[Federal Register Volume 85, Number 23 (Tuesday, February 4, 2020)]
[Rules and Regulations]
[Pages 6270-6354]
[FR Doc No: 2019-27760]

Vol. 85

Tuesday,

No. 23

February 4, 2020

Part II

 Securities and Exchange Commission

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17 CFR Parts 201 and 240

 Cross-Border Application of Certain Security-Based Swap Requirements
and Risk Mitigation Techniques for Uncleared Security-Based Swaps;
Final Rules; Order Designating Certain Jurisdictions as ``Listed
Jurisdictions'' for Purposes of Applying the Security-Based Swap Dealer
De Minimis Exception of Rule 3a71-3(d) Under the Exchange Act to
Certain Cross-Border Security-Based Swap Transactions; Rule

Federal Register / Vol. 85 , No. 23 / Tuesday, February 4, 2020 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 201 and 240

[Release No. 34-87780; File No. S7-07-19]
RIN 3235-AM13

Cross-Border Application of Certain Security-Based Swap
Requirements

AGENCY: Securities and Exchange Commission.

ACTION: Final rules; guidance.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting rule amendments and providing guidance to
address the cross-border application of certain security-based swap
requirements under the Securities Exchange Act of 1934 (``Exchange
Act'') that were added by Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the ``Dodd-Frank Act''). The
Commission also is issuing a statement regarding compliance with rules
for security-based swap data repositories and Regulation SBSR.

DATES:
    Effective date: These rules are effective April 6, 2020.
    Compliance date: The compliance dates are discussed in Part X.B of
this final release.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director,
Laura Compton, Senior Special Counsel, or Kateryna Imus, Special
Counsel, regarding the guidance related to security-based swap
transactions that have been ``arranged'' or ``negotiated'' by personnel
located in the United States, the amendment to Exchange Act Rule 3a71-
3, applications for substituted compliance, the amendments to Rule 0-13
related to designation as a listed jurisdiction, and the compliance
dates and statement regarding compliance with rules for security-based
swap data repositories and Regulation SBSR referenced in Part X, at
202-551-5870; Devin Ryan, Senior Special Counsel, and Edward
Schellhorn, Special Counsel, regarding the amendment to Commission Rule
of Practice 194; Joanne Rutkowski, Assistant Chief Counsel, and Bonnie
Gauch, Senior Special Counsel, regarding the amendments to Exchange Act
Rule 15Fb2-1 and guidance related to Exchange Act Rule 15Fb2-4; and
Joseph Levinson, Senior Special Counsel, regarding the modifications to
Exchange Act Rule 18a-5, at<PHONE_NUMBER>; Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is providing guidance
regarding the application of certain uses of the terms ``arranged'' and
``negotiated'' in connection with the cross-border application of
security-based swap regulation under the Exchange Act; providing
guidance regarding the certification and opinion of counsel
requirements in Exchange Act Rule 15Fb2-4 and Rule 3a71-6 and adequate
assurance requirement in Exchange Act Rule 3a71-6; adopting amendments
to Exchange Act Rules 0-13, 3a71-3, 15Fb2-1, and 18a-5 and Commission
Rule of Practice 194; and issuing a statement regarding compliance with
rules for security-based swap data repositories and Regulation SBSR.

I. Overview

    The Commission is enhancing the effectiveness and the efficiency,
in the cross-border context, of rules that implement requirements under
Title VII of the Dodd-Frank Act \1\ to provide for the regulation of
security-based swap activity. The amendments finalize proposals that
the Commission made to address issues regarding the cross-border
application of Title VII.\2\ Previously, market participants and other
commenters had raised concerns regarding possible disruptive effects
associated with several requirements that implicate cross-border
activity in the security-based swap market, suggesting that those
requirements would create significant operational burdens and impose
unwarranted costs. The Commission also noted that those concerns may be
exacerbated by differences between the Commission's rules in those
areas and corresponding rules of the Commodity Futures Trading
Commission (``CFTC'') in connection with the regulation of the swaps
market.\3\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise
indicated, references to Title VII in this release are to Subtitle B
of Title VII of the Dodd-Frank Act.
    \2\ Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements,
Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 24,
2019) (``Proposing Release'').
    \3\ See Proposing Release, 84 FR at 24207.
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    Commenters addressed a range of issues regarding the proposed rules
and guidance, and those comments are addressed below.\4\ The Commission
has carefully considered commenters' views. For the reasons discussed
below, the Commission is taking the following actions:
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    \4\ The comment letters are available at https://www.sec.gov/comments/s7-07-19/s70719.htm. The Commission also received comments
on topics outside the scope of the proposal that are not addressed
in this release. See letter from Scott O'Malia, CEO, International
Swaps and Derivatives Association, dated July 23, 2019 (``ISDA
letter'') at 3-4 (arguing that the CFTC's rules for swaps and the
Commission's rules regarding security-based swaps, including those
not proposed to be amended, should not materially differ); Yolanda
Lewis, dated July 23, 2019 (generally discussing certain issues
related to certificate-less bonds and employees' securities
companies).
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     The Commission is providing guidance regarding the terms
``arrange'' and ``negotiate,'' as those terms are used within certain
rules connected to the cross-border application of Title VII.\5\
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    \5\ As discussed in more detail below, these rules include
provisions of Exchange Act Rule 3a71-3 regarding the cross-border
application of the ``security-based swap dealer'' definition, the
cross-border application of security-based swap dealer business
conduct requirements, and provisions related to activities of
foreign branches of U.S. banks. These also include provisions of
Regulation SBSR regarding the cross-border application of regulatory
reporting and public dissemination requirements, and provisions of
Rule 3a67-10 regarding the cross-border application of definitions
and requirements applicable to major security-based swap
participants. See generally Part II.B, infra.
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     The Commission is adopting a conditional exception to
provisions of Exchange Act Rule 3a71-3 that otherwise would require
non-U.S. persons to count--against the thresholds associated with the
de minimis exception to the ``security-based swap dealer'' definition--
security-based swap dealing transactions with non-U.S. counterparties
when U.S. personnel arrange, negotiate, or execute those
transactions.\6\
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    \6\ In connection with that exception, the Commission also is
adopting a technical amendment to Exchange Act Rule 0-13.
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     The Commission is adopting an amendment to Exchange Act
Rule 15Fb2-1 to allow a nonresident security-based swap dealer or major
security-based swap participant (each, an ``SBS Entity'') that is
unable to provide the certification and opinion of counsel required by
Rule 15Fb2-4, to be conditionally registered if the nonresident SBS
Entity instead submits a certification and an opinion of counsel that
identify, and are conditioned upon, the occurrence of a future action
that would provide the Commission with adequate assurances of prompt
access to the books and records of the nonresident SBS Entity, and the
ability of the nonresident SBS Entity to submit to onsite inspection
and examination by the Commission. A nonresident SBS Entity that
submits a conditional certification and opinion of counsel in
connection with an application that otherwise is complete in all
respects shall be conditionally registered and

will remain conditionally registered until the Commission acts to grant
or deny ongoing registration. If none of the future actions that are
included in an applicant's conditional certification and opinion of
counsel occurs within 24 months of the compliance date for Rule 15Fb2-
1, and there is not otherwise a basis that would provide the Commission
with the required assurances, the Commission may institute proceedings
thereafter to determine whether ongoing registration should be denied.
     The Commission is providing guidance regarding the
requirements, in Exchange Act Rules 15Fb2-4(c) and 3a71-6, to provide
the Commission with a certification and opinion of counsel, including
with respect to the foreign laws to be covered in the certification and
opinion of counsel of a nonresident SBS Entity; the scope of the books
and records covered by the certification and opinion of counsel;
whether the certification and opinion of counsel can be predicated on
consents (if consents are allowed in the relevant jurisdiction); and
whether the certification and opinion of counsel can rely on a
memorandum of understanding (``MOU''), agreement, protocol, or other
regulatory arrangement with the Commission facilitating access to the
books and records of SBS Entities located in that jurisdiction, an
applicant's understanding of the general experience with the
application of the relevant local law or rule, or a Commission order
granting substituted compliance based on a finding of ``adequate
assurances'' in accordance with Exchange Act Rule 3a71-6(c).
     The Commission is adopting, as proposed, an amendment to
Rule of Practice 194, by including proposed paragraph (c)(2), to
exclude an SBS Entity, subject to certain limitations, from the
prohibition in Exchange Act Section 15F(b)(6) with respect to an
associated person who is a natural person who (i) is not a U.S. person
and (ii) does not effect and is not involved in effecting security-
based swap transactions with or for counterparties that are U.S.
persons, other than a security-based swap transaction conducted through
a foreign branch of a counterparty that is a U.S. person.
     The Commission is adopting, as proposed, amendments to
Rule 18a-5 to provide that a bank \7\ or stand-alone \8\ SBS Entity is
not required to make and keep current a questionnaire or application
for employment executed by an associated person if the SBS Entity is
excluded from the prohibition in Section 15F(b)(6) of the Exchange Act
with respect to such associated person. The Commission also is adopting
amendments to Rule 18a-5 to provide that a questionnaire or application
for employment executed by an associated person who is not a U.S.
person need not include all of the information described in paragraphs
(a)(10)(i)(A) through (H) and (b)(8)(i)(A) through (H) of Rule 18a-5
unless the SBS Entity (1) is required to obtain such information under
applicable law in the jurisdiction in which the associated person is
employed or located or (2) obtains such information in conducting a
background check that is customary for such firms in that jurisdiction,
and the creation or maintenance of records reflecting that information
would not result in a violation of applicable law in the jurisdiction
in which the associated person is employed or located.\9\
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    \7\ The Exchange Act distinguishes between SBS Entities for
which there is a prudential regulator as defined in Section 1a(39)
of the Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(39),
incorporated by reference in Section 3(a)(74) of the Exchange Act,
15 U.S.C. 78c(a)(74), and those that are not subject to supervision
by a prudential regulator (see, e.g., 15 U.S.C. 78o-10(f)(1)(B)).
SBS Entities for which there is a prudential regulator are referred
to herein as ``bank SBS Entities.''
    \8\ An SBS Entity for which there is no prudential regulator
could be dually registered with the Commission as a broker-dealer
(``broker-dealer SBS Entity'') or registered with the Commission
only as an SBS Entity (``stand-alone SBS Entity'').
    \9\ 17 CFR 240.17a-3(a)(12) requires broker-dealers, including
broker-dealer SBS Entities, to make and keep current a questionnaire
or application for employment for each associated person that
contains information about the associated person (the
``questionnaire requirement'') as well other information about
associated persons. The Commission adopted parallel requirements in
Rule 18a-5 for stand-alone and bank SBS Entities. See Requirements
for Security-Based Swap Dealers, Major Security-Based Swap
Participants, and Broker-Dealers; Capital Rule for Certain Security-
Based Swap Dealers, Exchange Act Release No. 87005 (Sep. 19, 2019),
84 FR 68550 (Dec. 16, 2019) (``Recordkeeping and Reporting Adopting
Release'').
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     The Commission is issuing a statement regarding compliance
with rules for security-based swap data repositories and Regulation
SBSR.
    A number of these final actions have been modified from the
proposals to address issues raised by commenters, and more generally to
enhance the actions' effectiveness and efficiency. The Commission has
consulted and coordinated with staff of the CFTC and the prudential
regulators,\10\ in accordance with the consultation mandate of the
Dodd-Frank Act.\11\ The Commission also has consulted and coordinated
with foreign regulatory authorities through Commission staff
participation in numerous bilateral and multilateral discussions with
foreign regulatory authorities addressing the regulation of OTC (over-
the-counter) derivatives.\12\
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    \10\ The term ``prudential regulator'' is defined in Section
1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is
incorporated by reference in Section 3(a)(74) of the Exchange Act,
15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of
Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Farm Credit Administration, or the Federal Housing
Finance Agency (collectively, the ``prudential regulators'') is the
``prudential regulator'' of a security-based swap dealer or major
security-based swap participant if the entity is directly supervised
by that regulator.
    \11\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.''
    In addition, Section 752(a) of the Dodd-Frank Act provides in
part that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.''
    \12\ Staff participates in a number of international standard-
setting bodies and workstreams working on OTC derivatives reforms.
For example, Commission staff participates in the Financial
Stability Board's Working Group on OTC Derivatives Regulation.
Commission staff also participates in the International Organization
of Securities Commissions (``IOSCO'') Committee on Derivatives, the
joint Basel Committee on Banking Supervision (``BCBS'') and IOSCO
Working Group on Margin Requirements' Monitoring Group and
participates in international working groups that impact OTC
derivatives financial market infrastructures, such as Committee on
Payment Market Infrastructures (``CPMI'')--IOSCO joint working
groups assessing legal and regulatory frameworks for central
counterparties and trade repositories and examining central
counterparty resilience and recovery.
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II. Security-Based Swap Transactions Arranged, Negotiated, or Executed
by U.S. Personnel

