security-based swaps, whereas broker-dealers are generally engaged
in the sale of a broader range of financial instruments. Thus, it is
likely that fewer people would be needed to facilitate this
business.
    \258\ This information was drawn from FOCUS Report filings
submitted by broker-dealers as of December 31, 2014. While there are
far more broker-dealers registered with the Commission, we believe
clearing broker-dealers are more analogous to SBS Dealers. Many
introducing broker-dealers are quite small, and focus their business
on particular types of instruments (e.g., mutual funds or limited
partnership shares). Clearing broker-dealers extend margin, hold
customer collateral, and engage in a range of activities that we
believe SBS Entities would perform as part of their business.
However, clearing broker-dealers also generally service a large
number of customer accounts, which likely would differ from the
security-based swap business. We believe that SBS Entities likely
would effect transactions with a more limited number of investors
and counterparties and, thus, would generally employ fewer
associated persons.
    \259\ In estimating the number of associated persons that effect
or are involved in effecting security-based swaps on behalf of SBS
Dealers, we believe that it is more appropriate to use the number of
registered persons of broker-dealers rather than the number of
persons associated with a broker-dealer. In the brokerage business,
persons who are engaged in the securities business of a broker-
dealer must register, while associated persons of a broker-dealers
include individuals performing a broader range of functions,
including those that may do require registration. Exchange Act
Section 15Fb(6) and Rule 15Fb6-2 capture only associated persons who
effect or are involved in effecting security-based swaps on behalf
of SBS Entities, not all associated persons of an SBS Entity. We
believe that the type of activities captured by this category of
associated persons is more akin to the types of activities performed
by persons that engage in the securities business of a broker-
dealer, and thus must register, than to associated persons of a
broker-dealer in general.
    \260\ We recognize that SBS Entities will be limited to sales of
security-based swaps, whereas broker-dealers are generally engaged
in the sale of a broader range of financial instruments; thus less
staff may be needed to facilitate this business.
    \261\ See Intermediary Definitions Adopting Release, at 30748.
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    The Registration Proposing Release estimated that it would take a
CCO (or the CCO's designee) approximately one hour to review and sign a
relevant employee's employment record to determine that associated
persons who effect or are involved in effecting security-based swaps on
their behalf are not subject to statutory disqualification.\262\ If the
SBS Entity has not already performed a background check of the
employee, we estimate that it may take the CCO (or the CCO's designee)
an additional hour to conduct whatever additional review may be
necessary.\263\ Consequently, the Commission estimates that the burden
for each SBS Dealer that is registered or registering with the
Commission or the CFTC would be 423,\264\ and the burden for each other
SBS Dealer would be 846.\265\ We have no basis to determine whether
Major SBS Participants would already be registered or registering with
the Commission or the CFTC, but we assume that all five will be dually-
registered. Thus, the burden for each Major SBS Participant would be
approximately 63.\266\ We therefore estimate that the total burden to
all SBS Entities to have their CCOs (or designees) review and sign the
employment application or questionnaire for each associated person who
is a natural person and who effects or is involved in effecting
security-based swaps on their behalf and/or conduct whatever review may
be necessary to assure that each such associated person is not subject
to statutory disqualification would be approximately 23,157 hours.\267\
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    \262\ Registration Proposing Release, at 65810. We received no
comments on this estimate, and continue to believe it is
appropriate.
    \263\ The Commission continues to believe that SBS Entities that
are registered with the Commission or the CFTC must already conduct
a review to determine if their associated persons are statutorily
disqualified persons in the CEA and the Exchange Act. See 15 U.S.C.
78f(c)(2), 78o-3(g)(2), and 78q(f)(2), and 7 U.S.C. 6k(5) and
12a(1).
    \264\ 423 associated persons x 1 hour = 423.
    \265\ 423 associated persons x 2 hours = 846.
    \266\ 63 associated persons x 1 hour = 63.
    \267\ ((One hour x 423 associated persons that are natural
persons x (30 SBS Dealers that are registered or registering with
the CFTC + 16 SBS Dealers that are registered or registering with
the Commission as broker-dealers)) = 19,458 hours for SBS Dealers
already registered or registering with the Commission or CFTC. (One
hour x 63 associated persons x 5 Major SBS Participants) = 315 hours
for Major SBS Participants. (Two hours x 4 SBS Dealers that are not
otherwise registered or registering with the Commission or the CFTC
x 423 associated persons) = 3,384 hours. 19,458 hours + 315 hours +
3,384 hours = 23,157.
---------------------------------------------------------------------------

    The Commission believes that signing the required certification
will not take a significant amount of time. In the Registration
Proposing Release the Commission estimated that it would take a CCO
approximately one hour to certify on Schedule G that no associated
person that effects or is involved in effecting security-based swaps on
behalf of the SBS Entity is subject to a statutory
disqualification.\268\ This was based on the assumption that the CCO
(or his or her designee) had reviewed and signed the associated
persons' employment applications or questionnaires and performed
background checks on those persons. However, to the extent this
certification requires a CCO to also consider whether associated
persons that are not natural persons are subject to statutory
disqualification, and the CCO (or his or her designee) would not have
already reviewed employment questionnaires or applications or conducted
background checks on those persons, the certification may take longer
than our original estimate. Based on staff experience and observation,
we believe that SBS Entities would most likely have affiliated entities
as associated persons that are not natural persons. However, to the
extent that an SBS Entity has a non-affiliated entity as an associated
person that is not a natural person, it is likely they would have
reviewed information on those

associated persons when the relationship was established. Based on
staff experience and industry norms we understand that as part of their
existing business practices financial institutions generally collect
information from business partners to gain comfort and reduce
risks.\269\ Consequently, we believe it would likely take, on average,
approximately five hours for a CCO to collect information from its
legal or other internal departments or its holding company to determine
whether each of its associated persons that is not a natural person is
subject to statutory disqualification. Thus, we estimate that it would
take a CCO approximately 50 hours to obtain sufficient information that
none of its associated persons is subject to statutory disqualification
\270\ and one hour to sign the certification.
---------------------------------------------------------------------------

    \268\ Registration Proposing Release, at 65811. We received no
comments on this estimate, and continue to believe it is
appropriate, even with the modification to the certification to add
the phrase ``unless otherwise specifically provided by rule,
regulation or order of the Commission,'' because the modification
should not change the burden associated with this certification
requirement.
    \269\ Firms generally collect information to assure that a
business partner will be able to perform activities, provide timely
payments, and will not expose it any unknown or unnecessary risks.
    \270\ 10 associated persons that are not natural persons x 5
hours = 50 hours.
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    We have modified the requirement so that this CCO certification is
no longer contained in Schedule G, but in Form SBSE-C. The Commission
staff estimates that the total burden to all SBS Entities to complete
the CCO Certification Regarding Associated Persons on Form SBSE-C would
be approximately 2,805 hours,\271\ and we have included these hours
above in the burden associated with Form SBSE-C (see Section IV.D.1.).
---------------------------------------------------------------------------

    \271\ 51 hours x 55 SBS Entities = 2,805 hours.
---------------------------------------------------------------------------

