differing organizational structures that serve similar economic
purposes, including structures such as security-based swap positions
entered into by a non-U.S. person that are subject to a recourse
guarantee by a U.S. person and security-based swap positions carried
out through a foreign branch.\608\
---------------------------------------------------------------------------

    \608\ See section 0, supra. For the above reasons, we conclude
that this final rule is not being applied to persons who are
``transact[ing] a business in security-based swaps without the
jurisdiction of the United States,'' within the meaning of Exchange
Act section 30(c). See section 0, supra. We also believe, moreover,
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. Without this rule, U.S. persons would be able to evade
major participant regulation under Title VII simply by conducting
their security-based swap positions via a guaranteed non-U.S.
person, while still being subject to the risks associated with those
positions.
---------------------------------------------------------------------------

    While we recognize one commenter's concern that attribution would
require ``double counting'' certain positions, we do not agree with
that commenter's assertion that the final rule constitutes double-
counting, given that both entities assume the risk of the position by
either entering into it directly or by guaranteeing it. Because both
entities are involved in the position that poses risk to the U.S.
financial system, both entities are required to include it in their
respective major participant

threshold calculations, at least until the entity whose position is
guaranteed is required to register as a major security-based swap
participant.\609\
---------------------------------------------------------------------------

    \609\ See Exchange Act rule 3a67-10(c)(2)(i).
---------------------------------------------------------------------------

2. Positions Attributed to Non-U.S. Person Guarantors
(a) Proposed Approach and Commenters' Views
    In the proposal, we expressed our preliminary view that a non-U.S.
person that provides a recourse guarantee for performance on the
obligations of a U.S. person should attribute to itself the security-
based swap positions of the U.S. person that are subject to guarantees
by the non-U.S. person.\610\ However, when a non-U.S. person provides a
guarantee to another non-U.S. person, the non-U.S. person providing the
guarantee would have been required to attribute to itself only those
positions for which a U.S. person counterparty has rights of recourse
against the non-U.S. person guarantor under the security-based swap. As
noted above, one commenter argued that attribution is beyond the scope
of section 30(c) of the Exchange Act.\611\
---------------------------------------------------------------------------

    \610\ See Cross-Border Proposing Release, 78 FR 31032-33.
    \611\ See note 600, supra.
---------------------------------------------------------------------------

(b) Final Rule
    Consistent with our preliminary view, the final rule requires a
non-U.S. person to attribute to itself any security-based swap
positions of a U.S. person that are subject to a guarantee by the non-
U.S. person.\612\ In other words, the non-U.S. person guarantor will
attribute to itself all security-based swap positions of the U.S.
person for which a counterparty of the U.S. person has rights of
recourse against the non-U.S. person guaranteeing the position.\613\
The rule reflects our view that the guarantee may enable the U.S.
person to enter into significantly more security-based swap positions
with both U.S.-person and non-U.S. person counterparties than it would
be able to absent the guarantee, increasing the risk that such persons
could incur, amplifying the risk of the non-U.S. person's inability to
carry out its obligations under the guarantee.\614\
---------------------------------------------------------------------------

    \612\ Exchange Act rule 3a67-10(c)(1)(ii)(A).
    \613\ Exchange Act rule 3a67-10(c)(1)(ii)(A) may be broader than
the CFTC Cross-Border Guidance in this context because the final
rule requires the non-U.S. person to attribute to itself all the
positions of the U.S. person that are guaranteed by the non-U.S.
person, whereas the CFTC Cross-Border Guidance states that the non-
U.S. person would generally not attribute to itself positions of the
U.S. person that it guarantees where the counterparty is another
non-U.S. person that is not guaranteed by a U.S. person. See CFTC
Cross-Border Guidance at 45326 (stating that a non-U.S. person would
generally consider in its own calculation (i.e., attribute to
itself) any swap position (of a U.S. or non-U.S. person) that it
guarantees in which the counterparty is a U.S. person or a
guaranteed affiliate).
    \614\ See Cross-Border Proposing Release, 78 FR 31032-33.
---------------------------------------------------------------------------

    Under the final rule, if a U.S. person in a transaction with a non-
U.S. person counterparty has rights of recourse against another non-
U.S. person under the security-based swap, the non-U.S. person
guaranteeing the transaction must attribute the security-based swap to
itself for purposes of its major security-based swap participant
threshold calculations.\615\ We note that, consistent with the rule
requiring non-U.S. persons to count positions entered into with U.S.
persons, a non-U.S. person that attributes a position of another non-
U.S. person to itself does not need to attribute to itself positions
arising from a transaction conducted through a foreign branch of the
U.S.-person counterparty when the counterparty is a registered
security-based swap dealer or positions arising from a transaction
conducted through a foreign branch of a U.S.-person counterparty, when
the transaction is entered into prior to 60 days following the earliest
date on which registration of security-based swap dealers is first
required.\616\
---------------------------------------------------------------------------

    \615\ Exchange Act rule 3a67-10(c)(ii)(B).
    \616\ See section 0 (describing exception for transaction
conducted through a foreign branch of a registered security-based
swap dealer), supra; Exchange Act rule 3a67-10(c)(ii)(B)
(incorporating Exchange Act rule 3a67-10(b)(3)(i)(A) and (B)).
---------------------------------------------------------------------------

    As explained above, we believe that attribution of positions to
guarantors is consistent with Exchange Act section 30(c),
notwithstanding the argument by one commenter that attribution to a
guarantor ``goes beyond the intended limits of section 30(c) of the
Exchange Act.'' \617\ As we discuss in more detail above, the major
security-based swap participant definition focuses on positions that
may raise systemic risk concerns within the United States.\618\ It is
our view that 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
guaranteed by a U.S. person, as the risks associated with such
positions are borne within the United States, and given the involvement
of U.S. persons may give rise, at the thresholds established for the
major security-based swap participant definition, to the types of
systemic risk within the United States that major security-based swap
participant regulation is intended to address.\619\
---------------------------------------------------------------------------

    \617\ See SIFMA/FIA/FSR Letter at A-20 to A-21.
    \618\ See section 0, supra.
    \619\ See id.
---------------------------------------------------------------------------

    The final rules requiring non-U.S. persons to attribute certain
positions to themselves for purposes of calculating their own major
security-based swap participant calculation thresholds aims to apply
major participant regulation in similar ways to differing
organizational structures that serve similar economic purposes. For
example, when a U.S. person has rights of recourse against a non-U.S.
person, the economic reality of the position is substantially
identical, in relevant respects, to a position entered into directly by
the non-U.S. person with the U.S. person. The relevant attribution
requirements reflect that a non-U.S. person would need to include such
positions were it to enter into them directly.\620\
---------------------------------------------------------------------------

    \620\ See section 0, supra. For the above reasons, we conclude
that this final rule is not being applied 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). See section 0, supra. We also believe, moreover, 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. Without
this rule, non-U.S. persons would be able to evade major participant
regulation under Title VII simply by conducting their security-based
swap positions by guaranteeing another entity that would then enter
into the positions.
---------------------------------------------------------------------------

3. Limited Circumstances Where Attribution of Guaranteed Security-Based
Swap Positions Does Not Apply
(a) Proposed Approach and Commenters' Views
    The proposal stated our preliminary view that a guarantor would not
be required to attribute to itself the security-based swap positions it
guarantees, and, therefore, may exclude those positions from its
threshold calculations, if the person whose positions it guarantees is
already subject to capital regulation by the Commission or the CFTC
(for example, by virtue of being regulated as a swap dealer, security-
based swap dealer, major swap participant, major security-based swap
participant, FCMs, brokers, or dealers), is regulated as a bank in the
United States, or is subject to capital standards adopted by its home
country supervisor that are consistent in all respects with the Capital
Accord of the Basel Committee on Banking Supervision (``Basel
Accord'').\621\ This preliminary

view applied both to U.S. persons and non-U.S. persons that are subject
to registration and regulation in the enumerated categories.\622\ Our
preliminary view was that such consistent foreign regulatory capital
requirements would adequately address the risks arising from such
positions, making it unnecessary to separately address the risks
associated with guarantees of those same positions.\623\ We noted that
this approach was consistent with the capital standards of the
prudential regulators with respect to foreign banks that are bank
holding companies subject to the Federal Reserve Board of Governors'
supervision.\624\
---------------------------------------------------------------------------

    \621\ See Cross-Border Proposing Release, 78 FR 31033
(explaining that the non-U.S. person must be subject to capital
standards that are consistent with the capital standards such non-
U.S. person would have been subject to if it was a bank subject to
the prudential regulators' capital regulation, i.e., the Basel
Accord); see also Intermediary Definitions Adopting Release, 77 FR
30689 (stating that it is not necessary to attribute a person's
positions to a parent or other guarantor if the person already is
subject to capital regulation by the CFTC or SEC or if the person is
a U.S. person regulated as a bank in the United States). Thus, once
the person whose position is guaranteed registers as a major
security-based swap participant, attribution would no longer be
required.
    \622\ See Cross-Border Proposing Release, 78 FR 31033 at n. 636.
    \623\ See id. at 31033-34.
    \624\ See id. at 31033 (citing Sec.  225.2(r)(3) of Regulation
Y, which states that ``[f]or purposes of determining whether a
foreign banking organization qualifies under paragraph (r)(1) of
this section: (A) A foreign banking organization whose home country
supervisor . . . has adopted capital standards consistent in all
respects with the Basel Accord may calculate its capital ratios
under the home country standard . . .'').
---------------------------------------------------------------------------

    One commenter supported our preliminary view that a non-U.S.
person's guaranteed positions would not be attributed to the guarantor
if the guaranteed non-U.S. person is subject to capital regulation by
the Commission, the CFTC, or capital standards in its home jurisdiction
that are consistent with the Basel Accord.\625\ Another commenter
sought clarification that a U.S. guarantor will not be required to
attribute transactions of guaranteed entities while the guaranteed
person's registration as a major security-based swap participant is
pending.\626\
---------------------------------------------------------------------------

    \625\ See SIFMA/FIA/FSR Letter at A-21 to A-22; see also Cross-
Border Proposing Release, 78 FR 31033.
    \626\ See AFGI Letter I at 3 (stating that this clarification
would be within the spirit and language of the proposed rules).
---------------------------------------------------------------------------

(b) Final Rules
    Although the final rules require, in some circumstances, both the
guarantor and the guaranteed person to include guaranteed positions in
their respective major security-based swap participant threshold
calculations, the final rules do not require a guarantor to attribute
guaranteed positions to itself when the guaranteed person is subject to
capital regulation by the Commission or the CFTC (including, but not
limited to regulation as a swap dealer, major swap participant,
security-based swap dealer, major security-based swap participant,
futures commission merchant, broker, or dealer).\627\ This codifies our
preliminary view.\628\ The final rule, moreover, does not require a
guarantor to attribute to itself positions that it guarantees when the
guaranteed person is regulated as a bank in the United States, or is
subject to capital standards adopted by its home country supervisor
that are consistent in all respects with the Basel Accord.\629\
Consistent with our preliminary view, we believe that consistent
foreign regulatory capital requirements would adequately address the
risks arising from such positions, making it unnecessary to separately
address the risks associated with guarantees of those same
positions.\630\ We continue to view such regulatory treatment as
adequate to address the risks that the attribution requirement is
intended to address. We also note that this approach is consistent with
the capital standards of the prudential regulators with respect to
foreign banks that are bank holding companies subject to the Federal
Reserve Board of Governors' supervision.
---------------------------------------------------------------------------

