Dealer and that up to five entities may fit within the definition of
Major SBS Participant.\1510\ Further, the Commission understands swap
and security-based swap markets to be integrated, and continues to
estimate that approximately thirty-five firms that may register as SBS
Entities will also be registered with the CFTC as Swap Entities.\1511\
As a result, these entities will also be subject to the business
conduct standards applicable to Swap Entities, which the CFTC adopted
in 2012. In addition, the Commission continues to estimate that
approximately sixteen registered broker-dealers will also register as
SBS Dealers.\1512\ In the Proposing Release, the Commission estimated
that fewer than eight firms not otherwise registered with the CFTC or
the Commission would register as SBS Entities. Based on an analysis of
updated DTCC data, the Commission now estimates that four registrants
would not otherwise be registered with the CFTC or the
Commission.\1513\
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    \1510\ Proposing Release, 76 FR at 42442, supra note 3. See also
Registration Adopting Release, 80 FR at 48990, supra note 965.
    \1511\ Proposing Release, 76 FR at 42442, supra note 3. See also
Registration Adopting Release, 80 FR at 48990, supra note 989.
    \1512\ Proposing Release, 76 FR at 42442, supra note 3. See also
Registration Adopting Release, 80 FR at 48990, supra note 1129.
    \1513\ See Registration Adopting Release, 80 FR at 48990, supra
note 1129.
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    In the Proposing Release, the Commission estimated that there were
approximately 8,500 market participants, including approximately 1,200
special entities in the security-based swap markets.\1514\ Based on an
analysis of more recent DTCC data and our understanding of security-
based swap markets, we currently believe that there are approximately
10,900 market participants in the security-based swap market, of which
1,141 are special entities.\1515\ Of the 10,900 market participants, we
estimate approximately 68% of them (7,412) are also swap

market participants.\1516\ Based upon the number of registered
municipal advisors, we estimate that there are approximately 385 third-
party independent representatives for special entities.\1517\ In the
Proposing Release, we estimated that approximately 95% of special
entities would use a third-party independent representative.\1518\
Based on additional data from DTCC through 2014, the Commission
currently estimates that approximately 98% of special entities would
use a third-party independent representative in their security-based
swap transactions.\1519\ For purposes of calculating reporting burdens,
in the Proposing Release, we estimated that 60 special entities (the
remaining 5% of special entities), had employees who could serve as an
in-house independent representative.\1520\ The Commission currently
estimates that the remaining 2% of special entities, or 25 special
entities, have employees who currently negotiate on behalf of and
advise the special entity regarding security-based swap transactions,
and who could likely fulfill the qualifications and obligations of the
independent representative.\1521\ Consequently, the Commission
estimates a total of 410 potential independent representatives.\1522\
We received no comments on any of the foregoing estimates or our basis
for the estimates.
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    \1514\ Proposing Release, 76 FR at 42442, supra note 3.
    \1515\ As discussed in the economic baseline, estimates of the
number and type of market participants are based on hand
classifications of TIW data for 2006-2014. Our classifications are
not sufficiently granular to distinguish between ERISA special
entities, and special entities defined in, but not subject to ERISA,
and our estimates include both. Therefore, our estimates reflect
both ERISA special entities, and entities that may choose to opt out
of the special entity status under these final rules. See Sections
VI.B and Section VI.C.4.i, infra.
    \1516\ This estimation assumes that the proportion of single
name CDS market participants that also use index CDS is
representative of the proportion of security-based swap market
participants that are swap market participants in 2014. See Section
VI.B.6, infra.
    \1517\ As of January 1, 2016 there were 665 municipal advisors
registered with the Commission (http://www.sec.gov/help/foia-docs-muniadvisorshtm.html), of which 381 indicated that they expect to
provide advice concerning the use of municipal derivatives or advice
or recommendations concerning the selection of other municipal
advisors or underwriters with respect to municipal financial
products or the issuance of municipal securities. We expect that
many of these municipal advisors will also act as independent
representatives for other special entities. The Commission therefore
estimates that approximately 385 municipal advisors will act as
independent representatives to special entities with respect to
security-based swaps.
    \1518\ Proposing Release, 76 FR at 42442, supra note 3.
    \1519\ The estimate is based on available market data for
November 2006-December 2014 provided by DTCC that indicates
approximately 98% of special entities used registered or
unregistered third-party investment advisers in connection with
security-based swaps transactions.
    \1520\ Proposing Release, 76 FR at 42442, supra note 3.
    \1521\ The estimate is based on available market data for
November 2006-December 2014 provided by DTCC.
    \1522\ The estimate is based on the following calculation: 385
third-party independent representatives + 25 in-house independent
representatives.
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    In the Cross-Border Proposing Release, the Commission preliminarily
estimated that 50 entities may include a representation that a
security-based swap is a ``transaction conducted through a foreign
branch'' in their trading relationship documentation.\1523\ We estimate
that, consistent with the proposal, a total of 50 entities may incur
burdens under this collection of information, whether solely in
connection with the business conduct requirements being adopted in this
release or also in connection with the application of the de minimis
exception.\1524\
---------------------------------------------------------------------------

    \1523\ See Cross-Border Proposing Release, 78 FR at 31108, supra
note 6.
    \1524\ See id. See also Cross-Border Adopting Release, 79 FR at
47366, supra note 193.
---------------------------------------------------------------------------

    Under the final rule related to substituted compliance,
applications for substituted compliance may be filed by foreign
financial authorities, or by non-U.S. SBS Entities. Based on the
analysis of recent data, the Commission staff expects that there may be
approximately 22 non-U.S. entities that potentially may register as SBS
Dealers, out of approximately 50 total entities that may register as
SBS Dealers.\1525\ Potentially, all such non-U.S. SBS Dealers, or some
subset thereof, may seek to rely on substituted compliance in
connection with these business conduct requirements.\1526\
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    \1525\ See U.S. Activity Adopting Release, 81 FR at 8605, supra
note 17.
    \1526\ Consistent with prior estimates, the Commission staff
further believes that there may be zero to five major security-based
swap participants. See Cross-Border Proposing Release, 78 FR at
31103, supra note 6. It is possible that some subset of those
entities will be non-U.S. major security-based swap participants
that will seek to rely on substituted compliance in connection with
the business conduct requirements.
---------------------------------------------------------------------------

    In practice, the Commission expects that the greater portion of any
such substituted compliance requests will be submitted by foreign
financial authorities, given their expertise in connection with the
relevant substantive requirements, and in connection with their
supervisory and enforcement oversight with regard to security-based
swap dealers and their activities.

D. Total Annual Reporting and Recordkeeping Burdens

    As discussed in Section I.C., above, aspects of Rules 15Fh-1 to
15Fh-6 conform, to the extent practicable, to the business conduct
standards applicable to Swap Dealers or Major Swap Participants
promulgated by the CFTC.\1527\ Therefore, to the extent an SBS Entity
already complies with the CFTC's business conduct standards, the
Commission believes there will be minimal additional burden in
complying with the requirements under the Commission's business conduct
standards, as adopted.\1528\
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    \1527\ See CFTC Adopting Release, supra note 21.
    \1528\ Notably, the CFTC adopted its final rules in 2012.
Current estimates reflect the fact that the CFTC rules have been in
place since that time, and that registrants will not incur a de novo
burden in complying with the Commission's rules, which largely
conform to those of the CFTC. In addition, as noted in the Proposing
Release, some banks will register as SBS Dealers. Banking agencies,
such as the Office of the Comptroller of the Currency, have issued
guidance to national banks that engage in financial derivatives
transactions regarding business conduct procedures, and,
accordingly, the banks that may register as SBS Entities are also
likely already complying with similar requirements. See e.g., Risk
Management of Financial Derivatives, Office of Comptroller of the
Currency Banking Circular No. 277 (Oct. 27, 1993).
---------------------------------------------------------------------------

    Furthermore, a number of these rules are based on existing FINRA
rules. Accordingly, the Commission expects that the estimated 16 SBS
Entities that are also registered as broker-dealers are already
complying with a number of these requirements in the context of their
equities businesses.
1. Verification of Status
    As discussed above, the Commission estimates that approximately 55
SBS Entities (of which we expect approximately 35 will be dually
registered with the CFTC as Swap Entities) will be required to verify
whether a counterparty is an ECP or special entity, as required by Rule
15Fh-3(a). These verification requirements are the same under the
business conduct standards adopted by the CFTC.\1529\ We understand
that industry has developed protocols and questionnaires that allow the
counterparty to indicate its status, whether or not it is a special
entity and whether it elects to be treated as a special entity.\1530\
As a result of these protocols and questionnaires, the Commission
continues to believe that these dually registered SBS Entities will not
incur any start-up or ongoing burdens in complying with the rules, as
adopted, because they already adhere to the relevant protocols to
obtain the information under the CFTC's business conduct standards. The
remaining 20 SBS Entities will each incur $500 in start-up burdens to
adhere to the protocols. In addition, each

counterparty that does not already adhere to the protocols will incur
$500 in start-up burdens to adhere to the protocols. In addition to the
$500 fee to adhere to the protocol, in order to adhere to the protocol,
an adherence letter must also be submitted, the form of which is
provided online. Accordingly, we conservatively estimate that one hour
will be needed to input the data required to generate the adherence
letter.\1531\ We do not anticipate any ongoing burdens with respect to
this rule. We anticipate that the parties will adhere to the protocol.
We also anticipate that in connection with each transaction, SBS
Entities will require counterparties to provide a certificate
indicating that there are no changes to the representations included in
the protocol and that reliance on those representations would be
reasonable.
---------------------------------------------------------------------------

    \1529\ See CFTC Adopting Release, 75 FR at 80658, supra note 21.
Accordingly, the SBS Entities that would also be registered as a
Swap Dealer or Major Swap Participant with the CFTC would have
verification procedures for engaging in swaps.
    \1530\ See ISDA August 2012 DF Protocol at http://www2.isda.org/functional-areas/protocol-management/protocol/8 (``ISDA August 2012
DF Protocol'').
    \1531\ In lieu of adhering to the protocol, market participants
may engage in bilateral negotiations either to obtain
representations regarding the status of the counterparty or the SBS
Entity may conduct due diligence to determine the status of the
counterparty. However, given the relatively low cost and time burden
to adhere to the protocol, we estimate that market participants will
choose to adhere to the protocol rather than pay counsel to
negotiate representations or conduct the necessary due diligence in
the absence of any indications that reliance on such representations
would not be reasonable. For the purposes of this estimate, we have
assumed that reliance on the representations in the protocol would
be reasonable.
---------------------------------------------------------------------------

    As noted above, the Commission believes that approximately 7,412 of
the 10,900 security-based swap market participants (which include SBS
Entities and counterparties) are also swap market participants and
likely already adhere to the relevant protocol.\1532\ These 7,412
market participants would not have any start-up burdens or ongoing
burdens with respect to verification. The remaining 3,488 market
participants would incur $500 each to adhere to the protocol for an
aggregate total of $1,744,000 and one hour for the adherence letter for
an aggregate total of 3,488 hours.\1533\
---------------------------------------------------------------------------

    \1532\ See supra Section V.C. regarding the estimate for the
number of market participants.
    \1533\ Although we understand that ISDA offers bulk pricing for
multiple entities that are part of the same corporate group or for
fund families, we do not have the data as to how many of the 3,488
market participants are related entities that would be able to take
advantage of this bulk pricing. As a result, we have conservatively
estimated that each of the 3,488 market participants would incur the
$500 fee and the hour for the adherence letter.
---------------------------------------------------------------------------