    To the extent that approximately 35 SBS Entities will also be
registered with the CFTC as swap entities and 16 will also be
registered as broker-dealers, the burdens and costs associated with
reviewing associated persons' backgrounds will likely be significantly
less than this because those firms' employment applications likely
contain the appropriate information and because we are allowing SBS
Entities to rely on background checks performed in those contexts.
4. Burdens on Nonresident SBS Entities
    In the Cross Border Proposing Release, the Commission estimated
that approximately 18 entities will be registered foreign SBS Dealers,
as defined in proposed Rule 3a71-3(a)(3) or foreign Major SBS
Participants, as defined in proposed Rule 3a67-10(a)(1). Since that
time we have come to believe that 22 nonresident entities will fit the
definition of nonresident SBS Dealer or nonresident Major SBS
Participant and will, therefore, need to register with the
Commission.\272\ Rule 15Fb2-4 requires that each nonresident SBS Entity
file an additional schedule (Schedule F) as part of the application
they file with the Commission, to identify its U.S. agent for service
of process and to certify that the firm can, as a matter of law,
provide the Commission with access to its books and records and can, as
a matter of law, and will submit to onsite inspection and examination
by the Commission.
---------------------------------------------------------------------------

    \272\ See Cross-Border Activity Proposing Release, at 27452.
---------------------------------------------------------------------------

    In the Registration Proposing Release the Commission estimated that
the average time necessary for a nonresident SBS Entity to complete and
file Schedule F would be approximately one hour.\273\ We stated our
belief in the Cross Border Proposing Release that adding the new
section to Schedule F could increase the amount of time it would take
for an SBS Entity to complete this form by one-half hour.\274\ Thus,
the Commission estimates that the total burden for all nonresident SBS
Entities to complete and file Schedule F would be approximately 33
hours.\275\
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    \273\ Registration Proposing Release, at 65811.
    \274\ Cross Border Proposing Release, at 31105. We received no
comments on this estimate, and continue to believe it is
appropriate.
    \275\ 1\1/2\ hours x 22 nonresident SBS Entities = 33 hours.
---------------------------------------------------------------------------

    The Commission estimates, based on internet research,\276\ that it
would cost each nonresident SBS Entity approximately $179 annually to
appoint and maintain a relationship with a U.S. agent for service of
process. Consequently, the total cost for all nonresident SBS Entities
to appoint and maintain relationships with U.S. agents for service of
process is approximately $3,938 per year.\277\
---------------------------------------------------------------------------

    \276\ See, e.g., http://www.incorp.com/registered-agent-resident-agent-services.aspx (as of June 23, 2015, $99 per state per
year), https://ct.wolterskluwer.com/registered-agent-services?mm_campaign=Enter_Campaign_Code_Here&keyword=registered%20agent&utm_source=Google&utm_medium=CPC&utm_campaign=RegisteredAgent&jadid=69563123457&jap=1t3&jk=registered%20agent&jkId=gc:a8a8ae4cd4a6542cf014a97541e8d183e:t1_p:k_registered%20agent:pl_&jp=&js=1&jsid=35672&jt=1 (as of June 23, 2015, $289 per year), and https://www.ailcorp.com/services/registered-agent (as of June 23, 2015, $149
per year). The staff sought Web sites that provided pricing
information and a comprehensive description of their registered
agent services. We calculated our estimate by averaging the costs
provided on these three Web sites--($99 + $289 + $149)/3 = $179.
    \277\ $179 per nonresident SBS Entity x 22 nonresident SBS
Entities = $3,938.
---------------------------------------------------------------------------

    In addition, nonresident SBS Entities likely will incur outside
legal costs associated with obtaining an opinion of counsel. In the
Registration Proposing Release the Commission estimated that each
nonresident SBS Entity would incur, on average, approximately $25,000
in outside legal costs to obtain the necessary opinion of counsel.\278\
Consequently, we estimate that the total cost for all nonresident SBS
Entities to obtain this opinion of counsel would be approximately
$550,000.\279\
---------------------------------------------------------------------------

    \278\ Registration Proposing Release, at 65811. While a
nonresident SBS Entity or its outside counsel would also need to
monitor the foreign jurisdiction's legal and regulatory framework so
that it can submit a new opinion of counsel and re-certify on
Schedule F if the foreign laws changed, we believe that it is usual
and customary for a nonresident SBS Entity to continually monitor
the applicable law and regulations in the jurisdiction in which it
resides, so we don't believe it would incur any additional paperwork
costs to monitor those regulations for purposes of this rulemaking.
We received no comments on this estimate, and continue to believe it
is appropriate.
    \279\ $25,000 x 22 SBS Entities = $550,000.
---------------------------------------------------------------------------

    Nonresident entities must also amend Schedule F to inform the
Commission if they replace their agent for service of process or if
information regarding their existing agent for service of process
changes. We do not believe this would occur frequently, and therefore
estimate that ten percent of the nonresidents may need to amend their
Schedule F to reflect these types of changes annually. Consequently, we
estimate that the total annual burden for SBS Entities to amend
Schedule F to reflect changes in information regarding their agent for
service of process would be 3 hours.\280\
---------------------------------------------------------------------------

    \280\ 22 nonresident SBS Entities x 10% = approximately 2 SBS
Entities. 2 SBS Entities x 1\1/2\ hours = 3 hours.
---------------------------------------------------------------------------

    An SBS Entity must also re-certify on Schedule F of such Forms
within 90-days after any changes in the legal or regulatory framework
that would impact the SBS Entity's ability to provide, or manner in
which it provides, the Commission with prompt access to its books and
records or that impacts the Commission's ability to inspect and examine
the SBS Entity. The SBS Entity's re-certification must be accompanied
by a revised opinion of counsel regarding the new regulatory regime. We
do not believe this would occur frequently, and therefore estimate that
one nonresident entity may need to recertify annually. Thus, the total
ongoing burden associated with this requirement would be approximately
1\1/2\ hours and $25,000 annually.
5. Burden Related to Retention of Manually Signed Signature Pages
    Pursuant to Rule 15Fb1-1, each signatory to an electronic filing
must, when the electronic filing is made, manually sign a signature
page or other document adopting his or her signature that appears in
typed form within the electronic filing. This manually signed page must
be retained by the SBS Entity until at least three years after the form

or certification has been replaced or is no longer effective.
Consequently, each SBS Entity will need to maintain at least three
pages with manually signed signatures (the execution page of Form SBSE,
SBSE-A, or SBSE-BD, as applicable, Schedule C and Schedule G). In
addition, nonresident SBS Entities also would need to retain a manually
signed copy of Schedule F. As so few pages would need to be retained,
the staff believes the burden associated with retaining them would not
be significant. Thus, the Commission estimated in the Registration
Proposing Release that it would take each SBS Entity approximately 10
minutes annually to assure that these pages are retained.\281\
Consequently, it would take approximately 9 hours annually for all SBS
Entities.\282\
---------------------------------------------------------------------------

    \281\ Registration Proposing Release, at 65811. We received no
comments on this estimate, and continue to believe it is
appropriate.
    \282\ (10 minutes x 55 SBS Entities)/60 minutes = 9.17 hours.
---------------------------------------------------------------------------

