requirement to a particular transaction, the mandatory trade execution
requirement would not apply to such transaction.
---------------------------------------------------------------------------

    \1061\ See 15 U.S.C. 78c-3(h).
    \1062\ See 15 U.S.C. 78c-3(a)(1).
    \1063\ In Section IX above, the Commission proposes Rule 3Ca-3
under the Exchange Act. Subject to certain exceptions, proposed Rule
3Ca-3 would apply the mandatory clearing requirement to any person
that engages in a security-based swap transaction in which at least
one of the counterparties to the transaction is a U.S. person or a
non-U.S. person whose performance under the security-based swap is
guaranteed by a U.S. person, or if the transaction is a
``transaction conducted within the United States,'' as defined in
proposed Rule 3a71-3(a)(5) under the Exchange Act. See Section IX.C,
supra, and Section III.B.6, supra (discussing proposed Rule 3a71-
3(a)(5)).
    \1064\ See note 1053, supra.
---------------------------------------------------------------------------

2. Proposed Rule
    Consistent with our proposed rule applying the mandatory clearing
requirement \1065\ and our general approach in applying Title VII in
the cross-border context,\1066\ the Commission is proposing Rule 3Ch-1
under the Exchange Act. Under the proposed rule, the mandatory trade
execution requirement would apply to any person that engages in a
security-based swap transaction in which at least one of the
counterparties to the transaction is (i) a U.S. person \1067\ or (ii) a
non-U.S. person whose performance under the security-based swap is
guaranteed by a U.S. person.\1068\ We also are proposing to apply the
mandatory trade execution requirement to any person that engages in a
security-based swap if such transaction is a ``transaction conducted
within the United States,'' as defined in proposed Rule 3a71-3(a)(5)
under the Exchange Act.\1069\
---------------------------------------------------------------------------

    \1065\ See proposed Rule 3Ca-3 under the Exchange Act.
    \1066\ See Section II.B, supra.
    \1067\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the
term ``U.S. person'' would have the same meaning as set forth in
proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed in
Section III.B.5 below.
    \1068\ Proposed Rule 3Ch-1(a)(1) under the Exchange Act.
    \1069\ Proposed Rule 3Ch-1(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

    To limit the scope of the proposal, we are proposing exceptions to
the mandatory trade execution requirement in the following two
scenarios: \1070\
---------------------------------------------------------------------------

    \1070\ Consistent with our intent to apply the mandatory trade
execution requirement in the same way as the mandatory clearing
requirement, these exceptions are identical to the exceptions from
the mandatory clearing requirement. See proposed Rule 3Ca-3(b) under
the Exchange Act, as discussed in Section IX, supra.
---------------------------------------------------------------------------

     If the security-based swap transaction is not a
``transaction conducted within the United States,'' the proposed rule
would not apply the mandatory trade execution requirement if one
counterparty to the transaction is (i) a foreign branch of a U.S. bank
\1071\ or (ii) a non-U.S. person whose performance under the security-
based swap is guaranteed by a U.S. person,\1072\ and if the other
counterparty to the transaction is a non-U.S. person (i) whose
performance under the security-based swap is not guaranteed by a U.S.
person and (ii) who is not a foreign security-based swap dealer.\1073\
---------------------------------------------------------------------------

    \1071\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the
term ``foreign branch'' would have the same meaning as set forth in
proposed Rule 3a71-3(a)(1) under the Exchange Act. See discussion in
Section III.B.7, supra. A security-based swap transaction conducted
through a foreign branch, as defined in proposed Rule 3a71-3(a)(4)
under the Exchange Act, would be specifically excluded from the
proposed definition of ``transaction conducted within the United
States.'' See proposed Rule 3a71-3(5)(ii) under the Exchange Act, as
discussed in Section III.B.6, supra.
    \1072\ A security-based swap transaction involving a non-U.S.
person whose performance under the security-based swap is guaranteed
by a U.S. person would not be a ``transaction conducted within the
United States'' by virtue of the guarantee alone because providing a
guarantee on a transaction is not one of the factors that would
cause a transaction to be a transaction conducted within the United
States under proposed Rule 3a71-3(a)(5) under the Exchange Act. We
would consider such transaction to be engaged in within the United
States, however, by virtue of the guarantee from the U.S. person,
who acts as an ``indirect counterparty'' to the transaction.
    \1073\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act.
Proposed Rule 3Ch-1(c) under the Exchange Act defines the term
``foreign security-based swap dealer'' by cross-reference to the
definition of that term in proposed Rule 3a71-3(a)(3) of the
Exchange Act (defining ``foreign security-based swap dealer'' to
mean ``a security-based swap dealer, as defined in section 3(a)(71)
of the [Exchange] Act (15 U.S.C. 78c(a)(71)), and the rules and
regulations thereunder, that is not a U.S. person'').
---------------------------------------------------------------------------

     If the security-based swap transaction is a ``transaction
conducted within the United States,'' the proposed rule would not apply
the mandatory trade execution requirement if (i) neither counterparty
to the transaction

is a U.S. person; (ii) neither counterparty's performance under the
security-based swap is guaranteed by a U.S. person; and (iii) neither
counterparty to the transaction is a foreign security-based swap
dealer.\1074\
---------------------------------------------------------------------------

    \1074\ Proposed Rule 3Ch-1(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

We discuss below the proposed rule regarding the application of the
mandatory trade execution requirement in more detail.
3. Discussion
    In considering how to apply the mandatory trade execution
requirement, we have relied primarily on the express statutory
relationship between the mandatory clearing requirement and the
mandatory trade execution requirement. The statutory text, in our view,
indicates that Congress viewed the clearing and trade execution
requirements as complementary, since a security-based swap transaction
that is subject to the mandatory clearing requirement is subject to the
mandatory trade execution requirement, absent circumstances that
trigger one of the exceptions to the mandatory trade execution
requirement. In the following, we discuss the proposed rule regarding
the application of the mandatory trade execution requirement in more
detail.
(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S. Persons
i. Proposed Rule
    The proposed rule would apply the mandatory trade execution
requirement to transactions in which one of the counterparties is (i) a
U.S. person or (ii) a non-U.S. person whose performance under the
security-based swap is guaranteed by a U.S. person,\1075\ subject to
certain exceptions.\1076\ We preliminarily believe that applying the
mandatory trade execution requirement to transactions in which U.S.
persons are counterparties or provide guarantees of the performance of
non-U.S. persons under a security-based swap would be consistent with
the purposes of the Dodd-Frank Act to improve transparency in the U.S.
financial system.\1077\ As noted above, the mandatory trade execution
requirement in Title VII is critical to this goal because this
requirement is designed promote the trading of security-based swap
transactions on transparent, regulated markets.\1078\ Therefore, by
applying the mandatory trade execution requirement to transactions in
which U.S. persons are counterparties or provide guarantees of the
performance of non-U.S. persons under a security-based swap, the
proposed rule would further the goals of the Dodd-Frank Act to improve
the transparency of the U.S. financial system.\1079\
---------------------------------------------------------------------------

    \1075\ Proposed Rules 3Ch-1(a)(1)(i) and (ii) under the Exchange
Act.
    \1076\ Proposed Rule 3Ch-1(b) under the Exchange Act. See also
note 1053, supra.
    \1077\ See Section II.B.2(d), supra (discussing guarantees in
the cross-border context).
    \1078\ See note 1054, supra.
    \1079\ We preliminarily believe that the proposed approach with
respect to the mandatory trade execution requirements is not being
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within
the meaning of Section 30(c). See Section II.B.2(b), supra. However,
the Commission also preliminarily believes that the proposed
approach with respect to the mandatory trade execution requirements
is necessary or appropriate to help prevent the evasion of the
particular provisions of the Exchange Act that were added by the
Dodd-Frank Act that are being implemented by the approach and
prophylactically will help ensure that the purposes of those
provisions of the Dodd-Frank Act are not undermined. See Section
II.B.2(e), supra; see also Section II.B.2(d), supra.
    For example, if the mandatory trade execution requirement does
not apply to a transaction among non-U.S. persons that receive
guarantees from U.S. persons and foreign branches of U.S. banks,
then U.S. persons would have an incentive to evade the mandatory
trade execution requirement by conducting transactions with other
U.S. persons through guaranteed foreign affiliates or foreign
branches. Altering the form of the transaction in this manner would
allow U.S. persons to continue to avail themselves of transparency
in the U.S. security-based swap market while evading the
requirements intended to enhance that transparency, even though the
substance of the transaction remains unchanged. See note 1054 and
accompanying text, supra.
---------------------------------------------------------------------------

ii. Proposed Exception for Certain Transactions Involving Foreign
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    Consistent with the Commission's proposed approach to the mandatory
clearing requirement discussed above,\1080\ the Commission is proposing
an exception from the mandatory trade execution requirement described
above for certain transactions that involve foreign branches of U.S.
banks or guaranteed non-U.S. persons, provided the transactions are not
conducted within the United States. Specifically, under proposed Rule
3Ch-1(b)(1), the mandatory trade execution requirement would not apply
to a security-based swap transaction if one counterparty to the
transaction is (i) a foreign branch of a U.S. bank \1081\ or (ii) a
non-U.S. person whose performance under the security-based swap is
guaranteed by a U.S. person and if the other counterparty to the
transaction is a non-U.S. person (i) whose performance under the
security-based swap is not guaranteed by a U.S. person and (ii) who is
not a foreign security-based swap dealer.\1082\ Such exception would
not apply if the security-based swap transaction were a transaction
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1083\
---------------------------------------------------------------------------

    \1080\ See Section IX, supra.
    \1081\ See note 1071, supra.
    \1082\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act. See
also note 1073, supra.
    \1083\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act.
---------------------------------------------------------------------------

    The Commission preliminarily believes that imposing the mandatory
trade execution requirement on all security-based swap transactions in
which a U.S. person is a counterparty or in which a U.S. person
provides a guarantee to a non-U.S. person counterparty may adversely
affect the ability of U.S. persons to access foreign security-based
swap markets because non-U.S. persons may be less willing to enter into
transactions with them if such transactions are subject to the
mandatory trade execution requirement. Accordingly, we are proposing an
exception from the mandatory trade execution requirement for
transactions in which a counterparty to the transaction is a foreign
branch of a U.S. bank or a non-U.S. person who receives a guarantee
from a U.S. person on its performance under the security-based swap and
the other counterparty is a non-U.S. person whose performance under the
security-based swap is not guaranteed by a U.S. person and who is not a
foreign security-based swap dealer.\1084\
---------------------------------------------------------------------------

    \1084\ Id.
---------------------------------------------------------------------------

    We recognize that imposing the mandatory trade execution
requirement on a foreign branch of a U.S. bank or on a non-U.S. person
whose performance under a security-based swap is guaranteed by a U.S.
person would be consistent with the view that a foreign branch of a
U.S. bank is part of a U.S. person \1085\ and that a U.S. guarantor is
an indirect counterparty \1086\ to the transaction entered into by the
guaranteed non-U.S. person. We also recognize that subjecting such
transactions to the mandatory trade execution requirement could help to
bring the trading of security-based swaps onto transparent, regulated
markets, from more opaque OTC market. At the same time, however,
imposing the mandatory trade execution requirement on U.S. persons that
conduct their foreign security-based swap dealing activity through
foreign branches or guaranteed non-U.S. persons, without any
exceptions, could put such U.S. persons at a significant

competitive disadvantage to non-U.S. persons who conduct security-based
swap business in the same foreign local market and thereby limit the
access of such U.S. persons to foreign security-based swap markets.
After balancing the various policy considerations, including the Dodd-
Frank Act's goal of promoting trading on transparent, regulated
markets, we have preliminarily concluded that the proposed exception
from the mandatory trade execution requirement for transactions by U.S.
persons conducting security-based swap activity out of foreign
branches, or transactions by guaranteed non-U.S. persons, with non-U.S.
persons whose performance under the security-based swap is not
guaranteed by a U.S. person (and who is not a foreign security-based
swap dealer) is appropriate, provided that it is not a transaction
conducted within the United States.
---------------------------------------------------------------------------

