aggregate risks presented by a person's security-based swap activity,
as these considerations reflect the market risk concerns expressly
identified in the statute.\118\
---------------------------------------------------------------------------

    \115\ See Intermediary Definitions Adopting Release, 77 FR
30663-84.
    \116\ See id.
    \117\ Id. at 30666.
    \118\ See id. We defined ``substantial counterparty exposure''
in a similar manner, noting the focus of the statutory test on
``serious adverse effects on financial stability or financial
markets.'' Id. at 30683. Cf. Section 3(a)(67)(A)(ii)(II) of the
Exchange Act (encompassing in major security-based swap participant
definition persons whose ``outstanding security-based swaps create
substantial counterparty exposure that could have serious adverse
effects on the financial stability of the United States banking
system or financial markets'').
---------------------------------------------------------------------------

    The statutory focus of the major security-based swap participant
definition differs from that of security-based swap dealer, in that the
security-based swap dealer definition focuses on activity that may
raise the concerns that dealer regulation is intended to address, while
the major security-based swap participant definition focuses on
positions that may raise systemic risk concerns within the United
States. Accordingly, a territorial approach to application of the
definition of major security-based swap participant involves
identifying security-based swap positions that exist within the United
States.\119\ In our view, and consistent with the approach taken in our
proposal, a security-based swap position exists within the United
States when it is held by or with a U.S. person, or when it is subject
to a recourse guarantee against a U.S. person,\120\ as the risks
associated with such positions are borne within the United States, and
given the involvement of U.S. persons may, at the thresholds
established for the major security-based swap participant definition,
give rise to the types of systemic risk within the United States that
major security-based swap regulation is intended to address. To the
extent that a position exists within the United States in this sense,
we believe that it is appropriate under a territorial approach to
require a market participant, whether a U.S. person or otherwise, that
is a counterparty or guarantor with respect to that position, to
include that position in its major security-based swap participant
threshold calculations, wherever the security-based swap was entered
into.
---------------------------------------------------------------------------

    \119\ Cf. Morrison, 130 S. Ct. at 2884 (performing a textual
analysis to identify the focus of the statute).
    \120\ The economic reality of a position subject to such a
guarantee, even though entered into by a non-U.S. person, is
substantially identical in relevant respects to a position entered
into directly by the U.S. guarantor. See section 0, supra.
---------------------------------------------------------------------------

(d) Regulations Necessary or Appropriate To Prevent Evasion of Title
VII
    Consistent with our proposal, we interpret section 30(c) of the
Exchange Act as not requiring us to find that actual evasion has
occurred or is occurring to invoke our authority to reach activity
``without the jurisdiction of the United States'' or to limit
application of Title VII to security-based swap activity ``without the
jurisdiction of the United States'' only to business that is transacted
in a way that is purposefully intended to evade Title VII. Section
30(c) of the Exchange Act authorizes the Commission to apply Title VII
to persons transacting a business ``without the jurisdiction of the
United States'' if they contravene rules that the Commission has
prescribed as ``necessary or appropriate to prevent the evasion of any
provision'' of Title VII. The focus of this provision is not whether
such rules impose Title VII requirements only on entities engaged in
evasive activity but whether the rules are generally ``necessary or
appropriate'' to prevent potential evasion of Title VII. In other
words, section 30(c) of the Exchange Act permits us to impose
prophylactic rules intended to prevent possible purposeful evasion,
even though such rules may affect or prohibit some non-evasive conduct.
Moreover, exercising the section 30(c) authority does not require us to
draw a distinction

between conduct ``without the jurisdiction of the United States'' that
is purposely evasive as opposed to identical conduct that was motivated
by some non-evasive purpose. Indeed, to interpret section 30(c)
authority otherwise could create a bifurcated regulatory regime where
the same conduct is treated differently based on parties' underlying
purpose for engaging in it, which could create extraordinary oversight
challenges involving difficult subjective considerations concerning
parties' true intentions in entering any given transaction or
establishing particular business structures, and could create
significant competitive advantages for incumbent firms.\121\ Thus, we
read the statute to permit us to prescribe such rules to conduct
without the jurisdiction of the United States, even if those rules
would also apply to a market participant that has been transacting
business through a pre-existing market structure, such as a foreign
branch or foreign affiliate whose positions are guaranteed by the
market participant, established for valid business purposes, provided
the proposed rule or guidance is designed to prevent possibly evasive
conduct.\122\
---------------------------------------------------------------------------

    \121\ Such an interpretation of our anti-evasion authority, for
example, could privilege incumbent firms by allowing them to
leverage existing business models that may not be available to new
entrants under rules promulgated pursuant to that authority.
    \122\ As a general matter, the final rules adopted in this
release are not being applied to persons who are ``transacting a
business in security-based swaps without the jurisdiction of the
United States'' within the meaning of section 30(c) of the Exchange
Act. See sections 0-(c), supra. However, as noted below, the
Commission also believes that these rules are necessary or
appropriate as a prophylactic measure to help prevent the evasion of
the provisions of the Exchange Act that were added by the Dodd-Frank
Act and thus help ensure that the particular purposes of the Dodd-
Frank Act addressed by the rule are not undermined. See, e.g.,
section 0 and note 186, infra.
---------------------------------------------------------------------------

C. Principles Guiding Final Approach To Applying ``Security-Based Swap
Dealer'' and ``Major Security-Based Swap Participant'' Definitions in
the Cross-Border Context

    As in our proposal, our final rules and guidance reflect our
careful consideration of the global nature of the security-based swap
market and the types of risks created by security-based swap activity
to the U.S. financial system and market participants and other concerns
that the dealer and major security-based swap participant definitions
were intended to address, as well as the needs of a well-functioning
security-based swap market.\123\ We also have been guided by the
purpose of Title VII \124\ and the applicable requirements of the
Exchange Act, including the following:
---------------------------------------------------------------------------

    \123\ See section 0, supra.
    \124\ See note 11, supra.
---------------------------------------------------------------------------

     Economic Impacts--The Exchange Act requires the Commission
to consider the impact of our rulemakings on efficiency, competition,
and capital formation.\125\
---------------------------------------------------------------------------

    \125\ Specifically, section 3(f) of the Exchange Act provides:
``Whenever pursuant to this title the Commission is engaged in
rulemaking, . . . , and is required to consider or determine whether
an action is necessary or appropriate in the public interest, the
Commission shall also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation.'' Section 23(a)(2) of the Exchange Act also
provides: ``The Commission . . . , in making rules and regulations
pursuant to any provisions of this title, shall consider among other
matters the impact any such rule or regulation would have on
competition. The Commission . . . shall not adopt any such rule or
regulation which would impose a burden on competition not necessary
or appropriate in furtherance of the purposes of [the Exchange
Act].''
---------------------------------------------------------------------------

     Counterparty Protection--The Dodd-Frank Act adds
provisions to the Exchange Act relating to counterparty protection,
particularly with respect to ``special entities.'' \126\
---------------------------------------------------------------------------

    \126\ See Exchange Act section 15F(h), as added by section
764(a) of the Dodd-Frank Act, in particular.
---------------------------------------------------------------------------

     Transparency--The Dodd-Frank Act was intended to promote
transparency in the U.S. financial system.\127\
---------------------------------------------------------------------------

    \127\ See note 11, supra.
---------------------------------------------------------------------------

     Risk to the U.S. Financial System--The Dodd-Frank Act was
intended to promote, among other things, the financial stability of the
United States by limiting/mitigating risks to the financial
system.\128\
---------------------------------------------------------------------------

    \128\ Id.
---------------------------------------------------------------------------

     Anti-Evasion--The Dodd-Frank Act amends the Exchange Act
to provide the Commission with authority to prescribe rules and
regulations as necessary or appropriate to prevent the evasion of any
provision of the Exchange Act that was added by the Dodd-Frank
Act.\129\
---------------------------------------------------------------------------

    \129\ See Exchange Act section 30(c), 15 U.S.C. 78dd(c), as
discussed in section 0, supra.
---------------------------------------------------------------------------

     Consultation and Coordination with Other U.S. Regulators--
In connection with implementation of Title VII, the Dodd Frank Act
requires the Commission to consult and coordinate with the CFTC and
prudential regulators for the purpose of ensuring ``regulatory
consistency and comparability, to the extent possible.'' \130\
---------------------------------------------------------------------------

    \130\ See section 712(a)(2) of the Dodd-Frank Act.
---------------------------------------------------------------------------

     Consistent International Standards--To promote effective
and consistent global regulation of swaps and security-based swaps, the
Dodd-Frank Act requires the Commission and the CFTC to consult and
coordinate with foreign regulatory authorities on the ``establishment
of consistent international standards'' with respect to the regulation
of swaps and security-based swaps.\131\ In this regard, the Commission
recognizes that regulators in other jurisdictions are currently engaged
in implementing their own regulatory reforms of the OTC derivatives
markets and that our application of Title VII to cross-border
activities may affect the policy decisions of these other regulators as
they seek to address potential conflicts or overlaps in the regulatory
requirements that apply to market participants under their
authority.\132\
---------------------------------------------------------------------------

    \131\ See section 752(a) of the Dodd-Frank Act.
    \132\ For example, subjecting non-U.S. persons to Title VII may
prompt a foreign jurisdiction to respond by subjecting U.S. persons
to the foreign jurisdiction's regulatory regime.
---------------------------------------------------------------------------

    At times, these principles reinforce one another; at other times,
they may be in tension. For instance, regulating risk posed to the
United States may, depending on the final rules, make it more costly
for U.S.-based firms to conduct security-based swap business,
particularly in foreign markets, compared to foreign firms; it could
make foreign firms less willing to deal with U.S. persons; and it could
discourage foreign firms from carrying out security-based swap dealing
activity through branches or offices located in the United States. On
the other hand, providing U.S. persons greater access to foreign
security-based swap markets may, depending on the final rules, fail to
appropriately address the risks posed to the United States from
transactions conducted in part outside the United States or create
opportunities for market participants to evade the application of Title
VII, particularly until such time as other jurisdictions adopt similar
comprehensive and comparable derivative regulations.
    Balancing these sometimes competing principles has been complicated
by the fact that Title VII imposes a new regulatory regime in a global
marketplace. Title VII establishes reforms that will have implications
for entities that compete internationally in the global security-based
swap market. We have generally sought, in accordance with the statutory
factors described above, to avoid creating opportunities for market
participants to evade Title VII requirements, whether by restructuring
their business or other means, or the potential for overlapping or
conflicting regulations. We also have considered the needs for a well-
functioning security-based swap market and for avoiding disruption that
may reduce liquidity, competition, efficiency, transparency, or
stability in the security-based swap market.