6. Burden Associated With Filing Withdrawal Form
    As discussed in the Registration Proposing Release, the Commission
believes that entities will not enter and exit this business regularly
because the cost and effort to register as an SBS Entity will be
significant.\283\ As the Form SBSE-W is only one page and consists of
information readily available to SBS Entities, the Commission estimates
(based on experience relative to Form BD-W) that it likely would take
an SBS Entity, on average, approximately one hour to complete and file
a Form SBSE-W. While the Commission believes it is unlikely that SBS
Entities will withdraw from registration often or within the first
year, solely for purposes of this PRA the Commission believes that one
SBS Entity may file Form SBSE-W to withdraw from registration annually
and the total burden associated with completing and filing Form SBSE-W
would be approximately one hour each year.\284\ We included these
estimates in the Registration Proposing Release and received no comment
on our estimates. Consequently, the estimated paperwork burden for
filing Form SBSE-W is one hour annually for all SBS Entities.\285\
---------------------------------------------------------------------------

    \283\ See Registration Proposing Release, at 65811.
    \284\ The burden associated with the requirement to amend Forms
SBSE, SBSE-A, or SBSE-BD, as appropriate before filing Form SBSE-W
is included in the burden described with respect to amending those
forms more generally.
    \285\ 1 hour x 1 entity per year = 1 hour.
---------------------------------------------------------------------------

E. Retention Period of Recordkeeping Requirements

    Proposed Rules 15Fb1-1 through 15Fb6-2 and Forms SBSE, SBSE-A,
SBSE-BD, and SBSE-W would require that each respondent retain certain
records and information for three years.

F. Collection of Information is Mandatory

    Any collections of information required pursuant to Rules 15Fb1-1
through 15Fb6-2 and Forms SBSE, SBSE-A, and SBSE-BD are mandatory to
permit the Commission to determine whether applicants meet the
standards for registration, and to fulfill its oversight
responsibilities.
    The collections of information required pursuant to Rule 15Fb3-2
and Form SBSE-W are mandatory to allow the Commission to determine
whether it is in the public interest to allow an SBS Entity to withdraw
from registration.

G. Confidentiality

    SBS Entity applications on Forms SBSE, SBSE-A, and SBSE-BD
(including the Schedules and DRPs) filed with the Commission as
required by Rule 15Fb2-1, will be made public.
    All amendments to SBS Entity applications, required by Rule 15Fb2-
3, will be made public.
    SBS Entities' Form SBSE-C certifications, required by Rules 15Fb2-1
and 15Fb6-2 and filed as part of their applications, will be made
public.
    The review and signature of the CCO (or the CCO's designee) that is
used as the basis for a background check of the associated person to
verify that the associated person is not subject to statutory
disqualification, will be retained by the SBS Entity. To the extent the
Commission obtains copies of these records, they will be kept
confidential, subject to applicable law.
    SBS Entities' Schedules F and attached opinions of counsel,
required by Rule 15Fb2-4 and filed with the Commission as part of their
applications, will be made public. Written consents and powers of
attorney appointing an agent in the United States for service of
process obtained and maintained for three years after the agreement is
terminated to comply with Rule 15Fb2-4 will be retained by the SBS
Entity. To the extent the Commission obtains copies of these records,
they will be kept confidential, subject to applicable law.
    Manually signed signature pages or other document adopting
signatures that appear in typed form within electronic filings
submitted by SBS Entities that are created are retained by SBS Entities
in accordance with Rule 15Fb1-1. To the extent the Commission obtains
copies of these records, they will be kept confidential, subject to
applicable law.
    SBS Entities' Forms SBSE-W, required by Rule 15Fb3-2 and filed with
the Commission, will be made public.

V. Economic Analysis

A. Introduction and Broad Economic Considerations

    As discussed above, consistent with our mandate under Title VII of
the Dodd-Frank Act, the Commission is adopting final rules and forms
that establish a process by which SBS Entities can register (and
withdraw from registration) with the Commission. This section presents
a detailed analysis of the particular economic effects--including the
costs and benefits and the impact on efficiency, competition, and
capital formation--that may result from our final rules.
    Section 3(f) of the Exchange Act requires the Commission, when
engaging in rulemaking that requires the Commission to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. Further, section 23(a)(2) of the Exchange Act requires the
Commission, when adopting rules under the Exchange Act, to consider the
impact that any new rule would have on competition and to not adopt any
rule that would impose a burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
    In the Registration Proposing Release, the Commission solicited
comments on all aspects of the costs and benefits associated with the
proposed rules, including any effect the proposed registration rule may
have on efficiency, competition, and capital formation. The Commission
has considered these comments and has modified some of the rules being
adopted today from the proposal in ways designed to reduce the
cumulative burden and costs associated with complying with the
registration requirements. Nonetheless, the Commission recognizes--as
reflected in the economic analysis--that the final rules establish new
requirements applicable to SBS Entities and that complying with these
requirements will entail significant costs to SBS Entities. In
considering the economic consequences of these final rules we have been
mindful of the link between various registration requirements and

the scope of the persons that will register as dealers or Major SBS
Participants, as well as the direct costs and indirect costs these
rules will impose on market participants. We have considered the likely
costs and benefits of the registration process on resident and
nonresident SBS Entities, security-based swap counterparties, and
participants in reference security markets. As discussed throughout
this release, the Commission believes that the new requirements are
necessary and appropriate for SBS Entity registration and for enabling
the Commission's effective oversight of security-based swap markets.
The Commission believes these final registration rules should result in
substantial benefits and will not impose a burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Exchange Act.
    The final registration rules establish a process that enables
resident and nonresident market participants that meet SBS Entity
registration thresholds to register and participate as dealers and
major participants in U.S. security-based swap markets pursuant to
Title VII. This section provides background about the rules being
adopted, placing them in the context of Title VII and identifying
broader economic considerations behind the more detailed assessment of
the likely economic effects discussed in the sections that follow. The
economic analysis addresses, among other things, the effects of the
final registration rules on both the market participants that are
expected to register with the Commission and face a compliance burden,
and on the nonresident market participants from jurisdictions with
strict blocking laws, privacy laws, secrecy laws and other legal
barriers that may be legally unable to comply with final SBS Entity
registration requirements concerning access to books and records.
    The Commission has considered the potential benefits, costs, and
effects on competition, efficiency and capital formation of
registration rules as they pertain to resident and nonresident SBS
Entities and other market participants in Sections V.C, V.D and V.E,
below. In considering the costs and benefits of these rules, we are
mindful of the various considerations that must be taken into account
in establishing the baseline against which these costs and benefits may
be evaluated. A key consideration is that registration requirements,
while integral to the regulatory requirements that will be imposed on
SBS Entities pursuant to Title VII, do not establish the scope or
nature of substantive requirements of the Title VII regulatory regime
or their related costs and benefits. Our economic analysis reflects
rules adopted as part of the Intermediary Definitions Adopting Release,
the Cross-Border Adopting Release, Regulation SBSR and SDR Rules and
Core Principles. The economic impact of the final registration rules
will occur predominantly through the application of the substantive
requirements outlined in future substantive Title VII rules, without,
as a general matter, altering the nature of those substantive
requirements. Although final registration rules do not define the
specific substantive requirements, they may affect which entities
register with the Commission and become subject to the Title VII
requirements, which may influence the overall costs and benefits of
particular regulatory requirements, and of the Title VII regulatory
framework as a whole. For example, potential benefits and costs of
pending clearing, business conduct, and capital and margin
requirements, may depend on whether and which SBS Entities are required
to and choose to register as SBS Entities and become subject to the
Title VII regime, as opposed to exit the U.S. market and remain outside
of the scope of the Title VII substantive rules. In formulating these
rules, we have taken into account their anticipated costs and benefits
to market participants, the incentives of market participants to
register, and the ability of certain market participants to register
and continue to participate in U.S. security-based swap markets. Many
of the effects of the final registration rules flow not from the
registration process directly, but rather indirectly from establishing
a population of registered entities subject to the Title VII regulatory
requirements. If some SBS Entities restructure or lower their security-
based swap market participation in response to final registration
rules, the ensuing programmatic costs and benefits of the Title VII
regulatory regime may be impacted.\286\
---------------------------------------------------------------------------