A. Use of ``Arranged, Negotiated, or Executed'' Criteria

1. Background
    A number of the rules implementing Title VII in the cross-border
context account for whether security-based swap transactions have been
arranged, negotiated, or executed by personnel located in the United
States. In 2016, the Commission adopted Exchange Act Rule 3a71-
3(b)(1)(C)(iii). The rule provides that for purposes of determining
whether non-U.S. persons will be deemed to be security-based swap
dealers--and hence subject to the Title VII requirements applicable to

security-based swap dealers--non-U.S. persons (other than conduit
affiliates as defined in the rule) must count, against the applicable
de minimis threshold, their security-based swap dealing transactions
with non-U.S. counterparties that were ``arranged, negotiated, or
executed'' by personnel within the United States.\13\ The Commission
also incorporated the ``arranged, negotiated, or executed'' criteria
into the cross-border application of other parts of the security-based
swap dealer de minimis counting rules,\14\ of the cross-border
application of business conduct provisions for SBS Entities,\15\ of
Regulation SBSR's regulatory reporting and public dissemination
provisions,\16\ and of Title VII rules regarding major security-based
swap participants.\17\
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    \13\ See Proposing Release, 84 FR at 24208 nn.12-13.
     Rule 3a71-3 further requires that such non-U.S. persons count
their dealing transactions with certain U.S. counterparties, their
dealing transactions in which their performance under the security-
based swap is guaranteed by a U.S. affiliate, and, in some
circumstances, certain transactions of affiliates. See Exchange Act
Rules 3a71-3(b)(1)(iii)(A)-(B), (b)(2) and 3a71-4, 17 CFR 240.3a71-
3(b)(1)(iii)(A)-(B), (b)(2) and 3a71-4.
    Persons whose dealing activities exceed the de minimis
thresholds will be required to register as security-based swap
dealers. See Exchange Act Section 3(a)(71)(D), 15 U.S.C.
78(c)(a)(71)(D); Exchange Act Rule 3a71-2, 17 CFR 240.3a71-2. For a
discussion of the compliance date for registration of security-based
swap dealers, see Part X.B.
    \14\ See Proposing Release, 84 FR at 24208 n.81.
    \15\ See Exchange Act Rule 3a71-3(c), 17 CFR 240.3a71-3(c). See
Proposing Release, 84 FR at 24208 n.79 for further discussion.
    \16\ See Regulation SBSR Rules 908(a)(1)(v) and 908(b)(5), 17
CFR 242.908(a)(1)(v) and 908(b)(5) (incorporating an ``arranged,
negotiated, or executed'' standard). See Proposing Release, 84 FR at
24208 n.80 for further discussion.
    \17\ See Exchange Act Rule 3a67-10(b)(3)(i), 17 CFR 240.3a67-
10(b)(3)(i) (setting out that the ``major security-based swap
participant'' excludes positions that arise from transactions
conducted through a foreign branch of a counterparty that is a
registered security-based swap dealer and thus incorporating the
definition of ``transaction conducted through a foreign branch,''
which makes use of ``arranged, negotiated, and executed'' criteria);
Exchange Act Rule 3a67-10(d), 17 CFR 240.3a67-10(d) (stating that
U.S. and non-U.S. major security-based swap participants are
excluded from having to comply with certain business conduct
requirements in connection with transactions conducted through a
foreign branch, based on that same definition). See Proposing
Release, 84 FR at 24208 n.82 for further discussion.
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    In the Proposing Release, the Commission solicited comment
regarding how U.S. personnel are used in connection with cross-border
security-based swap transactions, and regarding the impacts of tests
that account for the activity of U.S. personnel.\18\ The Commission
also solicited comment on guidance regarding the use of the terms
``arranged'' and ``negotiated'' in the cross-border application of
Title VII rules, as well as on two alternative approaches to a
conditional exception to Rule 3a71-3(b)(1)(C)(iii).\19\ The proposals
sought to address concerns that had been raised regarding the
consequences associated with the incorporation of ``arranged,
negotiated, or executed'' criteria in the cross-border application of
Title VII, in a manner that balanced two competing considerations.\20\
On one hand, the proposals reflected the Commission's continued belief
that the use of ``arranged, negotiated, or executed'' criteria
appropriately should constitute part of the security-based swap dealer
de minimis counting requirement in connection with transactions
involving two non-U.S. counterparties, in part due to the risk that
non-U.S. persons engaged in security-based swap dealing activity in the
United States otherwise could avoid regulation under Title VII.\21\ On
the other hand, the proposals also reflected the Commission's
recognition that the use of ``arranged, negotiated, or executed''
criteria as part of the de minimis counting requirement might produce
negative consequences such as causing financial groups ``to relocate
U.S. personnel or relocate the activities performed by U.S. personnel,
to avoid security-based swap dealer registration,'' and that those
results ``have the potential to increase fragmentation and harm U.S.
market participants and the U.S. economy.'' \22\
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    \18\ See Proposing Release, 84 FR at 24217, 24227-28.
    \19\ See Proposing Release, 84 FR at 24217-18, 24237-43.
    \20\ See Proposing Release, 84 FR at 24207-08.
    \21\ See Proposing Release, 84 FR at 24208-09, 24218.
    \22\ See id. at 24216, 24218.
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2. Commission Action
    After considering comments submitted in response to the Proposing
Release, the Commission continues to believe the ``arranged,
negotiated, or executed'' criteria form an appropriate basis for
applying Title VII requirements in the cross-border context.\23\ At the
same time, after considering commenters' views, the Commission
continues to recognize that the use of ``arranged, negotiated, or
executed'' criteria has the potential to lead to a variety of negative
consequences. Accordingly, the Commission is issuing guidance regarding
the application of the terms ``arranged'' and ``negotiated'' in the
cross-border application of Title VII rules to the provision of
``market color,'' as well as adopting a conditional exception from the
incorporation of ``arranged, negotiated, or executed'' criteria as part
of the de minimis counting test.\24\
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    \23\ Some commenters supported these criteria, with one noting
that failure to regulate these transactions under Title VII would
create competitive disparities between U.S. and non-U.S. market
participants, while regulating these transactions ``will enable the
Commission to better monitor for disruptive trading practices and
will also provide the necessary data regarding overall market
trading activity to allow the Commission to evaluate market trends
and accurately assess the impact of other reforms implemented in the
security-based swap market.'' See letter from Stephen Berger,
Managing Director, Citadel, dated July 23, 2019 (``Citadel letter'')
at 2-5; see also letter from Dennis Kelleher, President and CEO,
Better Markets, dated July 23, 2019 (``Better Markets letter'') at
11 (``Better Markets would like to commend the SEC for affirming
fundamental legal bases for continuing to apply Dodd-Frank Act
requirements to ANE Transactions based on a territorial analysis of
the SEC's cross-border jurisdiction''); letter from Americans for
Financial Reform Education Fund, dated July 23, 2019 (``AFR
letter'') at 2 (``we also pointed out that given the narrow
definition of U.S. person under the rule, the inclusion of ANE
transactions in the de minimis count was an absolutely crucial
protection to include in the rule'').
    In contrast, some commenters reiterated opposition to any use of
``arranged, negotiated, or executed'' criteria in connection with
Title VII implementation, including cross-border tests related not
only to the de minimis exception to the ``security-based swap
dealer'' definition, but also to other requirements related to
security-based swap dealer registration, to business conduct
requirements and to reporting and public dissemination requirements.
See letter from Briget Polichene, CEO, Institute of International
Bankers, and Kenneth E. Bentsen, President and CEO, Securities
Industry and Financial Markets Association, dated July 23, 2019
(``IIB/SIFMA letter'') at 7-8, 16-18; ISDA letter at 4-7; letter
from Wim Mijs, CEO, European Banking Federation, dated July 23, 2019
(``EBF letter'') at 7; letter from Mark Hutchinson, Managing
Director & General Counsel, HSBC Bank USA, N.A., dated July 23, 2019
(``HSBC letter'') at 2-3. Some of these commenters also expressed
the view, however, that the proposed exception would partially--but
not completely--address the problems they identified in connection
with the use of those criteria. See IIB/SIFMA letter at 2 (stating
that if the Commission does not adopt the commenter's recommended
approach of not incorporating ``arranged, negotiated, or executed''
criteria as part of Title VII implementation, it should ``adopt a
modified version of the Proposal's conditional exception from the de
minimis calculation''); ISDA letter at 7-9; HSBC letter at 1, 5. One
commenter also argued that the Commission should exempt all non-U.S.
registered security-based swap dealers from business conduct
requirements other than those that also apply to transactions
subject to the proposed exception to the de minimis counting
requirement. See IIB/SIFMA letter at 16.
    \24\ As noted in the Proposing Release, the antifraud provisions
of the federal securities laws and certain relevant Title VII
requirements would continue to apply to the transactions subject to
the exception. See Proposing Release, 84 FR at 24219.
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    As the Commission previously recognized, the ``arranged,
negotiated, or executed'' criteria serve important regulatory
interests, including helping protect against the potential that market
participants would use booking practices to engage in an unregistered
security-based swap dealing business in the United States. Those
criteria further

reflect the activity-based focus of the ``security-based swap dealer''
definition,\25\ as well as considerations regarding competitive
disparities, market fragmentation, and public transparency. Similarly,
the Title VII SBS Entity requirements more generally serve a number of
regulatory purposes apart from mitigating counterparty and operational
risks, ``including enhancing counterparty protections and market
integrity, increasing transparency, and mitigating risk to participants
in the financial markets and the U.S. financial system more broadly.''
\26\
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    \25\ As the Commission has previously noted, ``Exchange Act
Section 3(a)(71)(A) identifies specific activities that bring a
person within the definition of a `security-based swap dealer': (1)
[h]olding oneself out as a dealer in security-based swaps; (2)
making a market in security-based swaps; (3) regularly entering into
security-based swaps with counterparties as an ordinary course of
business for one's own account; or (4) engaging in any activity
causing oneself to be commonly known in the trade as a dealer in
security-based swaps.'' Security-Based Swap Transactions Connected
with a Non-U.S. Person's Dealing Activity That Are Arranged,
Negotiated, or Executed By Personnel Located in a U.S. Branch or
Office or in a U.S. Branch or Office of an Agent; Security-Based
Swap Dealer De Minimis Exception, Exchange Act Release No. 77104
(Feb. 10, 2016), 81 FR 8598, 8614 (Feb. 19, 2016) (``ANE Adopting
Release'') (citing Exchange Act Section 3(a)(71)(A), 15 U.S.C.
78c(a)(71)(A)).
     The Commission has interpreted this definition to apply to
persons engaged in indicia of dealing activity. See ANE Adopting
Release, 81 FR at 8614 (citing Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant,'' Exchange Act Release No. 66868
(Apr. 27, 2012), 77 FR 30596, 30617-18 (May 23, 2012)
(``Intermediary Definitions Adopting Release'')).
    Consistent with the statutory definition, the Commission has
stated that the de minimis threshold relates to the volume of
dealing activity and not to specific risk-related factors. Moreover,
the fact that risk from a transaction between two non-U.S. persons
exists largely outside the United States does not determine whether
a sufficient nexus exists to require a non-U.S. person to count the
transaction toward its de minimis threshold. Rather, ``the
appropriate analysis . . . also considers whether a non-U.S. person
in such a transaction is engaged, in the United States, in any of
the activities set forth in the statutory definition [or in the
Commission's further definition] of `security-based swap dealer.'''
ANE Adopting Release, 81 FR at 8614.
    \26\ See Proposing Release, 84 FR at 24201 n.20. The
Commission's actions to mitigate the negative consequences
potentially associated with the various uses of this type of test
accordingly are designed to do so while preserving the important
Title VII interests that the Commission advanced when it
incorporated the test into the various cross-border rules. See
Proposing Release, 84 FR at 24208.
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    For similar reasons, the Commission is unpersuaded by one
commenter's suggestion \27\ to replace the ``arranged, negotiated, or
executed'' criteria for applying Title VII in the cross-border context
with a ``primary trading relationship'' test. Moreover, the Commission
recognizes that a test, such as a primary trading relationship test,
that purports to distinguish between ``direct'' and ``meaningful''
involvement in a transaction on the one hand, and ``occasional'' and
``incidental'' involvement on the other hand, in practice would be
subject to subjective and inconsistent application.
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    \27\ See HSBC letter (highlighting operational issues associated
with the use of an ``arranged, negotiated, or executed test'' and
stating that it would be more practical to make use of a ``primary
trading relationship'' test that looks at ``the nature of the
trading relationship between the non-U.S. parties and the U.S.
personnel involved in the trade''; adding that that test would apply
``if U.S. personnel are directly and meaningfully involved in the
trading relationship with the non-U.S. parties at the relationship
level (e.g., the client's primary point of contact for the SBS is
located in the United States), but not when ``U.S. personnel are
only occasionally and incidentally involved in the trading
relationship with the non-U.S. parties'').
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    At the same time, commenters argued that the use of ``arranged,
negotiated, or executed'' criteria has the potential to lead to a
variety of negative consequences. In particular, commenters expressed
concern that these criteria may cause the relocation of operations and
personnel out of the United States, inhibit the use of centralized risk
management, reduce liquidity in the U.S. market, increase fragmentation
in global markets, impose significant compliance costs and logistical
challenges, and produce competitive disparities.\28\ As discussed
below, the conditional exception should help mitigate the negative
consequences that otherwise may arise from the use of those criteria to
their security-based swap business, while also helping to avoid
allowing persons to engage in an unregulated security-based swap
dealing business in the United States.
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    \28\ See IIB/SIFMA letter at 7-8, 16-18; ISDA letter at 4-7; EBF
letter at 7; HSBC letter at 2-3.
---------------------------------------------------------------------------