    \627\ See Exchange Act rule 3a67-10(c)(2)(i).
    \628\ See Cross-Border Proposing Release, 78 FR 31032-33, notes
629, 632, and 634.
    \629\ Exchange Act rule Sec.  240.3a67-10(c)(2)(ii) and (iii).
See Cross-Border Proposing Release, 78 FR 31033 (explaining that the
non-U.S. person must be subject to capital standards that are
consistent with the capital standards such non-U.S. person would
have been subject to if it were a bank subject to the prudential
regulators' capital regulation, i.e., the Basel Accord);
Intermediary Definitions Adopting Release, 77 FR 30689. This
approach generally is consistent with the CFTC Cross-Border
Guidance. See CFTC Cross-Border Guidance, 78 FR 45326 (stating that
``where a subsidiary is subject to Basel-compliant capital standards
and oversight by a G20 prudential supervisor, the subsidiary's
positions would generally not be attributed to a parental guarantor
in the computation of the parent's outward exposure under the MSP
definition'').
    \630\ See Cross-Border Proposing Release, 78 FR 31033-34.
---------------------------------------------------------------------------

    As noted above, one commenter requested that a U.S. guarantor not
be required to attribute to itself a person's positions for which it
provides a guarantee while that person's registration as a major
security-based swap participant is pending.\631\ Upon further
consideration, we believe that it is appropriate to permit a guarantor
not to attribute the positions of such entities to itself. This change
will mitigate market disruption that may otherwise result due to the
prospect of a person intermittently exceeding the major participant
threshold when a person that it guarantees is in the process of
registering as a major security-based swap participant. This approach
is also consistent with the approach under the application of the de
minimis exception that allows a person not to count the transactions of
its affiliates that are in the process of registering as dealers.\632\
---------------------------------------------------------------------------

    \631\ See note 626, supra.
    \632\ See Exchange Act rule 3a67-10(c)(2)(iv) (referring to rule
3a67-8(a)); see also Exchange Act rule 3a71-4 (addressing persons
who have exceeded the de minimis thresholds but are in the process
of registering); section 0, supra.
---------------------------------------------------------------------------

F. Other Issues Related to the Application of the Major Security-Based
Swap Participant Definition

1. Threshold for Registration as a Major Security-Based Swap
Participant
    One commenter commented generally that the threshold for having to
register as a major-security-based swap participant is too high.\633\
This threshold, however, was adopted in the Intermediary Definitions
Adopting Release and is not under consideration in this rulemaking. In
addition, the Intermediary Definitions Adopting Release provided that
the Commission staff will prepare a report subsequent to the
effectiveness of the security-based swap reporting requirements that
will examine a number of aspects of our definitional rules and related
interpretations, including relevant major security-based swap
participant thresholds.\634\
---------------------------------------------------------------------------

    \633\ BM Letter at 15-16 (stating that the excessively high
major participant threshold excludes most market participants, thus
leaving large, non-U.S. entities that are active in the market
subject only to dealer requirements).
    \634\ See Intermediary Definitions Adopting Release, 77 FR
30697-30699.
---------------------------------------------------------------------------

2. Entities That Maintain Legacy Portfolios
    The Cross-Border Proposing Release did not address the treatment of
legacy portfolios, but we stated in the Intermediary Definitions
Adopting Release that ``the fact that these entities no longer engage
in new swap or security-based swap transactions does not overcome the
fact that entities that are major participants will have portfolios
that are quite large and could pose systemic risk to the U.S. financial
system.'' \635\ Based on this understanding, the Commissions jointly
determined that such entities should not be excluded from major
participant regulation but explained that the Commissions would pay
particular attention to special issues raised by the application of
substantive rules to those legacy portfolios.\636\
---------------------------------------------------------------------------

    \635\ Id. at 30691.
    \636\ Id. at 30691 and n. 1170.
---------------------------------------------------------------------------

    In the Commission's proposed capital and margin requirements, we
proposed exceptions from certain account equity requirements, such as
collection of

margin, for non-bank security-based swap dealers' and non-bank major
security-based swap participants' accounts holding legacy security-
based swaps and we requested comment on these proposals.\637\ As
explained in the Intermediary Definitions Adopting Release, we may
entertain requests for relief or guidance on a case-by-case basis.\638\
One commenter requested that, at a minimum, the Commission provide
flexibility in any requirements that require a person to register as a
major security-based swap participant solely due to activity related to
its legacy portfolios.\639\ With respect to the activities of financial
guaranty insurers, one commenter suggested that amendments made to an
existing insured security-based swap or entry into a new security-based
swap with the same or a substituted counterparty in connection with
loss mitigation or risk reduction efforts, should receive the same
regulatory treatment given to legacy portfolio security-based swaps
because such security-based swaps do not increase notional
exposure.\640\
---------------------------------------------------------------------------

    \637\ See Exchange Act proposed rules 18a-3(c)(1)(iii)(D) and
18a-3(c)(2)(iii)(C); see also Capital and Margin Proposing Release,
77 FR 70214, 70247, 70265, 70269-70, 70271-72 (proposed capital,
margin and segregation requirements for security-based swap dealers
and major security-based swap participants).
    \638\ Intermediary Definitions Adopting Release, 77 FR 30691.
    \639\ AFGI Letter I at 2 (suggesting that the Commission
consider providing an exemption from major security-based swap
participant registration for entities that will be required to
register solely due to their legacy portfolios, if their legacy
positions are expected to decline below the major security-based
swap participant threshold within 12 to 14 months of the effective
date due to projected run-off or terminations); AFGI Letter II at 2-
5; AFGI letter, dated February 18, 2011 (``AFGI Letter V'') at 11
(stating that attribution to a financial guaranty insurer is not
appropriate when the insurer guarantees a security-based swap
obligation of an unaffiliated entity) (incorporated by reference in
AFGI Letter I).
    \640\ AFGI Letter I at 3 (stating that such activities, like
activities related to legacy swaps, do not constitute new business
and that regulators should implement consistent regulatory treatment
in this area to reduce exposure resulting from these legacy
transactions); AFGI Letter II at 2-3. See also AFGI Letter III at 5
(arguing that an amendment to a legacy account for loss mitigation
or credit strengthening without increasing notional exposure should
still be considered the legacy account instead of a new security-
based swap); AFGI letter, dated July 20, 2011 (``AFGI Letter IV'')
at 2-4 (supporting exclusion for state-regulated insurers)
(incorporated by reference in AFGI Letter I); AFGI Letter V at 3
(same).
---------------------------------------------------------------------------

    In the context of the cross-border application of the major
security-based swap participant definition, we are maintaining our
approach to legacy portfolios as described in the Intermediary
Definitions Adopting Release and are not excluding entities that
maintain legacy portfolios from the major security-based swap
participant definition.\641\ Given the foregoing, we are not adopting
an exclusion from the cross-border application of the major security-
based swap participant definition for entities that maintain legacy
portfolios.
---------------------------------------------------------------------------

    \641\ See Intermediary Definitions Adopting Release, 77 FR
30691.
---------------------------------------------------------------------------

G. Foreign Public Sector Financial Institutions and Government-Related
Entities

    In the Cross-Border Proposing Release, we did not propose to
specifically address the treatment of entities such as foreign central
banks, international financial institutions, multilateral development
banks, and sovereign wealth funds in the context of the major security-
based swap participant definition and instead sought comment regarding
the types, levels, and natures of security-based swap activity that
such organizations regularly engage in in order to allow us to better
understand the roles of these organizations in the security-based swap
markets.\642\
---------------------------------------------------------------------------

    \642\ See Cross-Border Proposing Release, 78 FR 31034-35. See
section 0 and Exchange Act rule 3a71-3(a)(4)(iii) (listing the
international organizations that are excluded from the definition of
``U.S. person'').
---------------------------------------------------------------------------

    The final rule defining ``U.S. person'' (like the proposed
definition of that term) specifically excludes several foreign public
sector financial institutions and their agencies and pension plans, and
more generally excludes any other similar international organization
and its agencies and pension plans.\643\ As explained in the context of
the de minimis exception, certain commenters requested that we take
further action to address the application of the dealer definition and
its de minimis exception to security-based swap activities involving
such organizations.\644\ Additionally, we noted that two commenters
stated that they should not be subject to the possibility of dealer
regulation for comity reasons, on the grounds that they were arms of a
foreign government.\645\ Commenters did not make arguments specific to
the application of the major security-based swap participant definition
but articulated their arguments in conjunction with their arguments
related to the application of the dealer definition. However, one
commenter explained that, though it understands that multilateral
development banks do not currently engage in security-based swap at the
level that would trigger major security-based swap participant
registration, even if they did, regulation would violate their
privileges and immunities.\646\
---------------------------------------------------------------------------

    \643\ See section 0, supra.
    \644\ See, e.g., WB/IFC Letter at 2-4, 6-7 (also stating that
such organizations should not be required to register as major
participants or to clear security-based swaps, and that affiliates
of such organizations should be excluded from the ``U.S. person''
definition); SC Letter at 16-24 (contending that the privileged and
immunities afforded such organizations would be violated by their
direct regulation as dealers or major participants, or by direct
regulation equivalents, and that affiliates of such organizations
also are immune from regulation); IDB Letter at 5. See note 420,
supra.
    \645\ See note 422, supra.
    \646\ See SC Letter at 16.
---------------------------------------------------------------------------

    As discussed in the context of the de minimis exception, it is our
view that such issues are outside the scope of this release given that
the source of any such privileges and immunities is found outside of
the Dodd-Frank Act and the federal securities laws.\647\
---------------------------------------------------------------------------

    \647\ See section 0, supra.
---------------------------------------------------------------------------

    Similar to the discussion in the context of the de minimis
exception, commenters also stated that non-U.S. persons should not have
to count their security-based swap positions involving these
organizations against their major security-based swap participant
threshold calculations on the basis that counting such positions would
constitute the impermissible regulation of such organizations.\648\ As
discussed in the context of the de minimis exception, we do not agree
with the suggestion that counting a person's positions with such
organizations against the major participant calculation thresholds--
when otherwise provided for by the rules--involves the regulation of
such organizations.\649\ Requiring a person to count, against their
major participant calculation thresholds, the person's positions
involving such an international organization as counterparty simply
reflects the application of the federal securities laws to that person
and its positions, and does not constitute the regulation of the
international organization.\650\ A person's security-based swap
positions with such an international organization are considered the
same, for purposes of applying the major participant calculation
thresholds and other Title VII requirements, as a position with some
other non-U.S. person counterparty.
---------------------------------------------------------------------------

    \648\ See section 0, supra; SC Letter at 18-19; WB/IFC Letter
(incorporating SC Letter).
    \649\ See 0, supra.
    \650\ See id.
---------------------------------------------------------------------------

H. Economic Analysis of Final Rules Regarding ``Major Security-Based
Swap Participants''

    These final rules and guidance regarding the cross-border

implementation of the application of the definition of major security-
based swap participants will affect the costs and benefits of major
security-based swap participant regulation by determining which
positions will be counted against a market participant's major
security-based swap participant calculation thresholds.\651\ The cross-
border rules have the potential to be important in determining the
extent to which the risk mitigation and other benefits of Title VII are
achieved, by identifying those market participants with sufficiently
large exposures to raise the types of systemic risk concerns that the
major security-based swap participant definition was intended to
address.\652\
---------------------------------------------------------------------------

    \651\ See section 0, supra; see also Intermediary Definitions
Adopting Release, 77 FR 30666 (explaining that in developing the
rules further defining ``substantial position,'' we were mindful of
the costs associated with regulating major participants and
considered cost and benefit principles as part of that analysis).
    \652\ See section 0, supra.
---------------------------------------------------------------------------