    \1085\ See Section III.B.5, supra.
    \1086\ See note 1012, supra.
---------------------------------------------------------------------------

    This exception from the mandatory trade execution requirement would
not apply under the proposed rule, however, when the non-U.S. person
counterparty of the foreign branch of the U.S. bank or the guaranteed
non-U.S. person is a foreign security-based swap dealer.\1087\ The
reason for this proposed carve-out from the exception from the
mandatory trade execution requirement is similar to the reason
discussed above in the context of the mandatory clearing requirement.
Because a foreign security-based swap dealer would necessarily have a
significant connection with the U.S. security-based swap market because
its dealing activity with U.S. persons or within the United States
would trigger registration requirements, we preliminarily believe it is
not appropriate to provide an exception for U.S. persons conducting
security-based swap activity out of foreign branches or for guaranteed
non-U.S. persons when they enter into security-based swaps with foreign
security-based swap dealers.
---------------------------------------------------------------------------

    \1087\ Proposed Rule 3Ch-1(b)(1)(ii)(B) under the Exchange Act.
---------------------------------------------------------------------------

(b) Transactions Conducted Within the United States
i. Proposed Rule
    Under the proposed rule, a security-based swap transaction that is
a transaction conducted within the United States, as defined in
proposed Rule 3a71-3(a)(5) under the Exchange Act, would be subject to
the mandatory trade execution requirement.\1088\ As we have noted
above, a ``transaction conducted within the United States,'' as defined
in proposed Rule 3a71-3(a)(5), includes soliciting, negotiating,
executing, or booking a security-based swap transaction.\1089\ The
Commission believes that applying the mandatory trade execution
requirement to a security-based swap transaction when the activities
that are key stages in that transaction are conducted within the United
States furthers a goal of the mandatory trade execution requirement,
namely, to bring the trading of security-based swaps within the United
States onto regulated markets, unless an exception applies.
Furthermore, such an approach is consistent with our proposed approach
to the mandatory clearing requirement discussed above.\1090\
---------------------------------------------------------------------------

    \1088\ Proposed Rule 3Ch-1(a)(2) under the Exchange Act.
    \1089\ See Section III.B.6, supra.
    \1090\ As discussed above, the statutory language for the
mandatory clearing requirements apply to any person that ``engages
in a security-based swap,'' which the Commission proposes to
interpret to include any transaction in which a person performs any
of the activities that are key stages in a security-based swap
transaction (i.e., solicitation, negotiation, execution, or booking
of the transaction). See Section IX.C, supra; see also Section
3C(a)(1) of the Exchange Act.
---------------------------------------------------------------------------

ii. Proposed Exception for Transactions Conducted Within the United
States by Certain Non-U.S. Persons
    We recognize that one commenter has recommended that transactions
between two non-U.S. persons that utilize U.S. agents should not be
subject to the mandatory trade execution requirement.\1091\ The
commenter noted that it is common for non-U.S. persons to utilize U.S.
agents because of their expertise in the relevant market (such as in
the case of a swap with an underlying U.S. security) or because of
logistical matters (such as the time zones in which the parties conduct
business).\1092\ The commenter argued that applying the mandatory trade
execution requirement to these transactions could curtail the use of
U.S. agents to negotiate trades and encourage personnel in the United
States to relocate elsewhere.\1093\
---------------------------------------------------------------------------

    \1091\ See Cleary Letter IV at 27-28.
    \1092\ See id.
    \1093\ See id.
---------------------------------------------------------------------------

    Consistent with our proposed approach to applying the mandatory
clearing requirement to transactions conducted within the United States
by non-U.S. persons, the Commission is proposing an exception from the
mandatory trade execution requirement for security-based swap
transactions that are transactions conducted within the United States
when no counterparty to the transaction is (i) a U.S. person; (ii) a
non-U.S. person whose performance under the security-based swap is
guaranteed by a U.S. person; or (iii) a foreign security-based swap
dealer.\1094\
---------------------------------------------------------------------------

    \1094\ Proposed Rule 3Ch-1(b)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to
limit the exception from the mandatory trade execution requirement when
one or both of the non-U.S. person counterparties is a foreign
security-based swap dealer. Non-U.S. persons whose transactions arising
from dealing activity with U.S. persons or otherwise conducted within
the United States exceed the de minimis threshold in the security-based
swap dealer definition have a sufficient connection to the U.S.
security-based swap market to lead the Commission to preliminarily
conclude that it would not be appropriate to except transactions
involving them from the mandatory trade execution requirement when they
conduct security-based swap transactions within the United States.
Permitting non-U.S. persons to engage in security-based swap
transactions within the United States with foreign security-based swap
dealers without being subject to the mandatory trade execution
requirement would potentially limit the access of U.S. persons to
foreign security-based swap markets because non-U.S. persons seeking to
engage in security-based swaps within the United States may prefer to
engage in security-based swaps with foreign security-based swap dealers
rather than U.S. persons to avoid the mandatory trade execution
requirement.
Request for Comment
    The Commission seeks comment on all aspects of proposed Rule 3Ch-1,
including the following:
     Should the mandatory trade execution requirement apply to
all transactions conducted by a U.S. person, including transactions
conducted out of a foreign branch of a U.S. bank or a non-U.S. person
whose performance under a security-based swap is guaranteed by a U.S.
person? Why or why not?
     Is it appropriate for the application of the mandatory
trade execution requirement in the cross-border context to follow our
approach to the mandatory clearing requirement? If not, why not? What
alternative approach would better suit the relationship between these
two requirements under the statute? Please explain.
     Is the proposed rule appropriate and sufficiently clear?
Should additional details be included as to any aspect of the proposed
rule? If so, what additional details should be provided and why?

     As discussed above, under proposed Rule 3Ch-1(a), the
mandatory trade execution requirement would apply to a person that
engages in a security-based swap transaction if such person is a U.S.
person, such person is a non-U.S. person whose performance under such
security-based swap transaction is guaranteed by a U.S. person, or such
security-based swap transaction is a transaction conducted within the
United States. Are the circumstances in which the Commission proposes
to apply the mandatory trade execution requirement sufficiently clear?
If not, why not? Are these the appropriate circumstances in which to
apply the mandatory trade execution requirement? If not, why not? Are
there additional types of counterparties or security-based swap
transactions to which the mandatory trade execution requirement should
be applied? If so, who or what are they, and why? Are there types of
counterparties or security-based swap transactions that should not be
covered by the proposed rule? If so, why not?
     Would the proposed rule apply the mandatory trade
execution requirement in ways that appropriately promote the goals of
Title VII? Would any objectives of Title VII be hindered by applying
the mandatory trade execution requirement as proposed? Would there be
any regulatory gaps created by the proposed rule? Please provide
detail.
     By requiring transactions conducted within the United
States to be subject to the mandatory trade execution requirement,
would the proposed rule appropriately create competitive parity between
U.S. and non-U.S. persons that act as intermediaries within the United
States to conduct transactions in security-based swaps? Why or why not?
Please explain. Please provide specific recommendations and explain how
any recommended approach would better promote competition than the
proposed rule. More generally, should security-based swap transactions
be subject to the mandatory trade execution requirement solely because
a transaction was solicited or negotiated within the United States?
     Under proposed Rule 3Ch-1(b), certain security-based swap
transactions by foreign branches and guaranteed non-U.S. persons that
are not conducted within the United States would be excluded from the
mandatory trade execution requirement. The Commission generally
solicits comments on the appropriateness of excluding the security-
based swap transactions described in proposed Rule 3Ch-1(b) from the
application of the mandatory trade execution requirement. Should
additional types of transactions be excluded from the application of
the mandatory trade execution requirement? Should some or all of the
transactions covered by proposed Rule 3Ch-1(b) not be excluded? If so,
in either case, please explain why. Does proposed Rule 3Ch-1(b)
appropriately balance the competitiveness of U.S. persons in the global
security-based swaps market and the goals of Title VII? If not, how
could this balance be better achieved? Should proposed Rule 3Ch-1(b)
also apply to non-U.S. persons that are security-based swap dealers?
Why or why not?
     What would be the market impact of proposed Rule 3Ch-1?
How would the proposed application of the mandatory trade execution
requirement affect the competitiveness of U.S. entities in the global
marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed rule place any market participants
at a competitive disadvantage or advantage? If so, please explain.
Would the proposed rule be a more general burden on competition? If so,
please explain. Would any burdens on competition be effectively
mitigated by the proposed exception to mandatory trade execution in
proposed Rule 3Ch-1(b)? Please explain. What other measures should the
Commission consider to implement the mandatory trade execution
requirement? What would be the market impacts and competitiveness
effects of alternatives to the proposed approach discussed in this
release?

XI. Substituted Compliance

A. Introduction

    As noted above, we are proposing to establish a policy and
procedural framework pursuant to rules under the Exchange Act in which
the Commission would consider permitting compliance with comparable
regulatory requirements in a foreign jurisdiction to substitute for
compliance with requirements in the Exchange Act, and rules and
regulations thereunder, relating to security-based swaps (i.e.,
substituted compliance). As proposed, under a Commission substituted
compliance determination, a person would be able to satisfy relevant
requirements in the Exchange Act, and the rules and regulations
thereunder, by substituting compliance with corresponding requirements
under a foreign regulatory system. A person relying on a substituted
compliance determination still would be subject to the particular
Exchange Act requirement that is the subject of the substituted
compliance determination, but would be permitted to comply with such
requirement in an alternative fashion. Failure of a person to comply
with the applicable foreign regulatory requirements would mean that
such person would be in violation of the requirements in the Exchange
Act.
    The Commission is proposing to consider making substituted
compliance determinations with respect to four distinct categories of
requirements, each of which raises separate issues and will be
discussed separately below. These categories are as follows: (i)
Requirements applicable to registered security-based swap dealers in
Section 15F of the Exchange Act and the rules and regulations
thereunder; (ii) requirements relating to regulatory reporting and
public dissemination of information on security-based swaps; (iii)
requirements relating to clearing for security-based swaps; and (iv)
requirements relating to trade execution for security-based swaps.
    With respect to each of these categories of requirements, the
Commission is proposing a ``comparability'' standard as the basis for
making a substituted compliance determination. Generally, the
Commission would endeavor to take a holistic approach in making
substituted compliance determinations--that is, we would ultimately
focus on regulatory outcomes as a whole with respect to the
requirements within the same category rather than a rule-by-rule
comparison. As noted above,\1095\ efforts to regulate the derivatives
market are underway, not only in the United States, but also in other
jurisdictions. Since their 2009 statement, the G20 leaders have
reiterated their commitment to OTC derivatives regulatory reform. And,
as described above,\1096\ the Commission has participated in numerous
bilateral and multilateral discussions with foreign regulatory
authorities addressing the regulation of OTC derivatives and foreign
regulatory reform efforts. We recognize that foreign regulatory systems
differ in their approaches to achieving particular regulatory outcomes,
and that foreign regulatory requirements may differ from those
ultimately adopted by the Commission, but may nonetheless achieve
regulatory outcomes comparable with the regulatory outcomes of the
relevant provisions of the Exchange Act added by Title VII of the Dodd-
Frank Act. In addition, we recognize that different regulatory systems
may be able to achieve some or all of those regulatory outcomes by
using more--or fewer--specific requirements than the

Commission. For example, under certain circumstances, a foreign
regulatory system may be able to achieve one of those regulatory
outcomes in the absence of one or more specific requirements that the
Commission has implemented under a particular set of provisions of the
Dodd-Frank Act.
---------------------------------------------------------------------------

    \1095\ See Section I.C., supra.
    \1096\ Id.
---------------------------------------------------------------------------