2. Disclosures by SBS Entities
    Pursuant to Rule 15Fh-3(b), (c), and (d), SBS Entities would be
required to provide certain disclosures to market participants. Based
on the Commission's experience with burden estimates for similar
disclosure requirements,\1534\ as well as our discussions with market
participants,\1535\ we understand that the SBS Entities that are dually
registered with the CFTC already provide their counterparties with
disclosures similar to those required under Rules 15Fh-3(b) and (c). To
the extent that the material characteristics required by Rule 15Fh-
3(b)(1) are included in the documentation of a security-based swap,
such as the master agreement, credit support annex, trade confirmation
or other documents, the Commission does not believe that any additional
burden will be required for the disclosure of material characteristics.
For other required disclosures relating to material risks required by
Rule 15Fh-3(b)(1) or disclosures relating to material incentives or
conflicts of interest required by Rule 15Fh-3(b)(2), the Commission
understands that certain market participants have developed
standardized disclosures for some of these requirements.\1536\ For
example, many SBS Dealers already provide a statement of potential
risks related to investing in certain security-based swaps to their
counterparties. However, to the extent that an SBS Entity and
counterparty engage in a highly bespoke transaction, the standardized
disclosure may not satisfy all of the SBS Entities disclosure
requirements. In those cases, the SBS Entity will likely use a
combination of standardized disclosures and de novo disclosures to
fulfill its obligations under Rules 15Fh-3(b)(1) and (2).
---------------------------------------------------------------------------

    \1534\ For disclosures similar to the disclosure of
methodologies and assumptions of daily mark, see Disclosure of
Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative
Financial Instruments, Other Financial Instruments and Derivative
Commodity Instruments, Securities Act Release No. 7386 (Jan. 31,
1997), 62 FR 6044 (Feb. 10, 1997).
    \1535\ See Proposing Release n. 14, 76 FR at 42398, supra note
3. See also, supra note 19 regarding a list of Commission staff
meetings with interested parties.
    \1536\ See e.g., ISDA General Disclosure Statement for
Transactions (August 2015). To the extent that disclosures of
material risks and characteristics under Rule 15Fh-3(b)(1) or
disclosures of material incentives and conflicts of interest under
Rule 15Fh-3(b)(2) are initially provided orally, the additional
burden of providing a written version of the disclosure at or before
delivery of the trade confirmation pursuant to Rule 15Fh-3(b)(3)
will be considered in connection with the overall reporting and
recordkeeping burdens of the SBS Entity. See Recordkeeping Release,
supra note 242.
---------------------------------------------------------------------------

    In some cases, such as disclosures about the daily mark for a
cleared security-based swap, the SBS Entity is obligated to provide the
daily mark upon request. We understand that in the current model of
clearing security-based swaps, the security-based swap between the SBS
Entity and counterparty is terminated upon novation by the clearing
agency. The SBS Entity would no longer have any obligation to provide a
daily mark to the original counterparty because a security-based swap
no longer exists between them. Therefore, there would not be any
ongoing burden on the SBS Entity. Depending on how quickly the
security-based swap is cleared, there may not be an initial burden on
the SBS Entity either. Unlike the CFTC's rule, Rule 15Fh-3(c)(1) does
not require a pre-trade daily mark. So if the security-based swap is
cleared before the end of the next day and the clearing results in
novation of the original swap, the SBS Entity would not have any daily
mark obligations for the cleared swap.
    For uncleared security-based swaps, the Commission believes that
SBS Entities may need to slightly modify the models used for
calculating variation margin to calculate the daily mark. In addition,
the SBS Entity will need to provide the counterparty with a description
of the methodologies and assumptions used to calculate the daily mark.
    Nevertheless, existing accounting standards and other disclosure
requirements under the Exchange Act, such as FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, or
Item 305 of Regulation S-K, require disclosures similar to the
description of the methodologies and assumptions of the daily mark. To
the extent that the model it uses and methodologies and assumptions are
not already prepared, the SBS Entity may need to prepare the initial
description of the data sources, methodologies and assumptions. In
addition, the SBS Entity will have an ongoing burden of updating the
disclosure for any material changes to the data sources, methodologies
and assumptions.
    The Commission continues to believe that SBS Entities will use
internal staff to revise existing disclosures to comply with Rules
15Fh-3(b) and (c), and to assist in preparing language to comply with
Rule 15Fh-3(d) regarding the clearing options available for a
particular security-based swap. In addition, the requirements of Rule
15Fh-3(d) are not the same as the CFTC requirements to disclose
clearing choices, so SBS Entities will need to develop new disclosures.
    The Commission estimates that in 2014 there has been approximately
740,700 security-based swap transactions between an SBS Dealer and a
counterparty that is not an SBS Dealer. Of these, the Commission
estimates that approximately 428,000 were new or

amended trades requiring these disclosures.\1537\ In view of the
factors discussed in the Economic Analysis section and elsewhere in
this release, the Commission recognizes that the time required to
develop an infrastructure to provide these disclosures will vary
significantly depending on, among other factors, the complexity and
nature of the SBS Entity's security-based swap business, its market
risk management activities, its existing disclosure practices, whether
the security-based swap is cleared or uncleared and other applicable
regulatory requirements. Under the rule, as adopted, SBS Entities could
make the required disclosures to their counterparties through
standardized documentation, such as a master agreement or other written
agreement, if the parties so agree. The Commission recognizes that it
will likely be necessary to prepare some disclosures that are
particular to a transaction to meet all of an SBS Entity's disclosure
obligations under Rules 15Fh-3(b), (c) and (d). The Commission also
believes that, because the reporting burden will generally require
refining or revising an SBS Entity's existing disclosure processes, the
disclosures will be prepared internally.
---------------------------------------------------------------------------

    \1537\ Available DTCC-TIW data for 2014 indicated approximately
740,700 transactions between SBS Entities and non-SBS Entities
during that time period. Of these, approximately 240,000 were new
trades, and 188,000 were amendments. Of the approximately 240,000
new trades between likely SBS Dealers and non-dealers, only 1,000
trades or approximately 0.5% were voluntarily cleared bilateral
trades in 2014.
---------------------------------------------------------------------------

    Given the foregoing, the Commission continues to conservatively
estimate that on average, SBS Entities will initially require three
persons from trading and structuring, three persons from legal, two
persons from operations, and four persons from compliance, for 100
hours each, to comply with the rules.\1538\ This team will analyze the
changes necessary to comply with the new disclosure requirements,
including the redesign of current compliance systems, if necessary, as
well as the creation of functional requirements and system
specifications for any systems development work that may be needed to
automate the disclosure process.\1539\ This will amount to an aggregate
initial burden of 66,000 hours.\1540\
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    \1538\ In the Proposing Release, the Commission used this
estimate and it recognizes the development of market practice to
comply with very similar CFTC rules. It also recognizes that given
the current model used for clearing security-based swaps, daily mark
disclosures in that context are unlikely to be required.
Furthermore, no comments were received on these estimates. As a
result, the Commission conservatively continues to use these
estimates.
    \1539\ Some SBS Entities may choose to utilize in-house counsel
to review, revise and prepare these disclosures.
    \1540\ The estimate is based on the following calculation: (55
SBS Entities) x (12 persons) x (100 hours).
---------------------------------------------------------------------------

    Following the initial analysis and development of specifications,
the Commission continues to estimate that half of these persons will
still be required to spend 20 hours annually to re-evaluate and modify
the disclosures and system requirements as necessary, amounting to an
ongoing annual burden of 6,600 hours.\1541\ In addition, the Commission
estimates that on average, the SBS Entities will require one burden
hour per security-based swap to evaluate whether more particularized
disclosures are necessary for the transaction and to develop the
additional disclosures for an aggregate ongoing burden of 428,000
hours.\1542\
---------------------------------------------------------------------------

    \1541\ The estimate is based on the following calculation: (55
SBS Entities) x (6 persons) x (20 hours).
    \1542\ The estimate is based on the following calculation:
(428,000 security-based swaps that require these disclosures) x (1
hour). The Commission realizes that some assessments may take less
time and some may take more. In addition, to the extent that
additional disclosures are required, drafting the disclosure is
likely to take more than an hour, but we expect the vast majority of
transactions will not require additional disclosures so that an
average of one hour per transaction is a reasonable estimate.
---------------------------------------------------------------------------

    The Commission also continues to estimate that, to create and
maintain an information technology infrastructure to the specifications
identified by the team of persons from trading and structuring, legal,
operations and compliance described above, each SBS Entity will
require, on average, eight full-time persons for six months of systems
development, programming and testing, amounting to a total initial
burden of 440,000 hours.\1543\ The Commission continues to estimate
that maintenance of this system will require two full-time persons for
a total ongoing burden of 220,000 hours annually.\1544\
---------------------------------------------------------------------------

    \1543\ The estimate is based on the following calculation: (55
SBS Entities) x (4 persons) x (2000 hours).
    \1544\ The estimate is based on the following calculation: (55
SBS Entities) x (2 persons) x (2000 hours).
---------------------------------------------------------------------------

3. Know Your Counterparty and Recommendations
    As noted in the Proposing Release, the estimates in this paragraph
reflect the Commission's experience with and burden estimates for
similar collections of information, as well as our discussions with
market participants.\1545\ The Commission continues to believe that
most SBS Dealers already have policies and procedures in place for
knowing their counterparties, to comply with existing CFTC and FINRA
standards. The Commission estimates that, on average, the rules will
require each SBS Dealer to initially spend approximately five hours to
review existing policies and procedures and to document the collection
of information necessary to comply with its ``know your counterparty''
obligations--for a total initial burden of 250 hours. The Commission
also continues to estimate that an SBS Dealer will spend an average of
approximately 30 additional minutes each year per unique non-SBS Dealer
counterparty to assess whether the SBS Dealer is in compliance with the
rules' know your counterparty requirements--a total ongoing burden of
approximately 11,500 hours annually,\1546\ or an average of 230 hours
annually per SBS Dealer.\1547\
---------------------------------------------------------------------------

    \1545\ See Proposing Release n. 14, 76 FR at 42398, supra note
3. See also supra note 19 regarding a list of Commission staff
meetings with interested parties.
    \1546\ The estimate is based on the following calculation:
(23,000 unique SBS Dealer--non-dealer counterparty pairs) x 30
minutes / 60 minutes. In the Proposing Release, the Commission
estimated 47,000 unique SBS Dealer--non-dealer counterparty pairs.
Based on updated DTCC-TIW data, we now estimate 23,000 SBS Dealer--
non-dealer counterparty pairs.
    \1547\ To the extent that the SBS Dealer is unfamiliar with the
counterparty, the Commission would expect a greater time burden and
as an SBS Dealer becomes more familiar with the particular
counterparty, the Commission would expect a lesser time burden. As a
result, we use 30 minutes as an average estimate.
---------------------------------------------------------------------------

    In addition, the Commission estimates that the counterparties will
require approximately ten hours for each counterparty or its agent to
collect and provide essential facts to the SBS Dealer for a total
initial burden of 109,000 hours.\1548\
---------------------------------------------------------------------------

    \1548\ The estimate is based on 10,900 market participants x 10
hours.
---------------------------------------------------------------------------

