[Federal Register Volume 81, Number 117 (Friday, June 17, 2016)]
[Rules and Regulations]
[Pages 39807-39845]
[FR Doc No: 2016-13915]

Vol. 81

Friday,

No. 117

June 17, 2016

Part III

Securities and Exchange Commission

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17 CFR Part 240

Trade Acknowledgment and Verification of Security-Based Swap
Transactions; Final Rule

Federal Register / Vol. 81 , No. 117 / Friday, June 17, 2016 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-78011; File No. S7-03-11]
RIN 3235-AK91

Trade Acknowledgment and Verification of Security-Based Swap
Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with Section 764(a) of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-
Frank Act''), the Securities and Exchange Commission (``Commission'')
is adopting Rules 15Fi-1 and 15Fi-2 under the Securities Exchange Act
of 1934 (``Exchange Act'') requiring security-based swap dealers and
major security-based swap participants to provide trade acknowledgments
and to verify those trade acknowledgments in security-based swap
transactions. The Commission also is amending Rule 3a71-6 under the
Exchange Act to address the potential availability of substituted
compliance in connection with those trade acknowledgment and
verification requirements.

DATES: Effective Date: August 16, 2016. Compliance date: The applicable
compliance date is discussed in Section V of this final rule.

FOR FURTHER INFORMATION CONTACT: Paula Jenson, Deputy Chief Counsel;
Joanne Rutkowski, Assistant Chief Counsel; or Darren Vieira, Special
Counsel, at<PHONE_NUMBER>, Office of Chief Counsel, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Trade Acknowledgment and Verification
    B. Cross-Border Application and Availability of Substituted
Compliance
II. Discussion of Trade Acknowledgment and Verification Rule
    A. Definitions
    1. Proposed Rule
    2. Comments
    3. Response to Comments and Final Rule
    B. Trade Acknowledgment Requirement
    1. Proposed Rule
    2. Comments
    3. Response to Comments and Final Rule
    C. Time To Provide a Trade Acknowledgment
    1. Proposed Rule
    2. Comments
    3. Response to Comments and Final Rule
    D. Form and Content of Trade Acknowledgments
    1. Proposed Rule
    2. Comments
    3. Response to Comments and Final Rule
    E. Trade Verification
    1. Proposed Rule
    2. Comments
    3. Response to Comments and Final Rule
    F. Exception for Clearing Transactions
    G. Exception for Transactions Executed on a Security-Based Swap
Execution Facility or National Securities Exchange or Accepted for
Clearing by a Clearing Agency
    1. Exception for Transactions Executed on a Security-Based Swap
Execution Facility or National Securities Exchange
    2. Exception for Transactions Accepted for Clearing by a
Clearing Agency
    3. Trade Acknowledgment and Verification After Notice That an
SBSEF or Exchange Has Not Acknowledged and Verified a Transaction or
That a Transaction Has Not Been Accepted for Clearing by a Clearing
Agency
    H. Exemption From Rule 10b-10
III. Cross-Border Application of Trade Acknowledgment and
Verification Requirements
    A. Proposed Application
    B. Commenter Views
    C. Response to Comments and Final Interpretation
IV. Availability of Substituted Compliance for Trade Acknowledgment
and Verification Requirements
    A. Existing Substituted Compliance Rule
    B. Response to Comments and Final Rule
    1. Basis for Substituted Compliance in Connection With the Trade
Acknowledgment and Verification Requirements
    2. Comparability Criteria, and Consideration of Related
Requirements
V. Effective and Compliance Dates
    A. Trade Acknowledgment and Verification
    B. Substituted Compliance Rule
VI. Paperwork Reduction Act
    A. Introduction
    B. Rule 15Fi-2
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    5. Retention Period of Recordkeeping Requirements
    6. Collection of Information is Mandatory
    7. Confidentiality
    C. Rule 3a71-6
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    5. Collection of Information Is Mandatory
    6. Confidentiality
VII. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Available Data on Security-Based Swaps
    2. Current Security-Based Swap Market
    3. Current Estimates of Number of SBS Dealers and Major SBS
Participants
    4. Trade Execution
    5. Clearing Activity
    6. Current Trade Confirmation Practices
    a. Joint Regulatory Initiative
    b. CFTC Trade Confirmation Rules
    c. Foreign Trade Confirmation Rules
    C. Benefits, Costs, and Effects on Efficiency, Competition, and
Capital Formation
    1. Effects on Efficiency, Competition, and Capital Formation
    a. Broad Market Effects
    b. Substituted Compliance
    2. Costs and Benefits to Registered SBS Entities
    3. Costs and Benefits to Non-Registered Market Participants
    4. Costs and Benefits of the Substituted Compliance Provisions
    5. Costs and Benefits of the Clearing and Security-Based Swap
Execution Facility and National Securities Exchange Exceptions
    6. Exemption from Rule 10b-10
    D. Alternatives Considered
    1. Trade Acknowledgment Rules
    a. Approved Third Parties
    b. Time of Acknowledgment
    c. Terms of the Transaction
    2. Clearing Transactions
    3. Certain Transactions on a Security-Based Swap Execution
Facility or a National Securities Exchange
    E. Comment and Response to Comment
VIII. Regulatory Flexibility Act Certification
IX. Statutory Basis and Text of Amendments

I. Introduction

A. Trade Acknowledgment and Verification

    Section 764 of the Dodd-Frank Act,\1\ enacted on July 21, 2010,
added Section 15F to the Exchange Act.\2\ Among other things, Section
15F requires security-based swap (``SBS'') dealers \3\ and major SBS
participants \4\ (together, ``SBS Entities'') to register with the
Commission, and directs the Commission to prescribe rules applicable to
SBS Entities.
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    \1\ Pub. L. 111-203, 124 Stat. 1376, 1784 (2010).
    \2\ 15 U.S.C. 78o-8.
    \3\ See Exchange Act Section 3(a)(71)(A) [15 U.S.C. 78c(71)(A)]
and Rule 3a71-1 [17 CFR 240.3a71-1]; see also 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 (May 23, 2012) (``Intermediary
Definitions Adopting Release'') and Application of ``Security-Based
Swap Dealer'' and ``Major Security-Based Swap Participant''
Definitions to Cross-Border Security-Based Swap Activities;
Republication, Exchange Act Release No. 72472 (Jun. 25, 2014), 79 FR
47278 (Aug. 12, 2014) (``Cross-Border Adopting Release'').
    \4\ See Exchange Act Section 3(a)(67) [15 U.S.C. 78c(67)] and
Rule 3a67-1 [17 CFR 240.3a67-1]; see also Intermediary Definitions
Adopting Release and Cross-Border Adopting Release.
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    Section 15F(i)(1) of the Exchange Act provides that registered SBS
Entities

shall conform with such standards as may be prescribed by the
Commission, by rule or regulation, that relate to timely and accurate
confirmation, processing, netting, documentation, and valuation of all
security-based swaps. Section 15F(i)(2) of the Exchange Act requires
the Commission to adopt rules governing documentation standards for SBS
Entities. Pursuant to this authority, the Commission published proposed
Rule 15Fi-1 for public comment.\5\ The proposed rule prescribed
standards intended to provide for timely and accurate confirmation of
SBS transactions, as discussed more fully below.
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    \5\ Trade Acknowledgment and Verification of Security-Based Swap
Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR
3859 (Jan. 21, 2011) (``Proposing Release'').
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    The Commission proposed Rule 15Fi-1 to promote the efficient
operation of the SBS market, and to facilitate market participants'
management of their SBS-related risk.\6\ The proposed rule was intended
to help avoid a recurrence of documentation backlogs that had persisted
in the industry prior to the adoption of the Dodd-Frank Act, and to
help address concerns expressed by the Government Accountability Office
regarding the documentation of credit derivatives.\7\ In particular,
the proposed rule was intended to reduce the risk a court may have to
supply contract terms upon which there was no previous agreement.\8\
Furthermore, unconfirmed trades could allow errors to go undetected
that might subsequently lead to losses and other problems, such as an
SBS Entity's inaccurately measuring and managing its risk exposures.\9\
Such operational risks have the potential to contribute to broader
market problems.\10\
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    \6\ See Proposing Release, 76 FR at 3861.
    \7\ See Proposing Release, 76 FR at 3860-61, and Section VII.A,
infra.
    \8\ See Proposing Release, 76 FR at 3860.
    \9\ U.S. Gov't Accountability Office, GAO-07-716, Confirmation
Backlogs Increased Dealers' Operational Risks, but Were Successfully
Addressed After Joint Regulatory Action (2007) (``GAO Confirmation
Report'') at 15.
    \10\ Id.
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    If an SBS transaction is not reduced to writing, there is no
definitive written record of the contract terms to which the
counterparties have agreed, which can lead to legal and operational
risk for market participants. For this reason, prudent practice
requires that, after coming to an agreement on the terms of an SBS
transaction, the counterparties document the transaction in a complete
and definitive written record so there is certainty about the terms of
their agreement in case those terms are later disputed. The Commission
understands that market participants generally issue a ``trade
acknowledgment'' (sometimes referred to by market participants as a
``draft confirmation'' or an ``alleged trade'') to memorialize the
economic and related terms of an SBS transaction, regardless of the
means by which the transaction was executed. The Commission also
understands that industry best practices incorporate a process by which
the counterparties verify that the trade acknowledgment accurately
reflects the terms of their trade.\11\ This process, through which one
counterparty acknowledges an SBS transaction and its counterparty
verifies it, is the confirmation process, which results in the issuance
of a confirmation that reflects the terms of the contract between the
counterparties.\12\ This confirmation generally includes any
transaction-specific modifications to master agreements between the
counterparties that might apply to the transaction, such as the
International Swaps and Derivatives Association (``ISDA'') Master
Agreement and Schedule. A confirmation is thus a written or electronic
record of an SBS transaction that has been sent by one counterparty to
its counterparty and then manually, electronically, or by some other
legally equivalent means, signed (i.e., verified) by the receiving
counterparty.
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    \11\ See Part II.E, below, for a discussion of verification.
    \12\ Confirmations may also be used by an SBS Entity to make
certain disclosures, or to disclaim certain obligations, to a
counterparty. The Commission has separately adopted rules governing
required disclosures by an SBS Entity in connection with business
conduct rules for SBS Entities. See Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR
29960 (May 13, 2016) (``Business Conduct Adopting Release'').
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    Proposed Rule 15Fi-1 generally would have required that an SBS
Entity provide a trade acknowledgment containing certain information
memorializing an SBS transaction to its counterparty. If more than one
counterparty to the SBS transaction is an SBS Entity, the proposed rule
specified which counterparty would be required to provide the trade
acknowledgment. The proposed rule also would have required an SBS
Entity to establish, maintain, and enforce written policies and
procedures that are reasonably designed to obtain prompt verification
of the terms of a trade acknowledgment. In addition, an SBS Entity
would have been required to promptly verify the accuracy of, or
otherwise dispute with its counterparty, the terms of any trade
acknowledgment that it receives. The proposed rule is described more
fully below in Section II.
    The comment period for proposed Rule 15Fi-1 ended on February 22,
2011. On May 1, 2013, the Commission reopened the comment period for
proposed Rule 15Fi-1 and sought comment on, among other things, the
relationship of the proposed rule to any parallel requirements of other
authorities, including the CFTC and relevant foreign regulatory
authorities and, with respect to the CFTC rules, whether the
Commission's rules should emphasize consistency with the CFTC rules or
be more tailored to the security-based swap market.\13\ The Commission
received seven comments in total on proposed Rule 15Fi-1.\14\ As
discussed more fully in Section II below, commenters generally
supported the proposed rule but suggested modifications to certain
provisions.
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    \13\ Reopening of Comment Periods for Certain Rulemaking
Releases and Policy Statement Applicable to Security-Based Swaps,
Exchange Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23,
2013). The CFTC adopted its final rule on swap confirmation, 17 CFR
23.501 (``CFTC Rule''), in 2012. See Confirmation, Portfolio
Reconciliation, Portfolio Compression, and Swap Trading Relationship
Documentation Requirements for Swap Dealers and Major Swap
Participants, 77 FR 55904 (Sept. 11, 2012) (``CFTC Adopting
Release'').
    \14\ Comments were received from Chris Barnard, dated Jan. 22,
2011 (``Barnard''); Robert Pickel, Executive Vice Chairman,
International Swaps and Derivatives Association, Inc., dated Feb.
22, 2011 (``ISDA I''); Jeff Gooch, Chief Executive Officer,
MarkitSERV, dated Feb. 22, 2011 (``MarkitSERV''); Anonymous, dated
Feb. 19, 2011 (``Anonymous''); Dennis Kelleher, President & CEO, and
Stephen W. Hall, Securities Specialist, Better Markets, Inc., dated
Jul. 22, 2013 (``Better Markets I''); Robert G. Pickel, Chief
Executive Officer, International Swaps and Derivatives Association,
Inc., dated Jul. 22, 2013 (``ISDA II''); and Financial Services
Roundtable, Futures Industry Association, Institute of International
Bankers, International Swaps and Derivatives Association, Investment
Company Institute, Securities Industry and Financial Markets
Association, dated May 21, 2013 (in relevant part, this letter
requested that the Commission grant additional time for the
commenters to analyze the implications of the Commission's cross-
border proposal on certain rules, including the Proposed Rule that
the Commission reopened for comment).
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    After careful consideration of the comments, the Commission is
adopting Rules 15Fi-1 and 15Fi-2 (each a ``Final Rule'') with certain
modifications to the proposal as discussed below in Section II. These
changes generally are intended to address concerns expressed by some
commenters and to bring the rule into greater conformity with the CFTC
Rule. The Commission has also modified the proposal to separate the
proposed rule into two rules. Final Rule 15Fi-1 contains the
definitions, which are re-designated as paragraphs (a) through (i) of
Final Rule 15Fi-1. Final Rule 15Fi-2 contains the substantive trade
acknowledgment and verification