    Accordingly, we do not envision that the Commission, in making a
comparability determination, would look to whether a foreign
jurisdiction has implemented specific rules and regulations that are
comparable to rules and regulations adopted by the Commission. Rather,
the Commission would determine whether the foreign regulatory system in
a particular area, taking into consideration any relevant principles,
regulations, or rules in other areas of the foreign regulatory system
to the extent they are relevant to the analysis, achieves regulatory
outcomes that are comparable to the regulatory outcomes of the relevant
provisions of the Exchange Act. If it does, the Commission
preliminarily believes that a comparability determination would be
appropriate, notwithstanding differences in or the absence of specific
requirements of particular regulatory provisions.
    In addition, the Commission recognizes that other regulatory
systems are informed by the business and market practices present in
the foreign jurisdictions where those systems apply, and that such
practices may differ in certain respects from practices described in
this release. More broadly, other regulatory systems are informed by
the characteristics of the markets for which they were designed,
including the number and nature of their market participants to which
they apply. In making a comparability determination, the Commission
recognizes that it may need to take into account such practices and
characteristics in understanding the design and application of another
regulatory system and whether and how it may achieve regulatory
outcomes comparable to the regulatory outcomes of the relevant
provisions of the Exchange Act.
    As explained below, how the Commission would find a foreign
regulatory system ``comparable'' would vary depending on the category
of requirements. Because the Commission is proposing to make
substituted compliance determinations with respect to each of the
aforementioned categories of requirements, it is possible that a
foreign regulatory system would be comparable with respect to some, but
not all, categories of requirements. For instance, a foreign regulatory
system may impose requirements on non-U.S. dealers that achieve
regulatory outcomes comparable to the requirements applicable to
registered security-based swap dealers in Section 15F of the Exchange
Act, but the same foreign regulatory system may not achieve comparable
regulatory outcomes regarding public reporting of trade information for
security-based swaps. Similarly, a foreign regulatory system may impose
requirements on clearing agencies that achieve regulatory outcomes
comparable to the requirements applicable to registered security-based
swap clearing agencies under Section 17A of the Exchange Act, but may
not provide for comparable regulation of SB SEFs. By assessing each of
these categories separately, the Commission would have the flexibility
to make a substituted compliance determination with respect to one
category of requirements but not another. However, the Commission would
also retain the flexibility to consider the extent to which principles,
regulations, or rules in one category may bear on a determination with
respect to another category. Such an approach also would allow
substituted compliance in certain categories to address competition and
market efficiency concerns when a foreign regime is not comparable
across the full range of Title VII policy objectives.
    In addition, as described below, in making substituted compliance
determinations, the Commission would consider a variety of factors that
the Commission deems appropriate, including the nature of the global
security-based swap market and the scope and objectives of the relevant
foreign regulatory requirements. As part of this holistic review, the
Commission would consider the various ways in which a foreign
regulatory system achieves its overall goals and purposes, including
those undertaken in response to the G20 commitments. As noted above,
the Commission would also consider the extent to which applicable
principles, regulations, or rules in one category may bear on a
determination with respect to another category. In addition, the
Commission recognizes that our proposed application of Title VII to
cross-border activities may affect the policy decisions of these other
regulators as they seek to address potential conflicts or duplication
in the regulatory requirements that apply to market participants under
their authority.
    More specifically, the proposed policy and procedural framework for
substituted compliance recognizes the potential, in a market as global
as the security-based swap market, for market participants who engage
in cross-border security-based swap activity to be subject to
conflicting or duplicative compliance obligations. As a result of the
efforts to implement the G20 commitments in various jurisdictions
described above, in some cases of cross-border activity, market
participants may be subject to compliance obligations in a foreign
jurisdiction that are similar to those imposed by the Exchange Act. The
proposed framework would allow the Commission to provide for
substituted compliance to address the effect of conflicting or
duplicative regulations on competition and market efficiency and to
facilitate a well-functioning global security-based swap market. In
other cases, however, market participants may not be subject to
conflicting or duplicative regulation because the foreign jurisdiction
has not enacted comprehensive regulation of the security-based swap
markets or is still in the process of implementing regulatory reforms
that have been enacted. It also may be that the foreign jurisdiction's
regulation does not apply to the market participant or entity or the
foreign jurisdiction has established regulations that differ, in
material respects, from requirements in the Exchange Act (e.g.,
requirements relating to real-time public reporting) and do not achieve
comparable regulatory outcomes. In such cases, there would be less
justification for allowing substituted compliance.
    One alternative to making substituted compliance determinations by
looking at separate categories of requirements would be to provide
substituted compliance across the entire set of security-based swap
requirements with respect to regimes that have implemented regulations
consistent with the overall objectives of the G20 commitments.
Preliminarily, however, we believe that making substituted compliance
determinations on a regime-wide basis would be unworkable in light of
the Commission's responsibility to implement the specific statutory
provisions of the Exchange Act added by Title VII of the Dodd-Frank
Act. While these provisions of the Exchange Act are consistent with the
G20 commitments, they also contain provisions designed to achieve
particular regulatory outcomes that may not be part of another
jurisdiction's regulatory system. Thus, while the Commission would
certainly consider the broader regulatory landscape in a foreign
jurisdiction--including its approach to the G20 commitments--before
making a substituted compliance

determination, the Commission would also need to consider the
particular regulatory outcomes achieved under the Exchange Act
provisions added by Title VII of the Dodd-Frank Act.
    In the following, we propose rules and interpretive guidance
addressing the policy and procedural framework under which we would
consider permitting compliance with comparable regulatory requirements
in a foreign jurisdiction to substitute for compliance with
requirements of the Exchange Act, and the rules and regulations
thereunder, relating to security-based swaps, with respect to each of
the aforementioned categories of requirements.
Request for Comment
    The Commission requests comment on all aspects of our general
approach to substituted compliance, including the following questions:
     Should the Commission make substituted compliance
determinations on a regime-wide basis for a jurisdiction rather than
with respect to categories of requirements? If so, should the finding
that the regulatory outcomes of a foreign regulatory system are not
comparable with respect to the regulatory outcomes of one category of
the Exchange Act requirements cause the Commission to find the entire
foreign regulatory regime to be not comparable as a whole? More
specifically, under a regime-wide approach, how should the Commission
make substituted compliance determinations with respect to foreign
regulatory systems that do not achieve regulatory outcomes comparable
to the regulatory outcomes with respect to certain categories of the
Exchange Act requirements, taking into account the Commission's
responsibility and statutory authority to implement the requirements of
the Exchange Act added by Title VII of the Dodd-Frank Act?
     Should the Commission take into consideration the various
ways in which a foreign regulatory system achieves its overall goals
and purposes that are consistent with the G20 commitments in making a
substituted compliance determination with respect a category of the
Exchange Act requirements added by Title VII of the Dodd-Frank Act? Why
or why not?
     Should the Commission take a more granular approach to
substituted compliance determinations, for example, conducting a rule-
by-rule or requirement-by-requirement comparison? Why or why not?
     Should the Commission identify more or less categories in
our framework for substituted compliance? If so, how should those
categories be demarcated?

B. Process for Making Substituted Compliance Requests

    The Commission is proposing to amend our Rules of General
Application to establish procedures pursuant to which it would consider
applications for substituted compliance determinations with respect to
each of the aforementioned categories of requirements.\1097\ These
procedures are similar to those now used by the Commission in
considering exemptive order applications under Section 36 of the
Exchange Act.\1098\ All supporting documentation submitted pursuant to
the proposed amendment would be made public.
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    \1097\ Proposed Rule 0-13 under the Exchange Act.
    \1098\ See 17 CFR 240.0-12. Cf. 17 CFR 30.10 (Petitions for
Exemptions), including Appendices A and C (CFTC's procedures for
application by foreign persons with respect to foreign futures and
foreign options transactions).
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    Specifically, the proposed amendment would add new Rule 0-13 under
the Exchange Act setting forth the general procedures for submission of
requests for substituted compliance determinations. These procedures
include the requirement that all applications for substituted
compliance determinations must be in writing in the form of a letter,
must include any supporting documents necessary to make the application
complete, and otherwise must comply with 17 CFR 240.0-3 (Filing of
Material with the Commission).\1099\ All applications must be submitted
to the Office of the Secretary of the Commission, and may be submitted
either electronically \1100\ or in paper format.\1101\ In addition, all
filings and supporting documentation filed pursuant to this proposed
rule must be in the English language.\1102\ If an application is
incomplete, the Commission may request that the application be
withdrawn unless the applicant can justify, based on all the facts and
circumstances, why supporting materials have not been submitted and
undertakes to submit promptly the omitted materials.\1103\
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    \1099\ Proposed Rule 0-13(a) under the Exchange Act. In 17 CFR
240.0-3, the Commission sets forth general procedures for filing
materials with the Commission.
    \1100\ Proposed Rule 0-13(b) under the Exchange Act.
    \1101\ Proposed Rule 0-13(d) under the Exchange Act.
    \1102\ Proposed Rule 0-13(c) under the Exchange Act. If a filing
or submission filed pursuant to this rule requires the inclusion of
a document that is in a foreign language, a party must submit
instead a fair and accurate English translation of the entire
foreign language document. A party may submit a copy of the
unabridged foreign language document when including an English
translation of a foreign language document in a filing or submission
filed pursuant to this rule. A party must provide a copy of any
foreign language document upon the request of Commission staff. Id.
    \1103\ Proposed Rule 0-13(a) under the Exchange Act.
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    The Commission would not consider hypothetical or anonymous
requests for a substituted compliance order.\1104\ Consistent with this
position, every application (electronic or paper) must contain the
name, address, telephone number, and email address of each applicant
and the name, address, telephone number, and email address of a person
to whom any questions regarding the application should be
directed.\1105\ In addition, each applicant must provide the Commission
with any supporting documentation it believes necessary for the
Commission to make the requested substituted compliance determination,
including information regarding applicable requirements established by
the foreign financial regulatory authority or authorities, as well as
the methods used by the foreign financial regulatory authority or
authorities to monitor compliance with, and enforce, such
requirements.\1106\ Applicants also should cite to and discuss
applicable precedent related to a substituted compliance
determination.\1107\ Any amendments to an application would be required
to be prepared and submitted as set forth in the proposed procedures
and marked to show what changes were made.\1108\
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    \1104\ Proposed Rule 0-13(e) under the Exchange Act.
    \1105\ Id.
    \1106\ Id.
    \1107\ Id.
    \1108\ Proposed Rule 0-13(f) under the Exchange Act.
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    Under the proposed rule, after the filing of an application for a
substituted compliance determination is complete, Division of Trading
and Markets staff would review the application and make a
recommendation to the Commission.\1109\ After consideration of the
recommendation by the Commission, the Commission's Office of the
Secretary would issue an appropriate response and would notify the
applicant.\1110\ As part of our review, the Commission may, in our sole
discretion, schedule a hearing on the

matter addressed by the application.\1111\ The Commission also may, in
our sole discretion, choose to publish in the Federal Register a notice
that the application has been submitted which invites public comment on
the application.\1112\ Requestors may, however, seek confidential
treatment of their applications for substituted compliance
determinations.\1113\
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    \1109\ As with other matters, the Division of Trading and
Markets would work with the Office of General Counsel, the Division
of Risk, Strategy, and Financial Innovation, the Office of
International Affairs, the Office of Compliance Inspections and
Examinations, and the Division of Enforcement, as well as other
divisions and offices within the Commission, in reviewing and making
a recommendation regarding substituted compliance determinations.
    \1110\ Proposed Rule 0-13(g) under the Exchange Act.
    \1111\ Proposed Rule 0-13(i) under the Exchange Act.
    \1112\ Proposed Rule 0-13(h) under the Exchange Act. The notice
would provide that any person may, within the period specified
therein, submit to the Commission any information that relates to
the Commission action requested in the application. The notice also
would indicate the earliest date on which the Commission would take
final action on the application, but in no event would such action
be taken earlier than 25 days following publication of the notice in
the Federal Register. Id.
    \1113\ Proposed Rule 0-13(a) under the Exchange Act. Requests
for confidential treatment would be permitted to the extent provided
under 17 CFR 200.81. Id.
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    The Commission preliminarily believes that these proposed
procedures would provide sufficient guidance regarding the process
whereby persons may seek to make a request for a substituted compliance
determination with respect to each of the categories of requirements,
as described more fully below.
Request for Comment
    The Commission seeks comment on all aspects of the proposed rule,
including the following:
     Do the proposed procedures give sufficient guidance to
persons regarding the procedures for making a substituted compliance
determination? If not, why not? What other procedures should the
Commission adopt?
     Should the substituted compliance framework contemplate
foreign regulatory authorities, rather than or in addition to market
participants, submitting substituted compliance determination requests?
Why or why not?

