markets (``DCM''), swap execution facilities (``SEF''), and foreign
boards of trade (``FBOT''), and security-based swaps may trade only on
registered national securities exchanges (``NSE'') and SB SEFs, a
tolerance and grace period creates the benefit of permitting the index
provider to substitute certain index components in order to maintain
the characteristic of such index being narrow-based or broad-based and
allow market participants to continue to enter into the Title VII
instrument on which such index is based.\1339\ The associated
programmatic costs are primarily related to the monitoring of index
migrations performed by various trading platforms. Such monitoring
costs would be part of the operation costs that a trading platform
would incur in connection with implementing Title VII regardless of
whether rule 3a68-3 under the Exchange Act is adopted. Absent rule
3a68-3 under the Exchange Act, trading platforms still need to have the

technology necessary to monitor and conduct surveillance for index
migration, as well as create internal policies and procedures relating
to such migration. On the other hand, without a tolerance and grace
period, if a market participant wishes to offset a security-based swap
to hedge its index CDS position on an SEC-regulated trading platform
where the underlying security index has migrated from narrow-based to
broad-based, the participant would be prohibited from doing so because
a Title VII instrument based on the index would be a swap, and is
ineligible for trading on an NSE or SB SEF.
---------------------------------------------------------------------------

    \1339\ Id.
---------------------------------------------------------------------------

(ii) Assessment Costs
    Rule 3a68-3 under the Exchange Act provides a tolerance and grace
period and does not require any determination to be made beyond the
programmatic cost to monitor for migration as described above. The SEC
believes that the assessment costs associated with rule 3a68-3 under
the Exchange Act should be nominal on the parties entering into an
agreement, contract, or transaction.
(iii) Alternatives
    One commenter stated its view that extending the ``grace period''
from three months to six months would ease any disruption or
dislocation associated with the delisting process with respect to an
index that has migrated from broad-based to narrow-based, or narrow-
based to broad-based, and such migration is not reversed during the
tolerance period.\1340\ The commenter did not provide any data,
evidence, or other justification for its request. The Commissions are
adopting the three-month grace period as proposed, which was the time
frame used by Congress in the context of migration of indexes
underlying security futures to address the same issue caused by index
migration.\1341\ The SEC believes that the three-month grace period
gives parties to a swap or security-based swap on an index that has
migrated sufficient time to execute offsetting positions and believes
that it is appropriate to maintain the three-month period that is the
applicable grace period for security futures.
---------------------------------------------------------------------------

    \1340\ See MarketAxess Letter. See also supra part III.G.5.b).
    \1341\ See section 3(a)(55)(C)(iii)(II) of the Exchange Act, 15
U.S.C. 77c(a)(55)(C)(iii)(II).
---------------------------------------------------------------------------

    (e) Request for Interpretation Process (Rule 3a68-2 Under the
Exchange Act)
    (i) Programmatic Benefits and Costs
    Rule 3a68-2 under the Exchange Act allows persons to submit a
request for a joint interpretation from the Commissions regarding
whether an agreement, contract or transaction (or a class of
agreements, contracts, or transactions) is a swap, security-based swap,
or mixed swap. As stated above,\1342\ if an agreement, contract, or
transaction is a swap or a security-based swap the overall programmatic
costs and benefits that may arise from the Commissions' regulatory
programs are expected to be broadly similar and complementary.\1343\
However, in implementing Title VII the Commissions may diverge on rules
and requirements stemming from the Title VII regulatory regime.
Accordingly, a party to an agreement, contract, or transaction will
need to know the appropriate classification, e.g. whether it is a swap
or security-based swap, in order to know which regulatory regime and
corresponding requirements is applicable. The Dodd-Frank Act requires
that, with respect to the definitions of swaps, security-based swaps,
and mixed swaps, the Commissions must jointly interpret such
definitions. This rule, by providing a mechanism for the Commissions to
provide such joint interpretations, allows parties to understand the
timing and process for seeing such joint interpretation. Regardless of
this rule, the programmatic costs and benefits that flow from being a
swap or security-based swap remain the same for parties requesting a
joint interpretation. But, the rule allows for parties to the
agreement, contract, or transaction to request through a joint
interpretation from the Commissions, what regulatory regime would apply
or whether the agreement, contract, or transaction is within the
definition of swap or security-based swap.
---------------------------------------------------------------------------

    \1342\ See supra part X.4(b)(i).
    \1343\ Id.
---------------------------------------------------------------------------

(ii) Assessment Costs
    The SEC estimates the costs of submitting a request for a joint
interpretation pursuant to rule 3a68-2 under the Exchange Act would be
approximately $20,000.\1344\ The use of inside counsel in lieu of
outside counsel would reduce this estimate. Once such a joint
interpretation is made, however, other market participants that seek to
transact in the same agreement, contract, or transaction (or class
thereof) would be able to rely on such interpretation in determining
whether their agreement, contract, or transaction is a swap, security-
based swap, or mixed swap. Accordingly, assessment costs may be
affected by the number of parties seeing an interpretation or whether
prior interpretations with respect to the same or similar agreements,
contracts, or transactions have been sought.
---------------------------------------------------------------------------

    \1344\ As stated in the Proposing Release at 29878, n. 354, this
estimate is based on information indicating that the average costs
associated with preparing and submitting a no action request to the
SEC staff, which the SEC believes is a process similar to the
process under rule 3a68-2 under the Exchange Act. The staff
estimates that costs associated with a request pursuant to rule
3a68-2 will cost approximately $19,560. The SEC estimates the
analysis will require approximately 20 hours of in-house counsel
time and 30 hours of outside counsel time. Based upon data from
SIFMA's Management & Professional Earnings in the Securities
Industry 2011 (modified by SEC staff to account for an 1800-hour-
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead), staff estimates that the average
national hourly rate for an in-house attorney is $378. The SEC
estimates the costs for outside legal services to be $400 per hour.
This is the same estimate used by the SEC for these services in the
release involving Exemptions for Security-Based Swaps Issued By
Certain Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 77
FR 20536 (Apr. 5, 2012). Accordingly, the SEC estimates the cost to
be $19,560 ($7,560 (based on 20 hours of in-house counsel time x
$378) + $12,000 (based on 30 hours of outside counsel x $400)) to
submit a joint request for interpretation. This estimate is rounded
by two significant digits to avoid the impression of false precision
of the estimate.
---------------------------------------------------------------------------

(f) Definition of Swap (Rule 3a69-2 Under the Exchange Act)
(i) Programmatic Benefits and Costs
    Rule 3a69-2(a) under the Exchange Act states that the term swap has
the meaning set forth in section 3(a)(69) of the Exchange Act.\1345\
Rule 3a69-2(b) under the Exchange Act explicitly defines the term
``swap'' to include an agreement, contract, or transaction that is a
cross-currency swap, currency option, foreign currency option, foreign
exchange option, foreign exchange rate option, foreign exchange
forward, foreign exchange swap, forward rate agreement, or non-
deliverable forward involving foreign exchange, unless such agreement,
contract, or transaction is otherwise excluded by section 1a(47)(B) of
the CEA.\1346\ Rule 3a69-2(c) under the Exchange Act provides that: (1)
A foreign exchange forward or a foreign exchange swap shall not be
considered a swap if the Secretary of the Treasury makes the
determination described in section 1a(47)(E)(i) of the CEA; \1347\ and
(2) notwithstanding any such determination, certain provisions of the
CEA will apply to such a foreign exchange forward or foreign exchange
swap (specifically, the reporting requirements in section 4r of the CEA
\1348\ and regulations thereunder

and, in the case of a swap dealer or major swap participant that is a
party to a foreign exchange swap or foreign exchange forward, the
business conduct standards in section 4s of the CEA \1349\ and
regulations thereunder). Rule 3a69-2(c) under the Exchange Act further
clarifies that a currency swap, cross-currency swap, currency option,
foreign currency option, foreign exchange option, foreign exchange rate
option, or non-deliverable forward involving foreign exchange is not a
foreign exchange forward or foreign exchange swap subject to a
determination by the Secretary of the Treasury as described in the
preamble.
---------------------------------------------------------------------------