requirements, an exception for clearing transactions, an exception for
certain transactions that are executed on a security-based swap
execution facility (``SBSEF'') or a national securities exchange or
that are accepted for clearing by a clearing agency, and the exemption
from Rule 10b-10.
    Final Rule 15Fi-2 generally requires an SBS Entity to provide a
trade acknowledgment through electronic means disclosing all the terms
of a security-based swap transaction to its counterparty promptly, but
in any event no later than then end of the first business day following
the day of execution. Final Rule 15Fi-2 also requires an SBS Entity to
establish, maintain, and enforce written policies and procedures that
are reasonably designed to obtain prompt verification of the terms of a
trade acknowledgment, and to promptly verify the accuracy of, or
otherwise dispute with its counterparty, the terms of a trade
acknowledgment it receives. In addition, Final Rule 15Fi-2 provides an
exception from the requirement to send a trade acknowledgment for
clearing transactions and an exception for certain security-based swap
transactions executed on an SBSEF or a national securities exchange, or
accepted for clearing by a clearing agency. Finally, Final Rule 15Fi-2
provides to an SBS Entity that is also a broker or dealer an exemption
from Exchange Act Rule 10b-10 if the SBS Entity provides a trade
acknowledgment, or timely verifies or disputes the terms of a trade
acknowledgment that it receives, in compliance with the Final Rules.
    Final Rules 15Fi-1 and 15Fi-2 reflect deliberation by the
Commission of the way that its rules could affect the security-based
swap market. The Commission has sought to adopt rules that take into
account current market practices while providing appropriate
protections for investors' interests and to promote the purposes of the
Exchange Act. In developing these rules, Commission staff consulted and
coordinated with the CFTC and the prudential regulators.\15\
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    \15\ 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 purpose of assuring regulatory
consistency and comparability, to the extent possible.''
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B. Cross-Border Application and Availability of Substituted Compliance

    In 2013, the Commission proposed rules and interpretive guidance to
address the cross-border application of Title VII, including
requirements applicable to security-based swap dealers and major
security-based swap participants.\16\ The Commission in particular
expressed the preliminary view that the Title VII requirements apply
generally to the activities of registered security-based swap dealers
and major security-based swap participants.\17\ The Commission also
proposed rules that would provide that a registered foreign security-
based swap dealer, a foreign branch of a registered U.S. security-based
swap dealer or a foreign major security-based swap participant, with
respect to their foreign business, shall not be subject to certain
transaction-level business conduct requirements.\18\
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    \16\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968, 30986 (May 23, 2013) (``Cross-Border Proposing
Release'').
    \17\ See notes 191 to 195, infra, and accompanying text.
    \18\ See note 197, infra, and accompanying text.
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    As part of that Cross-Border Proposing Release, the Commission also
proposed rules to establish a framework to permit market participants
to satisfy certain requirements by complying with comparable regulatory
requirements of a foreign jurisdiction. Among these was a proposed rule
by which foreign security-based swap dealers registered with the
Commission might satisfy requirements under Exchange Act Section 15F--
other than dealer registration requirements--by complying with the
corresponding rules and regulations established in a foreign
jurisdiction.\19\
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    \19\ See Cross-Border Proposing Release, 78 FR at 31088, 31207-
08 (proposed Exchange Act Rule 3a71-5). In adopting final rules
related to the registration requirements applicable to security-
based swap dealers, the Commission stated that substituted
compliance would not be available in connection with those
registration requirements. See Exchange Act Release No. 75611 (Aug.
5, 2015), 80 FR 48964, 48972-73 (Aug. 14, 2015) (``Registration
Adopting Release''). Also, in 2014, the Commission adopted a final
procedural rule regarding the submission of requests for substituted
compliance determinations. See Cross-Border Adopting Release, 79 FR
at 47357-60, 47369 (Exchange Act Rule 0-13).
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    As discussed below, a number of commenters to the Cross-Border
Proposing Release addressed various aspects of the proposed substituted
compliance framework for security-based swap dealers.
    As discussed below, moreover, the Commission is setting forth its
interpretation regarding the cross-border scope of the trade
acknowledgment and verification requirements. The Commission also is
amending Rule 3a71-6 to provide that when the Commission has made a
substituted compliance determination, non-U.S. SBS Entities may satisfy
the trade acknowledgment and verification requirements applicable to
SBS Entities by complying with comparable requirements of a foreign
regime.

II. Discussion of Trade Acknowledgment and Verification Rule

A. Definitions

1. Proposed Rule
    We proposed to define several key terms in Rule 15Fi-1 to have the
meaning that we believe is commonly attributed to those terms by
industry participants. Thus, we proposed to define the term ``trade
acknowledgment'' to mean a written or electronic record of an SBS
transaction sent by one party to the other.\20\ We also proposed that
the term ``verification'' would mean the process by which a trade
acknowledgment has been manually, electronically, or by some other
legally equivalent means, signed by the receiving counterparty,\21\ and
that a ``confirmation'' of an SBS transaction would mean a trade
acknowledgment that has been verified.\22\ ``Execution'' would have
been defined to mean the point at which the parties become irrevocably
bound to a transaction under applicable law.\23\
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    \20\ See proposed Rule 15Fi-1(a)(10).
    \21\ See proposed Rule 15Fi-1(a)(13).
    \22\ See proposed Rule 15Fi-1(a)(4).
    \23\ See proposed Rule 15Fi-1(a)(6).
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    Proposed Rule 15Fi-1 also would have defined certain items that SBS
Entities would have been required to include on a trade acknowledgment,
including ``asset class'';\24\ ``broker ID'';\25\ ``desk ID'';\26\
``participant ID'';\27\ ``price;\28\ and ``trader ID''.\29\ UIC was
also defined to mean the unique identification code assigned to a
person, unit of a person, or product by or on behalf of an
internationally recognized

standards-setting body that imposes fees and usage restrictions that
are fair and reasonable and not unreasonably discriminatory.\30\ These
terms were proposed to be defined as in the proposed rules for
reporting and public dissemination of SBS.\31\
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    \24\ See proposed Rule 15Fi-1(a)(1) (defining the term to mean
``those security-based swaps in a particular broad category,
including, but not limited to, credit derivatives, equity
derivatives, and loan-based derivatives'').
    \25\ See proposed Rule 15Fi-1(a)(2) (defining the term to mean
``the unique identification code (``UIC'') assigned to a person
acting as a broker for a participant'').
    \26\ See proposed Rule 15Fi-1(a)(5) (defining the term to mean
``the UIC assigned to the trading desk of a participant or of a
broker of a participant'').
    \27\ See proposed Rule 15Fi-1(a)(7) (defining the term to mean
``the UIC assigned to a participant'').
    \28\ See proposed Rule 15Fi-1(a)(8) (defining the term to mean
``the price of a security-based swap transaction, expressed in terms
of the commercial conventions used in that asset class'').
    \29\ See proposed Rule 15Fi-1(a)(11) (defining the term to mean
``the UIC assigned to a natural person who executes security-based
swaps'').
    \30\ See proposed Rule 15Fi-1(a)(12). Proposed Rule 15Fi-
1(a)(12) also provided that if no standards-setting body meets these
criteria, a registered security-based swap data repository shall
assign all necessary UICs using its own methodology. If a standards-
setting body meets these criteria but has not assigned a UIC to a
particular person, unit of a person, or product, a registered
security-based swap data repository shall assign a UIC to that
person, unit of a person, or product using its own methodology.
    \31\ See Regulation SBSR-Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 63346
(Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010) (``SBSR Proposing
Release'').
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    Proposed Rule 15Fi-1 also would have defined ``clearing agency''
for purposes of the rule to mean a clearing agency registered pursuant
to Section 17A of the Securities Exchange Act of 1934.\32\ In addition,
the proposed rule would have defined ``processed electronically'' to
mean entered into a security-based swap dealer or security-based swap
participant's computerized processing systems to facilitate clearance
and settlement.\33\
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    \32\ See proposed Rule 15Fi-1(a)(3).
    \33\ See proposed Rule 15Fi-1(a)(9).
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2. Comments
    Two commenters requested that the Commission clarify the meanings
of certain terms used in the proposal, particularly ``executed
electronically'' and ``processed electronically.'' \34\ One commenter
noted that there are a variety of systems and communication devices
that may be used and that may have different assortments of features,
and stated its view that it would be inappropriate to include in these
terms all transactions for which some element of the transaction is
captured or processed through electronic means.\35\ This commenter
suggested that the Commission define ``processed electronically'' with
reference to a trading facility's electronic processing system.\36\ The
other commenter suggested that the term ``processed electronically'' be
defined as ``entered into a [SBS Dealer] or [Major SBS Participant]'s
computerized processing systems to facilitate clearance and settlement,
as well as to become capable of being communicated electronically to
the counterparty either as trade acknowledgment or as trade
verification.'' \37\
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    \34\ ISDA I at 5; MarkitSERV at 2, 9.
    \35\ ISDA I at 5.
    \36\ Id.
    \37\ MarkitSERV at 9.
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3. Response to Comments and Final Rule
    We did not receive any comments on, and we are adopting as proposed
the definition for the term ``verification'' in Final Rule 15Fi-1.
Final Rule 15Fi-1(e) as adopted defines the term ``execution''
substantially as proposed, except we have changed a reference to
``parties'' in a transaction to ``counterparties'' to clarify that we
are referring to the same persons in each part of the rule where the
term is used. Final Rule 15Fi-1(f) adopts the term ``trade
acknowledgment'' substantially as proposed, except that the definition
is clarified by changing a reference to a ``party'' to ``counterparty
of the security-based swap transaction'' for the same reason discussed
above. Final Rule 15Fi-1 also defines the terms ``clearing
transaction'' as discussed further in Section II.F. below, ``business
day'' and ``day of execution'' as discussed further in Section II.C.
below, and ``security-based swap execution facility'' and ``national
securities exchange'' as discussed further in Section II.G. below. In
addition, Final Rule 15Fi-1(b) as adopted defines the term ``clearing
agency'' differently than the proposed rule for reasons discussed
further in Section II.F. below.
    The term ``executed electronically'' is not being adopted as part
of Final Rule 15Fi-1 as a result of changes, discussed in Section II.C.
below, made to the rule's timing requirements. The Commission also is
not adopting the definition of ``processed electronically,'' \38\ due
to changes in Final Rule 15Fi-2's timing requirements and the
elimination of the requirement for electronic processing.\39\ In
addition, as discussed further in Section II.D. below, Final Rule 15Fi-
2 does not contain an enumerated list of items that are required to be
disclosed on the trade acknowledgment, and thus the Commission is not
adopting definitions for the terms ``asset class,'' ``broker ID,''
``desk ID,'' ``participant ID,'' ``price,'' ``trader ID,'' or ``UIC,''
which were proposed only to define the enumerated contents of the trade
acknowledgment. Finally, Final Rule 15Fi-1 does not adopt the term
``confirmation,'' which is not used elsewhere in Final Rules 15Fi-1 or
15Fi-2.
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    \38\ See proposed Rule 15Fi-1(c)(1)(i) and (ii) (which would
have required SBS transactions to be acknowledged within 15 minutes
for transactions that were electronically executed and processed
electronically, and within 30 minutes for transactions that were not
electronically executed but were processed electronically).
    \39\ See infra, Section II.C.
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B. Trade Acknowledgment Requirement