    The Commission expects that, given the institutional nature of the
participants involved in security-based swaps, most SBS Dealers will
obtain the representations in Rules 15Fh-3(f)(2) and (3) to comply with
Rule 15Fh-3(f).\1549\ For the 1,141 special entities, we expect SBS
Entities will not act as an advisor pursuant to Rule 15Fh-2(a) and
accordingly, the burden estimates for the SBS Entities and special
entities are included in the context of the discussion for that rule,
infra. For the 7,412 security-based swap market participants that are
also swap market participants, including the thirty-five firms that we
expect to be dually registered as Swap Dealers and SBS Dealers, most of
the requisite

representations have been drafted for the swaps context.\1550\ We
understand that swap market participants are currently utilizing
standardized representations that are currently in Schedule 3 of the
ISDA August 2012 DF Protocol. The $50 million institutional suitability
threshold is consistent with the institutional suitability exception in
FINRA standards, but may require SBS Dealers to obtain an additional
representation or conduct due diligence to determine the counterparty
has total assets of at least $50 million. To the extent that any
modifications are necessary to adapt those representations to the
security-based swap context, we conservatively estimate that market
participants will each require two hours to assess the necessity and
make any necessary modifications for the security-based swap context
for an aggregate initial burden of 12,542 hours for the market
participants that participate in both the security-based swaps market
and the swaps market.\1551\ We do not anticipate any ongoing burden
with respect to the requisite representations because the
representations in the swaps context are deemed repeated ``as of the
occurrence of each Swap Communication Event'' and we would anticipate a
similar construction in the security-based swap context. For the
remaining 3,488 market participants, we expect that they will draft the
requisite representations to comply with the institutional suitability
analysis in Rule 15Fh-3(f)(2). We also anticipate that these 3,488
market participants are likely to model their representations on the
representations included in the ISDA August 2012 DF Protocol because
the SBS Entity is already familiar with those particular
representations. Accordingly, we estimate that the remaining 3,488
market participants will each require five hours to review and agree to
representations similar to those included in such protocol for an
aggregate initial burden of 17,440 hours.\1552\ Again, we do not
anticipate an ongoing burden for these representations for the reasons
set forth above.
---------------------------------------------------------------------------

    \1549\ The Commission bases its expectation on its observation
and experience in the context of transactions by broker-dealers with
institutional clients and the use of FINRA's institutional
suitability exception in that context.
    \1550\ Of the 7,412 market participants that engage in both
swaps and security-based swaps, a proportion of them will also be
special entities. This calculation assumes all of the special
entities are engaged in transactions in both markets, leaving 6,271
market participants (7,412 market participants -1,141 special
entities) to adapt the representations in the ISDA August 2012 DF
Protocol to the security-based swap context, as necessary.
    \1551\ This calculation is based on the assumption that all of
the special entities are engaged in both the swaps market and the
security-based swaps market and that the special entities will
choose to comply with the safe harbor of Rule 15Fh-5(b). (7,412
market participants -1,141 special entities) x (2 hours).
    \1552\ This estimate is based on the following calculation:
(3,488 market participants) x (5 hours).
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4. Fair and Balanced Communications
    Rule 15Fh-3(g) requires SBS Entities to communicate with
counterparties ``in a fair and balanced manner, based on principles of
fair dealing and good faith.'' The three specific standards of Rule
15Fh-3(g) require that: (1) Communications must provide a sound basis
for evaluating the facts with respect to any security-based swap or
trading strategy involving a security-based swap; (2) communications
may not imply that past performance will recur, or make any exaggerated
or unwarranted claim, opinion, or forecast; and (3) any statement
referring to the potential opportunities or advantages presented by a
security-based swap or trading strategy involving a security-based swap
shall be balanced by an equally detailed statement of the corresponding
risks.\1553\ We expect that a discussion of material risks of the
transaction will be included in the documentation for the security-
based swap. The Commission believes that all 55 SBS Entities will be
required to comply with Rule 15Fh-3(g), and that they will likely send
their existing marketing materials to outside counsel for review and
comment. Accordingly, the Commission continues to believe that each SBS
Entity will likely incur $6,000 in legal costs, or $330,000 in the
aggregate initial burden, to draft or review statements of potential
opportunities and corresponding risks in the marketing materials for
single name and narrow based index credit default swaps, total return
swaps and other security-based swaps.\1554\
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    \1553\ To the extent that the 16 registered broker-dealers that
are expected to register as SBS Entities are also FINRA members,
they are already subject to these similar FINRA requirements in the
non-security based swap context. Cf. FINRA Rule 2210(d)(1)(D)
(``Members must ensure that statements are clear and not misleading
within the context in which they are made, and that they provide
balanced treatment of risks and potential benefits. Communications
must be consistent with the risks of fluctuating prices and the
uncertainty of dividends, rates of return and yield inherent to
investments.'') The Commission believes that this requirement
addresses concerns raised by a commenter that to be fair and
balanced, communications must inform investors of both the potential
rewards and risks of their investments. See Levin, supra note 5.
    \1554\ The Commission estimates that the review of marketing
materials for these three categories of security-based swaps would
require 5 hours of outside counsel time, at an average cost of $400
per hour. This estimate also assumes that each SBS Entity engages in
all three categories of security-based swaps.
---------------------------------------------------------------------------

    The Commission additionally believes that compliance with Rule
15Fh-3(g) would require a review of SBS Entities' other communications
to their counterparties, such as emails and Bloomberg messages.
However, we believe that such additional communications would likely be
reviewed internally, by in-house legal counsel or an SBS Entity's CCO.
We estimate that the initial internal burden hours associated with this
review would be approximately six hours, for an aggregate total of 330
hours.\1555\
---------------------------------------------------------------------------

    \1555\ The Commission estimates that the review of additional
communications for these three categories of security-based swaps
would require internal burden hours for each of the 55 SBS Entities.
This estimate also assumes that each SBS Entity engages in all three
categories of security-based swaps.
---------------------------------------------------------------------------

    For more bespoke transactions, the cost for outside counsel to
review the marketing materials will depend on the complexity, novelty
and nature of the product, but the Commission expects a higher cost
associated with the review for more novel products. The Commission
accordingly estimates an initial, aggregate compliance cost for the
marketing materials relating to bespoke single name and narrow based
index credit default swaps, total return swaps and other security-based
swaps at $462,000.\1556\
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    \1556\ The Commission estimates the review of the marketing
materials for each of these categories would require seven hours of
outside counsel time at a cost of $400 per hour. This estimate also
assumes that each SBS Entity engages in all three categories of
transactions.
---------------------------------------------------------------------------

    As stated above in Section II.G.5, Rule 15Fh-3(g) applies to
communications made before the parties enter into a security-based
swap, and continues to apply over the term of a security-based swap.
The Commission believes that the ongoing compliance costs associated
with the rule will likely be limited to a review of SBS Entities' email
communications sent to counterparties, which we believe will likely be
done by in-house counsel. We estimate that the ongoing compliance costs
of the rule will be approximately two burden hours, for an aggregate
total of 330 hours.\1557\
---------------------------------------------------------------------------

    \1557\ The Commission estimates that the review of additional
communications for these three categories of security-based swaps
would require two internal burden hours for each of the 55 SBS
Entities. This estimate also assumes that each SBS Entity engages in
all three categories of security-based swaps.
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5. Supervision
    As outlined above, Rule 15Fh-3(h) requires an SBS Entity to
establish and maintain a system to supervise, and to diligently
supervise, its business and the activities of its associated persons.
Such a system shall be reasonably designed to prevent violations of the
provisions of applicable federal

securities laws and the rules and regulations thereunder relating to
its business as an SBS Entity. The written policies and procedures
required by Rule 15Fh-3(h) must include, at a minimum, procedures for
nine specific areas of supervision.
    As for the number of SBS Entities respondents, the Commission
continues to estimate that approximately 55 SBS Entities (of which we
expect approximately 35 will be dually registered with the CFTC as Swap
Entities) will be required to comply with analogous supervision rules
like those required by Rule 15Fh-3(h).\1558\ The supervision
requirements in Rule 15Fh-3(h) are largely the same under the business
conduct standards and related rules adopted by the CFTC.\1559\
---------------------------------------------------------------------------

    \1558\ Proposing Release, 76 FR at 42442, supra note 3. See also
Registration Adopting Release, 80 FR at 48990, supra note 1129.
    \1559\ See Commodity Exchange Act Rule 23.602. See also
Commodity Exchange Act Rule 23.402(a) (policies and procedures to
ensure compliance); Commodity Exchange Act Rule 3.3(d)(1)
(administration of compliance policies and procedures). Accordingly,
the SBS Entities that would also be registered as a swap dealer or
major swap participant with the CFTC would have supervision policies
and procedures for engaging in swaps.
---------------------------------------------------------------------------

    The estimates in this paragraph reflect the foregoing information,
as well as the Commission's general experience with and understanding
of the burden estimates in similar contexts, including, but not limited
to, FINRA's analogous supervision rules. While each of the nine written
policies and procedures required, at a minimum, by Rule 15Fh-3(h) will
vary in cost, the Commission continues to estimate that such policies
and procedures will require, on average, 210 hours per respondent, per
policy and procedure to initially prepare written policies and
procedures in order to establish a system to diligently supervise those
policies and procedures, or an average of 1,890 burden hours per SBS
Entity--resulting in an initial aggregate burden of 103,950
hours.\1560\ The Commission also continues to expect that many SBS
Entities will primarily rely on outside counsel for the collection of
information required under this rule at a rate of $400 per hour, for an
average of 450 hours per respondent, with a minimum of nine policies
and procedures, resulting in an outside initial cost burden of $180,000
per respondent--or an aggregate initial cost of $9,900,000.\1561\ Once
these policies and procedures are established, the Commission continues
to estimate that, on average, each SBS Entity will spend approximately
540 hours (approximately 60 hours per policy and procedure) each year
to maintain these policies and procedures, yielding a total ongoing
annual burden of approximately 29,700 internal burden hours (55 SBS
Entities x 540 hours).\1562\ The Commission believes that the
maintenance of these policies and procedures will be conducted
internally.
---------------------------------------------------------------------------

    \1560\ See Proposing Release, 76 FR at 42446, supra note 3. The
estimate is based on the following calculation: (210 hours) x (9
policies and procedures) x (55 SBS Entities). The estimates
reflected do not include the burden and cost of actually complying
with the underlying substance of these written policies and
procedures as that is beyond the scope of the PRA analysis.
    \1561\ Some SBS Entities may choose to utilize in-house counsel
to initially prepare these policy and procedure, which would
mitigate the aggregate initial cost, but the Commission's estimate
of $9,900,000 reflects a conservative assumption of SBS Entities
primarily relying on outside counsel to prepare these materials.
    \1562\ See Proposing Release, 76 FR at 42446, supra note 3.
---------------------------------------------------------------------------

6. SBS Dealers Acting as Advisors to Special Entities
    As discussed above, Rule 15Fh-4 imposes on SBS Dealers that act as
advisors to special entities a duty to make a reasonable determination
that any security-based swap or related trading strategy that the SBS
Dealer recommends is in the ``best interests'' of the special entity.
Rule 15Fh-2(a) states that an SBS Dealer ``acts as an advisor'' to a
special entity when it recommends a security-based swap or related
trading strategy to the special entity. However, the rule provides a
safe harbor whereby an SBS Entity will not be deemed an ``advisor'' if
an ERISA special entity counterparty relies on advice from an ERISA
fiduciary, or where any special entity counterparty relies on advice
from a qualified independent representative that acts in its best
interests.\1563\
---------------------------------------------------------------------------

    \1563\ Rule 15Fh-2(a)(1)-(2).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission recognized the inherent
tensions that arise where SBS Dealers recommend a security-based swap
or related transaction to special entity counterparties.\1564\ Given
the parties' incentive to transact in security-based swaps, the
Commission believes that the parties are likely to resolve these
tensions by providing the necessary representations and disclosures to
meet the requirements of the safe harbor under Rule 15Fh-2(a)(1)-(2),
such that an SBS Dealer will not be deemed to act as an advisor to a
special entity, particularly for transactions in which the SBS Dealer
is the counterparty to the transaction.
---------------------------------------------------------------------------

    \1564\ See Proposing Release, 76 FR at 42424, supra note 3.
---------------------------------------------------------------------------

    Among swap dealers operating under the CFTC's parallel safe
harbor,\1565\ parties have generally included representations in
standard swap documentation that both counterparties are acting as
principals, and that the counterparty is not relying on any
communication from the swap dealer as investment advice. We believe
that SBS Dealers and their special entity counterparties will similarly
include the requisite representations in standard security-based swap
documentation. These representations will need to be reviewed and
revised to ensure that they comply with the rules the Commission adopts
today.
---------------------------------------------------------------------------