    \1345\ 15 U.S.C. 78c(a)(69).
    \1346\ 7 U.S.C. 1a(47)(B).
    \1347\ 7 U.S.C. 1a(47)(E)(i).
    \1348\ 7 U.S.C. 6r.
    \1349\ 7 U.S.C. 6s.
---------------------------------------------------------------------------

    Rule 3a69-2 is parallel to rule 1.3(xxx)(2) under the CEA. In order
to determine whether an agreement, contract, or transaction is a
``swap'' or ``security-based swap'', it is necessary for the
Commissions to adopt parallel rules that will apply to a Title VII
instrument. Therefore, rule 3a69-2 is included under the Exchange Act.
The definition of swap is the starting point for determining the status
of a Title VII Instrument as a swap, security-based swap, or mixed
swap. To the extent that the specific agreements, contracts, and
transactions listed in section 1a(47)(B) of the CEA are swaps, the
programmatic costs and benefits that flow from such agreements,
contracts or transactions being a Title VII instrument under rule 3a69-
2 will be determined by the substantive rules adopted by the CFTC
mandated by Title VII. If any such agreements, contracts, or
transactions are security-based swaps, the programmatic costs and
benefits will be the same as with other security-based swaps.
(ii) Assessment Costs
    Since this rule lists some of the types of agreements, contracts or
transactions already listed in section 1a(47)(B) of the CEA \1350\ and
the determination made by the Secretary of the Treasury, the SEC does
not believe there would be assessment costs in addition to those
incurred by market participants in determining whether an agreement,
contract or transaction falls within the definition of swap.
---------------------------------------------------------------------------

    \1350\ 7 U.S.C. 1a(47)(B).
---------------------------------------------------------------------------

(g) Mixed Swaps (Rule 3a68-4 Under the Exchange Act)
(i) Programmatic Benefits and Costs
    Rule 3a68-4(a) under the Exchange Act defines a ``mixed swap'' in
the same manner as the term is defined in both the CEA and Exchange
Act. Furthermore, rule 3a68-4(b) under the Exchange Act establishes the
regulatory framework for mixed swaps with which parties to bilateral
uncleared mixed swaps (i.e., mixed swaps that are neither executed on
or subject to the rules of a DCM, NSE, SEF, SB SEF, or FBOT nor cleared
through a DCO or clearing agency), as to which at least one of the
parties is dually registered with both the CFTC and the SEC, will need
to comply. The SEC believes that paragraph (b) of rule 3a68-4 under the
Exchange Act will augment the programmatic benefits of the Title VII
regulatory regime. The rule addresses potentially duplicative
regulatory requirements for dually-registered dealers and major
participants that are subject to regulation by both the CFTC and the
SEC, while requiring dual registrants to comply with the regulatory
requirements the Commissions believe are necessary to provide
sufficient regulatory oversight for mixed swaps transactions entered
into by such dual registrants. It eliminates potentially duplicative
regulation and reduces the programmatic costs associated with
regulatory implementation and compliance in the context of mixed swaps
by providing that a bilateral uncleared mixed swap would be subject to
all applicable provisions of the Federal securities laws (and the SEC
rules and regulations promulgated thereunder) but would be subject only
to certain CEA provisions (and the CFTC rules and regulations
promulgated thereunder).
    Rule 3a68-4(c) under the Exchange Act establishes a process for
persons to request that the Commissions issue a joint order, with
respect to parallel provisions \1351\ applicable to mixed swaps, to
permit such persons (and any other person or persons that subsequently
lists, trades, or clears that class of mixed swap) to comply with the
parallel provisions of either the CEA or the Exchange Act and related
rules and regulations (collectively ``specified parallel provisions''),
instead of being required to comply with parallel provisions in both
the CEA and the Exchange Act. This process applies except with respect
to bilateral, uncleared mixed swaps where one of the parties to the
mixed swap is dually registered with the CFTC as a swap dealer or major
swap participant and with the SEC as a security-based swap dealer or
major security-based swap participant, for which the regulatory
framework is established under rule 3a68-4(c). The SEC has recognized
the programmatic benefits associated with rule 3a68-4(c) and believes
that in the mixed swap area, the process established by rule 3a68-4(c)
would eliminate potentially duplicative regulatory requirements and
reduce the compliance costs associated with mixed swaps.
---------------------------------------------------------------------------

    \1351\ For purposes of paragraph (c) of rule 3a68-4 under the
Exchange Act, ``parallel provisions'' means comparable provisions of
the CEA and the Exchange Act that were added or amended by Title VII
with respect to security-based swaps and swaps, and the rules and
regulations thereunder.
---------------------------------------------------------------------------

(ii) Assessment Costs
    With respect to rule 3a68-4(b) under the Exchange Act, one cost is
that parties to a mixed swap would need to determine whether they
satisfy the conditions set forth in such rule in order to ascertain the
regulatory treatment of the mixed swap. Such assessment includes
determining whether the mixed swap is neither executed on nor subject
to the rules of a DCM, NSE, SEF, SB SEF, or FBOT, whether the mixed
swap will not be submitted for clearing, and whether one party to the
mixed swap is a dually registered dealer or major participant. The SEC
believes that the above determinations would be based on readily
ascertainable facts and the assessment costs associated with such
determinations should be minimal.
    With respect to rule 3a68-4(c) under the Exchange Act, parties to
mixed swaps have the option to decide whether to submit a request for
issuing a joint order, weighing the benefits realized from the joint
order against the cost of submitting such request. If parties to mixed
swaps decide to submit a request, the SEC estimates the total costs of
preparing and submitting a party's request to the Commissions pursuant
to rule 3a68-4(c) under the Exchange Act will be $31,000 per request
for mixed swaps for which a request for a joint interpretation pursuant
to rule 3a68-4(c) was not previously made.\1352\ The use of inside

counsel in lieu of outside counsel would reduce this estimate. Absent
such a process, though, market participants that desire or intend to
offer or enter into such a mixed swap (or class thereof) would not have
the option to request for the Commissions' joint interpretation and
absent a joint interpretation, they would be required pursuant to Title
VII to comply with all regulatory requirements applicable to both swaps
and security-based swaps.
---------------------------------------------------------------------------

    \1352\ As discussed in the Proposing Release at 29878, note 356,
this estimate is based on information indicating that the average
costs associated with preparing and submitting a no-action request
to the SEC staff, which the SEC believes is a process similar to the
process under rule 3a68-4(c). The staff estimates that costs
associated with such a request will cost approximately $31,340. The
SEC estimates the analysis will require approximately 30 hours of
in-house counsel time and 50 hours of outside counsel time. Based
upon data from SIFMA's Management & Professional Earnings in the
Securities Industry 2011 (modified by SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead), staff estimates that
the average national hourly rate for an in-house attorney is $378.
The SEC estimates the costs for outside legal services to be $400
per hour. This is the same estimate used by the SEC for these
services in the release involving Exemptions for Security-Based
Swaps Issued By Certain Clearing Agencies, Release No. 33-9308 (Mar.
30, 2012), 77 FR 20536 (Apr. 5, 2012). Accordingly, the SEC
estimates the cost to be $31,340 ($11,340 (based on 30 hours of in-
house counsel time x $378) + $20,000 (based on 50 hours of outside
counsel x $400)) to submit a joint request for interpretation. This
estimate is rounded by two significant digits to avoid the
impression of false precision of the estimate.
---------------------------------------------------------------------------

(iii) Alternatives
    One commenter recommended that the Commissions require that market
participants disaggregate mixed swaps and enter into separate
simultaneous transactions so that they cannot employ mixed swaps to
obscure the underlying substance of transactions.\1353\ This commenter
stated that ``the regulatory complexity of dealing with a mixed swap
far outweighs the legitimate benefits to counterparties from
documenting the transactions as mixed swaps.'' \1354\ This commenter
asserted that some benefits of requiring disaggregation include more
useful price reporting; increased transparency; regulatory reporting
and monitoring that will align with the transaction database of the
counterparties; and the thwarting of illegitimate motivations, such as
obfuscation of prices and fees. Regardless of the benefits of
disaggregation raised by the commenter, Title VII specifically
contemplates that there would be mixed swaps comprised of both swaps
and security-based swaps. The SEC believes that requiring parties to
disaggregate mixed swaps into separate components is not consistent
with congressional intent and may result in certain programmatic costs,
such as limiting the types of derivatives products and transactions
market participants may offer and enter into and increasing transaction
costs (such as documentation costs) by disaggregating a mixed swap into
multiple separate transactions.
---------------------------------------------------------------------------