    \286\ As in the Intermediary Definitions Adopting Release, we
use ``programmatic costs and benefits'' to refer to economic costs
and benefits that stem from having a population of registered
entities complying with the fully-implemented Title VII regulatory
regime.
---------------------------------------------------------------------------

    Title VII provides a statutory framework for the OTC derivatives
market and divides authority to regulate that market between the CFTC
(which regulates swaps) and the Commission (which regulates security-
based swaps). The Title VII framework requires certain market
participants to register with the Commission as SBS Dealers or Major
SBS Participants and subjects such entities to certain requirements.
The economic analysis below considers both the various required
disclosures and certifications in the rules being adopted, and how they
compare to alternatives, such as CFTC swap dealer and major swap
participant registration rulemakings. We have assessed whether certain
SBS Entities may have already registered with the CFTC as swap dealers
or major swap participants, and how potential differences in
registration requirements may lead to frictions in single-name CDS and
index CDS markets.
    The Commission is cognizant of the potential flow from regulations
that impact security-based swap markets into underlying securities
markets. End-users may demand security-based swaps in order to hedge or
mitigate credit risk of reference securities. For example, since CDS
can protect bond investors, CDS may reduce fire sale risk, increase
liquidity of underlying bonds and decrease yield spreads. As both CDS
and corporate bonds price credit risk of the underlying reference
security, information may flow between the two markets. These channels
would indicate a potential positive spillover effect between
transparency, pricing and liquidity in security-based swap markets, and
market quality in bond markets, with implications for firm ability to
place debt and raise external financing necessary for real investments.
At the same time, CDS markets are sometimes more liquid than the
underlying bond markets and dominated by large institutional traders,
hence, price discovery and liquidity in the single name CDS market need
not necessarily translate into informational efficiency or liquidity in
the underlying bond markets. In formulating the registration rules
being adopted, the Commission has considered the likely effects of
registration-related disclosure requirements, requirements that might
preclude certain nonresident SBS Entities from registering, and the
overall registration burden for SBS Entities on security-based swap and
reference security markets.
    The final registration rules govern the application process for
entities required to register with the Commission as SBS Entities, as
well as withdrawal, cancellation and revocation of registration, and
include certifications relating to policies and procedures addressing
compliance, access to books and records, and statutorily disqualified
persons who effect or are involved in effecting security-based swap
transactions. The Commission has sought to accommodate a variety of

expected SBS Entity filers with tailored registration forms designed to
minimize the economic costs of registration for some SBS Entities that
are already filing similar information with regulatory authorities. The
final registration rules include registration forms SBSE, SBSE-A for
entities already registered with the CFTC as swap dealers or major swap
participants, SBSE-BD for entities already registered with the
Commission as broker dealers, and SBSE-W for withdrawal from
registration.
    At the outset, the Commission notes that, where possible, it has
attempted to quantify the costs, benefits, and effects on efficiency,
competition, and capital formation expected to result from adopting
these rules and forms. In many cases, however, the Commission is unable
to quantify the economic effects because it lacks the information
necessary to provide a reasonable estimate. For example, we lack data
on the complexity and variety of current SBS Entity business structures
and activities; the degree of SBS Entity business reliance on
associated persons subject to a statutory disqualification, as well as
the location and specificity of expertise of such persons; the
feasibility of potential restructuring through which nonresident SBS
Entities may be able to bring themselves out of the potential reach of
foreign blocking laws, privacy laws, secrecy laws and other legal
barriers; profitability of SBS Entity dealing activities at different
transaction volumes; and how other SBS Entities, new entrants, and
other market participants, including those currently not transacting in
security-based swap markets, may react to individual registration
rules. To the best of our knowledge, no such data are publicly
available and commenters have not provided data to allow such
quantification. Further, the compliance date for registration rules is
the later of six months after publication in the Federal Register of
final capital, margin and segregation rules; the compliance date of
final rules establishing recordkeeping and reporting requirements for
SBS Entities; the compliance date of final rules establishing business
conduct requirements under Exchange Act Sections 15F(h) and 15F(k); or
the compliance date for final rules establishing a process for a
registered SBS Entity to make an application to the Commission to allow
an associated person who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on the SBS
Entity's behalf. Therefore, we cannot quantify how market participants
currently expected to register as SBS Entities may choose to
restructure or cease their U.S. security-based swap market
participation in response to the pending substantive requirements of
Title VII, or whether or how many new participants may choose to enter
the U.S. security-based swap market as SBS Entities in order to avail
themselves of the greater transparency and counterparty protections
stemming from Title VII. Where we cannot quantify, we discuss in
qualitative terms the economic effects, including the costs and
benefits, of entity registration.

B. Baseline

    To assess the economic impact of the final rules described in this
release, we are using as our baseline the security-based swap market as
it exists at the time of this release, including applicable rules we
have already adopted but excluding rules that we have proposed but not
yet finalized.\287\ The analysis includes the statutory and regulatory
provisions that currently govern the security-based swap market
pursuant to the Dodd-Frank Act, as well as rules adopted in the
Intermediary Definitions Adopting Release, the Cross-Border Adopting
Release, the Regulation SBSR Adopting Release, and the SDR Rules and
Core Principles Adopting Release.\288\ Our understanding of the market
is informed by available data on security-based swap transactions,
though we acknowledge the data limit the extent to which we can
quantitatively characterize the market. Because these data do not cover
the entire market, we have developed an understanding of market
activity using a sample that includes only certain portions of the
market.
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    \287\ We also considered, where appropriate, the impact of rules
and technical standards promulgated by other regulators, such as the
CFTC and the European Securities and Markets Authority, on practices
in the security-based swap market.
    \288\ As noted above, we have not yet adopted other substantive
requirements of Title VII that may affect how firms structure their
security-based swap business and market practices more generally.
---------------------------------------------------------------------------

1. Current Security-Based Swap Market
    Our analysis of the state of the current security-based swap market
is based on data obtained from the DTCC Derivatives Repository Limited
Trade Information Warehouse (``TIW''), especially data regarding the
activity of market participants in the single-name credit-default swap
(``CDS'') market during the period from 2008 to 2014. According to data
published by the Bank for International Settlements (``BIS''), the
global notional amount outstanding in equity forwards and swaps as of
December 2014 was $2.50 trillion. The notional amount outstanding in
single-name CDS was approximately $9.04 trillion, in multi-name index
CDS was approximately $6.75 trillion, and in multi-name, non-index CDS
was approximately $611 billion.\289\ Our analysis in this release
focuses on the data relating to single-name CDS. As we have previously
noted, although the definition of security-based swaps is not limited
to single-name CDS, we believe that the single-name CDS data are
sufficiently representative of the market and therefore can directly
inform the analysis of the state of the current security-based swap
market.\290\
---------------------------------------------------------------------------

