and does not include provisions that can readily be adapted into
rule text.
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    148. Do you agree with how the Commission is proposing to implement
SEA Core Principle 10? Why or why not?

K. Rule 828--Core Principle 11--Conflicts of Interest

    SEA Core Principle 11 \197\ requires an SBSEF to establish and
enforce rules to minimize conflicts of interest in its decision-making
process and to establish a process for resolving the conflicts of
interest. CEA Core Principle 12 \198\ is substantively identical.
---------------------------------------------------------------------------

    \197\ Section 3D(d)(11) of the SEA, 15 U.S.C. 78c-4(d)(11).
    \198\ 7 U.S.C. 7b-3(f)(12).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 12 in subpart M of part 37.
Section 37.1200 of subpart M repeats the statutory text of Core
Principle 12. There are no other provisions in subpart M, nor is there
any guidance or acceptable practices associated with Core Principle 12
in appendix B to part 37.\199\
---------------------------------------------------------------------------

    \199\ The CFTC has proposed additional rules regarding the
mitigation of conflicts of interest but has not adopted any such
rules. See CFTC, Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR
63732 (October 18, 2010); CFTC, Governance Requirements for
Derivatives Clearing Organizations, Designated Contract Markets, and
Swap Execution Facilities; Additional Requirements Regarding the
Mitigation of Conflicts of Interest, 76 FR 722 (January 6, 2011).
---------------------------------------------------------------------------

    Proposed Rule 828 would implement SEA Core Principle 11. Paragraph
(a) of proposed Rule 828, like Sec.  37.1200, repeats the statutory
text of the Core Principle. Paragraph (b) would direct an SBSEF to
comply with the requirements of proposed Rule 834, which, as discussed
below, would implement section 765 of the Dodd-Frank Act for both
SBSEFs and SBS exchanges.\200\
---------------------------------------------------------------------------

    \200\ See infra section X.
---------------------------------------------------------------------------

    The Commission seeks comment on the following:
    149. Do you agree with how the Commission is proposing to implement
SEA Core Principle 11 in Rule 828? Why or why not?
    150. The Commission is proposing to subject SBS exchanges and
SBSEFs to the same conflicts-of-interest requirements, in Rule 834.
Therefore, proposed Rule 828 cross-references proposed Rule 834 rather
than enumerating conflicts-of-interest requirements for SBSEFs separate
from those for SBS exchanges. Do you believe that this is an
appropriate way to structure the proposed rules? Why or why not? Are
there any conflicts-of-interest requirements that you believe should be
applied to SBSEFs but not to SBS exchanges? If so, what requirement(s)
and why?

L. Rule 829--Core Principle 12--Financial Resources

    SEA Core Principle 12 \201\ has a paragraph (A) that requires an
SBSEF to have adequate financial, operational, and managerial resources
to discharge each responsibility of the SBSEF, as determined by the
Commission. Paragraph (B) of SEA Core Principle 12 provides that the
financial resources of an SBSEF shall be considered to be adequate if
the value of the financial resources: (i) Enables the organization to
meet its financial obligations to its members and participants
notwithstanding a default by the member or participant creating the
largest financial exposure for that organization in extreme but
plausible market conditions; and (ii) exceeds the amount that would
enable the SBSEF to cover operating costs of the SBSEF for a one-year
period, as calculated on a rolling basis. CEA Core Principle 13 for
SEFs \202\ is substantively identical with respect to paragraphs (A)
and (B)(ii) of SEA Core Principle 12, but lacks an equivalent to
paragraph (B)(i) of SEA Core Principle 12.
---------------------------------------------------------------------------

    \201\ Section 3D(d)(12) of the SEA, 15 U.S.C. 78c-4(d)(12).
    \202\ Section 5h(f)(13) of the CEA, 7 U.S.C. 7b-3(f)(13).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 13 for SEFs in subpart N of
part 37. Section 37.1300 of subpart N repeats the statutory text of CEA
Core Principle 13. Section 37.1301 provides that financial resources
shall be considered adequate if their value exceeds the total amount
that would enable a SEF to cover its projected operating costs
necessary for the SEF to comply with section 5h of the CEA and
applicable CFTC regulations for a one-year period, calculated on a
rolling basis. Section 37.1302 describes the types of financial
resources that may satisfy the requirements of Sec.  37.1301. Section
37.1303 provides that the financial resources allocated by the SEF to
meet the financial resources requirements shall include unencumbered,
liquid financial assets equal to at least the greater of three months
of projected operating costs or the projected costs needed to wind down
the SEF's operations. If a SEF lacks sufficient unencumbered, liquid
financial assets, it may satisfy this obligation by obtaining a
committed line of credit in an amount at least equal to the deficiency.
Section 37.1304 requires a SEF, each fiscal quarter, to make a
reasonable calculation of its projected operating costs and wind-down
costs in order to determine its applicable obligations under this
section. It further provides that the SEF shall have reasonable
discretion in determining the methodology used to compute such amounts,
provided that the CFTC may review the methodology and require changes
as appropriate. Section 37.1305 provides that, no less than each fiscal
quarter, a SEF must compute the current market value of each financial
resource used to meet its obligations under Sec. Sec.  37.1301 and
37.1303 and that reductions in value to reflect market and credit risk
(``haircuts'') shall be applied as appropriate.
    Section 37.1306 addresses reporting to the CFTC. Paragraph (a) of
Sec.  37.1306 provides that, each fiscal quarter, or at any time upon
CFTC request, a SEF shall report the amount of financial resources
necessary to meet the requirements of Sec. Sec.  37.1301 and 37.1303
and the market value of each financial resource available, and provide
the CFTC with financial statements, including the balance sheet, income
statement, and statement of cash flows of the SEF, prepared in
accordance with U.S. generally acceptable accounting principles
(``GAAP''). Paragraph (a) further provides that the financial
statements of a SEF that is not domiciled in the United States and is
not otherwise required to prepare financial statements in accordance
with U.S. GAAP may instead prepare its financial statements in
accordance with either International Financial Reporting Standards
issued by the International Accounting Standards Board or a comparable
international standard as the CFTC may otherwise accept in its
discretion. Paragraph (b) provides that the calculations required under
paragraph (a) shall be made as of the last business day of the SEF's
fiscal quarter. Paragraph (c) requires the SEF to provide the CFTC with
sufficient documentation to explain its methodology for computing its
financial requirements under Sec. Sec.  37.1301 and 37.1303. Further,
paragraph (c) of Sec.  37.1306 requires that the documentation must
allow the CFTC to reliably determine, without additional requests for
information, that the SEF has made reasonable calculations pursuant to
Sec.  37.1304. Paragraph (d) of Sec.  37.1306 provides that these
reports and supporting documentation shall be filed within 40 calendar
days of the end of the SEF's first three fiscal quarters, and within 90
calendar days of the end of the SEF's fourth fiscal quarter, or at such
later time as the CFTC may permit. Paragraph (e) requires a SEF to
provide notice to the CFTC no later than 48 hours after it knows or
reasonably should know that it no longer meets its

obligations under Sec. Sec.  37.1301 and 37.1303.
    Proposed Rule 829 would implement SEA Core Principle 12 and is
based closely on subpart N of part 37.\203\ Because this Core Principle
relates to the business operations of the trading venue, very few
modifications are necessary to adapt the CFTC rule to apply to SBSEFs.
Therefore, proposed Rule 829 is closely modelled on the rules in
subpart N.
---------------------------------------------------------------------------

    \203\ However, paragraph (a)(2)(i) of proposed Rule 829 would
include the additional language in SEA Core Principle 12 that is not
present in CEA Core Principle 13. As noted above, this language
relates to an SBSEF meeting financial obligations to members and
participants notwithstanding a default by the member or participant
creating the largest financial exposure for the SBSEF in extreme but
plausible market conditions.
---------------------------------------------------------------------------

    However, one slight difference in the rule text stems from the
Commission's global approach to adapting the CFTC's guidance and
acceptable practices from appendix B to part 37 into formal rules,
where appropriate. Although the Commission considered proposing a
separate rule that adapts the guidance in appendix B pertaining to CEA
Core Principle 13, the Commission is proposing instead to weave the
concepts and some of the specific language from the CFTC guidance
relating to financial resources into paragraph (e) of proposed Rule
829, as the guidance relates only to that portion of the proposed rule.
Proposed Rule 829(e) begins by incorporating the provisions of Sec.
37.1304 regarding computation of costs to meet the financial resources
requirement. Proposed Rule 829(e) then appends language based on the
CFTC guidance concerning the following topics, all of which relate to
computation of costs: (i) Reasonableness of calculating projected
operating costs and what may be excluded from such calculation; (ii)
proration of expenses; and (iii) allocation of expenses among
affiliates.
    Another non-substantive difference between proposed Rule 829 and
subpart N of part 37 is the requirement in proposed Rule 829(g)(6) for
an SBSEF to submit reports and documentation to the Commission using
the EDGAR system as an Interactive Data File, in accordance with Rule
405 of Regulation S-T. The Commission is proposing this requirement
here and in other locations to implement the Inline XBRL and EDGAR
electronic filing requirements for various documents that would have to
be provided to the Commission under proposed Regulation SE.
    The Commission preliminarily believes that the CFTC has implemented
its equivalent Core Principle in an appropriate way, and that closely
harmonizing with the CFTC rule would provide comparable regulatory
benefits while imposing only marginal additional costs. Given that most
if not all entities that will seek to register with the SEC as SBSEFs
are already registered with the CFTC as SEFs, these entities already
have in place the processes and controls to designed to comply with
subpart N. Furthermore, the Commission recognizes that the swap
business of a dually registered SEF/SBSEF is likely to be much larger
than its SBS business. Therefore, the greatest risk to a dually
registered entity is likely to arise from the swap business rather than
the SBS business, so it would be logical for the SEC to defer to the
CFTC's approach for ensuring that SEFs have adequate financial
resources. Different or additive requirements imposed by the SEC could
increase costs for SEF/SBSEFs while generating benefits that are
marginal at best. The Commission does not observe any differences in
the SBS market relative to the swap market that warrant imposing
different or additive financial resource requirements on SBSEFs.
    The Commission seeks comment on the following:
    151. Do you agree in general with the Commission's approach to
implementing SEA Core Principle 12? Why or why not?
    152. In particular, do you agree with how the Commission is
proposing to adapt the language of subpart N of part 37 into proposed
Rule 829? If not, how would you revise that language?
    153. How does the anticipated size of the SBS trading business on
dually registered SEF/SBSEFs relative to the size of swap trading
business affect your view of the financial resource requirements that
the SEC should impose on dually registered entities? Do you agree that
there would be only marginal additional costs imposed on dually
registered entities to provide the same financial information at the
same times to both the SEC and CFTC (pursuant to proposed Rule 829 and
subpart N, respectively)? Why or why not?
    154. Are there provisions of subpart N that the SEC should not
incorporate, even if you believe that the SEC should harmonize with the
majority of subpart N? In other words, are there areas where omitting a
subpart N provision would reduce burdens on SBSEFs and/or their members
without lessening any regulatory benefits? If so, please explain, with
particular regard to the economic impacts and/or PRA burdens.
    155. Should the Commission adopt different or additive financial
resource requirements for SBSEFs, even if there are no analogous
provisions in subpart N? If so, please explain, with particular regards
to the economic impacts and/or PRA burdens. For example, do you believe
that the SEC-specific provision would impose additional costs or
burdens on SBSEFs and/or their members that are nevertheless
appropriate in view of new and additional benefits? Or do you believe
that the SEC-specific provision would be appropriate because it would
relieve costs or burdens that are imposed on SEFs by subpart N that, in
your view, are unnecessary or inappropriate for SBSEFs?
    156. Do you agree with how the Commission is proposing to adapt the
CFTC guidance pertaining to its equivalent Core Principle by converting
it into formal rule text? Why or why not? Would adapting the CFTC
guidance into the Commission's rules necessitate any changes in how
financial resources are calculated?

M. Rule 830--Core Principle 13--System Safeguards

    Paragraph (A) of SEA Core Principle 13 \204\ provides that an SBSEF
must establish and maintain a program of risk analysis and oversight to
identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that are reliable and secure and that have adequate scalable
capacity. Paragraph (B) requires that an SBSEF also must establish and
maintain emergency procedures, backup facilities, and a plan for
disaster recovery that allow for the timely recovery and resumption of
operations; and the fulfillment of the responsibilities and obligations
of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires
an SBSEF to periodically conduct tests to verify that the backup
resources of the SBSEF are sufficient to ensure continued order
processing and trade matching; price reporting; market surveillance;
and maintenance of a comprehensive and accurate audit trail. CEA Core
Principle 14 \205\ is substantively identical to SEA Core Principle 13.
---------------------------------------------------------------------------

    \204\ Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c-4(d)(13).
    \205\ Section 5h(f)(14) of the CEA, 7 U.S.C. 7b-3(f)(14).
---------------------------------------------------------------------------

    Subpart O of part 37 is entitled ``System Safeguards'' and
implements CEA Core Principle 14. Section 37.1400 of subpart O repeats
the statutory text of the Core Principle. Sec.  37.1401 sets forth
detailed requirements for a SEF to comply with the Core Principle.