    Commenters expressed concerns about both the proposed ``market
color'' guidance and the proposed conditional exception. Some
commenters asserted that the proposed guidance would encourage market
participants to restructure their security-based swaps business to
avoid the requirements of the Dodd-Frank Act.\29\ Commenters argued
that this evasion would impede the Commission's ability to monitor
compliance,\30\ as well as to exercise its anti-fraud authority.\31\
Commenters also worried that the Commission would lose the ability to
oversee the vast majority of ``arranging'' and ``negotiating''
activity.\32\ Similarly, some commenters objected to the proposed
exception to the de minimis counting rule, asserting that the proposal
reflected industry preference contrary to the Commission's public
interest mandate,\33\ was unsupported by new information,\34\ and would
permit certain market participants to use booking practices to avoid
having to register as security-based swap dealers.\35\ The Commission
recognizes that the guidance addresses certain activity that will not
be cross-border ``arranging'' and ``negotiating'' subject to the
application of certain Title VII rules. Further, the Commission is
mindful that the exception modifies the approach taken in 2016, when
the Commission incorporated the ``arranged, negotiated, or executed''
criteria into the de minimis counting rule. Though the exception does
permit market participants to avoid counting certain ``arranging,
negotiating, or executing'' activity towards the security-based swap
dealer registration thresholds, in the Commission's view, its approach
appropriately balances the recent concerns presented by commenters \36\
and helps avoid the potential negative consequences that some have
suggested may be associated with the current ``arranging, negotiating,
or executing'' standard. In the Commission's view, this approach is in
the public interest because it should help facilitate implementation of
the Title VII security-based swap dealer requirements in a manner that
is both effective and efficient.\37\
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    \29\ See Citadel letter at 5; see also Better Markets letter at
17.
    \30\ See Citadel letter at 5.
    \31\ See Better Markets letter at 21.
    \32\ See Citadel letter at 5.
    \33\ See Better Markets letter at 1-2.
    \34\ See Better Markets letter at 25; AFR letter at 3-4.
    \35\ See AFR letter at 4; see also Citadel letter at 5
(expressing concerns regarding permitting counterparties to ``engage
in dealing activity using U.S.-based personnel without being
appropriately registered with the Commission'' in connection with
expressing opposition to Alternative 2); letter from Karl Muth,
dated July 19, 2019 (``Muth letter'') (expressing view that ``the
risk that non-U.S. persons engaged in security-based swap dealing
activity in the United States could avoid regulation under Title VII
. . . is a more serious risk than the risk that the ambit of Title
VII may be expanded nominally in some unanticipated way'').
    \36\ See note 23, supra, and Parts II.B and II.C, infra.
    \37\ Three commenters expressed concerns regarding
documentation-related compliance burdens in connection with the use
of the ``arranging, negotiating, or executing'' standard in Title
VII rules. See IIB/SIFMA letter at 16 (asserting that many business
conduct requirements ``would impose documentation burdens on non-
U.S. counterparties that would deter them from having the
interactions with U.S. personnel that would trigger these
requirements''; suggesting an exemption from all business conduct
requirements as applied to non-U.S. security-based swap dealers'
``arranging, negotiating, or executing'' activity,'' except for
those requirements that are conditions to the new exception from the
de minimis counting rule); ISDA letter at 7 (asserting that
``certain business conduct requirements would impose documentation
burdens on non-U.S. counterparties that may incentivize them not to
transact with nonresident [security-based swap dealers] that utilize
U.S. personnel''; suggesting either an exemption from, or
substituted compliance for, all business conduct requirements as
applied to non-U.S. security-based swap dealers' ``arranging,
negotiating, or executing'' activity''); HSBC letter at 3-4 (noting
that it would be ``immensely cumbersome to modify [OTC derivatives
regulation compliance systems] to systematically monitor and track
the location of any front office personnel acting for HSBC'').
Another commenter did not cite documentation burdens but called for
an exemption from all business conduct requirements for transactions
between two non-U.S. persons that are ``arranged, negotiated, or
executed'' by U.S. personnel. See EBF letter at 7. For the reasons
discussed above, the Commission continues to believe the ``arranged,
negotiated, or executed'' criteria form an appropriate basis for
applying Title VII requirements, including business conduct
requirements, in the cross-border context. The Commission encourages
potential foreign SBS Entity registrants, however, to contact the
staff to discuss concerns regarding any disruption that may be
associated with any documentation requirements arising from
transactions that are arranged, negotiated, or executed by U.S.
personnel. In this regard, the Commission notes that certain of
these business conduct requirements are required by statute.
     Similarly, three commenters expressed concerns regarding the
application of Regulation SBSR to transactions between non-U.S.
persons that are ``arranged, negotiated, or executed'' by U.S.
personnel. See IIB/SIFMA letter at 16-18 (suggesting an exemption
from Regulation SBSR for such transactions when they are reported in
another jurisdiction but not publicly disseminated due to
insufficient liquidity in that jurisdiction); ISDA letter at 5-7
(suggesting an exemption from Regulation SBSR for such transactions
until the Commission issues substituted compliance determinations
for all G-20 jurisdictions); EBF letter at 7 (suggesting an
exemption from Regulation SBSR for such transactions). One commenter
urged the Commission to continue applying Regulation SBSR to
transactions between non-U.S. persons that are ``arranged,
negotiated, or executed'' by U.S. personnel, to promote the
Commission's supervisory interest in monitoring U.S. trading
activity and to increase transparency and enhance price discovery
for U.S. market participants. See Citadel letter at 1, 2-5. For the
reasons discussed above, the Commission continues to believe the
``arranged, negotiated, or executed'' criteria form an appropriate
basis for applying Title VII requirements, including Regulation
SBSR, in the cross-border context. Another commenter asked the
Commission to allow transaction reports made pursuant to Regulation
SBSR to mask counterparty information when a foreign legal barrier
requires counterparty consent and/or regulatory authorization to
report unmasked data. See IIB/SIFMA letter at 28-29. As discussed in
Part X.C, the Commission is issuing a statement regarding compliance
with Regulation SBSR. This statement takes account of these
comments.

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B. Guidance Regarding the Meaning of ``Arranged'' and ``Negotiated'' in
Connection With the Cross-Border Application of Title VII

1. Proposed Approach
    For purposes of the ``arranged, negotiated, or executed'' test, the
Commission intended for the terms ``arrange'' and ``negotiate'' to
``indicate market-facing activity of sales or trading personnel in
connection with a particular transaction, including interactions with
counterparties or their agents.'' \38\ Recognizing that market-facing
activity may vary significantly in connection with security-based swap
transactions, the Commission proposed guidance regarding activity that
is not ``arranging'' or ``negotiating'' for purposes of Title VII
requirements.\39\ The proposed guidance would have applied to the
``arranged, negotiated, or executed'' test that is used in connection
with the de minimis counting rules \40\ and in the cross-border
application of business conduct rules,\41\ regulatory reporting and
public dissemination requirements,\42\ and major security-based swap
participant rules.\43\
---------------------------------------------------------------------------

    \38\ See ANE Adopting Release, 81 FR at 8622; see also Proposing
Release, 84 FR at 24215.
    \39\ See Proposing Release, 84 FR at 24216.
    \40\ In connection with de minimis counting, this guidance would
apply to: (1) Exchange Act Rule 3a71-3(b)(1)(iii)(C), which requires
the counting of security-based swap dealing transactions between
non-U.S. counterparties that have been ``arranged, negotiated, or
executed'' in the United States, 17 CFR 240.3a71-3(b)(1)(iii)(C);
(2) Exchange Act Rule 3a71-3(b)(2), which addresses the counting of
affiliate transactions described by paragraph (b)(1) (which includes
the (b)(1)(iii)(C) requirement), 17 CFR 240.3a71-3(b)(2); (3)
Exchange Act Rule 3a71-5, which excepts certain cleared anonymous
transactions from the individual counting requirement of paragraph
(b)(1) of Rule 3a71-3 and from the affiliate counting requirement of
paragraph (b)(2), but is unavailable to transactions ``arranged,
negotiated, or executed'' by U.S. personnel, 17 CFR 240.3a71-5; and
(4) the de minimis counting requirement of Exchange Act Rule 3a71-
3(b)(1)(iii)(A), requiring the counting of dealing transactions
involving a foreign branch of a registered security-based swap
dealer and a non-U.S. counterparty (or another foreign branch), 17
CFR 240.3a71-3(b)(1)(iii)(A). The regulatory interests underlying
the Rule 3a71-3(b)(1)(iii)(C) and Rule 3a71-3(b)(1)(iii)(A) uses of
arranged, negotiated, and/or executed criteria to implement the de
minimis counting requirement are similar (as are, derivatively, the
Rule 3a71-3(b)(2) and Rule 3a71-5 uses).
    The guidance also would apply to the definition of ``transaction
conducted through a foreign branch'' in Rule 3a71-3(a)(3), which
incorporates the functionally equivalent ``arranged, negotiated, and
executed'' terminology.
    \41\ See note 14, supra.
    \42\ See note 16, supra.
    \43\ See note 17, supra.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission explained that in certain
circumstances the market-facing activity of U.S. personnel is so
limited that it would not implicate the regulatory interests underlying
the relevant Title VII requirements.\44\ The Commission proposed that
such circumstances arise when U.S. personnel provide ``market color''
in connection with security-based swap transactions, but otherwise have
no client responsibility and receive no transaction-linked
compensation.\45\ The Commission further proposed that, for those
purposes, the term ``market color'' would mean background information
regarding pricing or market conditions associated with particular
instruments or with markets more generally, including information
regarding current or historic pricing, volatility, or market depth, and
trends or predictions regarding pricing, volatility, or market depth,
as well as other types of information reflecting market conditions and
trends.\46\ The Commission proposed that U.S. personnel who have no
client responsibility and receive no transaction-linked compensation
could provide market color in connection with security-based swap
transactions in support of non-U.S. persons who actually arrange,
negotiate, and execute those transactions on behalf of their clients,
without triggering the requirements under Title VII that incorporate
the ``arranged, negotiated, or executed'' test.\47\ The Commission
explained that, for purposes of the proposed guidance, having no client
responsibility would mean that the U.S. personnel providing market
color must not have been assigned, and must not otherwise exercise,
client responsibility in connection with the transaction.\48\ The
Commission noted that the involvement of U.S. personnel who are
designated as sales persons or traders would not necessarily trigger
the ``arranged, negotiated, or executed'' test as long as such
personnel's activity is limited to the provision of market color,
rather than arranging or negotiating.\49\ The Commission also explained
that U.S. personnel not receiving transaction-linked compensation means
that the U.S. personnel do not receive compensation based on or
otherwise linked to the completion of transactions on which the U.S.
personnel provide market color.\50\ The Commission clarified, however,
that this does not include profit-sharing arrangements or other
compensation practices that account for aggregated profits, as such
arrangements would not be expected to incentivize U.S. personnel in a
similar manner or to a similar degree as compensation that is directly
linked to the success of individual transactions.\51\
---------------------------------------------------------------------------

    \44\ See Proposing Release, 84 FR at 24216.
    \45\ See id. at 24216-17.
    \46\ See id. at 24216.
    \47\ See id. at 24217.
    \48\ See id. at 24217.
    \49\ See id. at 24216 n.95.
    \50\ See id. at 24217.
    \51\ See id. at 24217 n.96.
---------------------------------------------------------------------------