    \1565\ See CFTC Regulation Sec.  23.440(b)(1)-(2).
---------------------------------------------------------------------------

    As stated in the Proposing Release, the Commission continues to
believe that the 50 SBS Dealers will primarily rely on in-house counsel
for compliance with this rule, each of which will need approximately
five internal burden hours to draft, review and revise the
representations in its standard security-based swap documentation to
comply with Rule 15Fh-2(a)(1)-(2), for an initial aggregate burden of
250 hours.\1566\ The Commission also believes that, once an SBS Dealer
revises the language of the representations to meet the requirements of
Rule 15Fh-2(a)(1)-(2), such language will become part of the SBS
Dealer's standard security-based swap documentation and, accordingly,
there will be no further ongoing burden associated with this rule. For
transactions in which an SBS Dealer is not a counterparty and chooses
to act as an advisor, the Commission estimates that an SBS Entity will
require approximately 20 internal burden hours to collect the requisite
information from each special entity, for an aggregate initial burden
of approximately 1,700 hours.\1567\
---------------------------------------------------------------------------

    \1566\ See Proposing Release, 76 FR at 42446, supra note 3. This
estimate is based on multiplying the number of SBS Dealers (50) by
the number of estimated internal burden hours (5).
    \1567\ This estimate is based on available market data for
November 2006-September 2014 provided by DTCC that indicates 85
unique pairs of SBS Dealers and U.S. special entities without a
third-party investment adviser. Based on 2014 single name CDS data
in DTCC-TIW, there were 2 unique trading relationships between
likely SBS Dealers and special entities without a third party
investment adviser, which entered into 272 new trades and 200
terminations, representing 0.039% of all transactions in 2014.
---------------------------------------------------------------------------

7. SBS Entities Acting as Counterparties to Special Entities
    Where a special entity is a counterparty to a security-based swap,
Rule 15Fh-5(a)(1) requires an SBS Entity to have a reasonable basis for
believing that the special entity has a qualified independent
representative

that meets specified requirements. Where the special entity
counterparty is an ERISA plan, under Rule 15Fh-5(a)(2), the SBS Entity
must have a reasonable basis to believe that the ERISA plan is
represented by an ERISA fiduciary. The Commission believes that written
representations will likely provide the basis for establishing an SBS
Entity's reasonable belief regarding the qualifications of the
independent representative.
    As stated in the Proposing Release, the Commission continues to
believe that the burden for determining whether an independent
representative is independent of the SBS Entity will depend on the size
of the independent representative, the size of the SBS Entity, and the
volume of transactions with which each is engaged. The Commission
further believes that each SBS Entity would initially require written
representations regarding the qualifications of a special entity's
independent representative, but would only require updates to the
independent representative's qualifications in subsequent dealings with
the same independent representative throughout the duration of the swap
term, provided the volume and nature of the security-based swap
transaction remain the same.
    Regarding the initial burden estimates for SBS Entities, the
Commission's updated estimates reflect that each SBS Entity will
interact with and be required to form a reasonable basis regarding the
qualifications of approximately 385 independent, third-party
representatives and 25 in-house independent representatives, for a
total of 410 independent representatives. In the Proposing Release, the
Commission estimated an average internal burden of 15 hours for each
SBS Entity per independent representative. We have increased this
estimate based on changes to the representations that SBS Entities will
have to obtain and now estimate that each SBS Entity, on average, will
initially require approximately 15.5 internal burden hours from the SBS
Entity's own in-house counsel per independent representative to collect
the information necessary to comply with this requirement. This will
result in an aggregate initial burden of 349,525 internal hours (15.5
hours x 410 independent representatives x 55 SBS Entities).\1568\ We do
not believe there will be any external burdens associated with this
rule.
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    \1568\ While the Commission does not believe that every SBS
Entity is likely to deal with every independent representative, we
do not have data on the average number of independent
representatives with whom each SBS Entity would deal. Accordingly,
for the purposes of these calculations, we have assumed that each
SBS Entity will deal with each independent representative.
---------------------------------------------------------------------------

    With regard to SBS Entities' ongoing burden, the Commission
believes that such burden would be minimal, since, once an SBS Entity
forms a reasonable basis to believe that a given independent
representative meets the qualifications of Rule 15Fh-5, the SBS Entity
will not likely need to reaffirm that independent representative's
qualifications anew, but could instead rely on past representations
regarding the representative's qualifications. We estimate that SBS
Entities will incur an ongoing, aggregate burden of 22,500 hours (1
hour x 55 SBS Entities x 410 independent representatives) per year as a
result of this rule.
    In addition to the burdens imposed on SBS Entities, Rule 15Fh-
5(a)(1) will also impose a burden on special entities' independent
representatives to collect the necessary information regarding their
relevant qualifications, and provide that information to the SBS Entity
and/or the special entity. The Commission continues to believe that the
reporting burden for the independent representative will consist of
providing written representations to the SBS Entity and/or the special
entity it represents. The Commission believes that the burden
associated with an independent representative's obligation to assess
its independence from the SBS Entity will likely depend on the size of
the independent representative, the size of the SBS Entity, the
interactions between the independent representative and the SBS Entity,
the policies and procedures of the independent representative and
depend less on the number of transactions in which the independent
representative is engaged. The policies and procedures of the
independent representative will facilitate its ability to quickly
assess, disclose, manage and mitigate any potential material conflicts
of interest. We now believe the number of transactions in which the
independent representative engages is less likely to impact this
assessment. Accordingly, we have updated our estimates.
    We anticipate that independent representatives will rely on in-
house counsel to collect and submit the relevant documentation and
information regarding its qualifications. The Commission also estimates
that each independent representative, on average, will initially
require approximately 16 internal burden hours from its in-house
counsel per SBS Entity to collect the information necessary to comply
with this requirement.\1569\ This will result in an aggregate initial
burden of 360,800 internal hours (16 hours x 410 independent
representatives x 55 SBS Entities).
---------------------------------------------------------------------------

    \1569\ While the Commission does not believe that every
independent representative is likely to deal with every SBS Entity,
we do not have data on the average number of SBS Entities with whom
each independent representative would deal. Accordingly, for the
purposes of these calculations, we have assumed that each SBS Entity
will deal with each independent representative.
---------------------------------------------------------------------------

    As with SBS Entities' ongoing burden associated with this rule, the
Commission believes that the ongoing burden imposed on independent
representatives would be minimal, since, once the independent
representative has provided information regarding its qualifications to
the SBS Entity, the independent representative will not likely need to
collect or provide that information again, but could instead rely on a
bring down certificate that reflects past representations regarding its
qualifications. We estimate that independent representatives will incur
an ongoing, aggregate burden of 22,500 hours (1 hour x 55 SBS Entities
x 410 independent representatives) per year as a result of this
rule.\1570\ We do not believe there will be external burdens associated
with this rule.
---------------------------------------------------------------------------

    \1570\ We note that, in the Proposing Release, we based our
burden estimates for evaluating an independent representative's
qualifications on the underlying assumption that representations
regarding an independent representative's qualifications must be
provided prior to every transaction, and therefore the associated
burden calculations were transaction-specific. See Proposing
Release, 76 FR 42446-7, supra note 3. However, based on the observed
practices of swap market participants, we now believe that
representations regarding an independent representative's
qualifications need only be provided in the context of each
relationship with an SBS Entity. Our revised calculations, which are
now relationship-specific, reflect this shift in our underlying
assumption.
---------------------------------------------------------------------------

8. Political Contributions
    As noted above, the Commission believes that there will be
approximately 50 SBS Dealers subject to these rules, and estimates that
all of them will provide, or will seek to provide, security-based swap
services to municipal entities. SBS Dealers, in order to supervise and
assess internal compliance with the pay to play rules, will need to
collect information regarding the political contributions of SBS
Dealers and their covered associates. In addition, SBS Dealers' covered
associates will also need to collect and provide the information
required by these rules to SBS Dealers.
    The Commission's estimates in this paragraph take into account the
burden of the covered associates and the SBS Dealers. These estimates
also reflect the

Commission's experience with and burden estimates for similar
requirements, as well as our discussions with market
participants.\1571\ Based on the foregoing, the Commission estimates
that it will take, on average, approximately 185 hours per SBS Dealer--
resulting in a total initial burden of 9,250 hours \1572\ to collect
the information regarding the political contributions of SBS Dealers
and their covered associates to assist SBS Dealer in their compliance
with the rule. The Commission believes that many SBS Dealers will
primarily rely on in-house counsel for the collection of information
required under this rule.
---------------------------------------------------------------------------

    \1571\ See Advisers Act Pay-to-Play Release, 75 FR 41018, 41061-
65, supra note 1100. See also supra note 19 regarding a list of
Commission staff meetings with interested parties.
    \1572\ The estimate is based on the following calculation: (185
hours x 50 SBS Dealers).
---------------------------------------------------------------------------

    Additionally, we expect some SBS Dealers to incur one-time costs to
establish or enhance current systems to assist in their compliance with
the rule. These costs will vary widely among firms. Similar to the
estimates made by the Commission in connection with the Advisers Act
pay to play rule, we have also estimated that some small and medium
firms will incur start-up costs, on average, of $10,000, and larger
firms will incur, on average, $100,000. Assuming all SBS Dealers will
be larger firms, the initial cost to establish or enhance current
systems to assist in their compliance with the rule is estimated at
$5,000,000 for all SBS Dealers.\1573\ Nevertheless, we note that some
SBS Dealers may not incur any system costs if they determine a system
is unnecessary due to their limited number of employees, or their
limited number of municipal entity counterparties. Furthermore, like
other large firms, SBS Dealers have likely devoted significant
resources to automating compliance and reporting with respect to
regulations concerning certain political contributions. This rule
could, therefore, cause them to enhance the existing systems that had
originally been designed to comply with MSRB Rules G-37 and G-38 and
Advisers Act Rule 206(4)-5.
---------------------------------------------------------------------------

    \1573\ The initial cost is estimated at: 50 SBS Dealers x
$100,000 = $5,000,000. See Advisers Act Pay-to-Play Release, 75 FR
at 41061, supra note 1100 (estimating that larger firms will incur,
on average, $100,000, in start-up costs).
---------------------------------------------------------------------------

    The final rules also allow SBS Dealers to file applications for
exemptive relief, and outline a list of items to be addressed,
including, whether the SBS Dealer has developed policies and procedures
to monitor political contributions; the steps taken after discovery of
the contribution; and the apparent intent in making the contribution
based on the facts and circumstances of each case. The incidence of
exemptive relief related to MSRB Rule G-37 and the number of
applications the Commission has received under the Advisers Act Rule
206(4)-5 may be indicative of the possible applications for exemptive
relief under these final rules. Consistent with the Commission's
estimates in connection with Advisers Act Rule 206(4)-5, we also
estimate that a firm that applies for an exemption will hire outside
counsel to prepare an exemptive request, and estimate that the number
of hours counsel will spend preparing and submitting an application
between 16 hours to 32 hours, at a rate of $400 per hour. Recognizing
that this is an estimate, we conservatively estimate that the
Commission may receive up to two applications for exemptive relief per
year with respect to pay to play rules.\1574\ at a total ongoing cost
of $25,600 per year, assuming conservatively 32 hours for outside
counsel to prepare an exemptive request.\1575\
---------------------------------------------------------------------------

    \1574\ FINRA has granted 17 exemptive letters related to Rule G-
37 between 1/05 and 12/15 (11 years) http://www.finra.org/industry/exemptive-letters. In addition, the Commission has received 13
applications under the Adviser's act (since the compliance date,
approximately 4 years).
    \1575\ Ongoing: (Outside counsel at $400 per hour x 32 hours per
application x 2) = $25,600. See Advisers Act Pay-to-Play Release, 75
FR at 41065, supra note 1100 (making similar estimates in connection
with Advisers Act Rule 206(4)-5).
---------------------------------------------------------------------------