Paragraph (a) of Sec.  37.1401 requires a SEF's program of risk
analysis and oversight to address enterprise risk management and
governance, information security, business continuity-disaster recovery
planning and resources, capacity and performance planning, systems
operations, systems development and quality assurance, and physical
security and operational controls. Paragraph (b) provides that, in
addressing the categories of risk analysis and oversight required under
paragraph (a), a SEF shall follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems. Paragraph (c) requires a
SEF to maintain a business continuity-disaster recovery plan and
business continuity-disaster recovery resources, emergency procedures,
and backup facilities that satisfy several enumerated criteria.
Paragraph (d) explains how a SEF that is not determined by the CFTC to
be a critical financial market may satisfy its requirement to be able
to resume its operations and resume its ongoing fulfillment of its
responsibilities and obligations during the next business day following
any disruption of its operations.
    Paragraph (e) of Sec.  37.1401 requires a SEF to notify the CFTC
promptly of all electronic trading halts and material system
malfunctions; cyber security incidents or targeted threats that
actually or potentially jeopardize automated system operation,
reliability, security, or capacity; and activations of SEF's business
continuity-disaster recovery plan. Paragraph (f) requires the SEF to
provide CFTC staff timely advance notice of all material planned
changes to automated systems that may impact the reliability, security,
or adequate scalable capacity of such systems; and planned changes to
the SEF's program of risk analysis and oversight. Paragraph (g) sets
forth recordkeeping requirements related to the SEF's system
safeguards. Paragraph (h) requires the SEF to conduct testing and
review of its automated systems and business continuity-disaster
recovery capabilities and provides several definitions for terms used
in paragraph (h). Paragraph (h) also requires the SEF to conduct
``vulnerability testing,'' ``external penetration testing,'' ``internal
penetration testing,'' ``controls testing,'' ``security incident
response plan testing,'' and ``enterprise technology risk assessment''
subject to various enumerated criteria.
    Paragraph (i) of Sec.  37.1401 provides that the SEF, to the extent
practicable, shall coordinate its business continuity-disaster recovery
plan with those of the market participants that it depends upon to
provide liquidity, in a manner adequate to enable effective resumption
of activity in its markets following a disruption causing activation of
the SEF's business continuity-disaster recovery plan. Paragraph (i)
also requires the SEF to initiate and coordinate periodic, synchronized
testing of its business continuity-disaster recovery plan with those of
the market participants it depends upon to provide liquidity; and to
ensure that its business continuity-disaster recovery plan takes into
account the business continuity-disaster recovery plans of its
telecommunications, power, water, and other essential service
providers.
    Paragraph (j) of Sec.  37.1401 provides that part 40 of the CFTC's
rules shall govern the obligations of those registered entities that
the CFTC has determined to be critical financial markets, with respect
to maintenance and geographic dispersal of disaster recovery resources
sufficient to meet a same-day recovery time objective in the event of a
wide-scale disruption. Paragraph (k) sets forth criteria for the scope
for all system safeguard testing and assessment required under the
rule. Paragraph (l) requires that both the senior management and the
board of directors of the SEF shall receive and review reports setting
forth the results of the testing and assessment required by the rule.
Paragraph (m) requires the SEF to identify and document the
vulnerabilities and deficiencies in its systems revealed by testing and
assessment, conduct and document an appropriate analysis of the risks
presented by such vulnerabilities and deficiencies, and remediate in a
timely manner given the nature and magnitude of the associated risk.
    Proposed Rule 830 is closely modelled on subpart O of part 37 of
the CFTC's rules, except in one aspect. Subpart O includes language
relating to ``critical financial markets,'' \206\ which is a
designation applied by the CFTC to certain of its registrants that
would subject them to more stringent requirements, although the CFTC
has not yet adopted any such requirements.\207\ A similar concept in
the SEC's rules is ``SCI entity.'' \208\ When adopting Regulation SCI,
the Commission considered whether it should apply Regulation SCI to
SBSEFs, among other entities, and determined not to do so.\209\ Because
SBSEFs are not SCI entities and the corresponding CFTC rule has not
imposed additional requirements on critical financial markets, the
Commission preliminarily believes that it is not necessary or
appropriate to adapt into Rule 830 the language of subpart O applicable
to critical financial markets.\210\
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    \206\ See Sec.  37.1401(c) (providing that SEFs determined by
the CFTC to be critical financial markets are subject to more
stringent requirements); Sec.  37.1401(d); Sec.  37.1401(j)
(providing that part 40 governs the obligations of registered
entities that the CFTC has determined to be critical financial
markets, with respect to maintenance and geographic dispersal of
disaster recovery resources sufficient to meet a same-day recovery
time objective in the event of a wide-scale disruption).
    \207\ The provisions in subpart O relating to ``critical
financial markets'' reference Sec.  40.9 of the CFTC's rules, which
is marked as ``Reserved.''
    \208\ See Rule 1000 of Regulation SCI (defining ``SCI entity'').
In November 2014, the Commission adopted Regulation Systems
Compliance and Integrity (``SCI'') to strengthen the technology
infrastructure of the U.S. securities markets, reduce the occurrence
of systems issues in those markets, improve their resiliency when
technological issues arise, and establish an updated and formalized
regulatory framework, thereby helping to ensure more effective
Commission oversight of such systems. See Regulation Systems
Compliance and Integrity, SEA Release No. 73639 (November 19, 2014),
79 FR 72252 (December 5, 2014).
    \209\ See id., 79 FR at 72363-64 (reviewing comments received
regarding the potential application of Regulation SCI to SBSEFs,
among others).
    \210\ The Commission also notes that, while subpart O frequently
uses the term ``market participant,'' proposed Rule 830 substitutes
the term ``member'' in these places, since the rule pertains to
market participants who are engaging as members of the SEF/SBSEF.
See supra note 53.
---------------------------------------------------------------------------

    The Commission preliminarily believes that subpart O is reasonably
designed to promote SEF operational capability, and that the most
appropriate way to implement SEA Core Principle 13 would be to closely
harmonize with the CFTC's rules that implement the corresponding Core
Principle. As with SEA Core Principle 12 (Financial resources), the
Commission recognizes that the swap business of a dually registered
SEF/SBSEF is likely to be much larger than its SBS business. Therefore,
the greatest operational risk to a dually registered entity is likely
to arise from the swap business rather than the SBS business, so it
would be logical for the SEC to defer to the CFTC's approach for
ensuring that SEFs have adequate system safeguards and business
continuity protocols. Different or additive requirements imposed by the
SEC could increase costs for SEF/SBSEFs while generating benefits that
are marginal at best. The Commission does not observe any differences
in the SBS market relative to the swap market that warrant imposing
different or additive operational capability requirements on SBSEFs.

    The Commission seeks comment on the following:
    157. Do you agree in general with how the Commission is proposing
to implement SEA Core Principle 13 in proposed Rule 830? Why or why
not?
    158. In particular, do you believe that close harmonization with
subpart O of the CFTC's rules is appropriate? If not, is there another
framework for system safeguards that would be more appropriate for
SBSEFs? What would be the economic impact of the SEC adopting different
or additive system safeguard requirements in the case of dually
registered SEF/SBSEFs?
    159. As noted above,\211\ the Commission previously determined not
to subject SBSEFs to Regulation SCI. Do you see any changes in the SBS
market that should cause the Commission to revisit that decision?
---------------------------------------------------------------------------

    \211\ See supra note 209 and accompanying text.
---------------------------------------------------------------------------

    160. Do you believe it is appropriate to omit from Rule 830 the
provisions of subpart O relating to critical financial markets? Why or
why not?
    161. Are there provisions of subpart O that the SEC should not
incorporate, even if the SEC opts to harmonize with most of subpart O?
In other words, are there areas where omitting a subpart O provision
would reduce burdens on SBSEFs and/or their members without lessening
any regulatory benefits? If so, please explain, with particular regard
to the economic impacts and/or PRA burdens.
    162. Should the Commission adopt different or additive system
safeguard requirements for SBSEFs, even if there is no analog to such
provisions in subpart O? If so, please explain, with particular regards
to the economic impacts and/or PRA burdens. For example, do you believe
that the SEC-specific provision would impose additional costs or
burdens on SBSEFs and/or their market participants that are
nevertheless appropriate in view of new and additional benefits? Or do
you believe that the SEC-specific provision would be appropriate
because it would relieve costs or burdens that are imposed on SEFs by
subpart O that, in your view, are unnecessary or inappropriate for
SBSEFs?

N. Rule 831--Core Principle 14--Designation of Chief Compliance Officer

    SEA Core Principle 14 \212\ requires each registered SBSEF to
designate a chief compliance officer (``CCO''), and requires the CCO to
review the SBSEF's compliance with the Core Principles, resolve
conflicts of interest, be responsible for establishing and
administering policies and procedures required under the Core
Principles, establish procedures for the remediation of noncompliance,
prepare and sign an annual report that describes the SBSEF's
compliance, certify that the report is accurate and complete, and
submit the report to the Commission. CEA Core Principle 15 for SEFs
\213\ is substantively identical.
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    \212\ Section 3D(d)(14) of the SEA, 15 U.S.C. 78c-4(d)(14).
    \213\ Section 5h(f)(15) of the CEA, 7 U.S.C. 7b-3(f)(15).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 15 in subpart P of part 37.
Section 37.1500 of subpart P repeats the statutory text of CEA Core
Principle 15. Section 37.1501(a) sets forth definitions for the terms
``board of directors'' and ``senior officer.'' Section 37.1501(b)(1)
provides that the position of CCO shall carry with it the authority and
resources to develop, in consultation with the board of directors or
senior officer, and enforce the SEF's policies and procedures, and that
the CCO shall have supervisory authority over all staff acting at the
direction of the CCO. Section 37.1501(b)(2) through (4) include
provisions relating to the qualifications of the CCO, appointment and
removal of the CCO, and compensation of the CCO. Section 37.1501(b)(5)
through (6) state that the CCO must meet with the SEF's board of
directors or senior officer at least annually, and the CCO must provide
any information regarding the SEF's self-regulatory program as
requested by the board of directors or the senior officer.
    Section 37.1501(c) sets out the duties of the CCO, including
overseeing and reviewing the SEF's compliance with the Core Principles;
taking reasonable steps, in consultation with the board of directors or
senior officer, to resolve any material conflicts of interest;
establishing and administering written policies and procedures
reasonably designed to prevent violations of the CEA and the rules of
the CFTC; taking reasonable steps to ensure compliance with the CEA and
CFTC rules; establishing procedures reasonably designed to handle,
respond, remediate, retest, and resolve noncompliance issues identified
by the CCO; establishing and administering a compliance manual and a
written code of ethics for the SEF; supervising the self-regulatory
program of the SEF with respect to trade practice surveillance, market
surveillance, real-time market monitoring, compliance with audit trail
requirements, enforcement and disciplinary proceedings, audits,
examinations, and other regulatory responsibilities; and supervising
the effectiveness and sufficiency of any regulatory services provided
to the SEF by a regulatory service provider.
    Section 37.1501(d) requires the CCO to prepare and sign an annual
compliance report that covers the prior fiscal year. The report must
contain, at a minimum: A description and self-assessment of the
effectiveness of the SEF's written policies and procedures, code of
ethics, and conflict of interest policies; any material changes made to
compliance policies and procedures during the coverage period for the
report and any areas of improvement or recommended changes to the
compliance program; a description of the financial, managerial, and
operational resources set aside for compliance with the CEA and
applicable CFTC regulations; any material non-compliance matters
identified and an explanation of the corresponding action taken to
resolve them; and CCO certification that the annual compliance report
is accurate and complete.
    Section 37.1501(e) requires the CCO to provide the annual
compliance report to the SEF's board of directors or a senior officer
for review before submitting it to the CFTC, and the board or the
senior office may not require the CCO to make any changes to the
report. Section 37.1501(e) further provides that the annual compliance
report shall be submitted electronically to the CFTC not later than 90
calendar days after the end of the SEF's fiscal year and concurrently
with the fourth-quarter financial report pursuant to Sec.  37.1306.
Section 37.1501(e) also addresses amendments to and requests for
extensions for the annual compliance report.
    Section 37.1501(f) requires the SEF to maintain all records
demonstrating compliance with the duties of the CCO and the preparation
and submission of annual compliance report, consistent with Sec. Sec.
37.1000 and 37.1001. Finally, appendix B to part 37 includes
``acceptable practices'' regarding the qualifications of a CCO and the
SEF's discretion in choosing one, as well as the need to be vigilant
regarding conflicts of interest when appointing a CCO.
    Proposed Rule 831 would implement SEA Core Principle 14 and is
closely modelled on subpart P of part 37, with two minor substantive
exceptions.\214\