    In proposing the guidance, the Commission reasoned that the
provision of market color by U.S. personnel who have no client
responsibility and receive

no transaction-linked compensation is a type of limited market-facing
activity by U.S. personnel that, standing alone, would not trigger the
concerns and regulatory interests that underpin the various uses of the
``arranged, negotiated, or executed'' test, as such activity would not
appear comprehensive enough to pose a significant risk of allowing an
entity to exit the Title VII regulatory regime without exiting the U.S.
market.\52\ Moreover, non-U.S. counterparties reasonably would not
expect Title VII business conduct requirements to apply merely as the
result of receiving technical information from U.S. personnel.\53\ As
noted in the Proposing Release, in circumstances where limited market-
facing activity by U.S. personnel does not trigger the ``arranged,
negotiated, or executed'' test, the federal securities laws, including
applicable anti-fraud provisions, still may apply to that activity
depending on the particular facts and circumstances.\54\
---------------------------------------------------------------------------

    \52\ See id. at 24216 n.94.
    \53\ See id.
    \54\ See id. at 24217 n.97.
---------------------------------------------------------------------------

2. Commission Action
    The Commission is providing the guidance largely as proposed,
modified to further explain the term ``market color.'' \55\ The
Commission believes that, as revised, the guidance will help entities
evaluate what is, and what is not, ``market color.''
---------------------------------------------------------------------------

    \55\ Three commenters expressed general support for the guidance
as proposed. See IIB/SIFMA letter at 3, 9-10; HSBC letter at 1, 5
(expressing general support for the comments in the IIB/SIFMA
letter); ISDA letter at 2.
---------------------------------------------------------------------------

    The Commission is providing guidance \56\ regarding the ``arranged,
negotiated, or executed'' test that is used in connection with de
minimis counting,\57\ the cross-border application of business conduct
rules,\58\ regulatory reporting and public dissemination
requirements,\59\ and major security-based swap participant rules.\60\
---------------------------------------------------------------------------

    \56\ The Commission continues to believe there is no reason to
revisit its prior guidance regarding the scope of the term
``execute''; the Commission therefore did not in the Proposing
Release and does not now provide any additional guidance regarding
the interpretation of that term. Moreover, although the Commission
is providing guidance with respect to certain market-facing
activities that in its view do not constitute arranging or
negotiating for purposes of the relevant Title VII requirements, the
Commission's view otherwise remains unchanged with respect to
guidance provided in the ANE Adopting Release regarding what
constitutes arranging, negotiating, or executing security-based
swaps.
    \57\ In connection with de minimis counting, this guidance
applies to: (1) Exchange Act Rule 3a71-3(b)(1)(iii)(C), which
requires the counting of security-based swap dealing transactions
between non-U.S. counterparties that have been ``arranged,
negotiated, or executed'' in the United States, 17 CFR 240.3a71-
3(b)(1)(iii)(C); (2) Exchange Act Rule 3a71-3(b)(2), which addresses
the counting of affiliate transactions described by paragraph (b)(1)
(which includes the (b)(1)(iii)(C) requirement), 17 CFR 240.3a71-
3(b)(2); (3) Exchange Act Rule 3a71-5, which excepts certain cleared
anonymous transactions from the individual counting requirement of
paragraph (b)(1) of Rule 3a71-3 and from the affiliate counting
requirement of paragraph (b)(2), but is unavailable to transactions
``arranged, negotiated, or executed'' by U.S. personnel, 17 CFR
240.3a71-5; and (4) the de minimis counting requirement of Exchange
Act Rule 3a71-3(b)(1)(iii)(A), requiring the counting of dealing
transactions involving a foreign branch of a registered security-
based swap dealer and a non-U.S. counterparty (or another foreign
branch), 17 CFR 240.3a71-3(b)(1)(iii)(A). The regulatory interests
underlying the Rule 3a71-3(b)(1)(iii)(C) and Rule 3a71-
3(b)(1)(iii)(A) uses of arranged, negotiated, and/or executed
criteria to implement the de minimis counting requirement are
similar (as are, derivatively, the Rule 3a71-3(b)(2) and Rule 3a71-5
uses).
    The guidance also applies to the definition of ``transaction
conducted through a foreign branch'' in Rule 3a71-3(a)(3), which
incorporates the functionally equivalent ``arranged, negotiated, and
executed'' terminology.
    \58\ See note 15, supra (addressing Exchange Act Rule 3a71-3(c),
17 CFR 240.3a71-3(c), business conduct exclusion).
    \59\ See note 16, supra (addressing Regulation SBSR Rules
908(a)(1)(v) and 908(b)(5), 17 CFR 242.908(a)(1)(v) and 908(b)(5),
regarding the cross-border application of regulatory reporting and
public dissemination requirements).
    \60\ See note 18, supra (addressing cross-border major security-
based swap participant provisions of Exchange Act Rules 3a67-
10(b)(3)(i) and 3a67-10(d), 17 CFR 240.3a67-10(b)(3)(i) and 3a67-
10(d)).
---------------------------------------------------------------------------

    In the Commission's view, ``market color'' is limited to background
information regarding pricing or market conditions associated with
particular instruments or with markets more generally in support of
persons who arrange, negotiate, or execute security-based swap
transactions on behalf of their clients. Background information
includes information regarding (1) current or historic pricing,
volatility, or market depth, and (2) trends or predictions regarding
pricing, volatility, or market depth, as well as information related to
risk management.
    The Commission is clarifying that U.S personnel who provide market
color in connection with security-based swap transactions--in the form
of information or data as described above--do not trigger the Title VII
requirements that use an ``arranged, negotiated, or executed'' test
when both the following circumstances exist:
     No client responsibility--The U.S. personnel have not been
assigned, and do not otherwise exercise, client responsibility in
connection with the transaction.
     No transaction-linked compensation--The U.S. personnel do
not receive compensation based on, or otherwise linked to, the
completion of individual transactions on which the U.S. personnel
provide market color. \61\
---------------------------------------------------------------------------

    \61\ As stated in the Proposing Release, the Commission
understands that it is commonplace for firms to account for the
overall profit or loss of the firm, or of a particular division or
office, in calculating compensation for personnel. Solely for the
purposes of this guidance, the Commission does not view profit-
sharing arrangements or other compensation practices that account
for aggregated profits as transaction-linked compensation, as such
arrangements would not be expected to incentivize U.S. personnel in
a similar manner or to a similar degree as compensation that is
directly linked to the success of individual transactions.
---------------------------------------------------------------------------

    In contrast, in the Commission's view, any solicitation activity by
personnel located in the United States or activity to respond to
requests by counterparties to enter into transactions when such
requests are made directly to personnel located in the United States
would not be ``market color.'' \62\ Moreover, market-facing activity by
personnel located in the United States also would not be ``market
color'' if such activity involves:
---------------------------------------------------------------------------

    \62\ See Intermediary Definitions Adopting Release, 77 FR at
30618 (identifying actively soliciting clients in security-based
swaps as a factor in indicating that a person meets the statutory
definition of security-based swap dealer); see also Application of
``Security-Based Swap Dealer'' and ``Major Security-Based Swap
Participant'' Definitions to Cross-Border Security-Based Swap
Activities, Exchange Act Release 34-72472 (Jun. 25, 2014), 79 FR
47278, 47322 n.364 (Aug. 12, 2014) (``Cross-Border Adopting
Release'') (stating that the term ``arranging'' was used in lieu of
``solicit'' to reflect the fact that a person may engage in dealing
activity not only through transactions that the person actively
solicits, but also through transactions that result from
counterparties reaching out to the person); ANE Adopting Release, 81
FR 8622 n.221.
---------------------------------------------------------------------------

     Providing recommendations, such as recommending particular
instruments;
     providing predictions regarding potential merits or risks
of, or providing trading ideas or strategies relating to, a proposed
security-based swap transaction;
     structuring a particular security-based swap transaction;
or
     finalizing or reaching agreement with respect to any
pricing or non-pricing element, such as underlier, notional amount or
tenor, that must be resolved to complete a security-based swap
transaction.
    The language above is different from the language in the proposal
in response to a number of commenters who expressed concern that it
would be difficult to distinguish ``market color'' activity from
``arranging'' and ``negotiating'' activity.\63\
---------------------------------------------------------------------------

    \63\ See Citadel letter at 5; Better Markets letter at 13-14.
---------------------------------------------------------------------------

    Commenters expressed concern that the guidance would encourage
entities (including U.S. entities) to restructure to avoid or evade
requirements applicable

under the Dodd-Frank Act.\64\ One commenter warned that ``market
color'' was ``highly facts and circumstances-specific, complicating
monitoring and surveillance by the Commission regarding whether dealer
firms are appropriately classifying ANE transactions,'' \65\ as well as
the exercise of the Commission's anti-fraud authority \66\ and would
result in the Commission losing oversight over the vast majority of
transactions that are currently classified as ``arranging'' or
``negotiating.'' \67\ Finally, a commenter stated that the guidance
would lead to ``bifurcation of U.S. and non-U.S. markets'' that would
be ``almost certain to impair liquidity and increase costs on U.S.
counterparties'' and lead to increased fragmentation.\68\
---------------------------------------------------------------------------

    \64\ See Citadel letter at 5; see also Better Markets letter at
17.
    \65\ See Citadel letter at 5.
    \66\ See Better Markets letter at 21.
    \67\ See Citadel letter at 5.
    \68\ See Better Markets letter at 23-24.
---------------------------------------------------------------------------

    The Commission is not making additional changes in response to
these comments. The Commission believes the guidance describes
activities that are sufficiently limited and should not encourage
entities (including U.S. entities) to restructure to avoid requirements
applicable under the Dodd-Frank Act or to lead to market fragmentation.
Moreover, contrary to one commenter's suggestion, the Commission is not
taking the position that market color activities are not within its
jurisdiction.\69\ Indeed, to the extent federal securities laws,
including anti-fraud, apply to U.S. personnel's provision of market
color, nothing in this guidance affects requirements for U.S. personnel
to comply with those laws. Moreover, any U.S. personnel who would have
the requisite expertise to provide market color, likely would be
associated persons of an entity registered with the Commission in an
appropriate capacity, such as a security-based swap dealer or broker-
dealer.
---------------------------------------------------------------------------

    \69\ Nothing in the amendments or guidance should be interpreted
as a limitation or further clarification of the ``outer bounds of
the agency's cross-border jurisdiction.'' See ISDA letter at 2.
---------------------------------------------------------------------------

C. Conditional Exception to Required De Minimis Counting of Certain
Dealing Transactions Arranged, Negotiated, or Executed by U.S.
Personnel

    For the reasons discussed above in part A.2, and after carefully
considering comments received, the Commission is adopting a conditional
exception to the de minimis counting requirement of Rule 3a71-
3(b)(1)(iii)(C), subject to certain modifications from the proposal
that are addressed below.\70\
---------------------------------------------------------------------------

    \70\ As discussed below, the Commission is adopting a modified
version of Alternative 2 of the proposed exception, which requires
that the U.S. personnel at issue be associated either with a
registered broker or with a registered security-based swap dealer.
See Part II.C.1, infra.
     This conditional exception to Rule 3a71-3(b)(1)(iii)(C) also
would have ramifications to affiliate counting provisions of
paragraph (b)(2) of Rule 3a71-3. Paragraph (b)(2) requires persons
engaged in security-based swap transactions described in paragraph
(b)(1) of the rule -which includes the transactions at issue--also
to count certain dealing transactions of affiliates under common
control, including transactions described in paragraph (b)(1)(iii)
(unless, pursuant to Rule 3a71-4, the affiliate itself is a
registered security-based swap dealer or a person in the process of
registering as a security-based swap dealer). As a result,
transactions subject to the proposed Rule 3a71-3(b)(1)(iii)(C)
exception further would not be subject to the paragraph (b)(2)
affiliate transaction counting requirement.
    Also, Exchange Act Rule 3a71-5 excepts certain cleared anonymous
transactions from the individual counting requirement of paragraph
(b)(1) of Rule 3a71-3 (which includes the (b)(1)(iii)(C)
requirement) and from the affiliate counting requirement of
paragraph (b)(2), but the Rule 3a71-5 exception is unavailable to
transactions arranged, negotiated, or executed by U.S. personnel.
Because the exception to (b)(1)(iii)(C) will prevent the
transactions at issue from triggering either the (b)(1) or (b)(2)
counting requirements, the Rule 3a71-5 exception would not be
relevant to those transactions.
---------------------------------------------------------------------------