    As discussed in the context of the cost-benefit analysis of the
application of the de minimis exception in the cross-border context,
commenters addressed cost-benefit issues from a variety of
perspectives, including arguing that cost-benefit principles warranted
greater harmonization with the approaches taken by the CFTC or foreign
regulators.\653\ Commenters, however, did not separately address cost-
benefit issues related to the application of the major security-based
swap participant definition.
---------------------------------------------------------------------------

    \653\ See section 0, supra.
---------------------------------------------------------------------------

    We have taken economic effects into account in adopting these final
cross-border rules and providing guidance. Because security-based swap
contracts are associated with complex risks and the markets are highly
interconnected, we believe that positions that exist within the United
States, which are most likely to expose the U.S. financial system to
financial risk, should generally be included in the major security-
based swap participant threshold calculations. At the same time, we
recognize that the cross-border application of Title VII has the
potential to reduce liquidity within the U.S. market to the extent it
increases the costs of entering into security-based swaps or provides
incentives for particular market participants to avoid the U.S. market
to operate wholly outside the Title VII framework.\654\
---------------------------------------------------------------------------

    \654\ See id., supra.
---------------------------------------------------------------------------

    As addressed in the analysis of the costs and benefits of our
application of the de minimis rule, the application of the major
security-based swap participant definition implicates two types of
costs and benefits: Assessment costs and programmatic costs and
benefits.\655\ First, certain current and future participants in the
security-based swap market will incur assessment costs in connection
with determining whether they fall within the ``major security-based
swap participant'' definition and thus would have to register with the
Commission.
---------------------------------------------------------------------------

    \655\ See id., supra.
---------------------------------------------------------------------------

    Second, the registration and regulation of some entities as major
security-based swap participants will lead to programmatic costs and
benefits arising as a consequence of the Title VII requirements that
apply to registered major security-based swap participants.\656\
---------------------------------------------------------------------------

    \656\ See Cross-Border Proposing Release, 78 FR 31139.
---------------------------------------------------------------------------

    We discuss these costs and benefits associated with the final rules
more fully below. We also discuss the economic impact of certain
potential alternatives to the approach taken in the final rules.
1. Programmatic Costs and Benefits
(a) Cost-Benefit Considerations of the Final Rules
    Exchange Act rule 3a67-10 will permit market participants to
exclude certain of their positions from their major security-based swap
participant threshold calculations, and thus may cause particular
entities that engage in security-based swap transactions not to be
regulated as major security-based swap participants. The rules
accordingly may be expected to affect the programmatic costs and
benefits associated with the regulation of major security-based swap
participants under Title VII, given that those costs and benefits are
determined in part by which persons will be regulated as major
security-based swap participants.\657\
---------------------------------------------------------------------------

    \657\ See Intermediary Definitions Adopting Release, 77 FR
30727.
---------------------------------------------------------------------------

    As discussed in the context of the application of the de minimis
exception, this does not mean that there is a one-to-one relationship
between a person not being a ``major security-based swap participant''
as a result of these cross-border rules, and the resulting change to
programmatic benefits and costs.\658\ In practice, we believe that
these rules will focus the regulation of major security-based swap
participants on those market participants whose security-based swap
positions may expose the U.S. financial system to the levels of risk we
identified as warranting regulation as a major security-based swap
participant in the Intermediary Definitions Adopting Release, or on the
prevention of evasion. To the extent that a person's positions within
the United States remain below these thresholds, we believe that
regulating it as a major security-based swap participant under Title
VII would be less likely to produce the types of programmatic benefits
that Title VII was intended to address. In other words, these
requirements will direct the application of the major security-based
swap participant definition--which itself is the product of cost-
benefit considerations--towards those entities whose security-based
swap positions are most likely to pose the type and level of risk to
the U.S. financial system that Title VII was intended to mitigate.
---------------------------------------------------------------------------

    \658\ See section 0 and note 431, supra (discussing various
fixed and variable costs).
---------------------------------------------------------------------------

    As such, the rules reflect our assessment and evaluation of
programmatic costs and benefits:
     Positions of U.S. persons--Requiring U.S. persons, as
defined in the final rules (including the foreign branches of such
persons), to include all of their positions in their major participant
threshold calculations, addresses risks that these positions pose to
the U.S. financial system.
     Positions guaranteed by U.S. persons--Requiring non-U.S.
persons to include in their major security-based swap participant
threshold calculations all their positions that are guaranteed by a
U.S. person, where their counterparties have recourse to the guarantor,
reflects both the economic reality of the position--that the position
exists within the United States--and addresses the risks posed to the
U.S. financial system by the positions of such persons that are
guaranteed by U.S. persons.\659\
---------------------------------------------------------------------------

    \659\ See Exchange Act rule 3a67-10(b)(3)(ii); section 0, supra.
---------------------------------------------------------------------------

     Positions with U.S.-person counterparties--Requiring non-
U.S. persons to include their positions with counterparties that are
U.S. persons, unless the positions are with a foreign branch of a
registered security-based swap dealer, addresses risks to the U.S.
financial system arising from positions entered into with U.S.
persons.\660\
---------------------------------------------------------------------------

    \660\ See Exchange Act rule 3a67-10(b)(3)(i); section 0; see
also note 437, supra (discussing rationale for this limitation in
context of de minimis exception).
---------------------------------------------------------------------------

     Attribution of certain positions to guarantors of
performance under a security-based swap--Requiring guarantors of
performance under security-based swaps to attribute to themselves, for
purposes of their own major security-based swap participant threshold
calculations, positions that they guarantee, addresses risks that

guarantees pose to the U.S. financial system. To the extent that the
guarantee involves a position within the United States or brings a
position within the United States, our final rules would typically
require attribution to the guarantor. These requirements are intended
to help ensure that positions that pose risks to the U.S. financial
system are included in the guarantor's major participant threshold
calculations.\661\
---------------------------------------------------------------------------

    \661\ See Exchange Act rule 3a67-10(c); section 0, supra.
---------------------------------------------------------------------------

     Positions subject to anti-evasion provisions--Requiring
conduit affiliates to include all of their positions in their major
participant threshold calculations addresses, in a targeted manner, the
potential for evasion of the major security-based swap participant
requirements of Title VII.\662\ As noted above we are adopting a
definition of ``conduit affiliate'' that excludes affiliates of
registered security-based swap dealers and major security-based swap
participants to avoid imposing costs on registered persons in
situations that would not appear to implicate the types of evasion
concerns that the conduit affiliate definition is intended to address.
---------------------------------------------------------------------------

    \662\ See Exchange Act rule 3a67-10(b)(2); section 0, supra.
---------------------------------------------------------------------------

    In short, these final rules apply the major security-based swap
participant definition--which itself reflects cost-benefit
considerations \663\--to cross-border security-based swap positions in
a way that directs the focus of major participant regulation toward
those entities whose security-based swap positions may expose the U.S.
financial system to the levels of risk we identified as warranting
regulation as a major security-based swap participant.
---------------------------------------------------------------------------

    \663\ See Intermediary Definitions Adopting Release, 77 FR 30666
(explaining that in developing the rules further defining
``substantial position,'' we were mindful of the costs associated
with regulating major participants and considered cost and benefit
principles as part of that analysis).
---------------------------------------------------------------------------

(b) Evaluation of Programmatic Impacts
    In defining ``substantial position'' and ``substantial counterparty
exposure'' as part of the Intermediary Definitions Adopting Release, we
sought to capture persons whose security-based swap positions pose
sufficient risk to counterparties and the markets generally that
regulation as a market participant was warranted, without imposing
costs of Title VII on those entities for which regulation currently may
not be justified in light of the purposes of the statute.\664\ As
discussed above in the context of the dealer analysis, we estimated in
the Intermediary Definitions Adopting Release that, under those rules,
approximately 12 entities had outstanding positions large enough that
they would likely carry out threshold calculations and that fewer than
five entities, and potentially zero, would ultimately be required to
register as major security-based swap participants.\665\ Those
estimates provide a baseline against which the Commission can analyze
the programmatic costs and benefits and assessment costs of the final
rules applying the major security-based swap participant definition to
cross-border activities.
---------------------------------------------------------------------------

    \664\ See id. at 30724-25.
    \665\ See id. at 30727 and note 1529; section 0.
    That methodology determined that an entity that margins its
positions would need to have security-based swap positions
approaching $100 billion to reach the levels of potential future
exposure required to meet the substantial position threshold, even
before accounting for the impact of netting, while an entity that
clears its security based swaps generally would need to have
positions approaching $200 billion. We believed that it was
reasonable to assume that most entities that will have security-
based swap positions large enough to potentially cause them to be
major participants in practice will post variation margin in
connection with those positions that they do not clear, making $100
billion the relevant measure. The available data from 2011 showed
that only one entity had aggregate gross notional positions (i.e.,
aggregate buy and sell notional positions) in single-name CDS
exceeding $100 billion, and three other entities had aggregate gross
notional positions between $50 and $100 billion. We explained,
however, that an entity's positions reflecting single-name credit
protection sold to its counterparties, as opposed to purchased, may
be expected to be a more key determinant of potential future
exposure under those rules. The data showed that zero entities had
more than $100 billion in positions arising from selling single-name
credit protection and that only two entities had between $50 and
$100 billion arising from such positions. See id. at 30727, 30734
and note 1529.
    In the Intermediary Definitions Adopting Release, we noted that
to the extent that an entity's security-based swap positions are not
cleared or associated with the posting of variation margin,
security-based swap positions of $20 billion may lead to sufficient
potential future exposure to cause the entity to be a major
participant, though we believed that few, if any, entities would
have a significant number of such positions. The data indicated that
only 32 entities have notional CDS positions in excess of $10
billion. See id. at note 1529.
---------------------------------------------------------------------------

    We believe the methodology used in the Intermediary Definitions
Adopting Release also is appropriate for considering the potential
programmatic costs and benefits associated with the final cross-border
rules. This methodology particularly can help provide context as to how
rules regarding the cross-border application of the definition of major
security-based swap participant may change the number of entities that
must register as major security-based swap participants, and thus help
provide perspective regarding the corresponding impact on the
programmatic costs and benefits of Title VII. Applying that methodology
to 2012 data regarding the single-name CDS market suggests that under
these final rules five or fewer entities may have to register as major
security-based swap participants--a number that is consistent with our
estimates in the Intermediary Definitions Adopting Release.\666\
---------------------------------------------------------------------------

    \666\ See note 444, supra (noting that the data on which the
methodology is based has been updated).
    Consistent with the methodology used in the Intermediary
Definitions Adopting Release, the 2012 data indicated that two
entities had aggregate gross notional positions (i.e., aggregate buy
and sell notional positions) in single-name CDS exceeding $100
billion. Applying the principles reflected in these final rules
regarding the counting of positions against the major security-based
swap participant thresholds suggests that two entities would have
aggregate gross notional positions in single name CDS exceeding $100
billion. No additional entities would be required to register as a
result of aggregation. Based on this data, we believe that it is
reasonable to conclude that five or fewer entities ultimately may
register as major security-based swap participants.
---------------------------------------------------------------------------

    The factors that are described in more detail in section IV.I.1(b)
regarding the application of the de minimis exception are also relevant
to and may impact the programmatic benefits and costs associated with
the implementation of the cross-border application of the major
security-based swap participant definition. Those factors include
limitations of the methodology and data used, the impact of the not yet
finalized rules implementing Title VII entity-level and transaction-
level requirements applicable to major security-based swap
participants, market participants' modifications to their business
structure or practices in response to the final rules, and the impact
on market participants of other regulatory requirements that are
analogous to the major security-based swap participant
requirements.\667\
---------------------------------------------------------------------------

    \667\ See section 0, supra.
---------------------------------------------------------------------------