The first relates to disqualification of the CCO. Section
37.1501(b)(2)(ii) states: ``No individual disqualified from
registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve
as a chief compliance officer.'' The Commission preliminarily believes
that SBSEFs, like SEFs, should be subject to a rule setting out
criteria for disqualification of the CCO. However, the SEC cannot
cross-reference provisions of the CEA, since the CEA does not apply to
SBSEFs. The Commission consulted Sections 8a(2) and 8a(3) of the
CEA,\215\ but believes they are not easily adaptable into a rule
applicable to SBSEFs and their CCOs. The Commission is proposing
instead, in Rule 831(c)(2), that no individual that would be
disqualified from serving on an SBSEF's governing board \216\ or
committees pursuant to the criteria set forth in Sec.  242.819(i) may
serve as the CCO. As noted above,\217\ the disqualification criteria in
proposed Rule 819(i) are adapted from Sec.  1.63 of the CFTC's rules.
Second, the Commission has adapted the acceptable practices pertaining
to CEA Core Principle 15 into paragraph (c) of proposed Rule 831.\218\
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    \214\ In addition, the requirement in proposed Rule 831 that the
CCO's annual compliance report be submitted electronically to the
Commission, based on Sec.  37.1501(e)(2), includes an added clause
to provide that the submission must be made using the EDGAR system
and must be provided as an Interactive Data File in accordance with
Rule 405 of Regulation S-T, in conformance with other rules in
Regulation SE requiring electronic submissions. See proposed Rule
831(j)(2); supra note 55.
    \215\ 7 U.S.C. 12a(2) and 12a(3).
    \216\ The Commission notes that subpart P uses the term ``board
of directors,'' while the Commission is proposing to use the term
``governing board'' instead throughout proposed Regulation SE. See
supra note 29.
    \217\ See supra section VIII(B)(2)(b).
    \218\ Proposed Rule 831(c) provides that, in determining whether
the background and skills of a potential CCO are appropriate for
fulfilling the responsibilities of the role of the CCO, an SBSEF has
the discretion to base its determination on the totality of the
qualifications of the potential CCO, including, but not limited to,
compliance experience, related career experience, training,
potential conflicts of interest, and any other relevant factors.
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    The Commission preliminarily believes that the CFTC has implemented
CEA Core Principle 14 for SEFs in an appropriate way, and that closely
harmonizing with subpart P of part 37 would yield comparable regulatory
benefits while imposing only marginal additional costs. The Commission
recognizes that the swap business of a dually registered SEF/SBSEF is
likely to be much larger than its SBS business. Therefore, the greatest
compliance risks to a dually registered entity are likely to arise from
the swap business rather than the SBS business, so it would be logical
for the SEC to harmonize with the CFTC's rules regarding the CCO. There
are strong economic incentives for a dually registered entity to
appoint the same individual to serve as the CCO for both the swap and
SBS businesses, and for the CCO to carry out their functions under a
similar set of rules. Different or additive requirements imposed by the
SEC could increase costs for SEF/SBSEFs while generating benefits that
are marginal at best. The Commission does not observe any differences
in the SBS market relative to the swap market that warrant imposing
different or additive CCO requirements on SBSEFs relating to the CCO.
    The Commission seeks comment on the following:
    163. Do you agree in general with how the Commission is proposing
to implement SEA Core Principle 14? Why or why not?
    164. In particular, do you agree that close harmonization with
subpart P is appropriate? Are there provisions of subpart P that the
SEC should not incorporate, even if the SEC opts to harmonize with most
of subpart P? In other words, are there areas where omitting a subpart
P provision would reduce burdens on SBSEFs and/or their members without
lessening any regulatory benefits? If so, please explain, with
particular regard to the economic impacts and/or PRA burdens.
    165. Should the Commission adopt different or additive CCO
requirements for SBSEFs, even if there is no analog to such provisions
in subpart P? If so, please explain, with particular regards to the
economic impacts and/or PRA burdens. For example, do you believe that
the SEC-specific provision would impose additional costs or burdens on
SBSEFs and/or their members that are nevertheless appropriate in view
of new and additional benefits? Or do you believe that the SEC-specific
provision would be appropriate because it would relieve costs or
burdens that are imposed on SEFs by subpart P that, in your view, are
unnecessary or inappropriate for SBSEFs?
    166. Do you agree with how the Commission is proposing to adapt the
acceptable practices from appendix B relating to CEA Core Principle 15
into proposed Rule 831(c)? Why or why not?
    167. Do you agree with proposed Rule 831(c)(2) using a cross-
reference to proposed Rule 819(i) to incorporate disqualification
criteria for the CCO? Why or why not? If not, what alternate standard
would you suggest for the disqualification criteria, and why?

IX. Cross-Border Rules

A. Rule 832--Cross-Border Mandatory Trade Execution

    As noted above,\219\ section 3C(h) of the SEA provides that an SBS
that is subject to mandatory clearing can become subject to the trade
execution requirement.\220\ The trade execution requirement, like other
provisions of the SEA, is subject to jurisdictional constraints which
are particularly germane in light of the global nature of the SBS
market, where there is frequent interaction among counterparties
domiciled in different jurisdictions. Proposed Rule 832 of Regulation
SE is designed to address when the SEA's trade execution requirement
applies to a cross-border SBS transaction.
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    \219\ See supra note 106 and accompanying text.
    \220\ Even if an SBS is subject to mandatory clearing, it will
not be subject to the trade execution requirement if no exchange or
SBSEF makes the SBS available to trade or the SBS is subject to an
exception from the clearing requirement under section 3C(g) of the
SEA. In addition, as discussed above in section VII(F)(2), proposed
Rule 816(e) would provide certain additional exemptions from the
trade execution requirement.
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    Paragraph (a) of proposed Rule 832 would provide that the trade
execution requirement set forth in section 3C(h) of the SEA shall not
apply to an SBS unless at least one counterparty to the SBS is a
``covered person'' as defined in paragraph (b). Paragraph (b) of
proposed Rule 832 would define the term ``covered person,'' with
respect to a particular security-based swap, as any person that is a
U.S. person; a non-U.S. person whose performance under an SBS is
guaranteed by a U.S. person; or a non-U.S. person who, in connection
with its SBS dealing activity, uses U.S. personnel located in a U.S.
branch or office, or personnel of an agent of such non-U.S. person
located in a U.S. branch or office, to arrange, negotiate, or execute a
transaction.\221\
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    \221\ The proposed term ``covered person'' is designed to apply
on a transaction-by-transaction basis. In other words, if a non-U.S.
person were guaranteed by a U.S. person on a specific SBS or
utilized U.S. personnel in connection with its dealing activities to
arrange, negotiate, or execute a specific SBS, that person would be
a covered person with respect to that SBS, but not necessarily with
respect to other SBS. Because domicile is generally static, a person
who is a U.S. person would be a covered person with respect to all
of its SBS transactions.
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    Thus, a particular SBS would fall within the jurisdictional reach
of section 3C(h) of the SEA if at least one side had a connection to
the United States of a type specified in paragraph (b)(1), (2), or (3)
of proposed Rule 832. The trade execution requirement would not apply
to an SBS transaction--even if the SBS were subject to mandatory
clearing and MAT--if neither side had a connection to the United States
of a type specified in proposed Rule 832.
    Proposed Rule 832 is consistent with the Commission's territorial
approach to applying Title VII requirements in other contexts. The
Commission previously has stated that Title VII requirements

``apply to all SBS transactions that exist in whole or in part within
the United States, unless an exception applies.'' \222\ Relevant
activity need not occur wholly within the United States or solely
between U.S. persons in order for Title VII requirements to apply.\223\
For example, under Rule 908(a)(1) of Regulation SBSR,\224\ the Title
VII requirements for regulatory reporting and public dissemination
apply to an SBS transaction even if only one counterparty to the
transaction is a U.S. person. As the Commission previously stated,
``any security-based swap executed by a U.S. person exists at least in
part within the United States.'' \225\ This is true even if a
transaction is effected through the foreign branch of a U.S. person,
because ``a foreign branch has no separate existence from the U.S.
person itself.'' \226\
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    \222\ Regulation SBSR Adopting Release I, 80 FR at 14652
(discussing cross-border application of Title VII requirements for
regulatory reporting and public dissemination of SBS transactions).
    \223\ See SEA Release No. 72472 (June 25, 2014), 79 FR 47278,
47286 (``Cross-Border Adopting Release'') (stating that applying
Title VII only to persons incorporated, organized, or established
within the United States or only to SBS activity occurring entirely
within the United States would inappropriately exclude from
regulation a majority of SBS activity that involves U.S. persons or
otherwise involves conduct within the United States, even though
such activity raises the types of concerns that the Commission
believed Congress intended to address through Title VII).
    \224\ 17 CFR 242.908(a)(1).
    \225\ Regulation SBSR Adopting Release I, 80 FR at 14652.
    \226\ Id. See also Cross-Border Adopting Release, 79 FR at 47289
(discussing the Commission's rationale for viewing a foreign branch
of an SBS dealer as an integral part of the SBS dealer).
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    The Commission also has found it consistent with the territorial
approach to apply Title VII requirements where one counterparty of an
SBS transaction is a non-U.S. person whose performance under an SBS is
guaranteed by a U.S. person.\227\ As the Commission stated when
applying this criterion to Title VII reporting: ``A security-based swap
with a U.S.-person indirect counterparty [i.e., guarantor] is
economically equivalent to a security-based swap with a U.S.-person
direct counterparty, and both kinds of security-based swaps exist, at
least in part, within the United States . . . [T]he presence of a U.S.
guarantor facilitates the activity of the non-U.S. person who is
guaranteed and, as a result, the security-based swap activity of the
non-U.S. person cannot reasonably be isolated from the U.S. person's
activity in providing the guarantee.'' \228\
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    \227\ See, e.g., Regulation SBSR Adopting Release I, 80 FR at
14653. See also Cross-Border Adopting Release, 79 FR at 47290 (``the
guarantee provided by a U.S. person poses risk to U.S. persons and
potentially to the U.S. financial system, and both the non-U.S.
person whose dealing activity is guaranteed and its counterparty
rely on the creditworthiness of the U.S. guarantor when entering
into a security-based swap transaction and for the duration of the
security-based swap. The economic reality of this transaction, even
though entered into by a non-U.S. person, is substantially
identical, in relevant respects, to a transaction entered into
directly by a U.S. person. Accordingly, in our view, it is
consistent with both the statutory text and with the purposes of the
statute to identify such transactions as occurring within the United
States for purposes of Title VII'').
    \228\ Regulation SBSR Adopting Release I, 80 FR at 14653. In
addition, section 30(c) of the SEA, 15 U.S.C. 78dd(c), authorizes
the Commission to apply Title VII requirements to persons
transacting a business ``without the jurisdiction of the United
States'' if they contravene rules that the Commission has prescribed
as ``necessary or appropriate to prevent the evasion of any
provision'' of Title VII. For the reasons described above, the
Commission does not believe that applying the trade execution
requirement to non-U.S. persons whose performance under an SBS is
guaranteed by a U.S. person would cause the trade execution
requirement to apply to persons that are ``transact[ing] a business
in security-based swaps without the jurisdiction of the United
States.'' The Commission nonetheless preliminarily believes that
applying the trade execution requirement to such persons is also
necessary or appropriate as a prophylactic measure to help prevent
the evasion of the provisions of the SEA that were added by the
Dodd-Frank Act, and thus help prevent the relevant purposes of the
Dodd-Frank Act from being undermined. See Cross-Border Adopting
Release, 79 FR at 47291-92 (interpreting the anti-evasion provisions
of SEA section 30(c)). Without this rule, U.S. persons could have an
incentive to evade the trade execution requirement by engaging in
SBS via a guaranteed affiliate, while the economic reality of
transactions arising from that activity--including the risks these
transactions introduce to the U.S. market--would be no different in
most respects than transactions entered into directly by U.S.
persons.
---------------------------------------------------------------------------