    \1353\ See Better Markets Letter.
    \1354\ Id.
---------------------------------------------------------------------------

(h) Books and Records Requirement for SBSAs (Rule 3a69-3 Under the
Exchange Act)
(i) Programmatic Benefits and Costs
    Rule 3a69-3 under the Exchange Act provides that there are no
additional books and records, or data, requirements regarding SBSAs
beyond those required for swaps. The SEC recognized the following
programmatic benefits and costs in adopting this rule.
    As discussed above, SBSAs are swaps over which the CFTC has primary
regulatory authority, but for which the SEC has antifraud, anti-
manipulation, and certain other authority.\1355\ There will be
programmatic benefits and costs as a result of the SDRs, swap dealers,
and major swap participants implementing and complying with the books
and records requirements provided in sections 21 and 4s of the
CEA.\1356\ The programmatic benefits and costs will flow from the
substantive rules adopted by the CFTC regarding record keeping
requirements for swaps. SBSAs are swaps and will be subject to these
books and records requirements. The SEC believes that the rules
proposed by the CFTC would provide sufficient books and records
regarding SBSAs,\1357\ and that additional books and records
requirements for SBSAs may be duplicative and would not produce
corresponding benefits warranting such additional costs. Rule 3a69-3
under the Exchange Act avoids any additional programmatic costs,
especially the additional compliance and operation costs that would be
incurred by SDRs, swap dealers, and major swap participants in the area
of data maintenance and recordkeeping, beyond those which have already
been prescribed by the CFTC's rules.
---------------------------------------------------------------------------

    \1355\ See supra part V.
    \1356\ 7 U.S.C. 24a and 6s. Pursuant to sections 21(b)(2) and
4s(f)(1)(B)(ii) of the CEA, the CFTC has adopted rules with respect
to data collection and maintenance by SDR and books and records
requirements for swap dealers and major swap participants. See Swap
Dealer and Major Swap Participant Recordkeeping, Reporting, and
Duties Rules; Futures Commission Merchant and Introducing Broker
Conflicts of Interest Rules; and Chief Compliance Officer Rules for
Swap Dealers, Major Swap Participants, and Futures Commission
Merchants, 77 FR 20128 (April 3, 2012); and Swap Data Recordkeeping
and Reporting Requirements, 77 FR 2136 (January 13, 2012).
    \1357\ See Proposing Release at 29863. See also supra part V.
---------------------------------------------------------------------------

(ii) Assessment Costs
    The SEC does not believe that any assessment costs associated with
rule 3a69-3 under the Exchange Act would be material.
5. Effects on Competition, Efficiency, and Capital Formation
    Section 3(f) of the Exchange Act requires the SEC, whenever it
engages in rulemaking and is required to consider or determine whether
an action is necessary or appropriate in the public interest, to
consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\1358\ In addition, section 23(a)(2) of the Exchange Act
\1359\ requires the SEC, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition. Section
23(a)(2) of the Exchange Act also prohibits the SEC from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \1358\ 15 U.S.C. 78c(f).
    \1359\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commissions are further defining ``swap'' and ``security-based
swap'' pursuant to section 712(d)(1) of the Dodd-Frank Act.\1360\ In
the Proposing Release, the SEC stated that the SEC preliminarily
believed that the proposed Exchange Act rules would not impose
significant burden on competition, that they would create efficient
processes, and that they would not have adverse effects on capital
formation.\1361\ In the Proposing Release, the SEC requested comment on
each of these issues,\1362\ and no commenters responded to specifically
address these issues.
---------------------------------------------------------------------------

    \1360\ The SEC is also acting pursuant to its rulemaking
authority provided by sections 3 and 23(a) of the Exchange Act.
    \1361\ See Proposing Release at 29885-87.
    \1362\ Id. at 29887.
---------------------------------------------------------------------------

    The SEC recognizes that the most significant impact of the swap and
security-based swap definitions will derive from these definitions
serving as the foundation for implementing the Title VII regulatory
regime, particularly given the significant impacts that Title VII will
have on the security-based swap market. In adopting these definitional
rules, the SEC has sought to fairly reflect the statutory definitions
and their underlying intent to implement the regulatory framework
Congress intended to impose on the derivatives markets by enacting
Title VII.
    The scope of the definitions will affect the ultimate regulatory
effects on competition, efficiency, and capital formation that will
accompany the full implementation of Title VII. The SEC anticipates
analyzing these effects in the adopting releases for the particular
regulations. Below is a general discussion of the impacts on
competition, efficiency, and capital formation as a result of the rules
being adopted in this release.
    The final rules being adopted relate primarily to further defining
the terms ``swap,'' ``security-based swap,'' and ``mixed swap'' to
determine (i) the instruments that will be subject to the Title VII
regulatory regime and (ii) the jurisdictional line between Title VII

instruments regulated by the SEC and those regulated by the CFTC. There
also are procedural rules regarding interpretive requests and joint
orders from the Commissions, and recordkeeping relating to SBSAs. The
SEC believes that these procedural rules are related to the status of a
product and the regulatory treatment of a mixed swaps, and therefore,
the effects of these rules on competition, efficiency, and capital
formation are subsumed in the overall impact of the rules defining the
perimeter of the Title VII regulatory regime, and those of the rules
relating to the jurisdictional line between the SEC and CFTC.
(a) The Status of Products
    The status of products as inside the Title VII regulatory perimeter
(i.e., swaps and security-based swaps) or outside the regulatory
perimeter will have impacts on market participants. These rules will
impact the status of certain market participants currently acting as
intermediaries in the security-based swap market, subjecting them to
regulatory oversight and registration. As the SEC has noted, the market
among intermediaries for security-based swaps is highly concentrated.
The concentration in large part appears to reflect the fact that larger
entities possess competitive advantages in engaging in over-the-counter
security-based swap dealing activities, particularly with respect to
having sufficient financial resources to provide potential
counterparties with adequate assurances of financial performance.\1363\
At the same time, as noted by commenters to the Entities Definition
Release, some entities engage in smaller volumes of security-based swap
dealing activity.\1364\ Some small and mid-size banks, for example,
routinely provide such services involving relatively small notional
amounts to their customers.\1365\ Although these relatively small
dealers in general may not compete directly with the largest dealers
(because they service a different segment of the market), they may be
expected to play a role in helping certain types of customers (such as
customers with a relatively small need for security-based swaps) enter
into security-based swaps, thus promoting the availability of these
products.\1366\ This availability may assist market participants (as
end users), as discussed below, in engaging security-based swap
activities that may be related to their businesses or financing needs.
---------------------------------------------------------------------------

    \1363\ See Entity Definitions Release, at 30740.
    \1364\ Id.
    \1365\ Id.
    \1366\ Id.
---------------------------------------------------------------------------

    As the SEC has noted before, persons who fall within the
definitions of ``security-based swap dealer'' and ``major security-
based swap participant'' will incur a range of programmatic costs by
virtue of their status as a registered dealer or major participant and
certain assessment costs regarding their security-based swap
activities. To the extent the costs associated with these statutorily
mandated requirements are relatively fixed or large enough, they may
negatively affect competition within the security-based swap
market.\1367\ This may, for example, lead smaller dealers or entities
for whom dealing is not a core business to keep their security-based
swap dealing activity below the volume threshold required to be
registered with the SEC or exit the market if the profit from the
security-based swap dealing activity cannot justify the cost incurred
to comply with the Title VII requirements; both scenarios could cause
customers to have less access to the market or to incur higher costs in
accessing the market. Such costs might also deter the entry of new
firms into the market. If sufficiently high, these costs of compliance
may increase concentration among dealers.\1368\
---------------------------------------------------------------------------