III. Baseline

    To assess the economic impact of the final rules described in this
release, we are using as our baseline the security-based swap market as
it exists at the time of this release, including applicable rules we
have already adopted but excluding rules that we have proposed but not
yet finalized.\133\ The analysis includes the statutory and regulatory
provisions that currently govern the security-based swap market
pursuant to the Dodd-Frank Act.\134\ We acknowledge limitations in the
degree to which we can quantitatively characterize the current state of
the security-based swap market. As we describe in more detail below,
because the available data on security-based swap transactions do not
cover the entire market, we have developed an understanding of market
activity using a sample that includes only certain portions of the
market.
---------------------------------------------------------------------------

    \133\ We also consider, where appropriate, the impact of rules
and technical standards promulgated by other regulators, such as the
CFTC and the European Securities and Markets Authority, on practices
in the security-based swap market.
    \134\ As noted above, we have not yet adopted other substantive
requirements of Title VII that may affect how firms structure their
security-based swap business and market practices more generally.
---------------------------------------------------------------------------

A. Current Security-Based Swap Market

    Our analysis of the state of the current security-based swap market
is based on data obtained from DTCC-TIW, especially data regarding the
activity of market participants in the single-name CDS market during
the period from 2008 to 2012. While other repositories may collect data
on transactions in total return swaps on equity and debt, we do not
currently have access to such data for these products (or other
products that are security-based swaps). We have previously noted that
the definition of security-based swaps is not limited to single-name
CDS but we believe that the single-name CDS data are sufficiently
representative of the market and therefore can directly inform the
analysis of the state of the current security-based swap market.\135\
Additionally, the data for index CDS encompass both broad-based
security indices and narrow-based security indices, and ``security-
based swap'' in relevant part encompasses swaps based on single
securities or reference entities or on narrow-based security indices.
Accordingly, with the exception of the analysis regarding the degree of
overlap between participation in the single-name CDS market and the
index CDS market (cross-market activity), our analysis below does not
include data regarding index CDS.
---------------------------------------------------------------------------

    \135\ According to data published by the Bank for International
Settlements (``BIS''), the global notional amount outstanding in
equity forwards and swaps as of June 2013 was $2.32 trillion. The
notional amount outstanding in single-name CDS was approximately
$13.14 trillion, in multi-name index CDS was approximately $10.17
trillion, and in multi-name, non-index CDS was approximately $1.04
trillion. See Semi-annual OTC derivatives statistics at end-June
2013 (Nov. 2013), Table 19, available at: http://www.bis.org/statistics/dt1920a.pdf. As we stated in the Cross-Border Proposing
Release, for the purposes of this analysis, we assume that multi-
name index CDS are not narrow-based index CDS and therefore, do not
fall within the security-based swap definition. See Cross-Border
Proposing Release, 78 FR 31120 n.1301; see also Exchange Act section
3(a)(68)(A); Further Definition of ``Swap,'' ``Security-Based-
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, Exchange Act Release
No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (``Product
Definitions Adopting Release''), 77 FR 48208. We also assume that
all instruments reported as equity forwards and swaps are security-
based swaps, potentially resulting in underestimation of the
proportion of the security-based swap market represented by single-
name CDS. Based on those assumptions, single-name CDS appear to
constitute roughly 80 percent of the security-based swap market. No
commenters disputed these assumptions, and we therefore continue to
believe that, although the BIS data reflect the global OTC
derivatives market, and not just the U.S. market, these ratios are
an adequate representation of the U.S. market.
---------------------------------------------------------------------------

    We believe that the data underlying our analysis here provide
reasonably comprehensive information regarding the single-name CDS
transactions and composition of the single-name CDS market
participants. We note that the data available to us from DTCC-TIW do
not encompass those CDS transactions that both: (i) Do not involve U.S.
counterparties; \136\ and (ii) are based on non-U.S. reference
entities. Notwithstanding this limitation, we believe that the DTCC-TIW
data provide sufficient information to identify the types of market
participants active in the security-based swap market and the general
pattern of dealing within that market.\137\
---------------------------------------------------------------------------

    \136\ We note that DTCC-TIW's entity domicile determinations may
not reflect our definition of ``U.S. person'' in all cases.
    \137\ The challenges we face in estimating measures of current
market activity stems, in part, from the absence of comprehensive
reporting requirements for security-based swap market participants.
The Commission has proposed rules regarding trade reporting, data
elements, and real-time public reporting for security-based swaps
that would provide us with appropriate measures of market activity.
See Regulation SBSR--Reporting and Dissemination of Security-Based
Swap Information, Exchange Act Release No. 34-63346 (Nov. 19, 2010),
75 FR 75208 (Dec. 2, 2010).
---------------------------------------------------------------------------

1. Security-Based Swap Market Participants
    A key characteristic of security-based swap activity is that it is
concentrated among a relatively small number of entities that engage in
dealing activities. In addition to these entities, thousands of other
participants appear as counterparties to security-based swap contracts
in our sample, and include, but are not limited to, investment
companies, pension funds, private (hedge) funds, sovereign entities,
and industrial companies. We observe that most non-dealer users of
security-based swaps do not engage directly in the trading of swaps,
but use dealers, banks, or investment advisers as intermediaries or
agents to establish their positions. Based on an analysis of the
counterparties to trades reported to the DTCC-TIW, there are 1,695
entities that engaged directly in trading between November 2006 and
December 2012.
    Table 1, below, highlights that more than three-quarters of these
entities (DTCC-defined ``firms'' shown in DTCC-TIW, which we refer to
here as ``transacting agents'') were identified as investment advisers,
of which approximately 40 percent (about 30 percent of all transacting
agents) were registered investment advisers under the Investment
Advisers Act of 1940 (``Investment Advisers Act'').\138\ Although
investment advisers comprise the vast majority of transacting agents,
the transactions they executed account for only 10.8 percent of all
single-name CDS trading activity reported to the DTCC-TIW, measured by
number of transaction-sides (each transaction has two transaction
sides, i.e., two transaction counterparties). The vast majority of
transactions (81.9 percent) measured by number of transaction-sides
were executed by ISDA-recognized dealers.\139\
---------------------------------------------------------------------------

    \138\ See 15 U.S.C. 80b1-80b21. Transacting agents participate
directly in the security-based swap market, without relying on an
intermediary, on behalf of principals. For example, a university
endowment may hold a position in a security-based swap that is built
up by an investment adviser that transacts on the endowment's
behalf. In this case, the university endowment is a principal that
uses the investment adviser as its transacting agent.
    \139\ The 1,695 entities included all DTCC-defined ``firms''
shown in DTCC-TIW as transaction counterparties that report at least
one transaction to DTCC-TIW as of December 2012. The staff in the
Division of Economic and Risk Analysis classified these firms, which
are shown as transaction counterparties, by machine matching names
to known third-party databases and by manual classification. This is
consistent with the methodology used in the proposal. See Cross-
Border Proposing Release, 78 FR 31120 n.1304. Manual classification
was based in part on searches of the EDGAR and Bloomberg databases,
the SEC's Investment Adviser Public Disclosure database, and a
firm's public Web site or the public Web site of the account
represented by a firm. The staff also referred to ISDA protocol
adherence letters available on the ISDA Web site.

 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                   November 2006 Through December 2012, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                Transaction
                       Transacting agents                             Number          Percent          share
                                                                                (percent)
----------------------------------------------------------------------------------------------------------------
Investment Advisers.............................................           1,261            74.4            10.9
--SEC registered................................................             510            30.1             6.6
Banks...........................................................             256            15.1             5.9
Pension Funds...................................................              27             1.6             0.1
Insurance Companies.............................................              32             1.9             0.3
ISDA-Recognized Dealers \140\...................................              17             1.0            82.1
Other...........................................................             102             6.0             0.8
                                                                 -----------------------------------------------
    Total.......................................................           1,695           100.0           100.0
----------------------------------------------------------------------------------------------------------------

    Principal holders of CDS risk exposure are represented by
``accounts'' in the DTCC-TIW.\141\ The staff's analysis of these
accounts in DTCC-TIW shows that the 1,695 transacting agents classified
in Table 1 represent over 9,238 principal risk holders. Table 2, below,
classifies these principal risk holders by their counterparty type and
whether they are represented by a registered or unregistered investment
adviser.\142\ For instance, 256 banks in Table 1 allocated transactions
across 364 accounts, of which 25 were represented by investment
advisers. In the remaining 339 instances, banks traded for their own
accounts. Meanwhile, 17 ISDA-recognized dealers in Table 1 allocated
transactions across 65 accounts.
---------------------------------------------------------------------------

    \140\ For the purpose of this analysis, the ISDA-recognized
dealers are those identified by ISDA as belonging to the G14 or G16
dealer group during the period: JP Morgan Chase NA (and Bear
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS,
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Credit
Agricole, Wells Fargo and Nomura. See, e.g., http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf.
    \141\ ``Accounts'' as defined in the DTCC-TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person''
provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also do not
necessarily represent separate legal persons. One entity or legal
person may have multiple accounts. For example, a bank may have one
DTCC account for its U.S. headquarters and one DTCC account for one
of its foreign branches.
    \142\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and may
include investment advisers registered with a state or a foreign
authority.
---------------------------------------------------------------------------

    Among the accounts, there are 1,000 Dodd-Frank Act-defined special
entities and 570 investment companies registered under the Investment
Company Act of 1940.\143\ Private funds comprise the largest type of
account holders that we were able to classify, and although not
verified through a recognized database, most of the funds we were not
able to classify appear to be private funds.\144\
---------------------------------------------------------------------------

    \143\ See 15 U.S.C. 80a1 through 80a64. There remain over 4,000
DTCC ``accounts'' unclassified by type. Although unclassified, each
was manually reviewed to verify that it was not likely to be a
special entity within the meaning of the Dodd-Frank Act and instead
was likely to be an entity such as a corporation, an insurance
company, or a bank.
    \144\ Private funds for this purposes encompasses various
unregistered pooled investment vehicles, including hedge funds,
private equity funds, and venture capital funds.

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap
Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting
                                 Agent, From November 2006 Through December 2012
----------------------------------------------------------------------------------------------------------------
                                                            Represented by a   Represented by
                                                               registered      an unregistered   Participant is
         Account holders by type               Number          investment        investment        transacting
                                                                 adviser           adviser         agent \145\
                                                                (percent)         (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
Private Funds...........................             2,696         1,275--47         1,400--52            21--1.
DFA Special Entities....................             1,000           973--97              7--1            20--2.
Registered Investment Companies.........               570           560--98              8--1             2--0.
Banks (non-ISDA-recognized dealers).....               364             21--6              4--1          339--93.
Insurance Companies.....................               205           132--64            20--10           53--26.
ISDA-Recognized Dealers.................                65              0--0              0--0          65--100.
Foreign Sovereigns......................                57            40--70              2--4           15--26.
Non-Financial Corporations..............                55            37--67              3--5           15--27.
Finance Companies.......................                 8             4--50              0--0            4--50.
Other/Unclassified......................             4,218         2,885--68         1,146--27           187--4.
                                         -----------------------------------------------------------------------
    All.................................             9,238         5,927--64         2,590--28           721--8.
----------------------------------------------------------------------------------------------------------------

    (a) Dealing Structures
    Security-based swap dealers use a variety of business models and
legal structures to engage in dealing business with counterparties in
jurisdictions all around the world. As we noted in the proposal, both
U.S.-based and foreign-based entities use certain dealing structures
for a variety of legal, tax, strategic, and business reasons.\146\
Dealers may use a variety of structures in part to reduce risk and
enhance credit

protection based on the particular characteristics of each entity's
business.
---------------------------------------------------------------------------

    \145\ This column reflects the number of participants who are
also trading for their own accounts.
    \146\ See Cross-Border Proposing Release, 78 FR 30976-78.
---------------------------------------------------------------------------

    Bank and non-bank holding companies may use subsidiaries to deal
with counterparties. Further, dealers may rely on multiple sales forces
to originate security-based swap transactions. For example, a U.S. bank
dealer may use a sales force in its U.S. home office to originate
security-based swap transactions in the United States and use separate
sales forces spread across foreign branches to originate security-based
swap transactions with counterparties in foreign markets.
    In some situations, an entity's performance under security-based
swaps may be supported by a guarantee provided by an affiliate. More
generally, guarantees may take the form of a blanket guarantee of an
affiliate's performance on all security-based swap contracts, or a
guarantee may apply only to a specified transaction or counterparty.
Guarantees may give counterparties to the dealer direct recourse to the
holding company or another affiliate for its dealer-affiliate's
obligations under security-based swaps for which that dealer-affiliate
acts as counterparty.
(b) Participant Domiciles
    The security-based swap market is global in scope, with
counterparties located across multiple jurisdictions. As depicted in
Figure 1, the domicile of new accounts participating in the market has
shifted over time.
[GRAPHIC] [TIFF OMITTED] TR09JY14.000

    Over time a greater share of accounts entering the market either
have a foreign domicile, or have a foreign domicile while being managed
by a U.S. person. The increase in foreign accounts may reflect an
increase in participation by foreign accountholders while the increase
in foreign accounts managed by U.S. persons may reflect the flexibility
with which market participants can restructure their market
participation in response to regulatory intervention, competitive
pressures, and other stimuli. There are, however, alternative
explanations for the shifts in new account domicile we observe in
Figure 1. Changes in the domicile of new accounts through time may
reflect improvements in reporting by market participants to DTCC-
TIW.\148\