    Finally, the Commission also has found it consistent with the
territorial approach to apply Title VII requirements where one
counterparty is a non-U.S.-person who, in connection with its SBS
dealing activity, uses U.S. personnel located in a U.S. branch or
office, or personnel of an agent of such non-U.S. person located in a
U.S. branch or office, to arrange, negotiate, or execute (``ANE'') the
transaction. As the Commission previously stated when applying the ANE
criterion to Title VII requirements for regulatory reporting and public
dissemination: ``when a foreign dealing entity uses U.S. personnel to
arrange, negotiate, or execute a transaction in a dealing capacity,
that transaction occurs at least in part within the United States and
is relevant to the U.S. security-based swap market.'' \229\ Declining
to apply Title VII requirements to SBS transactions of foreign dealing
entities that use U.S. personnel to engage in ANE transactions would
allow such entities ``to exit the Title VII regulatory regime without
exiting the U.S. market.'' \230\
---------------------------------------------------------------------------

    \229\ Regulation SBSR Adopting Release II, 81 FR at 53591. See
also SEA Release No. 87780 (December 18, 2019), 85 FR 6270, 6271-76
(February 4, 2020) (discussing other Title VII rules that
incorporate ANE criteria and providing guidance on the meaning of
the terms ``arranged'' and ``negotiated'' for purposes of these
rules).
    \230\ Regulation SBSR Adopting Release II, 81 FR at 53591. The
Commission does not believe that applying the trade execution
requirement to persons that satisfy the ANE criterion would cause
the trade execution requirement to apply to persons that are
``transact[ing] a business in security-based swaps without the
jurisdiction of the United States,'' within the meaning of section
30(c) of the SEA. See supra note 228. The Commission also believes
that applying the trade execution requirement to such persons is
necessary or appropriate as a prophylactic measure to help prevent
the evasion of the provisions of the SEA that were added by the
Dodd-Frank Act, and thus help prevent the relevant purposes of the
Dodd-Frank Act from being undermined. Without this rule, non-U.S.
persons could retain the benefits of operating in the United States
while avoiding compliance with the trade execution requirement.
---------------------------------------------------------------------------

    The Commission recognizes the difficulties that can arise when a
binary requirement, such as the trade execution requirement, applies in
two separate jurisdictions. In other words, if the counterparties to a
cross-border SBS are subject to a trade execution requirement under the
rules of each of their jurisdictions, the counterparties could violate
the rules of one jurisdiction by executing the SBS in one jurisdiction
but not the other, or in a manner that is consistent with the rules of
one jurisdiction but potentially not of the other jurisdiction. The
following section, regarding proposed Rule 833, will discuss conditions
for allowing an SBS to trade on foreign venues not registered with the
Commission, notwithstanding the SBS being subject to the SEA's trade
execution requirement and proposed Rule 832.
    The Commission seeks comment on the following:
    168. Of the SBS products that, in your view, are plausible
candidates for mandatory clearing and mandatory trade execution under
the SEA, how frequently do these products trade on foreign SBS trading
venues? Do you believe that the SBS market is sufficiently regionalized
such that cross-border application of the trade execution requirement
might not be a significant issue?
    169. Do you believe that the proposed text of Rule 832 is
sufficiently clear? If not, what aspects do you believe require
clarification?

B. Rule 833--Cross-Border Exemptions

1. Exemptions for Foreign SBS Trading Venues
    As noted above in discussing proposed Rule 832, the swap and SBS
markets are global in nature, and counterparties domiciled in different
jurisdictions frequently trade with each

other.\231\ Proposed Rule 832 is designed to answer the question of
when the trade execution requirement would apply to an individual
cross-border SBS transaction. There might be instances where covered
persons (as defined in proposed Rule 832) wish to be members of a
foreign trading venue for SBS (a ``foreign SBS trading venue''). Having
members who are covered persons, as defined in Rule 832, with respect
to SBS transacted on that venue, whether or not the SBS that they trade
are subject to the SEA's trade execution requirement, could require the
foreign SBS trading venue to register with the Commission as a national
securities exchange or SBSEF.\232\ In addition, because a foreign SBS
trading venue would be facilitating the execution of SBS between
persons, the foreign SBS trading venue also might be required to
register with the Commission as a broker.\233\
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    \231\ See supra section IX(A).
    \232\ See 15 U.S.C. 78c-4(a)(1) (stating that no person may
operate a facility for the trading or processing of SBS, unless the
facility is registered as an SBSEF or national securities exchange).
    \233\ A ``broker'' is generally defined as a person engaged in
the business of effecting transactions in securities for the account
of others. See section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4).
Section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), generally provides
that it shall be unlawful for any broker to make use of the mails or
any means or instrumentality of interstate commerce to effect any
transactions in, or to induce or attempt to induce the purchase or
sale of, any security unless such broker is registered in accordance
with SEA section 15(b). See also infra section XIII (discussing
proposed new Rule 15a-12).
---------------------------------------------------------------------------

    A foreign SBS trading venue with members who are covered persons,
as defined in Rule 832, with respect to SBS transacted on that venue
and that wishes to avoid having to register in one or more of these
capacities could request that the Commission grant it an exemption
under section 36(a)(1) of the SEA \234\ by submitting an application
pursuant to SEA Rule 0-12.\235\ Proposed Rule 833(a) would provide that
such an application, relating to the status of the foreign SBS trading
venue under the SEA, may state that the application also is submitted
pursuant to Rule 833(a).\236\ In such case, the Commission would
consider the submission as an application to exempt the foreign SBS
trading venue, with respect to its providing a market place for SBS,
from the definition of ``exchange'' in section 3(a)(1) of the SEA;
\237\ the definition of ``security-based swap execution facility'' in
section 3(a)(77) of the SEA; \238\ the definition of ``broker'' in
section 3(a)(4) of the SEA; \239\ and section 3D(a)(1) of the SEA.\240\
Because a foreign SBS trading venue that obtains an order under SEA
section 36 and proposed Rule 833(a) \241\ would be exempt from these
definitions and from section 3D(a)(1) of the SEA, the foreign SBS
trading venue would not be required to register with the Commission as
a national securities exchange, SBSEF, or broker, or comply with other
requirements applicable to such entities under the SEA or Commission
rules thereunder.\242\
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    \234\ 15 U.S.C. 78mm(a)(1).
    \235\ 17 CFR 240.0-12 (setting forth procedures for filing
applications for orders for exemptive relief under section 36 of the
SEA).
    \236\ An application for an exemption under proposed Rule 833(a)
could be submitted by a foreign SBS trading venue itself or another
interested party. For example, a financial regulatory authority in a
foreign jurisdiction could submit an application under proposed Rule
833(a) on behalf of one or more SBS trading venues licensed and
regulated in that jurisdiction.
    \237\ 15 U.S.C. 78c(a)(1).
    \238\ 15 U.S.C. 78c(a)(77).
    \239\ 15 U.S.C. 78c(a)(4).
    \240\ 15 U.S.C. 78c-4(a)(1) (stating that no person may operate
a facility for the trading or processing of SBS, unless the facility
is registered as an SBSEF or national securities exchange).
    \241\ For the remainder of this discussion, an exemption under
SEA section 36 and Rule 833(a) will be referred to simply as a
``Rule 833(a) exemption.'' In addition, the Commission will use the
term ``trading venue covered by an exemption order under Rule 833''
(or a similar formulation) rather than ``exempt exchange,'' ``exempt
SBSEF'' or ``exempt broker'' because, pursuant to an exemption
granted under proposed Rule 833(a), the covered trading venue would
no longer be an exchange, SBSEF, or broker (as defined by the SEA).
    \242\ However, as discussed further below, the Rule 833(a)
exemption is designed to address only activities related to
providing a market place for SBS. An entity that engages in other
SBS-related activity or any activity involving non-SBS securities
would need other authority under the SEA.
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    Under section 5h(g) of the CEA,\243\ the CFTC may exempt,
conditionally or unconditionally, a SEF from registration if the CFTC
finds that the SEF is subject to comparable, comprehensive supervision
and regulation on a consolidated basis by the SEC, a prudential
regulator, or the appropriate governmental authorities in the home
country of the facility. The CFTC has exercised this authority to grant
exemptions from SEF registration to swap trading venues in the European
Union, Japan, and Singapore.\244\
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    \243\ 7 U.S.C. 7b-3(g).
    \244\ See https://www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs (listing all exemption orders
issued by the CFTC under section 5h(g) of the CEA and subsequent
amendments to those orders).
---------------------------------------------------------------------------

    Proposed Rule 833(a) would set forth how interested parties could
make similar requests for exemptive relief with respect to foreign SBS
trading venues. For example, Rule 833(a) lists four separate provisions
of the SEA that the Commission believes generally would have to be
addressed in an exemption request relating to a foreign SBS trading
venue's status under the SEA. A foreign SBS trading venue that was
exempted solely from section 3D(a)(1) of the SEA, for example, might
still be subject to various requirements under the SEA by virtue of
falling within one or more of the above-noted definitions.\245\ The
exemptive framework set out in proposed Rule 833(a) is designed to
avoid this result.
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    \245\ Furthermore, section 5 of the SEA generally prohibits any
broker, dealer, or exchange from using U.S. jurisdictional means to
effect or report a transaction in a security on an exchange, unless
the exchange is registered as a national securities exchange or has
received a low-volume exemption from registration as a national
securities exchange. See 15 U.S.C. 78e. Absent an exemption from the
definition of ``exchange,'' this provision would apply to a foreign
SBS trading venue (and brokers and dealers who are members of that
trading venue) to the extent that it uses U.S. jurisdictional means.
---------------------------------------------------------------------------

    As with applications for other exemptive relief under section 36 of
the SEA, an applicant requesting a Rule 833(a) exemption would be
required to submit a complete application pursuant to SEA Rule 0-12. To
issue a Rule 833(a) exemption, like any other exemption issued pursuant
to section 36, the Commission would be required to find that the
exemption is necessary or appropriate in the public interest, and
consistent with the protection of investors.\246\ As contemplated by
section 36(a)(1), the Commission may subject a Rule 833(a) exemption to
any conditions that it deems appropriate.
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    \246\ See 15 U.S.C. 78mm(a)(1). Unlike the CFTC which has
exemptive authority under section 5h(g) of the CEA, the Commission
would not be required to find that the foreign trading venue is
subject to comparable, comprehensive supervision and regulation by a
U.S. or foreign regulator.
---------------------------------------------------------------------------

    Proposed Rule 833(a) is designed to address only activities
relating to providing a market place for SBS and would not extend to
trading in any other type of security or to other activities with
respect to SBS.\247\ A foreign SBS trading venue covered by an
exemption order under Rule 833(a) might offer trading in other types of
securities; however, the exemption order would permit covered persons
to trade only SBS on that trading venue without causing the trading
venue to have to register with the Commission as an exchange or SBSEF.
The exemption order would not address any registration obligations that
might arise from any other type of exchange activity by the foreign
trading venue.\248\
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    \247\ For example, although a foreign trading venue covered by a
Rule 833(a) exemption would be exempt from the definition of
``broker,'' that exemption would extend only to the operation of a
market place for SBS and would not permit the foreign trading venue
to otherwise act as a securities broker using U.S. jurisdictional
means.
    \248\ The Commission considered the alternative of requiring
that a Rule 833(a) exemption could apply to a foreign SBS trading
venue only if it traded SBS and no other type of security. The
Commission preliminarily believes, however, that this alternative is
unnecessary. Other jurisdictions might have market structures where
it is common to trade SBS and other types of securities on the same
trading venue. The Commission preliminarily believes that it would
be inequitable to disqualify such jurisdictions ex ante from
qualifying for a Rule 833(a) exemption. Nevertheless, a foreign SBS
trading venue that benefits from a Rule 833(a) exemption and that
offers trading in both SBS and non-SBS securities would have to take
appropriate steps to prevent covered persons from trading non-SBS
securities on that trading venue, because the Rule 833(a) exemption
would not cover the trading activity in non-SBS securities.