    \1367\ Id.
    \1368\ Id.
---------------------------------------------------------------------------

    Certain aspects of the regulation of products defined as security-
based swaps may enhance competition in the market for security-based
swaps. For example, the proposed business conduct standards, if adopted
as proposed, including those for disclosure of material risks and for
fair and balanced communications, may reduce information asymmetries
between security-based swap dealers, major security based swap
participants, and their counterparties. The reduction of information
asymmetries should promote price efficiency, promote more informed
decision-making, and reduce the incidence of fraudulent or misleading
representations.\1369\
---------------------------------------------------------------------------

    \1369\ See Business Conduct Standards Proposing Release, 76 FR
42396-42459, at 42452. See also supra part XI.A.3.
---------------------------------------------------------------------------

    In addition, as the SEC noted in the Entity Definitions Release,
the current security-based swap market is subject to the potential for
risk spillovers and systemic risk, which can occur when the financial
sector as a whole (or certain key segments) is exposed to a significant
amount of concentrated financial risk, either through direct
counterparty relationships or the deterioration of asset values, and
such exposure gives rise to the systemic chain effect of one firm's
financial distress or losses leading to financial distress or losses of
the entire financial sector as a whole.\1370\ With respect to
transactions involving security-based swaps, security-based swap
dealers and major security-based swap participants will be regulated
and, as noted in the Entity Definitions Release, such regulation and
requirements are expected to increase market participants' confidence
in the dealers' and major participants' ability to perform their
obligations.\1371\
---------------------------------------------------------------------------

    \1370\ See Entity Definitions Release, at 30740.
    \1371\ Id. at 30723-30724.
---------------------------------------------------------------------------

    The effect of the definitions on efficiency and capital formation
is linked to their effect on competition. Markets that are competitive,
with fair and transparent pricing and equal access to security-based
swaps, may be expected to promote the efficient allocation of capital.
Similarly, definitions that promote, or do not unduly restrict,
competition can be accompanied by regulatory benefits that minimize the
risk of market failure and thus promote efficiency and capital
formation within the market.\1372\
---------------------------------------------------------------------------

    \1372\ See Entity Definitions Release, at 30742.
---------------------------------------------------------------------------

    As discussed above, certain Title VII requirements and rules
relating to intermediaries, such as internal and external business
conduct standards, if adopted as proposed, are expected to reduce
information asymmetries and promote price efficiency. These business
conduct standards, if adopted as proposed, would also help regulators
perform their functions in an effective manner. The resulting increase
in market integrity could affect capital formation in U.S. capital
markets positively.\1373\
---------------------------------------------------------------------------

    \1373\ See Business Conduct Standards Proposing Release, at
42452; SDR Proposing Release, at 77365.
---------------------------------------------------------------------------

    Other entities also will be affected by the scope of the security-
based swap definition, including clearing agencies that currently, and
in the future will, clear security-based swaps, the security-based swap
data repositories that collect security-based swap data, and the SB
SEFs and exchanges that are transaction venues for security-based
swaps, subjecting these entities to regulation and oversight by the
SEC.\1374\ For example, The SEC has noted that the intent of the
proposed rules concerning standards for clearing agency operations and
governance standards of clearing agencies is to promote the prompt and
accurate clearance and settlement of securities transactions, including
security-based swap transactions, by

requiring certain minimum standards at clearing agencies.\1375\ The SEC
stated that it preliminarily believes that these requirements would
ensure resilient and cost-effective clearing agency operations as well
as promote transparent and effective clearing agency governance that
would consequently support confidence among market participants in
clearing agencies' ability to serve as efficient mechanisms for
clearance and settlement and to facilitate capital formation.\1376\
---------------------------------------------------------------------------

    \1374\ See supra part XI.A.3.
    \1375\ See Clearing Agency Standards Proposing Release, at
14535.
    \1376\ Id.
---------------------------------------------------------------------------

    Similarly, the SEC has previously stated that the core principles,
duties, and requirements imposed by Title VII and the proposed rules on
SB SEFs will foster innovation in the security-based swap market by
allowing entities that seek to become SB SEFs to structure diverse
platforms for the trading of security-based swaps,\1377\ increase pre-
trade price transparency, and establish fair, objective, and not
unreasonably discriminatory standards for granting impartial access to
trading on the SB SEFs,\1378\ thereby furthering higher efficiency,
promoting competition, and encouraging capital formation.\1379\ The SEC
also noted that any resulting increase in market integrity proceeding
from the rules intended to support the statutorily-mandated regulatory
obligations of SB SEFs would likely increase market participants'
confidence in the soundness and fairness of the security-based swap
market.\1380\ Such increased confidence likely would stimulate
financial investment in SB swaps by corporate entities and others that
may find that more transparent venues for the trading of SB swaps would
allow them to purchase SB swaps to offset business risks and to meet
hedging objectives.\1381\ Further, to the extent that market
participants utilize SB swaps to better manage portfolio risks with
respect to positions in underlying securities, the extent that they are
willing to participate in the SB swap market may impact their
willingness to participate in the underlying asset's market.\1382\
Therefore, the Commission stated its preliminary belief that the
proposed rules would help encourage capital formation.\1383\
---------------------------------------------------------------------------

    \1377\ See SB SEF Proposing Release, at 11049.
    \1378\ Id.
    \1379\ Id. at 11049-50.
    \1380\ Id. at 11049.
    \1381\ Id.
    \1382\ Id. at 11050.
    \1383\ Id.
---------------------------------------------------------------------------

    Furthermore, in the proposing release regarding SDRs, \1384\ the
SEC noted that, by allowing multiple SDRs to provide data collection,
maintenance, and recordkeeping services, the rules are intended to
promote competition among SDRs. The SEC also stated that the proposed
rules promote data collection, maintenance, and recordkeeping according
to existing best practices that are used in similar capital market
institutions and are likely to positively affect transparency in credit
markets and would help capital formation in the broader capital markets
whose participants rely on security-based swap markets to meet their
hedging objectives.\1385\
---------------------------------------------------------------------------

    \1384\ See SDR Proposing Release, at 77365.
    \1385\ Id.
---------------------------------------------------------------------------

    Other parties to security-based swap transactions may be affected
by the definitions as well. Title VII amends the Exchange Act and the
Securities Act to include security-based swap within the definition of
the term ``security.'' \1386\ End-users will have the benefit and
protection of the existing Federal securities laws, including the
Exchange Act and Securities Act provisions added by Title VII. As a
result of the amendment to the Securities Act regarding security-based
swap transactions entered into by issuers of the securities underlying
the security-based swap, and their affiliates and underwriters,\1387\
such issuers, affiliates, and underwriters cannot use security-based
swaps without also complying with the Securities Act provisions with
respect to the underlying securities. Furthermore, Title VII provides
protections to non-ECPs by adding provisions to both the Securities Act
and the Exchange Act that require security-based swap transactions with
such non-ECPs to be covered by an effective registration statement
under the Securities Act and traded on a national securities exchange,
and for brokers and dealers engaging in transactions with non-ECPs to
be registered as such under section 15 of the Exchange Act. To the
extent counterparties, including issuers of the underlying securities,
or their affiliates or underwriters, determine to engage in such
transactions, other counterparties may have a greater willingness to
engage in such transactions because of the protections afforded by the
Securities Act registration, disclosure, and civil liability scheme. An
increased interest by end-users may create effects on competition.
---------------------------------------------------------------------------

    \1386\ See section 2(a)(1) of the Securities Act and section
3(a)(10) of the Exchange Act, 15 U.S.C. 77b(a)(1) and 15 U.S.C.
78c(a)(10).
    \1387\ See supra part XI.A.3.
---------------------------------------------------------------------------