9. Chief Compliance Officer
    Under Rule 15Fk-1, an SBS Entity's CCO is responsible for, among
other things, taking reasonable steps to ensure that the SBS Entity
establishes and maintains policies and procedures reasonably designed
to ensure compliance by the SBS Entity with the Exchange Act and the
rules and regulations thereunder relating to its business as an SBS
Entity. The Commission continues to estimate that, on average, the
establishment and administration of the policies and procedures
required under Rule 15Fk-1 (e.g., preparing an annual compliance report
and the SBS Entity's annual assessment of its written policies and
procedures reasonably designed to achieve compliance with Section 15F
and the rules and regulations thereunder) will require 630 hours to
create and 180 hours to administer per year per respondent, for a total
burden of 34,650 initial hours, and 9,900 hours per year on average, on
an ongoing basis.\1576\ The Commission also continues to estimate that
a total of $60,000 in outside legal costs will be incurred to, among
other things, assist in the preparation of the annual compliance report
and the SBS Entity's annual assessment of its written policies and
procedures, as a result of this burden per respondent, for a total
initial outside cost burden of $3,300,000.\1577\
---------------------------------------------------------------------------

    \1576\ See Proposing Release, 76 FR at 42448, supra note 3.
    \1577\ See id. This figure is the result of an estimated $400
per hour cost for outside legal services times 150 hours for 3
policies and procedures for 55 respondents. See SDR Registration
Release, supra note 1202.
---------------------------------------------------------------------------

    A CCO will also be required to prepare and submit annual compliance
reports to the Commission and the SBS Entity's board of directors. In
the Proposing Release, the Commission estimated that these reports
would require on average 92 hours per respondent per year for an
ongoing annual burden of 5,060 hours. As a result of additional
descriptions that some CCOs will have to include in their annual
compliance reports, we now estimate that these reports will require on
average 93 hours per respondent per year for an ongoing annual burden
of 5,115.\1578\ Because the report will be submitted by an internal
CCO, the Commission does not expect any external costs associated
therewith.
---------------------------------------------------------------------------

    \1578\ The estimate is based on the following calculation: (93
hours) x (55 SBS Dealers).
---------------------------------------------------------------------------

10. Foreign Branch Exception
    The Commission estimates the one-time paperwork burden associated
with developing representations under this collection of information
would be, for each U.S. bank counterparty that may make such
representations to its registered Major SBS Participant or registered
SBS Dealer counterparty, no more than five hours, and up to $2,000 for
the services of outside professionals, for an estimate of approximately
250 hours and $100,000 across all security-based swap counterparties
that may make such representations.\1579\ This estimate assumes little
or no reliance on standardized disclosure language.
---------------------------------------------------------------------------

    \1579\ See Cross-Border Proposing Release, 78 FR at 31108, supra
note 6 (explaining that the Commission estimated that 50 entities
may include a representation that security-based swap is a
``transaction conducted through a foreign branch'' in their trading
relationship documentation).
---------------------------------------------------------------------------

    However, as the Commission has previously noted in connection with
this collection of information, in most cases, the representations
associated with the definition of ``transaction conducted through a
foreign branch'' are likely to be made through amendments to the
parties' existing trading documentation (e.g., the schedule to a

master agreement).\1580\ Because these representations relate to new
regulatory requirements, the Commission anticipates that U.S. bank
counterparties may elect to develop and incorporate these
representations in trading documentation soon after the effective date
of the Commission's security-based swap regulations, rather than
incorporating specific language on a transactional basis. The
Commission believes that parties would be able to adopt, where
appropriate, standardized language across all of their security-based
swap trading relationships.
---------------------------------------------------------------------------

    \1580\ See Cross-Border Adopting Release, 79 FR at 47366, supra
note 193. See also Cross-Border Proposing Release, 78 FR at 31108,
supra note 6 (noting that entities may include the representation in
their trading relationship documentation). The Commission believes
that because trading relationship documentation is established
between two counterparties, the question of whether one of those
counterparties is able to represent that it is entering into a
``transaction conducted through a foreign branch'' would not change
on a transaction-by-transaction basis and, therefore, such
representations would generally be made in the schedule to a master
agreement, rather than in individual confirmations.
---------------------------------------------------------------------------

    The Commission expects that the majority of the burden associated
with the new disclosure requirements will be experienced during the
first year as language is developed and trading documentation is
amended. After the new representations are developed and incorporated
into trading documentation, the Commission continues to believe that
the on-going paperwork burden associated with this requirement will be
10 hours per U.S. bank counterparty for verifying representations with
existing counterparties, for a total of approximately 500 hours across
all applicable U.S. bank counterparties.\1581\
---------------------------------------------------------------------------

    \1581\ The Commission staff estimates that this burden would
consist of 10 hours of in-house counsel time for each security-based
swap market participant that may make such representations. See
Cross-Border Adopting Release, 79 FR 47367 (estimating 10 hours per
counterparty for verification), supra note 193; Cross-Border
Proposing Release, 78 FR 31108 (same), supra note 6.
---------------------------------------------------------------------------

11. Substituted Compliance Rule
    Rule 3a71-6 under the Exchange Act would require submission of
certain information to the Commission to the extent that foreign
financial authorities or security-based swap dealers or major security-
based swap participants elect to request a substituted compliance
determination with respect to the Title VII business conduct
requirements. Consistent with Exchange Act Rule 0-13, such applications
must be accompanied by supporting documentation necessary for the
Commission to evaluate the request, including information regarding
applicable foreign requirements, and the methods used by foreign
authorities to monitor and enforce compliance.
    The Commission expects that registered security-based swap dealers
and major security-based swap participants will seek to rely on
substituted compliance upon registration, and that it is likely that
the majority of such requests will be made during the first year
following the effective date of this substituted compliance rule.
Requests would not be necessary with regard to applicable rules and
regulations of a foreign jurisdiction that have previously been the
subject of a substituted compliance determination in connection with
the applicable rules.
    In light of the provisions of the final rule and rule 0-13,
permitting substituted compliance applications to be made by foreign
regulatory authorities, the Commission expects that the great majority
of substituted compliance applications will be submitted by foreign
authorities, and that very few substituted compliance requests will
come from SBS Entities. For purposes of this assessment, the Commission
estimates that three such SBS Entities will submit such
applications.\1582\ The Commission estimates that the total one-time
paperwork burden incurred by such entities associated with preparing
and submitting a request for a substituted compliance determination in
connection with the business conduct requirements will be approximately
240 hours, plus $240,000 for the services of outside professionals for
all three requests.\1583\
---------------------------------------------------------------------------

    \1582\ This estimate differs from the Cross-Border Proposing
Release estimate, that there would be no more than 50 requests for
substituted compliance determinations pursuant to proposed Rule
3a71-5. See Cross-Border Proposing Release, 78 FR at 31110, supra
note 6. The revised estimate reflects our expectation that the large
majority of substituted compliance requests will be made by foreign
regulatory authorities, rather than by market participants.
    \1583\ Consistent with the per-request estimates in the Cross-
Border Proposing Release, the Commission estimates that the
paperwork burden associated with making each such substituted
compliance request would be approximately 80 hours of in-house
counsel time, plus $80,000 for the services of outside professionals
(based on 200 hours of outside time * 400). See Cross-Border
Proposing Release, 78 FR at 31110, supra note 6.
    In practice, those amounts may overestimate the costs of
requests pursuant to Rule 3a71-6 as adopted, as such requests would
solely address business conduct requirements, rather than the
broader proposed scope of substituted compliance set forth in that
proposal.
---------------------------------------------------------------------------

E. Collections of Information are Mandatory

    With the exception of the collection of information related to the
foreign branch exception, compliance with collection of information
requirements under these rules is mandatory for all SBS Dealers and SBS
Entities. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
    Compliance with the collection of information requirements
associated with rule 3a71-6, regarding the availability of substituted
compliance, is mandatory for all foreign financial authorities or non-
U.S. SBS Entities that seek a substituted compliance determination.

F. Confidentiality

    The forms that the Commission has adopted for use by applicants for
registration as security-based swap dealers or major security-based
swap participants provide for applicants to notify the Commission
regarding intended reliance on substituted compliance.\1584\ Also, the
Commission generally will make requests for substituted compliance
determination public, subject to requests for confidential treatment
being submitted pursuant to any applicable provisions governing
confidentiality under the Exchange Act.\1585\
---------------------------------------------------------------------------

    \1584\ See Registration Adopting Release, 80 FR at 49049, supra
note 989 (questions 3A, B and C of Form SBSE-A, addressing potential
reliance on substituted compliance determinations)
    \1585\ See SBS Entity Definitions Adopting Release, 79 FR at
47359, supra note 1451 (discussing confidentiality provisions under
the Exchange Act in connection with adopting Rule 0-13, governing
applications for substituted compliance).
---------------------------------------------------------------------------

    The representations provided in connection with the foreign branch
exception would be provided voluntarily by certain U.S. bank
counterparties to their registered SBS Dealer counterparties;
therefore, the Commission would not typically receive confidential
information as a result of this collection of information. However, to
the extent that the Commission receives confidential information
contained in a representation document through our examination and
oversight program, an investigation, or some other means, such
information would be kept confidential, subject to the provisions of
applicable law.

G. Retention Period of Recordkeeping Requirements

    SBS Dealers will be required to retain records and information
relating to

these rules for the required retention periods specified in Exchange
Act Rule 17a-4.

VI. Economic Analysis

A. Introduction and Broad Economic Considerations

    The Commission is sensitive to the costs and benefits imposed by
its rules. This section presents an analysis of the particular economic
effects--including costs, benefits and impact on efficiency,
competition, and capital formation--that may result from our final
rules. Section 3(f) of the Exchange Act requires the Commission, when
engaging in rulemaking that requires the Commission to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. Further, Section 23(a)(2) of the Exchange Act requires the
Commission, when adopting rules under the Exchange Act, to consider the
impact that any new rule would have on competition and to not adopt any
rule that would impose a burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act. In the
Proposing Release, the Commission solicited comments on all aspects of
the costs and benefits associated with the proposed rules, including
any effect the proposed business conduct rules may have on efficiency,
competition, and capital formation.\1586\ The Commission has considered
these comments and has modified some of the rules being adopted as
discussed in sections I, II and III, supra.
---------------------------------------------------------------------------

    \1586\ See Proposing Release, supra note 3.
---------------------------------------------------------------------------

    The business conduct rules as adopted implement the requirements
under Sections 15F(h) and 15F(k) of the Exchange Act as added by
Section 764(a) of the Dodd-Frank Act. As discussed in Section VI.C,
infra, the final rules include both requirements expressly addressed by
Title VII of the Dodd-Frank Act, as well as discretionary rules
designed to further the principles which underlie the statutory
requirements. These discretionary rules include requirements to make
certain additional disclosures; certain ``know your counterparty''
obligations; suitability obligations for SBS Dealers; prohibitions
against certain ``pay to play'' activities; and a requirement of board
approval for decisions related to the compensation or removal of the
CCO.
    SBS Entities play a central role in intermediating transactions in
complex and opaque security-based swaps, and enjoy significant
informational advantages compared to their less sophisticated
counterparties. For instance, SBS Dealers observe quote solicitations
and order flow. SBS Dealers may also act as lenders, placement agents,
underwriters, structurers or securitizers of the securities underlying
security-based swaps. As a result of operating in such additional
capacities, SBS Dealers may have superior information about the quality
of security-based swaps and of securities underlying security-based
swaps. Major SBS Participants may have lower volumes of dealing
activity than SBS Dealers, but may hold large concentrated positions in
security-based swaps,\1587\ and may have specialized expertise in
pricing and trading security-based swaps. At the same time, less
informed and less sophisticated counterparties do not observe order
flow, may have less information concerning the risks and expected
returns of security-based swaps and reference securities, and may have
less expertise in valuing complex security-based swaps.
---------------------------------------------------------------------------