1. Registration and Ownership Status of the Entity With Which U.S.
Personnel Is Associated
(a) Proposed Approach
    The proposal set forth two alternatives that differed with regard
to the registration status of the entity with which personnel engaged
in arranging, negotiating, or executing activity within the United
States is associated. Under Alternative 1, all such arranging,
negotiating, or executing activity within the United States would have
to be performed by personnel associated with an entity that is
registered with the Commission as a security-based swap dealer.\71\
Alternative 1 was predicated on the reasoning that requiring this U.S.
activity to be conducted by personnel in their capacity as associated
persons of a registered security-based swap dealer would help ensure
that the U.S. activity would be subject to key security-based swap
dealer requirements under Title VII, including requirements regarding
supervision, books and records, trade acknowledgments and
verifications, and business conduct standards. Alternative 2 as
proposed was broader, allowing for the U.S. activity to be performed by
personnel associated with an entity that is registered with the
Commission as a broker (or, as with the first alternative, an entity
that is registered as a security-based swap dealer).\72\ The other
proposed conditions to the two alternatives were intended to be
functionally identical.\73\
---------------------------------------------------------------------------

    \71\ See Alternative 1--proposed Rule 3a71-3(d)(1)(i)(A).
    \72\ See Alternative 2--proposed Rule 3a71-3(d)(1)(i)(A).
    \73\ There were certain technical differences between the two
alternatives, to reflect the potential that, under Alternative 2,
the U.S. activity could be conducted by a registered broker that is
not also registered as a security-based swap dealer. See note 154,
infra.
---------------------------------------------------------------------------

    Both proposed alternatives required that the registered entity
(whether it is a registered security-based swap dealer or a registered
broker) be a majority-owned affiliate of the non-U.S. person relying on
the exception.\74\ The affiliation condition in part reflected the
expectation that financial groups that use the exception to avoid
having to relocate their U.S.-based personnel (so as to avoid
triggering security-based swap dealer registration) would use
affiliated entities to satisfy the exception.\75\ The affiliation
condition also was intended to help guard against the risk that a
financial group may seek to attenuate its responsibility for any
shortcomings in the registered entity's compliance with the conditions
to the exception.\76\ The proposal made use of a majority-ownership
standard \77\ to achieve that goal--rather than other measures of
affiliation such as a common control standard or alternative ownership
thresholds--to help ensure that the financial group has a significant
interest in the registered entity, including the registered entity's
compliance with applicable requirements.\78\
---------------------------------------------------------------------------

    \74\ See Alternatives 1 and 2--proposed Exchange Act Rule 3a71-
3(d)(1)(i)(B).
    \75\ See Proposing Release, 84 FR at 24220, 24227.
    \76\ See id.
    \77\ Paragraph (a)(10) of Rule 3a71-3 defines the term
``majority-owned affiliate'' to encompass relationships whereby one
entity directly or indirectly owns a majority interest in another,
or whereby a third party directly or indirectly owns a majority
interest in both, where ``majority interest'' is the right to vote
or direct the vote of a majority of a class of voting securities of
an entity, the power to sell or direct the sale of a majority of a
class of voting securities of an entity, or the right to receive
upon dissolution, or the contribution of, a majority of the capital
of a partnership.
    \78\ See id.
---------------------------------------------------------------------------

(b) Commission Action
    As discussed above in part II.A.2, ``arranging,'' ``negotiating,''
and ``executing'' are core components of security-based swap dealing
activity.\79\

Moreover, a non-U.S. person that, as part of its security-based swap
dealing, ```engages in market-facing activity using personnel located
in the United States' would perform activities that fall within the
security-based swap dealer definition `at least in part in the United
States.' '' \80\ The Commission is adopting Alternative 2--which
requires that the ``arranging, negotiating, or executing'' activity in
the United States be performed by personnel associated with either a
registered security-based swap dealer or a registered broker \81\--but
is modifying elements of Alternative 2 from the proposal in response to
concerns raised by commenters.\82\ In addition, the Commission is
adopting, as proposed, the condition requiring that the registered
entity be a majority-owned affiliate of the non-U.S. person relying on
the exception.\83\
---------------------------------------------------------------------------

    \79\ The ``arranged, negotiated, or executed'' criteria do not
encompass non market-facing activity, such as:
     Processing trades and other back-office activities; designing
security-based swaps without engaging in market-facing activity in
connection with specific transactions; preparing underlying
documentation including negotiating master agreements (``as opposed
to negotiating with the counterparty the specific economic terms of
a particular security-based swap transaction''); and clerical and
ministerial tasks such as entering executed transactions on a non-
U.S. person's books.
     Proposing Release, 84 FR at 24215 (citing ANE Adopting Release,
81 FR at 8622). Further, the ``arranged'' and ``negotiated''
criteria do not include certain types of market-facing activity
consistent with the ``market color'' guidance discussed in Part
II.B, supra.
    \80\ See Proposing Release, 84 FR at 24208.
    As noted in the Proposing Release, the exception applies only to
the Rule 3a71-3(b)(1)(iii)(C) requirement for non-U.S. persons to
count transactions that involve dealing activity in the United
States. Rule 3a71-3 continues to require non-U.S. persons to count
all of their security-based swap dealing transactions with U.S.
person counterparties, all of their security-based swap dealing
transactions that are guaranteed by their U.S. person affiliates,
and certain dealing transactions of their affiliates. See Proposing
Release, 84 FR at 24219 nn.102, 105.
    \81\ As noted in the Proposing Release, the exception would not
be satisfied if the ``arranging, negotiating, or executing''
activity is conducted by a bank that has not registered as a broker
due to exceptions for bank brokerage activity in the Exchange Act's
definition of ``broker,'' unless the bank is registered as a
security-based swap dealer. See Proposing Release, 84 FR at 24226
n.166.
    \82\ See Exchange Act Rule 3a71-3(d)(1)(i)(A).
    \83\ The Commission received no comments specific to that
proposed condition. As discussed in the Proposing Release, that
condition is intended to help ensure that the financial group of the
non-U.S. person has a significant interest in the registered
security-based swap dealer or registered broker-dealer, to help
promote appropriate compliance and oversight practices. See
Proposing Release, 84 FR at 24220.
    Paragraph (a)(10) to Rule 3a71-3 defines ``majority-owned
affiliate'' to encompass a relationship whereby one entity directly
or indirectly owns a majority interest in another, or where a third
party directly or indirectly owns a majority interest in both, where
``majority interest'' reflects voting power, the right to sell, or
the right to receive capital upon dissolution or the contribution of
capital.
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    The Commission believes that its modified approach to Alternative 2
is preferable both to Alternative 1--which would have required the U.S.
activity to be performed by persons associated with a registered
security-based swap dealer--and to Alternative 2 as proposed in
supporting the use of ``arranged, negotiated, or executed'' criteria as
part of de minimis counting, while avoiding negative consequences that
otherwise may be associated with those criteria. The Commission also
believes that the modified approach to Alternative 2 will provide
important relief to non-U.S. persons from the potential need to
register multiple entities. This conclusion in part reflects the
reasons outlined below and in part reflects the fact that, although the
registration status of the entity engaged in U.S. activity is
different, the two alternatives are subject to other conditions that
are nearly identical (as one commenter also noted).\84\ Though the
registered entity is not the counterparty to the transaction, the
registered entity must comply with certain requirements for security-
based swap dealers who act as counterparties to a security-based swap.
The registered entity must comply with these requirements as if it were
the counterparty to the transaction. Moreover, even when the U.S.
activity at issue is conducted through a registered broker that is not
also registered as a security-based swap dealer, the entity nonetheless
must comply with these requirements as if it were a registered
security-based swap dealer. These additional conditions protect both
counterparties and the Commission's ability to access information, as
well as avoid the potential that the exception could be relied upon by
non-U.S. persons that are not subject to certain minimum financial
responsibility requirements.\85\ These conditions also materially
distinguish the modified version of Alternative 2 from alternatives
that the Commission previously rejected when it incorporated
``arranged, negotiated, or executed'' criteria into the de minimis
counting test.\86\ Further, the Commission agrees with the commenters
who supported Alternative 2 because it provides more flexibility to
market participants to utilize U.S. personnel associated with either a
registered broker or a registered security-based swap dealer.\87\
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    \84\ See IIB/SIFMA letter at 10-11 (stating that under
Alternative 2 the relevant transactions would be ``no less
protected'' than under Alternative 1 because Alternative 2 would
require compliance with the same conditions as Alternative 1).
    \85\ See id.
    \86\ In particular, when the Commission adopted rule amendments
incorporating ``arranged, negotiated, or executed'' criteria as part
of the de minimis counting test, and rejected an alternative
approach based on the use of registered broker-dealers or U.S.
banks:
    The Commission noted that the broker-dealer framework does not
apply to banks engaged in certain activities, which may include a
significant proportion of security-based swap dealing activity, and
stated that such an approach would effectively supplant Title VII
security-based swap dealer regulation for a majority of dealing
activity carried out in the United States with a ``cobbled
together'' grouping of other requirements.
    Proposing Release, 84 FR at 24220.
    Alternative 2, in contrast, does not permit any carve-out for
banks, and would require compliance with security-based swap dealer
requirements in connection with key protections, including security-
based swap dealer requirements regarding disclosure of risks,
characteristics, material incentives, and conflicts of interest;
suitability; fair and balanced communications; and trade
acknowledgment and verification.
    \87\ See ISDA letter at 7-8 (``We believe that this flexible
approach is important given that certain non-U.S. entities that
enter into SBSs with other non-U.S. persons do not intend to
register as an SBSD in the United States.''); HSBC letter at 2-3
(noting that U.S. personnel associated with two registered security-
based swap dealers and one registered broker-dealer engage in
arranging, negotiating, or executing activity for non-U.S. entities
in the HSBC group).
     For the same reasons, and for the avoidance of doubt, the
Commission is adopting as proposed the provision of Alternative 2
that permits the registered entity not to count against the de
minimis thresholds for security-based swap dealer registration the
transactions that its associated persons arrange, negotiate, or
execute pursuant to the exception. See Exchange Act Rule 3a71-
3(d)(3).
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    In adopting its modified approach to Alternative 2, the Commission
also is mindful both of the comments in opposition to any exception as
discussed above in Part II.A.2 and of one commenter's view that the
exception should not permit a non-U.S. firm to engage in security-based
swap dealing activity in the United States without it or an affiliate
being registered as a security-based swap dealer.\88\ On