    While other securities-related derivatives have the same
limitations on issuers, affiliates, and underwriters using the
derivative to avoid the Securities Act application to the underlying
securities at the time the transaction is entered into, these other
derivatives, such as security options and security futures, do not
contain the same limitation on transactions with non-ECPs. Although
security options and security futures must be traded on a national
securities exchange as one condition to avail themselves of an
exemption from registration under the Securities Act,\1388\ other
exemptions from registration under the Securities Act may be available
for transactions in security options sold to non-ECPs that are not
available to security-based swap transactions with non-ECPs.
---------------------------------------------------------------------------

    \1388\ See section 3(a)(14) of the Securities Act and Rule 238
under the Securities Act.
---------------------------------------------------------------------------

    There also may be effects on efficiency and capital formation by
facilitating end-users' use of security-based swaps for investment or
hedging of risks relating to investments or business operations,
thereby affecting liquidity and costs in connection with the issuance
of equity and debt securities. The further definitions may promote
capital formation by facilitating these hedging and investment
activities. For example, in the context of CDS, as credit risk is
correlated, lenders who made loans and investors in debt securities may
find it desirable to hedge credit risks on their loan or securities
portfolios by purchasing protection through single-name or index
CDS.\1389\ Although basis risk may exist in this type of trade, it
should be effective at reducing counterparty exposure.\1390\
---------------------------------------------------------------------------

    \1389\ See Entity Definitions Release, at 30742.
    \1390\ Id.
---------------------------------------------------------------------------

(b) Jurisdictional Divide Impacts
    There may be competitive impacts that arise due to the
jurisdictional divide between the CFTC and the SEC that Congress
imposed in Title VII. While the competitive impacts of the substantive
rules will be addressed as part of each substantive rulemaking, the SEC
acknowledges that such competitive effects may exist as a consequence
of the statutory jurisdictional divide. These competitive impacts may
arise due to capital and margin treatment, for example, which may
affect demand for security-based swaps as compared to other types of
security instruments. In addition, to the extent there are differences
in regulatory treatment between security-based swaps

and other securities-based or securities-related instruments, there
will be competition across the markets affecting all market
participants.
    As one example of the possible competitive effects of the
jurisdictional divide, section 3E(a) of the Exchange Act provides that
only a registered broker, dealer, or security-based swap dealer may
accept margin from customers to secure cleared security-based swap
transactions,\1391\ and that the broker, dealer, or security-based swap
dealer shall treat and deal with all margin received from a customer as
belonging to the customer.\1392\ Similarly, section 4d(f) of the
Commodity Exchange Act requires that only a registered futures
commission merchant may accept margin from customers to secure cleared
swap transactions \1393\ and that the futures commissions merchant
shall treat and deal with margin received from a customer as belonging
to the customer.\1394\ The SEC understands that many members of
clearing agencies are dually-registered broker-dealers and futures
commission merchants and that much of the clearing of security-based
swaps may occur through such dually-registered entities.\1395\ Because
collateral for swaps and security-based swaps are required under
applicable statutory requirements to be maintained in two separate
accounts under the CEA and Exchange Act, respectively, the derivatives
portfolio of a customer will be separated into a swap portfolio and a
security-based swap portfolio, with two separate margin accounts and
without the benefits of netting swaps against security-based swaps for
purposes of calculating margin requirements. Absent the adoption of a
margin and segregation approach that would permit a customer to hold
both swaps and security-based swaps in a single customer account, a
customer who clears swaps and security-based swaps through a clearing
member who is dually-registered as a futures commission merchant with
the CFTC and a broker-dealer with the SEC may have to deliver
collateral to the clearing member with respect to the customer's
cleared swap portfolio and also deliver collateral as margin to the
clearing member with respect to its security-based swap portfolio even
if the positions in the swap portfolio offset the risk arising from the
positions in the security-based swap portfolio. This will impact
customers' liquidity, as opposed to holding swap and security-based
swap positions in one single account,\1396\ and increase customers'
transaction costs. Such an increase will affect customers' ability to
use security-based swaps and may drive them to seek less expensive
alternatives. Decrease in demand for security-based swaps may increase
dealer competition in the security-based swap market for the remaining
business, or result in dealers exiting the market.
---------------------------------------------------------------------------

    \1391\ See section 3E(a) of the Exchange Act, 15 U.S.C. 78c-
5(a).
    \1392\ See section 3E(b)(1) of the Exchange Act, 15 U.S.C. 78c-
5(b)(1).
    \1393\ See section 4d(f)(1) of the CEA, 7 U.S.C. 6d(f)(1).
    \1394\ See section 4d(f)(2)(A) of the CEA, 7 U.S.C. 6d(f)(2)(A).
    \1395\ See, e.g., letter to the SEC from ICE Clear Credit LLC,
dated November 7, 2011 (``ICE Clear Credit Letter''), available at
http://www.sec.gov/rules/petitions/2011/petn4-641.pdf (requesting
exemptive relief from the application of section 15(c)(3) of the
Exchange Act and Rule 15c3-3 thereunder to allow ICE Clear Credit,
and its members that are dually-registered broker-dealers and
futures commission merchants, to, among other things: (1) Hold
customer assets used to margin, secure, or guarantee customer
positions consisting of cleared credit default swaps that include
swaps and security-based swaps in a commingled customer omnibus
account subject to section 4d(f) of the CEA; and (2) calculate
margin for this commingled customer account on a portfolio margin
basis); see also section 4d(F)(1) of the CEA (making it unlawful for
any person to, among other things, accept money and securities from
a swaps customer for a cleared swap unless such person has
registered with the CFTC as a futures commission merchant).
    \1396\ See ICE Clear Credit Letter at 6, 13-14. See also
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, 77 FR 35625 n.138
(June 14, 2012).
---------------------------------------------------------------------------

    In addition, there may be competitive impacts on security-based
swap dealers, major security-based swap participants, clearing
agencies, security-based swap data repositories and security-based swap
execution facilities (or national securities exchanges) if they provide
services for both security-based swaps and swaps, as their businesses
will be divided based on the jurisdictional line between swaps and
security-based swaps. For registered entities whose derivatives
activities involve products that reference indexes or baskets, they
will incur assessment costs \1397\ and, to the extent that SEC and CFTC
regulations diverge, they will incur additional regulatory compliance
costs \1398\ to implement two sets of regulations that would not
otherwise be incurred if the jurisdictional divide did not exist. The
SEC recognizes that these costs may affect existing market
participants' considerations whether to continue to operate their
business, and new entrants' desire to enter into new business, across
two separate regulatory regimes and if they determine that the
incremental costs of operating the derivatives business under two
separate regulatory regimes would outweigh potential revenues, they may
exit certain products to limit the application of regulatory
requirements to solely those of the CFTC or the SEC. This could result
in a redistribution of the swaps or security-based swaps dealing
activity in the derivatives market and lead to further concentration of
security-based swap dealing activity.
---------------------------------------------------------------------------

    \1397\ See the discussion of assessment costs of various rules
and interpretations, supra part XI.A.4.
    \1398\ See supra parts XI.A.3and XI.A.4.
---------------------------------------------------------------------------

    The SEC understands that Congress intended to create two parallel
regulatory regimes for the derivatives market that complement each
other. Each regulatory regime will have the benefit of the regulatory
expertise of the respective agency. The rules further defining swap,
security-based swap, and mixed swap do not by themselves create
negative competitive impacts other than those which potentially could
be imposed if the Commissions' substantive requirements differ
substantially.
    Finally, the rules being adopted may have effects on efficiency and
capital formation. For example, the rules defining the terms ``issuers
of securities in a narrow-based security index'' and ``narrow-based
security index'' for purposes of the jurisdictional divide are intended
to, among other things, minimize the likelihood that an index on which
a CDS is based that is outside of the SEC's jurisdiction can be used as
a surrogate or substitute for the underlying security, or with respect
to securities of the referenced issuer, or to manipulate the market for
such securities. Such provisions will provide greater protection to the
reference issuers or the issuers of the securities in the index that
the index CDS cannot be used in a manner that will adversely affect
such issuers and their ability to raise capital.
    In conclusion, the SEC believes the rules and interpretations
adopted here would not have overall adverse effects on efficiency,
competition, or capital formation.