C. Security-Based Swap Dealer Requirements

1. Proposed Rule--Commission Substituted Compliance Determinations
    The Commission is proposing a rule that would establish a framework
in which the Commission may make a substituted compliance determination
permitting a foreign security-based swap dealer that is registered with
the Commission to satisfy requirements in Section 15F of the Exchange
Act, and the rules and regulations thereunder, by complying with the
corresponding rules and regulations established in a foreign
jurisdiction.\1114\ Specifically, the proposed rule would provide that
the Commission may, conditionally or unconditionally, by order, make a
substituted compliance determination with respect to a foreign
financial regulatory system that compliance with specified requirements
under such foreign financial regulatory system by a registered foreign
security-based swap dealer (or class thereof) \1115\ may satisfy the
corresponding requirements in Section 15F of the Exchange Act, and the
rules and regulations thereunder, that would otherwise apply to such
foreign security-based swap dealer (or class thereof).\1116\ The
proposed framework would permit the Commission to make a substituted
compliance determination only if we find that the requirements of such
foreign financial regulatory system are comparable to otherwise
applicable requirements, taking into account factors that the
Commission determines appropriate, such as, for example, the scope and
objectives of the relevant foreign regulatory requirements, as well as
the effectiveness of the supervisory compliance program administered,
and the enforcement authority exercised, by a foreign financial
regulatory authority or authorities in such system to support its
oversight of such foreign security-based swap dealer (or any class
thereof).\1117\
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    \1114\ Proposed Rule 3a71-5 under the Exchange Act.
    \1115\ The Commission is proposing a framework under which it
may consider making substituted compliance determinations applicable
to bona fide foreign security-based swap dealers. This proposed
approach would not extend to entities organized outside of the
United States for the purpose of evading U.S. regulation. The
Commission would consider a variety of factors to confirm the bona
fide nature of a foreign security-based swap dealer for these
purposes, including the location of management and risk controls
related to such entity's security-based swap dealing activities and
the nature of the counterparties.
    \1116\ Proposed Rule 3a71-5(a)(1) under the Exchange Act.
    \1117\ Proposed Rule 3a71-5(a)(2)(i) under the Exchange Act. In
assessing oversight, the Commission would consider not only overall
oversight activities, but also oversight specifically directed at
conduct and activity that would be relevant to the substituted
compliance determination. For example, it would be difficult for the
Commission to make a comparability determination if oversight is
directed solely at the local activities of foreign security-based
swap dealers, as opposed to the cross-border activities of such
dealers.
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    In making a substituted compliance determination, as noted above,
the Commission's determination would focus on the similarities in
regulatory objectives, rather than requiring that the foreign
jurisdiction's rules be identical. Depending on our assessment of the
comparability of the foreign regulatory regime, the Commission could
condition the substituted compliance determination by limiting it to a
particular class or classes of registrants in the foreign
jurisdiction.\1118\ For instance, if the foreign jurisdiction imposes
different levels of supervisory oversight with respect to classes of
entities conducting security-based swap dealing activity, the
Commission could limit a substituted compliance determination to permit
only certain classes of supervised foreign security-based swap dealers
to rely on a substituted compliance determination. The Commission would
determine what conditions are appropriate on a case-by-case basis.
---------------------------------------------------------------------------

    \1118\ Proposed Rule 3a71-5(a)(1) under the Exchange Act
(permitting the Commission to make the substituted compliance
determination ``conditionally or unconditionally'').
---------------------------------------------------------------------------

    The proposed rule would require that, before making a substituted
compliance determination, the Commission must have entered into a
supervisory and enforcement MOU or other arrangement with the
appropriate financial regulatory authority or authorities in that
jurisdiction addressing oversight and supervision of applicable
security-based swap dealers subject to the substituted compliance
determination.\1119\ Through such MOU or other arrangement, the
Commission and the foreign financial regulatory authority or
authorities would express their commitment to cooperate with each other
to fulfill their respective regulatory mandates.
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    \1119\ Proposed Rule 3a71-5(a)(2)(ii) under the Exchange Act.
The Commission expects that any existing supervisory or enforcement
MOU or other arrangement would need to be re-negotiated during the
substituted compliance determination process to reflect the
particulars of a determination.
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    Although we intend generally to take a category-by-category
approach to substituted compliance, under the proposed rule, the
Commission could make a substituted compliance determination with
respect to one Title VII requirement applicable to registered security-
based swap dealers but not another.\1120\ However, consistent with our
category-by-category approach, we believe that certain requirements are
interrelated such that the Commission would expect to make a
substituted compliance determination for the entire group of related
requirements. For example, the core entity-level requirements relate to
the regulation of an entity's capital and margin. But certain other
entity-level requirements (such as risk management, general
recordkeeping and reporting, and diligent supervision) are so

interconnected with capital and margin oversight that we would expect
to make substituted compliance determinations, where warranted with
regard to capital and margin rules, on the entire package of entity-
level regulations.
---------------------------------------------------------------------------

    \1120\ Proposed Rule 3a71-5(a) under the Exchange Act.
---------------------------------------------------------------------------

    The proposed rule also would permit the Commission, on our own
initiative, to modify the terms of, or withdraw, a substituted
compliance determination for a particular foreign jurisdiction, after
appropriate notice and opportunity for comment.\1121\ For instance, due
to changes in the foreign regulatory regime, or a failure of a foreign
regulator to exercise its supervisory or enforcement authority in an
effective manner, the Commission may determine to modify the terms of,
or withdraw, a previous substituted compliance determination. The
Commission also would have the ability to periodically review the
substituted compliance determinations it has granted and decide whether
the substituted compliance determination should continue to apply.
---------------------------------------------------------------------------

    \1121\ Proposed Rule 3a71-5(a)(4) under the Exchange Act.
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    In addition, the proposed rule would permit a foreign security-
based swap dealer to rely on an applicable substituted compliance
determination by the Commission with regard to a particular
jurisdiction to satisfy the specified requirements in Section 15F of
the Exchange Act, and the rules and regulations thereunder, as
applicable, by complying with the corresponding requirements
established in the foreign jurisdiction.\1122\ The proposed rule would
require a foreign security-based swap dealer relying on a substituted
compliance determination to satisfy the conditions of the Commission's
substituted compliance determination.\1123\
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    \1122\ Proposed Rule 3a71-5(b) under the Exchange Act.
    \1123\ Proposed Rule 3a71-5(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

    Finally, the proposed rule would address the situation in which a
foreign security-based swap dealer seeks to rely on the rules and
regulations of a foreign jurisdiction to satisfy Commission
requirements but the Commission has not previously made a substituted
compliance determination with respect to that jurisdiction. In such a
case, the proposed rule would permit the foreign security-based swap
dealer, or a group of foreign security-based swap dealers, to request
pursuant to the procedures set forth in proposed Rule 0-13 under the
Exchange Act, that the Commission make a substituted compliance
determination for the foreign jurisdiction with respect to specified
requirements in Section 15F of the Exchange Act.\1124\ The proposed
rule would require that the foreign security-based swap dealer (or
foreign security-based swap dealers) be directly supervised by one or
more financial regulatory authorities in that jurisdiction with respect
to requirements similar to those in Section 15F of the Exchange Act,
and the rules and regulations thereunder,\1125\ and provide the
certification and opinion of counsel as described in proposed Rule
15Fb2-4(c) under the Exchange Act.\1126\
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    \1124\ Proposed Rule 3a71-5(c)(1) under the Exchange Act.
    \1125\ Proposed Rule 3a71-5(c)(2)(i) under the Exchange Act.
    \1126\ Proposed Rule 3a71-5(c)(2)(ii) under the Exchange Act.
Proposed Rule 15Fb2-4 under the Exchange Act, as discussed in the
Registration Proposing Release, 76 FR 65799-801, would require that
a nonresident security-based swap dealer provide the Commission with
an opinion of counsel concurring that the firm can, as a matter of
law, provide the Commission with prompt access to its books and
records and can, as a matter of law, submit to onsite inspection and
examination by the Commission. See Section III.C.3(b)ix, supra. The
Commission preliminarily believes that, before a foreign security-
based swap dealer should be permitted to make a substituted
compliance request, it should assure the Commission that it can
provide the Commission with prompt access to books and records and
submit to onsite inspection and examination because we expect that
access to books and records and the ability to inspect and examine a
foreign security-based swap dealer will be essential conditions of
any substituted compliance determination.
---------------------------------------------------------------------------

    Although the request for a substituted compliance determination
could come from a particular foreign security-based swap dealer or
group of dealers, the Commission would make such a determination, under
the proposed rule, on a class or jurisdiction basis, depending on the
regulator(s) and the foreign regulatory regime (rather than on a firm-
by-firm basis).\1127\ As a result, once the Commission has made a
substituted compliance determination with respect to a particular
foreign jurisdiction, it would apply to every foreign security-based
swap dealer in the specified class or classes registered and regulated
in that jurisdiction, subject to the conditions specified in the
Commission's substituted compliance order.
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    \1127\ Proposed Rule 3a71-5(a) under the Exchange Act. Because,
under the proposed approach, all requests for substituted compliance
determinations must come directly from a foreign security-based swap
dealer, foreign financial regulatory authorities may not themselves
request such a determination.
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    The proposed rule would not provide for substituted compliance with
respect to registration requirements described in Sections 15F(a)-(d)
of the Exchange Act and the rules and regulations thereunder.\1128\ As
an initial matter, the registration process serves two important notice
functions for the Commission. First, it is through the submission of a
registration application that security-based swap dealers notify the
Commission that they are engaged in dealing activity in excess of the
de minimis threshold. Second, the registration application process is
how foreign security-based swap dealers notify the Commission that they
intend to seek or to rely on an existing substituted compliance
determination.\1129\ In addition to these key notice functions, the
registration process provides the Commission with information that is
essential to the Commission's ability to provide effective oversight of
foreign security-based swap dealers, particularly for those relying on
substituted compliance determinations to satisfy their obligations
under Section 15F requirements.\1130\ As a result, we are not proposing
to allow substituted compliance for the registration requirements in
Section 15F of the Exchange Act.
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    \1128\ Proposed Rule 3a71-5(a)(3) under the Exchange Act.
    \1129\ See Section III.E, supra (discussing the process by which
foreign security-based swap dealers would be required to notify the
Commission of their reliance on substituted compliance
determinations).
    \1130\ As part of the registration process, nonresident
security-based swap dealers must (i) appoint an agent for service of
process in the United States, (ii) furnish the Commission with the
identity and address of its agent for services of process, (iii)
certify that the firm can, as a matter of law, provide the
Commission with prompt access to its books and records and can, as a
matter of law, submit to onsite inspection and examination by the
Commission, and (iv) provide the Commission with an opinion of
counsel concurring that the firm can, as a matter of law, provide
the Commission with prompt access to its books and records and can,
as a matter of law, submit to onsite inspection and examination by
the Commission. See proposed Rule 15Fb2-4 under the Exchange Act, as
discussed in the Registration Proposing Release, 77 FR 65799-801
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2. Discussion
    The goal of the proposed rule is to increase the efficiency of the
security-based swap market and promote competition by helping to avoid
subjecting foreign security-based swap dealers to potentially
conflicting or duplicative compliance obligations, while still
achieving the policy objectives of Title VII of the Dodd-Frank Act. The
Commission preliminarily believes that the proposed rule, by requiring
that a substituted compliance determination be made on a class or
jurisdictional basis and that a foreign jurisdiction's requirements be
comparable to otherwise applicable U.S. requirements, is consistent
with this goal.