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    The Commission also emphasizes that a Rule 833(a) exemption would
not have any impact on section 6(l) of the SEA,\249\ which makes it
unlawful for any person to effect a transaction in an SBS with or for a
person that is not an ECP, unless such transaction is effected on a
national securities exchange registered pursuant to section 6(b) of the
SEA. Because a foreign SBS trading venue covered by a Rule 833(a)
exemption would not be registered as a national securities exchange,
the foreign SBS trading venue would not be permitted to effect SBS
transactions with or for a covered person that is not an ECP.
---------------------------------------------------------------------------

    \249\ 15 U.S.C. 78f(l).
---------------------------------------------------------------------------

2. Exemptions Relating to the Trade Execution Requirement
    Proposed Rule 833(b) would address requests for exemptive relief
relating to the application of the trade execution requirement under
section 3C(h) of the SEA to transactions executed on a foreign SBS
trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is
subject to the trade execution requirement must be executed on an
exchange, on an SBSEF registered under section 3D of the SEA, or on an
SBSEF that is exempt from registration under section 3D(e) of the
SEA.\250\ As a result, a covered person (as defined in proposed Rule
832) would not be permitted to execute an SBS that is subject to the
trade execution requirement on a foreign SBS trading venue unless that
venue has registered with the Commission as a national securities
exchange or an SBSEF, or has received an exemption under section 3D(e)
of the SEA.
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    \250\ Section 3D(e) of the SEA gives the Commission authority to
exempt an SBSEF from registration if it is subject to comparable,
comprehensive supervision and regulation by the CFTC. See 15 U.S.C.
78c-4(e).
---------------------------------------------------------------------------

    A covered person seeking to execute such an SBS on a foreign SBS
trading venue that does not fall within one of these categories could
request that the Commission grant an exemption from this requirement
under section 36(a)(1) of the SEA by submitting an application, as with
Rule 833(a), pursuant to SEA Rule 0-12. Proposed Rule 833(b)(1) would
provide that such an application, relating to the application of the
trade execution requirement to SBS executed on a foreign SBS trading
venue, may state that the application also is submitted pursuant to
proposed Rule 833(b).\251\ Proposed Rule 833(b) is intended to clarify
how interested parties could make requests for exemptive relief from
the trade execution requirement for SBS traded on one or more foreign
SBS trading venues.\252\
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    \251\ For the remainder of this discussion, an exemption under
SEA section 36 and Rule 833(b) will be referred to simply as a
``Rule 833(b) exemption.''
    \252\ An SBS can be subject to the SEA's trade execution
requirement only if it first becomes subject to the clearing
requirement in section 3C(h) of the SEA, 15 U.S.C. 78c-3(h). A Rule
833(b) exemption would not have any impact on this clearing
requirement, unless otherwise explicitly addressed in the exemption
order.
---------------------------------------------------------------------------

    To issue a Rule 833(b) exemption, like with any other section 36
exemption, the Commission would be required to find that the exemption
is necessary or appropriate in the public interest, and consistent with
the protection of investors. Furthermore, as contemplated by section
36(a)(1), the Commission may subject a Rule 833(b) exemption to any
conditions that it deems appropriate.
    Proposed Rule 833(b)(2) would provide that, in considering whether
to issue a Rule 833(b) exemption, the Commission may consider: (i) The
extent to which the SBS traded in the foreign jurisdiction covered by
the request are subject to a trade execution requirement comparable to
that in section 3C(h) of the SEA and the Commission's rules thereunder;
(ii) the extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the SEA, including section 3D of the SEA, and
the Commission's rules thereunder; (iii) whether the foreign trading
venue or venues where covered persons intend to trade SBS have received
an exemption order contemplated by proposed Rule 833(a); and (iv) any
other factor that the Commission believes is relevant for assessing
whether the exemption is in the public interest and consistent with the
protection of investors.
    The first factor listed above is intended to highlight the
Commission's preliminary belief that, to grant an exemption from the
SEA's trade execution requirement to allow SBS subject to that
requirement to trade in a foreign jurisdiction on one or more venues
not registered with the Commission, there should be a comparable trade
execution requirement in that jurisdiction. As part of any analysis
regarding the comparability of the trade execution requirement, the
Commission could consider not only whether the relevant SBS must be
executed on a trading venue in the foreign jurisdiction, but also the
permissible execution means for mandatory trade execution in the
foreign jurisdiction. In general, the Commission preliminarily believes
that a trade execution requirement in a foreign jurisdiction would not
be comparable to the trade execution requirement under the SEA if the
foreign jurisdiction's rules did not require SBS products subject to
that requirement to be executed through means comparable to Required
Transactions as described in proposed Rule 815 (e.g., if the foreign
jurisdiction allowed the use of single-dealer platforms to discharge
any mandatory trading execution requirement in that jurisdiction).
    Under the second factor listed above, the Commission could consider
whether the trading venues in the foreign jurisdiction are subject to
regulation and supervision comparable to that under the SEA, including
section 3D of the SEA and the Commission's rules thereunder. The
Commission preliminarily believes that the goals of Title VII regarding
trade execution \253\ could be subverted if it were to allow covered
persons to trade SBS subject to the SEA's trade execution requirement
on foreign trading venues that are not subject to rules designed to
foster comparable levels of pre- and post-trade transparency, access,
and liquidity.
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    \253\ See supra notes 94-96 and accompanying text.
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    The Commission also believes that it would be important to consider
whether the foreign trading venue or venues where covered persons
intend to trade SBS have received an exemption order contemplated by
proposed Rule 833(a). The fact that covered persons are executing SBS
on a foreign trading venue typically would require the venue to
register with the Commission as a national securities exchange or
SBSEF.\254\
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    \254\ A request for an exemption under proposed Rule 833(a)
could be submitted at the same time--and by the same person(s)--as a
request for an exemption under proposed Rule 833(b). For example, a
financial regulatory authority in a foreign jurisdiction could
combine a request for an exemption under proposed Rule 833(a) on
behalf of one or more SBS trading venues licensed and regulated in
that jurisdiction with a request for an exemption under proposed
Rule 833(b) that would allow covered persons to trade on those
venues SBS that would, absent an exemption, be subject to the SEA's
trade execution requirement.
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    Finally, the fourth factor listed above would emphasize that these

considerations are not exhaustive. The Commission may consider any
other factor that it believes is relevant for assessing whether the
Rule 833(b) exemption is in the public interest and consistent with the
protection of investors.
    The Commission seeks comment on the following:
    170. Do you believe in general that the Commission should establish
a rule for granting exemptions regarding a foreign SBS trading venue's
status under the SEA and mandatory trade execution of cross-border SBS
transactions? Why or why not?
    171. Do you disagree with any of the specific language proposed in
Rule 833? If so, how would you revise it?
    172. Do you expect that there are foreign SBS trading venues that
would seek an exemption under proposed Rule 833(a)? If so, how many?
    173. Do you agree with the factors that the Commission is proposing
to consider for a Rule 833(b) exemption? Are there are any that you
would eliminate or revise? If so, which ones and why? Are there any
criteria that you believe should be added? If so, what and why?
    174. Are there any conditions or limitations that should be
included in the rule? If so, what conditions or limitations would you
suggest, and why?

X. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and
Governance of SBSEFs and SBS Exchanges

    Section 765(a) of the Dodd-Frank Act \255\ provides in relevant
part that, to mitigate conflicts of interest, the Commission ``shall
adopt rules which may include numerical limits on the control of, or
the voting rights with respect to'' any clearing agency that clears
SBS, or on the control of any SBSEF or SBS exchange by certain bank
holding companies, certain nonbank financial companies, an affiliate of
such a bank holding company or nonbank financial company, an SBS
dealer, major SBS participant, or person associated with an SBS dealer
or major SBS participant. Section 765(b) states that the purpose of the
statutory provision is ``to improve the governance of, or to mitigate
systemic risk, promote competition, or mitigate conflicts of interest
in connection with'' an SBS dealer or major SBS participant's conduct
of business with, a clearing agency, SBSEF, or SBS exchange and in
which such SBS dealer or major SBS participant ``has a material debt or
equity investment.'' Finally, section 765(c) provides in relevant part
that, in adopting rules pursuant to section 765, the Commission shall
consider any conflicts of interest arising from the amount of equity
owned by a single investor, the ability to vote, cause the vote of, or
withhold votes entitled to be cast on any matters by the holders of the
ownership interest.
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    \255\ 15 U.S.C. 8343.
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    In 2010, the Commission proposed Regulation MC to implement section
765.\256\ In view of the significant amount of time that has elapsed
and the significant evolution in the swap and SBS markets since the
proposal of Regulation MC, the Commission hereby withdraws that
proposal. The Commission is now proposing Rule 834 of Regulation SE to
implement section 765 of the Dodd-Frank Act with respect to SBSEFs and
SBS exchanges.
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    \256\ See Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges With Respect to
Security-Based Swaps Under Regulation MC, SEA Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010).
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    The Commission, in accordance with section 765 of the Dodd-Frank
Act, has reviewed the potential for conflicts of interest arising from
an SBS dealer or major SBS participant having voting rights in an SBSEF
or SBS exchange in which it is a member. The Commission preliminarily
believes that, to satisfy the requirements of section 765, it is
appropriate to impose a cap on the size of the voting rights that an
individual member of an SBSEF or SBS exchange may own or direct.
Accordingly, paragraph (b) of proposed Rule 834 would bar an SBSEF or
SBS exchange from permitting any of its members, either alone or
together with any officer, principal, or employee of the member, to:
    (1) Own, directly or indirectly, 20% or more of any class of voting
securities or of other voting interest in the SBSEF or SBS exchange; or
    (2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20% of the voting power of any class of securities or of other
ownership interest in the SBSEF or SBS exchange.
    The 20% cap in proposed Rule 834(b) attempts to balance competing
policy interests. On the one hand, execution venues need capital,
expertise, and liquidity to establish and grow. Historically, market
participants who become members of an execution venue are a source of
all three components, and any person contributing capital to a new
venture might reasonably expect to have a voting interest commensurate
with the amount of capital contributed. The Commission considered
proposing a cap in voting interest below 20%, but preliminarily
believes that too low of a cap, even if imposed in the name of
eliminating conflicts of interest, could have the unintended effect of
retarding the development of execution venues for SBS altogether, if
market participants who become members have no (or substantially
limited) ability to vote their equity interest.
    On the other hand, allowing a member of an SBSEF or SBS exchange
too large of a voting interest could undermine the public policy
benefits of having transparent, fair, and regulated markets for the
trading of SBS. A member of an SBSEF or SBS exchange with a
sufficiently large voting interest could exercise undue influence over
the rules and policies applicable to members, the venue's access
criteria, decisions regarding access, and disciplinary matters, among
other things. In particular, members who are SBS dealers and conduct a
significant amount of business in the bilateral OTC market have
incentives to restrict the scope of SBS that an SBSEF or SBS exchange
makes eligible for trading. Trading in a market with robust order
competition and pre-trade transparency reduces search costs for end
users and liquidity seekers, and reduces the information and bargaining
asymmetry of end users and liquidity seekers relative to SBS dealers.
An SBS dealer with a large voting interest in an SBSEF or SBS exchange,
if it perceived that trading on the regulated venue was diminishing the
rents obtained from its bilateral OTC business, might seek to utilize
its voting influence in a number of ways to degrade the capability of
the regulated venue, thus making the OTC market by comparison a more
attractive option.
    The Commission preliminarily believes that capping a member's
voting interest at 20% strikes a reasonable balance between these
competing interests. It would allow a single member to make an
investment in an SBSEF or SBS exchange significant enough to give it a
20% voting interest, while reserving at least 80% to unrelated parties.
The Commission preliminarily believes that the 20% cap would still
afford an SBS dealer or major SBS participant that has made an
investment in an SBSEF or SBS exchange a reasonable commercial means of
monitoring and protecting that investment. But requiring 80% of the
voting power to reside with unrelated parties would reduce the
likelihood that the large member could tilt the playing

field in its favor. In proposing this 20% threshold in Rule 834, the
Commission is informed by long experience with handling questions of
member influence over national securities exchanges raised in
applications to register with the Commission on Form 1 and in
governance rule filings made on SEA Form 19b-4.\257\
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    \257\ See SEA Release No. 49718 (May 17, 2004), 69 FR 29611,
29624 (May 24, 2004) (approving PCX limitation of trading permit
holder ownership to 20% and stating that ``a member who trades
securities through the facilities of an exchange can have an
ownership interest in the exchange. However, a member's interest
could become so large as to cast doubt on whether the exchange can
fairly and objectively exercise its self-regulatory responsibilities
with respect to that member. A member that also directly or
indirectly controls an exchange might be tempted to exercise that
controlling influence by directing the exchange to refrain from
diligently surveilling the member's conduct or from punishing any
conduct that violates the rules of the exchange or the Federal
securities laws. An exchange also might be reluctant to surveil and
enforce its rules zealously against a member that the exchange
relies on as its largest source of capital''). See also, e.g., SEA
Release No. 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019)
(approving Long Term Stock Exchange's registration as a national
securities exchange with a 20% limit on LTSE ownership by members);
SEA Release No. 62716 (August 13, 2010), 75 FR 51295 (August 19,
2010) (approving BATS-Y Exchange's registration as a national
securities exchange with a 20% limit on exchange ownership by
members); SEA Release No. 49067 (January 13, 2004), 69 FR 2761
(January 20, 2004) (approving a voting collar on members that hold
interests in BOX in excess of 20%); SEA Release No. 54399 (September
1, 2006), 71 FR 53728 (September 12, 2006) (approving ISE's
limitation of a member's ownership interest to 20%).
---------------------------------------------------------------------------