B. Paperwork Reduction Act

1. Background
    Rules 3a68-2 and 3a68-4(c) under the Exchange Act contain new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995.\1399\ The SEC has submitted them to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\1400\ The titles

for the collections of information are: (1) Interpretation of Swaps,
Security-Based Swaps, and Mixed Swaps and (2) Regulation of Mixed
Swaps: Process for determining regulatory treatment for mixed swaps
(OMB Control No. 3235-0685). An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \1399\ 44 U.S.C. 3501 et seq.
    \1400\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    The rules containing these two collections of information are being
adopted pursuant to the Exchange Act. The rules establish a process
through which a person can submit a request to the Commissions that the
Commissions provide a joint interpretation of whether an agreement,
contract, or transaction (or class thereof) is a swap, security-based
swap, or both (i.e., a mixed swap). The rules also establish a process
with respect to mixed swaps through which a person can submit a request
to the Commissions that the Commissions issue a joint order permitting
the requesting person (and any other person or persons that
subsequently lists, trades, or clears that class of mixed swap) to
comply, as to parallel provisions only, with specified parallel
provisions, instead of being required to comply with parallel
provisions of both the CEA and the Exchange Act. The hours and costs
associated with preparing and sending these requests will constitute
reporting and cost burdens imposed by each collection of information.
    In the Proposing Release, the SEC requested comment on the
collection of information requirements.\1401\ As discussed in
connection with rules 3a68-2 and 3a68-4(c) under the Exchange Act,
under the Exchange Act the final rules require the same information to
be collected as proposed.\1402\ As noted above, the Commissions
received approximately 86 comment letters on the Proposing
Release.\1403\ The SEC did not receive any comments that directly
address its Paperwork Reduction Act analysis or its burden estimates.
However, the SEC did receive comments regarding confidentiality of
information submitted as a result of the collection of information
requirements. These comments do not directly address the SEC's
Paperwork Reduction Act analysis, but they do implicate those aspects
of the analysis regarding confidentiality. These comments are discussed
below.\1404\
---------------------------------------------------------------------------

    \1401\ See Proposing Release at 29877, 29879.
    \1402\ See discussion of rules 3a68-2 and 3a68-4(c) supra parts
VI and IV.B.3.
    \1403\ See supra part I.
    \1404\ See infra part XI.B.3.
---------------------------------------------------------------------------

2. Summary of Collection of Information Under Rules 3a68-2 and 3a68-
4(c) Under the Exchange Act
    First, the SEC is adopting new rule 3a68-2 under the Exchange Act,
which will allow persons to submit a request for a joint interpretation
from the Commissions regarding whether an agreement, contract, or
transaction (or a class thereof) is a swap, security-based swap, or
both (i.e., a mixed swap). Under rule 3a68-2 under the Exchange Act, a
person will provide to the Commissions all material information
regarding the terms of, and a statement of the economic characteristics
and purpose of, each relevant agreement, contract, or transaction (or
class thereof), along with that person's determination as to whether
each such agreement, contract, or transaction (or class thereof) should
be characterized as a swap, security-based swap, or both (i.e., a mixed
swap), including the basis for such a determination. The Commissions
also may request the submitting person to provide additional
information.
    The Commissions may issue in response a joint interpretation or
joint notice of proposed rulemaking regarding the status of that
agreement, contract, or transaction (or class thereof) as a swap,
security-based swap, or both (i.e., a mixed swap). Any joint
interpretation, like any joint notice of proposed rulemaking, will be
public and may discuss the material information regarding the terms of
the relevant agreement, contract, or transaction (or class thereof), as
well as any other information the Commissions deem material to the
interpretation. Requesting persons also will be permitted to withdraw a
request made pursuant to rule 3a68-2 under the Exchange Act at any time
before the Commissions have issued a joint interpretation or joint
notice of proposed rulemaking in response to the request.
    Persons will submit requests pursuant to rule 3a68-2 under the
Exchange Act on a voluntary basis. However, if a person submits a
request, all of the information required under the rule, including any
additional information requested by the Commissions, must be submitted
to the Commissions, except to the extent a person withdraws the request
pursuant to the rule.
    Second, the SEC is adopting rule 3a68-4(c) under the Exchange Act,
which will allow persons to submit requests to the Commissions for
joint orders regarding the regulation of a particular mixed swap (or
class thereof). Under rule 3a68-4(c) under the Exchange Act, a person
will provide to the Commissions all material information regarding the
terms of, and the economic characteristics and purpose of, the
specified (or specified class of) mixed swap. In addition, a person
will provide the specified parallel provisions, the reasons the person
believes such specified parallel provisions are appropriate for the
mixed swap (or class thereof), and an analysis of: (1) The nature and
purposes of the parallel provisions that are the subject of the
request; (2) the comparability of such parallel provisions; and (3) the
extent of any conflicts or differences between such parallel
provisions. The Commissions also may request the submitting person to
provide additional information.
    The Commissions may issue in response a joint order, after public
notice and opportunity for comment, permitting the requesting person
(and any other person or persons that subsequently lists, trades, or
clears that class of mixed swap) to comply, as to parallel provisions
only, with the specified parallel provisions (or another subset of the
parallel provisions that are the subject of the request, as the
Commissions determine is appropriate), instead of being required to
comply with parallel provisions of both the CEA and the Exchange Act.
Any joint order will be public and may discuss the material information
regarding the terms of the relevant agreement, contract, or transaction
(or class thereof), as well as any other information the Commissions
deem material to the interpretation. Requesting persons also will be
permitted to withdraw a request made pursuant to rule 3a68-4(c) under
the Exchange Act at any time before the Commissions have issued a joint
order in response to the request.
    Persons will submit requests pursuant to rule 3a68-4(c) under the
Exchange Act on a voluntary basis. However, if a person submits a
request, all of the information required under the rule, including any
additional information requested by the Commissions, must be submitted
to the Commissions, except to the extent a person withdraws the request
pursuant to the rule.
3. Reasons for and Use of Information
    The SEC will use the information collected pursuant to rule 3a68-2
under the Exchange Act to evaluate agreements, contracts, or
transactions (or classes thereof) in order to provide joint
interpretations or joint notices of

proposed rulemaking with the CFTC regarding whether these agreements,
contracts, or transactions (or classes thereof) are swaps, security-
based swaps, or both (i.e., mixed swaps) as defined in the Dodd-Frank
Act. The SEC will use the information collected pursuant to rule 3a68-
4(c) under the Exchange Act to evaluate a specified, or a specified
class of, mixed swap in order to provide joint orders or joint notices
of proposed rulemaking with the CFTC regarding the regulation of that
particular mixed swap or class of mixed swap. The information provided
to the SEC pursuant to rules 3a68-2 and 3a68-4(c) under the Exchange
Act also will allow the SEC to monitor the development of new OTC
derivatives products in the marketplace and determine whether
additional rulemaking or interpretive guidance is necessary or
appropriate.
    As discussed above, some commenters expressed concern about the
public availability of information regarding the joint interpretive
process and asked that the parties be able to seek confidential
treatment of their submissions.\1405\ As stated above, under existing
rules of both Commissions, requesting parties may seek confidential
treatment for joint interpretive requests from the SEC and the CFTC in
accordance with the applicable existing rules relating to confidential
treatment of information.\1406\ Also as stated above, even if
confidential treatment has been requested, all joint interpretive
requests, as well all joint interpretations and any decisions not to
issue a joint interpretation (along with the explanation of the grounds
for such decision), will be made publicly available at the conclusion
of the review period.\1407\
---------------------------------------------------------------------------

    \1405\ See supra part VI.
    \1406\ See 17 CFR 200.81 and 17 CFR 140.98. See also supra part
VI.
    \1407\ See supra part VI.
---------------------------------------------------------------------------

4. Respondents
    As discussed in the Proposing Release, the SEC believes that the
relevant categories of persons that will submit requests under rule
3a68-2 under the Exchange Act will be swap dealers, security-based swap
dealers, major swap participants, and major security-based swap
participants; SEFs, security-based SEFs and DCMs trading swaps; and
SDRs, SBSDRs, DCOs clearing swaps, and clearing agencies clearing
security-based swaps.\1408\ The SEC estimates that the total number of
such persons will be 475.\1409\ Similarly, the SEC believes that the
relevant categories of persons that will submit a request under rule
3a68-4(c) under the Exchange Act will be SEFs, security-based SEFs, and
DCMs trading swaps and estimates that the total number of such persons
will be 72.\1410\
---------------------------------------------------------------------------