    In addition, the Commission preliminarily believes that such an
approach is consistent with the global nature of the security-based
swap market and may be less disruptive of entity business arrangements
than not permitting substituted compliance. At the same time, the
Commission recognizes that U.S. security-based swap dealers may be put
at a competitive disadvantage with their foreign counterparts if they
are subject to, for example, more stringent capital or margin
requirements than foreign security-based swap dealers. For instance,
all other things being equal, a foreign security-based swap dealer that
is subject to lower capital requirements would be able to enter into a
security-based swap with a customer at a more competitive price than a
U.S. security-based swap dealer that is subject to a higher capital
requirement. Of course, more stringent capital or margin requirements
could equally be viewed as a source of competitive advantage, with
counterparties having greater confidence in the financial stability of
U.S. counterparties.
    One alternative to the proposed approach would be to impose uniform
compliance on all registered security-based swap dealers rather than
permitting substituted compliance for registered foreign security-based
swap dealers. If the Commission were to adopt a uniform approach to the
application of Section 15F requirements to registered U.S. and foreign
security-based swap dealers without allowing for substituted
compliance, foreign security-based swap dealers may find that complying
with the Commission's capital, margin, and other entity-level rules
would subject them to duplicative or conflicting requirements and may
put them at a competitive disadvantage as a result.
    As discussed above, the Dodd-Frank Act divides the entity-level
regulatory oversight of security-based swap dealers between the
Commission and prudential regulators.\1131\ This statutory division of
authority means that the Commission is not responsible for the capital
and margin regulation of bank security-based swap dealers and,
therefore, does not have the authority to make substituted compliance
determinations in those areas for dealers that are banks. As a result,
the Commission's provision of substituted compliance for capital and
margin requirements only would extend to nonbank security-based swap
dealers, whereas the Commission's substituted compliance determinations
for all other entity-level requirements would apply to both bank and
nonbank security-based swap dealers.
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    \1131\ See Section III.C.3(b), supra.
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    In addition to this statutory limitation on the Commission's
ability to provide for substituted compliance in certain areas, the
Commission also may consider the rationale for different capital
treatment of banks and nonbanks in the United States. As discussed
above, the Commission's proposed capital rules for nonbank security-
based swap dealers differ from those that would be applicable to bank
dealers as proposed by the prudential regulators in that the
Commission's proposed capital standards are principally focused on the
retention of highly liquid assets that can be distributed to
customers.\1132\ Assuming that the Commission adopts capital standards
for nonbank security-based swap dealers as proposed, the Commission's
comparability determinations regarding entity-level requirements would
likely analyze separately the capital treatment of nonbank entities in
jurisdictions that do not impose a comparable net liquid assets test.
In performing such an analysis, the Commission would take into account
the other principles, rules, and regulations of the foreign
jurisdiction that may be relevant to the analysis. It also would
consider whether nonbank dealers in that jurisdiction are permitted to
hold more illiquid assets as regulatory capital compared to the assets
permitted to be held under the capital rules adopted by the Commission
and, if so, whether nonbank dealers in that jurisdiction have access to
sufficient liquidity at the entity level to support the liabilities
they incur out of their business activity.\1133\ Similarly, the
Commission would need to consider the impact of any reduced liquidity
associated with the application of foreign capital standards on the
ability of nonbank dealers in such jurisdiction to wind down operations
quickly and distribute assets to customers.\1134\ As this example
illustrates, however, even when separately analyzing capital
requirements, the Commission's focus would remain on ensuring not that
the foreign jurisdiction has identical rules but on ensuring that a
foreign jurisdiction that applies capital rules that do not impose a
comparable net liquid assets test to nonbank security-based swap
dealers can achieve the regulatory outcomes comparable to those
intended under the Dodd-Frank Act.
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    \1132\ See Section III.C.3(b)(1), supra.
    \1133\ See Capital, Margin, and Segregation Proposing Release,
77 FR 70304.
    \1134\ See id.
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    Similarly, consistent with our category-based approach, the
Commission's comparability determination with respect to the
requirements set forth in Section 15F of the Exchange Act generally
would not depend on the comparability of the goals achieved by foreign
jurisdiction's capital and margin requirements taken alone but also
would, in light of the interconnectedness of capital and margin with
related entity-level requirements, take into account regulatory
outcomes of other aspects of the jurisdiction's requirements. Although
we believe that capital and margin requirements are at the core of a
robust internal risk controls system at a firm, equally foundational to
the financial integrity of a firm are effective internal risk
management procedures and the effectiveness of other relevant foreign
regulatory requirements that are connected to an entity's financial
integrity. As noted above, the Commission is proposing to permit
substituted compliance, not only with capital and margin requirements,
but also with such other related entity-level requirements as the
Commission finds appropriate.\1135\ The Commission preliminarily
believes that this approach to substituted compliance in the context of
entity-level requirements will benefit foreign security-based swap
dealers by allowing them to comply, where possible, with a single set
of entity-level requirements where a substituted compliance
determination is deemed appropriate, while ensuring that all registered
security-based swap dealers are subject to robust entity-level
oversight.
---------------------------------------------------------------------------

    \1135\ See Section XII.B.1, supra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule
establishing a policy and procedural framework for making substituted
compliance determinations for registered foreign security-based swap
dealers, including the following:
     What, if any, are the likely competitive effects, within
the U.S. security-based swap market and among U.S. security-based swap
dealers, of the proposed approach for application of substituted
compliance for foreign security-based swap dealers? Please describe the
specific nature of any such effects.
     The Commission generally solicits comments on the
appropriateness and clarity of the proposed rule. Should

additional details be included regarding any aspects of the proposed
rule?
     As discussed above, in making a substituted compliance
determination, the Commission would ultimately focus on the
comparability of regulatory outcomes rather than a rule-by-rule
comparison. Is this holistic approach to making a substituted
compliance determination appropriate? If not, why not?
     Is the comparability standard appropriate and sufficiently
clear? Should additional detail be provided as to what would and would
not satisfy this standard? If so, what additional detail should be
provided? Should a different standard be used? If so, what should be
the standard and why?
     As discussed above, in making a substituted compliance
determination, the Commission would consider factors such as the scope
and objectives of the relevant foreign regulatory requirements, as well
as the effectiveness of the supervisory compliance program
administered, and the enforcement authority exercised. Are these
factors appropriate? Are the enumerated factors too broad or too
narrow? What other factors should the Commission consider?
     When assessing the effectiveness of a foreign
jurisdiction's supervisory compliance program should the Commission
consider factors such as the existence of a dedicated examination
program, the expertise of examiners, the existence of a risk monitoring
framework and an examination plan, and the existence of a disciplinary
program to enforce compliance with laws? Similarly, when assessing the
effectiveness of a foreign jurisdiction's enforcement program, should
the Commission consider factors such as whether the program is actively
administered, resourced, and transparent?
     As discussed above, the Commission could condition a
substituted compliance determination by limiting it to a particular
class or classes of registrants in the foreign jurisdiction, in which
case the Commission would determine what conditions are appropriate on
a case-by-case basis. What, if any, are the competitive effects of the
proposed approach with respect to conditional substituted compliance
determinations?
     As discussed above, the proposed rule permits the
Commission, on our own initiative, to modify or withdraw a substituted
compliance determination for a particular foreign jurisdiction, after
appropriate notice and opportunity for comment. In the event that the
Commission determines that a previous substituted compliance
determination needs to be further conditioned or even withdrawn, how
much advance notice would be sufficient to permit market participants
to adjust their activities to reflect the modification or withdrawal?
For example, would 60 days be appropriate? Should the opportunity for
comment be made public? Why or why not?
     Should a review period or ``sunset provision'' to revisit
a previous substituted compliance determination be required? If so,
what should the appropriate time period be for such review period or
sunset provision?
     Should the ability of a foreign security-based swap dealer
to take advantage of substituted compliance be conditioned on it not
transacting with certain classes of U.S. counterparties, such as
persons that do not meet the definition of qualified institutional
buyer, as defined in Securities Act Rule 144A (17 CFR 230.144A(a)(1))
(``QIB''), or some other threshold, such as qualified investor, as
defined in Section 3(a)(54) of the Exchange Act? Would such
counterparties be less able to appreciate the differences between
engaging in security-based swap transactions with a security-based
dealer subject to relevant provisions of Title VII versus a security-
based swap dealer complying with comparable foreign regulations than a
QIB or qualified investor? Would such an approach result in meaningful
safeguards that would justify adopting such an approach? Is the use of
such a substituted compliance regime likely to have a disparate impact
on any particular class of counterparties? What are the potential
advantages or disadvantages (including in terms of risk, competition,
and counterparty protection) to counterparties, foreign security-based
swap dealers, and U.S. security-based swap dealers in restricting the
use of substituted compliance to transactions involving certain classes
of U.S. counterparties?
     As discussed above, the proposed rule permits a foreign
security-based swap dealer or group of foreign security-based swap
dealers to submit a request that the Commission make a substituted
compliance determination for the foreign jurisdiction with respect to
specified requirements in Section 15F of the Exchange Act. Is the
proposed procedure for submitting such requests sufficiently clear?
Should additional details be included regarding any aspects of the
proposed procedure?
     Do the proposed substituted compliance rules appropriately
reflect the goal to increase the efficiency of the security-based swap
market and promote competition by avoiding (as appropriate) subjecting
foreign security-based swap dealers to potentially conflicting or
duplicative compliance obligations? Would it be more appropriate to
make substituted compliance determinations on a firm-by-firm basis
rather than a class or jurisdictional basis? If so, why?
     Should entity-level requirements be treated separately for
purposes of substituted compliance determinations, or should they be
considered as a package of regulations?
     Should the Commission permit substituted compliance with
respect to external business conduct standards in Section 15F(h) of the
Exchange Act and the rules and regulations thereunder? Would allowing
substituted compliance impair the Commission's ability to enforce the
business conduct standards that the Dodd-Frank Act added to the
Exchange Act?
     Should the Commission permit substituted compliance in
transactions between registered non-U.S. dealers and U.S. persons?
     Should the Commission permit substituted compliance in
transactions by registered non-U.S. dealers within the United States?
     Would allowing substituted compliance impair the
Commission's ability to enforce the business conduct standards that the
Dodd-Frank Act added to the Exchange Act relating to counterparty
protection, particularly with respect to ``special entities''?
     Should the Commission not permit substituted compliance
with respect to the conflicts of interest duties described in Section
15F(j)(5) of the Exchange Act and the rules and regulations thereunder?
Why or why not? In particular, would allowing substituted compliance
with respect to these requirements impair the Commission's ability to
enforce these counterparty protections that the Dodd-Frank added to the
Exchange Act? Why or why not? Should the foreign dealing subsidiaries
of U.S. parents be allowed to take advantage of substituted compliance
for entity-level requirements if they engage in U.S. Business?
     Should there be a threshold requirement that foreign
security-based swap dealers engage in a predominately foreign business
in order to rely on substituted compliance? If so, how should the
``predominantly foreign business'' threshold be measured? Should it be
based on the relative notional amount of the security-based swap
business of foreign security-based swap dealers with U.S. persons
compared to the notional amount of their security-based swap business
with

non-U.S. persons? If so, what should the threshold be (e.g., 80%
Foreign Business by notional amount? More than 50%?)?
     Should the Commission consider providing substituted
compliance determinations related to capital regulation in
jurisdictions that apply Basel-based capital standards to nonbank
security-based swap dealers? Why or why not?
     In what ways are Basel-based capital standards as applied
to nonbank security-based swap dealers consistent with the Commission's
own capital standards for nonbank security-based swap dealers? In what
ways are they inconsistent?
     While the Commission is determining whether to make an
initial set of substituted compliance determinations, should the
Commission delay compliance with the requirements of the Exchange Act,
and the rules and regulations thereunder, relating to security-based
swap dealers for foreign security-based swap dealers? Are there some
requirements that would be appropriate for delayed compliance? If so,
please specify which ones and explain why. Are there other regulatory
or market interests that the Commission should consider in determining
the scope of the delayed compliance provision? If so, please describe
those interests and how the proposed rule should address them.
     What would be the market impact of the proposed policy and
procedural framework for making substituted compliance determinations
for registered foreign security-based swap dealers? How would the
application of the proposed policy and procedural framework affect the
competitiveness of U.S. entities in the global marketplace (both in the
United States as well as in foreign jurisdictions)? Would the proposed
approach place any market participants at a competitive disadvantage or
advantage? If so, please explain. Would the proposed approach be a more
general burden on competition? If so, please explain. What other
measures should the Commission consider to implement the proposed
policy and procedural framework? What would be the market impacts and
competitiveness effects of alternatives to the proposed approach
discussed in this release?
     Should the Commission permit substituted compliance in
transactions between registered non-U.S. dealers and U.S. persons?
     Should the Commission permit substituted compliance in
transactions by registered non-U.S. dealers within the United States?