    In general, however, and consistent with our territorial approach,
we believe that these rules are targeted appropriately and do not apply
major security-based swap participant regulation to those entities
whose positions have a more limited impact on the U.S. financial system
and hence whose regulation as a major security-based swap participant
under Title VII would be less linked to programmatic benefits (i.e.,
non-U.S. persons that engage in security-based swap transactions
entirely, or almost entirely, outside the United States with non-U.S.
persons or with certain foreign branches), while applying major
participant regulation to those entities whose positions would be more
likely to produce programmatic benefits under Title VII. The nexus
between specific

aspects of these requirements and the programmatic costs and benefits
also is addressed below in connection with our consideration of various
alternatives to the approach taken in the final rules.
    Finally, as discussed in the context of the de minimis exception,
we recognize that the U.S. market participants and positions regulated
under Title VII are a subset of the overall global security-based swap
market and that shocks to risk or liquidity arising from a foreign
entity's positions outside the United States may spill into the United
States.\668\ We also have considered these spillovers in connection
with our analysis of the effects of these final cross-border rules on
efficiency, competition, and capital formation.\669\
---------------------------------------------------------------------------

    \668\ See section 0, supra (describing spillover risks).
    \669\ See section 0, infra.
---------------------------------------------------------------------------

2. Assessment Costs
    The analysis of how these cross-border rules will affect the
assessment costs associated with the ``major security-based swap
participant'' definition is related to the assessment cost analysis
described in the Intermediary Definitions Adopting Release,\670\ but
must also account for certain issues specific to these cross-border
rules. While in certain regards those assessment costs can more readily
be estimated than the programmatic effects discussed above, the
assessment costs associated with the cross-border application of the
Title VII major participant requirements will be considerably less
significant than those programmatic effects.
---------------------------------------------------------------------------

    \670\ See Intermediary Definitions Adopting Release, 77 FR
30733-36.
---------------------------------------------------------------------------

    The Intermediary Definitions Adopting Release addressed how certain
market participants could be expected to incur costs in connection with
their determination of whether they have a ``substantial position'' in
security-based swaps or pose ``substantial counterparty exposure''
created by their security-based swaps, which is necessary for
determining whether they are major security-based swap
participants.\671\ In that release we estimated that as many as 12
entities would likely perceive the need to perform these calculations,
given the size of their security-based swap positions.\672\ We
preliminarily believed that entities that perceive the need to perform
the threshold calculations as a result of the proposed rules and
guidance set forth in the Cross-Border Proposing Release would incur
only relatively minor incremental costs to those described in the
Intermediary Definitions Adopting Release.\673\ Based on the estimate
that no more than 12 entities would perceive the need to engage in the
analysis of whether they are a major security-based swap participant,
we estimated that the total legal costs associated with evaluating the
various elements of the definition may approach $360,000.\674\
---------------------------------------------------------------------------

    \671\ See id. at 30734-36.
    \672\ See id. at 30734.
    \673\ See Cross-Border Proposing Release, 77 FR 31141.
    \674\ See Intermediary Definitions Adopting Release, 77 FR
30736. We also noted in that release that if 32 entities were to
perform the analysis, the market wide legal costs would total
$960,000. See id. at 30736 n. 1539; see also note 665, supra (noting
that if an entity did not clear or post variation margin, $20
billion in notional CDS positions may be sufficient exposure to
cause the entity to be a major participant and that 32 entities have
notional CDS positions exceeding $10 billion).
---------------------------------------------------------------------------

    As discussed in the context of the de minimis exception,
application of these cross-border rules can be expected to affect the
assessment costs that market participants will incur. In part, certain
non-U.S. persons may be expected to incur personnel costs and legal
costs--beyond the legal costs addressed as part of the Intermediary
Definitions Adopting Release--associated with analyzing these cross-
border rules and developing systems and procedures to assess which
transactions would have to be counted against the major security-based
swap participant calculation thresholds (or with the purpose of
avoiding positions that pose risk to the United States financial system
that would be sufficient to meet the applicable thresholds). On the
other hand, while certain market participants also would incur
additional legal costs associated with the major security-based swap
participant determination (i.e., the assessment of whether particular
positions should be included in the major participant threshold
calculations) addressed in the Intermediary Definitions Adopting
Release, the application of the cross-border rules may reduce the
number of entities that incur such legal costs.\675\
---------------------------------------------------------------------------

    \675\ See section 0, supra.
---------------------------------------------------------------------------

    In adopting these rules we estimate the assessment costs that
market participants may incur as a result. As discussed below, however,
these costs in practice may be mitigated in large part by steps that
market participants already have taken in response to other regulatory
initiatives, including compliance actions taken in connection with the
requirements applicable to swaps.
(a) Legal Costs
    The implementation of these cross-border rules in some
circumstances has the potential to change the legal costs identified in
the Intermediary Definitions Adopting Release, including by adding new
categories of legal costs that non-U.S. persons may incur in connection
with applying the major security-based swap participant definition in
the cross-border context.
    Legal costs related to the cross-border application of major
security-based swap participant definition--As discussed in the
Intermediary Definitions Adopting Release, certain market participants
will incur assessment costs related to the analysis of whether their
positions rise to the levels set by the major security-based swap
participant definition. For purposes of that release, we assumed that
entities with aggregate gross notional single-name CDS positions
exceeding $25 billion may identify a need to perform the major
participant analysis.\676\ Based on that figure, we estimated that 12
entities would perceive the need to perform the major participant
analysis.\677\
---------------------------------------------------------------------------

    \676\ See Intermediary Definitions Adopting Release, 77 FR note
1529.
    \677\ Based on data as of December 2011, in that release we
found that 1 entity had aggregate gross notional positions from
bought and sold credit protection exceeding $100 billion, 4 entities
had aggregate gross notional single-name CDS positions exceeding $50
million, and 12 entities had aggregate gross notional CDS positions
exceeding $25 billion. See id. at 30734 n. 1529.
---------------------------------------------------------------------------

    Under the final rules described above, available data from 2012
indicates that approximately nine persons will have relevant positions
exceeding $25 billion, and we continue to believe that firms whose
positions exceed this amount will be likely to perform the major
participant threshold analysis.\678\ Of those nine, five entities are
not domiciled in the United States. Consistent with our view in the
proposing release, we expect that non-U.S. firms in this set will incur
additional costs beyond those described in the Intermediary Definitions
Adopting Release. These additional costs would arise due to information
that non-U.S. market participants would have to collect and maintain in
order to calculate the size of positions that count towards the major
participant thresholds. Consistent with our analysis in the
Intermediary Definitions Adopting Release, we believe that it is
reasonable to conclude that at least some entities with security-based
swap positions approaching the major participant thresholds are likely
to seek

legal counsel for interpretation of various aspects of the rules
pertaining to the major participant definition.\679\ Though the costs
associated with obtaining such legal services would vary depending on
the facts and circumstances regarding an entity's positions, we believe
that $40,000 is a reasonable estimate of the upper end of the range of
the costs of obtaining the services of outside counsel in undertaking
the legal analysis of the entity's status as a major security-based
swap participant.\680\
---------------------------------------------------------------------------

    \678\ See section 0, supra. The difference between this and our
previous estimate of 12 entities reflects changes in security-based
swap activity since the Intermediary Definitions Adopting Release
and the final rules' treatment of positions between non-U.S. persons
in the absence of guarantees from U.S. persons.
    \679\ See Intermediary Definitions Adopting Release, 77 FR
30735.
    \680\ The average cost incurred by such entities in connection
with outside counsel is based on staff experience in undertaking
legal analysis of status under federal securities laws. The staff
believes that costs associated with obtaining outside legal counsel
relating to such determinations range from $20,000 to $40,000
depending on the complexity of the entity. See id. at 30735-36 n.
1537 (estimating the upper bound of such costs at $30,000). We note
that the additional $10,000 added to the estimate in the
Intermediary Definitions Adopting Release is intended to account for
the additional complexity that non-U.S. persons may face in
performing the analysis.
    These estimates do not reflect a new category of costs arising
from the cross-border rules. They instead are a revision of a
category of previously identified costs that market participants may
incur in obtaining legal services to assist in performing the major
participant analysis, using newer data and reflecting only positions
that are counted under the final cross-border rules.
---------------------------------------------------------------------------

    Legal costs related to systems analysis--As noted in the assessment
cost analysis related to the de minimis exception (and in addition to
the estimates in the Cross-Border Proposing Release), we believe that
it is reasonable to conclude that those five entities not domiciled in
the United States may have to incur one-time legal expenses related to
the development of systems and analysis expenses--discussed below--to
identify which of their security-based swap positions potentially must
be counted for purposes of the major security-based swap participant
analysis, consistent with these cross-border rules. As in the dealer
context, this additional cost estimate reflects the fact that the
development of such systems and procedures must address cross-border
rules that require accounting for factors such as whether an entity's
security-based swaps are subject to guarantees from U.S. persons,
whether its counterparties are U.S. persons, and, specific to the major
security-based swap participant analysis, whether the entity must
attribute the position to itself pursuant to the attribution rules. As
in the analysis of assessment costs related to the dealer definition,
we estimate that such legal costs would amount to approximately $30,400
per entity, and that those five entities would incur total costs of
approximately $152,000.\681\
---------------------------------------------------------------------------

    \681\ See section 0 and note 460 (addressing calculations of
costs), supra.
---------------------------------------------------------------------------

(b) Costs Related to New Systems, Analysis, and Representations
    Transaction-monitoring systems--The elements introduced by the
final cross-border rules may cause certain non-U.S. persons to
implement systems to identify whether their positions exceed the major
security-based swap participant calculation thresholds. Such systems
may reflect the need for non-U.S. persons to: (i) Identify whether
their counterparties are ``U.S. persons''; (ii) determine whether their
positions with U.S. persons arise from transactions conducted through a
foreign branch (which itself requires consideration of whether their
counterparty is a ``foreign branch'') and--of those--determine which
positions involve a foreign branch of a U.S. bank that itself is a
registered security-based swap dealer; (iii) determine whether
particular positions are subject to a recourse guarantee against a U.S.
person; and (iv) evaluate the applicability of the attribution
rules.\682\ Our estimates for the required systems are the same in the
major participant analysis as they are in the dealer analysis: One-time
programming costs of $14,904 and ongoing annual systems costs of
$16,612 per entity.\683\
---------------------------------------------------------------------------

    \682\ We do not believe that a potential major security-based
swap participant will need to use any systems to determine if it is
a ``conduit affiliate.'' See note 462, supra.
    \683\ See section 0 and note 464, supra.
---------------------------------------------------------------------------

    Analysis of counterparty status, including representations--As
discussed in the context of the de minimis exception, non-U.S. market
participants would be likely to incur costs arising from the need to
assess the potential U.S.-person status of their counterparties, which
we would typically expect to be dealers, and in some cases to obtain
and maintain records related to representations regarding their
counterparty's U.S.-person status.\684\ We anticipate that non-U.S.
persons are likely to review existing information about their
counterparties to assess whether those counterparties are U.S.
persons.\685\ Non-U.S. persons at times may also request and maintain
representations from their dealer and non-dealer counterparties to help
determine or confirm their counterparties' status.\686\ Accordingly, as
in the discussion of dealer assessment costs, in our view, such
assessment costs primarily would encompass one-time costs to review and
assess existing information regarding counterparty domicile, principal
place of business, and other factors relevant to potential U.S.-person
status, as well as one-time costs associated with requesting and
collecting representations from counterparties.\687\ The costs
associated with representations in the context of the major participant
analysis would be one-time costs of approximately $24,200 per
firm.\688\
---------------------------------------------------------------------------