1. Proposed Rule
    Proposed Rule 15Fi-1(b) would have required an SBS Entity to
provide a trade acknowledgment to its counterparty when it purchases an
SBS from, or sells an SBS to, the counterparty. As noted in the
Proposing Release, the terms ``purchase'' and ``sale'' are defined in
Sections 3(a)(13) and (14), respectively, of the Exchange Act.\40\ As
amended by the Dodd-Frank Act, those definitions as applied to SBS
transactions include any ``execution, termination (prior to its
scheduled maturity date), assignment, exchange, or similar transfer or
conveyance of, or extinguishing of rights or obligations under, a
security-based swap.'' \41\ Because the proposed rule would apply
solely to an SBS Entity that ``purchases'' or ``sells'' an SBS, the
proposed rule would be effectively limited to ``principal
transactions'' in which the SBS Entity is a counterparty to the
transaction and is acting for its own account.
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    \40\ See Proposing Release, 76 FR at 3861; see also 15 U.S.C.
78c(a)(13) and (14).
    \41\ Dodd-Frank Act Sections 761(a)(3) and (4), amending
Exchange Act Sections 3(a)(13) and (14), respectively; 15 U.S.C.
78c(a)(13) and (14).
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    Proposed Rule 15Fi-1(b) also stated which counterparty that is an
SBS Entity to a security-based swap transaction has the responsibility
to provide a trade acknowledgment. Specifically, proposed Rule 15Fi-
1(b) would have required that, in a transaction between an SBS dealer
and a major SBS participant, the SBS dealer would be responsible for
providing the trade acknowledgment.\42\ In a transaction where only one
counterparty is an SBS dealer or major SBS participant, the SBS dealer
or major SBS participant would be responsible for providing the trade
acknowledgment.\43\ In any other transaction involving SBS Entities,
the counterparties would be required to select which counterparty would
provide the trade acknowledgment.\44\ The rule therefore

would have applied only to SBS Entities, thus there would have been no
requirement to provide a trade acknowledgment in a transaction that
does not involve an SBS Entity.
---------------------------------------------------------------------------

    \42\ See proposed Rule 15Fi-1(b)(1)(i).
    \43\ See proposed Rule 15Fi-1(b)(1)(ii).
    \44\ See proposed Rule 15Fi-1(b)(1)(iii). For most transactions
subject to the proposed rule, the party responsible for providing
the trade acknowledgment would be determined in a similar manner to
the party responsible for reporting the transaction under proposed
Regulation SBSR. As discussed in the Proposing Release, the
Commission used Section 13A(a)(3) of the Exchange Act as a model in
proposed Rule 15Fi-1 to determine which counterparty would be
responsible for providing the trade acknowledgment in the
transaction. See Proposing Release, 76 FR at 3862. Section 13A(a)(3)
specifies which party is obligated to report certain SBS
transactions--an SBS dealer, a major SBS participant, or a
counterparty to the transaction. 15 U.S.C. 78m-1(a)(3).
---------------------------------------------------------------------------

    The Commission stated in the Proposing Release that it expected
that many transactions would be confirmed by ``matching services''
provided through a clearing agency, noting that it used the term
``matching services'' in the Proposing Release to refer only to
services through which two counterparties enter a new transaction.\45\
The Commission also noted in the Proposing Release that a clearing
agency is providing matching services if it captures trade information
regarding a securities transaction, performs an independent comparison
of that information, and issues a confirmation of the transaction.\46\
The Commission stated that the use of clearing agencies' matching
services would promote the principles of Exchange Act Section 15F(i)
and that it wished to encourage SBS Entities to use these matching
services. Accordingly, paragraph (b)(2) of the proposed rule would have
provided that an SBS Entity would have satisfied its requirement to
provide a trade acknowledgment if a clearing agency, through its
matching service facilities, produced a confirmation of the SBS
transaction.\47\
---------------------------------------------------------------------------

    \45\ See Proposing Release, 76 FR at 3862.
    \46\ Id. ``Confirmation'' was proposed to mean a trade
acknowledgment that has been subject to verification. See proposed
Rule 15Fi-1(a)(4).
    \47\ See Proposing Release, 76 FR at 3862 and n.22.
---------------------------------------------------------------------------

    The Commission also noted in the Proposing Release that a clearing
agency may also serve as a central counterparty (``CCP'') in SBS
transactions whereby the counterparties may novate their contracts to
the CCP.\48\ The novation would constitute a purchase from or a sale to
the clearing agency in the agency model of clearing which predominates
in the United States.\49\ In the agency model, a swap that is accepted
for clearing--often referred to in the industry as an ``alpha''--is
terminated and replaced with two new swaps, known as ``beta'' and
``gamma.'' \50\ Therefore, such a novation would involve three
security-based swap transactions: The initial bilateral contract
between the counterparties, a new transaction between the CCP and one
of the counterparties to the initial bilateral contract, and a new
transaction between the CCP and the other counterparty to the initial
bilateral contract. Under proposed Rule 15Fi-1, if an SBS entity were a
counterparty to the bilateral transaction, it would be subject to the
trade acknowledgment requirement. Further, any subsequent transaction
in which an SBS Entity novated the transaction to a CCP would also be
subject to the trade acknowledgment requirement. While the purchase or
sale would require that an SBS Entity provide a trade acknowledgment
under paragraph (b)(1) of the proposed rule, paragraph (b)(2) of the
proposed rule would have permitted the CCP to satisfy the SBS Entity's
obligation to provide a trade acknowledgment to the SBS Entity's
counterparty, both for the initial bilateral transaction between an SBS
Entity and its counterparty, and for the subsequent purchases or sales
that result from the novation to the CCP.
---------------------------------------------------------------------------

    \48\ In the Proposing Release, the Commission noted its
understanding that in a CCP arrangement, if the original
counterparties to a bilateral SBS transaction are clearing members,
they may novate their bilateral trade to the clearing agency (acting
as a CCP). In such a novation to a CCP, each counterparty may
terminate its contract with the other and enter into a new contract
on identical terms with the CCP. In this way, the CCP would become
buyer to one counterparty and seller to the other. See Proposing
Release, 76 FR at 3862.
    \49\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14564 at 14599 (Mar. 19, 2015) (``SBSR
Adopting Release'').
    \50\ Id.
---------------------------------------------------------------------------

2. Comments
    Commenters focused on paragraph (b)(2) of proposed Rule 15Fi-1,
which would have permitted a clearing agency to provide a trade
acknowledgment on behalf of an SBS Entity. One commenter suggested that
SBS Entities should be permitted to delegate their recordkeeping
responsibilities to qualified third parties.\51\
---------------------------------------------------------------------------

    \51\ MarkitSERV at 2.
---------------------------------------------------------------------------

    One commenter indicated its view that an SBS Entity should be able
to satisfy the proposed rule's requirements merely by executing the
transaction on a swap execution facility or a designated contract
market, or by clearing the swap through a derivatives clearing
organization.\52\ Another commenter believed, however, that execution
platforms would not hold all the data necessary to bilaterally confirm
trades, either because the data is assumed at execution (such as
payment frequency) or because the execution platform lacks bilaterally
specific terms (such as the master confirmation agreement type and
date).\53\ These comments are addressed in Sections II.F and II.G
below.
---------------------------------------------------------------------------

    \52\ ISDA I at 5.
    \53\ MarkitSERV at 5.
---------------------------------------------------------------------------

    One commenter also maintained that any swap execution facility,
designated contract market, or derivatives clearing organization that
provides confirmations should be required to meet all the regulatory
requirements applicable to clearing agencies that provide
confirmations.\54\ Alternatively, the commenter suggested that the
Commission provide an exemption from registration as a clearing agency
for ``confirmation clearing agencies,'' or otherwise provide a
conditional exemption from registration that would apply only relevant
requirements to confirmation clearing agencies.\55\ The commenter also
suggested that the registration requirements applicable to entities
that must register with the Commission as clearing agencies for
providing confirmation services should be fair and apply to all
entities that provide similar acknowledgment, verification, and
confirmation services.\56\ Moreover, the commenter indicated that
``confirmation clearing agencies'' should be subject to a more limited
scope of clearing agency regulation than credit-substituting central
clearing counterparties, or should receive an exemption from certain
requirements that the commenter viewed as irrelevant.\57\
---------------------------------------------------------------------------

    \54\ Id. at 7.
    \55\ Id. at 6.
    \56\ Id.
    \57\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    We did not receive any comments on proposed paragraph (b)(1) of the
proposed rule, and are adopting it as proposed but re-designating it as
Rule 15Fi-2(a). We are also making a technical change to paragraph
(b)(3) of proposed rule 15Fi-1, changing the word ``in'' to ``by'' in
one place, re-designating the rule as Rule 15Fi-2(a), and updating
cross references in the paragraph to the re-designated rule numbers as
appropriate.
    In response to comments, the Commission is not adopting paragraph
(b)(2) of proposed Rule 15Fi-1, which would have permitted a clearing
agency to provide a trade acknowledgment on behalf of an SBS Entity.
After further consideration and in response to the comments, we believe
that it is appropriate to permit an SBS Entity to rely on a third party
of its choice to provide a trade acknowledgment on its behalf because
it will allow SBS Entities flexibility to select a provider of these
services even if the provider is not a registered clearing agency. The
Final Rules do not restrict an SBS Entity's ability to use a third
party of its choice to provide a trade acknowledgment. Eliminating
paragraph (b)(2) of the

proposed rule will also make the Final Rules more consistent with the
CFTC Rule, which does not impose any limitation on which third parties
may provide a swap trade acknowledgment or confirmation on behalf of a
swap dealer or major swap participant (``Swap Entities'').\58\ Thus,
SBS Entities that are also Swap Entities may use the same third parties
to provide trade acknowledgments pursuant to Final Rule 15Fi-2 that
they use to comply with the CFTC Rule \59\ without regard to whether
those third parties are registered as clearing agencies. This may
simplify dually-registered SBS Entities' operations or help to mitigate
their costs of compliance. However, the Commission emphasizes that the
SBS Entity remains responsible for complying with Final Rule 15Fi-2.
---------------------------------------------------------------------------

    \58\ Two commenters encouraged the SEC and the CFTC to harmonize
their rules. MarkitSERV at 9, ISDA II at 3, 8.
    \59\ See 17 CFR 23.501.
---------------------------------------------------------------------------

    We do, however, recognize the role of a clearing agency in
security-based swap transactions to which it is a counterparty. Thus,
Final Rule 15Fi-2 also provides an exception from an SBS Entity's
general requirement to provide a trade acknowledgment for: (1) Clearing
transactions, as discussed in Section II.G below; and (2) SBS
transactions that are submitted for clearing at a clearing agency, if
the transaction is submitted for clearing as soon as technologically
practicable, but in any event no later than the time established for
providing a trade acknowledgment under the rule; and the rules,
procedures or processes of the clearing agency provide for the
acknowledgment and verification of all the terms of the transaction
prior to or at the same time that the SBS is accepted for clearing, as
discussed in Section II.G below.\60\ We also recognize that executing
an SBS transaction on an SBSEF may provide the counterparties a means
of providing a trade acknowledgment and verifying the transaction and,
as discussed further in Section II.G. below, we are excepting certain
transactions executed on an SBSEF from the requirement that the
counterparties provide a trade acknowledgment.\61\
---------------------------------------------------------------------------