Additionally, because the data only include accounts that are domiciled
in the United States, transact with U.S.-domiciled counterparties, or
transact in single-name CDS with U.S. reference entities, changes in
the domicile of new accounts may reflect increased transaction activity
between U.S. and non-U.S. counterparties.
---------------------------------------------------------------------------

    \147\ In these instances, the fund or account lists a non-U.S.
registered office location while the investment adviser, U.S. bank,
or U.S. parent lists the United States as its settlement country.
    \148\ Consistent with the guidance on CDS data access, see text
accompanying note 37, supra, DTCC-TIW surveyed market participants,
asking for the physical address associated with each of their
accounts (i.e., where the account is incorporated as a legal
entity). This is designated the registered office location. For
purposes of this discussion, we have assumed that the registered
office location reflects the place of domicile for the fund or
account. When the fund does not report a registered office location,
we assume that the settlement country reported by the investment
adviser or parent entity to the fund or account is the place of
domicile.
---------------------------------------------------------------------------

    A U.S.-based holding company may conduct dealing activity through a
foreign subsidiary that faces both U.S. and foreign counterparties.
Similarly, foreign dealers may choose to deal with U.S. and foreign
counterparties through U.S. subsidiaries. Non-dealer users of security-
based swaps may participate in the market using an agent in their home
country or abroad. An investment adviser located in one jurisdiction
may transact in security-based swaps on behalf of beneficial owners
that reside in another.
    The various layers separating origination from booking by dealers,
and management from ownership by non-dealer users, highlights the
potential distinctions between the location where a transaction is
arranged, negotiated, or executed, the location where economic
decisions are made by managers on behalf of beneficial owners, and the
jurisdiction ultimately bearing the financial risks associated with the
security-based swap transaction that results. As a corollary, a
participant in the security-based swap market may be exposed to
counterparty risk from a jurisdiction that is different from the market
center in which it participates.
(c) Current Estimates of Dealers and Major Participants.
    In the Intermediary Definitions Adopting Release, we estimated,
based on an analysis of DTCC-TIW data, that out of more than 1,000
entities engaged in single-name CDS activity worldwide in 2011, 166
entities engaged in single-name CDS activity at a sufficiently high
level that they would be expected to incur assessment costs to
determine whether they meet the ``security-based swap dealer''
definition.\149\ Analysis of those data further indicated that
potentially 50 entities may engage in dealing activity that would
exceed the de minimis threshold and thus ultimately have to register as
security-based swap dealers.\150\
---------------------------------------------------------------------------

    \149\ Based on the de minimis threshold of $3 billion for
single-name CDS, we estimated that there were 123 entities engaged
in single-name CDS transactions in 2011 that had more than $3
billion in single-name CDS transactions over the previous 12 months.
We also estimated that 43 entities with between $2 and $3 billion in
transactions over the trailing 12 months may opt to engage in the
dealer analysis out of an abundance of caution or to meet internal
compliance guidelines, thus leading to the 166 total. See
Intermediary Definitions Adopting Release, 77 FR 30731-32; see also
Cross-Border Proposing Release, 78 FR 31139-40. We adopted a phase-
in period during which the de minimis threshold will be $8 billion
and during which Commission staff will study the security-based swap
market as it evolves under the new regulatory framework, resulting
in a report that will consider the operation of the security-based
swap dealer and major security-based swap participant definitions.
At the end of the phase-in period, the Commission will take into
account the report, as well as public comment on the report, in
determining whether to terminate the phase-in period or propose any
changes to the rule implementing the de minimis exception, including
any increases or decreases to the $3 billion threshold. See
Intermediary Definitions Adopting Release, 77 FR 30640.
    \150\ In particular, we estimated that 28 entities and corporate
groups had three or more counterparties that are not ISDA dealers
(which we viewed as a useful proxy for application of the dealer-
trader distinction) and that 25 of those entities had trailing
notional transactions exceeding $3 billion. See id. at 30725 n.1457;
SEC Staff Report, ``Information regarding activities and positions
of participants in the single-name credit default swap market (``CDS
Data Analysis'') (Mar. 15, 2012), available at: http://www.sec.gov/comments/s7-39-10/s73910-154.pdf at 14. Our additional estimate of
up to 50 potential dealers reflected our recognition of the
potential for growth in the security-based swap market, for new
entrants into the dealing space, and the possibility that some
corporate groups may register more than one entity. See Intermediary
Definitions Adopting Release, 77 FR 30725 n.1457.
    In the Cross-Border Proposing Release, we revised those
estimates to reflect a more granular analysis of the data. Under
this refined approach--which identified the number of entities
within a corporate group that may have to register--we estimated
that 46 individual firms had three or more non-ISDA dealer
counterparties, and that, of those, 31 firms engaged in at least $3
billion of security-based swap activity in 2011. We further
estimated that, under the cross-border provisions of proposed
Exchange Act rule 3a71-3(b), 27 of those entities engaged in at
least $3 billion notional activity that they would have to count
against the de minimis threshold, and that accounting for the
aggregation requirement may result in an additional two firms being
required to register, for a total of 29. We also concluded that our
original estimate of there being up to 50 dealers was still valid,
noting that the revised estimate included individual entities within
corporate groups (thus accounting for the possibility that some
corporate groups may register more than one dealer), and also
accounted for the likely results of the proposed aggregation
requirement. See Cross-Border Proposing Release, 78 FR 31137-38
n.1407.
---------------------------------------------------------------------------

    Analysis of more recent data regarding the single-name CDS market
using the same methodology suggests comparable results that are
consistent with the reduction in transaction volume noted below. In
particular, single-name CDS data from 2012 indicate that out of more
than 1,000 entities engaged in single-name CDS activity, approximately
145 engaged in single-name CDS activity at a level high enough such
that they may be expected to perform the dealer-trader analysis
prescribed under the security-based swap dealer definition.\151\ These
data suggest that, consistent with the Intermediary Definitions
Adopting Release analysis, up to approximately 50 entities would engage
in dealing activity that would exceed the de minimis threshold.\152\
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    \151\ Consistent with the earlier analysis, this figure is
derived from the fact that 110 transacting agents had total single-
name security-based swap activity above the $3 billion de minimis
threshold, while another 35 transacting agents had activity between
$2 and $3 billion and hence out of caution may be expected to engage
in the dealer-trader analysis.
    In calculating this estimate, Commission staff used methods
identical to those used referenced in the Intermediary Definitions
Adopting Release, 77 FR 30732 n.1509, aggregating the activity of
DTCC accounts to the level of transacting agents and estimating the
number of transacting agents with gross transaction notional amounts
exceeding $2 billion in 2012. While the analysis contained in the
Intermediary Definitions Adopting Release used a sample that ended
in December 2011, the sample has been updated through the end of
December 2012.
    In connection with the economic analysis of the final cross-
border dealer de minimis rules, we also have estimated the number of
entities that may perform the dealer-trader analysis using a more
granular methodology that considers data both at the account level
and at the transacting agent level. See notes 456 through 458,
infra, and accompanying text.
    \152\ As discussed below, and consistent with the methodology
used in the Cross-Border Proposing Release, 78 FR 31137 n.1407, data
from 2012 indicates that 40 entities engaged in the single-name
security-based swap market had three or more counterparties that
were not identified by ISDA as dealers, and that 27 of those
entities had $3 billion or more in notional single-name CDS activity
over a 12 month period. Applying the principles reflected in these
final rules regarding the counting of transactions against the de
minimis thresholds suggests that 25 of those entities would have $3
billion or more in notional transactions counted against the
thresholds, and that applying the aggregation rules increases that
number to 26 entities. Based on this data, we believe that it is
reasonable to conclude that up to 50 entities ultimately may
register as security-based swap dealers, although the number may be
smaller. See note 444, infra.
    In this regard it is important to note that, due to limitations
in the availability of the underlying data, this analysis does not
include information about transactions involving single-name CDS
with a non-U.S. reference entity when neither party is domiciled in
the United States or guaranteed by a person domiciled in the United
States. This is because for single-name CDS with a non-U.S.
reference entity, the data supplied to the Commission by the DTCC-
TIW encompasses only information regarding transactions involving at
least one counterparty domiciled in the United States or guaranteed
by a person domiciled in the United States, based on physical
addresses reported by market participants. That data exclusion
introduces the possibility that these numbers may underestimate the
number of persons that would engage in the dealer-trader analysis
(and hence incur assessment costs) or that exceed $3 billion in
dealing transactions on an annual basis (and hence would potentially
be linked to programmatic costs and benefits).
---------------------------------------------------------------------------

    Additionally, in the Intermediary Definitions Adopting Release, we
estimated, based on position data from DTCC-TIW for 2011, that as many
as 12 entities would be likely to perform

substantial position and substantial counterparty exposure tests, and
thus incur assessment costs, prescribed under the major security-based
swap participant definition. Of these 12 firms, we estimated that the
number of persons with positions sufficiently large to bring them
within the scope of the definition of major security-based swap
participant likely would be fewer than five. Although we did not
specify how the major security-based swap participant definition would
apply to foreign persons in the Intermediary Definitions Adopting
Release, our approach in estimating the assessment costs caused by our
final definition used available single-name CDS data as a proxy for the
market as a whole, and assumed that all potential major security-based
swap participants would be required to include in their threshold
calculations all positions with all counterparties.
    Analysis of more recent data regarding the single-name CDS market
suggests comparable results. In particular, single-name CDS data from
2012 indicate that out of over 1,100 DTCC-TIW firms holding positions
in single-name CDS activity and not expected to register as security-
based swap dealers, nine had worldwide single-name CDS positions at a
level high enough such that they may be expected to perform the major
security-based swap participant threshold analysis prescribed under the
security-based swap dealer definition. Analysis based on these more
recent data is consistent with the prior conclusion that five or fewer
entities would be likely to register as major security-based swap
participants.\153\
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    \153\ In calculating this estimate, Commission staff used
methods identical to those used referenced in the Intermediary
Definitions Adopting Release, 77 FR 30734, note 1529, estimating the
number of participants with notional positions exceeding $100
billion in 2012. The analysis contained in the Intermediary Adopting
Release used a sample that ended in December 2011, aggregated the
activity of DTCC accounts to the level of transacting agents, and
did not attribute positions to parent companies. For the purposes of
analysis of the final rules, the sample has been updated through the
end of December 2012 and positions falling short of the $100 billion
threshold have been attributed to parent companies.
---------------------------------------------------------------------------

2. Levels of Security-Based Swap Trading Activity
    Single-name CDS contracts make up the vast majority of security-
based swap products and most are written on corporate issuers,
corporate securities, sovereign countries, or sovereign debt (reference
entities and reference securities). Figure 2 below describes the
percentage of global, notional transaction volume in North American
corporate single-name CDS reported to the DTCC-TIW between January 2008
and December 2012, separated by whether transactions are between two
ISDA-recognized dealers (interdealer transactions) or whether a
transaction has at least one non-dealer counterparty.
    The level of trading activity with respect to North American
corporate single-name CDS in terms of notional volume has declined from
more than $5 trillion in 2008 to approximately $2 trillion in
2012.\154\ While notional volume has declined over the past five years,
the share of interdealer transactions has remained fairly constant and
interdealer transactions continue to represent the bulk of trading
activity, whether measured in terms of notional value or number of
transactions (see Figure 2).
---------------------------------------------------------------------------

    \154\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking. The timing of this decline seems to
indicate that CDS market demand shrank prior to the enactment of the
Dodd-Frank Act, and therefore the causes of this reduction in
trading volume may be related to market dynamics and not directly
related to the enactment of statutes and the development of
security-based swap market regulation. If the security-based swap
market experiences further declines in trading activity, it would be
difficult to identify the effects of the newly developed security-
based swap market regulation apart from changes in trading activity
that may be due to natural market forces, or the anticipation of (or
reaction to) proposed (or adopted) Title VII requirements or
requirements being considered or implemented in other jurisdictions.