balance, however, the Commission is persuaded that the modified version
of Alternative 2 will help to address the potential negative
consequences that otherwise would be associated with the use of
``arranged, negotiated, or executed'' criteria as part of the de
minimis counting test, while providing flexibility to market
participants and promoting effective, efficient cross-border
implementation of security-based swap dealer registration requirements
in a manner consistent with the public interest.\89\ Importantly, the
exception does not apply to dealing activities involving U.S.
counterparties or U.S. guarantees and thus does not permit market
participants to avoid counting those transactions against the de
minimis thresholds.\90\
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    \88\ See Citadel letter at 5-6 (``While we have concerns about
permitting a dealer counterparty to engage in dealing activity using
U.S.-based personnel without being appropriately registered with the
Commission, in no event should the Commission adopt Alternative 2.
This would allow a non-U.S. firm to engage in dealing activity in
the U.S. in security-based swaps without either it, or an affiliate,
being registered in the appropriate capacity with the Commission. As
a result, key entity-level requirements designed specifically for
firms engaged in security-based swap dealing activities would not
apply. The Exchange Act is clear that `[i]t shall be unlawful for
any person to act as a security-based swap dealer unless the person
is registered as a security-based swap dealer with the Commission.'
ANE Transactions constitute dealing activity in the U.S. and
therefore should be taken into account for security-based swap
dealer registration.'' (footnote omitted)). The same commenter also
stated that a failure to regulate the transactions at issue would
create competitive disparities between U.S. and non-U.S. dealers
with respect to the requirements applicable to the trading
activities conducted by their U.S. personnel. See Citadel letter at
2. Finally, the commenter viewed Alternative 2 as allowing non-U.S.
persons to ``exit the Title VII regulatory regime without exiting
the U.S. market'' and to conduct ``an unregistered security-based
swap dealing business in the United States.'' See Citadel letter at
2 (quoting the Proposing Release, 84 FR at 24215 nn.80-81).
    \89\ As discussed in Part II.A.2, supra, the Commission
reiterates its conclusion that the ``arranged, negotiated, or
executed'' criteria appropriately belong in the de minimis counting
requirement.
    \90\ To be clear, the exception to the de minimis counting
requirement does not reflect a determination by the Commission that
these transactions are without the jurisdiction of the United States
under Exchange Act Section 30(c). Consistent with the Commission's
view expressed in the ANE Adopting Release, transactions that are
arranged, negotiated, or executed by personnel located in the United
States in connection with a foreign person's dealing activity
constitute dealing activity within the United States. Accordingly,
and as noted above, although the Commission is providing a limited
exception from the requirement to count certain of these trades
toward the de minimis threshold, the antifraud provisions of the
federal securities laws and certain relevant Title VII requirements
would continue to apply to the transactions subject to the
exception.
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(1) Minimum Capital Requirement
    The Commission is modifying Alternative 2 from the proposal to
require any broker that serves as the registered entity for purposes of
the exception, and that is not approved to use models to compute
deductions for market or credit risk, to maintain minimum net capital
and establish and maintain risk management control systems as if the
broker were also registered as a security-based swap dealer.\91\ The
Commission is mindful that, as proposed, Alternative 2 would have
permitted a registered broker holding significantly less capital than a
registered security-based swap dealer to serve as the registered entity
for purposes of the exception. Indeed, one commenter favored
Alternative 2 precisely because it would not require a broker to dually
register as a security-based swap dealer, nor require it to hold the
potentially higher minimum net capital required of registered security-
based swap dealer, if it wished to serve as the registered entity for
purposes of the exception.\92\ The lowest fixed-dollar minimum net
capital requirement for registered broker-dealers is $5,000, so long as
the broker-dealer does not receive, owe, or hold customer funds or
securities, does not carry customer accounts, and does not engage in
certain other activities.\93\ However, broker-dealers may be subject to
significantly higher capital requirements depending on their
businesses. For example, broker-dealers that carry customer funds or
securities must maintain at least $250,000 in net capital.\94\ These
minimum net capital requirements nonetheless are significantly lower
than the minimum net capital required of brokers who are also
registered security-based swap dealers. A broker dually registered as a
security-based swap dealer must maintain at least $20 million in net
capital if it does not use models to compute deductions for market or
credit risk (or the sum of an indebtedness-based ratio and up to eight
percent of the risk margin amount, if that sum is greater than $20
million).\95\
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    \91\ See Exchange Act Rule 3a71-3(d)(1)(i)(A)(1)-(2).
    \92\ See IIB/SIFMA letter at 10-11 & n.18 (arguing that the
higher security-based swap dealer capital requirements would be
disproportionate to the associated risk to the registered entity).
    \93\ See Exchange Act Rule 15c3-1(a)(2)(vi), 17 CFR 240.15c3-
1(a)(2)(vi).
    \94\ See Exchange Act Rule 15c3-1(a)(2)(i), 17 CFR 240.15c3-
1(a)(2)(i).
    \95\ See Exchange Act Rule 15c3-1(a)(10), 17 CFR 204.15c3-
1(a)(10).
---------------------------------------------------------------------------

    The Commission believes it is appropriate to require a broker
serving as the registered entity for purposes of the exception to
maintain minimum net capital at least equal to the minimum net capital
requirements for brokers that are also security-based swap dealers. A
minimum capital requirement for brokers serving as the registered
entity for purposes of the exception ensures that every financial group
that has foreign dealers engaged in U.S. security-based swap dealing
activity pursuant to the exception--whether through a registered
security-based swap dealer or a registered broker--must maintain the
same amount of net capital. The Commission believes that this
requirement reduces the potential for competitive disparities between
firms that make use of a registered broker for purposes of the
exception and those that make use of a registered security-based swap
dealer. Reducing the potential for such disparities should help to
mitigate one commenter's concern that Alternative 2 could allow non-
U.S. persons to ``exit the Title VII regulatory regime without exiting
the U.S. market'' and to conduct ``an unregistered security-based swap
dealing business in the United States.'' \96\ On balance, the
Commission believes that these concerns regarding the potential for
evasion of Title VII weigh more heavily than another commenter's
preference for the flexibility to use a minimally capitalized broker
for purposes of the exception.\97\ Accordingly, a broker not approved
to use models may not serve as the registered entity for purposes of
the exception unless it maintains at least as much net capital as that
required for a broker that is also registered as a security-based swap
dealer (i.e., currently a minimum of $20 million).\98\ Because the use
of a broker subject to higher capital requirements mitigates concerns
regarding the potential for avoidance of Title VII, a broker that is
approved to use models also could serve as the registered entity for
purposes of the exception. In addition to complying with the other
conditions to the exception, such brokers must comply with the higher
minimum net capital and tentative net capital requirements that apply
to them (i.e., currently minimums of $1 billion and $5 billion,
respectively).\99\
---------------------------------------------------------------------------

    \96\ See Citadel letter at 2 (quoting the Proposing Release, 84
FR at 24215 nn.80-81).
    \97\ See IIB/SIFMA letter at 10-11 & n.18.
    \98\ See Exchange Act Rule 15c3-1(a)(10), 17 CFR 240.15c3-
1(a)(10). The minimum net capital requirement for a broker that
serves as the registered entity for purposes of the exception does
not lower the minimum net capital or tentative net capital that a
broker must maintain if required pursuant to other applicable
requirements.
    \99\ See Exchange Act Rule 15c3-1(a)(7), 17 CFR 240.15c3-
1(a)(7).
---------------------------------------------------------------------------

    For analogous reasons, the Commission is modifying the proposal to
require any broker that is not approved to use models and that serves
as the registered entity for purposes of the exception to establish and
maintain risk management control systems as if the entity also were a
security-based swap dealer.\100\ This condition imposes a new
requirement to comply with portions of Rule 15c3-4 only for brokers who
engage in ``arranging, negotiating, or executing'' activity pursuant to
the exception and who are not approved to use models and are not dually
registered as a security-based swap dealer or an OTC derivatives
dealer. Other registered entities who may engage in ``arranging,
negotiating, or executing'' activity pursuant to the exception--brokers
who are approved to use models, non-model brokers who are dually
registered as

either a security-based swap dealer or an OTC derivatives dealer, and
stand-alone security-based swap dealers--are already required to comply
with Rule 15c3-4.\101\ As the Commission noted when adopting rules
regarding risk management control systems for non-model-approved
broker-dealers also registered as security-based swap dealers, ``[t]he
Commission believes that establishing and maintaining a strong risk
management control system is necessary for entities engaged in
security-based swap business.'' \102\ Appropriate risk management
controls help a firm to reduce its risk of significant loss, which also
reduces the risk of spreading the losses to other market participants
or throughout the financial markets as a whole.\103\ The Commission
recognizes that service as the registered entity for purposes of the
exception would not by itself be expected to create the same level of
market or credit risk for a registered broker as it would for dealing
entities that hold positions in security-based swaps. The Commission
would expect the registered broker to establish such controls
appropriate to the risk it undertakes. If the registered broker does
not undertake any other activities other than arranging, negotiating,
or executing transactions for its affiliates, the system of internal
risk management controls regarding market and credit risk could, for
example, entail guidelines, policies, and procedures that the broker
does not undertake activities that create market or credit risk.
Accordingly, the Commission is requiring that a broker that is not
approved to use models and that serves as the registered entity for the
purposes of the exception, must comply with Rule 15c3-1(a)(10)(ii) as
if that entity were registered with the Commission as a security-based
swap dealer.
---------------------------------------------------------------------------

    \100\ See Exchange Act Rule 3a71-3(d)(1)(i)(B)(2) (requiring
compliance with Exchange Act Rule 15c3-1(a)(10)), which in turn
requires compliance with portions of Exchange Act Rule 15c3-4, when
the registered entity is a broker not approved to use models to
compute deductions for market or credit risk).
    \101\ See Exchange Act Rule 15c3-1(a)(7) (requiring brokers
approved to use models to comply with portions of Exchange Act Rule
15c3-4); Exchange Act Rule 15c3-1(a)(10) (requiring brokers not
approved to use models who are dually registered as security-based
swap dealers to comply with portions of Exchange Act Rule 15c3-4);
Exchange Act Rule 15c3-4 (requiring compliance by OTC derivatives
dealers); Exchange Act Rule 18a-1(f) (requiring security-based swap
dealers to comply with portions of Exchange Act Rule 15c3-4).
    \102\ Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR
43872, 43907 (Aug. 22, 2019) (``Capital, Margin, and Segregation
Adopting Release'').
    \103\ See id.
---------------------------------------------------------------------------

(2) Limited Exemption From Broker Registration
    The Commission is modifying Alternative 2 from the proposal to
include, as an ancillary to the conditional exception, a limited
exemption from the broker registration requirement in Section 15(a) of
the Exchange Act for ``arranging, negotiating, or executing'' activity
that is conducted in compliance with the exception and that is with or
for a counterparty that is an eligible contract participant. Consistent
with the Proposing Release, the Commission also recognizes that the
``arranging, negotiating, or executing'' activity subject to the
exception generally would constitute ``broker'' activity under the
Exchange Act.\104\ As a result, a security-based swap dealer not
already registered as a broker that serves as the registered entity for
purposes of the exception, and its associated persons, could be
required to register as brokers pursuant to Section 15(a) of the
Exchange Act unless they can avail themselves of an exception from
broker status or an exemption from broker registration.\105\ One
commenter suggested that the Commission exempt from broker registration
any registered security-based swap dealer whose only securities
brokerage activity is the ``arranging, negotiating, or executing''
activity that its U.S. personnel conducts in connection with the
exception.\106\ That commenter noted that a security-based swap dealer
not dually registered as a broker-dealer and approved to use models to
compute deductions for market or credit risk is subject to a minimum
net capital requirement of $20 million and a minimum tentative net
capital requirement of $100 million, versus minimum requirements of $1
billion and $5 billion, respectively, for a broker-dealer approved to
use models.\107\ The Commission believes that applying the heightened
broker-dealer capital requirements to all security-based swap dealers
approved to use models who serve as the registered entity for purposes
of the exception could limit the usefulness of the exception, and is
adopting the limited exemption from broker registration to avoid that
potential outcome.\108\
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    \104\ See Proposing Release, 84 FR at 24220. Although the Dodd-
Frank Act excludes from the Exchange Act definition of ``dealer''
persons who engage in security-based swaps with or for persons who
are eligible contract participants, see Section 3(a)(5) of the
Exchange Act, 15 U.S.C. 78c(a)(5), as amended by Section 761(a)(1)
of the Dodd-Frank Act, it does not include comparable provisions for
persons who act as brokers in security-based swaps. Because
security-based swaps, as defined in Section 3(a)(68) of the Exchange
Act, are included in the Exchange Act Section 3(a)(10) definition of
``security,'' persons who act as brokers in connection with
security-based swaps must, absent an exception or exemption,
register with the Commission as a broker pursuant to Exchange Act
Section 15(a), and comply with the Exchange Act's requirements
applicable to brokers. See Intermediary Definitions Adopting
Release, 77 FR at 30597 n.9
    \105\ See Proposing Release, 84 FR at 24220. Exchange Act
Section 15(a) requires persons who engage in brokerage activities
involving securities (including security-based swaps) to register
with the Commission unless they can avail themselves of an exception
or exemption from the registration requirement. The definition of
``broker'' in Exchange Act Section 3(a)(4) generally encompasses
persons engaged in the business of effecting transactions in
securities for the account of others, but does not encompass banks
that are engaged in certain activities, which may include a
significant portion of banks' security-based swap dealing activity.
See Proposing Release, 84 FR at 24209 n.21 (citing ANE Adopting
Release, 81 FR at 9619).
    \106\ See IIB/SIFMA letter at 11.
    \107\ See IIB/SIFMA letter at 11 n.18; Exchange Act Rules 18a-
1(a) and 15c3-1(a)(7), (10), 17 CFR 240.18a-1(a) and 15c3-1(a)(7),
(10).
    \108\ The Commission also acknowledges that the exemption
creates the potential for competitive disparities between market
participants who engage in ``arranging, negotiating, or executing''
activity with non-U.S. eligible contract participants pursuant to
the exception, for whom an exemption from broker registration
potentially would be available, and market participants who engage
in similar activity with U.S. persons, for whom the Rule 3a71-3
exception is not available and thus the related exemption from
broker registration also would not apply. For example, an exemption
from broker registration available only with respect to ``arranging,
negotiating, or executing'' activity with non-U.S. persons could
create an incentive for market participants to provide greater
liquidity and/or liquidity at a lower cost to non-U.S. eligible
contract participants than to U.S. eligible contract participants.
The limitations on the availability of the exemption should minimize
the potential for these competitive disparities while also making
the exception from the de minimis counting standard a practicable
alternative.
---------------------------------------------------------------------------

    At the same time, the Commission is mindful that the exception
applies to ``arranging, negotiating, or executing'' activity with both
eligible contract participants and non-eligible contract participants.
As noted above, the exemption from broker registration applies only to
``arranging, negotiating, or executing'' activity that is conducted in
compliance with the exception and that is with or for a counterparty
that is an eligible contract participant. The Commission believes that
requiring broker registration with respect to ``arranging, negotiating,
and executing'' activity with or for a counterparty that is not an
eligible contract participant is consistent with the heightened
protections that Congress applied to security-based swap transactions
with or for non-eligible contract participants.\109\
---------------------------------------------------------------------------

    \109\ In its Title VII statutory framework, Congress applied
heightened protections for security-based swap counterparties who
are not eligible contract participants, requiring, for example,
security-based swap transactions with or for a person who is not an
eligible contract participant to be effected only on a registered
national securities exchange. See Exchange Act Section 6(l), 15
U.S.C. 78f(l), as added by Section 763(e) of the Dodd-Frank Act.
Congress' Title VII statutory framework also includes an exception
from the definition of dealer for persons engaged in the business of
buying and selling security-based swaps with or for eligible
contract participants, but provides no exception from the dealer
definition for persons engaged in the business of buying and selling
security-based swaps with or for non-eligible contract participants.
See Exchange Act Section 3(a)(5), 15 U.S.C. 78c(a)(5), as amended by
Section 761(a)(1) of the Dodd-Frank Act.