    \60\ See also infra Section II.G., which discusses an exception
from trade acknowledgment and verification requirements for SBS
transactions executed on an SBSEF or national securities exchange,
subject to certain conditions.
    \61\ We are not addressing at this time when a third-party
provider of trade acknowledgment and confirmation services, such as
one that provides matching services as discussed in the Proposing
Release, would be required to register as a clearing agency. In
2011, the Commission issued a temporary conditional exemption from
the registration requirement under Section 17A(b)(1) of the Exchange
Act for any clearing agency that may be required to register with
the Commission solely as a result of providing collateral management
services, trade matching services, tear up and compression services,
and/or substantially similar services for SBS (``Exempted
Activities''). See Order Pursuant to Section 36 of the Securities
Exchange Act of 1934 Granting Temporary Exemptions from Clearing
Agency Registration Requirements under Section 17A(b) of the
Exchange Act for Entities Providing Certain Clearing Services for
Security-Based Swaps, Exchange Act Release No. 64796 (July 1, 2011).
The order provides a temporary exemption, until the compliance date
for the final rules relating to registration of clearing agencies
that clear security-based swaps pursuant to Sections 17A(i) and (j)
of the Exchange Act, from Section 17A(b)(1) of the Exchange Act to
persons conducting Exempted Activities. Id.
---------------------------------------------------------------------------

C. Time To Provide a Trade Acknowledgment

1. Proposed Rule
    Proposed Rule 15Fi-1(c) would have provided that the maximum time
for providing a trade acknowledgment of an SBS transaction would vary
depending upon whether the transaction was electronically executed or
electronically processed, but would not exceed 24 hours following
execution. Specifically, proposed Rule 15Fi-1(c)(1) would have required
any SBS transaction to be confirmed promptly, but in any event:
     For any transaction that has been executed and processed
electronically, a trade acknowledgment must be provided within 15
minutes of execution.
     For any transaction that is not electronically executed,
but that will be processed electronically, a trade acknowledgment must
be provided within 30 minutes of execution.
     For any transaction that the SBS Entity cannot process
electronically, a trade acknowledgment must be provided within 24 hours
following execution.
    The Commission stated that it encourages SBS Entities to minimize
the number of manual transactions processed, and to process
electronically all SBS transactions if it is reasonably practicable to
do so.\62\ However, the Commission also stated that it understands that
an SBS Entity may have the ability to process electronically only
certain SBS transactions. For example, an SBS Entity may have the
ability to process electronically certain standardized SBS transactions
in certain asset classes, or transactions that it executes on an
exchange or SBS execution facility, but may lack the ability to process
electronically SBS transactions in other asset classes or that are
executed by other means.\63\ The Commission also stated that an SBS
Entity's ability to process a transaction electronically may be limited
by its counterparty's abilities.\64\ For example, an SBS Entity may
have the ability to process an SBS transaction through a matching
facility, but if its counterparty lacks access to the matching
facility, it would need to process transactions with that counterparty
through non-computerized means.
---------------------------------------------------------------------------

    \62\ See Proposing Release, 76 FR at 3863.
    \63\ The Commission noted that transactions in non-standardized
SBS that are individually negotiated and contain unique terms, or
transactions effected telephonically and processed manually, might
be in this category. See Proposing Release, 76 FR at 3863 and n.28.
    \64\ See Proposing Release, 76 FR at 3863.
---------------------------------------------------------------------------

    Proposed Rule 15Fi-1(c)(2) would have provided that an SBS Entity
would be required to process electronically an SBS transaction if it
has the ability to do so. In other words, an SBS Entity could not delay
providing a trade acknowledgment by choosing to process a transaction
by non-electronic means. The Commission stated its preliminary view
that requiring SBS Entities to acknowledge trades as promptly as they
are able to do so would promote the purposes of Exchange Act Section
15Fi-1.\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

    The proposed requirements were intended to promote the stability of
the SBS market by preventing documentation backlogs from creating
uncertainty over SBS Entities' exposure to SBS. As the Commission noted
in the Proposing Release, it expects a lag between the time when an SBS
is executed (i.e., the point at which both counterparties become
irrevocably bound to a transaction under applicable law), and when the
transaction is confirmed (i.e., when a trade acknowledgment of the
transaction is provided and verified).\66\ Requiring prompt provision
of trade acknowledgments also should help SBS Entities to submit timely
and accurate reports with respect to those transactions to SBS data
repositories. The Commission's proposed rule was intended to promote
the goal of promptly providing trade acknowledgments, though it
tempered that objective due to the Commission's recognition that it
might be difficult to achieve that goal, particularly for customized
agreements that are not executed or processed electronically.\67\
---------------------------------------------------------------------------

    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

2. Comments
    Four commenters discussed the timing requirements of proposed Rule
15Fi-1(c).\68\ Two comments from the same commenter generally
questioned the reason for requiring confirmation in 24 hours or less
and expressed concern

that it could increase systemic risk by forcing market participants to
focus on speed rather than accuracy.\69\
---------------------------------------------------------------------------

    \68\ ISDA I; MarkitSERV; ISDA II; Barnard.
    \69\ ISDA I at 3; ISDA II at 3.
---------------------------------------------------------------------------

    One commenter expressed the view that the proposed timing standards
are impractical for products where no master confirmation agreement or
similar template exists.\70\ This commenter also suggested that certain
terms of the transaction, such as the counterparty name (if the trade
is being allocated by an investment manager) or initial rates, may not
be available until after the execution.\71\ In addition, this commenter
stated that SBS Entities may need more than 24 hours to deliver a trade
acknowledgment in cross-border transactions due to business day and
time zone differences.\72\ Moreover, this commenter maintained that it
may not be achievable to send a trade acknowledgment within the
proposed time period for a transaction that is neither traded
electronically nor processed electronically.\73\ The commenter stated
that some transactions are heavily negotiated, bespoke in nature, and
require protracted post-trade detail work.\74\ The commenter also
indicated that ``complete pre-agreement of terms would require end-
users to engage significant legal resources for all proposed
transactions, as compared to existing practice, which focuses on
transactions that have actually been executed.'' \75\
---------------------------------------------------------------------------

    \70\ ISDA I at 4.
    \71\ Id. at 3.
    \72\ Id.
    \73\ Id. at 5.
    \74\ Id.
    \75\ Id. at 6.
---------------------------------------------------------------------------

    One commenter compared the Commission's proposed rule (which would
have allowed SBS Entities 24 hours from execution to issue the trade
acknowledgment for transactions that are not electronically processed)
with the CFTC's proposal to require confirmation of non-electronically
processed transactions by the end of the day of execution.\76\ The
commenter suggested that the 24 hour period should be measured only
during business days, but expressed doubts that even this time frame
could be achieved for all transactions that are not electronically
processed.\77\
---------------------------------------------------------------------------

    \76\ MarkitSERV at 8. The final CFTC Rule requires that Swap
Entities, as soon as technologically practicable, but in any event
by the end of first business day following the day of execution: (i)
Confirm a transaction with another Swap Entity, and (ii) provide a
trade acknowledgment to a counterparty that is not a Swap Entity. 17
CFR 23.501(a).
    \77\ MarkitSERV at 8.
---------------------------------------------------------------------------

    The commenter also expressed concern that the proposed rule's
timing requirement is inconsistent with the CFTC Rule and those of
relevant foreign regulatory authorities.\78\ The commenter believes
that these differences will impose unnecessary costs on market
participants, and may lead to confusion in, and disruption of, the SBS
market without yielding commensurate benefits.\79\ The commenter noted
that the CFTC replaced the proposed time periods for swaps executed or
processed electronically in their entirety with a requirement that,
subject to a compliance phase-in schedule, all swaps among Swap
Entities or between swap dealers, major swap participants, and
financial entities be confirmed as soon as technologically practicable,
but no later than the end of the first business day following the day
of execution.\80\
---------------------------------------------------------------------------

    \78\ ISDA II at 2.
    \79\ Id.
    \80\ Id. at 2-3.
---------------------------------------------------------------------------

    Further, this commenter suggested that different asset classes, and
even different products within an asset class, will require tailoring
the confirmation timing requirements, particularly between bespoke
transactions and ``garden variety'' security-based swaps.\81\
---------------------------------------------------------------------------

    \81\ ISDA II at 3.
---------------------------------------------------------------------------

    One commenter suggested that the Commission provide more guidance
on how to interpret the term ``promptly'' as used in proposed Rule
15Fi-1(c).\82\
---------------------------------------------------------------------------

    \82\ Barnard at 2.
---------------------------------------------------------------------------

    Two commenters maintained that the proposed rule may affect the way
investment managers conduct their business.\83\ One of these commenters
asserted that certain terms required to be on a trade acknowledgment
may not be known to the transacting counterparties within 24 hours of
execution, including the counterparty name (if the trade is being
allocated by an investment manager).\84\ The commenter explained that
investment managers commonly execute a single trade and then allocate
positions across their clients and this process may take more than 24
hours.\85\ The commenter also stated that the allocation process may
require investment managers to receive instructions from their
clients.\86\ The second commenter explained that the current market
practice is for investment managers to enter a transaction at the
`execution' level for a certain notional size and price,'' and only
allocate the transaction to multiple underlying funds thereafter.\87\
Thus, the commenter suggested measuring the time period in which a
trade acknowledgment should be sent from the point when the SBS Entity
possesses all the information necessary to issue the trade
acknowledgment.\88\
---------------------------------------------------------------------------

    \83\ Id. at 4; MarkitSERV at 8.
    \84\ ISDA I at 3.
    \85\ ISDA I at 4.
    \86\ Id.
    \87\ MarkitSERV at 8.
    \88\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    After considering the comments, the Commission is revising proposed
Rule 15Fi-1(c) to provide that an SBS Entity must provide a trade
acknowledgment promptly, but in any event by the end of the first
business day following the day of execution, and renumbering it as Rule
15Fi-2(b).\89\ The requirement that the responsible counterparty
promptly provide a trade acknowledgment would help ensure that the
counterparties know, and have a record of, the terms of their executed
agreement in a timely manner. ``Promptly,'' in this context, generally
should be understood to mean that an SBS Entity should provide a trade
acknowledgment as soon as practicable within the period specified in
the rule (by the end of the first business day following the day of
execution).\90\
---------------------------------------------------------------------------

    \89\ Final Rule 15Fi-2(b).
    \90\ An SBS Entity generally should not purposefully delay
sending trade acknowledgments, for example by programming its
systems to delay sending the trade acknowledgments until the end of
the allowable time period specified in the rule.
---------------------------------------------------------------------------

    The Commission recognizes the commenters that were concerned that
24 hours might not be enough time for all transactions, and has taken
those comments into account in providing additional time under the rule
as adopted.\91\ The additional time permitted under the rule as adopted
to provide a trade acknowledgment takes into account that certain
transactions may take more time to acknowledge because of the asset
class of the transaction or the bespoke nature of the particular
transaction. In addition, the additional time permitted under the rule
as adopted takes into account the process by which investment managers
allocate transactions, and should help to ensure that SBS Entities have
adequate time to provide a trade acknowledgment for transactions that
occur late in the day. This time period also will provide efficiencies
for SBS Entities that are also Swap Entities by allowing the same
amount of time as that required by the CFTC rule requiring confirmation
of swap transactions.\92\ We also note that,

under the final rule, an SBS Entity has at least as much time to
provide a trade acknowledgment as it would under one commenter's
suggestion that we measure our proposed 24 hour timing requirement only
during business days.\93\ As compared to the timing requirement of the
proposed rule, the final rule's requirement that an SBS Entity provide
a trade acknowledgment promptly but no later than the end of the first
business day following the day of execution aligns more closely with
the timing requirement for confirmation of SBS transactions that have
been adopted by certain foreign regulators.\94\
---------------------------------------------------------------------------

    \91\ See ISDA I at 3-4; ISDA II at 3; MarkitSERV at 8.
    \92\ See 17 CFR 23.501(a)(1)-(2). This change thus responds to
commenters who requested greater conformity between the Commission's
and the CFTC's rules. See MarkitSERV at 9, ISDA II at 3, 8.
    \93\ MarkitSERV at 8.
    \94\ See note 78, supra, and accompanying text. See, e.g.,
Commission Delegated Regulation 149/2013, art. 12(1)-(2), 2013 O.J.
(L52) 20-21 (EU) (requiring the documentation of the counterparties'
agreement to all the terms of non-centrally cleared OTC derivative
contracts as soon as possible and at the latest as follows: (1) If
concluded between financial counterparties or certain non-financial
counterparties with OTC derivatives portfolios above specified
thresholds, by the end of the next business day following the date
of execution, and (2) if concluded with a non-financial counterparty
with an OTC derivatives portfolio at or below specified thresholds,
by the end of the second business day following the date of
execution).
---------------------------------------------------------------------------