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[GRAPHIC] [TIFF OMITTED] TR09JY14.001

    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data we analyzed was
between counterparties domiciled in the United States and
counterparties domiciled abroad. Basing counterparty domicile on the
self-reported registered office location of the DTCC-TIW accounts, the
Commission estimates that only 13 percent of the global transaction
volume by notional volume between 2008 and 2012 was between two U.S.-
domiciled counterparties, compared to 48 percent entered into between
one U.S.-domiciled counterparty and a foreign-domiciled counterparty
and 39 percent entered into between two foreign-domiciled
counterparties (see Figure 3).\155\
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    \155\ Following publication of the Warehouse Trust Guidance on
CDS data access, the DTCC-TIW surveyed market participants, asking
for the physical address associated with each of their accounts
(i.e., where the account is organized as a legal entity). This is
designated the registered office location by the DTCC-TIW. When an
account does not report a registered office location, we assume that
the settlement country reported by the investment adviser or parent
entity to the fund or account is the place of domicile. For purposes
of this discussion, we have assumed that the registered office
location reflects the place of domicile for the fund or account.
     Changes to these estimates relative to figures presented in the
proposing release represent additional data regarding new accounts
in the time series as well as the use of a longer sample period.
---------------------------------------------------------------------------

    When the domicile of DTCC-TIW accounts are instead defined
according to the domicile of their ultimate parents, headquarters, or
home offices (e.g., classifying a foreign bank branch or foreign
subsidiary of a U.S. entity as domiciled in the United States), the
fraction of transactions entered into between two U.S.-domiciled
counterparties increases to 29 percent, and to 53 percent for
transactions entered into between a U.S.-domiciled counterparty and a
foreign-domiciled counterparty.
    Differences in classifications across different definitions of
domicile illustrate the effect of participant structures that operate
across jurisdictions. Notably, the proportion of activity between two
foreign-domiciled counterparties drops from 39 percent to 18 percent
when domicile is defined as the ultimate parent's domicile. As noted
earlier, foreign subsidiaries of U.S. parent companies and foreign
branches of U.S. banks, and U.S. subsidiaries of foreign parent
companies and U.S. branches of foreign banks may transact with U.S. and
foreign counterparties. However, this decrease in share suggests that
the activity of foreign subsidiaries of U.S. firms and foreign branches
of U.S. banks is generally higher than the activity of U.S.
subsidiaries of foreign firms and U.S. branches of foreign banks.
    By either of those definitions of domicile, the data indicate that
a large fraction of North American corporate single-name CDS
transaction volume is entered into between counterparties domiciled in
two different jurisdictions or between counterparties domiciled outside
the United States. For the purpose of establishing an economic
baseline, this observation indicates that a large fraction of security-
based swap

activity would be affected by the scope of any cross-border approach we
take in applying the Title VII requirements. Further, the large
fraction of North American corporate single-name CDS transactions
between U.S.-domiciled and foreign-domiciled counterparties also
highlights the extent to which security-based swap activity transfers
risk across geographical boundaries, both facilitating risk sharing
among market participants and allowing for risk transmission between
jurisdictions.
[GRAPHIC] [TIFF OMITTED] TR09JY14.002

B. Global Regulatory Efforts

    Efforts to regulate the swaps market are underway not only in the
United States but also abroad. In 2009, leaders of the G20--whose
membership includes the United States, 18 other countries, and the EU--
called for global improvements in the functioning, transparency, and
regulatory oversight of OTC derivatives markets agreeing that ``all
standardised OTC derivatives contracts should be traded on exchanges or
electronic trading platforms, where appropriate, and cleared through
central counterparties (``CCPs'') by end-2012 at the latest. OTC
derivatives contracts should be reported to trade repositories. Non-
centrally cleared contracts should be subject to higher capital
requirements.'' \156\ In subsequent summits, the G20 leaders have
reiterated their commitment to OTC derivatives regulatory reform and
encouraged international consultation in developing standards for these
markets.\157\ The FSB monitors implementation of OTC derivatives
reforms and provides progress reports to the G20.\158\
---------------------------------------------------------------------------

    \156\ See G20 Leaders' Statement cited in note 16, supra.
    \157\ See e.g., G20 Leaders' St. Petersburg Declaration. See
also G20 Meeting, Los Cabos, Mexico, June 2012, available at: http://www.treasury.gov/resource-center/international/g7-g20/Documents/Los%20Cabos%20Leaders%27%20Declaration.pdf; and G20 Meeting, Cannes,
France, November 2011, available at: https://www.g20.org/sites/default/files/g20_resources/library/Declaration_eng_Cannes.pdf
(``G20 Leaders' Cannes Declaration''). In the G20 Leaders' Cannes
Declaration, the G20 Leaders agreed to develop standards on margin
for non-centrally cleared OTC derivatives.
    \158\ The FSB has published seven progress reports on OTC
derivatives markets reform implementation: FSB Progress Report April
2014 (available at: http://www.financialstabilityboard.org/publications/r_140408.pdf); September 2013 (available at: http://www.financialstabilityboard.org/publications/r_130902b.pdf), April
2013 (available at: http://www.financialstabilityboard.org/publications/r_130415.pdf), October 2012 (available at: http://www.financialstabilityboard.org/publications/r_121031a.pdf), June
2012 (available at: http://www.financialstabilityboard.org/publications/r_120615.pdf), October 2011 (available at: http://www.financialstabilityboard.org/publications/r_111011b.pdf) and
April 2011 (available at: http://www.financialstabilityboard.org/publications/r_110415b.pdf) (collectively, ``FSB Progress
Reports'') . The ODWG prepares the FSB Progress Reports. The
Commission participates in the ODWG, both on its own behalf and as
the representative of IOSCO, which is co-chair of the ODWG.
---------------------------------------------------------------------------

    Pursuant to these commitments, jurisdictions with major OTC
derivatives markets have taken steps toward substantive regulation of
these markets, though the pace of regulation varies. This suggests that
many foreign participants will face substantive regulation of their
security-based swap activities that is intended to implement the G20
objectives and that may therefore address concerns similar to those
addressed by rules the Commission has proposed but not yet adopted.
    Foreign legislative and regulatory efforts have focused on five
general areas: Requiring post-trade reporting of transactions data for
regulatory purposes, moving OTC derivatives onto organized trading
platforms, requiring central clearing of OTC derivatives, establishing
or enhancing capital requirements, and establishing or enhancing margin
requirements for OTC derivatives transactions.
    The first two areas of regulation should help improve transparency
in OTC derivatives markets, both to regulators and market participants.
Regulatory transaction reporting requirements have entered into force
in a number of jurisdictions including the EU, Hong Kong SAR, Japan,
and Singapore, and other jurisdictions are in

the process of proposing legislation and rules to implement these
requirements.\159\ The European Parliament has adopted legislation for
markets in financial instruments that addresses trading OTC derivatives
on regulated trading platforms.\160\ This legislation also should
promote post-trade public transparency in OTC derivatives markets by
requiring the price, volume, and time of OTC derivatives transactions
conducted on these regulated trading platforms to be made public in as
close to real time as technically possible.
---------------------------------------------------------------------------

    \159\ Information regarding ongoing regulatory developments
described in this section was primarily obtained from the FSB
Progress Reports cited in note 158, supra, which reflect the input
of relevant jurisdictions.
    \160\ Id.
---------------------------------------------------------------------------

    Regulation of derivatives central clearing, capital requirements,
and margin requirements aims to improve management of financial risks
in these markets. Japan has rules in force mandating central clearing
of certain OTC derivatives transactions. The EU has its legislation in
place but has not yet made any determinations of specific OTC
derivatives transactions subject to mandatory central clearing. Most
other jurisdictions are still in the process of formulating their legal
frameworks that govern central clearing. While the EU is the only major
foreign jurisdiction that has initiated the process of drafting rules
to implement margin requirements for OTC derivatives transactions, we
understand that several other jurisdictions anticipate taking steps
towards implementing such requirements.

C. Cross-Market Participation

    Persons registered as security-based swap dealers or major
security-based swap participants are likely also to engage in swap
activity, which is subject to regulation by the CFTC. In the release
proposing registration requirements for security-based swap dealers and
major security-based swap participants, we estimated, based on our
experience and understanding of the swap and security-based swap
markets that of the 55 firms that might register as security-based swap
dealers or major security-based swap participants, approximately 35
would also register with the CFTC as swap dealers or major swap
participants.\161\
---------------------------------------------------------------------------

    \161\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 65543
(Oct. 12, 2011), 76 FR 65784, 65808 (Oct. 24, 2011). Based on its
analysis of 2012 DTCC-TIW and the list of swap dealers
provisionally-registered with the CFTC, and applying the methodology
used in the Intermediary Definitions Adopting Release, the
Commission estimates that substantially all registered security-
based swap dealers would also register as swap dealers with the
CFTC. See also CFTC list of provisionally registered swap dealers,
available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.
---------------------------------------------------------------------------

    This overlap reflects the relationship between single-name CDS
contracts, which are security-based swaps, and index CDS contracts,
which may be swaps or security-based swaps. A single-name CDS contract
covers default events for a single reference entity or reference
security. These entities and securities are often part of broad-based
indices on which market participants write index CDS contracts. Index
CDS contracts and related products make payouts that are contingent on
the default of index components and allow participants in these
instruments to gain exposure to the credit risk of the basket of
reference entities that comprise the index, which is a function of the
credit risk of the index components. As a result of this construction,
a default event for a reference entity that is an index component will
result in payoffs on both single-name CDS written on the reference
entity and index CDS written on indices that contain the reference
entity. Because of this relationship between the payoffs of single-name
CDS and index CDS products, prices of these products depend upon one
another. This dependence is particularly strong between index CDS
contracts and single-name CDS contracts written on index
components.\162\
---------------------------------------------------------------------------

    \162\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., Casella, George and Roger L.
Berger, ``Statistical Inference'' (2002), at 171.
---------------------------------------------------------------------------

    Because payoffs associated with these single-name CDS and index CDS
are dependent, hedging opportunities exist across these markets.
Participants who sell protection on reference entities through a series
of single-name CDS transactions can lay off some of the credit risk of
their resulting positions by buying protection on an index that
includes a subset of those reference entities. Participants that are
active in one market are likely to be active in the other. Commission
staff analysis of approximately 4,400 DTCC-TIW accounts that
participated in the market for single-name CDS in 2012 revealed that
approximately 2,700 of those accounts, or 61 percent, also participated
in the market for index CDS. Of the accounts that participated in both
markets, data regarding transactions in 2012 suggest that, conditional
on an account transacting in notional volume of index CDS in the top
third of accounts, the probability of the same account landing in the
top third of accounts in terms of single-name CDS notional volume is
approximately 62 percent; by contrast, the probability of the same
account landing in the bottom third of accounts in terms of single-name
CDS notional volume is only 14 percent.
    In an effort to comply with CFTC rules and applicable statutory
provisions in the cross-border context, swap market participants, many
of whom, as discussed above, likely also participate in the security-
based swap market, may have already changed some market practices.\163\
Although a commenter suggested that swap market participants have
already conformed their business practices to the CFTC's approach to
cross-border regulation, the commenter did not supply particular
details as to the scope of that operations restructuring.\164\ We
believe, however, based on these comments, it is likely that all
participants who preliminarily believe they may be subject to the
CFTC's registration requirements will have expended resources to build
systems and infrastructure that will permit them to determine and then
record the U.S.-person status of their counterparties consistent with
applicable requirements, as interpreted by the CFTC Cross-Border
Guidance.
---------------------------------------------------------------------------