D. Regulatory Reporting and Public Dissemination

    As initially proposed, Regulation SBSR did not contemplate that the
reporting and public dissemination requirements associated with cross-
border security-based swaps could be satisfied by complying with the
rules of a foreign jurisdiction instead of U.S. rules. Thus,
counterparties to a security-based swap would be required to comply
with proposed Regulation SBSR even if the security-based swap also was,
for example, reported to a foreign data repository or a foreign
regulatory authority.
    In response to this proposed approach, several commenters stated
that requiring counterparties to report cross-border security-based
swaps in more than one jurisdiction could result in duplicative or
inconsistent reporting, unnecessary expense and administrative burden,
and potential conflicts with another jurisdiction's confidentiality
requirements.\1136\ Commenters suggested various ways to address these
issues. Some recommended generally that the Commission coordinate our
trade reporting regime with those of other jurisdictions.\1137\ Two
commenters urged regulators to encourage the development of a single,
global trade repository for each asset class.\1138\ One of these
commenters also stated that, in the absence of a global trade
repository, regulators should implement internationally compatible
reporting systems so that cross-border security-based swaps would not
have to be reported twice.\1139\ Another commenter suggested that the
Commission define the term ``security-based swap'' to exclude a
transaction that is reported to a non-U.S. trade repository, which
would have the effect of eliminating any U.S. reporting requirement
because the transaction would not be a security-based swap.\1140\
Several commenters recommended that the Commission refrain from
imposing any reporting requirements on security-based swaps that are
reported pursuant to comparable rules of another jurisdiction.\1141\
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    \1136\ See, e.g., AIMA Letter at 6; DTCC Letter II at 21; ISDA/
SIFMA Letter I at 18. While not specifically addressing reporting
requirements, another commenter believed generally that the U.S.
branches of Japanese banks should not be subject to Title VII
requirements, because such banks will be subject to comprehensive
regulation under Japanese law. See Japanese Banks Letter at 4
(arguing that application of Title VII would be ``superfluous at
best'' and could subject foreign banks to potentially inconsistent
requirements).
    \1137\ See AIMA Letter at 6; ISDA/SIFMA Letter I at 18 (urging
the Commission to ``consult with foreign regulators before
establishing the extra-territorial scope of the rules promulgated
under Title VII''); Markit Letter III at 2 (arguing that the SEC and
CFTC should ``harmonize their regulations with those of
international regulators to the extent possible'').
    \1138\ See AIMA Letter at 6; ISDA Letter at 14.
    \1139\ See ISDA Letter at 13.
    \1140\ See Davis Polk Letter II at 21.
    \1141\ See, e.g., Cleary Letter II at 17; Davis Polk Letter I at
2 (urging the Commission to implement Title VII in a way that relies
on home country supervision), 7 (arguing that a transaction required
to be reported to a foreign trade repository should not also be
required to be reported to an SDR); Davis Polk Letter II at 21-22;
ISDA Letter at 14 (stating that, in the absence of a single
international trade repository, regulators should recognize trade
repositories in other jurisdictions); Soci[eacute]t[eacute]
G[eacute]n[eacute]rale Letter I at 11 (recommending deference to
foreign regulators that have a comparable regulatory scheme).
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    The Commission is sympathetic to the desire to avoid redundant or
conflicting reporting requirements, to the extent consistent with
applicable statutory requirements. The Commission participates in a
number of international organizations and initiatives that seek to
coordinate regulation of the global OTC derivatives market, and the
Commission staff has engaged in ongoing bilateral discussions with a
number of foreign regulators on the subject of cross-border security-
based swap activity. The Commission preliminarily believes that
regulatory reporting of security-based swap transaction data is crucial
to allow it and other regulators more effectively to carry out their
statutorily assigned functions, which include the assessment of
systemic risks.\1142\ In addition, the Commission preliminarily
believes that public dissemination generally would increase efficiency
and price competition in the security-based swap market.\1143\ The
Commission preliminarily believes, therefore, that our own efforts to
promote these goals should be implemented as quickly as practicable.
---------------------------------------------------------------------------

    \1142\ See Regulation SBSR Proposing Release, 75 FR 75262-64.
    \1143\ See Regulation SBSR Proposing Release, 75 FR 75280-82
(discussing anticipated impact of proposed Regulation SBSR on
efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    It is possible that other jurisdictions will implement reporting
and dissemination regimes for security-based swap transactions that are
comparable to the one set forth in Title VII and Regulation SBSR. In
anticipation of that possibility, the Commission is now proposing rules
regarding substituted compliance relating to regulatory reporting and
public dissemination of security-based swaps, which are described
below.
1. General
    Proposed Rule 908(c)(2)(i) would provide that the Commission could,
conditionally or unconditionally, by

order, make a substituted compliance determination with respect to
regulatory reporting and public dissemination in a foreign jurisdiction
if such foreign jurisdiction imposes a comparable system for the
regulatory reporting and public dissemination of all security-based
swaps.
    Section 13A(a)(1) of the Exchange Act \1144\ provides that all
security-based swaps that are not accepted for clearing shall be
subject to regulatory reporting. Section 13(m)(1)(G) of the Exchange
Act \1145\ provides that each security-based swap (whether cleared or
uncleared) shall be reported to a registered SDR, and Section
13(m)(1)(C) of the Exchange Act \1146\ generally provides that
transaction, volume, and pricing data of all security-based swaps shall
be publicly disseminated. However, these statutory provisions do not
address whether, or the extent to which, these requirements should
apply to cross-border security-based swaps. Reporting security-based
swap transactions pursuant to the regimes of both the United States and
a foreign jurisdiction could be duplicative and potentially burdensome.
Re-proposed Rule 908(c)(2)(i) would provide generally that compliance
with a comparable system of a foreign jurisdiction for the regulatory
reporting and public dissemination of all security-based swaps could,
if certain conditions are met, be substituted for compliance with U.S.
rules to satisfy the goals and objectives of these Title VII
requirements.
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    \1144\ 15 U.S.C. 78m-1(a)(1).
    \1145\ 15 U.S.C. 78m(m)(1)(G).
    \1146\ 15 U.S.C. 78m(m)(1)(C).
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2. Security-Based Swaps Eligible and Not Eligible for Substituted
Compliance
    The Commission preliminarily believes that, if a foreign
jurisdiction applies a comparable system for the regulatory reporting
and public dissemination of an entity's security-based swaps, it would
be appropriate not to apply the U.S. requirements in addition to the
requirements of that foreign jurisdiction. Where the Commission has
found that a foreign jurisdiction's reporting and public dissemination
requirements are comparable to those implemented by the Commission, we
expect to make a substituted compliance determination with respect to
such jurisdiction for these requirements. The Commission is re-
proposing Rule 908(c)(1) to provide that compliance with the regulatory
reporting and public dissemination requirements in Sections 13(m) and
13A of the Exchange Act, and the rules and regulations thereunder, may
be satisfied by compliance with the rules of a foreign jurisdiction
that is the subject of a substituted compliance order issued by the
Commission, provided that, with respect to at least one of the direct
counterparties to the security-based swap:
    (i) Such counterparty is either a non-U.S. person or a foreign
branch; and
    (ii) No person within the United States is directly involved in
executing, soliciting, or negotiating the terms of the security-based
swap on behalf of such counterparty.
    The Commission preliminarily believes that, if at least one direct
counterparty to a security-based swap is a non-U.S. person (even if the
non-U.S. person is a security-based swap dealer or major security-based
swap participant, or is guaranteed by a U.S. person) and no person
within the United States is directly involved in executing, soliciting,
or negotiating the terms of the security-based swap on behalf of that
counterparty, the security-based swap should be eligible for
substituted compliance with respect to regulatory reporting and public
dissemination. Thus, substituted compliance with respect to regulatory
reporting and public dissemination could apply even in the instance of
a security-based swap with a direct counterparty that is operating from
within the United States, so long as the other direct counterparty is a
non-U.S. person and no person within the United States is directly
involved in executing, soliciting, or negotiating the terms of the
security-based swap on behalf of that non-U.S. person. This approach is
designed to limit disincentives for non-U.S. persons to transact
security-based swaps with U.S. persons by allowing compliance with the
rules of a foreign jurisdiction to be substituted for compliance with
U.S. rules when the non-U.S. person transacts with a U.S. person.
    The Commission also preliminarily believes that the approach
proposed above with respect to non-U.S. persons should be extended to
the foreign branches of U.S. banks. As a result, we are proposing to
allow the possibility of substituted compliance with respect to
regulatory reporting and public dissemination if at least one
counterparty of a security-based swap is the foreign branch of a U.S.
bank, as long as no person within the United States is directly
involved in executing, soliciting, or negotiating the terms of the
security-based swap on behalf of such foreign branch.\1147\ This
approach is designed to promote access of foreign branches of U.S.
banks to the local markets in which those branches are located. Assume,
for example, that a substituted compliance determination with respect
to regulatory reporting and public dissemination applied to a foreign
jurisdiction and a transaction involved, on one side, a local, non-U.S.
person market participant, and the security-based swap is required to
be reported and publicly disseminated under the rules of that foreign
jurisdiction regardless of whether the counterparty on the other side
is a local dealer or a foreign branch of a U.S. bank. If substituted
compliance with respect to regulatory reporting and public
dissemination were in effect, the fact that the foreign branch is a
counterparty would not cause the transaction to have to be reported
pursuant to U.S. rules in addition to the foreign jurisdiction's rules.
---------------------------------------------------------------------------

    \1147\ See Section III.B.6, supra (discussing the definition of
``foreign branch'' in proposed Rule 3a71-3(a)(1) under the Exchange
Act).
---------------------------------------------------------------------------

    Consistent with the factors described above, the Commission
preliminarily believes that certain kinds of security-based swaps
should not be eligible for substituted compliance with respect to
regulatory reporting and public dissemination, even if they might be
subject to reporting and public dissemination requirements in a foreign
jurisdiction.\1148\ As noted above, re-proposed Rule 908(c)(1) would
provide that a security-based swap would be eligible for substituted
compliance with respect to regulatory reporting and public
dissemination where both of the following conditions apply to at least
one direct counterparty to the transaction: (i) such counterparty is
either a non-U.S. person or a foreign branch; and (ii) the security-
based swap transaction is not solicited, negotiated, or executed by a
person within the United States on behalf of such counterparty. Thus, a
security-based swap between two U.S. persons would not be eligible for
substituted compliance with respect to regulatory reporting and public
dissemination, even if the security-based swap were solicited,
negotiated, and executed outside the United States.\1149\
---------------------------------------------------------------------------

    \1148\ If the rules of a foreign jurisdiction would not apply to
the security-based swap, there would be no need to consider the
possibility of substituted compliance, because there would be no
foreign rules that could substitute for the applicable U.S. rules.
    \1149\ This assumes that neither U.S. person is acting through a
foreign branch. If either U.S. person were acting through a foreign
branch, the security-based swap between those U.S. persons would be
eligible for substituted compliance.