    Given this change, the Commission is also defining ``day of
execution'' to mean the calendar day of the counterparty to the
security-based swap transaction that ends the latest, provided that if
a security-based swap transaction is: (1) Entered into after 4:00 p.m.
in the place of a counterparty; or (2) entered into on a day that is
not a business day in the place of a counterparty, then such security-
based swap transaction shall be deemed to have been entered into by the
counterparty on the immediately succeeding business day of that
counterparty, and the day of execution shall be determined with
reference to such business day. This definition matches that used in
the CFTC Rule, except to replace references to ``party'' in the CFTC
rule with ``counterparty'' in Rule 15Fi-2, and references to ``swap''
with ``security-based swap.'' \95\ For clarity, the Commission is also
defining ``business day'' to mean any day other than a Saturday,
Sunday, or a legal holiday.\96\ For SBS Entities in the U.S., a ``legal
holiday'' generally would be any U.S. federal holiday. The Commission
recognizes that counterparties to the trade may be in different time
zones and/or jurisdictions, and that in the absence of Rule 15Fi-1(d),
there could be confusion about whether ``business day'' referred to the
jurisdiction and time zone of one counterparty or the jurisdiction and
time zone of the other counterparty. These definitions help to clarify
the obligation to provide a trade acknowledgment in cross-border
transactions or those in which the parties have different business days
or time zones. These definitions also create consistency with the CFTC
Rule.
---------------------------------------------------------------------------

    \95\ 17 CFR 23.501(a)(5)(i).
    \96\ Final Rule 15Fi-1(a).
---------------------------------------------------------------------------

    As noted, the timing requirement in Final Rule 15Fi-2(b) takes into
account and should help address the comment suggesting that the
Commission adopt different timing requirements for different asset
classes of security-based swap transactions and to distinguish between
the timing requirements for transactions that are bespoke to greater or
lesser degrees.\97\ Although the timing requirement is uniform for
transactions in any asset class and between standardized and bespoke
contracts, the additional time provided should address what we believe
is the root of the commenter's concern--that the proposed rule did not
provide sufficient time to provide a trade acknowledgment for certain
asset classes or for more bespoke transactions. The Commission notes
that a uniform timing requirement for trade acknowledgments is
consistent with the CFTC Rule, which does not recognize distinctions
between different asset classes or whether a swap is standardized when
specifying the time allotted for provision of a trade acknowledgment or
confirmation. The Commission recognizes that the commenter may desire
even more time than that provided in the final rule to provide a trade
acknowledgment in bespoke transactions, but does not believe that it is
appropriate to provide for a longer period of time. The rule as adopted
takes into account the comments requesting a longer period of time than
that which we proposed, as well as the objective of the proposed rule
to help ensure that the counterparties know, and have a record of, the
terms of their executed agreement in a timely manner, and the
Commission believes that the time period as adopted is an appropriate
approach.
---------------------------------------------------------------------------

    \97\ See ISDA II at 3.
---------------------------------------------------------------------------

    One commenter noted that different investment managers may have
different policies for allocating trades to their clients and do so
over differing time periods.\98\ For example, assume a single
investment manager manages several investment funds and has
discretionary authority to execute SBS transactions with an SBS Entity
on behalf of each of the funds. Assume further that the SBS Entity
knows the universe of funds managed by the investment manager. We
understand that common industry practice is that the SBS Entity will
execute SBS transactions with the investment manager on behalf of one
or more of the funds it manages without requiring the investment
manager to disclose at the time of execution the specific funds that
will be the counterparties to the transaction. The timing requirement
in Final Rule 15Fi-2(b) recognizes that allocations by an investment
manager may not occur before or contemporaneous with the execution of
the ``bunched'' order, and thus it allows additional time compared to
the proposed rule for an SBS Entity to provide a trade
acknowledgment.\99\
---------------------------------------------------------------------------

    \98\ ISDA I at 4.
    \99\ The Commission has proposed rules concerning margin
requirements and books and record keeping requirements for SBS. To
the extent these rules are adopted, an SBS Entity that accepts
trades from an agent on behalf of unidentified principals in this
manner will need to separately consider its obligations under those
rules.
---------------------------------------------------------------------------

    In light of these considerations and the time period for providing
a trade acknowledgment that is being adopted, the Commission is not
modifying the rule, as suggested by one commenter, to measure the time
period in which a trade acknowledgment should be sent from the point
when the SBS Entity possesses all the information necessary to issue
the trade acknowledgment. Generally, the Commission is concerned that,
once an execution has occurred, delaying the trade acknowledgment for
an indefinite and unknown amount of time could create an unacceptable
period of lingering uncertainty about the terms of the transaction.
This in turn would extend the period of risk presented by undocumented
transactions and would be inconsistent with the objective of the rule
to promote timely provision of the trade acknowledgment. With respect
to the commenter's specific concerns regarding allocations or the
initial rate for a transaction,\100\ the Commission believes, as
discussed above,\101\ that the additional time allowed under Final Rule
15Fi-2(b) for an SBS Entity to provide a trade acknowledgment should
provide an appropriate amount of time for an SBS Entity to obtain the
information required on a trade acknowledgment that was not available
at the time of execution. The timing requirements of the CFTC Rule are
substantially similar to the Commission's final rule,\102\ and many

SBS Entities that will be subject to the final rule are Swap Entities
subject to the CFTC Rule. We have considered the commenter's request
that we effectively allow an unlimited amount of time to provide a
trade acknowledgment if the SBS Entity has not received certain
information, such as the allocation or initial rate for a transaction,
and we also considered the objectives of the rule to promote timely
acknowledgment and verification of transactions. After taking into
consideration the comments and the objectives of the rule, we believe,
as discussed above, that requiring that SBS Entities provide the trade
acknowledgment by the end of the next business day after the day of
execution is an appropriate approach that promotes timely
acknowledgment and verification of the terms of the transactions. We
are not adopting proposed Rule 15Fi-1(c)(2), which would have required
that an SBS Entity electronically process transactions if it has the
ability to do so. The Commission proposed the requirement to improve
the recordkeeping of SBS Entities and further promote the goals of
Section 15F(i) of the Exchange Act.\103\ However, the Commission
believes that requiring electronic processing is not necessary at this
time to achieve this objective in light of the Final Rule's timing
requirement--which requires prompt acknowledgment of SBS transactions
and thus encourages SBS Entities to electronically process transactions
to improve their ability to comply with its requirements.
---------------------------------------------------------------------------

    \100\ ISDA I at 3.
    \101\ See notes 98-99, supra, and associated text.
    \102\ See 17 CFR 23.501(a) (requiring that a Swap Entity either
confirm its transaction (if it is with a Swap Entity) or provide a
trade acknowledgment for the transaction (if it with counterparty
that is not a Swap Entity) as soon as technologically practicable,
but in any event by the end of first business day following the day
of execution.
    \103\ See Proposing Release, 76 FR at 3863.
---------------------------------------------------------------------------

D. Form and Content of Trade Acknowledgments

1. Proposed Rule
    Paragraph (d) of proposed Rule 15Fi-1 would have required the trade
acknowledgments to be provided through any electronic means that
provide reasonable assurance of delivery and a record of transmittal.
The Commission proposed the electronic delivery requirement to promote
the timely provision of trade acknowledgments in accordance with
Exchange Act Section 15F(i). The proposed rule was intended to provide
flexibility for SBS Entities to determine the specific electronic means
by which they will comply.\104\
---------------------------------------------------------------------------

    \104\ See id. at 3864.
---------------------------------------------------------------------------

    The Commission noted in particular that SBS Entities may choose to
provide trade acknowledgments through a mutually agreed upon electronic
standard, such as a messaging system that uses Financial products
Markup Language (commonly known as FpML).\105\ The Commission also
specifically discussed facsimile transmission or electronic mail as a
means of providing trade acknowledgments, particularly when engaging in
SBS transactions with counterparties that rarely buy or sell SBS and
that consequently do not have the means to receive trade
acknowledgments otherwise.\106\ The Commission further stated that
providing trade acknowledgments exclusively by mail or overnight
courier would not satisfy the requirements of the proposed rule.\107\
---------------------------------------------------------------------------

    \105\ Id.
    \106\ Id.
    \107\ Id.
---------------------------------------------------------------------------

    Paragraph (d) of proposed Rule 15Fi-1 also would have required
trade acknowledgments to contain a minimum of 22 items of information,
all but one of which were identical to the items that the Commission
had proposed that SBS Entities would be required to report to an SBS
data repository pursuant to Regulation SBSR.\108\
---------------------------------------------------------------------------

    \108\ See SBSR Proposing Release, note 31, supra. The Commission
later adopted Regulation SBSR. See SBSR Adopting Release, note 49,
supra.
    Specifically, proposed Rule 15Fi-1(d) would have required the
trade acknowledgment to include terms from proposed Regulation SBSR,
including: (1) The asset class; (2) information identifying the SBS
instrument and the specific asset(s) or issuer of a security on
which the SBS is based; (3) the notional amount and currency; (4)
date and time of execution; (5) the effective date; (6) the
scheduled termination date; (7) the price; (8) the terms of any
fixed or floating rate payments, and the frequency of any payments;
(9) whether or not the security-based swap would have been cleared
by a clearing agency; (10) an indication if both counterparties are
SBS dealers; (11) if the transaction involved an existing SBS, an
indication that the transaction did not involve an opportunity to
negotiate a material term of the contract, other than the
counterparty; (12) an indication if the SBS is customized to the
extent that the information provided above does not provide all of
the material information necessary to identify the customized SBS or
does not contain the data elements necessary to calculate the price;
(13) the participant ID of each counterparty; (14) the broker ID,
desk ID, and trader ID of the reporting party; (15) the amount(s)
and currenc(ies) of any up-front payment(s) and a description of the
terms and contingencies of the payment streams of each counterparty
to the other; (16) the title of any master agreement, or any other
agreement governing the transaction, incorporated by reference and
the date of any such agreement; (17) the data elements necessary for
a person to determine the market value of the transaction; (18) if
the SBS will be cleared, the name of the clearing agency; (19) if
the SBS is not cleared, whether the exception in Section 3C(g) of
the Exchange Act (15 U.S.C. 78c-3(g)) was invoked; (20) if the SBS
is not cleared, a description of the settlement terms, including
whether the security-based swap is cash-settled or physically
settled, and the method for determining the settlement value; and
(21) the execution venue. In addition to these items from proposed
Regulation SBSR, proposed Rule 15Fi-1(d)(22) would also have
required the trade acknowledgment to include any additional
information that is required for the transaction to be cleared by a
clearing agency, if the transaction was to be cleared.
---------------------------------------------------------------------------

2. Comments
    One commenter asserted that product innovation or the bespoke
nature of some SBS might cause situations where electronic confirmation
cannot be provided, and that the low number of transactions in a
specific instrument type might sometimes be insufficient to justify the
cost of building the capabilities to electronically confirm
transactions.\109\ Thus, the commenter indicated that it is not
realistic or achievable for the Commission to mandate electronic
confirmation of all SBS transactions, and it should be merely
encouraged rather than required.\110\
---------------------------------------------------------------------------

    \109\ MarkitSERV at 10.
    \110\ Id. at 2 and 10.
---------------------------------------------------------------------------

    Another commenter suggested that the trade acknowledgment terms
should be only the minimum required to evidence agreement to a trade
and its material economic terms, and objected to many of the enumerated
items in the proposed rule.\111\ In particular, the commenter objected
to inclusion on the trade acknowledgment of the following specific
items:
---------------------------------------------------------------------------

    \111\ ISDA I at 6.
---------------------------------------------------------------------------

     Asset class (recommending that the Commission adopt
standard taxonomy before requiring this item);
     notional amount (suggesting that the quantity of assets--
shares--rather than notional amount should be disclosed for equity
derivatives);
     time of the transaction (because execution times are not
typically recorded for voice trades);
     counterparty regulatory status (because dealers may not
know their counterparty's regulatory status unless it is published by
the Commission) and the counterparty's broker, trading and desk
identification (noting that there is no analog under Exchange Act Rule
10b-10, and because the information would presumably be maintained as
central reference data that could be saved elsewhere);
     an indication that the transaction did not involve an
opportunity to negotiate a material term of the contract, if the
transaction involved an existing SBS transaction;
     certain information for customized transactions (because
inclusion of the elements necessary to calculate prices may go beyond
the scope of what can or should be included in a confirmation);

     a description of the payment streams (because contingent
payment streams may be elaborate and can be located in other
documents);
     the data elements necessary for the counterparty to
determine the market value (because this information may also go beyond
the scope of what can or should be included in a confirmation);
     venue (because it is unclear whether this means trading
venue); and
     clearing-required information (asserting that it is
unnecessary to include clearing agency instructions on the
confirmation).\112\
---------------------------------------------------------------------------