    Proposed Rule 834(b) would cover both direct and indirect voting
interests. The 20% cap could be circumvented if, for example, a member
placed its voting interest in an SBSEF or SBS exchange of 20% or more
in a shell company or other affiliate and directed how the shell
company or affiliate casts those votes. Accordingly, proposed Rule
834(b) would look through the non-member entities holding interests in
SBSEFs and SBS exchanges to consider whether any member could
indirectly control 20% or more of the voting interest through the non-
member entity having the direct interest. Furthermore, proposed Rule
834(b) would look through the corporate structure of the SBSEF or SBS
exchange to consider whether any member could indirectly have 20% or
more of the voting interest in the underlying trading venue. For
example, an SBSEF or SBS exchange could be wholly owned by a holding
company. In such a case, the voting restriction in proposed Rule 834(b)
would apply to the voting interest in the parent holding company held
by a member of the child SBSEF or SBS exchange, since a direct voting
interest of 20% or more in the parent would equate to an indirect
voting interest of 20% or more in child trading venue.
    Similar to its approach to indirect voting interest, proposed Rule
834(b) would aggregate the voting interest of the member itself with
the voting interest held by any officer, principal, or employee of the
member for purposes of determining compliance with the 20% cap. Without
this provision, the member--or an officer, principal, or employee of
the member--could split the voting interest held in the SBSEF or SBS
exchange across multiple persons who would likely be voting that
interest in concert.
    Paragraph (c) of proposed Rule 834 would include requirements
designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would
require the rules of each SBSEF and SBS exchange to be reasonably
designed, and have an effective mechanism, to:
    (1) Deny effect to the portion of any voting interest held by a
member in excess of the 20% limitation;
    (2) Compel a member who possesses a voting interest in excess of
the 20% limitation to divest enough of that voting interest to come
within that limit; and
    (3) Obtain information relating to its ownership and voting
interests owned or controlled, directly or indirectly, by its members.
    Under paragraph (c)(1) of proposed Rule 834, if a member of an
SBSEF or SBS exchange managed to evade the 20% voting restriction
(e.g., by disguising its voting interest through one or more shell
companies), the SBSEF or SBS exchange would be required to deny the
effect of any part of the vote in excess of the 20% restriction when
the evasion is discovered. This could, in close cases, cause the SBSEF
or SBS exchange to have to reverse the outcome of a vote because of the
invalidation of the part of the vote in excess of the 20% threshold. In
addition, the Commission preliminarily believes--as reflected in
paragraph (c)(2) of proposed Rule 834--that an SBSEF or SBS exchange
should, if it discovers that a member has managed to evade the 20%
voting restriction, compel the member to divest enough of that voting
interest to come within the 20% limit. Finally, the Commission
preliminarily believes--as reflected in paragraph (c)(3) of proposed
Rule 834--that an SBSEF or SBS exchange must have an effective means of
obtaining information about the ownership and voting interests owned or
controlled, directly or indirectly, by its members. Proposed Rule
834(c)(3) is designed to promote compliance with proposed Rule 834(b)
by requiring an SBSEF or SBS exchange to actively obtain information
about the ownership and voting interests owned or controlled, directly
or indirectly, by its members. The Commission preliminarily believes
that ignorance of a member holding a voting interest in excess of the
proposed 20% limitation should not excuse a violation of Rule 834(b).
Furthermore, the information obtained by an SBSEF or SBS exchange under
proposed Rule 834(c)(3) should assist with any remedial actions
necessary under proposed Rules 834(c)(1) and (c)(2).
    Paragraph (d) of proposed Rule 834 is designed to mitigate
conflicts of interest in the disciplinary process of an SBSEF or SBS
exchange and would provide as follows: ``Each security-based swap
execution facility and SBS exchange shall ensure that its disciplinary
processes preclude any member, or group or class of its members, from
dominating or exercising disproportionate influence on the disciplinary
process. Each major disciplinary committee or hearing panel thereof
shall include sufficient different groups or classes of its members so
as to ensure fairness and to prevent special treatment or preference
for any person or member in the conduct of the responsibilities of the
committee or panel.'' Proposed Rule 834(d) recognizes that one way that
a conflict of interest could manifest itself is in the disciplinary
process. Therefore, the Commission is proposing, as the first sentence
of proposed Rule 834(d), that each SBSEF and SBS exchange should
``preclude any member, or group or class of its members, from
dominating or exercising disproportionate influence on the disciplinary
process.''
    The second sentence of proposed Rule 834(d) is adapted from Sec.
1.64 of the CFTC's rules, which addresses the composition of various
SRO governing boards and major disciplinary committees.\258\ Section
1.64(c)(4) requires an SRO (which term, under the CEA, includes a SEF)
to maintain in effect rules that ``each major disciplinary committee or
hearing panel [of the SRO] include sufficient different membership
interests so as to ensure fairness and to prevent special treatment or
preference for any person in the conduct of a committee's or the
panel's

responsibilities.'' Proposed Rule 834(d) reflects the Commission's
preliminary belief that an SBSEF or SBS exchange should be mindful of
its different membership interests, and how they are represented on
disciplinary committees and hearing panels in particular matters, to
avoid potential conflicts of interest.
---------------------------------------------------------------------------

    \258\ Proposed Rule 834(a) would define ``major disciplinary
committee'' as a committee of persons who are authorized by an SBSEF
to conduct disciplinary hearings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the SBSEF except those which
are related to decorum or attire, financial requirements, or
reporting or recordkeeping and do not involved fraud, deceit, or
conversion.
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    To further implement section 765 and promote good governance
generally for SBSEFs and SBS exchanges, the Commission is proposing
additional requirements in Rule 834 that are closely modelled on
Sec. Sec.  1.64 and 1.69 of the CFTC's rules.
    Section 1.64(b) requires an SRO to maintain in effect standards and
procedures that ensure that 20% or more of the regular voting members
of the SRO's governing board are persons who are knowledgeable of
futures trading or financial regulation or are otherwise capable of
contributing to governing board deliberations. Section 1.64(b) also
requires an SRO to maintain in effect standards and procedures that
ensure that 20% or more of the regular voting members of the governing
board are not: Members of the SRO; currently salaried employees of the
SRO; primarily performing services for the SRO in a capacity other than
as a member of the SRO's governing board; or officers, principals, or
employees of a firm which holds a membership at the SRO either in its
own name or through an employee on behalf of the firm.
    Paragraph (e) of proposed Rule 834 is closely modelled on Sec.
1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange
to ensure that 20% or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote
by the governing board) are persons who are knowledgeable of SBS
trading or financial regulation, or otherwise capable of contributing
to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of
proposed Rule 834 are based on four of the prongs in Sec.
1.64(b)(1)(ii) which provide that 20% or more of the persons who are
eligible to vote routinely on matters being considered by the governing
board (excluding those members who are eligible to vote only in the
case of a tie vote by the governing board) must not be: Members of the
SBSEF or SBS exchange; \259\ salaried employees of the SBSEF or SBS
exchange; primarily performing services for the SBSEF or SBS exchange
in a capacity other than as a member of the governing board; or
officers, principals, or employees of a firm which holds a membership
at the SBSEF or SBS exchange, either in its own name or through an
employee on behalf of the firm.
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    \259\ Proposed Rule 834(e)(1)(ii), read together with proposed
Rule 834(b), would have the effect of allowing four members of an
SBSEF or SBS exchange to control up to 80% of the voting interest
(assuming that each of the four holds 20%). Under proposed Rule
834(e)(1)(ii), at least 20% of the voting interest would have to be
held by non-members.
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    Paragraph (e)(2) of proposed Rule 834, modelled on Sec.
1.64(b)(3), would require each SBSEF and SBS exchange to ensure that
membership of its governing board includes a diversity of groups or
classes of its members.\260\
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    \260\ Section 1.64(b)(3) provides in relevant part that the
governing board of an SRO must include ``a diversity of membership
interests.'' Section 1.64(a)(4) provides a definition of
``membership interest'' that lists six classes of members, each of
which is considered a different membership interest. Many of these
specifically enumerated classes--e.g., ``floor traders,'' ``floor
brokers,'' ``futures commission merchants,'' ``producers, consumers,
processors, distributors, and merchandisers of commodities traded on
the particular contract market''--might not be relevant to SBSEFs
and SBS exchanges. Rather than crafting its own definition of
``membership interest,'' the Commission is opting for a principles-
based approach to incorporating Sec.  1.64(b)(3) into Rule 834, by
proposing that an SBSEF or SBS exchange must be able to demonstrate
that the board membership fairly represents the diversity of
interests at such SBSEF or SBS exchange. See proposed Rule
834(e)(2).
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    The Commission is not adapting the detailed provisions of Sec.
1.64(c) into proposed Rule 834. However, the key principle of Sec.
1.64(c)--that each major disciplinary committee or hearing panel should
include sufficient different membership interests so as to ensure
fairness and to prevent special treatment or preference in the conduct
of the committee's or panel's responsibilities, which is located in
paragraph Sec.  1.64(c)--is being adapted into proposed Rule 834(d), as
discussed above.
    Paragraph (f) of proposed Rule 834 is based closely on Sec.
1.64(d) and would require each SBSEF and SBS exchange to submit to the
Commission, within 30 days after each governing board election, a list
of the governing board's members, the groups or classes of members that
they represent, and how the composition of the governing board
otherwise meets the requirements of Rule 834. This provision would
provide the Commission information to help it assess an SBSEF's
compliance with Rule 834.
    Paragraph (g) of proposed Rule 834 is modelled on Sec.  1.69, which
requires an SRO to further address the avoidance of conflicts of
interest in the execution of its self-regulatory functions. Section
1.69(b)(1)(i) requires an SRO to maintain in effect rules that require
a member of its governing board, disciplinary committee, or oversight
panel to abstain from such body's deliberations and voting on any
matter involving a named party in interest, where such member: Is a
named party in interest; is an employer, employee, or fellow employee
of a named party in interest; is associated with a named party in
interest through a ``broker association''; has any other significant,
ongoing business relationship with a named party in interest; or has a
family relationship \261\ with a named party in interest.
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    \261\ See proposed Rule 834(a) (defining ``family relationship''
of a person to be person's spouse, former spouse, parent, step-
parent, child, step-child, sibling, step-brother, step-sister,
grandparent, grandchild, uncle, aunt, nephew, niece, or in-law). The
Commission's proposed definition is adapted from the CFTC's
definition of ``family relationship'' in Sec.  1.69(a)(2).
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    Section 1.69(b)(1)(ii) requires an SRO to maintain in effect rules
that require each member of its governing board, disciplinary
committee, or oversight panel to disclose to the appropriate SRO staff,
before consideration of any matter involving a named party in interest,
whether the member has one of the relationships listed in Sec.
1.69(b)(1)(i) with a named party in interest. Section 1.69(b)(1)(iii)
requires the SRO to establish procedures for determining whether a
member of its governing board, disciplinary committees, or oversight
committees is subject to a conflicts restriction in any matter
involving a named party in interest.\262\
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    \262\ Proposed Rule 834(a) would define ``named party in
interest'' as a person or entity that is identified by name as a
subject of any matter being considered by a governing board,
disciplinary committee, or oversight panel.
---------------------------------------------------------------------------