    \684\ See Exchange Act rule 3a67-10(a)(4) and (3) (incorporating
the definitions of ``U.S. person'' ``transaction conducted through a
foreign branch,'' including provisions permitting reliance on
representations); see also section 0 and note 465, supra (noting
that non-U.S. market participants may seek representations as to
whether positions arise from transactions conducted through a
foreign branch of a U.S. bank that is registered as a security-based
swap dealer and also noting our understanding that few, if any, U.S.
persons may participant in the single-name CDS market through their
foreign branches).
    \685\ See section 0, supra.
    \686\ See id.
    \687\ See section 0 and note 466, supra (explaining that
determination of U.S.-person status generally will not vary over
time absent changes involving corporate reorganizations).
    \688\ See section 0, supra. The cumulative estimate is based on
the same methodology and SIFMA Management & Professional Earnings in
the Securities Industry 2013 data that we used to estimate these
one-time costs for dealers. See note 467, supra. With respect to
major security-based swap participants, we conservatively assume
that each of the non-U.S. firms will have 30 single-name CDS
counterparties (based on data indicating that the five non-U.S.
firms persons with total single-name CDS positions in 2012 exceeding
$25 billion all had fewer than 45 counterparties in connection with
single-name CDS, which produces an estimate of 15 hours of
compliance staff time and 15 hours of legal staff time per firm.
Based upon data from SIFMA's Management & Professional Earnings in
the Securities Industry 2013 (modified by the Commission staff to
account for an 1800-hour-work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead), the staff
estimates that the average national hourly rate for a senior
compliance examiner is $217 and that the average national hourly
rate for an in-house attorney is $380; this leads to a cumulative
estimate of $9,000 per firm for such costs.
    Consistent with the Cross-Border Proposing Release, moreover,
this estimate is further based on estimated 40 hours of in-house
legal or compliance staff's time (based on the above rate of $380
per hour for an in-house attorney) to establish a procedure of
requesting and collecting representations from trading
counterparties, taking into account that such representation may be
incorporated into standardized trading documentation used by market
participants. This leads to an estimate of $15,200 per firm for such
costs. See section 0 and note 467, supra.
---------------------------------------------------------------------------

    Monitoring of counterparty status--Also as addressed in the context
of the de minimis exception, market participants may be expected to
adapt their systems to monitor the status of their counterparties for
purposes of future security-based swap activities, which would allow
market participants to maintain records of counterparty status for
purposes of conducting the

major participant assessment.\689\ Market participants also may need to
monitor for the presence of information that may indicate that the
representations they have received are outdated or otherwise are not
valid.\690\ The costs associated with adapting the systems described
above to monitor the status of their counterparties for purposes of
their future security-based swaps would be the same as the costs in the
dealer analysis: One-time costs of approximately $12,436.\691\
---------------------------------------------------------------------------

    \689\ We also recognize that the final rules requiring
attribution may impose certain additional monitoring costs on market
participants whose position in a security-based swap is guaranteed
by another entity and on the entities that provide the guarantee. We
anticipate that the guarantors may receive reports from the market
participants whose position is guaranteed in order to allow the
guarantors to monitor the amount of such positions for purposes of
determining whether the positions attributed to the guarantor rise
to the level that would require them to register as a major
security-based swap participant.
    \690\ See section 0 and note 469, supra.
    \691\ See section 0 and note 468 (noting that parties may
structure their relationships in a way that will not require a
separate representation in conjunction with each individual
position) and 470, supra (describing calculations for this
estimate).
---------------------------------------------------------------------------

    Summary of systems, analysis, and representation costs--The summary
of costs that certain non-U.S. market participants would incur in
connection with systems, analysis of counterparty status and
representations in connection with these cross-border rules would be
approximately $51,500 in one-time costs \692\ and $16,612 in estimated
annual ongoing costs.\693\ Based on our estimate, subject to the
limitations associated with the use of data analysis discussed above,
that five non-U.S. domiciled entities will incur these assessment
costs, we estimate that the total one-time industry-wide costs
associated with establishing such systems would amount to approximately
$257,500 and total ongoing costs would amount to approximately $83,100.
---------------------------------------------------------------------------

    \692\ Consistent with the above discussion, the estimated one-
time costs of $51,500 represent: The costs to establish a system to
assess the status of their positions under the definitions and other
provisions specific to these cross-border rules ($14,904); the costs
related to the assessment of counterparty status, including costs of
assessing existing information and of requesting and obtaining
representations, as well as costs of related procedures ($24,200);
and the costs for monitoring the status of their counterparties for
purposes of their future security-based swap activities ($12,436).
See section 0 and note 471, supra.
    \693\ See section 0, supra.
---------------------------------------------------------------------------

(c) Overall Considerations Related to Assessment Costs
    In sum, we believe that the effect of these final cross-border
rules would be an increase over the amounts that otherwise would be
incurred by certain non-U.S. market participants, both in terms of
additional categories of legal costs and in terms of the need to
develop certain systems and procedures. As discussed in the context of
the assessment costs applicable to the dealer analysis, we believe that
requiring certain non-U.S. persons to incur such assessment costs is an
unavoidable adjunct to the implementation of a set of rules that are
appropriately tailored to apply the ``major security-based swap
participant'' definition under Title VII to a global security-based
swap market in a way that yields the relevant benefits associated with
the regulation of major participants and achieves the benefits of Title
VII.\694\ The benefits of Title VII's regulatory requirements
applicable to major security-based swap participants could be
undermined if a significant portion of positions held by non-U.S.
persons that impose risk on the U.S. financial system were excluded
from the Title VII framework. In certain respects, however, decisions
embedded in these final rules are designed to avoid imposing assessment
costs upon market participants.\695\
---------------------------------------------------------------------------

    \694\ See section 0, supra.
    \695\ See id.
---------------------------------------------------------------------------

    As explained in the context of the analysis for dealers, we
recognize that our estimates of assessment costs may result in an
overestimation as such costs may be tempered to the extent that market
participants' assessments correspond to the assessments they otherwise
would follow due to other regulatory requirements or business
practices, particularly with respect to assessments they may have made
regarding the U.S.-person status of their counterparties.\696\
---------------------------------------------------------------------------

    \696\ See id.
---------------------------------------------------------------------------

    Also as noted in the dealer discussion, we acknowledge that certain
aspects of the final rules may differ from those of the CFTC, which may
result in higher costs for market participants, but we believe that
such differences are justified and we discuss those differences in the
substantive discussions of the specific rules.\697\ We also recognize
other factors that may impact the assessment costs for potential major
security-based swap participants, such as the possibility that certain
market participants will choose to restructure their business to avoid
major security-based swap participant regulation.\698\
---------------------------------------------------------------------------

    \697\ See id.
    \698\ See id.
---------------------------------------------------------------------------

3. Alternative Approaches
    As discussed above, the final rules incorporate a number of
provisions designed to focus Title VII major security-based swap
participant regulation upon those persons whose security-based swap
positions may raise the risks within the United States that the major
participant definition was intended to address.\699\
---------------------------------------------------------------------------

    \699\ See section 0, supra.
---------------------------------------------------------------------------

    In adopting these final rules we have considered alternative
approaches suggested by commenters, including the economic effects of
following such alternative approaches. In considering the economic
impact of potential alternatives, we have sought to isolate the
individual alternatives to the extent practicable, while recognizing
that many of those alternatives are not mutually exclusive.\700\
---------------------------------------------------------------------------

    \700\ Cf. section 0, supra.
---------------------------------------------------------------------------

    We further have considered such potential alternatives in light of
the methodologies discussed above, by assessing the extent to which
following particular alternatives would be expected to increase or
decrease the number of entities that ultimately would be expected to be
regulated as major security-based swap participants under the final
rules, as well as the corresponding economic impact. Analysis of the
available data would tend to suggest that various alternative
approaches suggested by commenters would not produce any changes in the
numbers of market participants that may have to be regulated as major
security-based swap participants. These results are subject to the
above limitations, however, including limitations regarding the ability
to quantitatively assess how market participants may adjust their
future activities in response to the rules we adopt or for independent
reasons. Accordingly, while such analyses provide some context
regarding alternatives, their use as tools for illustrating the
economic effects of such alternatives is limited.
(a) Security-Based Swap Positions Held by Foreign Branches of U.S.
Banks
    As with the final rules in the context of the de minimis exception,
the final rules applying the major security-based swap participant
definition require U.S. banks to count all positions of their foreign
branches against the major participant calculation thresholds, even
when the counterparty is a non-U.S. person or another foreign branch of
a U.S. person. The proposed definition of ``U.S. person'' plays a
central role in the application of Title VII in the cross-border
context, directly affecting which

positions a person must include in its major security-based swap
participant threshold calculations and ultimately, the number of
entities that will register as major security-based swap participants.
An alternative approach would permit U.S. persons not to include the
positions of their foreign branches in their major security based swap
participant calculation thresholds. As discussed above, we believe our
approach to U.S. persons as described above, is consistent with our
overall territorial approach to the application of Title VII
requirements to the cross-border security-based swap market, because it
requires that major security-based swap participant calculation
thresholds include the positions of such persons that are most likely
to cause risk to the U.S. financial system at the threshold levels set
in the major security-based swap participant definition.\701\ For the
reasons discussed above, we believe that it is appropriate for a U.S.
person to include in its calculation thresholds positions conducted
through foreign branches to the same extent as other positions help by
U.S. persons.\702\
---------------------------------------------------------------------------

    \701\ See section 0, supra.
    \702\ See section 0, supra.
---------------------------------------------------------------------------

    As in the dealer analysis, using the 2012 data to assess the impact
associated with this alternative does not indicate a change to our
estimate that up to five entities potentially would register as major
security-based swap participants, and the analysis is subject to the
limitations discussed in the context of the dealer analysis.\703\
Adopting an alternative approach that does not require foreign branches
to count their positions with non-U.S. persons could incentivize U.S.
persons to execute higher volumes through their branches.\704\
---------------------------------------------------------------------------

    \703\ See section 0 and note 477, supra.
    \704\ See section 0, supra (discussing the same issue in the
dealer context).
---------------------------------------------------------------------------

(b) Positions of Non-U.S. Persons for Which the Counterparty Has Rights
of Recourse Against a U.S. Person
    The final rules require a non-U.S. person to count, against its
major security-based swap participant calculation thresholds, positions
for which the non-U.S. person's performance in connection with the
transaction is subject to a recourse guarantee against a U.S. person.
Although the proposal instead would have treated such guaranteed
affiliates like any other non-U.S. persons, we believe that this
provision is appropriate for the reasons discussed above, including the
fact that such recourse guarantees pose risks to the U.S. financial
system via the guarantor.\705\
---------------------------------------------------------------------------

    \705\ See section 0, supra (addressing similar discussion in the
context of the dealer analysis).
---------------------------------------------------------------------------

    This aspect of the final rules reflects a middle ground between
commenter views, as is discussed above regarding the approach taken in
the dealer analysis.\706\ The same two alternatives that are presented
in the analysis of alternatives to the approach to the dealer final
rules are relevant to the discussion of the application of the major
security-based swap participant definition--one alternative in which
the final rules do not address guarantees at all, and one in which
(based on the concept of a de facto guarantee) all affiliates of a U.S.
person should have to count their security-based swap positions against
the calculation thresholds, with a potential exception if they
demonstrate to the market that there will be no guarantee.\707\ A third
alternative and the approach taken in the proposal would require the
non-U.S. person to include in its threshold calculations only those
positions with U.S. persons that are not guaranteed but would require
those positions that are guaranteed to be attributed to the U.S. person
guarantor for purposes of its own threshold calculations.
---------------------------------------------------------------------------

    \706\ See id., supra.
    \707\ See id.
---------------------------------------------------------------------------