    \1587\ See Definitions Adopting Release, 77 FR at 30751-30756,
supra note 115.
---------------------------------------------------------------------------

    In addition, SBS Dealers are for-profit entities with business
incentives that may be competing with those of their counterparties.
Due to the nature of their market making and intermediation roles, SBS
Dealers purchase security-based swaps from counterparties seeking to
sell them, and sell security-based swaps to counterparties seeking to
buy them. When SBS Dealers transact as principal risk holders and do
not hedge their exposures, they benefit from directional market moves
that result in losses for their counterparties. When SBS Dealers hedge
their exposures and do not carry balance sheet risk, they may be
indifferent to directional price moves of the security-based swap, but
profit from charging high fees to their counterparties, whereas their
counterparties benefit from low fees and transaction costs. If SBS
Dealers recommend security-based swaps to counterparties, such
recommendations may be influenced by the above business incentives.
Counterparties of SBS Dealers may be aware of these competing
incentives, and SBS Dealers generally benefit from intermediating a
greater volume of trades, potentially mitigating these effects.
However, informational asymmetries between SBS Dealers and their
counterparties outlined above may limit the ability of counterparties
to decouple the potential biases and information components of SBS
Dealer recommendations, and to evaluate the merits of each security-
based swap.
    Broadly, these external business conduct rules as adopted may
decrease informational asymmetries between SBS Entities and their less
sophisticated counterparties and strengthen counterparty protections.
This may enable market participants to make better informed investment
decisions, and enhance allocative efficiency in security-based swap
markets.
    The baseline for our economic analysis reflects rules adopted as
part of the SBS Entity Definitions Adopting Release, the Cross-Border
Adopting Release, Regulation SBSR and SDR Rules,\1588\ as well as SBS
Entity registration rules. We also recognize that final U.S. Activity
rules have been adopted, and affect the scope of cross-border
transactions that will become subject to various substantive Title VII
requirements, including those related to business conduct standards.
While these rules are not yet in effect, to perform a meaningful
analysis of the business conduct requirements being adopted and their
cross-border application, our baseline includes the final U.S. Activity
rules.\1589\
---------------------------------------------------------------------------

    \1588\ 17 CFR 232.11, 232.101, 232.305, and 232.407; 17 CFR
240.13n-1 to 240.13n-12 (``SDR Rules''). See SDR Registration
Release, supra note 1202.
    \1589\ See U.S. Activity Adopting Release, 81 FR at 8598.
---------------------------------------------------------------------------

    Title VII provides a statutory framework for the OTC derivatives
market and divides authority to regulate that market between the CFTC
(which regulates swaps) and the Commission (which regulates security-
based swaps). We note that many entities expected to register with the
Commission as SBS Entities are currently intermediating large volumes
of transactions across swap, security-based swap and reference security
markets. The Commission has previously estimated that of the total 55
entities expected to register with the Commission as SBS Entities, up
to 35 entities are registered with the CFTC as Swap Entities, and up to
16 entities are registered with the Commission as broker-dealers.\1590\
Since broker-dealers registered with the Commission and Swap Entities
registered with the CFTC are required to join an SRO, the majority of
SBS Entities may already be subject to CFTC and SRO oversight.
Therefore, we anticipate that many of the entities

expected to register as SBS Entities and become subject to the
Commission's final business conduct rules may have already brought
their business into compliance with CFTC business conduct requirements
and SRO rules, among others. The Commission has sought to harmonize, to
the extent practicable, the final business conduct requirements with
existing requirements applicable to SBS Dealers and broker-dealers.
Obligations imposed on SBS Entities in this rulemaking are modeled on,
and largely similar to, obligations applicable to Swap Entities and
registered broker-dealers. These obligations include disclosure, know-
your-customer, suitability, pay-to-play, supervision, and compliance
responsibilities. The Commission has also considered the implications
of certain business conduct rules regarding special entities subject to
ERISA. DOL staff has stated that the final business conduct standards
neither conflict with DOL regulations nor compel SBS Entities to engage
in fiduciary conduct, as discussed in Section II.D supra.
---------------------------------------------------------------------------

    \1590\ See Registration Adopting Release, 80 FR at 49000, supra
note 989. Also see U.S. Activity Proposing Release, 80 FR at 27458,
supra note 9.
---------------------------------------------------------------------------

    As discussed in the economic baseline, extensive cross-market
participation of dealers and non-dealer counterparties in swap,
security-based swap and reference security markets points to a high
degree of market integration. The Commission has sought to harmonize,
to the extent practicable, final business conduct requirements with
other existing rules, which may result in efficiencies and lower
incremental economic costs for cross-registered SBS Entities and their
counterparties than might have otherwise resulted.\1591\
---------------------------------------------------------------------------

    \1591\ A number of commenters recommended the Commission to
harmonize external business conduct rules with those of the CFTC.
See, e.g., Barnard, supra note 5; Levin, supra note 5; APPA, supra
note 5; BlackRock, supra note 5; NABL, supra note 5; Nomura, supra
note 5; AFGI (July 2013), supra note 5; ISDA (July 2013), supra note
5; Barnard (July 2015), supra note 10; and SIFMA (August 2015),
supra note 5.
---------------------------------------------------------------------------

    Nonetheless, the Commission recognizes--as reflected in the
economic analysis--that the final rules establish new requirements
applicable to SBS Entities, and that complying with these requirements
will entail costs to SBS Entities. In considering the economic
consequences of these final rules we have been mindful of the direct
and indirect costs these rules will impose on market participants, as
well as the effect of various business conduct requirements on the
ability of counterparties to transact with SBS Entities. We have
considered the likely costs and benefits of the final business conduct
requirements for SBS Entities, counterparties in security-based swap
markets, investors in reference security markets, as well as
stakeholders in special entities, such as taxpayers, pension holders,
endowment beneficiaries, and investors in municipal securities. We have
also considered how various types of market participants may respond to
the obligations and safe harbors in these final rules.
    Some of these final rules impose requirements on SBS Dealers only,
whereas others apply to transactions by both SBS Dealers and Major SBS
Participants. These final rules have considered potential differences
between the roles SBS Dealers and Major SBS Participants in security-
based swap markets. As discussed in the sections that follow,
registered SBS Dealers are expected to intermediate large volumes of
security-based swaps and to transact with many hundreds or thousands of
counterparties, whereas Major SBS Participants will be holding
significant positions in SBS without intermediating significant volumes
of deals.\1592\ As discussed in Regulation SBSR, SBS Dealers manage
large changes in exposure to reference entities (inventory risk).\1593\
Large CDS transactions on a particular reference entity create large
inventory positions that affect SBS Dealers' exposure to the credit
risk of reference assets. SBS Dealers may actively manage inventory
risks that they do not want to bear by entering into offsetting
contracts that diversify or hedge new risk exposures. Doing so requires
finding market participants, typically in the interdealer market, who
are willing to act as counterparties to these offsetting
contracts.\1594\ Further, as discussed above, SBS Dealers observe order
flow and may be involved in arranging or structuring security-based
swaps, enjoying informational advantages relative to their non-dealer
counterparties. In contrast, participants required to register as Major
SBS Participants will have accumulated large positions in security-
based swaps but have dealing activity below the de minimis threshold.
As a result of their substantial positions, Major SBS Participants may
be susceptible to market risks. We have considered these differences in
risks arising from the security-based swap activity of the two types of
SBS Entities.
---------------------------------------------------------------------------

    \1592\ See Definitions Adopting Release, 77 FR at 30751-30756,
supra note 115.
    \1593\ See Regulation SBSR Adopting Release, 80 FR at 14617,
infra note 1602.
    \1594\ See ``Inventory risk management by dealers in the single-
name credit default swap market'' (October 17, 2014) at 5, available
at http://www.sec.gov/comments/s7-34-10/s73410-184.pdf. The analysis
uses DTCC-TIW data to describe how SBS Dealers manage inventory risk
by hedging. Also see FN14 citing to Hansch, Oliver, Narayan Y. Naik,
and S. Viswanathan. ``Do inventories matter in dealership markets?
Evidence from the London Stock Exchange.'' The Journal of Finance
53, no. 5 (1998): 1623-1656.
---------------------------------------------------------------------------

    We have also taken into account comments regarding the different
application of various business conduct requirements to SBS Dealers and
Major SBS Participants,\1595\ including one comment that imposition of
``dealer-like'' obligations on Major SBS Participants may undermine
market development, and reduce competition and counterparty
choice.\1596\ The Commission recognizes that SBS Dealers serve as the
points of connection in security-based swap markets, whereas Major SBS
Participants may have greater market impacts and risks associated with
holding larger security-based swap positions. As discussed in Section
II, these final rules are intended to provide counterparty protections
and reduce information asymmetries. The Commission is imposing
counterparty status verification, disclosure, fair and balanced
communications, supervision, antifraud, CCO rules and rules related to
counterparties of special entities on both SBS Dealers and Major SBS
Participants. The final rules limit the scope of ``know your
counterparty'', suitability, pay to play and certain special entity
rules to SBS Dealers. Therefore, counterparties of Major SBS
Participants, as well as counterparties of SBS Dealers, may benefit
from counterparty protections and information benefits of these final
rules. At the same time, Major SBS Participants will not be subject to
the full range of business conduct obligations where business conduct
requirements are not expressly addressed by the Dodd-Frank Act or the
statute applies a requirement only to SBS Dealers. We further discuss
these considerations in the sections that follow.
---------------------------------------------------------------------------

    \1595\ See, e.g., MFA, supra note 5; Blackrock, supra note 5;
CFA, supra note 5.
    \1596\ See MFA, supra note 5.
---------------------------------------------------------------------------

    We recognize that costs of rules imposed on Major SBS Participants
may be passed on to counterparties in the form of transaction costs or
a decreased willingness to intermediate transactions with non-SBS or
Swap Entity counterparties. As reflected in the economic baseline, the
Commission estimates that of the 55 SBS Entities that may register with
the Commission, between zero and five entities may be Major SBS
Participants. The

Commission also estimates that non-SBS Entity counterparties may
transact with a median of three and an average of four SBS Dealers per
year. Should Major SBS Participants become less willing to transact
with non-SBS or Swap Entity counterparties, SBS Dealers are likely to
step in to intermediate OTC trades. As articulated in prior sections,
the Commission believes that imposing certain final business conduct
rules on both SBS Dealers and Major SBS Participants may reduce
information asymmetries and enhance counterparty protections in
security-based swap markets.
    Final business conduct rules reflect the informational advantage of
SBS Entities relative to other market participants. SBS Dealers enjoy
informational advantages over their non-SBS Entity counterparties. As
we quantify in the economic baseline, inter-dealer transactions play a
significant role in security-based swap markets, and security-based
swap activity is highly concentrated among a small number of dealers.
SBS Dealers observe deal flow, and may act in other capacities, such as
in the capacity of underwriters or arrangers, in relation to reference
securities underlying security-based swaps. Major SBS Participants may
also be better informed about the risks and valuations of security-
based swaps due to their large positions in security-based swaps.
Therefore, compared to other counterparties, both SBS Dealers and Major
SBS Participants may be better informed and better able to assess
material risks and characteristics of security-based swaps. Final
disclosure and suitability rules are limited to security-based swap
activities between SBS Entities and counterparties that are not
themselves SBS or Swap Entities. Other external business conduct rules
explicitly address conduct of SBS Entities when they act as
counterparties or advisors to special entities, such as employee
benefit plans, municipalities and endowments.
    The Commission has considered counterparty protections, information
asymmetries and risks arising from arm's length and inter-affiliate
transactions. Inter-affiliate transactions may be conducted for the
purposes of internal risk management within a commonly controlled
corporate group with generally aligned incentives and few informational
asymmetries, and may involve the same personnel acting in or on behalf
of both parties. Imposing business conduct requirements on transactions
among various control affiliates of the same SBS Entity is less likely
to result in counterparty protections, informational benefits or
improvements in allocative efficiency, but would result in additional
costs and execution delays for SBS Entities.\1597\ Similar to the
CFTC's adopted approach, the final business conduct rules 240.15Fh-
3(a)-(f), 240.15Fh-4(b), and 240.15F-5 will apply to arm's length
transactions and exclude transactions that SBS Entities enter into with
their majority-owned affiliates.
---------------------------------------------------------------------------