    \289\ See Semi-annual OTC derivatives statistics at December
2014, Table 19, available at http://www.bis.org/statistics/dt1920a.pdf (accessed July 29, 2015).
    \290\ While other repositories may collect data on transactions
in total return swaps on equity and debt, we do not currently have
access to such data for these products (or other products that are
security-based swaps). In the Cross-Border Proposing Release, we
explained that we believed that data related to single-name CDS was
reasonable for purposes of this analysis, as such transactions
appear to constitute roughly 82% of the security-based swap market
as measured on a notional basis. See Cross-Border Proposing Release,
footnote 1301 at 31120. No comments disputed these assumptions, and
we therefore continue to believe that, although the BIS data reflect
the global OTC derivatives market, and not just the U.S. market,
these ratios are an adequate representation of the U.S. market.
    Also consistent with our approach in that release, with the
exception of the analysis regarding the degree of overlap between
participation in the single-name CDS market and the index CDS market
(cross-market activity), our analysis below does not include data
regarding index CDS as we do not currently have sufficient
information to identify the relative volumes of index CDS that are
swaps or security-based swaps.
---------------------------------------------------------------------------

    We believe that the data underlying our analysis here provide
reasonably comprehensive information regarding single-name CDS
transactions and the composition of the single-name CDS market
participants. We note that the data available to us from TIW do not
encompass those CDS transactions that both: (i) Do not involve U.S.
counterparties; \291\ and (ii) are based on non-U.S. reference
entities. Notwithstanding this limitation, we believe that the TIW data
provide sufficient information to identify the types of market
participants active in the security-based swap market and the general
pattern of dealing within that market.\292\
---------------------------------------------------------------------------

    \291\ We note that DTCC-TIW's entity domicile determinations may
not reflect our definition of ``U.S. person'' in all cases. Our
definition of ``U.S. person'' follows the Cross-Border Adopting
Release, at 47303.
    \292\ The challenges we face in estimating measures of current
market activity stems, in part, from the absence of comprehensive
reporting requirements for security-based swap market participants.
The Commission has adopted rules regarding trade reporting, data
elements, and public reporting for security-based swaps that are
designed to, when fully implemented, provide us with appropriate
measures of market activity. See Regulation SBSR Adopting Release,
at 14699-700.

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

    Final registration rules require nonresident SBS Entities to make a
certification that they can, as a matter of law, and will provide the
Commission with prompt access to books and records and submit to onsite
inspection and examination by the Commission. As anticipated in the
Registration Proposing Release and noted by commenters, nonresident SBS
Entities in a number of foreign jurisdictions that have blocking laws,
privacy laws, secrecy laws and other legal barriers may be unable to
comply with this requirement as it may conflict with the laws in their
home jurisdictions. The following sections discuss common dealing
structures, participant domiciles and market centers, and quantify
extensive nonresident SBS Entity participation and cross-border trading
in security-based swap markets as they exist today.
i. Dealing Structures and Participant Domiciles
    Dealers occupy a central role in the security-based swap market and
SBS Dealers use a variety of business models and legal structures to
engage in dealing business with counterparties in jurisdictions all
around the world.\293\ As we noted in the Cross-Border Adopting Release
and discussed below, both U.S.-based and foreign-based entities use
certain dealing structures for a variety of legal, tax, strategic, and
business reasons.\294\ Dealers may use a variety of structures in part
to reduce risk and enhance credit protection based on the particular
characteristics of each entity's business.
---------------------------------------------------------------------------

    \293\ Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2014 involved an ISDA-recognized dealer. ``Price-
forming transactions'' include all new transactions, assignments,
modifications to increase the notional amounts of previously
executed transactions, and terminations of previously executed
transactions. Transactions terminated, transactions entered into in
connection with a compression exercise, and expiration of contracts
at maturity are not considered price forming and are therefore
excluded, as are replacement trades and all bookkeeping-related
trades. See Cross-Border Proposing Release, footnote 1312 at 31121.
For the purpose of this analysis, the ISDA-recognized dealers are
those identified by ISDA as belonging to the dealer group, including
JP Morgan Chase, Morgan Stanley, Bank of America, Goldman Sachs,
Deutsche Bank, Barclays, Citigroup, UBS, Credit Suisse, RBS Group,
BNP Paribas, HSBC, Soci[eacute]t[eacute] G[eacute]n[eacute]rale,
Credit Agricole, Wells Fargo, and Nomura. See, e.g., http://www2.isda.org/functional-areas/research/surveys/operations-benchmarking-surveys/.
    \294\ See Cross-Border Adopting Release, at 30976.
---------------------------------------------------------------------------

    Bank and non-bank holding companies may use subsidiaries to deal
with counterparties. A U.S.-based holding company may engage in dealing
activity through a foreign subsidiary that faces both U.S. and foreign
counterparties, and foreign dealers may choose to deal with U.S. and
foreign counterparties through U.S. subsidiaries. Similarly, a non-
dealer user of security-based swaps may participate in the market using
an agent in its home country or abroad. An investment adviser located
in one jurisdiction may transact in security-based swaps on behalf of
beneficial owners that reside in another.
    In some situations, an entity's performance under security-based
swaps may be supported by a guarantee provided by an affiliate. Such
guarantees may take the form of a blanket guarantee of an affiliate's
performance on all security-based swap contracts, or a guarantee may
apply only to a specified transaction or counterparty. Guarantees may
give counterparties to a dealer direct recourse to the holding company
or another affiliate for its dealer-affiliate's obligations under
security-based swaps for which that dealer-affiliate acts as
counterparty.

[GRAPHIC] [TIFF OMITTED] TR14AU15.000

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

    \295\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This is designated the
registered office location by TIW. When an account does not report a
registered office location, we have assumed that the settlement
country reported by the investment adviser or parent entity to the
fund or account is the place of domicile. This treatment assumes
that the registered office location reflects the place of domicile
for the fund or account.
---------------------------------------------------------------------------