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

    Furthermore, re-proposed Rule 908(c)(1) would not allow for the
possibility of substituted compliance with respect to regulatory
reporting and public dissemination if both direct counterparties (or
their agents)--regardless of place of domicile--solicit, negotiate, or
execute a security-based swap from within the United States. The
Commission preliminarily believes that U.S. rules for regulatory
reporting and public dissemination should apply to transactions where
all or the major part of actions associated with the security-based
swap, on both sides of the transaction, are performed within the United
States.
    The following examples explain the operation of re-proposed Rule
908(c)(1). In all examples, assume that the Commission has issued a
substituted compliance order with respect to regulatory reporting and
public dissemination that applies to the foreign jurisdiction:
     Example 1. A bank in country X--solely through personnel
located in country X--executes a security-based swap over the phone
with a U.S. person located in New York, and no person within the United
States is directly involved in soliciting, negotiating, or executing
the terms of the security-based swap on behalf of the foreign bank. The
security-based swap is not cleared. The security-based swap would be
eligible for substituted compliance, regardless of whether the foreign
bank is registered in any capacity with the Commission.
     Example 2. A foreign branch of a U.S. bank located in
country X executes a security-based swap over the phone with a U.S.
person located in New York. The foreign branch uses staff located
solely in country X to solicit, negotiate, and execute the security-
based swap. The security-based swap is not cleared. The security-based
swap would be eligible for substituted compliance.
     Example 3. Two foreign branches of U.S. banks, both
located in country X, execute a security-based swap in country X. The
security-based swap transaction is not solicited, negotiated, or
executed by a person within the United States on behalf of either
counterparty. The security-based swap would be eligible for substituted
compliance.
     Example 4. Two New York branches of foreign banks execute
a security-based swap. Persons acting on behalf of each bank are
located within the United States and are involved in soliciting,
negotiating, and executing the terms of the security-based swap. The
security-based swap would not be eligible for substituted compliance.
     Example 5. Same facts as Example 4, except that one
foreign bank, instead of soliciting, negotiating, or executing the
security-based swap using persons associated with its New York branch,
uses only persons located in its home office to perform such functions.
The security-based swap would be eligible for substituted compliance.
     Example 6. A foreign subsidiary (C1) of a U.S. person
executes a security-based swap with a U.S. person (C2). No person
within the United States solicits, negotiates, or executes the
security-based swap on behalf of the foreign subsidiary C1. The
security-based swap would be eligible for substituted compliance,
regardless of the location of persons who executed, solicited, or
negotiated the security-based swap on behalf of the U.S. person C2, and
regardless of whether the foreign subsidiary C1 is guaranteed by a U.S.
person.
3. Requests for Substituted Compliance
    Proposed Rule 908(c)(2)(ii) would provide that any person that
executes a security-based swap that would, in the absence of a
substituted compliance order, be required to be reported pursuant to
Regulation SBSR may file an application, pursuant to the procedures set
forth in proposed Rule 0-13,\1150\ requesting that the Commission make
a substituted compliance determination regarding regulatory reporting
and public dissemination with respect to a foreign jurisdiction the
rules of which also would require reporting and public dissemination of
the security-based swap. Proposed Rule 908(c)(2)(ii) would further
provide that such application shall include the reasons therefor and
such other information as the Commission may request. The Commission
would consider those reasons as well as information derived from other
sources in considering whether to grant a substituted compliance order
with respect to regulatory reporting and public dissemination.
---------------------------------------------------------------------------

    \1150\ See Section XI.B, supra.
---------------------------------------------------------------------------

4. Findings Necessary for Substituted Compliance
    Re-proposed Rule 908(c)(2)(iii) would provide that, in making a
substituted compliance determination with respect to a foreign
jurisdiction, the Commission shall take into account such factors as
the Commission determines are appropriate, such as the scope and
objectives of the relevant foreign regulatory requirements, as well as
the effectiveness of the supervisory compliance program administered,
and the enforcement authority exercised, by the foreign financial
regulatory authority to support oversight of its regulatory reporting
and public dissemination system for security-based swaps. Furthermore,
the Commission would not make a substituted compliance determination
with respect to regulatory reporting and public dissemination unless
the Commission found that:
    (A) The data elements that are required to be reported pursuant to
the rules of the foreign jurisdiction are comparable to those required
to be reported pursuant to Sec.  242.901;
    (B) The rules of the foreign jurisdiction require the security-
based swap to be reported and publicly disseminated in a manner and a
timeframe comparable to those required by Sec. Sec.  242.900-911;
    (C) The Commission has direct electronic access \1151\ to the
security-based swap data held by a trade repository or foreign
regulatory authority to which security-based swaps are reported
pursuant to the rules of that foreign jurisdiction; and
---------------------------------------------------------------------------

    \1151\ New paragraph (k) of re-proposed Rule 900 would define
the term ``direct electronic access'' to have the same meaning as in
proposed Rule 13n-4(a)(5) under the Exchange Act, as proposed in the
SDR Proposing Release, 75 FR 77318.
---------------------------------------------------------------------------

    (D) Any trade repository or foreign regulatory authority in the
foreign jurisdiction that receives and maintains required transaction
reports of security-based swaps pursuant to the laws of that foreign
jurisdiction is subject to requirements regarding data collection and
maintenance; systems capacity, resiliency, and security; and
recordkeeping that are comparable to the requirements imposed on SDRs
by sections 240.13n-5 to 240.13n-7 of the Exchange Act.
    As noted above, the Commission preliminarily believes that
compliance with a foreign jurisdiction's rules for reporting and public
dissemination of security-based swaps should be a substitute for
compliance with the U.S. rules only when the foreign jurisdiction has a
reporting and public dissemination regime comparable to that of the
United States. Thus, re-proposed Rule 908(c)(2)(iii)(A) would provide
that the data elements required to be reported pursuant to the rules of
the foreign jurisdiction must be comparable to those required to be
reported pursuant to Rule 901 of Regulation SBSR. If the data elements
required by the foreign jurisdiction were

not comparable, certain important data elements about a security-based
swap might not be captured by the foreign trade repository or foreign
regulatory authority.
    Furthermore, re-proposed Rule 908(c)(2)(iii)(B) would provide that
the rules of the foreign jurisdiction must require security-based swaps
to be reported and publicly disseminated in a manner and a timeframe
comparable to those required by Regulation SBSR. The Commission
preliminarily believes that, given the Title VII requirements that all
security-based swaps be reported to an SDR and that all security-based
swaps be publicly disseminated in real time (except for block trades),
allowing substituted compliance with the rules of a foreign
jurisdiction that has standards significantly different from those in
the United States would run counter to the objectives and requirements
of Title VII. Thus, for example, the Commission would not, under re-
proposed Rule 908(c), permit substituted compliance with respect to
regulatory reporting and public dissemination if the foreign
jurisdiction did not (among other things) impose public dissemination
requirements on a trade-by-trade basis; dissemination of trade
information on an aggregate basis would not be sufficient. Furthermore,
the Commission would not permit substituted compliance under re-
proposed Rule 908(c) with respect to regulatory reporting and public
dissemination if security-based swaps of non-block size were publicly
disseminated in other than real time, as required under Section 763 of
the Dodd-Frank Act.
    Re-proposed Rule 908(c)(2)(iii)(C) would also provide that, to
grant a substituted compliance order with respect to regulatory
reporting and public dissemination, the Commission must have direct
electronic access to the security-based swap data held by a trade
repository or foreign regulatory authority to which security-based
swaps are reported pursuant to the rules of that foreign jurisdiction.
This requirement stems from the fact that the regulatory reporting
provisions of Title VII are premised on the idea that the Commission
will have direct electronic access to all the reported data. Not having
direct electronic access could reduce the Commission's ability to
effectively and efficiently monitor the U.S. security-based swap market
and provide timely and complete data to other U.S. financial regulatory
agencies. Thus, the Commission preliminarily believes that direct
electronic access to the foreign trade repository or foreign regulatory
authority to which security-based swap transactions are reported in the
foreign jurisdiction should be a prerequisite to issuing a substituted
compliance order with respect to regulatory reporting and public
dissemination applying to that jurisdiction.
    An alternative to this proposed requirement would be to permit
substituted compliance with respect to regulatory reporting and public
dissemination if, instead, there existed an information-sharing
agreement between the Commission and an appropriate body in the foreign
jurisdiction that would permit the Commission to request and obtain
transaction information from the foreign trade repository or foreign
regulatory authority that otherwise would be reported to a registered
SDR pursuant to Regulation SBSR. The Commission preliminarily believes,
however, that it would be more appropriate to require direct electronic
access to such data before allowing substituted compliance with respect
to regulatory reporting and public dissemination. Without direct
electronic access, the Commission could face substantial delays before
a foreign entity, even acting expeditiously, could compile a
substantial volume of data relating to a substantial volume of
transactions. Delays in obtaining such data could compromise the
ability of the Commission to supervise security-based swap market
participants, and to share information with other U.S. financial
regulators, in a timely fashion.
    Re-proposed Rule 908(c)(2)(iii)(D) would provide that, to grant a
substituted compliance order regarding regulatory reporting and public
dissemination, the Commission must be able to find that any trade
repository or foreign regulatory authority in the foreign jurisdiction
that receives and maintains transaction reports of security-based swaps
pursuant to the laws of that foreign jurisdiction is subject to
requirements regarding data collection and maintenance; systems
capacity, resiliency, and security; and recordkeeping that are
comparable to the requirements that the Commission would impose on
SDRs. The Commission has proposed certain requirements for SDRs
relating to data collection and maintenance; \1152\ systems capacity,
resiliency, and security; \1153\ and recordkeeping.\1154\ These
requirements are designed, among other things, to enhance the ability
of SDRs to effectively receive and maintain security-based swap
transaction data that are reported to them. Without appropriate system
security, for example, the data held by an SDR could be destroyed or
rendered unusable by a hacker attack or computer virus. Therefore, the
Commission preliminarily believes that, to allow substituted compliance
for regulatory reporting and public dissemination with respect to a
foreign jurisdiction, any entity in that foreign jurisdiction that is
required to receive and maintain security-based swap transaction data
should be required to have comparable protections.
---------------------------------------------------------------------------

    \1152\ See proposed Rule 13n-5 under the Exchange Act.
    \1153\ See proposed Rule 13n-6 under the Exchange Act.
    \1154\ See proposed Rule 13n-7 under the Exchange Act.
---------------------------------------------------------------------------

    Re-proposed Rule 908(c)(2)(iv) would specify that, before issuing a
substituted compliance order pursuant to this section, the Commission
shall have entered into a supervisory and enforcement MOU or other
arrangement with the relevant foreign financial regulatory authority or
authorities under such foreign financial regulatory system addressing
oversight and supervision of the applicable security-based swap market
under the substitute compliance determination.
5. Modification or Withdrawal of Substituted Compliance Order
    Re-proposed Rule 908(c)(2)(v) would provide that the Commission
may, on our own initiative, modify or withdraw a substituted compliance
order with respect to regulatory reporting and public dissemination in
a foreign jurisdiction, at any time, after appropriate notice and
opportunity for comment. Such a modification or withdrawal could result
from a situation where, after the Commission issues an order
recognizing the reporting and public dissemination regime of a foreign
jurisdiction as eligible for substituted compliance, the basis for that
order ceases to be true. For example, if the foreign jurisdiction did
not sufficiently enforce its reporting and public dissemination rules,
compliance with the foreign rules might no longer be deemed an
effective substitute for compliance with the U.S. rules. Therefore, the
Commission preliminarily believes that it would be appropriate to
establish a mechanism whereby it could, at any time and on our own
initiative, modify or withdraw a previously issued substituted
compliance order with respect to regulatory reporting and public
dissemination, after appropriate notice and opportunity for comment.