    \1597\ As discussed in Section II.A, supra, all commenters
recommended not applying these final rules to inter-affiliate
transactions. See ABA Securities Association, supra note 5; FIA/
ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    The Commission notes that, where possible, it has attempted to
quantify the costs, benefits, and effects on efficiency, competition,
and capital formation expected to result from adopting these rules. In
many cases, however, the Commission is unable to quantify the economic
effects. Crucially, many of the relevant economic effects, such as
counterparty protections, information asymmetry, the ability of less
informed market participants to overcome information asymmetries, and
the value of Commission enforcement and oversight, are inherently
difficult to quantify. In other cases, we lack the information
necessary to provide reasonable estimates. For example, we lack data on
business conduct practices of U.S. SBS Entities' foreign branches;
profitability of SBS Dealer and Major SBS Participant transactions at
various volume levels, by type (SEF execution versus OTC/bespoke) and
by counterparty (other SBS and Swap Entities, special entities, all
other counterparties); the magnitude of the conflicts of interest
related to the ``pay to play'' practices by SBS Entities with respect
to special entities and the degree of reliance of dually registered SBS
Entities on covered associates already subject to similar prohibitions;
and how SBS Entities, new entrants, and counterparties, including those
currently not transacting in security-based swap markets, may react to
specific business conduct rules. To the best of our knowledge, no such
data are publicly available and commenters have not provided data to
allow such quantification.

B. Baseline

    To assess the economic impact of the final rules described in this
release, we are using as our baseline the security-based swap market as
it exists at the time of this release, including applicable rules we
have already adopted but excluding rules that we have proposed but not
yet finalized.\1598\ The analysis includes the statutory provisions
that currently govern the security-based swap market pursuant to the
Dodd-Frank Act, and rules adopted in the Definitions Adopting Release,
the Cross-Border Adopting Release,\1599\ the SDR Registration
Release,\1600\ the SBS Entity Registration Adopting Release,\1601\ and
the Regulation SBSR Adopting Release,\1602\ along with U.S. Activity
rules,\1603\ as these final rules--even if compliance is not yet
required--are part of the existing regulatory landscape that market
participants expect to govern their security-based swap activity.
---------------------------------------------------------------------------

    \1598\ We also considered, where appropriate, the impact of
rules and technical standards promulgated by other regulators, such
as the CFTC and the European Securities and Markets Authority, on
practices in the security-based swap market.
    \1599\ See Cross-Border Adopting Release, supra note 684.
    \1600\ See SDR Registration Release, supra note 1202.
    \1601\ See Registration Adopting Release, supra note 989.
    \1602\ See ``Regulation SBSR-Reporting and Dissemination of
Security-Based Swap Information,'' Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015) (``Regulation SBSR
Adopting Release'').
    \1603\ See U.S. Activity Adopting Release 81 FR 8598.
---------------------------------------------------------------------------

    The business conduct rules include a variety of standards for
conduct by SBS Entities when they transact with counterparties. While
certain requirements apply to SBS Entity transactions with all
counterparties, some requirements will affect only SBS Entity
transactions with non-SBS or Swap Entities, others distinguish between
SBS Dealers and Major SBS Participants, and yet others offer relief for
anonymous transactions. The following sections describe current
security-based swap market activity, participants, common dealing
structures, counterparties, and patterns of cross-border and cross-
market participation.
1. Available Data Regarding Security-Based Swap Activity
    Our understanding of the market is informed in part by available
data on security-based swap transactions, though we acknowledge that
limitations in the data limit the extent to which we can quantitatively
characterize the market.\1604\ Because these data do not cover the
entire market, we have developed an understanding of market activity
using a sample of transactions data that includes only certain portions

of the market. We believe, however, that the data underlying our
analysis here provide reasonably comprehensive information regarding
single-name CDS transactions and the composition of participants in the
single-name CDS market.
---------------------------------------------------------------------------

    \1604\ We also rely on qualitative information regarding market
structure and evolving market practices provided by commenters, both
in letters and in meetings with Commission staff, and knowledge and
expertise of Commission staff.
---------------------------------------------------------------------------

    Specifically, our analysis of the state of the current security-
based swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2008 to 2014. According to data
published by the Bank for International Settlements (``BIS''), the
global notional amount outstanding in single-name CDS was approximately
$9.04 trillion,\1605\ in multi-name index CDS was approximately $6.75
trillion, and in multi-name, non-index CDS was approximately $611
billion. The total gross market value outstanding in single-name CDS
was approximately $366 billion, and in multi-name CDS instruments was
approximately $227 billion.\1606\ The global notional amount
outstanding in equity forwards and swaps as of December 2014 was $2.50
trillion, with total gross market value of $177 billion.\1607\ As these
figures show (and as we have previously noted), although the definition
of security-based swaps is not limited to single-name CDS, single-name
CDS contracts make up a majority of security-based swaps, and we
believe that the single-name CDS data are sufficiently representative
of the market to inform our analysis of the state of the current
security-based swap market.\1608\
---------------------------------------------------------------------------

    \1605\ The global notional amount outstanding represents the
total face amount used to calculate payments under outstanding
contracts. The gross market value is the cost of replacing all open
contracts at current market prices.
    \1606\ See semi-annual OTC derivatives statistics at December
2014, Table 19, available at http://www.bis.org/statistics/dt1920a.pdf (accessed Jul. 29, 2015).
    \1607\ These totals include both swaps and security-based swaps,
as well as products that are excluded from the definition of
``swap,'' such as certain equity forwards.
    \1608\ While other repositories may collect data on transactions
in total return swaps on equity and debt, we do not currently have
access to such data for these products (or other products that are
security-based swaps). Consistent with the Cross-Border Proposing
Release, we believe that data related to single-name CDS provide
reasonably comprehensive information for purposes of this analysis,
as such transactions appear to constitute roughly 74 percent of the
security-based swap market as measured on the basis of gross
notional outstanding. See Cross-Border Proposing Release, 78 FR
31120 n.1301.
    Also consistent with our approach in that release, with the
exception of the analysis regarding the degree of overlap between
participation in the single-name CDS market and the index CDS market
(cross-market activity), our analysis below does not include data
regarding index CDS as we do not currently have sufficient
information to classify index CDS as swaps or security-based swaps.
---------------------------------------------------------------------------

    We note that the data available to us from TIW do not encompass
those CDS transactions that both: (i) Do not involve U.S.
counterparties; \1609\ and (ii) are based on non-U.S. reference
entities. Notwithstanding this limitation, the TIW data should provide
sufficient information to permit us to identify the types of market
participants active in the security-based swap market and the general
pattern of dealing within that market.\1610\
---------------------------------------------------------------------------

    \1609\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This physical address
is designated the registered office location by TIW. When an account
reports a registered office location, we have assumed that the
registered office location reflects the place of domicile for the
fund or account. When an account does not report a registered office
location, we have assumed that the settlement country reported by
the investment adviser or parent entity to the fund or account is
the place of domicile. Thus, for purposes of this analysis, we have
classified accounts as ``U.S. counterparties'' when they have
reported a registered office location in the United States. We note,
however, that this classification is not necessarily identical in
all cases to the definition of ``U.S. person'' under Exchange Act
rule 3a71-3(a)(4).
    \1610\ The challenges we face in estimating measures of current
market activity stem, in part, from the absence of comprehensive
reporting requirements for security-based swap market participants.
The Commission has adopted rules regarding trade reporting, data
elements, and public reporting for security-based swaps that are
designed to, when fully implemented, provide the Commission with
additional measures of market activity that will allow us to better
understand and monitor activity in the security-based swap market.
See Regulation SBSR Adopting Release, 80 FR at 14699-14700, supra
note 1602.
---------------------------------------------------------------------------

2. Security-Based Swap Market: Market Participants and Dealing
Structures
a. Security-Based Swap Market Participants
    Activity in the security-based swap market is concentrated among a
relatively small number of entities that act as dealers in this market.
In addition to these entities, thousands of other participants appear
as counterparties to security-based swap contracts in our sample, and
include, but are not limited to, investment companies, pension funds,
private (hedge) funds, sovereign entities, and industrial companies. We
observe that most non-dealer users of security-based swaps do not
engage directly in the trading of swaps, but trade through banks,
investment advisers, or other types of firms acting as dealers or
agents. Based on an analysis of the counterparties to trades reported
to the TIW, there are 1,875 entities that engaged directly in trading
between November 2006 and December 2014.\1611\
---------------------------------------------------------------------------

    \1611\ These 1,875 entities, which are presented in more detail
in Table 1, below, include all DTCC-defined ``firms'' shown in TIW
as transaction counterparties that report at least one transaction
to TIW as of December 2014. The staff in the Division of Economic
and Risk Analysis classified these firms, which are shown as
transaction counterparties, by machine matching names to known
third-party databases and by manual classification. See, e.g.,
Cross-Border Proposing Release, 78 FR 31120, n. 1304, supra note 6.
Manual classification was based in part on searches of the EDGAR and
Bloomberg databases, the SEC's Investment Adviser Public Disclosure
database, and a firm's public Web site or the public Web site of the
account represented by a firm. The staff also referred to ISDA
protocol adherence letters available on the ISDA Web site.
---------------------------------------------------------------------------

    As shown in Table 1, below, close to three-quarters of these
entities (DTCC-defined ``firms'' shown in TIW, which we refer to here
as ``transacting agents'') were identified as investment advisers, of
which approximately 40 percent (about 30 percent of all transacting
agents) were registered as investment advisers under the Advisers
Act.\1612\ Although investment advisers comprise the vast majority of
transacting agents, the transactions they executed account for only
11.5 percent of all single-name CDS trading activity reported to the
TIW, measured by number of transaction-sides (each transaction has two
transaction sides, i.e., two transaction counterparties). The vast
majority of transactions (83.7 percent) measured by number of
transaction-sides were executed by ISDA-recognized dealers.
---------------------------------------------------------------------------

    \1612\ See 15 U.S.C. 80b1-80b21. Transacting agents participate
directly in the security-based swap market, without relying on an
intermediary, on behalf of principals. For example, a university
endowment may hold a position in a security-based swap that is
established by an investment adviser that transacts on the
endowment's behalf. In this case, the university endowment is a
principal that uses the investment adviser as its transacting agent.