    The analysis of the first two alternatives discussed in the context
of the application of the dealer requirements above also applies in the
context of applying the major security-based swap participant
definition.\708\ The third alternative, which is the approach taken in
the proposal, may have reduced programmatic benefits by increasing the
likelihood that, even when a person exceeds the thresholds by virtue of
its own positions, which exist within the United States by virtue of
the U.S. person guarantor, it will not be subject to direct regulation
as a major participant.\709\ Under the proposed approach, only the U.S.
person guarantor would have counted the positions for which the non-
U.S. person's counterparty had rights of recourse against the U.S.
person, meaning that such positions would not be accounted for in the
major participant threshold calculations of the entity that directly
enters into the positions. The economic reality of such positions is
that by virtue of the guarantee the non-U.S. person effectively acts
together with a U.S. person to engage in the security-based swap
activity that results in the positions, and the non-U.S. person's
positions cannot reasonably be isolated from the U.S. person's
engagement in providing the guarantee.\710\ The final rule reflects
this economic reality by requiring the non-U.S. person whose position
is guaranteed to include such positions in its major security-based
swap participant threshold calculations.\711\
---------------------------------------------------------------------------

    \708\ See section 0, supra (explaining that not requiring non-
U.S. persons to include positions for which their counterparty has a
recourse guarantee against a U.S. person could incentivize U.S.
persons to use such guarantees, whereas an approach that requires an
affiliate of a non-U.S. person to include all of its positions in
its major security-based swap participant calculation thresholds may
negatively impact liquidity).
    \709\ See section 0, supra.
    \710\ See section 0, supra.
    \711\ See id.
---------------------------------------------------------------------------

    For the foregoing reasons, we believe that the approach taken in
the final rules is appropriate. We note that an assessment of the data
regarding the first alternative does not indicate a change in the
number of entities that may be expected to register as major security-
based swap participants.\712\ Due to data limitations that prevent us
from identifying which individual transactions of non-U.S. persons are
subject to guarantees by U.S. persons and data limitations preventing
us from obtaining information about the single-name security-based swap
transactions of non-U.S. domiciled persons for single-name CDS
involving a non-U.S. reference entity, the available data does not
enable us to assess the second and third alternatives.\713\
---------------------------------------------------------------------------

    \712\ See section 0 and note 481 (explaining that the data does
not enable us to identify which positions of non-U.S. persons are
subject to guarantees by U.S. persons).
    \713\ See section 0 and notes 481 and 482, supra.
---------------------------------------------------------------------------

(c) Positions of Conduit Affiliates
    The final rules require conduit affiliates to count all of their
security-based swap positions in their major security-based swap
participant threshold calculations. The available data does not permit
us to identify which market participants would be deemed conduit
affiliates.\714\ As explained in the corollary discussion in the dealer
analysis, we believe the alternative of not requiring such entities to
count their positions would remove a tool that should help to deter
market participants from seeking to evade regulation.
---------------------------------------------------------------------------

    \714\ See section 0, supra.
---------------------------------------------------------------------------

    As addressed in the dealer analysis another alternative to address
such evasive activity could be to narrow the inter-affiliate exception,
such as by making the exception unavailable when non-U.S. persons enter
into positions

with their U.S. affiliates.\715\ While this alternative may be expected
to reduce costs to such entities, we believe the final rules will
achieve comparable anti-evasion purposes with less cost and
disruption.\716\
---------------------------------------------------------------------------

    \715\ See id.
    \716\ See id.
---------------------------------------------------------------------------

(d) Positions of Non-U.S. Persons With Foreign Branches of U.S. Banks
and Certain Other Counterparties
    The final rules require non-U.S. persons to include their positions
arising from transactions conducted through foreign branches of U.S.
banks unless the U.S. bank is registered as a security-based swap
dealer. This reflects a change from the proposal, which would have
required non-U.S. persons to include all positions with foreign
branches of U.S. banks without exception. The final approach, as in the
context of the dealer analysis, reflects a middle ground between
commenter views, which provided two alternatives: That all positions
arising from transactions conducted through foreign branches be counted
or that no such position be counted against a non-U.S. person's major
security-based swap participant calculation thresholds.\717\ Adopting
the first alternative requiring non-U.S. persons to include all
positions with foreign branches would raise the potential for disparate
impacts upon U.S. persons with foreign branches, along with associated
concerns about liquidity impacts.\718\ Adopting the second alternative
excluding all such positions from being counted, could incentivize U.S.
market participants that are not registered as dealers to execute
higher volumes of security-based swaps through their foreign branches,
resulting in higher levels of risk being transmitted to the United
States without the risk-mitigating attributes of having a registered
dealer involved in the position.\719\
---------------------------------------------------------------------------

    \717\ See section 0, supra.
    \718\ See id.
    \719\ See id.
---------------------------------------------------------------------------

    The available data related to these alternatives is subject to the
limitations discussed above and does not indicate a change to our
assessment of the number of entities that may be expected to register
as major security-based swap participants.\720\
---------------------------------------------------------------------------

    \720\ See id.
---------------------------------------------------------------------------

    Another alternative approach would require non-U.S. persons to
include in their major security-based swap participant threshold
calculations those positions for which they have rights of recourse
against a U.S. person or their positions with counterparties that are
conduit affiliates.\721\ We believe that the positions of such non-U.S.
persons do not transmit risk to the United States in the same way as if
the potential major security-based swap participant is the entity whose
performance is guaranteed by a U.S. person because the default of the
non-U.S. person who holds the right of recourse against the U.S. person
guarantor will not impact the outward exposure of the U.S. person or
the non-U.S. person whose position is guaranteed. While these
alternatives may potentially increase programmatic benefits associated
with Title VII major participant regulation, they would also likely
increase assessment costs by requiring such non-U.S. persons to
evaluate and track whether they have a right of recourse against a U.S.
person, potentially reducing liquidity available to U.S. corporate
groups that provide guarantees to non-U.S. persons.\722\ We note that,
under the final rules regarding guaranteed positions, the entity
involved in the position with the closest connection to the United
States, the non-U.S. person whose position is guaranteed, as well as
the U.S. guarantor itself, will already be including the position in
each of their calculations. Thus we believe such benefits would be more
attenuated than those associated with the final rules' approach of
directly counting the positions of such guaranteed non-U.S. persons.
Accordingly, we do not believe these alternatives would generate
significant additional programmatic benefits.
---------------------------------------------------------------------------

    \721\ See note 576 (describing CFTC approach) and note 189
(describing comments suggesting to treat guaranteed entities as U.S.
persons), supra.
    \722\ See section 0.
---------------------------------------------------------------------------

(e) Attribution
i. Attribution to U.S. Persons
    Our final attribution approach requires U.S. persons to include,
for purposes of their major security-based swap participant calculation
thresholds, those positions for which a non-U.S. person's counterparty
has rights of recourse against the U.S. person.
    An alternative approach would not require a U.S. person to include
such positions in its threshold calculations. This alternative
potentially reduces the programmatic costs and benefits of major
participant regulation because it would reduce the number of positions
that U.S. guarantors would include in their calculations. By reducing
the costs associated with providing guarantees, such an alternative
could reduce the barriers to participation in the security-based swap
market faced by participants who might benefit from risk sharing
afforded by security-based swap positions but cannot credibly provide
sufficient information for their counterparties to assess
creditworthiness. We further believe that such an approach would only
reduce the assessment costs associated with major participant
regulation to the extent that U.S. guarantors do not have private
incentives in place to collect information about positions they
guarantee.
    As noted in section V.D.3, however, we believe it is important to
account for the risk to the U.S. financial system transmitted by such
guaranteed positions. Ensuring that a U.S. person counts positions of
potentially several entities whose counterparties have rights of
recourse against it, where each of those entities may be individually
below the major participant threshold, will generate the types of
benefits that Title VII was intended to produce. The benefits of
including these positions are significant because, through the U.S.
guarantor, these positions expose the U.S. financial system to the type
of risk that the definition of major security-based swap participant is
intended to address.
ii. Attribution to Non-U.S. Persons
    Under the final rules a non-U.S. person must include security-based
swap positions of a U.S. person for which that person's counterparty
has rights of recourse against the non-U.S. person, and security-based
swap positions of another non-U.S. person that are with a U.S.-person
counterparty who has rights of recourse against the non-U.S. person
that is the potential major security-based swap participant.
    An alternative approach to these requirements would be to not
require non-U.S. persons to include such positions, even when those
positions are entered into by U.S. persons or when a U.S. person has a
right of recourse against them under those positions. Not requiring
these positions to be attributed to the non-U.S. person could reduce
assessment costs for non-U.S. persons and potentially result in fewer
non-U.S. persons ultimately registering as major security-based swap
participants. This alternative potentially improves risk sharing by
U.S. persons who must rely on guarantees in order to participate in the
security-based swap market by reducing the costs incurred by non-U.S.
person guarantors. It likely would, however, also reduce programmatic
benefits to the extent that non-U.S. persons that guarantee positions
within the United States of multiple entities, each of which is below
the major participant threshold, are not required

to include such positions in their own calculations.
    Such non-U.S. persons who provide guarantees ultimately bear the
risk of positions they guarantee, and the aggregate risk exposure of
the U.S. financial system to a non-U.S. person guarantor varies more
directly with the notional amount of positions involving U.S. persons
that are guaranteed than with the number of entities to which it
provides guarantees. As a result, the Commission believes it is
appropriate to apply attribution requirements that treat non-U.S.
person guarantors of positions to which U.S. persons are counterparties
as if they were direct counterparties. With respect to guarantees
provided by non-U.S. persons to U.S. persons, the Commission believes
it is appropriate to attribute guaranteed positions because U.S.
persons bear the risk that non-U.S. person guarantors will be unable to
fulfill obligations under the guarantees they provide.
(f) Positions Cleared Through a Clearing Agency in the United States
    The final approach requires non-U.S. persons to include in their
major participant threshold calculations those positions that are
entered into with U.S. persons, including positions that are cleared
through a registered clearing agency in the United States. An
alternative raised by a commenter suggested that the location of
clearing not be relevant for purposes of determining whether a non-U.S.
person is a major security-based swap participant.\723\ This
alternative would ignore the risk that is posed to the U.S. financial
system by positions cleared through a U.S.-person clearing agency, and
would be inconsistent with the general approach that all positions with
U.S. counterparties should be counted towards the major security-based
swap participant threshold calculation. For this reason, we believe the
alternative would ignore important programmatic benefits that are
incorporated in the final approach.
---------------------------------------------------------------------------

    \723\ See section 0 and note 549, supra. See also section
VIII.A, infra.
---------------------------------------------------------------------------

(g) Foreign Government-Related Entities
    Several commenters suggested that foreign government-related
entities, such as sovereign wealth funds and MDBs, should be excluded
from the U.S. person, security-based swap dealer, and major security-
based swap participant definitions.\724\ By potentially capturing fewer
major security-based swap participants, this alternative approach would
correspondingly decrease the programmatic costs and benefits associated
with Title VII regulation of major security-based swap participants. We
believe that security-based swap transactions entered into by these
types of foreign government-related entities with U.S. persons pose the
same risks to the U.S. security-based swap markets as transactions
entered into by entities that are not foreign-government related.
Moreover, as noted above,\725\ we understand that foreign government-
related entities rarely enter into security-based swap transactions (as
opposed to other types of swap transactions) in amounts that would
trigger the obligation to register as a major security-based swap
participant. To the extent that such entities do enter into security-
based swaps with U.S. persons, however, we believe such requiring such
entities to include those positions in their major participant
threshold calculations will generate programmatic benefits, as such
positions introduce risk into the United States of the type title VII
intended to address.
---------------------------------------------------------------------------