    \163\ See, e.g., SIFMA/FIA/FSR Letter at 2-3. We understand that
new capabilities have been built by swap market participants
following issuance of the CFTC's guidance. To the extent that such
capabilities can be transferred to these participants' security-
based swap activities (e.g., to the extent that a market
participant's assessment practices regarding whether a counterparty
would generally be considered a U.S. person for purposes of the CFTC
guidance also can help determine the corresponding assessment for
purposes of these final rules and guidance), such capabilities may
tend to mitigate the costs that market participants otherwise would
incur in connection with the Commission's final cross-border rules.
    \164\ Id. at 2-4. The commenter notes the ``technological,
operational, legal and compliance systems'' necessary for complying
with the Commission's proposed rules, and taking account of the CFTC
Cross-Border Guidance, outlining the general categories of changes
to practice necessary for compliance. The commenter further
indicates a potential need to ``build[] separate systems for a small
percentage of the combined swaps and SBS market instead of using the
systems already built for compliance with the CFTC's cross-border
approach,'' suggesting that market participants have already altered
market practices to follow the CFTC Cross-Border Guidance.
---------------------------------------------------------------------------

    The CFTC's rules and cross-border guidance have likely influenced
the information that market participants collect and maintain about the
swap transactions they enter into and the counterparties they face. For
example, the CFTC's guidance describes a majority-ownership approach
for collective investment vehicles that are offered to U.S. persons,
contemplating

that managers of these vehicles would assess, on an ongoing basis, the
proportion of ownership by U.S. persons. As another example, the CFTC's
guidance articulates an approach by which all swap transactions by a
non-U.S. person that rely on guarantees from U.S. affiliates would
generally count against that non-U.S. person's dealer de minimis
exception.\165\
---------------------------------------------------------------------------

    \165\ See section 0, supra, for a discussion of costs to market
participants that may arise from differences between the CFTC
approach to guarantees and the Commission's final rules.
---------------------------------------------------------------------------

    Thus, as discussed in more detail in sections IV.I.2 and V.H.2
below, the adoption of rules that would seek similar information from
security-based swap market participants as the CFTC seeks from swap
market participants, may allow such participants to use infrastructure
already in place as a result of CFTC regulation to comply with
Commission regulation. Among those entities that participate in both
markets, entities that are able to apply to security-based swap
activity new capabilities they have built in order to comply with
requirements applicable to cross-border swap activity may experience
lower costs associated with assessing which cross-border security-based
swap activity counts against the dealer de minimis exception or towards
the major participant threshold, relative to those that are unable to
redeploy such capabilities. The Commission remains sensitive to the
fact that in cases where its final rules differ from the CFTC approach,
additional outlays related to information collection and storage may be
required even of market participants that conformed to the CFTC's
guidance regarding the applicable cross-border requirements.\166\ These
costs are discussed in sections IV.I.1 and V.H.1(b).
---------------------------------------------------------------------------

    \166\ We recognize that the CFTC Cross-Border Guidance is the
subject of ongoing litigation. Our economic analysis is not intended
to draw any conclusions about the ultimate outcome of that
litigation; rather, the economic analysis relies on the current
practices and operational abilities of firms that are, we
understand, either in accordance with the CFTC Cross-Border Guidance
or are in the process of adapting their systems to account for the
CFTC's approach to cross-border issues.
---------------------------------------------------------------------------

IV. Cross-Border Application of Dealer De Minimis Exception

A. Overview

    The Exchange Act excepts from designation as ``security-based swap
dealer'' entities that engage in a ``de minimis'' quantity of security-
based swap dealing activity with or on behalf of customers.\167\ Under
the final rules adopted in the Intermediary Definitions Adopting
Release, a person may take advantage of that exception if, in
connection with CDS that constitute security-based swaps, the person's
dealing activity over the preceding 12 months does not exceed a gross
notional amount of $3 billion, subject to a phase-in level of $8
billion.\168\ The phase-in level will remain in place until--following
a study regarding the definitions of ``security-based swap dealer'' and
``major security-based swap participant''--the Commission either
terminates the phase-in period or establishes an alternative threshold
following rulemaking.\169\
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    \167\ See Exchange Act section 3(a)(71)(D).
    \168\ See Exchange Act rule 3a71-2(a).
    \169\ See Intermediary Definitions Adopting Release, 77 FR
30640-41; see also note 149, supra (addressing process for
termination of phase-in level). Lower thresholds are set forth in
connection with dealing activity involving other types of security-
based swaps. See Exchange Act rule 3a71-2(a)(1)(ii).
---------------------------------------------------------------------------

    To apply the exception to cross-border dealing activity, the Cross-
Border Proposing Release would have required that a U.S. person count
against the de minimis thresholds all of its security-based swap
dealing activity, including transactions conducted through a foreign
branch of a U.S. bank.\170\ Non-U.S. persons, in contrast, would have
included only dealing transactions entered into with U.S. persons other
than foreign branches of U.S. banks, plus dealing transactions where
the transaction is ``conducted within the United States.'' \171\ To
implement, within the cross-border context, the existing rule that
requires a person to aggregate the dealing activity of its affiliates
against its own de minimis thresholds,\172\ the proposal would have
required a person to count: (i) Dealing transactions by its affiliates
that are U.S. persons; and (ii) dealing transactions by non-U.S.
affiliates that either are entered into with U.S. persons other than
foreign branches, or that are conducted within the United States.\173\
The proposal further would have permitted a person to exclude, from the
de minimis analysis, transactions by affiliates that are registered
security-based swap dealers, provided that the person's dealing
activity is ``operationally independent'' from the registered dealer's
dealing activity.\174\ The proposal, moreover, set forth definitions
relevant to the application of the de minimis exception in the cross-
border context, including proposed definitions of the terms ``U.S.
person'' and ``transaction conducted within the United States.'' \175\
---------------------------------------------------------------------------

    \170\ See proposed Exchange Act rule 3a71-3(b)(1)(i).
    \171\ See proposed Exchange Act rule 3a71-3(b)(1)(ii).
    \172\ See Exchange Act rule 3a71-2(a)(1) (providing that, for
purposes of the de minimis exception, a person shall count its own
dealing activity plus the dealing activity of ``any other entity
controlling, controlled by, or under common control with the
person'').
    \173\ See proposed Exchange Act rule 3a71-3(b)(2).
    \174\ See proposed Exchange Act rule 3a71-4.
    \175\ The proposal also set forth definitions of ``foreign
branch'' and ``transaction conducted through a foreign branch'' in
connection with the de minimis exception. See proposed Exchange Act
rule 3a71-3(a). The proposed definitions of ``U.S. person,''
``transaction conducted within the United States,'' ``foreign
branch,'' and ``transaction conducted through a foreign branch''
also are relevant to the Commission's proposed rules regarding the
cross-border application of certain other Title VII requirements.
See, e.g., proposed Exchange Act regulation SBSR (regarding
regulatory reporting and public dissemination).
    Proposed Exchange Act rule 3a71-3 also contained a provision and
associated definitions related to the cross-border application of
counterparty protection requirements in connection with security-
based swap activities. As discussed above, those matters are not the
subject of the present rulemaking, and the Commission intends to
address those matters as part of a subsequent rulemaking.
---------------------------------------------------------------------------

    Commenters raised issues related to various aspects of this
proposed approach to application of the de minimis exception in the
cross-border context. As discussed below, these include issues
regarding: The scope of the ``U.S. person'' definition, the proposal to
require counting of certain ``transactions conducted within the United
States'' between two non-U.S. persons, the treatment of the dealing
activity of non-U.S. persons that is guaranteed by U.S. persons, and
the application of the exception to non-U.S. persons whose
counterparties are foreign branches of U.S. banks. Some commenters also
urged us to more closely harmonize particular aspects of our proposal
with the CFTC Cross-Border Guidance.
    After considering commenters' views regarding the cross-border
application of the de minimis exception, we are adopting final rules
that have been modified from the proposal in certain important
respects. While these changes are discussed in more detail below, key
elements include:
     Modifications to the proposed definition of ``U.S.
person'';
     Provisions to distinguish non-U.S. persons' dealing
activity involving security-based swaps that are guaranteed by their
U.S. affiliates from such non-U.S. persons' other dealing activity for
purposes of the de minimis exception, by requiring a non-U.S. person to
count against the de minimis thresholds all dealing activity involving
security-based swaps for which its counterparty has rights of recourse
against a U.S. guarantor that is affiliated with the non-U.S. person;

     Provisions to distinguish non-U.S. persons that act as
conduit affiliates (by entering into certain security-based swap
transactions on behalf of their U.S. affiliates) from other non-U.S.
persons for purposes of the de minimis exception, in that conduit
affiliates are required to count all of their dealing activity against
the de minimis thresholds regardless of counterparty;
     Modifications to the application of the de minimis
exception to dealing activity by non-U.S. persons when the counterparty
is the foreign branch of a U.S. bank.
     The addition of an exclusion related to cleared, anonymous
transactions; and
     Modifications of the proposed aggregation provisions, in
part by removing the ``operational independence'' condition to
excluding dealing positions of affiliates that are registered dealers.
    The final rules we are adopting reflect a territorial approach that
is generally consistent with the principles that the Commission
traditionally has followed with respect to the registration of brokers
and dealers under the Exchange Act. Under this territorial approach,
registration and other requirements applicable to brokers and dealers
generally are triggered by a broker or dealer physically operating in
the United States, even if its activities are directed solely toward
non-U.S. persons outside the United States. The territorial approach
further generally requires broker-dealer registration by foreign
brokers or dealers that, from outside the United States, induce or
attempt to induce securities transactions by persons within the United
States--but not when such foreign brokers or dealers conduct their
activities entirely outside the United States.\176\
---------------------------------------------------------------------------

    \176\ See Cross-Border Proposing Release, 78 FR 30990; see
generally section 0, supra.
---------------------------------------------------------------------------

    In the cross-border context, moreover, the application of the
``security-based swap dealer'' definition and its de minimis exception
remains subject to general principles that we addressed in the
Intermediary Definitions Adopting Release. Accordingly, the term
``person'' as used in the ``security-based swap dealer'' definition and
in the Commission's rules implementing the de minimis exception should
be interpreted to refer to a particular legal person, meaning that a
trading desk, department, office, branch or other discrete business
unit that is not a separately organized legal person will not be viewed
as a security-based swap dealer. As a result, a legal person with a
branch, agency, or office that is engaged in dealing activity above the
de minimis threshold is required to register as a security-based swap
dealer, even if the legal person's dealing activity is limited to such
branch, agency, or office.\177\
---------------------------------------------------------------------------

    \177\ See Intermediary Definitions Adopting Release, 77 FR
30624; see also Cross-Border Proposing Release at 30993.
---------------------------------------------------------------------------

    Cross-border security-based swap transactions also are subject to
the principle that transactions between majority-owned affiliates need
not be considered for purposes of determining whether a person is a
dealer.\178\
---------------------------------------------------------------------------

    \178\ See Exchange Act rule 3a71-1(d).
---------------------------------------------------------------------------

    As discussed below, these final rules and guidance do not address
the proposed provisions regarding the cross-border application of the
dealer definition to ``transactions conducted within the United
States,'' as defined in the Cross-Border Proposing Release. We
anticipate soliciting additional public comment on potential approaches
for applying the dealer definition to non-U.S. persons in connection
with activity between two non-U.S. persons where one or both are
conducting dealing activity that occurs within the United States.\179\
---------------------------------------------------------------------------

    \179\ See section I.A, supra.
---------------------------------------------------------------------------

B. Application of De Minimis Exception To Dealing Activities of U.S.
Persons

1. Proposed Approach and Commenters' Views
    Under the proposal, a U.S. person would have counted all of its
security-based swap dealing activity against the de minimis thresholds,
including transactions that it conducted through a foreign branch.\180\
Although some persons who submitted comments in connection with the
Intermediary Definitions Adopting Release expressed the view that
dealing activity by foreign branches should not be counted as part of a
U.S. person's de minimis calculation,\181\ we did not propose such an
approach.\182\ Moreover, commenters to the Cross-Border Proposing
Release did not specifically express opposition to this aspect of the
proposal, although several commenters addressed related issues
regarding the proposed scope of the ``U.S. person'' definition.\183\
---------------------------------------------------------------------------