    As depicted in Figure 1, the domicile of new accounts participating
in the market has shifted over time. A greater share of accounts
entering the market either have a foreign domicile, or have a foreign
domicile while being managed by a U.S. person. The increase in foreign
accounts may reflect an increase in participation by foreign
accountholders while the increase in foreign accounts managed by U.S.
persons may reflect the flexibility with which market participants can
restructure their market participation in response to regulatory
intervention, competitive pressures, and other stimuli. Alternatively,
the shifts in new account domicile we observe in Figure 1 may be
unrelated to restructuring or increased foreign participation. For
example, changes in the domicile of new accounts over time may reflect
improvements in reporting by market participants to TIW rather than a
change in market participant structure. Additionally, because the data
only include accounts that are domiciled in the United States, transact
with U.S.-domiciled counterparties, or transact in single-name CDS with
U.S. reference entities, changes in the domicile of new accounts may
reflect increased transaction activity between U.S. and non-U.S.
counterparties or increased transactions in single-name CDS on U.S.
reference entities by foreign persons.
ii. Market Centers
    Security-based swap participants currently appear to be active in
market centers across the globe. Participants in the security-based
swap market may bear the financial risk of a security-based swap
transaction in a location different from the location where the
transaction is arranged, negotiated, or executed or the location where
economic decisions are made by managers on behalf of beneficial owners.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a jurisdiction that is different from
the market center or centers in which it participates. Depending on the
U.S. person status of the counterparties and the location of the
activity, security-based swap transactions that occur across borders or
within foreign jurisdictions may trigger U.S. registration requirements
and may also be subject to rules in foreign jurisdictions.
    The TIW transaction records include, in many cases, information on
particular branches involved in transactions, which may provide limited
insight as to where security-based swap activity is actually being
carried out.\296\ These data indicate branch locations in New York,

London, Tokyo, Hong Kong, Chicago, Sydney, Toronto, Frankfurt,
Singapore and the Cayman Islands. Because transaction records in the
TIW data provided to the Commission do not indicate explicitly the
location in which particular transactions were arranged, negotiated or
executed, these locations may not represent the full set of locations
in which activities relevant for these proposed rules take place.
Moreover, because we cannot identify the location of transactions
within TIW, we are unable to estimate the general distribution of
transaction volume across market centers.
---------------------------------------------------------------------------

    \296\ The value of this information is limited in part because
some market participants may use business models that do not involve
branches to carry out business in jurisdictions other than their
home jurisdiction. For example, some market participants may use
affiliated or unaffiliated agents to enter into security-based swap
transactions in other jurisdictions on their behalf. The available
data currently does not allow us to identify with certainty which
type of structure is being used in any particular transaction.
---------------------------------------------------------------------------

iii. Current Estimates of Number of SBS Dealers and Major SBS
Participants
    In the Regulation SBSR Adopting Release, we estimated, based on an
analysis of TIW data, that out of more than 4,000 entities engaged in
single-name CDS activity worldwide in 2013, 170 entities engaged in
single-name CDS activity at a sufficiently high level that they would
be expected to incur assessment costs to determine whether they meet
the ``security-based swap dealer'' definition.\297\ Approximately 45 of
these entities are non-U.S. persons and are expected to incur
assessment costs as a result of engaging in dealing activity with
counterparties that are U.S. persons or engaging in dealing activity
that involves recourse to U.S. persons.\298\ Analysis of those data
further indicated that potentially 50 entities may engage in dealing
activity that would exceed the de minimis threshold, and thus
ultimately have to register as SBS Dealers. The Commission also
undertook an analysis of the number of security-based swap market
participants likely to register as major security-based swap
participants, and estimated a range of between zero and five such
participants.\299\
---------------------------------------------------------------------------

    \297\ See Regulation SBSR Adopting Release, at 14693.
    \298\ See Exchange Act Rule 3a71-3(b).
    \299\ See Regulation SBSR Adopting Release 14693. Also See
Cross-Border Adopting Release, footnotes 150 and 153 at 47296 and
47297 (describing the methodology employed by the Commission to
estimate the number of potential SBS Dealers and Major SBS
Participants).
---------------------------------------------------------------------------

    As we noted in the Cross-Border Dealing Activity Proposing Release,
updated analysis of 2014 data leaves many of these estimates largely
unchanged.\300\ We estimate that approximately 170 entities engaged in
single-name CDS activity at a sufficiently high level that they would
be expected to incur assessment costs to determine whether they meet
the ``security-based swap dealer'' definition. Approximately 56 of
these entities are non-U.S. persons. Of the approximately 50 entities
that we estimate may potentially register as SBS Dealers, we believe it
is reasonable to expect 22 to be non-U.S. persons.\301\
---------------------------------------------------------------------------

    \300\ See Cross Border Dealing Activity Proposing Release, at
27452.
    \301\ These estimates are based on the number of accounts in
DTCC-TIW data with total notional volume in excess of de minimis
thresholds, increased by a factor of two, to account for any
potential growth in the security-based swap market, to account for
the fact that we are limited in observing transaction records for
activity between non-U.S. persons that reference U.S. underliers,
and to account for the fact that we do not observe security-based
swap transactions other than in single name CDS. See Cross Border
Dealing Activity Proposing Release, 80 FR at 27452. Also see
Intermediary Definitions Adopting Release, foonote 1457 at 30725.
---------------------------------------------------------------------------

    In addition, in the proposed registration requirements for SBS
Dealers and Major SBS Participants, we estimated, based on our
experience and understanding of the swap and security-based swap
markets that of the 55 firms that might register as SBS Dealers or
Major SBS Participants, approximately 35 would also register with the
CFTC as swap dealers or major swap participants.\302\ Available data
suggest that these numbers remain largely unchanged.\303\ Finally,
based on our analysis of TIW data and supervisory filings, we estimate
that sixteen market participants expected to register as SBS Entities
have already registered with the Commission as broker-dealers. In sum,
based on our analysis of TIW data and the current population of
registered broker-dealers, swap dealers, and OTC derivative dealers, we
anticipate that up to four entities seeking to register with the
Commission as SBS Entities will not have already registered as broker-
dealers or as swap dealers.
---------------------------------------------------------------------------

    \302\ See Registration Proposing Release, at 65808.
    \303\ Based on our analysis of 2014 DTCC-TIW data and the list
of swap dealers provisionally-registered with the CFTC, and applying
the methodology used in the Intermediary Definitions Adopting
Release, we estimate that substantially all registered security-
based swap dealers would also register as swap dealers with the
CFTC. See Cross Border Dealing Activity Proposing Release, at 27458.
See also CFTC list of provisionally registered swap dealers,
available at http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.
---------------------------------------------------------------------------

2. Levels of Security-Based Swap Trading Activity
    Below we describe the levels of security-based swap trading
activity and its concentration among SBS Dealers and Major SBS
Participants. Since registration rules may affect resident and
nonresident SBS Entities differently, we further discuss domicile
issues and participant structures operating across jurisdictions in
security-based swap markets as they exist today.
    Single-name CDS contracts make up the vast majority of security-
based swap products and most are written on corporate issuers,
corporate securities, sovereign countries, or sovereign debt (reference
entities and securities). Figure 2 below describes the percentage of
global, notional transaction volume in North American corporate single-
name CDS reported to the TIW between January 2008 and December 2014,
separated by whether transactions are between two ISDA-recognized
dealers (inter-dealer transactions) or whether a transaction has at
least one non-dealer counterparty.
    Annual trading activity with respect to North American corporate
single-name CDS in terms of notional volume has declined from more than
$6 trillion in 2008 to less than $3 trillion in 2014.\304\ While
notional volume has declined over the past six years, the portion of
the notional volume represented by inter-dealer transactions has
remained fairly constant and inter-dealer transactions continue to
represent a significant majority of trading activity, whether measured
in terms of notional value or number of transactions (see Figure 2).
---------------------------------------------------------------------------

    \304\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
---------------------------------------------------------------------------

    The high level of inter-dealer trading activity reflects the
central position of a small number of dealers, each of which
intermediates trades between many hundreds of counterparties. While the
Commission is unable to quantify the current level of trading costs for
single-name CDS, dealers appear to enjoy market power as a result of
their small number and the large proportion of order flow they
privately observe. This market power in turn appears to be a key
determinant of trading costs in this market.