    Section 1.69(b)(2)(i) requires a member of the SRO's governing
board, disciplinary committee, or oversight committee to abstain from
such body's deliberations and voting on any significant action, if the
member knowingly has a direct and substantial financial interest in the
result of the vote based upon either exchange or non-exchange positions
that could reasonably be expected to be affected by the action. Section
1.69(b)(2)(ii) requires a member of the SRO's governing board,
disciplinary committee, or oversight committee, before consideration of
any significant action, to disclose to the appropriate SRO staff that
position information, although this requirement does not apply to
members who choose to abstain from deliberations and voting on the
subject significant action. Section 1.69(b)(2)(iii) requires an SRO to
establish procedures for determining whether any member of its
governing

board, disciplinary committees, or oversight committees is subject to a
conflicts restriction under Sec.  1.69 in any significant action. Such
determination is required to include a review of various types of
positions enumerated in the rule, including: ``Any other types of
positions, whether maintained at that self-regulatory organization or
elsewhere, held in the member's personal accounts or the proprietary
accounts of the member's affiliated firm that the self-regulatory
organization reasonably expects could be affected by the significant
action.'' Section 1.69(b)(2)(iv) sets out the sources that the SRO
should review in determining a member's positions, including a catch-
all provision in paragraph (b)(2)(iv)(C) for ``[a]ny other source of
information that is held by and reasonably available to the self-
regulatory organization.''
    Section 1.69(b)(3)(i) provides that an SRO governing board,
disciplinary committee, or oversight panel may permit a member to
participate in deliberations prior to a vote on a significant action
for which that member otherwise would be required to abstain, if such
participation would be consistent with the public interest and the
member recuses from voting on such action. Section 1.69(b)(3)(ii)
requires the deliberating body, when determining whether to permit the
exception contemplated in paragraph (b)(3)(i), to consider whether the
member's participation in deliberations is necessary for the
deliberating body to achieve a quorum in the matter; and whether the
member has unique or special expertise, knowledge, or experience in the
matter under consideration. Section 1.69(b)(3)(iii) requires the
deliberating body also to consider, when determining whether to permit
an exception to ``fully consider the position information which is the
basis for the member's direct and substantial financial interest in the
result of a vote on a significant action.''
    Section 1.69(b)(4) requires an SRO's governing board, disciplinary
committees, and oversight panels to reflect in their minutes or
otherwise document that the conflicts determination procedures required
under Sec.  1.69 have been followed. Such records also must include:
The names of all members who attended the meeting in person or who
otherwise were present by electronic means; the name of any member who
voluntarily recused himself or herself or was required to abstain from
deliberations and/or voting on a matter and the reason for the recusal
or abstention, if stated; and information on the position information
that was reviewed for each member.
    Proposed Rule 834(g) closely follows the paragraph structure and
language of Sec.  1.69, with a few minor exceptions (beyond modifying
the rule's application to SBSEFs and SBS exchanges, rather than, in the
CFTC original, all SROs). First, paragraph (g)(1)(i)(A) of proposed
Rule 834 is based closely on Sec.  1.69(b)(1)(i) and would set out the
types of relationships with the named party of interest that would
create a conflict of interest for a member of the governing board,
disciplinary committee, or oversight panel. Paragraph (g)(1)(i)(A),
however, would incorporate only four of the five prongs in Sec.
1.69(b)(1)(i).\263\ Second, Sec.  1.69(b)(2)(iii) sets out five types
of financial positions that could be held by a member of the governing
board, disciplinary committee, or oversight panel that an SRO must
review to ascertain if there is a conflicts restriction in a
significant action. Proposed Rule 834(g)(1)(ii)(C) is a simplified
version of Sec.  1.69(b)(2)(iii); it would not include the five prongs
set forth in Sec.  1.69(b)(2)(iii), but rather would incorporate only
the final, catch-all prong (``Such determination must include a review
of any positions, whether maintained at that security-based swap
execution facility, SBS exchange, or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's
affiliated firm \264\ that the security-based swap execution facility
or SBS exchange reasonably expects could be affected by the significant
action'').\265\ Third, proposed Rule 834(g)(1)(ii)(C) would omit a
requirement in Sec.  1.69(b)(2)(iv) that an SRO, when making a
determination of whether a conflict of interest exists, must take into
consideration ``[t]he most recent large trader reports and clearing
records available to the self-regulatory organization.'' These types of
reports may not be as prevalent in the securities and SBS markets as
the swaps markets. The Commission believes that the final, catch-all
prong in Sec.  1.69(b)(2)(iv)--``Any other source of information that
is held by and reasonably available to the self-regulatory
organization''--would suffice, and is proposing it as Rule
834(g)(1)(ii)(C)(2).
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    \263\ The Commission is not proposing to include a prong about
being associated with a named party of interest through a ``broker
association,'' as defined in Sec.  156.1 of the CFTC's rules, as
that concept does not exist under the SEA.
    \264\ Proposed Rule 834(a) would define a ``member's affiliated
firm'' as a firm in which the member is a principal or an employee.
    \265\ Proposed Rule 834(a) would define ``significant action''
to include several types of actions or rule changes by an SBSEF or
SBS exchange that could be implemented without the Commission's
prior approval related to addressing an emergency and certain
changes in margin levels.
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    Proposed Rule 834(h) would require each SBSEF and SBS exchange to
maintain in effect various rules that would be required under proposed
Rule 834. An SBSEF would be required to file such rules under proposed
Rule 806 or 807 of Regulation SE; an SBS exchange would be required to
file such rules under existing SEA Rule 19b-4.\266\ Proposed Rule
834(h) is loosely modelled on various provisions in Sec. Sec.  1.64 and
1.69 providing that the SRO rules required under those CFTC rules must
be filed with the CFTC pursuant to relevant provisions of the CEA and
the CFTC's rules thereunder.
---------------------------------------------------------------------------

    \266\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Sec. Sec.  1.64 and 1.69
are reasonably designed to promote good governance of trading venues
and is therefore proposing to adapt them into Rule 834. These CFTC
rules identify various instances of potential conflicts of interest
that might involve a member of the governing board or an important
committee of a SEF, and require proactive measures to address those
conflicts. The Commission preliminarily believes that SBSEFs and SBS
exchanges should have the same types of rules because the same types of
conflicts that arise with SEFs could arise with SBS trading venues.
Furthermore, various provisions of Sec. Sec.  1.64 and 1.69 would
further the policy goals of section 765 of the Dodd-Frank Act. For
example, proposed Rule 834(e)(1)(ii), modelled on Sec.
1.64(b)(1)(ii)(A), would require that at least 20% of the regular
voting members of the governing board of an SBSEF or SBS exchange not
be members, and proposed Rule 834(e)(1)(v), which is modelled on Sec.
1.64(b)(1)(ii)(D), would require that at least 20% of the regular
voting members of the governing board not be persons affiliated with
members. These requirements, by reserving at least 20% of the governing
board's seats for persons not associated with any member of an SBSEF or
SBS exchange, would reduce the possibility that a combination of
members who are SBS dealers or major SBS participants could create a
conflict of interest for the SBSEF or SBS exchange.
    In addition, proposed Rule 834(d), which incorporates language from
Sec.  1.64(c), would require each major disciplinary committee or
hearing panel thereof to include sufficient different groups or classes
of its members so as to ensure fairness and to prevent special
treatment or preference for any person or member. The Commission

preliminarily believes that it is appropriate to impose such a
requirement on SBSEFs and SBS exchanges to further lessen the potential
for members of an SBSEF or SBS exchange who are SBS dealers or major
SBS participants from benefitting from a conflict of interest.
Furthermore, proposed Rule 834(e), which is modelled on Sec.  1.64(d),
would require an SBSEF or SBS exchange to submit to the Commission,
within 30 days after each governing board election, a list of the
governing board's members, the groups or classes of members that they
represent, and how the composition of the governing board otherwise
meets the requirements of Rule 834. Proposed Rule 834(e) is designed to
reinforce the other requirements of the rule by causing each SBSEF and
SBS exchange to actively consider how the composition of its governing
board comports with Rule 834, and to make an accurate representation to
the Commission regarding such compliance.
    The Commission preliminarily believes that Sec.  1.69 also includes
provisions that would further the policy goals of section 765 and is,
therefore, proposing to adapt them into Rule 834. Under proposed Rule
834(b), an SBSEF or SBS exchange generally may not permit any member to
hold 20% or more of the voting interest in that trading venue. Nothing
in proposed Rule 834, however, would prohibit a member--including an
SBS dealer or major SBS participant (or a person associated with such a
member, such as a firm principal)--from serving on a governing board,
disciplinary committee, or oversight panel of an SBSEF or SBS exchange.
Section 1.69 is designed to address various types of conflicts of
interest that might involve members of a governing board, disciplinary
committee, or oversight panel. For example, Sec.  1.69 specifies when a
member must abstain from the body's deliberations and voting because
the member has a relationship to the named party in interest or because
the member has ``a direct and substantial financial interest in the
result of the vote.'' Furthermore, Sec.  1.69 requires a member to
disclose its relationships to a named party in interest and provide
position information to the SRO so that the SRO can assess whether the
member has a conflict, and also requires the SRO to follow its own
procedures for determining whether a conflict exists. Because these
provisions further the goals of section 765--to mitigate conflicts of
interest created by an SBS dealer or major SBS participant that holds
an interest in an SBSEF or SBS exchange--and because they are
reasonably designed to promote good governance more generally, the
Commission is proposing to incorporate them into Rule 834.
    The Commission recognizes that promulgating rules under section 765
alone will not result in a highly competitive market for SBS. There
could be other ways for anticompetitive forces to impede the growth of
SBS trading on transparent, regulated platforms other than by misuse of
a large voting interest in the trading venue. For example, a large SBS
dealer or coalition of SBS dealers, even absent any voting interest in
any SBSEF or SBS exchange, could threaten to move their business
elsewhere unless given an unfair advantage by the trading venue. A
large SBS dealer or coalition of SBS dealers also could conspire to
shut out end users who sought to trade more actively on these
transparent, regulated venues rather than continuing to trade in the
bilateral OTC markets. The Commission will be alert to any such
anticompetitive practices and consider appropriate prophylactic
measures. At present, the Commission believes that adopting rules under
section 765 is a necessary and appropriate first step to guard against
conflicts of interest arising on SBSEFs and SBS exchanges.
    The Commission seeks comment on the following:
    175. In general, do you agree with how the Commission is proposing
to implement section 765 of the Dodd-Frank Act? Why or why not?
    176. In particular, do you believe that the 20% ownership cap in
proposed Rule 834(b) is appropriate? Why or why not? Do you believe
that a different numerical threshold would be appropriate? If so, what
numerical threshold and why?
    177. Do you believe that there are other means (such as ownership
of non-voting equity, holding a sizeable amount of the debt issuance,
etc.) by which an SBS dealer or major SBS participant could exercise an
undue influence over an SBSEF or SBS exchange of which it is a member?
If so, please discuss whether and how these other means should be
incorporated into Rule 834.
    178. Do you believe that proposed Rule 834(b) is sufficiently clear
about when a member would be deemed to have an indirect 20% voting
interest in an SBSEF or SBS exchange? If not, please provide other
scenarios where you believe the Commission should offer clarification.
    179. Do you agree in general with the Commission's proposal to
adapt the major provisions of Sec.  1.64 into Rule 834? Why or why not?
    180. Are there provisions of Sec.  1.64 that the Commission has
incorporated into proposed Rule 834 that you think inappropriate? If
so, what provisions and why?
    181. Conversely, are there provisions of Sec.  1.64 that the
Commission has not incorporated into proposed Rule 834 that you think
should be incorporated? If so, what provisions and why? Specifically,
do you believe that the Commission should incorporate a definition of
``membership interest''--as the CFTC does in Sec.  1.64(a)(4)--to more
precisely delineate the different interests that an SBSEF or SBS
exchange should take into account?
    182. Do you agree in general with the Commission's proposal to
incorporate the major provisions of Sec.  1.69 into Rule 834? Why or
why not?
    183. Are there provisions of Sec.  1.69 that the Commission has
incorporated into proposed Rule 834 that you think inappropriate? If
so, what provisions and why?
    184. Do you believe generally that the same rules for mitigating
conflicts of interest should apply to both SBSEFs and SBS exchanges, or
should different restrictions apply to each type of trading venue? If
you believe different restrictions should apply, please explain why and
what different restrictions you believe should be incorporated into
Rule 834?
    185. Are there any proposed requirements in Rule 834 that existing
national securities exchanges, which could in the future elect to list
SBS and thereby become SBS exchanges, would find difficult to comply
with? Would any of the requirements proposed in Rule 834 conflict with
their existing rules? If so, please describe.
    186. Are there other types of conflict of interest that SBS dealers
and major SBS participants might enjoy as members of an SBSEF or SBS
exchange? If so, discuss how any such conflict could be addressed via
Commission rulemaking.
    187. Do you believe that SBS dealers and major SBS participants can
exercise anticompetitive influence over one or more SBSEFs or SBS
exchanges even if not members of those trading venues? If so, what
additional measures would you recommend to combat that anticompetitive
influence?