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    Finally, Exchange Act Rule 10b-10 requires brokers to provide
certain disclosures in connection with ``transactions'' that involve
``customers'' of the broker.\110\ Although many of the disclosures
required by Rule 10b-10 would be included in a trade acknowledgment and
verification \111\ delivered pursuant to the condition discussed in
Part II.C.2 below, some of the Rule 10b-10-required disclosures may not
duplicate the information provided in a trade acknowledgment and
verification. These additional disclosures required under Rule 10b-10
provide the customer with important information regarding the brokerage
activity.\112\ The Commission thus believes that the limited exemption
from broker registration should be conditioned upon the security-based
swap dealer providing these non-duplicative disclosures to the customer
if Rule 10b-10 otherwise would apply to the activity subject to the
exception.\113\ Accordingly, pursuant to Section 15(a)(2) of the
Exchange Act, the Commission deems consistent with the public interest
and the protection of investors to adopt a limited exemption from the
broker registration requirements of Section 15(a)(1) of the Exchange
Act for ``arranging, negotiating, or executing'' activity conducted
pursuant to the exception with or for eligible contract participants.
New paragraph (d)(4) of Rule 3a71-3 provides that a registered
security-based swap dealer that serves as the registered entity for
purposes of the exception and its associated persons shall not be
subject to registration as a broker pursuant to Section 15(a)(1) solely
because that registered entity or the associated person engages in
``arranging, negotiating, or executing'' activity pursuant to the
exception with or for an eligible contract participant, provided that
(i) the conditions to the availability of the exception are satisfied
in connection with such activities and (ii) if Rule 10b-10 would apply
to an activity subject to the exception, the registered security-based
swap dealer provides to the customer \114\ the disclosures required by
Rule 10b-10(a)(2) (excluding Rule 10b-10(a)(2)(i)-(ii)) and Rule 10b-
10(a)(8) in accordance with the time and form requirements set forth in
Rule 15Fi-2(b)-(c), or, alternatively, promptly after discovery of any
defect in the registered security-based swap dealer's good faith effort
to comply with such requirements.
---------------------------------------------------------------------------

    \110\ See Exchange Act Rule 10b-10(a), 17 CFR 240.10b-10(a)
(prohibiting a broker or dealer to effect for or with an account of
a customer any transaction in, or to induce the purchase or sale by
such customer of, a security unless the broker or dealer delivers a
written confirmation at or before completion of the transaction).
    \111\ While Rule 15Fi-2 requires a trade acknowledgment to
disclose all terms of the security-based swap transaction, see
Exchange Act Rule 15Fi-2(c), 17 CFR 240.15Fi-2(c), Rule 10b-10
includes provisions requiring disclosures that may not form part of
the terms of the security-based swap transaction between the relying
entity and its counterparty, including the capacity in which the
broker (who would not be party to the transaction) is acting, see
Exchange Act Rule 10b-10(a)(2), CFR 240.10b-10(a)(2), and the fact
that the broker is not a member of the Securities Investor
Protection Corporation, if such is the case, see Exchange Act Rule
10b-10(a)(8), 17 CFR 240.10b-10(a)(8).
    \112\ For example, customers may use disclosures regarding the
capacity in which the broker is acting and membership in the
Securities Investor Protection Corporation to determine whether the
broker is able to meet the customer's needs.
    \113\ For the reasons discussed in Part II.C.2, infra, these
disclosures may be delivered to the customer in accordance with the
time and form requirements set forth in Rule 15Fi-2(b)-(c), rather
than in accordance with the slightly different timing standards set
forth in Rule 10b-10. If the registered security-based swap dealer
relying on this exemption from registration as a broker makes a good
faith effort to comply with the requirement to deliver these
disclosures to the customer as and when required, the failure to do
so will not make the exemption from broker registration unavailable
so long as the registered security-based swap dealer delivers the
disclosures to the customer promptly after discovery of the defect
in compliance. See Exchange Act Rule 3a71-3(d)(4).
    \114\ For example, the Rule 10b-10 disclosures could be provided
as part of the disclosures required pursuant to the disclosure
condition in Rule 3a71-3(d)(1)(ii)(B)(1) discussed below.
---------------------------------------------------------------------------

(3) Limit on Use of the Exception for Covered Inter-Dealer Security-
Based Swaps and Related Notice and Recordkeeping Provisions
    The final rule limits the availability of the exception in
connection with certain inter-dealer security-based swaps, and provides
for related notices and recordkeeping requirements to facilitate
implementation of this limit. In particular, the final rule provides
that the availability of the exception is conditioned on the aggregate
gross notional amount of certain inter-dealer security-based swap
positions connected with dealing activity subject to the exception over
the course of the immediately preceding 12 months remaining below $50
billion.\115\ If that threshold is exceeded, the exception will not be
available and all of the relevant transactions (including transactions
below the $50 billion threshold) must be counted against the de minimis
thresholds to the ``security-based swap dealer'' definition.\116\ The
rules further condition the availability of the exception on the
registered entity whose associated persons conduct the ``arranging,
negotiating, or executing'' activity in the United States filing a
notice with the Commission prior to commencing such activity.\117\
Finally, the registered entity must comply with certain recordkeeping
requirements designed to facilitate compliance with this $50 billion
threshold.\118\
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    \115\ See Exchange Act Rule 3a71-3(d)(1)(vii).
    \116\ See Exchange Act Rule 3a71-3(d)(6)(ii).
    \117\ See Exchange Act Rule 3a71-3(d)(1)(vi).
    \118\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
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(a) Purpose of the Limit
    In its releases adopting rules applying Title VII requirements to
cross-border transactions in 2014 and 2016, the Commission recognized
and sought to reduce the risk that market participants might
restructure their business or develop novel business structures to
permit them to characterize their security-based swap dealing activity
as occurring outside the United States.\119\ Section 30(c) of the
Exchange Act provides the Commission with authority to adopt rules that
apply to a ``person that transacts a business in security-based swaps
without the jurisdiction of the United States'' if it determines that
such rules are ``necessary or appropriate to prevent the evasion'' of
any Title VII requirements.\120\ The Commission invoked this authority
in connection with several of its cross-border requirements.\121\ In
particular, the Commission identified this provision as the basis for
adopting a rule requiring conduit affiliates to count certain of their
dealing transactions against the de minimis threshold.\122\ The
Commission

also explained that several other of its cross-border requirements that
apply to activity occurring in the United States are ``necessary or
appropriate as a prophylactic measure to help prevent the evasion of
the provisions of the Exchange Act that were added by the Dodd-Frank
Act, and thus help ensure that the relevant purposes of the Dodd-Frank
Act are not undermined.'' \123\
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    \119\ See Cross-Border Adopting Release, 79 FR at 47363-64; ANE
Adopting Release, 81 FR at 8609.
    \120\ Exchange Act Section 30(c), 15 U.S.C. 78dd(c).
    \121\ See, e.g., Cross-Border Adopting Release, 79 FR at 47291-
92 (interpreting the Commission's anti-evasion authority under
section 30(c) of the Exchange Act and including anti-evasion among
the principles informing the Commission's approach to cross-border
regulation of these markets).
    \122\ See Cross-Border Adopting Release, 79 FR at 47314. A
conduit affiliate is ``a non-U.S. affiliate of a U.S. person that
enters into security-based swaps with non-U.S. persons, or with
certain foreign branches of U.S. banks, on behalf of one or more of
its U.S. affiliates (other than U.S. affiliates that are registered
as security-based swap dealers or major security-based swap
participants), and enters into offsetting transactions with its U.S.
affiliates to transfer the risks and benefits of those security-
based swaps.'' Id. The Commission noted in that release that ``[t]he
conduit affiliate concept serves as a prophylactic anti-evasion
measure'' and that it did ``not believe that any entities currently
act as conduit affiliates in the security-based swap market.'' Id.
at 47315.
    \123\ The Commission stated in these releases that, apart from
the de minimis counting requirements applicable to conduit
affiliates, the rules it adopted apply to conduct occurring within
the United States and thus are within the Commission's authority
apart from this anti-evasion provision. However, it went on to state
that it also viewed these rules as necessary or appropriate as an
anti-evasion measure under Section 30(c) of the Exchange Act. See,
e.g., Cross-Border Adopting Release, 79 FR at 47302 n.186
(definitions of ``foreign branch'' and ``transaction conducted
through a foreign branch''); id. at 47309 n.262 (definition of
``principal place of business''); id. at 47320 n.365 (requirement
that non-U.S. persons count dealing transactions with U.S. persons
toward their de minimis thresholds); ANE Adopting Release, 81 FR at
8615 n.158 (requirement that non-U.S. persons count transactions in
connection with their dealing activity that are arranged,
negotiated, or executed by personnel located in the United States).
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    Similarly, when the Commission adopted the ``arranged, negotiated,
or executed'' test, it recognized the possibility that financial groups
might seek to avoid this requirement by having personnel outside the
United States perform market-facing activities under the direction of
personnel located in the United States.\124\ It addressed this concern
by explaining that ``arranging, negotiating, and executing'' as used in
Exchange Act Rule 3a71-3 ``also include directing other personnel to
arrange, negotiate, or execute a particular security-based swap.''
\125\ The Commission explained that it ``would view personnel located
in a U.S. branch or office who direct personnel not located in the
United States to arrange, negotiate, or execute a security-based swap
transaction as themselves arranging, negotiating, or executing the
transaction.'' \126\ Consequently, ``sales and trading personnel of a
non-U.S. person who are located in the United States cannot avoid
application of this rule by simply directing other personnel to carry
out dealing activity.'' \127\
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    \124\ ANE Adopting Release, 81 FR at 8623.
    \125\ Id.
    \126\ Id.
    \127\ Id.
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    The Commission recognizes that the exception it is adopting may
also create incentives for financial groups to restructure their
business to avoid the application of certain Title VII requirements in
some circumstances. Available data suggests that the majority of inter-
dealer transaction activity in North American corporate single-name
credit default swaps involved at least one non-U.S.-domiciled dealer in
2017.\128\ Although the data also suggests that these non-U.S.-
domiciled dealers would be likely to register as security-based swap
dealers even absent a requirement to count their transactions arranged,
negotiated, or executed by U.S. personnel,\129\ a financial group could
restructure its dealing business in response to this exception in such
a way that it could carry out this inter-dealer business in significant
part in one or more unregistered non-U.S. dealers, while continuing to
arrange, negotiate, or execute transactions using personnel located in
the United States. Further, as the Commission recognized in proposing
the exception, U.S. dealing entities also may use this type of
exception from the counting requirement to reduce the application of
Title VII requirements to their transactions.\130\ Two commenters
expressed similar concerns that the exception as proposed could allow
firms to structure large portions of their business to avoid Title VII
while continuing to pose risks to the U.S. financial system.\131\
Allowing this type of restructuring of the inter-dealer business could
have potentially undesirable effects on the underlying credit and
equity markets in the United States.
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    \128\ Using data obtained from the DTCC Derivatives Repository
Limited Trade Information Warehouse (see Part IV.A.1, infra), the
Commission estimates that approximately 82% of the notional amount
of bilateral (i.e., uncleared) inter-dealer transactions referencing
North American single-name corporate underliers involve at least one
non-U.S.-domicile dealer.
    \129\ Each of these dealers currently transacts significant
volumes security-based swaps with U.S. persons, including with
counterparties that are themselves not dealers, which they would be
required to count against their de minimis thresholds. These dealers
would exceed the $8 billion de minimis threshold that applies to
credit default swap transactions based solely on transactions with
U.S. persons.
    \130\ See Proposing Release, 84 FR at 24219 (``In making this
proposal, the Commission is mindful that U.S.-based dealing entities
may use this type of exception to structure their booking practices
to manage the application of Title VII to their security-based swap
dealing business--e.g., by booking dealing transactions with non-
U.S. counterparties into their non-U.S. affiliates, to reduce the
application of Title VII security-based swap dealer requirements to
those transactions.'').
    \131\ See Better Markets letter at 1, 25 (noting that the
proposed exception could ``facilitate[e] evasion or avoidance of
critical pillars of the [security-based swap] framework'' and
expressing concern that this framework must ``reach far enough'' to
prevent restructuring that would ``expos[e] [the] U.S. financial
system and U.S. taxpayers to the risks arising from [security-based
swap] activities''); AFR letter at 1-3 (noting that the proposed
exception could prompt U.S.-based financial groups to ``easily avoid
swap dealer designation for large shares of their U.S.-related
business'').
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    To help to mitigate these concerns, the Commission is imposing a
limit on covered inter-dealer security-based swap transactions that a
non-U.S. dealer or its affiliates may conduct in reliance on the
exception. In adopting this limit, the Commission is balancing the
concerns discussed above regarding the potential negative consequences
associated with both the ``arranging, negotiating, or executing''
counting standard and the exception as proposed. The Commission is
choosing not to apply the limit to non-inter-dealer security-based
swaps at this time because it is not clear that a broader limitation is
necessary to avoid the potential negative consequences associated with
the exception. Rather, the Commission believes that a limit on inter-
dealer security-based swaps will mitigate concerns regarding the
proposed exception without unduly restricting the non-inter-dealer
security-based swap market. Taken as a whole, the limit and related
notice and recordkeeping provisions are designed to focus the
availability of the exception in a manner that will promote the
exception's benefits for market efficiency as addressed above, but that
also will help reduce incentives for financial groups to restructure
their business to avoid the application of certain Title VII
requirements.
    The limit on use of the exception applies to any non-U.S. person,
regardless of whether it is affiliated with a U.S or non-U.S. financial
group, as the Commission has concerns about potential evasive activity
on the part of non-U.S. affiliates of U.S. financial groups as well as
of non-U.S. financial groups. The Commission is concerned that failing
to apply the same limit to non-U.S. dealers relying on the exception,
whether they belong to U.S. or non-U.S. financial groups, could distort
competition in this market. Moreover, the regulatory status of the
relying entity's counterparty does not impact these potentially
undesirable effects, and thus is not relevant to application of the $50
billion limit.\132\