    \180\ See proposed Exchange Act rule 3a71-3(b)(1)(i).
    \181\ See, e.g., ISDA Letter (Feb. 22, 2011) (``Non-U.S.
entities (including non-U.S. affiliates and branches of U.S. banks)
should not be required to register as Dealers when they are
conducting business with non-U.S. counterparties''). This and other
comments in connection with the Intermediary Definitions Adopting
Release are located at: http://www.sec.gov/comments/s7-39-10/s73910.shtml.
    \182\ We considered these comments in connection with the Cross-
Border Proposing Release. See Cross-Border Proposing Release, 78 FR
30990, 30994.
    \183\ We address these comments in the context of our discussion
of our final definition of ``U.S. person.'' See notes 192-231,
infra, and accompanying text.
---------------------------------------------------------------------------

2. Final Rule
    Consistent with the proposal, the final rules require U.S. persons
to apply all of their dealing transactions against the de minimis
thresholds, including activity they conduct through their foreign
branches.\184\ Such dealing transactions must be counted regardless of
where they are arranged, negotiated, or executed.
---------------------------------------------------------------------------

    \184\ See Exchange Act rule 3a71-3(b)(1)(i). Issues regarding
how the de minimis exception applies to a non-U.S. person whose
counterparty is a foreign branch are addressed in section 0, infra.
---------------------------------------------------------------------------

    As discussed above, it is our view that any dealing activity
undertaken by a U.S. person, as defined in this final rule, occurs at
least in part within the United States and therefore warrants the
application of Title VII regardless of where particular aspects of
dealing activity are conducted.\185\ Whenever a U.S. person enters into
a security-based swap in a dealing capacity, it is the U.S. person as a
whole--and not merely any applicable foreign branch or office of that
U.S. person--that holds itself out as a dealer in security-based swaps.
It is the U.S. person as a whole that seeks to profit by providing
liquidity and making a market in security-based swaps, and it is the
financial resources of the U.S. person as a whole that enable it to do
so. Even if the U.S. person engages in dealing activity through a
foreign branch or office, its dealing counterparties will look to the
entire U.S. person--and not merely its foreign branch or office--for
performance on the transaction, and the U.S. person as a whole assumes
and stands behind the obligations arising from the security-based swap,
thereby creating risk to the U.S. person and potentially to the U.S.
financial system. A dealer that is organized or has its principal place
of business in the United States thus cannot hold itself out as
anything other than a single person, and generally cannot operate as a
dealer absent the financial and other resources of that single person.
Accordingly, we conclude that U.S. persons that engage in security-
based swap dealing activity through foreign branches or offices should
be subject to the regulatory framework for dealers even if those U.S.
persons deal exclusively with non-U.S. persons.\186\
---------------------------------------------------------------------------

    \185\ See Cross-Border Proposing Release, 78 FR 30994.
    \186\ The definition of ``U.S. person'' is addressed below. The
definitions of ``foreign branch'' and ``transaction conducted
through a foreign branch'' are addressed in section 0, infra.
    This interpretation, moreover, is consistent with the goals of
security-based swap dealer regulation under Title VII. Security-
based swap activity that results in a transaction involving a U.S.
counterparty creates ongoing obligations that are borne by a U.S.
person, and thus is properly viewed as occurring within the United
States. The events associated with AIG FP, described in detail in
our proposal, illustrate how certain transactions of U.S. persons
can pose risks to the U.S. financial system even when they are
conducted through foreign operations. See Cross-Border Proposing
Release, 78 FR 30980-81. Such risks, and their role in the financial
crisis and in the enactment of Title VII, suggest that the statutory
framework established by Congress and the objectives of Title VII
would be undermined by an analysis that excludes from Title VII's
application certain transactions involving U.S. persons solely
because they involve conduct carried out through operations outside
the United States, particularly when those transactions raise
concerns about risk to the U.S. person and to the U.S. financial
system that are similar or identical to those raised by such conduct
when carried out by the U.S. person entirely inside the United
States.
    For the above reasons, we conclude that our approach does not
apply to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within
the meaning of section 30(c) of the Exchange Act. See section 0,
supra. A contrary interpretation would, in our view, reflect an
understanding of what it means to conduct a security-based swaps
business within the jurisdiction of the United States that is
divorced both from Title VII's statutory objectives and from the
reality of the role of U.S. persons within the global security-based
swap market. But in any event we also believe that this final rule
is necessary or appropriate as a prophylactic measure to help
prevent the evasion of the provisions of the Exchange Act that were
added by the Dodd-Frank Act, and thus help ensure that the relevant
purposes of the Dodd-Frank Act are not undermined. Otherwise, U.S.
persons could simply conduct dealing activities with non-U.S.
persons using foreign branches and remain outside of the application
of the dealer requirements of Title VII, bringing the same risk into
the United States that would be associated with such dealing
activity that is conducted out of their U.S. offices.

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

C. Definition of ``U.S. Person''

1. Proposed Approach
    Consistent with our territorial approach to application of Title
VII to cross-border security-based swap activity, our Cross-Border
Proposal defined ``U.S. person'' to mean:
     Any natural person resident in the United States;
     Any partnership, corporation, trust, or other legal person
organized or incorporated under the laws of the United States \187\ or
having its principal place of business in the United States; and
---------------------------------------------------------------------------

    \187\ Proposed Exchange Act rule 3a71-3(a)(9) under the Exchange
Act defined ``United States'' as ``the United States of America, its
territories and possessions, any States of the United States, and
the District of Columbia.''
---------------------------------------------------------------------------

     Any account (whether discretionary or non-discretionary)
of a U.S. person.\188\
---------------------------------------------------------------------------

    \188\ Proposed Exchange Act rule 3a71-3(a)(7)(i) under the
Exchange Act.

The Commission also proposed that the term ``U.S. person'' would
exclude the following international organizations: The International
Monetary Fund (``IMF''), the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the United Nations, and their
agencies and pension plans, and any other similar international
organizations, their agencies and pension plans.\189\
---------------------------------------------------------------------------

    \189\ See proposed Exchange Act rule 3a71-3(a)(7)(ii).
---------------------------------------------------------------------------

    This proposed definition of ``U.S. person'' generally followed an
approach to defining U.S. person that is similar to that used by the
Commission in other contexts,\190\ though it was tailored to the
specific goals of Title VII. As we noted in the proposal, we sought
with the proposed definition to identify those types of individuals or
entities whose security-based swap activity is likely to impact the
U.S. market even if they transact with security-based swap dealers that
are not U.S. persons and to identify those types of individuals or
entities that are part of the U.S. security-based swap market and
should receive the protections of Title VII.\191\
---------------------------------------------------------------------------

    \190\ See, e.g., Securities Act Release No. 6863 (``Regulation S
Adopting Release'') (April 24, 1990), 55 FR 18306, 18308 (May 2,
1990), 55 FR 18308 (adopting regulation ``based on a territorial
approach to [s]ection 5 of the Securities Act''). Although the
proposed rule followed the approach to defining ``U.S. person'' in
Regulation S in certain respects, we stated that we preliminarily
believed that it was necessary to depart from Regulation S in
defining ``U.S. person'' in the context of the cross-border
application of Title VII. See Cross-Border Proposing Release, 78 FR
31007-08 (comparing the proposed definition of ``U.S. person'' with
the definition of ``U.S. person'' in Regulation S). For example,
Regulation S expressly excludes foreign branches of U.S. banks from
the definition of ``U.S. person,'' whereas our proposed definition
provided that U.S.-person status would be determined at the entity
level, meaning that a foreign branch of a U.S. person would, as part
of that U.S. person, share in that U.S.-person status of the entity
as a whole. See section 0, supra. Thus, under our proposed approach,
the term ``U.S. person'' would have been interpreted to include any
foreign trading desk, office, or branch of an entity that is
organized under U.S. law or that has its principal place of business
in the United States. See Cross-Border Proposing Release, 78 FR
30996.
    The proposed definition of ``U.S. person'' was similar in many
respects to the definition provided by CFTC staff in its October 12,
2012 no-action letter. See Time-Limited No-Action Relief: Swaps Only
With Certain Persons to be Included in Calculation of Aggregate
Gross Notional Amount for Purposes of Swap Dealer De Minimis
Exception and Calculation of Whether a Person is a Major Swap
Participant (Oct. 12, 2012), available at<EMAIL_ADDRESS>see also
Final CFTC Cross-Border Exemptive Order, 78 FR 862 (indicating that
for purposes of its temporary conditional relief the CFTC is taking
a similar approach to the ``U.S. person'' definition as that set
forth in the October 12, 2012 no-action letter). In July 2013, the
CFTC issued its cross-border guidance, which modified its
interpretation of U.S. person in certain respects, discussed in
greater detail below.
    \191\ See Cross-Border Proposing Release, 78 FR 30996.
---------------------------------------------------------------------------

2. Commenters' Views
    We received extensive comments on our proposed definition of ``U.S.
person.'' In these comments, many commenters also expressed their views
on the interpretation of ``U.S. person'' in the CFTC Cross-Border
Guidance. As explained in more detail below, several commenters
emphasized that we should minimize divergence from the CFTC's approach,
including by adding certain elements to our definition of ``U.S.
person'' that we had not proposed. Many commenters also identified
specific elements of the CFTC interpretation that we should not adopt
in our final rule.
(a) Definition of ``U.S. Person'' Generally
    Several commenters expressed the view that our proposed definition
of ``U.S. person'' was clear, objective, and territorial in scope.\192\
At the same time, many commenters, including some who expressed
agreement with our proposed approach, urged us to adopt, in whole or in
part, a definition of ``U.S. person'' that is consistent with the
interpretation of ``U.S. person'' in the CFTC Cross-Border
Guidance.\193\ In contrast, two

commenters disagreed with our approach as being underinclusive and
urged us to define U.S. person more broadly than the CFTC had
interpreted it.\194\ Two commenters addressed whether our ``U.S.
person'' definition should follow the U.S. person analysis in
Regulation S.\195\
---------------------------------------------------------------------------

    \192\ See, e.g., SIFMA/FIA/FSR Letter at A-6 (stating that the
Commission's proposed ``U.S. person'' definition was ``clear,
objective and ascertainable''); American Bar Association (``ABA'')
Letter at 1-2, 4 (commending the Commission for a ``clear and
objective'' approach to the ``U.S. person'' definition that is
consistent with its statutory authority and respects principles of
comity); IIB Letter at 5 (stating that the Commission's proposed
``U.S. person'' definition is sensible in its jurisdictional scope
and is consistent with territorial principles). But see EC Letter at
2 (generally supporting the territorial scope of the ``U.S. person''
definition, with the exception of the ``principal place of
business'' requirement, arguing that it is inconsistent with the
territorial approach); ESMA Letter at 2 (supporting a definition of
``U.S. person'' that covers only persons located or incorporated in
the United States).
    \193\ See, e.g., SIFMA/FIA/FSR Letter at 2-3, A-7 (suggesting
that the Commission coordinate with the CFTC in order to provide a
``consistent set of standards for determining an entity's principal
place of business''); IIB Letter at 2 (noting that its
recommendations are generally intended to emphasize consistency
across regimes). See also Chris Barnard Letter at 2 (stating belief
that the ``U.S. person'' definition should be aligned with the
CFTC's definition, specifically with respect to commodity pools,
pension plans, estates, and trusts); Japan Financial Markets Council
(``JFMC'') Letter at 4 (noting that, even though JFMC does not
support all aspects of the CFTC's definition, it believes the
Commission should adopt the same definition as the CFTC); Japan
Securities Dealers Association (``JSDA'') Letter at 3 (expressing
hope that the Commission and the CFTC do not adopt different
definitions of U.S. person); Investment Adviser Association
(``IAA'') Letter at 3 (noting that, given the finalization of the
CFTC Cross-Border Guidance, the Commission should modify its
proposal in several respects to be more consistent with the CFTC's
definition of ``U.S. person'').
    \194\ See AFR Letter I at 3, 5 (stating that the proposed
definition of ``U.S. person'' is overly narrow because it does not
include foreign subsidiaries of the seven largest U.S. bank holding
companies); BM Letter at 5, 9, 14-15 (stating that the proposed
definition of ``U.S. person'' is too narrow because it excludes
guaranteed affiliates and other affiliates in a control relationship
with a U.S. person; further suggesting that, should such guaranteed
entities, whether they are implicitly or explicitly guaranteed, not
be considered U.S. persons, they be separately ``ring-fenced'' from
their U.S. affiliate in order to ensure that the U.S. affiliate does
not cover any of the guaranteed affiliates obligations; further
stating that such entities are within the scope of the Commission's
broad authority under Exchange Act section 30(c) to regulate cross-
border activity).
    \195\ See Citadel Letter at 3 (supporting our proposal to not
rely on Regulation S as it would not capture certain foreign funds
that the commenter believed should be considered U.S. persons); ICI
Letter at 6 (recommending that our analysis be consistent with
Regulation S because fund managers are accustomed to that
definition). Cf. note 190, supra (describing elements of ``U.S.
person'' definition contained in Regulation S).
---------------------------------------------------------------------------