[GRAPHIC] [TIFF OMITTED] TR14AU15.001

    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data we analyzed was
between counterparties domiciled in the United States and
counterparties domiciled abroad. Basing counterparty domicile on the
self-reported registered office location of the TIW accounts, the
Commission estimates that only 12 percent of the global transaction
volume by notional volume between 2008 and 2014 was between two U.S.-
domiciled counterparties, compared to 48 percent entered into between
one U.S.-domiciled counterparty and a foreign-domiciled counterparty
and 40 percent entered into between two foreign-domiciled
counterparties (see Figure 3).\305\
---------------------------------------------------------------------------

    \305\ For purposes of this discussion, we have assumed that the
registered office location reflects the place of domicile for the
fund or account, but we note that this domicile does not necessarily
correspond to the location of an entity's sales or trading desk. See
Cross Border Dealing Activity Proposing Release, footnote 44, at
27451.
---------------------------------------------------------------------------

    When the domicile of TIW accounts is instead defined according to
the domicile of an account holder's ultimate parents, headquarters, or
home offices (e.g., classifying a foreign bank branch or foreign
subsidiary of a U.S. entity as domiciled in the United States), the
fraction of transactions entered into between two U.S.-domiciled
counterparties increases to 32 percent, and to 51 percent for
transactions entered into between a U.S.-domiciled counterparty and a
foreign-domiciled counterparty.
    Differences in classifications across different definitions of
domicile illustrate the effect of participant structures that operate
across jurisdictions. Notably, the proportion of activity between two
foreign-domiciled counterparties drops from 40 percent to 17 percent
when domicile is defined as the ultimate parent's domicile. As noted
earlier, foreign subsidiaries of U.S. parent companies and foreign
branches of U.S. banks, and U.S. subsidiaries of foreign parent
companies and U.S. branches of foreign banks may transact with U.S. and
foreign counterparties. However, this change in respective shares based
on different classifications suggests that the activity of foreign
subsidiaries of U.S. firms and foreign branches of U.S. banks is
generally higher than the activity of U.S. subsidiaries of foreign
firms and U.S. branches of foreign banks.

[GRAPHIC] [TIFF OMITTED] TR14AU15.002

    Non-dealer participants remain active in the single name CDS
market. Based on our analysis of DTCC-TIW data on single name CDS
positions as of the end of 2014, the total notional outstanding of non-
dealer accounts was approximately $1.3 trillion. There were three
market participants with total notional outstanding of over $50
billion, 16 market participants with total notional between $10 billion
and $50 billion, 144 market participants with total notional between $1
billion and $10 billion and 748 participants with total notional
outstanding in single name CDS under $1 billion.
3. Cross-Market Participation
    As noted in the Cross-Border Dealing Activity Proposing Release,
persons registered as SBS Dealers or Major SBS Participants are likely
also to engage in swap activity, which is subject to regulation by the
CFTC.\306\ Indeed, as we discuss above, we estimate that of the 55
firms that might register as SBS Dealers or Major SBS Participants,
approximately 35 will also register with the CFTC as swap dealers or
major swap participants.
---------------------------------------------------------------------------

    \306\ See Cross Border Dealing Activity Proposing Release, at
27458.
---------------------------------------------------------------------------

    This overlap reflects the relationship between single-name CDS
contracts, which are security-based swaps, and index CDS contracts,
which may be swaps or security-based swaps. A single-name CDS contract
covers default events for a single reference entity or reference
security. Index CDS contracts and related products make payouts that
are contingent on the default of index components and allow
participants in these instruments to gain exposure to the credit risk
of the basket of reference entities that comprise the index, which is a
function of the credit risk of the index components. A default event
for a reference entity that is an index component will result in
payoffs on both single-name CDS written on the reference entity and
index CDS written on indices that contain the reference entity. Because
of this relationship between the payoffs of single-name CDS and index
CDS products, prices of these products depend upon one another,\307\
creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \307\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., Casella, George and Roger L.
Berger, ``Statistical Inference'' (2002), at 171.
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 4,500 TIW accounts that participated in the
market for single-name CDS in 2014 revealed that approximately 2,500 of
those accounts, or 56 percent, also participated in the market for
index CDS. Of the accounts that participated in both markets, data
regarding transactions in 2014 suggest that, conditional on an account
transacting in notional volume of index CDS in the top third of
accounts, the probability of the same account landing in the top third
of accounts in terms of single-name CDS notional volume is
approximately 60 percent; by contrast, the probability of the same
account landing in the bottom third of accounts in terms of single-name
CDS notional volume is only 11 percent.
    Activity in security-based swap markets can impact underlying
securities markets. Security-based swaps may be used in order to hedge
or speculate on credit risk of reference securities. For instance,
prices of both CDS and corporate bonds are sensitive to the credit risk
of underlying reference securities and, therefore, trading across
markets may sometimes result in a potential positive spillover effect
between informational efficiency, pricing and liquidity in security-
based swap markets, and market quality in bond markets. At the same
time, if some large institutional traders prefer to transact on their
credit risk information

in more liquid markets in order to minimize price impact and improve
execution quality, price discovery and liquidity in the single name CDS
market may draw out these sophisticated investors and lead to a drying
up of liquidity in the underlying bond markets.\308\
---------------------------------------------------------------------------

    \308\ Empirical evidence on the direction and significance of
the CDS-bond market spillover is mixed. Massa and Zhang (2012)
consider whether the presence of CDS improves pricing and liquidity
of investment grade bonds in 2001-2009. They find a positive effect,
strongest during the financial crisis period, and document a
dampened effect of shocks on bond liquidity and spreads for bonds
with CDS contracts. Das et al., (2014) consider the effects of CDS
trading on the efficiency, pricing error and liquidity of corporate
bond markets. They find that efficiency in corporate bond markets
has not improved after the introduction of CDS trading and find no
evidence of increases in market quality or bond liquidity. Boehmer,
Chava and Tookes (2015) find the emergence of CDS has adversely
affected equity market quality. Firms with traded CDS contracts on
their debt experience significantly lower liquidity and price
efficiency when these firms are closer to default and in times of
high market volatility.
     See Massa & L. Zhang, CDS and the Liquidity Provision in the
Bond Market (INSEAD Working Paper No. 2012/114/FIN, 2012), available
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2164675; M.
Oehmke & A. Zawadowski, The Anatomy of the CDS Market (Working
Paper, 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023108; S. Das, M. Kalimipalli & S. Nayak,
Did CDS Trading Improve the Market for Corporate Bonds?, 111 J. Fin.
Econ. 495 (2014); H. Tookes, E. Boehmer & S. Chava, Related
Securities and Equity Market Quality: The Cases of CDS, forthcoming,
J. Fin. & Quant. Analysis.
---------------------------------------------------------------------------