This limit thus applies without regard to whether either counterparty
is affiliated with a U.S or non-U.S. financial group and regardless of
the regulatory status of the relying entity's counterparty. The $50
billion limit should help ensure that a relying entity, together with
its non-U.S. person affiliates, cannot use the exception to enter into
unlimited transactions with other firms that themselves could engage in
dealing activity subject to the exception. Under this approach, the
Commission believes these financial groups will have less incentive to
structure their businesses to avoid regulation of their inter-dealer
business under the relevant Title VII requirements. For example, with
this limitation, a financial group will not be able to use the
exception to move its inter-dealer business with non-U.S. persons
involving ``arranging, negotiating, or executing'' activity above the
$50 billion threshold to an unregistered non-U.S. affiliate.\133\
Moreover, the requirement to aggregate transactions of covered
affiliates, as discussed below, ensures that the $50 billion threshold
applies to all unregistered non-U.S. persons in a financial group and
thus prevents the financial group from allocating its inter-dealer
transactions to multiple unregistered non-U.S. affiliates to avoid
registration of any affiliate.
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    \132\ In many cases, the non-U.S. person counterparty may be
recognized, registered, or regulated under U.S. or foreign law as a
security-based swap dealer, swap dealer, bank, broker-dealer, or
futures commission merchant, but the regulatory status of the
counterparty is not relevant to the $50 billion limit, as a
transaction will need to be counted toward that limit even if the
counterparty is an unregulated entity.
    Similarly, the regulatory status of the relying entity and its
affiliates also is irrelevant for purposes of the $50 billion limit.
The relying entity is required to count toward its de minimis
thresholds all covered inter-dealer security-based swap positions
connected with its own or an affiliate's ``arranging, negotiating,
or executing'' dealing activity subject to the exception, regardless
of the application of non-U.S. regulatory regimes to those
transactions.
    \133\ For the avoidance of doubt, the $50 billion limit does not
apply transactions that are not eligible for the exception (or for
which reliance on the exception is not sought). For example, if a
non-U.S. person (``counterparty 1'') enters into a security-based
swap with a U.S. person (``counterparty 2''), even if that U.S.
person is an affiliate of a registered entity that acts pursuant to
the exception, counterparty 1 would not be required to count that
transaction towards its $50 billion limit, as transactions with U.S.
persons are not eligible for the exception. Counterparty 1 would, of
course, count such a transaction toward the de minimis thresholds
for registration as a security-based swap dealer.
    Similarly, if a non-U.S. person (``counterparty 1'') enters into
a security-based swap that is ``arranged, negotiated, or executed''
by U.S. personnel with a non-U.S. person (``counterparty 2''), for
which counterparty 1 does not seek reliance on the exception,
counterparty 1 would not be required to count that transaction
towards its $50 billion limit, even if counterparty 1 relies on the
exception for other transactions and even if counterparty 2 is
relying on the exception for that transaction. Counterparty 1 would,
of course, count such a transaction toward the de minimis thresholds
for registration as a security-based swap dealer.
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    The Commission intends to monitor changes in the market in response
to this exception and initially will use the report that Commission
staff is required to produce under Exchange Act Rule 3a71-2A to analyze
the changes. Commission staff will repeat this analysis at least once
every five years. If this initial analysis or subsequent monitoring
suggests that firms are using the exception to avoid the de minimis
counting requirement in a manner that is inconsistent with the
statutory and regulatory objectives of Title VII or that non-U.S.
persons are entering into disproportionately large volumes of security-
based swaps pursuant to the exception, the Commission may determine
that it is necessary to consider amendments to the exception or to the
underlying counting requirements, including possible amendments
pursuant to its anti-evasion authority in Exchange Act Section 30(c).
(b) Scope of the Limit and Related Recordkeeping Requirement
    Under the final rule, the exception would be available to a relying
entity only if the aggregate gross notional amount of covered inter-
dealer security-based swap positions connected with dealing activity
subject to the exception over the course of the immediately preceding
12 months does not exceed $50 billion.\134\ Covered inter-dealer
security-based swaps are those that are between, on the one hand, the
non-U.S. person relying on the exception, and, on the other hand, a
non-U.S. person that is either (1) a registered entity that has filed
with the Commission a notice that its associated persons may conduct
``arranging, negotiating, or executing'' activity pursuant to the
exception \135\ or (2) an affiliate of such a registered entity.\136\ A
relying entity would count towards this $50 billion threshold two types
of covered int er-dealer security-based swaps: (1) The covered inter-
dealer security-based swap positions connected with the relying
entity's dealing activity subject to the exception and (2) the covered
inter-dealer security-based swap positions connected with dealing
activity subject to the exception engaged in by non-U.S. person
affiliates of the relying entity.\137\ The Commission is applying the
$50 billion limit to security-based swaps involving the relying
entity's non-U.S. person affiliates because failure to count such
affiliates could allow a financial group to structure its inter-dealer
security-based swap business to avoid the limit. For example, absent a
requirement to count the transactions of a relying entity's own
affiliates, a financial group could organize a new legal entity to
conduct inter-dealer security-based swap business each time a relying
entity approached the $50 billion limit. Similarly, the requirement to
count transactions with affiliates of another financial group's
registered entity includes the non-U.S. majority-owned affiliates
relying on the exception as well as other non-U.S. affiliates who do
not rely on the exception. Absent such a requirement, a relying entity
could conduct unlimited security-based swap business with the other
financial group, so long as the counterparty is an entity not relying
on the exception. The $50 billion limit applies to transactions of
affiliates as described above to avoid such outcomes.
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    \134\ See Exchange Act Rule 3a71-3(d)(1)(vii) (limitation on
application of the exception to covered inter-dealer security-based
swaps); Exchange Act Rule 3a71-3(a)(13) (definition of covered
inter-dealer security-based swap); Exchange Act Rule 3a71-3(d)(6)(i)
(description of the persons whose covered inter-dealer security-
based swaps count towards the limitation).
    \135\ If the counterparty to the security-based swap is a
registered entity that is a U.S. person, then the exception would
not be available for the security-based swap and the limitation on
covered inter-dealer security-based swaps conducted pursuant to the
exception thus would not apply.
    \136\ Exchange Act Rule 3a71-3(a)(13) defines covered inter-
dealer security-based swaps to include transactions with a
registered entity that has filed a notice pursuant to Rule 3a71-
3(d)(1)(vi) and with an affiliate of such a registered entity. As
discussed more fully below, Rule 3a71-3(d)(1)(vi) requires the
registered entity to file a notice with the Commission that its
associated persons may conduct ``arranging, negotiating, or
executing'' activity pursuant to the exception.
    \137\ See Exchange Act Rule 3a71-3(d)(1)(vii), (d)(6). This
threshold extends to dealing transactions by affiliates of the
relying entity to guard against a firm's evasion of the threshold by
dividing transactions among multiple affiliates.
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    To identify the covered inter-dealer security-based swap positions
connected with the relying entity's dealing activity subject to the
exception, a relying entity first must determine whether a security-
based swap is connected with its own dealing activity subject to the
exception and, if it is, then it must determine whether the
counterparty is a non-U.S. person that is either (i) a registered
entity whose associated persons conduct ``arranging, negotiating, or
executing'' activity pursuant to the exception or (ii) an affiliate of
such a registered entity. The Commission believes that a relying entity
will be able to structure its operations to answer this first question,
as it and its registered affiliate must comply with certain
recordkeeping conditions discussed below in connection with the
specific ``arranging, negotiating, or executing'' activity that is
subject to the exception. To assist the relying entity in determining
whether its counterparty is a registered entity whose associated
persons act pursuant

to the exception or an affiliate of such a registered entity, the final
rules condition the availability of the exception on a registered
entity first filing with the Commission a notice that its associated
persons may conduct activity pursuant to the exception.\138\ Further,
the final rules provide a safe harbor from the limitation for any
security-based swap if the relying entity reasonably determines at the
time of execution of the security-based swap that its counterparty is
neither another firm's registered entity nor an affiliate of such a
registered entity.\139\ For example, the Commission believes that it
would be reasonable for a relying entity (or its affiliate) to
determine a security-based swap is not a covered inter-dealer security-
based swap if the relying entity or an affiliate requests at least
quarterly, and diligently pursues, a list of affiliates from each
registered entity whose name appears on the Commission's website and
the relying entity determines at the time of execution of the security-
based swap that the name of the counterparty to the security-based swap
does not appear on any such list in the relying entity's possession at
that time.\140\ Further, the Commission believes that it would be
reasonable for financial groups to produce and share a single list of
their affiliates for use in connection with the $50 billion limit and
in connection with determining eligibility for exceptions to the
Commission's requirements for security-based swap dealers to collect
initial margin from counterparties.\141\
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    \138\ See Exchange Act Rule 3a71-3(d)(1)(vi). This notice must
be filed before an associated person of the registered entity
commences any ``arranging, negotiating, or executing'' activity
pursuant to the exception. The notice must be submitted to the
electronic mailbox described on the Commission's website at
www.sec.gov at the ``ANE Exception Notices'' section. The Commission
will post the notice on its website. A registered entity whose
associated persons will no longer conduct ``arranging, negotiating,
or executing'' activity pursuant to the exception may request that
the Commission remove such notice from its website by sending a
message to the same electronic mailbox.
    \139\ See Exchange Act Rule 3a71-3(a)(13).
    \140\ If a relying entity executes a security-based swap with a
counterparty that, at the time of execution, the relying entity
reasonably believes is not an affiliate of another firm's registered
entity, the relying entity need not later re-characterize the
security-based swap as a covered inter-dealer security-based swap,
even if it later discovers that its counterparty is an affiliate of
another firm's registered entity.
    \141\ The Commission's margin rules for non-bank security-based
swap dealers include an exception from the requirement to collect
initial margin for non-cleared security-based swaps when certain
exposures of the security-based swap dealer and its affiliates to
the counterparty and its affiliates do not exceed $50 million. See
Exchange Act Rule 18a-3(c)(1)(iii)(H)(1), 17 CFR 240.18a-
3(c)(1)(iii)(H)(1); see also Capital, Margin, and Segregation
Adopting Release, 84 FR at 43925-26 & nn.522-523 (citing Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 81 FR 636, 697 (Jan. 6, 2016); Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840, 74901 (Nov. 30,
2015)).