    \1408\ See Proposing Release at 29876.
    \1409\ This total number includes an estimated 250 swap dealers,
50 major swap participants, 50 security-based swap dealers, 10 major
security-based swap participants, 35 SEFs, 20 security-based SEFs,
12 DCOs, 17 DCMs, 15 SDRs, 10 SBSDRs, and 6 clearing agencies, as
set forth by the CFTC and SEC, respectively, in their other Dodd-
Frank Act rulemaking proposals. See Entity Definitions Release,
supra note 12 (regarding security-based swap dealers and major
security-based swap participants); Registration of Swap Dealers and
Major Swap Participants, supra note 1288 (regarding swap dealers and
major security-based swap participants); SDR Proposing Release,
supra note 1231 (regarding SBSDRs); Swap Data Repositories, supra
note 6 (regarding SDRs); Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214, Jan. 7, 2011 (regarding
SEFs); Registration and Regulation of Security-Based Swap Execution
Facilities, 76 FR 10948, Feb. 28, 2011 (regarding security-based
SEFs); Derivatives Clearing Organization General Provisions and Core
Principles, 76 FR 69334 (Nov. 8, 2011); Core Principles and Other
Requirements for Designated Contract Markets, 75 FR 80572, Dec. 22,
2010 (regarding DCMs); Clearing Agency Standards for Operation and
Governance, 76 FR 14472, Mar. 16, 2011 (regarding clearing
agencies).
    \1410\ Id.
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    However, based on the SEC's experience and information received
from commenters to the ANPR \1411\ and during meetings with the public
to discuss the Product Definitions generally, and taking into
consideration the certainty provided by the rules and interpretive
guidance in this release, the SEC believes that the number of requests
for a joint interpretation to the Commissions pursuant to rule 3a68-2
under the Exchange Act will be small.\1412\ With respect to proposed
rule 3a68-4(c) under the Exchange Act, the SEC also estimates the
number of requests for joint orders will be small.\1413\ Pursuant to
the Commissions' rules and interpretive guidance, a number of persons
that engage in agreements, contracts, or transactions that are swaps,
security-based swaps, or both (i.e., a mixed swap) will be certain that
their agreements, contracts, or transactions are, indeed, swaps,
security-based swaps, or both, (i.e., mixed swaps) and will not request
an interpretation pursuant to rule 3a68-2 under the Exchange Act. Also,
as the Commissions provide joint interpretations regarding whether
agreements, contracts, or transactions (or classes thereof) are or are
not swaps, security-based swaps, or both (i.e., mixed swaps), the SEC
expects that the number of requests for interpretation will decrease
over time. The SEC believes that the rules and interpretive guidance
regarding swaps, security-based swaps, and mixed swaps the Commissions
are adopting, as well as the additional guidance issued pursuant to
joint interpretations and orders under rules 3a68-2 and 3a68-4(c) under
the Exchange Act, will result in a narrow pool of potential
respondents, approximately 50,\1414\ to the collection of information
requirements of proposed rule 3a68-2 under the Exchange Act. Although
the SEC does not have precise figures for the number of requests that
persons will submit after the first year, the SEC believes it is
reasonable to estimate that there likely will be fewer than 10 requests
on average in each ensuing year.
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    \1411\ See supra note 12 and accompanying text.
    \1412\ See infra note 1414 and accompanying text.
    \1413\ See infra note 1415 and accompanying text.
    \1414\ The SEC believes that there will be approximately 50
requests in the first year. See discussion infra part XI.B.5. The
SEC recognizes that one person might submit more than one request
but for purposes of the PRA is considering the submitter of each
such request as a separate person.
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    Similarly, because the SEC believes that both the category of mixed
swap transactions and the number of market participants that engage in
mixed swap transactions are small, the SEC believes that the pool of
potential persons requesting a joint order regarding the regulation of
a specified, or specified class of, mixed swap pursuant to proposed
rule 3a68-4(c) under the Exchange Act will be small. In addition,
depending on the characteristics of a mixed swap (or class thereof), a
person may choose not to submit a request pursuant to rule 3a68-4(c)
under the Exchange Act. The SEC also notes that any joint order issued
by the Commissions will apply to any person that subsequently lists,
trades, or clears that specified, or specified class of, mixed swap, so
that requests for joint orders could diminish over time. Also, persons
may submit requests for an interpretation under rule 3a68-4(c) under
the Exchange Act that do not result in an interpretation that the
agreement, contract, or transaction (or class thereof) is a mixed
swap.\1415\ Also, those requests submitted pursuant to rule 3a68-2
under the Exchange Act that result in an interpretation that the
agreement, contract, or transaction (or class thereof) is not a mixed
swap will reduce the pool of possible persons submitting a request
regarding the regulation of particular mixed swaps (or class thereof)
pursuant to rule 3a68-4(c) under the Exchange Act.
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    \1415\ The SEC believes it is reasonable to estimate that it
will receive 20 requests in the first year and, as with rule 3a68-2
under the Exchange Act, it will count the submitter of each request
as a separate person. See id.
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    Furthermore, although certain requests made pursuant to rule 3a68-

4(c) under the Exchange Act may be made without a previous request for
a joint interpretation pursuant to rule 3a68-2 under the Exchange Act,
the SEC believes that most requests under rule 3a68-2 under the
Exchange Act that result in the interpretation that an agreement,
contract, or transaction (or class thereof) is a mixed swap will result
in a subsequent request for alternative regulatory treatment pursuant
to rule 3a68-4(c) under the Exchange Act. The SEC believes that 90
percent, or 18 of the estimated 20 requests pursuant to rule 3a68-4(c)
under the Exchange Act in the first year would be such ``follow-on''
requests.
    In addition, not only the requesting party, but also any other
person that subsequently lists, trades, or clears that mixed swap, will
be subject to, and must comply with, the joint order regarding the
regulation of the specified, or specified class of, mixed swap, as
issued by the Commissions. Therefore, the SEC believes that the number
of requests for a joint order regarding the regulation of mixed swaps,
particularly involving specified classes of mixed swaps, will decrease
over time. As discussed above, the SEC believes that as the Commissions
provide joint orders regarding alternative regulatory treatment, the
number of requests received will decrease over time. The SEC believes
it is reasonable to estimate that there likely will be five requests on
average in each ensuing year.
5. Paperwork Reduction Act Burden Estimates
    Rules 3a68-2 and 3a68-4(c) under the Exchange Act require
submission of certain information to the Commissions to the extent
persons elect to request an interpretation and/or alternative
regulatory treatment. Rules 3a68-2 and 3a68-4(c) under the Exchange Act
each require certain information that a requesting party must include
in its request to the Commissions in order to receive a joint
interpretation or order, as applicable.
(a) Rule 3a68-2 Under the Exchange Act
    Rule 3a68-2 will apply only to requests made by persons that desire
an interpretation from the Commissions. For each agreement, contract,
or transaction (or class thereof) for which a person requests the
Commissions' joint interpretation under rule 3a68-2 under the Exchange
Act, the requesting person will be required to provide certain
information, as discussed above.\1416\
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    \1416\ See discussion supra part VI.
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    As discussed above, the SEC believes it is reasonable to estimate
that 50 requests will be received in the first year. For purposes of
the PRA, the SEC estimates the total paperwork burden associated with
preparing and submitting a person's request to the Commissions pursuant
to rule 3a68-2 under the Exchange Act will be 20 hours per request and
associated costs of $12,000 for outside professionals, which the SEC
believes will consist of services provided by attorneys.\1417\ These
total costs include all collection burdens associated with the rule,
including burdens related to the initial determination requirements.
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    \1417\ See discussion supra part XI.A.4.e(ii). This estimate is
based on information indicating that the average burden associated
with preparing and submitting a no-action request to the SEC staff
in connection with the identification of whether certain products
are securities, which the SEC believes is a process similar to the
process under rule 3a68-2 under the Exchange Act, is approximately
20 hours and associated costs of $12,000. Assuming these costs
correspond to legal fees, which the SEC estimates at an hourly cost
of $400, the SEC estimates that this cost is equivalent to
approximately 30 hours ($12,000/$400). The estimated internal or
company time burden for rule 3a68-2 under the Exchange Act has not
changed from that included in the Proposing Release, but the
estimated burden of the cost for outside professionals for rule
3a68-2 under the Exchange Act has been revised from that included in
the Proposing Release to reflect updated data regarding hourly costs
for the services of outside professionals. The estimate of the
dollar burden for rule 3a68-2 under the Exchange Act in the
Proposing Release was based on data from SIFMA's ``Management &
Professional Earnings in the Securities Industry 2009.'' See
Proposing Release at 29876, note 345. The hourly rate used to
estimate the PRA burdens is discussed above. See supra note 1344.
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    Assuming 50 requests in the first year, the SEC estimates that this
will result in an aggregate burden for the first year of 1000 hours of
company time (50 requests x 20 hours/request) and $600,000 for the
services of outside professionals (e.g., attorneys) (50 requests x 30
hours/request x $400). The estimated internal or company time burden
for rule 3a68-2 under the Exchange Act has not changed from that
included in the Proposing Release.\1418\ However, the estimated burden
of the cost for outside professionals for rule 3a68-2 under the
Exchange Act has been revised from that included in the Proposing
Release to reflect updated data regarding the hourly cost for an
attorney.\1419\
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    \1418\ See Proposing Release at 29876, 29877-78.
    \1419\ See id.
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    As discussed above, the SEC believes that there will be 10 requests
on average in each ensuing year, which results in an aggregate burden
in each ensuing year of 200 hours of company time (10 requests x 20
hours/request) and $120,000 for the services of outside professionals
(e.g., attorneys) (10 requests x 30 hours/request x $400).\1420\
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    \1420\ See discussion supra part XI.B.4.
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(b) Rule 3a68-4(c) Under the Exchange Act
    Rule 3a68-4(c) under the Exchange Act will require any party
requesting a joint order regarding the regulation of a specified, or
specified class of, mixed swap under the rule to include certain
information about the agreement, contract, or transaction (or class
thereof) that is a mixed swap, including the specified parallel
provisions that the person believes should apply to the mixed swap (or
class thereof), the reasons the person believes the specified parallel
provisions will be appropriate for the mixed swap.\1421\
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    \1421\ See discussion supra part IV.B.3.
---------------------------------------------------------------------------