    \112\ Id. at 6-7.
---------------------------------------------------------------------------

    The commenter also urged the Commission to reconsider requiring the
trade acknowledgment to include all the data elements necessary to
determine the value of the security-based swap.\113\ The commenter
stated that valuation procedures vary from party to party, and, to the
extent that they must be agreed upon, they will be heavily negotiated.
The commenter said that requiring the results of the negotiations to be
reflected in the trade acknowledgment would slow down the confirmation
process.\114\
---------------------------------------------------------------------------

    \113\ Id. at 4.
    \114\ Id.
---------------------------------------------------------------------------

    One commenter also objected to the proposed rule diverging
substantially from the CFTC Rule, which requires parties to memorialize
the agreement of the counterparties to all the terms of a swap
transaction without identifying specific items to be listed on the
confirmation.\115\ This commenter also requested that the Commission's
rule allow for documentation to differ between different asset
classes.\116\
---------------------------------------------------------------------------

    \115\ ISDA II at 3; see also CFTC Rule, 17 CFR 23.501 and CFTC
Adopting Release, 77 FR 55901.
    \116\ ISDA I at 2.
---------------------------------------------------------------------------

    One commenter suggested that ``the record trail created by the
verification process (i.e., the confirmation) should constitute the
best evidence that the counterparties . . . agree to the terms and
binding nature of the trade.'' \117\ This commenter indicated that the
current practice in the security-based swap market is for
counterparties to execute a transaction by agreeing to the main
economic terms of the transaction (e.g., as to pricing and notional
size) and agreeing to other economic details only when they differ from
the accepted market practice or are specific to the terms of the
counterparty relationship (e.g., master agreement reference or credit
terms).\118\ The commenter explained that the process of adding
additional information to the transaction record to create a complete
documentation of the transaction is referred to as ``trade
enrichment,'' and that trade enrichment may happen through a variety of
processes, including trade capture systems or automated confirmation
services.\119\ The commenter also suggests that the definition of
``processed electronically'' should include electronic communication as
a required component.\120\
---------------------------------------------------------------------------

    \117\ MarkitSERV at 1.
    \118\ Id. at 2.
    \119\ Id.
    \120\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    The Commission is adopting the requirement to provide a trade
acknowledgment through any electronic means that provide reasonable
assurance of delivery and a record of transmittal as proposed in Rule
15Fi-1(d), but is re-designating it as Rule 15Fi-2(c).\121\ The
Commission acknowledges the comment that it should allow SBS Entities
to deliver trade acknowledgments in certain instances on paper rather
than electronically,\122\ but the Commission believes that requiring
electronic delivery of trade acknowledgments will promote the
objectives of Exchange Act Section 15F(i)(1) for timely and accurate
confirmation and documentation of security-based swaps. Specifically,
the electronic delivery of trade acknowledgments will result in SBS
counterparties receiving trade acknowledgments in a timelier manner,
which will enable them to review the terms of their transactions more
quickly to either verify the transactions or dispute the terms. This in
turn should help to reduce operational risk by decreasing the amount of
time within which a counterparty may recognize and work to resolve any
potential discrepancies in the trade documentation. The Commission also
understands that electronic confirmation is the norm for SBS
transactions.\123\ The Commission does not, however, specify the means
of electronic delivery, so SBS Entities may rely on any electronic
means, such as email systems, to comply with the rule's requirements
rather than acquiring or building new computer systems solely to
provide trade acknowledgments. Thus, taking into consideration the
potential costs of electronic trade acknowledgments and the expected
benefits, the Commission believes that it is appropriate to require
electronic delivery of trade acknowledgments. The Commission
acknowledges the comment that asserts that it might not be possible to
provide an electronic confirmation in all cases.\124\ However, the rule
as adopted does not require any particular means of electronic
delivery; for example, an SBS Entity could send an email with a PDF
attachment as a trade acknowledgment to a counterparty. Thus, given the
flexibility provided by the rule to provide an electronic confirmation,
the Commission believes it is appropriate to require SBS Entities to
provide an electronic trade acknowledgment by the end of the next
business day after the day of execution.
---------------------------------------------------------------------------

    \121\ The final rule also contains a technical correction
changing the word ``in'' to ``by.''
    \122\ See notes 109 and 110, supra, and accompanying text.
    \123\ See the discussion of current trade confirmation practices
in Section VII.B.3 below.
    \124\ See supra notes 109 and 110.
---------------------------------------------------------------------------

    After careful consideration of the comments, the Commission is
revising proposed Rule 15Fi-1(d), now re-designated as Final Rule 15Fi-
2(c), to require an SBS Entity to disclose all the terms of the
security-based swap transaction, rather than certain enumerated
items.\125\ The Commission agrees with the commenter that maintained
that the confirmation should constitute the best record of the
transaction so as to help SBS counterparties have a record that clearly
identifies their rights and obligations under the SBS, and thus is
requiring that the trade acknowledgment (which forms the basis of the
confirmation) include all the terms of the transaction. Final Rule
15Fi-2(c) also responds to objections to the required disclosure of
certain listed data requirements of proposed Regulation SBSR, such as
the participant ID of each counterparty, the broker ID, the desk ID,
and the trader ID, which are not terms of the transaction and may not
reflect the data that is most relevant to counterparties. Further, by
not enumerating the content requirements of the trade acknowledgment,
Final Rule 15Fi-2(c) also allows for flexibility for counterparties
with respect to the information provided for different SBS in different
asset classes. The requirement to report all the terms of the SBS
transaction implicitly accepts that if the terms of SBS in different
classes vary, only the terms relevant to the specific asset class of
the transaction being acknowledged must be included

on the trade acknowledgment under Final Rule 15Fi-2.\126\
---------------------------------------------------------------------------

    \125\ We emphasize that Rule 15Fi-2 as adopted does not limit
any disclosure obligations that an SBS Entity may have under other
applicable federal securities laws, rules or regulations, including
the anti-fraud provisions of the federal securities laws.
    \126\ The change to require all of the terms of the transaction
also responds to the commenter who opposed requiring the trade
acknowledgment to include all the data elements necessary to
determine the value of the security-based swap, as Final Rule 15Fi-2
does not state that an SBS Entity must include the data elements
necessary to determine the value of the security-based swap on the
trade acknowledgment.
---------------------------------------------------------------------------

    This change also responds to commenters who advocated for greater
consistency between the Commission's rules and those of the CFTC.\127\
The Commission believes that commonality between the trade
acknowledgment and verification standards for swaps and SBS will
facilitate compliance for SBS Entities that are also Swap Entities and
thus are already complying with the CFTC's rule.
---------------------------------------------------------------------------

    \127\ MarkitSERV at 9; ISDA II at 3, 8.
---------------------------------------------------------------------------

    Further, the Commission acknowledges that an SBS Entity may want to
comply with the Final Rule's content requirements by incorporating
documents by reference into the trade acknowledgment. For example, the
Commission understands that an SBS Entity may want to include by
reference in the trade acknowledgment certain standard provisions in
its master agreement with its counterparty that will control each SBS
transaction executed with that counterparty. An SBS Entity that chooses
to utilize this method should ensure that it complies with any
applicable rules regarding its maintenance of the documents
incorporated by reference\128\ and that the trade acknowledgment
reflects the actual terms of each SBS transaction.\129\
---------------------------------------------------------------------------

    \128\ The Commission has proposed rules governing books and
recordkeeping requirements for SBS Entities. See Recordkeeping and
Reporting 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.
71958 (Apr. 17, 2014), 79 FR 25193 (May 2, 2014) (``SBS Books and
Records Proposing Release'').
    \129\ This position is consistent with the CFTC's interpretive
guidance for the confirmation of swap transactions. See CFTC
Adopting Release, 77 FR 55903 at 55919.
---------------------------------------------------------------------------

    The Commission is not adopting any changes to the proposed rule
following one commenter's suggestion that ``processed electronically''
be defined to include electronic communication as a required component.
The Commission proposed the term ``processed electronically'' to define
a group of SBS transactions for which the proposed rule would have
required SBS Entities to provide a trade acknowledgment within 15 or 30
minutes of the transaction's execution. The proposed rule would have
required SBS Entities to provide a trade acknowledgment for certain
other transactions no later than 24 hours from the time of execution.
The Commission is not adopting a definition of ``processed
electronically,'' and the final rule does not use this term. The final
rule instead sets a uniform time during which SBS Entities must provide
a trade acknowledgment.

E. Trade Verification

1. Proposed Rule
    As part of the trade verification process, paragraph (e)(1) of
proposed Rule 15Fi-1 would have required an SBS Entity to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to obtain prompt verification of trade
acknowledgments that it provides pursuant to the proposed rule. The
Commission stated that it preliminarily believed that this requirement
would help to minimize the number of unverified trade acknowledgments,
and thereby reduce the operational risk and uncertainty associated with
unverified SBS transactions.\130\
---------------------------------------------------------------------------

    \130\ Proposing Release, 76 FR at 3866.
---------------------------------------------------------------------------

    Proposed Rule 15Fi-1(a)(13) would have defined ``verification'' as
the process by which a trade acknowledgment has been manually,
electronically, or by some other legally equivalent means, signed by
the receiving counterparty.\131\ The Commission noted in proposing the
rule that verifying trades may be done through a process in which the
counterparty affirms the transaction terms after reviewing a trade
acknowledgment sent by the first counterparty.\132\ The counterparty
may also dispute the terms of the transaction (often referred to as a
``DK'' of the transaction, short for ``don't know''). Verifying or
disputing the transaction may be done by various methods, including
where the first counterparty transmits a trade acknowledgment to its
counterparty, after which the counterparty--electronically, manually,
or by some other legally equivalent method--either signs and returns
the trade acknowledgment to verify the transaction, or notifies the
counterparty that it rejects the terms. By promoting prompt
verification, the proposed rule was intended to minimize the
operational risk and uncertainty associated with SBS transactions for
which trade acknowledgments have not been verified.
---------------------------------------------------------------------------

    \131\ See proposed Rule 15Fi-1(a)(13).
    \132\ Proposing Release, 76 FR at 3866.
---------------------------------------------------------------------------

    For SBS transactions that are not subject to clearing, paragraph
(e)(1) of the proposed rule would have required SBS Entities to
establish their own trade verification processes. For example, an SBS
Entity could establish, maintain, and enforce policies and procedures
under which it will only deal with a counterparty that agrees to timely
review any trade acknowledgment to ensure that it accurately describes
their agreed upon transaction, and sign and return the trade
acknowledgment as evidence of the verification. SBS Entities' policies
and procedures for verification could also include using a third-party
matching service.
    Proposed Rule 15Fi-1(e)(2) would have provided that: in any SBS
transaction to be cleared through a clearing agency, an SBS Entity must
comply with the verification process prescribed by the clearing agency;
\133\ and that such compliance would have satisfied the verification
requirements of subparagraph (e)(1) with respect to the
transaction.\134\
---------------------------------------------------------------------------

    \133\ The Commission noted in the Proposing Release that it
expected that clearing agencies would adopt rules to obtain the
signature of a counterparty on a trade acknowledgment as part of
their verification procedures. In electronically processed
transactions, the clearing agency could obtain counterparties'
signatures electronically or by other means. See Proposing Release,
76 FR at 3866.
    \134\ As also noted in the Proposing Release, each counterparty
could submit the SBS terms to an agreed-upon matching service
operated by a registered clearing agency. The matching service would
then compare the submitted transaction terms. If the submitted SBS
terms agreed, the transaction would be verified; otherwise, the
matching service would notify the counterparties of the
discrepancies, and the counterparties would have the opportunity to
resolve them. Id. at n.39.
---------------------------------------------------------------------------

    Paragraph (e)(3) of the proposed rule would have required SBS
Entities to promptly verify the accuracy of, or dispute with their
counterparties, the terms of trade acknowledgments they receive
pursuant to the proposed rule. This requirement was intended to reduce
the incidence of unverified SBS transactions, thereby reducing the
operational risk for SBS Entities.\135\
---------------------------------------------------------------------------