    \724\ See section 0 and note 420 (addressing comments in de
minimis context and citing WB/IFC Letter SC Letter and IDB Letter at
5), supra.
    \725\ See section 0, supra.
---------------------------------------------------------------------------

VI. Substituted Compliance Procedural Rule

A. Proposed Approach and Commenters' Views

    The Cross-Border Proposing Release addressed a range of substantive
issues regarding the potential availability of substituted compliance,
whereby a market participant could satisfy certain Title VII
obligations by complying with comparable foreign requirements. These
included issues regarding which requirements might be satisfied via
substituted compliance, and regarding the showings necessary to obtain
a substituted compliance order from the Commission.
    The release also proposed to amend the Commission's Rules of
General Application to establish procedures for considering substituted
compliance requests, similar to the procedures that the Commission uses
to consider exemptive order applications under section 36 of the
Exchange Act.\726\ Among other aspects, proposed Exchange Act rule 0-13
would require that substituted compliance applications be in writing
and include any supporting documentation necessary to make the
application complete--``including information regarding applicable
requirements established by the foreign financial regulatory authority
or authorities, as well as the methods used by the foreign financial
regulatory authority or authorities to monitor compliance with such
rules''--and that applications cite applicable precedent.\727\ The
proposed rule also stated that the Commission may choose to publish
requests in the Federal Register, and stated that requestors may seek
confidential treatment.\728\ We preliminarily concluded that those
proposed procedures would provide sufficient guidance regarding the
submission process.\729\ We also solicited comment regarding the
sufficiency of the guidance provided by the proposed rule, and
regarding whether foreign regulatory authorities should be able to
submit substituted compliance requests.\730\
---------------------------------------------------------------------------

    \726\ See generally Cross-Border Proposing Release, 78 FR 31087-
88.
    \727\ See proposed Exchange Act rule 0-13(a), (e). Proposed
Exchange Act rule 0-13 further would provide that applications must
comply with Commission rule 0-3 (regarding the filing of materials
with the Commission). Under the proposal, all applications would be
submitted to the Commission's Office of the Secretary electronically
or in paper format, and in the English language. If an application
is incomplete, the Commission may request that the application be
withdrawn unless the applicant can justify why supporting materials
have not been submitted and undertakes to submit promptly the
omitted materials. The Commission would not consider hypothetical or
anonymous requests for a substituted compliance order. The proposed
rule further addressed issues regarding contact information,
amendments to the application, the review process, and potential
hearings regarding the application. See proposed Exchange Act rule
0-13; see also Cross-Border Proposing Release, 78 FR 31087-88.
    \728\ See proposed Exchange Act rule 0-13(a), (h). The proposal
stated that requests for confidential treatment would be permitted
to the extent provided under 17 CFR 200.81. See proposed Exchange
Act rule 0-13(a); Cross-Border Proposing Release, 78 FR 31087-88.
Under 17 CFR 200.81, persons submitting exemptions and related
relief may also request that it be accorded confidential treatment
for a specified period of time not exceeding 120 days. If the
Commission staff determines that the request is reasonable and
appropriate it will be granted and the letter or other communication
will not be made available for public inspection or copying until
the expiration of the specified period. If the staff determines that
the request for confidential treatment should be denied, the staff
shall advise the person making the request and the person may
withdraw the letter or other communication within 30 days.
    \729\ See Cross-Border Proposing Release, 78 FR 31088.
    \730\ See id.
---------------------------------------------------------------------------

    One commenter raised concerns that the proposed availability of
confidential treatment ``would foreclose any public comment, debate or
analysis of the applicant's claims about the foreign regulatory regime,
leading to an industry-led process.'' That commenter urged us to
disallow confidential treatment of applications, and to invite public
comment as foreign jurisdictions are considered for comparability.''
\731\
---------------------------------------------------------------------------

    \731\ See AFR Letter I at 11-12.

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

    Commenters also asked for greater clarity regarding the information
to be provided in connection with substituted compliance requests.\732\
Commenters also asked that the Commission coordinate with the CFTC and
foreign regulators in making substituted compliance
determinations.\733\
---------------------------------------------------------------------------

    \732\ See FOA Letter at 4 (stating that the proposed requirement
that an application include supporting documentation that the
applicant believes necessary for the Commission to make the
determination ``puts the burden of interpretation wholly on the
applicant''; requesting additional guidance regarding the
information needed to accompany requests, and greater specificity to
ensure ``that the applications it receives address a similar range
of compliance issues and contain a similar amount of supporting
detail''); SIFMA/FIA/FSR Letter at A-38 (urging the Commission ``to
provide a more granular and detailed framework regarding the
considerations relevant to evaluating substituted compliance
requests'').
    \733\ See, e.g., FOA Letter at 8 (requesting that the Commission
and the CFTC coordinate in making substituted compliance
determinations and that the Commissions consider whether to accept
joint submissions from foreign regulators or foreign market
participants); CEDU Letter at 2 (stating that the Commission should
work closely with the CFTC ``when determining whether substituted
compliance is applicable with respect to a particular
jurisdiction'').
---------------------------------------------------------------------------

    Other commenters addressed a related issue regarding whether
foreign regulators could submit substituted compliance requests.
Proposed Exchange Act rule 3a71-5, regarding substituted compliance for
foreign security-based swap dealers, specified that such requests may
be filed by a foreign security-based swap dealer or group of dealers. A
number of commenters took the contrasting position that foreign
regulators should be able to submit substituted compliance
requests.\734\ Some commenters further stated that such requests solely
should be submitted by foreign regulators.\735\ Two commenters
particularly emphasized the importance of the Commission's substituted
compliance assessments taking into account foreign enforcement and
supervisory practices.\736\
---------------------------------------------------------------------------

    \734\ See, e.g., SIFMA/FIA/FSR Letter at A-36 (``Foreign
regulators are often best placed to describe their rules and provide
information for the purposes of a comparability analysis. Such an
approach would also allow for a more efficient use of resources.'').
    \735\ See EC Letter at 3 (suggesting that ``the review of a
foreign regime should be conducted in cooperation solely with the
relevant foreign regulators or legislators, as opposed to firms'' to
avoid duplication or confusion); ESMA Letter at 3.
    \736\ See AFR Letter I at 12 (supporting ability to reject or
withdraw substituted compliance determinations based on the failure
of a foreign regime to exercise supervisory or enforcement
authority); BM Letter at 30-31 (criticizing Cross-Border Proposing
Release for including ``only passing reference to foreign
supervision and enforcement as discretionary factors the SEC may
consider in making a substituted compliance determination,'' and
stating that any substituted compliance determinations be predicated
on evaluation of ``a host of factors regarding the foreign
regulatory system, including staff expertise, agency funding, agency
independence, technological capacity, supervision in fact, and
enforcement in fact'').
---------------------------------------------------------------------------

B. Final Rule

    In large part, we expect to address issues regarding the
availability of substituted compliance as part of future rulemakings,
in conjunction with considering the cross-border application of the
relevant substantive rules. As discussed above, we believe that it is
appropriate to address issues regarding the cross-border application of
the substantive requirements under Title VII in conjunction with
considering the final rules to implement those substantive
requirements, as substituted compliance potentially will constitute an
integral part of the final approach toward cross-border application.
    At this time, however, we believe that it is appropriate to adopt a
final rule to address the procedures for submitting substituted
compliance requests. Using the same general procedural requirements
would facilitate the efficient consideration of substituted compliance
requests. Proposed Exchange Act rule 0-13, moreover, is sufficiently
flexible to accommodate requests related to a range of regulatory
requirements, even when the requirements necessitate different
approaches toward substituted compliance.
    Accordingly, we are adopting Exchange Act rule 0-13 largely as
proposed. In response to commenter input, however, the final rule has
been modified from the proposal to provide that a request for a
substituted compliance order may be submitted either by a party that
potentially would comply with requirements under the Exchange Act
pursuant to a substituted compliance order, or by a relevant foreign
financial regulatory authority or authorities.\737\ We are persuaded
that allowing foreign regulators to submit such requests would promote
the completeness of requests and promote efficiency in the process for
considering such requests, in light of foreign regulators' expertise
regarding their domestic regulatory system, including the effectiveness
of their compliance and enforcement mechanisms, and to allow for a
single point of contact to facilitate the consideration of substituted
compliance requests associated with the jurisdiction. We are not,
however, foreclosing the ability of a market participant itself to
submit a request that it be able to comply with Exchange Act
requirements pursuant to a substituted compliance order.\738\
---------------------------------------------------------------------------

    \737\ The decision to permit foreign regulators to submit
substituted compliance requests may impact our future consideration
of proposed rule 3a71-5(c), which specified that applications for
substituted compliance determinations in connection with security-
based swap dealer requirements may be made by foreign dealers or by
groups of foreign dealers.
    \738\ To the extent we receive multiple requests in connection
with a particular jurisdiction, we may consider such requests
together.
---------------------------------------------------------------------------

    The final rule further revises the proposal to provide that
applications should include supporting documentation regarding the
methods that foreign financial regulatory authorities use to enforce
compliance with the applicable rules.\739\ This type of information--
which we expect would be best provided by the relevant foreign
regulator--is consistent with the fact that our substituted compliance
assessments will not be limited to a comparison of applicable rules and
their underlying goals, but also will take into account the capability
of a foreign financial regulatory authority to monitor compliance with
its rules and take appropriate enforcement action in response to
violations of such rules.\740\
---------------------------------------------------------------------------

    \739\ See Exchange Act rule 0-13(e). The final rule addresses
the need for applications to provide information regarding how
foreign regulatory authorities ``monitor and enforce'' compliance
with the applicable rules. The relevant language of the proposal
simply referred to ``monitor.''
     In addition, the final rule revises the proposed language
regarding the Commission's ability to request applications to be
withdrawn, by omitting the proposed reference to the Commission
acting ``through its staff.'' See Exchange Act rule 0-13(a).
     The final rule further revises the proposed language regarding
the process for considering applications, by providing that an
appropriate response will be issued following ``a vote by'' the
Commission. See Exchange Act rule 0-13(g).
    \740\ We note that assessments of analogous factors occur in
other contexts. For example, assessments conducted by the Federal
Reserve in connection with applications by foreign banks to
establish a branch, agency or commercial lending company in the
United States consider--and the Federal Reserve requires
applications to provide information regarding--the following factors
regarding the role played by the foreign bank's home country
supervisor: (a) The scope and frequency of on-site examinations by
the home-country supervisor; (b) off-site monitoring by the home-
country supervisor; (c) the role of external auditors; (d)
regulation and monitoring of affiliate transactions; (e) other
applicable prudential requirements (including capital adequacy,
asset classification and provisioning, single or aggregate credit
and foreign currency exposure limits, and liquidity) and associated
supervisor monitoring; (f) remedial authority of the home-country
supervisor to enforce compliance with prudential controls and other
supervisory or regulatory requirements; and (g) prior approval
requirements (related to investments in other companies or the
establishment of overseas offices). See Federal Reserve Board,
``International Applications and Prior Notifications under Subpart B
of Regulation K,'' (http://www.federalreserve.gov/reportforms/forms/FR_K-220110331_f.pdf). In noting this analogous requirement, we
are not predicting the extent to which such factors may or may not
be considered as part of the Commission's substituted compliance
assessments.