    As discussed above, the SEC believes the number of requests that
persons will submit pursuant to rule 3a68-4(c) under the Exchange Act
is quite small given the limited types of agreements, contracts, and
transactions (or classes thereof) the Commissions believe will
constitute mixed swaps and that it will receive 20 requests in the
first year.\1422\ For purposes of the PRA, the SEC estimates the total
paperwork burden associated with preparing and submitting a party's
request to the Commissions pursuant to rule 3a68-4(c) under the
Exchange Act will be 30 hours and associated costs of $20,000 for the
services of outside professionals, which the SEC believes will consist
of services provided by attorneys,\1423\ per request for mixed swaps
for which a request for a joint interpretation pursuant to rule 3a68-
4(c) under the Exchange Act was not previously made.\1424\ These total
costs include all collection burdens associated with the rule,
including burdens related to the initial determination requirements.

Assuming 20 requests in the first year, the SEC estimates that this
will result in an aggregate burden for the first year of 600 hours of
company time (20 requests x 30 hours/request) and $400,000 for the
services of outside professionals (20 requests x 50 hours/request x
$400).\1425\
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    \1422\ See supra note 1415 and accompanying text.
    \1423\ See supra note 1352.
    \1424\ This estimate is based on information indicating that the
average burden associated with preparing and submitting a no-action
request to the SEC staff in connection with the regulatory treatment
of certain securities products, which the SEC believes is a process
similar to the process under rule 3a68-4(c) under the Exchange Act,
is approximately 30 hours and associated costs of $20,000. Assuming
these costs correspond to legal fees, which the SEC estimates at an
hourly cost of $400 as discussed above, the SEC estimates that this
cost is equivalent to approximately 50 hours ($20,000/$400). As with
rule 3a68-2 under the Exchange Act, the estimated internal or
company time burdens for rule 3a68-4(c) under the Exchange Act have
not changed from those included in the Proposing Release, but the
estimated burdens of the cost for outside professionals for rule
3a68-4(c) under the Exchange Act have been revised from those
included in the Proposing Release to reflect updated data regarding
hourly costs for the services of outside professionals.
    \1425\ See supra note 1415 and accompanying text.
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    As discussed above, the SEC believes that most requests under rule
3a68-2 under the Exchange Act that result in the interpretation that an
agreement, contract, or transaction (or class thereof) is a mixed swap
will result in a subsequent request for alternative regulatory
treatment pursuant to rule 3a68-4(c) under the Exchange Act.
    Also as discussed above, the SEC believes that 90 percent, or 18 of
the estimated 20 requests pursuant to rule 3a68-4(c) under the Exchange
Act in the first year, as discussed above will be ``follow-on''
requests. For mixed swaps for which a request for a joint
interpretation pursuant to rule 3a68-2 under the Exchange Act was
previously made, the SEC estimates the total paperwork burden under the
PRA associated with preparing and submitting a party's request to the
Commissions pursuant to rule 3a68-4(c) under the Exchange Act will be
10 hours fewer and $6,000 less per request than for mixed swaps for
which a request for a joint interpretation pursuant to rule 3a68-2
under the Exchange Act was not previously made because certain,
although not all, of the information required to be submitted and
necessary to prepare pursuant to rule 3a68-4(c) under the Exchange Act
will have been required to be submitted and necessary to prepare
pursuant to rule 3a68-2 under the Exchange Act.\1426\ The SEC estimates
that this will result in an aggregate burden for such ``follow-on''
requests in the first year of 360 hours of company time (18 requests x
20 hours/request) and $252,000 for the services of outside
professionals (18 requests x 35 hours/request x $400) and an aggregate
burden for all requests in the first year of 420 hours of company time
(2 requests x 30 hours/request and 18 requests x 20 hours/request) and
$292,000 for the services of outside professionals (2 requests x 50
hours/request x $400 and 18 requests x 35 hours/request x $400).
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    \1426\ This estimate takes into account that certain information
regarding the mixed swap (or class thereof), namely the material
terms and the economic purpose, will have already been gathered and
prepared as part of the request submitted pursuant to proposed rule
3a68-2 under the Exchange Act. The SEC estimates that these items
constitute approximately 10 hours fewer and a reduction in
associated costs of $6,000. Assuming these costs correspond to legal
fees, which the SEC estimates at an hourly cost of $400, the SEC
estimates that this cost is equivalent to approximately 15 hours
($6,000/$400). As noted above, these amounts are revised from those
included in the Proposing Release to reflect updated data regarding
the hourly costs for the services of outside professionals.
---------------------------------------------------------------------------

    The estimated internal or company time burden for rule 3a68-4(c)
under the Exchange Act has not changed from that included in the
Proposing Release.\1427\ However, the estimated burden of the cost for
outside professionals for rule 3a68-4(c) has been revised from that
included in the Proposing Release to reflect updated data regarding the
hourly cost for an attorney.\1428\
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    \1427\ See Proposing Release at 29876, 29878-79.
    \1428\ See id.
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    As discussed above, the SEC believes that there will be five
requests on average in each ensuing year. Assuming five requests in
each ensuing year, the SEC estimates that this will result in an
aggregate burden in each ensuing year of 150 hours of company time (5
requests x 30 hours/request) and $100,000 for the services of outside
professionals (5 requests x 50 hours/request x $400). As discussed
above, however, assuming that approximately 90 percent, or 4 of the
estimated 5 requests pursuant to rule 3a68-4(c) under the Exchange Act
in each ensuing year are ``follow-on'' requests to requests for joint