    \135\ See proposed Rule 15Fi-1(e)(3); see also Proposing
Release, 76 FR at 3867.
---------------------------------------------------------------------------

2. Comments
    One commenter recommended applying time limitations to verifying
the transaction in addition to the proposed time limitation for sending
the trade acknowledgment.\136\ The commenter suggested that if the
trade acknowledgment is executed electronically and processed
electronically, the trade acknowledgment should be sent within 15
minutes, and the verification provided within 15 minutes of the trade
acknowledgment being sent. Similarly, trades that must be acknowledged
within 30 minutes should have to be verified within 30 minutes of the
trade

acknowledgment being sent, and trades acknowledged within 24 hours of
execution should have to be verified within 24 hours of receiving the
trade acknowledgment.\137\ This commenter also supported the CFTC's
proposed requirement that Swap Entities have written policies and
procedures reasonably designed to ensure confirmation with non-
financial entities not later than the next business day following the
day the swap transaction is executed, and the commenter suggested that
Commission harmonize its requirement with the CFTC's requirement.\138\
---------------------------------------------------------------------------

    \136\ MarkitSERV at 9.
    \137\ Id.
    \138\ Id. The CFTC Rule as adopted requires that a Swap Entity
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it executes a confirmation for
each swap transaction with a Swap Entity or a financial entity no
later than the end of the first business day following the day of
execution, and a requirement that a Swap Entity establish, maintain,
and follow written policies and procedures reasonably designed to
ensure that it executes a confirmation for each swap transaction
that it enters with any other entity not later than the end of the
second business day following the day of execution. See 17 CFR
23.501(a)(3).
---------------------------------------------------------------------------

    One commenter stated its view that the proposed trade
acknowledgment and verification process does not account for competing
conventions in some transactions.\139\ The commenter stated that, for
some products, an acknowledgment or notice is sent for certain ```mid-
life' trade events'' without the expectation of verification.\140\ In
other transactions, both counterparties may issue a trade
acknowledgment to their counterparty, but will respond only if there
are discrepancies.\141\ The commenter noted that counterparties may
also rely on ``negative affirmation,'' which relies only on one-way
confirmations unless the terms are being disputed.\142\
---------------------------------------------------------------------------

    \139\ ISDA I at 8.
    \140\ Id.
    \141\ Id.
    \142\ Id. at 5.
---------------------------------------------------------------------------

    One commenter supported what it viewed as a requirement in proposed
Rule 15Fi-1(e) that the counterparties ``consent to the binding nature
of the verification process (i.e., produce a legally binding
confirmation)'', and made the observation that this is consistent with
the CFTC Rule.\143\
---------------------------------------------------------------------------

    \143\ MarkitSERV at 4-5. We note that nothing in the rule as
proposed or adopted requires parties to ``consent to the binding
nature of the trade verification process.''
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    The Commission is adopting proposed Rule15Fi-1(e) with some
modifications compared to the proposed rule as described below, and is
re-designating it as Final Rule 15Fi-2(d). The Commission believes that
requiring SBS Entities to establish, maintain, and enforce written
policies and procedures reasonably designed to obtain prompt
verification of security-based swap transactions will encourage prompt
verification of trades with SBS Entities and thereby will advance the
objective of Exchange Act Section 15(F)(i) to promote timely and
accurate confirmation and documentation of security-based swaps. Final
Rule 15Fi-2(d)(2) will further promote this objective by requiring an
SBS Entity to promptly verify the accuracy of, or otherwise dispute
with its counterparty, the terms of a trade acknowledgment it receives
pursuant to Final Rule 15Fi-2(a).\144\
---------------------------------------------------------------------------

    \144\ ``Promptly,'' in this context, generally should be
understood to mean that an SBS Entity should verify or otherwise
dispute with its counterparty, the terms of a trade acknowledgment
that it receives as soon as practicable. See note 90, supra, and the
related text.
---------------------------------------------------------------------------

    The Commission is not adopting, as suggested by a commenter, a
maximum amount of time for an SBS Entity to verify a trade
acknowledgment that it receives. The Commission believes that it is
appropriate for the final rule to specify a maximum amount of time for
an SBS Entity to provide a trade acknowledgment because the trade
acknowledgment serves the important roles of notifying the recipient
that (1) its counterparty believes it has executed an SBS transaction
and (2) the purported terms of that transaction. The recipient then has
the opportunity to review the trade acknowledgment to determine if the
trade acknowledgment accurately reflects its agreement with the
counterparty. If the recipient agrees that the trade acknowledgment is
accurate, the recipient could be expected as an ordinary business
practice to verify the transaction promptly. If the recipient believes
the trade acknowledgment is inaccurate, the recipient may need
additional time to resolve its dispute about the purported terms.
Placing a specific time period on the requirement to verify a
transaction could mean that, even in the case of good faith disputes
about the terms of a trade acknowledgment, a trade acknowledgment
recipient would be made to verify, and effectively agree to, incorrect
terms on a trade acknowledgment solely to avoid violating the rule even
though both counterparties might benefit from using more time to
resolve the dispute. The trade acknowledgment's timing requirement thus
promotes timely documentation of the transaction, and the flexibility
afforded by the final rule's requirements on verification help to
safeguard the accuracy of that documentation.
    The Commission also is not modifying the proposed rule in response
to the commenter's concern that it does not account for differing
conventions with respect to ``'mid-life' trade events.'' It is not
clear whether the concern is with respect to certain corporate actions
(e.g., mergers, dividends, stock splits, or bankruptcies) that may
affect the securities underlying the SBS, or with respect to
modifications to the SBS agreed by the counterparties after execution
(e.g., novations or assignments, unwinds, terminations, or other
amendments or modifications to the SBS transaction). In our view, such
corporate actions do not require a trade acknowledgment under the rule
because these actions are not themselves a purchase or a sale of an
SBS.\145\ Thus, although counterparties may choose to issue some record
acknowledging these actions according to whatever conventions the
counterparties prefer, it is not required by Final Rule 15Fi-2. A
novation, assignment, unwind or termination (prior to the scheduled
maturity date) of an existing SBS would be a purchase or sale, and thus
require a trade acknowledgment under Final Rule 15Fi-2.\146\ This is
consistent with

the objective of the rules, to help ensure that counterparties have a
complete understanding of their agreement and a record of its terms in
a timely manner.
---------------------------------------------------------------------------

    \145\ However, a modification to an SBS that was made by the
counterparties as a result of a corporate action with respect to a
security underlying the SBS may be a purchase or sale of an SBS
under the definition of ``purchase'' or ``sale'' in Exchange Act
Sections 3(a)(13) and (14).
    \146\ Other amendments or modifications to an existing SBS may
also be purchases or sales if they meet the definitions for a
``purchase'' or ``sale'' in Exchange Act Sections 3(a)(13) and (14).
The Commission has previously noted that if the material terms of an
SBS are amended or modified during its life based on an exercise of
discretion and not through predetermined criteria or a predetermined
self-executing formula, the Commission views the amended or modified
SBS as a new SBS. See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, Exchange Act Release
No. 67453, 77 FR 48207 at 48286 (Aug. 13, 2012). The Commission
considers such amendments or modifications to an SBS based on the
exercise of discretion to result in the purchase and sale of a new
SBS. The Commission has also previously noted that its business
conduct rules generally will not apply to amendments or
modifications to a pre-existing SBS unless the amendment or
modification results in a new SBS. See Business Conduct Adopting
Release, 81 FR at 29969. For example, the Commission has stated that
the business conduct rules generally will not apply to either a full
or partial termination of a pre-existing SBS. Id. The trade
acknowledgment rule, however, applies to any transaction that is a
purchase or sale of an SBS, even if the amendment or modification
based on the exercise of discretion does not result in a new SBS.
Thus, for example, an SBS Entity must provide a trade acknowledgment
for a full termination (if prior to the scheduled maturity date) or
a partial termination.
---------------------------------------------------------------------------

    The Commission is not adopting the commenter's suggested
requirement for SBS Entities to have written policies and procedures
reasonably designed to ensure confirmation with non-SBS Entities by the
next business day after the swap transaction is executed.\147\ The
Commission expects that SBS Entities may enter transactions with
unregistered counterparties with varying levels of sophistication and
different compliance procedures, which may require different amounts of
time to respond to trade acknowledgments. The Commission notes,
however, that policies and procedures reasonably designed to ensure
prompt verification of a transaction may include policies and
procedures under which the SBS Entity relies on its counterparty's
negative affirmation to the terms of a trade acknowledgment. The
Commission understands that Swap Entities commonly use negative
affirmation to reduce the legal uncertainty that might otherwise occur
if a counterparty were to fail to verify a trade acknowledgment in a
timely manner. The Commission generally would consider negative
affirmation policies and procedures reasonable if they require that the
SBS Entity's counterparty agree to be bound by negative affirmation
before or at the time of execution of the SBS transaction and if the
policies and procedures provide adequate time after the counterparty
receives the trade acknowledgment to dispute its terms or otherwise
respond to the trade acknowledgment. Further, the policies and
procedures generally should require the SBS Entity to document its
counterparty's agreement to rely on negative affirmation.
---------------------------------------------------------------------------

    \147\ Id.
---------------------------------------------------------------------------

    After further consideration, the Commission has determined not to
adopt Rule 15Fi-1(e)(2) as proposed, which would have: (1) Required, in
any transaction to be cleared by a clearing agency, an SBS Entity to
comply with the verification process prescribed by the clearing agency;
and (2) provided that compliance with the clearing agency's
verification process in a transaction to be cleared would satisfy the
SBS Entity's requirement to establish, maintain, and enforce written
policies and procedures that are reasonably designed to obtain prompt
verification of the transaction. Instead, as discussed in Section II.G.
below, the Commission is adopting an exception from Rule 15Fi-2 for SBS
transactions submitted to, and accepted for, clearing at a registered
clearing agency, which exception essentially would address more broadly
the application of the proposed verification requirements to SBS
transactions to be cleared.
    Finally, we are adopting as proposed Rule 15Fi-1(e)(3), but re-
designating it as Final Rule 15Fi-2(d)(2).

F. Exception for Clearing Transactions

    Proposed Rule 15Fi-1(b) generally would have required an SBS Entity
to provide a trade acknowledgment to its counterparty whenever it
purchases or sells an SBS. ``Purchase'' is defined in the Exchange Act
to include ``any contract to buy, purchase, or otherwise acquire.''
\148\ Sale is defined under the Exchange Act as ``any contract to sell
or otherwise dispose of.'' \149\ ``Purchase'' and ``sale'' are each
further defined, for purposes of an SBS, to include ``the execution,
termination (prior to its scheduled maturity date), assignment,
exchange or similar transfer or conveyance of, or extinguishing of
rights or obligations under, a security-based swap, as the context may
require.'' \150\ Proposed Rule 15Fi-1(b) did not differentiate between
cleared SBS and uncleared SBS. Accordingly, if an SBS Entity purchased
a security-based swap from or sold a security-based swap to a clearing
agency as part of a clearing transaction, proposed Rule 15Fi-1(b) would
have required the SBS Entity to provide a trade acknowledgment to the
clearing agency.
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    \148\ Exchange Act Section 3(a)(13).
    \149\ Exchange Act Section 3(a)(14).
    \150\ Exchange Act Sections 3(a)(13) and (14).
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    In the Proposing Release, the Commission asked whether clearing
agencies should be permitted to provide trade acknowledgments on behalf
of SBS Entities in transactions where the clearing agency was not
responsible for clearing the transaction through a matching process,
and if so, under what conditions.\151\ One commenter suggested that an
SBS Entity should be able to satisfy the rule's requirements merely by
clearing the swap through a derivatives clearing organization, among
other means.\152\
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    \151\ Proposing Release, 76 FR at 3863.
    \152\ ISDA I at 5.
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    Upon consideration of the comment, for the reasons discussed below,
the Commission believes that it is unnecessary to require an SBS Entity
to comply with the trade acknowledgment and verification provisions of
Rule 15Fi-2 when it is a counterparty to an SBS transaction with a
clearing agency. Thus, we are providing in Rule 15Fi-2(e) as adopted
that a security-based swap dealer or major security-based swap
participant is excepted from the requirements of Rule 15Fi-2 with
respect to any clearing transaction. For these purposes, Final Rule
15Fi-1(c) defines ``clearing transaction'' as a security-based swap
that has a clearing agency as a direct counterparty,\153\ and
``clearing agency'' as a clearing agency as defined in Section 3(a)(23)
of the Exchange Act that is registered pursuant to Section 17A of the
Exchange Act and provides central counterparty services for SBS
transactions.
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    \153\ This is the same meaning as in Exchange Act Rule 900(g).
Clearing transactions thus include, for example, any security-based
swaps that arise if a registered clearing agency accepts a security-
based swap for clearing, as well as any security-based swaps that
arise as part of a clearing agency's internal processes, such as
security-based swaps used to establish prices for cleared products
and security-based swaps that result from netting other clearing
transactions of the same product in the same account into an open
position. See SBSR Adopting Release, supra note 49, 80 FR at 14599.
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    In the agency model of clearing which predominates in the United
States, clearing transactions are new transactions created to replace a
bilateral SBS transaction that was submitted to, and has been accepted
for clearing by, a registered clearing agency, in which the clearing
agency becomes the new direct counterparty to each of the
counterparties of the original bilateral transaction. Therefore, these
clearing transactions (known as the ``beta'' and ``gamma'') effectively
mirror the original bilateral transaction (known as the ``alpha'') that
was extinguished in the process of acceptance for clearing.\154\
Because the final rules define ``clearing transaction'' to include only
a transaction where the clearing agency is a counterparty to a trade,
e.g., beta and gamma transactions, the exception in Final Rule &15Fi-
2(e) does not apply to the initial bilateral