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

    Finally, the final rule revises the proposal by removing a
provision that would have stated that requestors may seek confidential
treatment of their application to the extent provided by Exchange Act
rule 200.81. This change reflects the fact that under the final rules
substituted compliance applications may be submitted by foreign
financial regulatory authorities, and recognizes the importance of
having the assessment consider potentially sensitive information
regarding a foreign regime's compliance and enforcement capabilities
and practices. Accordingly, requests for confidential treatment may be
submitted pursuant to any applicable provisions governing
confidentiality under the Exchange Act.\741\ We expect confidential
treatment requests will seek protection for privileged information
obtained from foreign regulators.\742\ Recognizing the significance of
commenter concerns regarding the need for public comment, debate and
analysis of substituted compliance requests, moreover, rule 0-13
provides that the Commission shall provide public notice of requests
and solicit public comment when a complete application has been
submitted.\743\ We recognize that public comment regarding substituted
compliance requests may be helpful to our consideration of particular
requests.\744\
---------------------------------------------------------------------------

    \741\ For example, Exchange Act rule 24b-2 addresses the
potential availability of confidential treatment in connection with
any registration statement, report, application, correspondence or
other document filed pursuant to the Exchange Act. The rule provides
that the person filing the information must make written objection
to its public disclosure at the time of the filing. See 17 CFR
240.24b-2.
    Separately, Commission Rule 200.83 is a procedural rule that
addresses how persons submitting information to the Commission may
request that the information not be disclosed pursuant to a request
under the Freedom of Information Act for reasons permitted by
Federal law. The rule does not apply when any other statute or
Commission rule provides procedures for confidential treatment
regarding particular categories of information, or where the
Commission has specified that an alternative procedure be utilized
in connection with a particular study, report, investigation or
other matter. Under this rule, a person submitting information to
the Commission must request confidential treatment at the time of
the submission. See 17 CFR 200.83.
    \742\ Exchange Act Section 24(d) provides that the Commission
generally shall not be compelled to disclose records obtained from a
foreign securities authority if: (1) The foreign authority in good
faith determines and represents that public disclosure of the
records would violate the laws applicable to that foreign securities
authority; and (2) the Commission obtains the records pursuant to
procedures authorized for use in connection with the administration
or enforcement of the securities laws, or a memorandum of
understanding.
     Exchange Act Section 24(f)(2) further provides that the
Commission shall not be compelled to disclose privileged information
obtain from any foreign securities authority or law enforcement
authority if the foreign authority in good faith has determined and
represented that the information is privileged.
    \743\ The text of the final rule has been revised from the
proposal to eliminate a reference to the Commission having ``sole
discretion'' to choose to publish a notice, and to provide that
publication would occur following submission of a ``complete''
application. See Exchange Act rule 0-13(h).
    \744\ The final rule also makes technical change to the proposal
by replacing references to the Commission's Division of Trading and
Markets with general references to the ``staff,'' consistent with
the broad range of issues that will likely arise in connection with
evaluating substituted compliance requests. See Exchange Act rule 0-
13(a), (g).
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    In adopting rule 0-13, we recognize that the requirement that an
application ``include any supporting documents necessary to make the
application complete'' implicates commenter concerns regarding the need
for further guidance regarding what information must be submitted as
part of substituted compliance requests. We expect to address such
issues regarding supporting documentation in the future, as we consider
the potential availability of substituted compliance in connection with
particular Title VII requirements.

C. Economic Analysis

    The availability of substituted compliance has the potential to
impact the interplay between programmatic costs and benefits associated
with the Title VII regulation of security-based swap dealers and major
security-based swap participants, as well as those associated with
other Title VII requirements. For example, substituted compliance
potentially may permit the risk management and other programmatic
benefits of dealer regulation to be achieved while avoiding costs that
market participants otherwise may incur. At the same time, the process
of making substituted compliance requests may cause certain market
participants to incur extra costs, although that possibility may be
obviated in part by the provision that permits foreign financial
authorities to make such requests.
    As discussed throughout this release, the security-based swap
market is a global market that is subject to regulatory requirements
that may vary by jurisdiction. As a result, market participants that
operate globally potentially could be subject to overlapping or
conflicting regulations. If Title VII requirements for non-U.S. market
participants conflict with regulations in local jurisdictions, Title
VII could act as a barrier to entry to the U.S. security-based swap
market. In such cases, allowing market participants to comply with
Title VII via substituted compliance could act as a mechanism to
preserve access for non-U.S. persons to the U.S. security-based swap
market, reducing the likelihood that non-U.S. persons exit the U.S.
market entirely. Therefore, we expect that substituted compliance--so
long as it is conditioned on a foreign regime's comparability to the
relevant requirements under the Dodd-Frank Act, and on the foreign
regime having adequate compliance and enforcement capabilities--would
help preserve access and competition in the U.S. market, and thus
benefit non-dealer participants in the security-based swap market.\745\
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    \745\ Cf. Institute of International Finance (``IIF'') Letter
(making a similar point).
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    Although the costs associated with the process of making
substituted compliance request may be uncertain at this time, the
decision to request substituted compliance is purely voluntary. To the
extent such requests are made by market participants, moreover, such
participants would request substituted compliance only if, in their own
assessment, compliance with applicable requirements under a foreign
regulatory system was less costly than compliance with both the foreign
regulatory regime and the relevant Title VII requirement. Even after a
substituted compliance determination is made, market participants would
only choose substituted compliance if the private benefits they expect
to receive from participating in the U.S. market exceeds the private
costs they expect to bear, including any conditions the Commission may
attach to the substituted compliance determination. Where substituted
compliance increases the number of dealers or other participants in the
U.S. security-based swap market, or prevents existing participants from
leaving the U.S. market, this may help mitigate the programmatic costs
associated with the applicable Title VII requirements, while helping to
ensure that the associated programmatic benefits are achieved.
    The costs particularly associated with making substituted
compliance requests, as well as the general costs and benefits
associated with allowing substituted compliance, may be expected to
vary between the various categories of Title VII requirements. Relevant
considerations may include: Whether (and to what extent) substituted
compliance is permitted in connection with a requirement; the relevant
information required to demonstrate consistency between the foreign
regulatory requirements and the Commission's analogous dealer
requirements; the relevant information required to demonstrate the
adequacy of the foreign regime's compliance and

enforcement mechanisms; and whether substituted compliance requests are
made by market participants or by foreign regulatory authorities. These
factors limit our ability to further predict the economic consequences
of this procedural rule.
    We recognize that commenters have asked that the Commission
coordinate with the CFTC and foreign regulators in making substituted
compliance determinations. As discussed above, the Commission is
subject to obligations to consult and coordinate with the CFTC and
foreign regulators in connection with Title VII.\746\ Our revision of
the final rule to permit foreign regulators to submit substituted
compliance requests also helps address goals of increased coordination.
Moreover, our substituted compliance assessments regarding particular
requirements applicable to security-based swap dealers also as
appropriate may take into account the way that other regulators address
similar issues, subject to the need for any allowance of substituted
compliance to be predicated on the extent to which compliance with
another regulatory regime will help achieve the goals of Title VII.
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    \746\ See section II.B, supra.
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VII. Antifraud Authority

A. Final Rule

    The provisions of the rules and guidance, discussed above, do not
limit the cross-border reach of the antifraud provisions or other
provisions of the federal securities laws that are not specifically
addressed by this release.
    In section 929P(b) of the Dodd-Frank Act, Congress added provisions
to the federal securities laws confirming the Commission's broad cross-
border antifraud authority.\747\ Congress enacted section 929P(b) in
the wake of the Supreme Court's decision in Morrison v. National
Australia Bank,\748\ which created uncertainty about the Commission's
cross-border enforcement authority under the antifraud provisions of
the federal securities laws. Before Morrison, the federal courts of
appeals for nearly four decades had construed the antifraud provisions
to reach cross-border securities frauds when the fraud either involved
significant conduct within the United States causing injury to overseas
investors, or had substantial foreseeable effects on investors or
markets within the United States.\749\ With respect to the Commission's
enforcement authority, section 929P(b) codified the courts of appeals'
prior interpretation of the scope of the antifraud provisions' cross-
border reach. Section 929P(b) also made clear that the scope of
subject-matter jurisdiction was coextensive with the cross-border reach
of the antifraud provisions.\750\
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    \747\ The antifraud provisions of the securities laws include
section 17(a) of the Securities Act, 15 U.S.C. 77q(a); sections 9,
10(b), 14(e), and 15(c)(1)-(2) & (7) of the Exchange Act, 15 U.S.C.
78i, 78j, 78n, 78o(c)(1)-(2); section 206 of the Investment Advisers
Act of 1940, 15 U.S.C. 80b-6; and any rule or regulation of the
Commission promulgated under these statutory authorities.
    \748\ See 130 S. Ct. 2869, 2888 (2010) (holding in a section
10(b) class action that ``it is . . . only transactions in
securities listed on domestic exchanges, and domestic transactions
in other securities, to which Sec.  10(b) applies'').
    \749\ See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d
Cir. 1968), modified on other grounds, 405 F.2d 215 (1968) (en
banc).
    \750\ See 156 Cong. Rec. H5237 (daily ed. June 30, 2010)
(statement of Rep. Kanjorski, author of section 929P(b)) (``In the
case of Morrison v. National Australia Bank, the Supreme Court last
week held that section 10(b) of the Exchange Act applies only to
transactions in securities listed on United States exchanges and
transactions in other securities that occur in the United States. In
this case, the Court also said that it was applying a presumption
against extraterritoriality. This bill's provisions concerning
extraterritoriality, however, are intended to rebut that presumption
by clearly indicating that Congress intends extraterritorial
application in cases brought by the SEC or the Justice Department.
Thus, the purpose of the language of section 929P(b) of the bill is
to make clear that in actions and proceedings brought by the SEC or
the Justice Department, the specified provisions of the Securities
Act, the Exchange Act and the Investment Advisers Act may have
extraterritorial application, and that extraterritorial application
is appropriate, irrespective of whether the securities are traded on
a domestic exchange or the transactions occur in the United States,
when the conduct within the United States is significant or when
conduct outside the United States has a foreseeable substantial
effect within the United States.''). See also 156 Cong. Rec. S5915-
16 (daily ed. July 15, 2010) (statement of Senator Reed).
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    Specifically, the Commission's antifraud enforcement authority
under section 17(a) of the Securities Act and the antifraud provisions
of the Exchange Act--including sections 9(j) and 10(b)--extends to
``(1) conduct within the United States that constitutes significant
steps in furtherance of [the antifraud violation], even if the
securities transaction occurs outside the United States and involves
only foreign investors,'' and ``(2) conduct occurring outside the
United States that has a foreseeable substantial effect within the
United States.'' \751\ Similarly, the Commission's enforcement
authority under section 206 of the Investment Advisers Act applies
broadly to reach ``(1) conduct within the United States that
constitutes significant steps in furtherance of the violation, even if
the violation is committed by a foreign adviser and involves only
foreign investors,'' and ``(2) conduct occurring outside the United
States that has a foreseeable substantial effect within the United
States.'' \752\
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    \751\ Section 22 of the Securities Act, 15 U.S.C. 77v(a);
section 27 of the Exchange Act, 15 U.S.C. 78aa.
    \752\ Section 214 of the Investment Advisers Act, 15 U.S.C. 80b-
14.
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    Although no commenters challenged the Commission's interpretation
of its cross-border antifraud authority, we are aware that a federal
district court recently expressed the view that the statutory language
may be unclear.\753\ We therefore have determined to adopt a rule that
clearly sets forth our interpretation of the Commission's cross-border
antifraud authority.\754\ We believe that our interpretation is not
only the better reading of the antifraud authorities and the statutory
text added by section 929P(b), but that our reading is consistent with
section 929P(b)'s legislative history and purpose.\755\
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    \753\ See SEC v. A Chicago Convention Center, LLC, 961 F. Supp.
2d 905 (N.D. Ill. 2013); see also Richard W. Painter et al., ``When