(b) Treatment of Investment Vehicles
    In response to our questions about whether our proposed definition
of ``U.S. person'' provided sufficient guidance to investment vehicles
and similar legal persons, commenters generally requested guidance but
expressed a range of views as to what guidance we should provide. One
commenter requested that we ensure that foreign investment vehicles
with a ``U.S. nexus'' be considered U.S. persons.\196\ This commenter
expressed support for what it described as our ``complementary''
proposed approach that would have required legal persons, including
investment vehicles, to perform a principal place of business
assessment to determine whether they are U.S. persons, and would have
subjected all transactions conducted within the United States to Title
VII requirements.\197\ One commenter conversely argued that a
``principal place of business'' test for investment vehicles would be
inappropriate.\198\
---------------------------------------------------------------------------

    \196\ See Citadel Letter at 2-3 (noting further that such an
approach will ensure that these entities will be subject to
clearing, reporting, and other transaction-level requirements).
    \197\ See id.
    \198\ See ICI Letter at 4-5 (arguing that a ``principal place of
business'' test is inappropriate for investment vehicles because
they generally have no employees or offices of their own).
---------------------------------------------------------------------------

    Several commenters requested that we provide additional guidance
regarding the application of the ``principal place of business'' test
to investment vehicles. Some commenters specifically requested that we
avoid diverging from the CFTC's interpretation of ``U.S. person'' in
our own final definition.\199\ One commenter urged us to help ensure
that market participants are able to make rational and consistent
determinations regarding the U.S.-person status of investment vehicles,
and suggested that an appropriate test would look to the location of
the person responsible for the fund's operational management, which the
commenter identified as the person that establishes the investment
vehicle and selects persons to carry out functions on behalf of the
vehicle, as opposed to the person responsible for the fund's investment
management activities.\200\ Another commenter requested guidance
regarding the application of the ``principal place of business'' test,
while expressing support for using an approach similar to the CFTC
Cross-Border Guidance.\201\ One commenter requested that the location
of an asset manager retained by a person not be the sole factor used to
determine the person's principal place of business or U.S.-person
status.\202\
---------------------------------------------------------------------------

    \199\ See IAA Letter at 3 (urging the Commission to coordinate
with the CFTC to develop a consistent definition of principal place
of business); SIFMA/FIA/FSR Letter at A-8 (urging harmonization with
the CFTC).
    \200\ See IIB Letter at 6. But see ICI Letter at 5 n.13
(requesting that the U.S.-person status of an investment vehicle not
turn on the location of the vehicle's activities, employees, or the
offices of its sponsor or adviser because such considerations are
not relevant to whether risk is transferred to the United States).
    \201\ See Citadel Letter at 2. This commenter suggested looking
to those senior personnel responsible for implementing the
investment vehicle's investment and trading strategy as well as
those responsible for ``investment selections, risk management
decisions, portfolio management, or trade execution.'' See id.
    \202\ See IAA Letter at 4 (suggesting that the Commission follow
the CFTC Cross-Border Guidance by specifically providing that non-
U.S. persons are not U.S. persons simply by virtue of using a U.S.-
person asset manager); SIFMA/FIA/FSA at A-8 (same).
---------------------------------------------------------------------------

    A few commenters responded to our question whether the proposed
definition should encompass funds that are majority-owned by U.S.
persons, as the CFTC's interpretation does, with two commenters
advocating against and three advocating in favor of such an
approach.\203\ One of the commenters that opposed such a test urged,
however, that if we were to adopt such a test, the test be identical to
the approach taken by the CFTC.\204\
---------------------------------------------------------------------------

    \203\ Compare ICI Letter at 7 (arguing that a majority-ownership
test is not workable for non-U.S. regulated funds that are offered
publicly abroad because it may be impossible or inconsistent with
local law to identify or reveal investor information) and IAA Letter
at 4 (explaining that a majority-ownership test would capture non-
U.S. funds with minimal nexus to the United States and present
implementation challenges) with AFR Letter I at 8 (recommending that
the U.S.-person status of investment vehicles be based on majority
ownership and/or actual locations of the person, regardless of the
location of incorporation), and Greenberger Letter I at 6-7 (making
a similar argument with respect to CFTC's interpretation of U.S.
person), and BM Letter at 10 (recommending that the ``U.S. person''
definition include collective investment vehicles that are majority-
owned by U.S. persons).
    \204\ See IAA Letter at 5.
---------------------------------------------------------------------------

    One commenter suggested that we adopt the CFTC's approach by which
collective investment vehicles that are offered publicly only to non-
U.S. persons, and not offered to U.S. persons, would not generally be
considered ``U.S. persons.'' \205\ Another commenter urged that the
definition exclude ``non-U.S. regulated funds'' that are offered
publicly only to non-U.S. persons but are offered privately to U.S.
persons in certain specific circumstances.\206\
---------------------------------------------------------------------------

    \205\ See id. at 3, 5 (noting that the CFTC Cross-Border
Guidance has been finalized and urging the Commission to adopt the
CFTC approach to permit market participants to operate ``under the
certainty and clarity'' of consistent definitions of U.S. persons).
    \206\ See ICI Letter at 5-6 (noting that such investment
vehicles have only minimal nexus to the United States and stating
that institutional investors that invest in such funds would not
expect U.S. law to apply to the vehicles' transactions).
---------------------------------------------------------------------------

(c) Treatment of Legal Persons More Generally
    Two commenters urged us to include in the definition of ``U.S.
person'' guaranteed subsidiaries and affiliates of U.S. persons.\207\
Alternatively, these

commenters suggested that we should require dealing transactions with
such persons to be included in the dealing counterparty's security-
based swap dealer de minimis calculation.\208\ However, another
commenter supported our proposed approach not to look to whether a
person's transactions are guaranteed by a U.S. person for purposes of
determining that person's U.S.-person status, stating that our proposal
to address such risk through major security-based swap participant
registration was sufficient.\209\
---------------------------------------------------------------------------

    \207\ See AFR Letter I at 3, 5-7 (stating that proposed
definition is too narrow and would allow U.S. entities to avoid
regulation and engage in regulatory arbitrage); BM Letter at 9, 11-
15 (requesting that the ``U.S. person'' definition be broadened to
include any person that is ``indistinguishable'' from a U.S. person,
such as by implicit or explicit guarantees from a U.S. person,
including any affiliate controlling, controlled by, or under common
control with a person that is headquartered, incorporated, or
otherwise residing in the United States). These commenters further
argued that the acknowledgement in the Cross-Border Proposing
Release that guarantees of foreign entities by a U.S. person may
subject the U.S. financial system to risk is inconsistent with a
definition that does not include such entities in the ``U.S.
person'' definition. See id. at 5-6; BM letter at 8, 12. Cf. AFR
Letter II at 2 (urging CFTC to include guaranteed affiliates in of
U.S. persons in the interpretation of U.S. person); Greenberger
Letter II at 3, 16 (requesting that the CFTC classify foreign
subsidiaries of U.S. financial institutions as U.S. persons); AFR
letter to CFTC, dated August 13, 2012 (``AFR Letter III'') (stating
that the CFTC's Final Exemptive Order Regarding Compliance with
Certain Swap Regulation, 78 FR 858, will pose a risk to U.S.
taxpayers due to the delay in applying requirements to foreign
affiliates of U.S. banks) (incorporated by reference in AFR Letter
I); Michael Greenberger letter to CFTC, dated August 13, 2012
(``Greenberger Letter III'') (incorporated by reference in AFR
Letter I).
    \208\ See AFR Letter I at 7; BM Letter at 17 (stating that the
exclusion from the de minimis calculation for guaranteed
transactions is ``indefensible'' and ``must be eliminated''). See
also Chris Barnard Letter at 2 (stating that Title VII should apply
to transactions involving a guarantee by a U.S. person).
    \209\ See SIFMA/FIA/FSR Letter at A-11 to A-12 (stating that to
treat the existence of a U.S. parent as relevant to determining
whether a person is a U.S. person would disregard the legal
independence of affiliates and imply that persons within the same
corporate group necessarily coordinate their security-based swap
activities).
---------------------------------------------------------------------------

    One commenter suggested that the Commission follow the CFTC in
including in its final ``U.S. person'' definition legal persons that
are directly or indirectly majority-owned by one or more U.S. persons
who bear unlimited responsibility for the obligations of that legal
person, stating that such a provision is necessary to prevent evasion
of Title VII.\210\
---------------------------------------------------------------------------

    \210\ See BM Letter at 10. Cf. CFTC Cross-Border Guidance, 78 FR
45312.
---------------------------------------------------------------------------