6. Regulatory Reporting and Public Dissemination Considered Together in
the Commission's Analysis of Substituted Compliance
    The Commission has considered, but has determined not to propose,
treating regulatory reporting and public dissemination separately for
purposes of allowing substituted compliance. Under such an approach,
for example, the Commission could allow substituted compliance for
regulatory reporting with respect to a particular foreign jurisdiction
without permitting substituted compliance for public dissemination. The
Commission preliminarily believes that this approach would not
implement Title VII's regulatory reporting and public dissemination
requirements as effectively as considering these requirements together
for purposes of analyzing requests for substituted compliance
determinations.
    One example of a potential problem with viewing these two
requirements separately relates to the public dissemination of
security-based swap transaction information. If the Commission were to
permit substituted compliance for regulatory reporting but not for
public dissemination, certain transactions could be reported to a
foreign trade repository in lieu of an SDR that is registered with the
Commission. However, the Commission has proposed that registered SDRs
would be the entities charged with publicly disseminating information
about security-based swap transactions. A registered SDR could carry
out that function only if data about individual transactions are
reported to it. If data about certain transactions were reported
instead to a foreign trade repository, it would be impractical if not
impossible for the SDR to publicly disseminate data about those
transactions. The Commission also preliminarily believes that it would
be impractical and unduly complicated to devise an alternate method for
public dissemination of such transactions that did not involve
registered SDRs.\1155\ The Commission preliminarily concludes,
therefore, that transactions should be required to be reported to a
registered SDR even if there are comparable foreign rules that would
provide for reporting of such transactions to a foreign trade
repository, unless the foreign rules also provide for public
dissemination of such transactions in a manner comparable to Regulation
SBSR. In such case, the Commission could, under re-proposed Rule
908(c), issue a substituted compliance order for both regulatory
reporting and public dissemination with respect to that foreign
jurisdiction.
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    \1155\ A reporting side could be required to report to a
registered SDR the data elements required by re-proposed Rule
901(c), which are those that would be publicly disseminated, but not
be required to report the elements required by re-proposed Rule
901(d), which are the additional elements required for regulatory
reporting. However, reporting the transaction to both a registered
SDR and to a foreign trade repository (which it would be required to
do by the rules of the foreign jurisdiction) would negate the effect
of the substituted compliance order.
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    The Commission notes that, under re-proposed Rules 908(a) and
908(b), certain security-based swap transactions would be subject to
regulatory reporting but not public dissemination. The Commission also
has considered, but has determined not to propose, treating regulatory
reporting and public dissemination separately for purposes of allowing
substituted compliance with respect to such transactions, even though
Regulation SBSR would not require public dissemination of such
transactions in any case. The Commission preliminarily believes that
this approach could introduce unnecessary operational complexity for
cross-border market participants and might yield few if any efficiency
gains. Assume that a foreign branch of a U.S. bank is operating in a
jurisdiction where a substituted compliance order were in effect for
transactions that otherwise would be required to be reported but not
publicly disseminated. With each transaction, the foreign branch would
be required to determine whether the transaction was such that
regulatory reporting but not public dissemination would be required
under Regulation SBSR, in which case substituted compliance could apply
and the transaction could instead be reported to the foreign trade
repository, or whether both regulatory reporting and public
dissemination would be required under Regulation SBSR, in which case
substituted compliance would not apply and the transaction would be
required to be reported to a registered SDR. The determination of the
appropriate place to send the trade report would depend on the nature
of the counterparty.\1156\ While market participants could be expected
to develop the appropriate compliance systems to report through the
appropriate channel depending on the circumstances, the Commission
preliminarily sees only limited benefit to requiring market
participants to do so. The Commission preliminarily believes instead
that it would be simpler to permit substituted compliance for a foreign
jurisdiction only when that foreign jurisdiction has rules for
regulatory reporting and public dissemination that are comparable to
Regulation SBSR. This approached is designed to minimize the necessity
of determining, on a transaction-by-transaction basis, which
jurisdiction's rules would apply.
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    \1156\ For example, if the foreign branch transacted with
another foreign branch of a U.S. bank or with a non-U.S. person that
was guaranteed by a U.S. person, the transaction would be subject to
public dissemination (see re-proposed Rule 908(b)(2)(ii)) and
substituted compliance would not apply. Thus, the transaction would
have to be reported to an SDR registered with the Commission.
However, if the foreign branch transacted outside the United States
with a non-U.S. person that was not guaranteed by a U.S. person,
public dissemination would not be required under Regulation SBSR.
See re-proposed Rule 908(b)(2). Therefore, the transaction could be
reported instead to the foreign trade repository.
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Request for Comment
    The Commission is re-proposing Regulation SBSR in a manner that
would set forth when a security-based swap generally would be required
to be reported and publicly disseminated, and when reporting and
dissemination requirements could be satisfied by substituting
compliance with the rules of a foreign jurisdiction for compliance with
U.S. rules. The public is invited to comment on all aspects of these
proposed rules. In particular, the Commission invites responses to the
following questions about our proposed rules relating to substituted
compliance:
     Should the Commission make determinations of substituted
compliance for regulatory reporting separately from public
dissemination? Why or why not? If so, how could a security-based swap
transaction be publicly disseminated if substituted compliance were in
effect for regulatory reporting but not for public dissemination?
     Do you believe the Commission, as proposed in Rule
908(c)(2)(i), should have the ability to conditionally or
unconditionally, by order, make a substituted compliance determination
with respect to regulatory reporting and public dissemination in a
foreign jurisdiction if such foreign jurisdiction imposes a comparable
system for the regulatory reporting and public dissemination of all
security-based swaps? Why or why not? Should the Commission allow for
substituted compliance determinations under more limited circumstances?
Why or why not? Under what other circumstances should the Commission
consider substituted compliance? Please be specific.
     How should the Commission evaluate whether a foreign
system is ``comparable'' for purposes of regulatory reporting and
public dissemination? Please be specific.

     The Commission stated that our approach is designed to put
the foreign branches of U.S. banks on a level playing field with non-
U.S. persons in foreign jurisdictions where those branches are located.
Do you believe that the proposed formulation would accomplish this
goal? Why or why not? How should the Commission restructure re-proposed
Rule 908(c)(1) to accomplish this goal? Please be specific.
     Do you believe that the examples provided adequately
describe the situations under which security-based swap transactions
should and should not be eligible for substituted compliance? Why or
why not? What additional situations should the Commission consider?
Please be specific.
     Do you agree with the Commission proposal, in re-proposed
Rule 908(c)(2)(ii), that any person that executes security-based swaps
that would be required to be reported to Regulation SBSR be eligible to
file an application requesting substituted compliance? Why or why not?
Should any other entities (i.e., foreign regulators or industry
associations) be eligible to file such an application? Why or why not?
     Do you agree with the factors the Commission would take
into account when making a substituted compliance determination? Why or
why not? What additional factors should the Commission take into
account? Should a trade repository be subject to requirements that are
comparable to all of Section 13(n) of the Exchange Act and the rules
and regulations thereunder as a condition to a substituted compliance
determination?
     Do you agree with the proposed findings that the
Commission would be required to make pursuant to re-proposed Rule
908(c)(2)(iii)? Why or why not? Are there any other findings the
Commission should be required to make? Please be specific.
     Do you agree, as detailed in re-proposed Rule
908(c)(2)(iv), that the Commission should have the ability, on our own
initiative, to modify or withdraw a substituted compliance order at any
time, after appropriate notice and opportunity for comment? Why or why
not?
     The Commission is not at this time proposing that a duty
to report and publicly disseminate a security-based swap would depend
on the domicile of the issuer of the loan or security underlying the
security-based swap. Should the Commission's rules for reporting and
public dissemination take this factor into consideration? Why or why
not?
     If a foreign jurisdiction has some form of public
dissemination but the Commission does not believe that the foreign
jurisdiction's rules are comparable to those of the United States to
allow substituted compliance with respect to regulatory reporting and
public dissemination, what would be the effect of having transaction
reports of security-based swaps publicly disseminated in multiple
jurisdictions? Do you believe that situation would impact price
discovery or the market for such security-based swaps generally? If so,
how, to what extent, and why? If not, why not? How practical would it
be, and what would be the cost, for private actors to consolidate
transaction reports of those security-based swaps emanating from
potentially multiple feeds across multiple jurisdictions?
     Should the Commission permit substituted compliance with
respect to regulatory reporting and public dissemination even if it
does not have direct electronic access to the security-based swaps
transactions reported to the foreign trade repository or foreign
regulatory authority? If yes, how could the Commission ensure that it
has timely access to the security-based swap transaction data held by
the foreign entity that otherwise would have been reported pursuant to
Regulation SBSR? If there were delays associated with obtaining data
from the foreign entity, how long could those delays be for substituted
compliance to still be appropriate? In addition to delays, do you
foresee any other potential obstacles to the Commission obtaining this
information from foreign entities?
     The Commission's re-proposed rules relating to substituted
compliance for regulatory reporting and public dissemination
requirements differ in certain respects from the CFTC's cross-border
guidance. For example, the CFTC guidance provides that a swap between a
U.S. person swap dealer and a non-U.S. person guaranteed by a U.S.
person would be subject to public dissemination requirements, and that
these requirements could not be satisfied through substituted
compliance.\1157\ The Commission, on the other hand, is proposing that
public dissemination of a security-based swap between two such direct
counterparties could be satisfied by substituted compliance (assuming
that no person is soliciting, negotiating, or executing the security-
based swap within the United States on behalf of the non-U.S. person
that is guaranteed by a U.S. person).\1158\ Please describe any other
differences that you believe might exist and what would be the impact
of any such differences.
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    \1157\ See 77 FR 41237.
    \1158\ See re-proposed Rule 908(c)(1) of Regulation SBSR.
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     When making a comparability determination, the Commission
would look not just at the rules of a foreign jurisdiction, but also at
the comprehensiveness of the supervision and regulation by the
appropriate governmental authorities of that jurisdiction. When
assessing the effectiveness of a foreign jurisdiction's supervisory
compliance program, should the Commission consider factors such as the
existence of a dedicated examination program, the expertise of
examiners, the existence of a risk monitoring framework and an
examination plan; and the existence of a disciplinary program to
enforce compliance with laws? Similarly, when assessing the
effectiveness of a foreign jurisdiction's enforcement program, should
the Commission consider factors such as whether the program is actively
administered, resourced, and transparent?
     Is the Commission's holistic approach to making a
comparability determination appropriate? Why or why not? Are there
specific procedures or comparability considerations that would be
useful for the Commission to incorporate in our proposed substituted
compliance approach? If so, please describe. What would be the
advantages of adopting such measures now? What would be the
disadvantages of adopting such measures now?
     What would be the market impact of proposed approach to
substituted compliance for regulatory reporting and public
dissemination? How would the proposed approach affect the
competitiveness of U.S. entities in the global marketplace (both in the
United States as well as in foreign jurisdictions)? Would the proposed
approach place any market participants at a competitive disadvantage or
advantage? If so, please explain. Would the proposed approach be a more
general burden on competition? If so, please explain. What other
measures should the Commission consider to implement the proposed
approach? What would be the market impacts and competitiveness effects
of alternatives to the proposed approach discussed in this release?
     In making substituted compliance determinations for
reporting, should the Commission require direct electronic access to
data maintained at foreign SDRs or should we only require an
information sharing arrangement? Why or why not?

E. Clearing Requirement

    Section 3C(a)(1) of the Exchange Act requires a security-based swap
that is subject to the mandatory clearing requirement to be cleared at
a clearing agency that is either registered with the Commission or
exempt from registration.\1159\ The Commission recognizes, however,
that in some circumstances counterparties may seek to clear security-
based swaps subject to mandatory clearing at a clearing agency that is
neither registered with the Commission nor exempt from registration,
which would fail to satisfy the Title VII mandatory clearing
requirement. This scenario may occur where counterparties seek either
due to their own preference or regulatory requirements in a foreign
jurisdiction to clear a transaction through a clearing agency that does
not have any U.S. members and does not clear transactions conducted
within the United States, because this type of clearing agency would
not be required to register with the Commission or obtain an exemption
from registration under the Commission's proposed interpretation of the
clearing agency registration requirement in Section 17A(g), discussed
in Section V above.
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