XI. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or Limitation
of Access

    The Commission is also proposing new Rule 835 to require an SBSEF
to provide the Commission notice of a final disciplinary action, a
final action

with respect to a denial or conditioning of membership, or a final
action with respect to a denial or limitation of access. Such notice is
designed to ensure that the Commission is kept aware of significant
disciplinary actions, denials or conditionings of membership, or
denials or limitations on access by SBSEFs that could be the subject of
an aggrieved person's request for review by the Commission. The
requirement to provide notice to the Commission also would obligate an
SBSEF to be cognizant of, and make records for, each such instance, and
such records would become a necessary part of the record should the
aggrieved person seek Commission review of the SBSEF's action.
    Specifically, paragraph (a) of proposed Rule 835 would provide
that, if an SBSEF issues a final disciplinary action against a member,
or takes a final action with respect to a denial or conditioning of
membership, or a final action with respect to a denial or limitation of
access of a person to any services offered by the SBSEF, the SBSEF
shall file a notice of such action with the Commission within 30 days
and serve a copy on the affected person. Proposed Rule 835(a) uses the
phrase ``final disciplinary action against a member'' (emphasis added)
because an SBSEF may utilize its disciplinary authority under Core
Principle 2 (Compliance with Rules) in section 3D of the SEA \267\ only
with respect to its members; but uses the phrase ``denies or limits
access of a person'' (emphasis added) because the person whose access
is denied or limited might not be a member. For example, a person that
is denied membership by an SBSEF would fall under this category.
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    \267\ 15 U.S.C. 78c-4(d)(2).
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    Paragraph (b)(1) of proposed Rule 835 would provide that, for
purposes of paragraph (a), a disciplinary action would not be
considered final unless: (1) The affected person has sought an
adjudication or hearing with respect to the matter, or otherwise
exhausted their administrative remedies at the SBSEF; and (2) the
disciplinary action is not a summary action permitted under proposed
Rule 819(g)(13)(ii).\268\ In addition, paragraph (b)(2) of proposed
Rule 835 would provide that, for purposes of paragraph (a), a
disposition of a matter with respect to a denial or conditioning of
membership, or a denial or limitation of access, would not be
considered final unless such person has sought an adjudication or
hearing, or otherwise exhausted their administrative remedies at the
SBSEF with respect to such matter. The Commission preliminarily
believes that it is appropriate to exclude disciplinary actions that
are summary actions under an SBSEF's summary fine schedule \269\
because the Commission expects such summary actions, if applicable, to
comprise lesser disciplinary actions that do not warrant appeal. The
CFTC has parallel procedures relating to review of SEF disciplinary
actions also excludes summary actions under an SEF's summary fine
schedule.\270\
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    \268\ As discussed above, see supra section VIII(B)(1), proposed
Rule 819(g)(13)(ii) would permit an SBSEF to adopt a summary fine
schedule for violations of rules relating to the failure to timely
submit accurate records required for clearing or verifying each
day's transactions, which may be summarily imposed against persons
within the SBSEF's jurisdiction for violating such rules.
Furthermore, an SBSEF's summary fine schedule could allow for
warning letters to be issued for first-time violations or violators.
If adopted, a summary fine schedule would be required by proposed
Rule 819(g)(13)(ii) to provide for progressively larger fines for
recurring violations.
    \269\ A summary fine schedule, if an SBSEF elects to adopt one,
would have to be part of the SBSEF's rules, and thus would need to
be submitted to the Commission. See proposed Rule 819(g)(13)(ii).
    \270\ See 17 CFR 9.1(b)(2).
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    Paragraph (c) of proposed Rule 835 would provide that the notice
required under Rule 835(a) must include the name of the member or the
associated person and last known address, as reflected in the SBSEF's
records, of the member or associated person, as well as the name of the
person, committee, or other organizational unit of the SBSEF that
initiated the disciplinary action or access restriction. In the case of
a final disciplinary action, the notice would be required to include a
description of the acts or practices, or omissions to act, upon which
the sanction is based, including, as appropriate, the specific rules
that the SBSEF has found to have been violated; a statement describing
the respondent's answer to the charges; and a statement of the sanction
imposed and the reasons for such sanction. In the case of a denial or
conditioning of membership or a denial or limitation of access, the
notice would be required to include: The financial or operating
difficulty of the prospective member or member (as the case may be)
upon which the SBSEF determined that the prospective member or member
could not be permitted to do, or continue to do, business with safety
to investors, creditors, other members, or the SBSEF; the pertinent
failure to meet qualification requirements or other prerequisites for
membership or access and the basis upon which the SBSEF determined that
the person concerned could not be permitted to have membership or
access with safety to investors, creditors, other members, or the
SBSEF; or the default of any delivery of funds or securities to a
clearing agency by the member. Finally, the notice must include the
effective date of such final disciplinary action, denials or
conditioning of membership, or denial or limitation of access, as well
as any other information that the SBSEF may deem relevant.
    The Commission seeks comment on the following:
    188. Do you agree with the proposed definition of ``final
disciplinary action'' in proposed Rule 835? Why or why not? If not, how
would you revise the definition? Do you think it would be appropriate
to exclude disciplinary actions that are summary actions under an
SBSEF's summary fine schedule from such definition? Why or why not?
    189. Do you agree with how the proposed rules and rule amendments
address when an aggrieved party may seek Commission review of a denial
or conditioning of membership, or a denial or limitation of access? Why
or why not? If not, how would you revise those provisions?
    190. In particular, do the proposed rules contain sufficient detail
to address all types of denials or conditionings of membership or
denials or limitations on access? Are there particular scenarios that
commenters believe the Commission should address in Rule 835? If so,
please describe in detail.
    191. Are the contents of the required notice to the Commission in
proposed Rule 835 appropriate? Do you believe these would provide the
Commission with enough detail regarding final disciplinary actions,
denials or conditionings of membership, and denials or limitations on
access? If not, what other information should be required in the
notice?

XII. Amendments to Existing Rule 3a1-1 Under the SEA--Exemptions From
the Definition of ``Exchange''

    An entity that meets the definition of ``security-based swap
execution facility'' also would likely meet the definition of
``exchange'' set forth in section 3(a)(1) of the SEA \271\ and the
interpretation of that definition set forth in Rule 3b-16
thereunder.\272\ Thus, absent an exemption, an entity needing to
register with the Commission as an SBSEF also would likely need to
register with the

Commission as a national securities exchange.\273\ The Commission
previously has stated that it ``believes that Congress specifically
provided a comprehensive regulatory framework for SBSEFs in the [SEA],
as amended by the Dodd Frank Act, and therefore that such entities that
are registered as SBSEFs should not also be required to register and be
regulated as national securities exchanges.'' \274\
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    \271\ 15 U.S.C. 78c(a)(1).
    \272\ 17 CFR 240.3b-16 (providing that an entity generally is
considered to meet the definition of ``exchange'' if it brings
together the orders for securities of multiple buyers and sellers
and uses established, non-discretionary methods--whether by
providing a trading facility or by setting rules--under which such
orders interact with each other, and the buyers and sellers entering
such orders agree to the terms of a trade).
    \273\ See section 3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1)
(``No person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a
security-based swap execution facility or as a national securities
exchange under this section'').
    \274\ 2011 SBSEF Proposal, 76 FR at 10958.
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    Therefore, the Commission is proposing to exercise its authority
under section 36(a)(1) of the SEA \275\ to exempt an SBSEF from the
definition of ``exchange''--and thus the obligation to register as a
national securities exchange--if it provides a market place solely for
the trading of SBS (and no other securities) and has registered with
the Commission as an SBSEF. To effect this exemption, the Commission is
proposing to amend Rule 3a1-1 under the SEA \276\ by adding new
paragraph (a)(4).\277\
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    \275\ 15 U.S.C. 78mm(a)(1).
    \276\ 17 CFR 240.3a1-1.
    \277\ The amended rule would provide that an organization,
association, or group of persons shall be exempt from the definition
of the term ``exchange'' if such organization, association, or group
of persons has registered with the Commission as an SBSEF pursuant
to Rule 803 and provides a market place for no securities other than
SBS.
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    The proposed amendment provides that an entity that has registered
with the Commission as an SBSEF pursuant to proposed Rule 803 and
provides a market place for no securities other than SBS would not fall
within the definition of ``exchange,'' and thus would not be subject to
the requirement in section 5 of the SEA to register as a national
securities exchange or obtain a low-volume exemption. Section 5 also
provides that a broker or dealer may not ``us[e] any facility of an
exchange within or subject to the jurisdiction of the United States to
effect any transaction in a security, or to report any such
transaction, unless such exchange (1) is registered as a national
securities exchange . . . or (2) is exempted from such registration . .
. by reason of the limited volume of transactions effected on such
exchange.'' Brokers and dealers who are members of a registered SBSEF
would not be in violation of section 5 by effecting or reporting any
SBS transactions on that SBSEF, because an SBSEF that qualifies for the
exemption under proposed Rule 3a1-1(a)(4) would not be an exchange
within the meaning of section 5.
    In addition, the Commission is proposing a new paragraph (a)(5) to
existing Rule 3a1-1 under the SEA which would provide that an
organization, association, or group of persons shall be exempt from the
definition of the term ``exchange'' if such organization, association,
or group of persons has registered with the Commission as a clearing
agency pursuant to section 17A of the SEA and limits its exchange
functions to operation of a trading session that is designed to further
the accuracy of end-of-day valuations. As noted above, this provision
would codify a series of exemptions that the Commission has granted
over several years to SBS clearing agencies that operate ``forced
trading'' sessions.\278\ As part of the clearing and risk management
processes, an SBS clearing agency must establish an end-of-day
valuation for any SBS in which any of its members has a cleared
position. Certain SBS clearing agencies utilize a valuation mechanism
whereby they require clearing members to submit indicative quotes for
those SBS products, and can require them to trade as a way to promote
accurate submissions. The precise means by which the clearing agency
matches quotes from different clearing members could cause the clearing
agency to fall within the definition of ``exchange'' in section 3(a)(1)
of the SEA. The Commission previously has found that it was necessary
or appropriate in the public interest and consistent with the
protection of investors to exempt clearing agencies that engage in this
activity from the definition of ``exchange.'' \279\ The Commission is
now proposing to codify this exemption. This exemption would cover only
the forced-trading session of an SBS clearing agency; any other
exchange activity that a clearing agency might engage in could remain
subject to the SEA provisions and the Commission's rules thereunder
applying to exchanges.
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    \278\ See supra note 37.
    \279\ See id.
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    Finally, the Commission is proposing to amend the introductory
language of existing paragraph (b) of Rule 3a1-1, which states:
``Notwithstanding paragraph (a) of this rule, an organization,
association, or group of persons shall not be exempt under this rule
from the definition of `exchange' if . . .'' Paragraph (b) then sets
out procedural and substantive criteria for the Commission to retract
an exemption under paragraph (a) of Rule 3a1-1 if an exchange's share
of the market in any one of the specified classes of securities exceeds
a defined threshold. The Commission is proposing to amend the
introductory language of paragraph (b) of Rule 3a1-1 to cover only
paragraphs (a)(1) through (3), not paragraph (a) as a whole.
    The changed language is designed to clarify that the retraction
provisions would not apply to organizations, associations, or groups of
persons who fall within proposed Rule 3a1-1(a)(4) or (a)(5). Thus, even
if a registered SBSEF were to grow very large, Rule 3a1-1(b), as
proposed to be amended, would not afford a basis for the Commission to
retract an SBSEF's exemption from the definition of ``exchange'' under
proposed Rule 3a1-1(a)(4), which would force the SBSEF to register as a
national securities exchange (to avoid being a registered exchange).
The Commission preliminarily believes that, in adopting section 3D of
the SEA, Congress gave the Commission a mechanism to regulate SBSEFs of
any size. Nothing in section 3D suggests that, if an SBSEF were to grow
above a certain size, the Commission should be able to withdraw that
entity's ability to operate as an SBSEF and instead compel it to
register as a national securities exchange.
    Finally, the Commission preliminarily believes that it is not
necessary to apply the retraction provisions in Rule 3a1-1(b) to
registered clearing agencies that engage in forced trading sessions and
are covered by proposed Rule 3a1-1(a)(5). SBS transactions effected
using this functionality are designed to facilitate the clearance and
settlement process by rendering more accurate the daily valuation that
is used to calculate margin requirements. The entities that utilize
this functionality are already registered with the Commission--as
clearing agencies--and carry out these operations under rules that have
been approved by the Commission. This trading functionality is not
effected for the purpose of conducting open-market transactions between
parties who are seeking to increase or decrease their positions for
investment or hedging purposes. Therefore, the Commission preliminarily
believes that it would not be appropriate to apply the retraction
provisions of Rule 3a1-1(b) to clearing agencies that would be covered
by proposed Rule 3a1-1(a)(5), as this would force these clearing