    One commenter expressed support for a principal place of business
component to the ``U.S. person'' definition as set forth in our
proposal.\211\ Several commenters requested that the Commission provide
additional guidance regarding relevant factors in identifying a legal
person's principal place of business.\212\ One commenter suggested that
the location of a company's headquarters should be determinative and
that a particular legal person should have only one principal place of
business.\213\
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    \211\ See Citadel Letter at 2 (stating that Commission was
correct to incorporate a principal place of business determination
into the ``U.S. person'' definition).
    \212\ See IIB Letter at 5 (noting the difficulty of implementing
the ``principal place of business'' test without further guidance
and requesting the Commission to provide workable criteria); ABA
Letter at 2-3 (requesting clarification of ``principal place of
business'' test and recommending that the Commission confirm that an
entity may rely on its counterparty's written representations
regarding the counterparty's principal place of business).
    \213\ See IIB Letter at 5-6. Another commenter suggested that
the location of the personnel directing the security-based swap
activity of the legal person be determinative. See Citadel Letter at
2.
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    Several commenters suggested that the Commission harmonize its
approach to determining a person's principal place of business to the
approach in the CFTC Cross-Border Guidance,\214\ while at least one
commenter suggested that the Commission work with the CFTC to develop a
new, common definition.\215\ At least two commenters, on the other
hand, objected to the use of a ``principal place of business''
test.\216\ One commenter suggested an alternative approach that would
establish criteria for this determination, such as quantitative
thresholds, and would also consider not requiring a principal place of
business analysis if the jurisdiction of incorporation has an
acceptable regulatory framework.\217\ Another commenter stated that a
U.S. branch of a person established in another jurisdiction should not
be considered to have its principal place of business in the United
States.\218\ Another suggested that requiring a principal place of
business analysis represented a departure from the Commission's stated
territorial approach to U.S. person.\219\
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    \214\ See JFMC Letter at 4 (notwithstanding burdensome aspects
of the CFTC's interpretation, and the difficulties of the
``principal place of business'' test in particular, urging the
Commission to adopt the same definition as the CFTC); SIFMA/FIA/FSR
Letter at A-8 (explaining the difficulty in having to determine a
counterparty's principal place of business under two different
standards); Citadel Letter at 2 (requesting that the Commission
provide further guidance ``to parallel the CFTC's guidance'' on
principal place of business).
    \215\ See IAA Letter at 3 (urging that, if the Commission adopts
a ``principal place of business'' test, it coordinate with the CFTC
to develop a consistent and harmonized definition).
    \216\ See ESMA Letter at 2 (arguing that the ``U.S. person''
definition should be limited to entities that are established within
the United States and should not in any case extend to an entity,
such as a U.S. branch of a foreign bank, whose presence in the
United States is ``complementary'' to its principal activity outside
the United States and which is already regulated by a non-U.S.
jurisdiction); JSDA Letter at 3 (recommending that the Commission
and the CFTC eliminate the principal place of business concept from
their respective criteria for identifying U.S. persons). See also EC
Letter at 2 (supporting the territorial approach of the ``U.S.
person'' definition, but suggesting that the ``principal place of
business'' test is not territorial and suffers from ambiguity);
    \217\ See EC Letter at 2. See also ESMA Letter at 2 (requesting
that the Commission provide clarity with respect to its proposed
``U.S. person'' definition, particularly the ``principal place of
business'' test).
    \218\ See ESMA Letter at 2 (noting that to include such persons
would place potentially duplicative and conflicting requirements on
the person in the case of European persons that would also be
subject to the European Market Infrastructure Regulation).
    \219\ See EC Letter at 2.
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    Several commenters recommended that, if the Commission were to
adopt a ``principal place'' of business test in its ``U.S. person''
definition, market participants be allowed to rely on a counterparty's
representations as to the counterparty's principal place of
business.\220\ Another suggested that the test look to information
found in the public filings of a public company or, with respect to a
private company, the location of its business.\221\
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    \220\ See ABA Letter at 2-3 (stating that entities should be
able to rely on their counterparty's written representations
``absent evidence to the contrary,'' regarding their principal place
of business); JSDA Letter at 3 (recommending that, if the
Commissions determine to keep a ``principal place of business''
test, they permit entities to rely on counterparty representations);
IIB Letter at 5 n.9 (recommending that a counterparty representation
as to U.S.-person status be sufficient to fulfill a person's
diligence requirements). One of these commenters specifically
requested that the reasonable reliance standard be limited to
representations regarding principal place of business. See ABA
letter at 3 n.2.
    \221\ See IIB Letter at 6.
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(d) Accounts
    One commenter supported the Commission's proposal for determining
the U.S.-person status of an account, which would look to whether the
owner of the account itself is a U.S. person,\222\ but suggested that
the Commission provide bright-line thresholds to clarify that de
minimis ownership by U.S. persons would not cause the account to be
considered a U.S. person.\223\ The commenter further requested that the
Commission clarify that the ``account'' prong of the ``U.S. person''
definition would not apply to collective investment vehicles but was
intended to capture persons that should be considered U.S. persons even
though they are conducting trades, as the direct counterparty, through
an account.\224\
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    \222\ See SIFMA/FIA/FSR Letter at A-8.
    \223\ See id. at A-9. See also IAA Letter at 4-5 (requesting
that, should the Commission adopt an ownership test, it adopt a test
consistent with and no more restrictive than the CFTC test for
collective investment vehicles).
    \224\ See SIFMA/FIA/FSR Letter at A-8 to A-9. Another commenter
expressed disagreement with the Commission's proposed treatment of
accounts in the ``U.S. person'' definition, expressing concern that
inclusion of accounts in the definition may affect the U.S.-person
status of funds. See IAA Letter at 4 (explaining that an ownership
test applying to accounts would potentially capture non-U.S. funds
that may have U.S. investors but whose ``purposeful activities''
such as ``marketing or offering'' are not aimed at U.S. persons,
meaning the fund would have ``little nexus to the U.S.'').
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(e) International Organizations
    A number of commenters expressed support for the Commission's
proposal to exclude certain international organizations (e.g.,
multilateral development banks, or ``MDBs'') from the ``U.S. person''
definition.\225\ Three

commenters specifically requested that the Commission list all such
institutions that would be excluded from the ``U.S. person''
definition, similar to the approach the CFTC took in its guidance,\226\
rather than refer to ``other similar international organizations.''
\227\ These commenters also argued that certain organizations have
absolute immunity under federal law and should be excluded from
regulation under Title VII entirely.\228\ Three commenters requested
that affiliates of MDBs and similar organizations also be excluded from
the definition of ``U.S. person.'' \229\
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    \225\ See SIFMA/FIA/FSR Letter at A-10 (supporting an exclusion
for all Foreign Public Sector Financial Institutions (including
MDBs) (``FPSFIs'') and their affiliates from the ``U.S. person''
definition); JFMC Letter at 4 (supporting an exclusion from ``U.S.
person'' definition for FPSFIs and their affiliates); JSDA letter at
3 (supporting the Commission's proposed exclusion from the ``U.S.
person'' definition for certain ``international organizations'' and
expressing support for an exclusion for FPSFIs); International Bank
for Reconstruction and Development, International Finance
Corporation et al. Letter (``WB/IFC Letter'') at 1, 6 (supporting an
exclusion for multilateral development institutions and their
affiliates from the ``U.S. person'' definition, and noting that such
affiliates are excluded under Regulation S as well); IDB Letter at 1
(requesting that MDBs and their affiliates not be considered U.S.
persons).
    \226\ See Sullivan and Cromwell (``SC'') Letter at 18 and n.20;
WB/IFC Letter at 4-5 (suggesting that to avoid confusion, the
Commission expressly include other MDBs that maintain headquarters
in Washington, DC and identify those organizations which include
IFC, the International Development Association, the Multilateral
Investment Guarantee Agency, and the Inter-American Investment
Corporation); IIB Letter at 5 (supporting an exclusion from U.S.-
person status for ``international organizations'' similar to those
already enumerated in the Cross-Border Proposing Release, and
stating that such an exclusion would be consistent with the CFTC
Cross-Border Guidance and ``well-established'' principles of
international law); Inter-American Development Bank (``IDB'') Letter
at 2 (stating that it shares the position of the International
Finance Corporation and the International Bank for Reconstruction
and Development that the Commission's approach to MDB's should be
consistent with the CFTC). See also Intermediary Definitions
Adopting Release, 77 FR 30692 n.1180 (listing international
financial institutions for purposes of CFTC requirements); CFTC
Cross-Border Guidance, 78 FR 45353 n.531 (incorporating list
provided in Intermediary Definitions Adopting Release by reference).
    \227\ Proposed Exchange Act rule 3a71-3(a)(7)(ii).
    \228\ See SC Letter at 3-4, 7-9, 12-14; WB/IFC letter at 2. See
also IDB Letter at 1 (requesting confirmation that MDBs will not be
subject to Commission's requirements with respect to security-based
swaps and indicating that such an approach would respect its
privileges and immunities).
    \229\ See SC Letter at 19-22 (requesting that, in response to
footnote 301 of the Cross-Border Proposing Release, ``controlled
affiliates'' of MDBs not be treated as U.S. persons); IDB Letter at
1 (requesting that affiliates of international organizations not be
treated as U.S. persons); WB/IFC Letter at 1, 6 (supporting an
exclusion for multilateral development institutions and their
affiliates from the ``U.S. person'' definition, and noting that such
affiliates are excluded under Regulation S as well). One commenter
suggested that this exclusion be made available for a ``controlled
affiliate,'' defined as follows: (1) An entity subject to the MDB's
governance structure; (2) all of whose activities must be consistent
with and in furtherance of the MDB's purpose and mission; (3) whose
governing instruments restrict it to engaging in activities in which
the MDB could itself engage and provide that it is not authorized to
engage in any other activities; and (4) which is under the
``control'' of the MDB as that term is used in securities laws
(Securities Act Rule 405). See also note 225, supra.
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(f) Status Representations
    Some commenters requested that a potential dealer expressly be
permitted to rely on a counterparty representation to fulfill its
diligence requirements in determining whether its counterparty is a
U.S. person under the final rule.\230\ Several commenters, as discussed
above, specifically requested that we permit reliance on
representations as to a person's principal place of business.\231\ Two
commenters requested that market participants be permitted to rely on
the representations prepared by counterparties under the CFTC Cross-
Border Guidance.\232\
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    \230\ See IIB Letter at 5 n.9. This commenter suggested that we
should permit reliance on a representation ``absent knowledge of
facts that would cause a reasonable person to question the accuracy
of the representation.'' See also JSDA Letter at 3.
    \231\ See note 220, supra.
    \232\ See SIFMA/FIA/FSR Letter at A-8 (noting that performing a
separate analysis would be burdensome); IIB Letter at 5, note 9
(noting that the CFTC's interpretation of ``U.S. person'' is broader
than, and encompasses the three elements of, the Commission's
proposed ``U.S. person'' definition).
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3. Final Rule
    Consistent with the proposal, we are adopting a final definition of
``U.S. person'' that continues to reflect a territorial approach to the
application of Title VII and is in most respects unchanged from the
proposal.\233\ In response to comments, the final definition reflects
certain changes intended to clarify the scope of the definition. Also
in response to comments, we are adopting a general definition of
``principal place of business'' and a specific application of the term
to externally managed investment vehicles. We are also adding a prong
relating specifically to the U.S.-person status of estates.
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    \233\ Cf. note 192, supra (citing comment letters expressing
general agreement with our territorial approach to defining U.S.
person).
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    The final rule defines ``U.S. person'' to mean:
     Any natural person resident in the United States;
     Any partnership, corporation, trust, investment vehicle,
or other legal person organized, incorporated, or established under the
laws of the United States or having its principal place of business in
the United States;
     Any account (whether discretionary or non-discretionary)
of a U.S. person; or
     Any estate of a decedent who was a resident of the United
States at the time of death. \234\
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    \234\ Exchange Act rule 3a71-3(a)(4)(i). The second prong has
been modified from the proposal to include an express reference to
``investment vehicle'' and to clarify that any legal person
``established'' under United States law is a U.S. person, as
discussed further below. See Exchange Act rule 3a71-3(a)(4)(i)(B).
The fourth prong has been added to include an express reference to
``estate.'' See Exchange Act rule 3a71-3(a)(4)(i)(D). In the text of
the final rule we have made a technical change to the proposal to
clarify that the ``U.S. person'' definition is met if any one of the
applicable prongs is satisfied (in part by replacing ``and'' with
``or'' in connection with the enumeration of the prongs). See
Exchange Act rule 3a71-3(a)(4)(i).
     Consistent with the proposal, ``special entities,'' as defined
in section 15F(h)(2)(C) of the Exchange Act, are U.S. persons
because they are legal persons organized under the laws of the
United States. Section 15F(h)(2)(C) of the Exchange Act defines the
term ``special entity'' as: A Federal agency; a State, State agency,
city, county, municipality, or other political subdivision of a
State; any employee benefit plan, as defined in section 3 of the
Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002; any
governmental plan, as defined in section 3 of the Employee
Retirement Income Security Act of 1974, 29 U.S.C. 1002; or any
endowment, including an endowment that is an organization described
in section 501(c)(3) of the Internal Revenue Code of 1986. 15 U.S.C.
78o-10(h)(2)(C).
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    The final rule defines ``principal place of business'' to mean
``the location from which the officers, partners, or managers of the
legal person primarily direct, control, and coordinate the activities
of the legal person.'' \235\ It also provides that, with respect to an
externally managed investment vehicle, this location ``is the office
from which the manager of the vehicle primarily directs, controls, and
coordinates the investment activities of the vehicle.'' \236\
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    \235\ Exchange Act rule 3a71-3(a)(4)(ii).
    \236\ Id.
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    Also consistent with the proposal, the final definition excludes
the following international organizations from the definition of ``U.S.
person'': The IMF, the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the United Nations, and their
agencies and pension plans, and any other similar international
organizations, their agencies and pension plans.\237\
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    \237\ Exchange Act rule 3a71-3(a)(4)(iii).
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    To address commenters' requests,\238\ the final rule also has been
revised from the proposal to provide that a person may rely on a
counterparty's representation regarding its status as a U.S. person,
unless such person knows, or has reason to know, that the
representation is inaccurate.\239\
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    \238\ See notes 220, 230, supra.
    \239\ Exchange Act rule 3a71-3(a)(4)(iv).

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    Although one commenter requested that we use a definition of ``U.S.