transaction, i.e., the alpha transaction.\155\ In the principal model,
a clearing member would clear a security-based swap for a customer by
becoming a direct counterparty to a transaction with the customer, and
then would become a counterparty to an offsetting transaction with the
clearing agency.\156\ Thus, the transaction between the clearing member
and the clearing agency would be a clearing transaction for purposes of
this rule.
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    \154\ If both direct counterparties to the alpha transaction are
members of the clearing agency, the direct counterparties would
submit the transaction to the clearing agency directly and the
resulting beta transaction would be between the clearing agency and
one clearing member, and the gamma transaction would be between the
clearing agency and the other clearing member. The Commission
understands, however, that if the direct counterparties to the alpha
transaction are a clearing member and a non-clearing member (a
``customer''), the customer's side of the trade would be submitted
for clearing by a clearing member acting on behalf of the customer.
When the clearing agency accepts the alpha transaction for clearing,
one of the resulting transactions--in this case, assume the beta
transaction--would be between the clearing agency and the customer,
with the customer's clearing member acting as guarantor for the
customer's trade. The other resulting transaction--the gamma
transaction--would be between the clearing agency and the clearing
member that was a direct counterparty to the alpha transaction. See
SBSR Adopting Release, supra note 49, 80 FR 14563 at n. 292.
    \155\ The application of an exception from the trade
acknowledgment and verification requirements for bilateral trades
that are submitted to clearing is discussed further in Sections G.2
and G.3 below.
    \156\ See SBSR Adopting Release, supra note 49, 80 FR 14563 at
n. 293.
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    In each of the models discussed above, when the CCP is a
counterparty to a transaction, the Commission observes that the rules,
procedures, and processes of registered clearing agencies that provide
central counterparty services for SBSs \157\ are generally designed to
ensure that the terms of SBS transactions submitted for clearing have
been matched and confirmed prior to or at the same time the transaction
is accepted by the registered clearing agency for clearing.\158\ Thus,
the Commission believes that it would be unnecessary and duplicative to
require SBS Entities to comply with the requirements of Rule 15Fi-2 for
clearing transactions, as it would result in essentially two processes,
those of the CCP and those under the rule, to acknowledge and verify
the same transaction. Therefore, paragraph (e) of Final Rule 15Fi-2
excepts an SBS Entity from the requirements of Rule 15Fi-2 with respect
to clearing transactions.\159\
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    \157\ There are currently two clearing agencies registered with
the Commission that provide central counterparty services for SBS
transactions. The two clearing agencies are ICE Clear Credit LLC and
ICE Clear Europe Limited.
    \158\ See, e.g., ICE Clear Credit LLC Clearing Rule 305
(requiring that participants file with ICE Clear Credit LLC each
business day confirmations covering trades made during the day that
include certain information about the trade, and providing that, for
authorized trade execution/processing platforms or other electronic
systems that submit matched trades, the requirement that
participants file a confirmation is satisfied by confirming reports
that are automatically generated by the platform) and Rule 306
(providing that when a trade between two participants is submitted
for clearing, if the trade confirmations submitted by the two
participants do not match in all material respects, ICE Clear Credit
LLC may reject the trade); see also, ICE Clear Europe Limited CDS
Procedures, Section 4.4(c) and more generally the provisions
included in Section 4 of the ICE Clear Europe Limited CDS
Procedures.
    \159\ Final Rule 15Fi-2(e).
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    The Commission proposed to define ``clearing agency'' as ``a
clearing agency registered pursuant to Section 17A of the Securities
Exchange Act of 1934 (15 U.S.C. 78q-1),'' \160\ but has adopted a final
definition that differs from the proposed definition in two ways.
First, the exception in the final rule is intended only for
transactions with a clearing agency that provides services that would
bring the person within the statutory definition of clearing
agency.\161\ Thus, for clarity, the final rule's definition of
``clearing agency'' is limited to a clearing agency as that term is
defined in Section 3(a)(23) of the Exchange Act. Second, the final
definition of clearing agency is further limited to a registered
clearing agency that provides central counterparty services for SBS
transactions. As discussed above, the Commission observes, through its
ability to approve the rules and procedures of registered clearing
agencies, and its ability to inspect the processes and operations of
registered clearing agencies, that the rules, procedures, and processes
of registered clearing agencies that provide central counterparty
services for SBSs are generally designed so that the terms of SBS
transactions submitted for clearing have been matched and confirmed
prior to or at the same time the transaction is accepted by the
registered clearing agency for clearing. Thus, the Commission is
satisfied that registered clearing agencies that provide central
counterparty services for SBSs have rules, procedures, and processes
that will serve the purpose of the trade acknowledgment rule by
providing the parties to the transaction with a record of their
transaction. However, the Commission does not make this same
observation about the rules, procedures, and processes of clearing
agencies that are not registered and do not provide central
counterparty services for SBS transactions, and thus it is not
extending the exception to clearing agencies that are not registered or
that do not provide central counterparty services for SBSs.
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    \160\ See proposed Rule 15Fi-1(a)(3).
    \161\ Exchange Act Section 3(a)(23)(A) generally defines a
clearing agency as ``any person who acts as an intermediary in
making payments or deliveries or both in connection with
transactions in securities or who provides facilities for comparison
of data respecting the terms of settlement of securities
transactions, to reduce the number of settlements of securities
transactions, or for the allocation of securities settlement
responsibilities. Such term also means any person, such as a
securities depository, who (i) acts as a custodian of securities in
connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates.'' Exchange Act Section 3(a)(23)(B)
excepts certain persons from the definition of ``clearing agency.''
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G. Exception for Transactions Executed on a Security-Based Swap
Execution Facility or National Securities Exchange or Accepted for
Clearing by a Clearing Agency

    The trade acknowledgment and verification requirements in proposed
Rules 15Fi-1(b) and (e) generally did not distinguish between
transactions executed in the over-the-counter market or transactions
executed on a security-based swap execution facility or a national
securities exchange. Proposed Rule 15Fi-1(b) also did not distinguish
between transactions that would be submitted for clearing at a clearing
agency, and those that are not.\162\ Proposed Rule 15Fi-1(e)(2) would
have addressed SBS transactions to be cleared by a clearing agency, by:
(1) Requiring, in any transaction to be cleared by a clearing agency,
an SBS Entity to comply with the verification process prescribed by the
clearing agency; and (2) providing that compliance with the clearing
agency's verification process in a transaction to be cleared would
satisfy the SBS Entity's requirement to establish, maintain, and
enforce written policies and procedures that are reasonably designed to
obtain prompt verification of the transaction.
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    \162\ Proposed Rule 15Fi-1(a) did, however, propose an exception
related to the use of the matching services of a clearing agency,
which is discussed separately in Section II.B.1 above.
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    The Commission solicited comment on whether persons such as
security-based swap execution facilities should be permitted to provide
trade acknowledgments on behalf of SBS Entities.\163\ Commenters
disagreed on the trade acknowledgment requirements for transactions
executed on an execution facility or cleared at a clearing agency. One
commenter supported a rule that would be satisfied by executing an SBS
on a swap execution facility or on a designated contract market, or by
clearing the swap through a derivatives clearing organization.\164\ The
commenter noted that this approach was consistent with the CFTC's
proposed rule.\165\ Another commenter

expressed concern that an execution facility would not typically have
all of the data required to bilaterally confirm trades, either because
it supports trading for standardized transactions, where for example
common terms such as payment frequency are assumed at execution, or
because it does not hold bilaterally specific terms, such as master
confirmation agreement type and date.\166\ In either case, the
commenter stated that these terms would be added during the enrichment
process, with the full transaction details later agreed through an
affirmation or matching process.\167\
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    \163\ Proposing Release, 76 FR 3862-3.
    \164\ ISDA I at 5.
    \165\ Id. The CFTC Rule as adopted provides that any swap
transaction executed on a swap execution facility or designated
contract market shall be deemed to satisfy the requirements of the
rule, provided that the rules of the swap execution facility or
designated contract market establish that confirmation of all terms
of the transaction shall take place at the same time as execution.
17 CFR 23.501(a)(4)(i). Furthermore, any swap transaction submitted
for clearing by a derivatives clearing organization are deemed to
satisfy the requirements of the rule, provided that: (A) The swap
transaction is submitted for clearing as soon as technologically
practicable, but in any event no later than the times established
for confirmation under the rule, and (B) confirmation of all terms
of the transaction takes place at the same time as the swap
transaction is accepted for clearing pursuant to the rules of the
derivatives clearing organization. 17 CFR 23.501(a)(4)(ii). The CFTC
Rule also requires a swap dealer or major swap participant to
execute a confirmation for a swap transaction as soon as
technologically practicable, but in any event no later than the
times established for confirmation under the rule as if such swap
transaction were executed at the time the swap dealer or major swap
participant receives notice that a swap transaction has not been
confirmed by a swap execution facility or a designated contract
market, or accepted for clearing by a derivatives clearing
organization. 17 CFR 23.501(a)(4)(iii).
    \166\ MarkitSERV at 5.
    \167\ Id.
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    For the reasons discussed below and in response to comments, the
Commission has determined to adopt an exception from the trade
acknowledgment and verification requirements of Final Rule 15Fi-2 for
transactions executed on registered SBSEFs and registered national
securities exchanges, and for transactions submitted to, and accepted
for, clearing at a registered clearing agency, subject to certain
conditions. Specifically, Rule 15Fi-2(f)(1) as adopted provides that an
SBS Entity is excepted from the requirements of the rule with respect
to any SBS transaction executed on an SBSEF or national securities
exchange, provided that the rules, procedures or processes of the SBSEF
or national securities exchange provide for the acknowledgment and
verification of all terms of the SBS transaction no later than the time
required by paragraphs (b) and (d)(2) of Rule 15Fi-2. Rule 15Fi-2(f)(2)
as adopted provides that an SBS Entity is excepted from the
requirements of the rule with respect to any SBS transaction that is
submitted for clearing to a clearing agency, provided that: (i) The SBS
transaction is submitted for clearing as soon as technologically
practicable, but in any event no later than the time established for
providing a trade acknowledgment under paragraph (b) of the rule; and
(ii) the rules, procedures or processes of the clearing agency provide
for the acknowledgment and verification \168\ of all terms of the
security-based swap transaction prior to or at the same time that the
security-based swap transaction is accepted for clearing. Finally, Rule
15Fi-2(f)(3) as adopted provides that if an SBS Entity receives notice
that an SBS transaction has not been acknowledged and verified pursuant
to the rules, procedures or processes of an SBSEF or a national
securities exchange, or accepted for clearing by a clearing agency
(e.g., if an alpha trade is not accepted for clearing), the SBS Entity
shall comply with the requirements of the rule with respect to such SBS
transaction as if such SBS transaction were executed at the time the
SBS Entity receives such notice.
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    \168\ Clearing agencies' rules and/or procedures generally refer
to ``confirming'' or ``confirmation'' of transactions rather than
trade acknowledgment and verification, but as the Commission has
noted, the process through which one counterparty acknowledges an
SBS transaction and its counterparty verifies it, is the