 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                November 2006 Through December 2014, Represented by Each Counterparty Type \1613\
----------------------------------------------------------------------------------------------------------------
                                                                                Transaction
                       Transacting agents                             Number          Percent          share
                                                                                (percent)
----------------------------------------------------------------------------------------------------------------
Investment advisers.............................................           1,425            76.0            11.5
    --SEC registered............................................             571            30.5             7.7
Banks...........................................................             252            13.4             4.3
Pension Funds...................................................              27             1.4             0.1
Insurance Companies.............................................              38             2.0             0.2
ISDA-Recognized Dealers \1614\..................................              17             0.9            83.7
Other...........................................................             116             6.2             0.2
                                                                 -----------------------------------------------
        Total...................................................           1,875            99.9             100
----------------------------------------------------------------------------------------------------------------

    Principal holders of CDS risk exposure are represented by
``accounts'' in the TIW.\1615\ The staff's analysis of these accounts
in TIW shows that the 1,875 transacting agents classified in Table 1
represent 10,900 principal risk holders. Table 2, below, classifies
these principal risk holders by their counterparty type and whether
they are represented by a registered or unregistered investment
adviser.\1616\ For instance, banks in Table 1 allocated transactions
across 327 accounts, of which 23 were represented by investment
advisers. In the remaining 304 instances, banks traded for their own
accounts. Meanwhile, ISDA-recognized dealers in Table 1 allocated
transactions across 75 accounts.
---------------------------------------------------------------------------

    \1613\ Adjustments to these statistics reflect updated
classifications of counterparties and transactions classification
resulting from further analysis of the TIW data.
    \1614\ For the purpose of this analysis, the ISDA-recognized
dealers are those identified by ISDA as belonging to the G14 or G16
dealer group during the period: JP Morgan Chase NA (and Bear
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS,
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Credit
Agricole, Wells Fargo and Nomura. See, e.g., http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf.
    \1615\ ``Accounts'' as defined in the TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person''
provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also do not
necessarily represent separate legal persons. One entity or legal
person may have multiple accounts. For example, a bank may have one
DTCC account for its U.S. headquarters and one DTCC account for one
of its foreign branches.
    \1616\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and may
include investment advisers registered with a state or a foreign
authority.

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap
Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting
                             Agent, From November 2006 Through December 2014.\1617\
----------------------------------------------------------------------------------------------------------------
                                                                                Represented by
                                                                  Represented by        an        Participant is
             Account holders by type                  Number       a registered    unregistered     transacting
                                                                    investment      investment     agent \1618\
                                                                      adviser         adviser
----------------------------------------------------------------------------------------------------------------
Private Funds...................................           3,168       1,569 50%       1,565 49%           34 1%
DFA Special Entities............................           1,141       1,088 95%           33 3%           20 2%
Registered Investment Companies.................             800         768 96%           30 4%            2 0%
Banks (non-ISDA-recognized dealers).............             327           17 5%            6 2%         304 93%
Insurance Companies.............................             232         150 65%           21 9%          61 26%
ISDA-Recognized Dealers.........................              75            0 0%            0 0%         75 100%
Foreign Sovereigns..............................              72          53 74%            3 4%          16 22%
Non-Financial Corporations......................              61          43 70%            3 5%          15 25%
Finance Companies...............................              13           6 46%            0 0%           7 54%
Other/Unclassified..............................           5,011       3,327 66%       1,452 29%          232 5%
                                                 ---------------------------------------------------------------
    All.........................................          10,900       7,021 64%       3,113 29%          766 7%
----------------------------------------------------------------------------------------------------------------

    Among the accounts, there are 1,141 Dodd-Frank Act-defined special
entities \1619\ and 800 investment companies registered under the
Investment Company Act of 1940.\1620\ Private funds comprise the
largest type of account holders that we were able to classify, and
although not verified through a recognized database, most of the funds
we were not able to classify appear to be private funds.\1621\
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    \1617\ Adjustments to these statistics reflect updated
classifications of counterparties and transactions classification
resulting from further analysis of the TIW data.
    \1618\ This column reflects the number of participants who are
also trading for their own accounts.
    \1619\ Our manual classification does not distinguish between
special entities subject to ERISA and special entities defined in,
but not subject to ERISA, and this estimate includes both groups of
entities. Therefore, our analysis includes entities that may opt out
of the special entity status under these final rules. If many such
entities opt out, this figure may overestimate the number of market
participants subject to business conduct standards with regards to
special entities. See Section VI.C.4.
    \1620\ See 15 U.S.C. 80a1-80a64. There remain approximately
5,000 DTCC ``accounts'' unclassified by type. Although unclassified,
each was manually reviewed to verify that it was not likely to be a
special entity within the meaning of the Dodd-Frank Act and instead
was likely to be an entity such as a corporation, an insurance
company, or a bank.
    \1621\ For the purposes of this discussion, ``private fund''
encompasses various unregistered pooled investment vehicles,
including hedge funds, private equity funds, and venture capital
funds.

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[GRAPHIC] [TIFF OMITTED] TR13MY16.000

b. Participant Domiciles
    As depicted in Figure 1 above, domiciles of new accounts
participating in the market have shifted over time. It is unclear
whether these shifts represent changes in the types of participants
active in this market, changes in reporting or changes in transaction
volumes in particular underliers. For example, the increased percentage
of new entrants that are foreign accounts may reflect an increase in
participation by foreign account holders in the security-based swap
market, and the increased percentage of the subset of new entrants that
are foreign accounts managed by U.S. persons also may reflect more
specifically the flexibility with which market participants can
restructure their market participation in response to regulatory
intervention, competitive pressures, and other stimuli.\1623\ On the
other hand, apparent changes in the percentage of new accounts with
foreign domiciles may reflect improvements in reporting by market
participants to TIW, an increase in the percentage of transactions
between U.S. and non-U.S. counterparties, and/or increased transactions
in single-name CDS on U.S. reference entities by foreign persons.\1624\
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    \1622\ See Section VI.B.1, supra (explaining how domiciles for
firms were identified for purposes of this analysis).
    \1623\ See Charles Levinson, ``U.S. banks moved billions in
trades beyond the CFTC's reach,'' Reuters (Aug. 21, 2015), available
at: http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821.
    \1624\ As noted above, the available data do not include all
security-based swap transactions but only transactions in single
name CDS that involve either (1) at least one account domiciled in
the United States (regardless of the reference entity) or (2)
single-name CDS on a U.S. reference entity (regardless of the U.S.-
person status of the counterparties).
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c. Market Centers
    A market participant's domicile, however, does not necessarily
correspond to where it engages in security-based swap activity. In
particular, financial groups engaged in security-based swap dealing
activity operate in multiple market centers and carry out such activity
with counterparties around the world.\1625\ Several commenters noted
that many market participants that are engaged in dealing activity
prefer to use traders and manage risk for security-based swaps in the
jurisdiction where the underlier is traded. Thus, although a
significant amount of the dealing activity in security-based swaps on
U.S. reference entities involves non-U.S. dealers, we understand that
these dealers tend to carry out much of the security-based swap trading
and related risk-management activities in these security-based swaps
within the United States.\1626\ Some dealers have explained that being
able to centralize their trading, sales, risk management and other
activities related to U.S. reference entities in U.S. operations (even
when the resulting transaction is booked in a foreign entity) improves
the efficiency of their dealing business.
---------------------------------------------------------------------------

    \1625\ See U.S. Activity Proposing Release, 80 FR 27449-27452,
supra note 9.
    \1626\ See id.
---------------------------------------------------------------------------

    Consistent with these operational concerns and the global nature of
the security-based swap market, the available data appear to confirm
that participants in this market are in fact active in market centers
around the globe. Although, as noted above, the available data do not
permit us to identify the location of personnel in a

transaction, TIW transaction records indicate that firms that are
likely to be security-based swap dealers operate out of branch
locations in key market centers around the world, including New York,
London, Tokyo, Hong Kong, Chicago, Sydney, Toronto, Frankfurt,
Singapore and the Cayman Islands.\1627\
---------------------------------------------------------------------------

    \1627\ TIW transaction records contain a proxy for the domicile
of an entity, which may differ from branch locations, which are
separately identified in the transaction records.
---------------------------------------------------------------------------

    Given these market characteristics and practices, participants in
the security-based swap market may bear the financial risk of a
security-based swap transaction in a location different from the
location where the transaction is arranged, negotiated, or executed, or
where economic decisions are made by managers on behalf of beneficial
owners. Market activity may also occur in a jurisdiction other than
where the market participant or its counterparty books the transaction.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a counterparty located in a
jurisdiction that is different from the market center or centers in
which it participates.
d. Common Business Structures for Firms Engaged in Security-Based Swap
Dealing Activity
    A financial group that engages in a global security-based swap
dealing business in multiple market centers may choose to structure its
dealing business in a number of different ways. This structure,
including where it books the transactions that constitute that business
and how it carries out market-facing activities that generate those
transactions, reflects a range of business and regulatory
considerations, which each financial group may weigh differently.
    A financial group may choose to book all of its security-based swap
transactions, regardless of where the transaction originated, in a
single, central booking entity. That entity generally retains the risk
associated with that transaction, but it also may lay off that risk to
another affiliate via a back-to-back transaction or an assignment of
the security-based swap.\1628\ Alternatively, a financial group may
book security-based swaps arising from its dealing business in separate
affiliates, which may be located in the jurisdiction where it
originates the risk associated with the security-based swap, or,
alternatively, the jurisdiction where it manages that risk. Some
financial groups may book transactions originating in a particular
region to an affiliate established in a jurisdiction located in that
region.\1629\
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    \1628\ See U.S. Activity Proposing Release, 80 FR 27463, supra
note 9; Cross-Border Proposing Release, 78 FR 30977-78, supra note
6.
    \1629\ There is some indication that this booking structure is
becoming increasingly common in the market. See, e.g., ``Regional
swaps booking replacing global hubs,'' Risk.net (Sep. 4, 2015),
available at: http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Such a development may
be reflected in the increasing percentage of new entrants that have
a foreign domicile, as described above.
---------------------------------------------------------------------------

    Regardless of where a financial group determines to book its
security-based swaps arising out of its dealing activity, it is likely
to operate offices that perform sales or trading functions in one or
more market centers in other jurisdictions. Maintaining sales and
trading desks in global market centers permits the financial group to
deal with counterparties in that jurisdiction or in a specific
geographic region, or to ensure that it is able to provide liquidity to
counterparties in other jurisdictions,\1630\ for example, when a
counterparty's home financial markets are closed. A financial group
engaged in a security-based swap dealing business also may choose to
manage its trading book in particular reference entities or securities
primarily from a trading desk that can take advantage of local
expertise in such products or that can gain access to better liquidity,
which may permit it to more efficiently price such products or to
otherwise compete more effectively in the security-based swap market.
Some financial groups prefer to centralize risk management, pricing,
and hedging for specific products with the personnel responsible for
carrying out the trading of such products to mitigate operational risk
associated with transactions in those products.
---------------------------------------------------------------------------

    \1630\ These offices may be branches or offices of the booking
entity itself, or branches or offices of an affiliated agent, such
as, in the United States, a registered broker-dealer.
---------------------------------------------------------------------------

    The financial group affiliate that books these transactions may
carry out related market-facing activities, whether in its home
jurisdiction or in a foreign jurisdiction, using either its own
personnel or the personnel of an affiliated or unaffiliated agent. For
example, the financial group may determine that another affiliate in
the financial group employs personnel who possess expertise in relevant
products or who have established sales relationships with key
counterparties in a foreign jurisdiction, making it more efficient to
use the personnel of the affiliate to engage in security-based swap
dealing activity on its behalf in that jurisdiction. In these cases,
the affiliate that books these transactions and its affiliated agent
may operate as an integrated dealing business, each performing distinct
core functions in carrying out that business.
    Alternatively, the financial group affiliate that books these
transactions may in some circumstances, determine to engage the
services of an unaffiliated agent through which it can engage in
dealing activity. For example, a financial group may determine that
using an interdealer broker may provide an efficient means of
participating in the interdealer market in its own, or in another,
jurisdiction, particularly if it is seeking to do so anonymously or to
take a position in products that trade relatively infrequently.\1631\ A
financial group may also use unaffiliated agents that operate at its
direction. Such an arrangement may be particularly valuable in enabling
a financial group to service clients or access liquidity in
jurisdictions in which it has no security-based swap operations of its
own.
---------------------------------------------------------------------------

    \1631\ We understand that interdealer brokers may provide voice
or electronic trading services that, among other things, permit
dealers to take positions or hedge risks in a manner that preserves
their anonymity until the trade is executed. These interdealer
brokers also may play a particularly important role in facilitating