    Because of this link between security-based swaps and their
underlying reference securities, registration rules are expected to
affect not only SBS Entities and their counterparties, but also
investors in underlying reference security markets. In the sections
that follow we discuss and, wherever possible, quantify the potential
costs and benefits of registration for affected parties.
4. Statutory Disqualification
    The final registration rules require SBS Entities to certify that
no associated person that effects or is involved in effecting security-
based swaps on behalf of the SBS Entity is subject to statutory
disqualification. The rule implements Exchange Act 15F(b)(6) that makes
it unlawful for SBS Entities to permit associated persons subject to
statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of SBS Entities, except to the extent
otherwise specifically provided by rule, regulation, or order of the
Commission. The Commission has provided temporary relief from the
Exchange Act Section 15F(b)(6) prohibition for persons who were
associated with an SBS Entity as of July 16, 2011; this temporary
exception expires on the effective date of adopted SBS Entity
registration rules.\309\
---------------------------------------------------------------------------

    \309\ See Effective Date Release, at 36301-02.
---------------------------------------------------------------------------

    Thus, there are currently no registered SBS Entities required to
comply with either the statutory disqualification certifications in the
final registration rules, or the prohibition in Exchange Act Section
15F(b)(6) on associated statutorily disqualified persons effecting or
involved in effecting security-based swaps on behalf of SBS Entities.
Therefore, the appropriate baseline reflects the state of the world
with relief from the general prohibition on disqualified associated
persons effecting or being involved in effecting security-based swaps
on behalf of SBS Entities.
    In evaluating the economic effects of final registration rules, we
are mindful of the fact that due to the temporary relief currently in
place, entities that are expected to register with the Commission as
SBS Entities may not have restructured their business to be in
compliance with the statutory prohibition in Exchange Act Section
15F(b)(6) and may currently be associating with disqualified persons
for the purposes of effecting security-based swaps. Since the CFTC's
approach excepts associated entities from the scope of the
disqualification requirement, SBS Entities that have cross-registered
as swap entities may be continuing to associate with disqualified
persons that are entities, but may have reassigned their current
employees, hired new employees or secured natural person waivers from
the NFA.

C. Benefits of Registration

    The economic benefits of entity registration stem from two sources:
(1) The direct benefits of registration, such as requirements to
provide information regarding disciplinary history and Senior Officer
Certifications; and (2) the benefits that flow from having a population
of registered participants complying with the Title VII regulatory
framework for SBS Entities.
1. Direct Benefits
    The certifications and other requirements contained in the final
registration rules may enable the Commission to more effectively
oversee security-based swap markets. The Senior Officer Certification
requirement helps ensure that the CCO considers whether an SBS Entity
has developed and implemented written policies and procedures that
would be reasonably designed to prevent violations of federal
securities laws and rules thereunder. Information about SBS Entities
and their control affiliates, including disciplinary history, may
facilitate ongoing Commission risk assessments and oversight of SBS
markets, as well as help market participants make more informed
counterparty choices. Associated person certifications help ensure
associated persons subject to a statutory disqualification, who may
pose a risk to participants, are precluded from effecting or being
involved in effecting security-based swap transactions on behalf of SBS
Entities absent a Commission rule, regulation or order. The books and
records certification helps to ensure the Commission will have access
to records and data of nonresident SBS Entities to facilitate ongoing
risk assessments and market surveillance, and that, like resident SBS
Entities, all nonresident SBS Entities are able to be subject to
Commission inspections and examinations as part of its regulatory
oversight of SBS Entities.
i. Disciplinary History and Other Information
    Final registration rules require SBS Entities to submit to the
Commission information about their business, including business
description, registration status with other regulators and disciplinary
histories, including those of control affiliates, with the information
subsequently being made public by the Commission. Although much of the
information required by registration forms is already publicly
available for entities that are registered with the Commission as
broker-dealers or with the CFTC as swap dealers, entities that are not
cross-registered will make some of this information--for instance,
disciplinary history of control affiliates--publicly available for the
first time. All new entrants that are not cross-registered would have
to provide this information as well, including as it pertains to their
control affiliates. Further, SBS Entities seeking to avail themselves
of the relief for associated entity disqualifications that precede the
compliance date of final registration rules, will have to provide a
list of disqualified associated entities which will be made public by
the Commission as part of the registration application. The Commission
believes these requirements may facilitate ongoing oversight of SBS
Entities and may help market participants make more informed
counterparty decisions.
    Informational asymmetry can negatively affect market participation
and decrease the amount of trading--a problem commonly known as adverse

selection.\310\ For example, when information about the quality of a
counterparty is scarce, market participants may be less willing to
enter into transactions and the overall level of trading may fall. To
the extent that adverse selection costs are present in security-based
swap markets, market participants may become more informed and may
increase their activity in security-based swaps, which may improve
market quality.
---------------------------------------------------------------------------

    \310\ George A. Akerlof, The Market For ``Lemons'': Quality
Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970).
---------------------------------------------------------------------------

    To the extent that SBS market participants consider disciplinary
history important in selecting security-based swap market
counterparties, this registration requirement may help market
participants make more informed counterparty choices. This requirement
may also reduce counterparty selection of SBS Entities that have been
the subject of disciplinary actions. Moreover, SBS Entities, knowing
that disciplinary history must now be disclosed, may have further
incentives to avoid engaging in misconduct (or may exit the market).
The increased dissemination of information regarding disciplinary
history may lead to improved quality-based competition among SBS
Entities to the extent that market participants rely on this
information in the selection process. Additionally, disciplinary
history information on SBS Entities and their control affiliates may
inform ongoing Commission oversight, risk assessments, and examination
priorities.
ii. Statutory Disqualification
    As discussed in section V.B., SBS Entities may currently be
permitting disqualified persons to effect or be involved in effecting
security-based swaps. Associated person certifications are designed to
help ensure that associated persons subject to a statutory
disqualification, who may pose a risk to counterparties and the
integrity of security-based swap markets as a whole, are precluded from
effecting or being involved in effecting security-based swap
transactions on behalf of SBS Entities absent a Commission rule,
regulation or order. The associated person requirement may offer a
degree of counterparty protection, which may differ for natural persons
and entities, and induce market participants to increase their
transaction volume or enter the market for the first time.
    The Commission has received comment urging a narrower definition of
associated persons to include only natural persons, consistent with the
CFTC's approach, arguing that ``business disruptions and other
ramifications stemming from an entire entity being statutorily
disqualified from effecting or being involved in effecting security-
based swaps could be considerable.'' \311\ Based on an analysis of
DTCC-TIW and Form BD data, approximately three quarters of entities
that are likely to trigger registration thresholds based on their
dealing activity in single name CDS accounting for approximately 86% of
overall U.S. CDS dealing activity in 2014 may be associating with a
statutorily disqualified entity. Crucially, however, the general
statutory prohibition and the requirements of final registration rules
apply not to all associated entities, but only to those entities
effecting or involved in effecting security-based swaps on behalf of
SBS Entities. In addition, SBS Entities currently intermediating
security-based swaps are frequently part of complex organizational
structures, which may include hundreds of entities. While we estimate
that approximately three quarters of potential registrants may be
associating with a statutorily disqualified entity, the Commission
lacks data or other information indicating whether associated
disqualified entities are effecting or involved in effecting security-
based swaps on their behalf. We are, therefore, unable to determine
whether and which SBS Entities may be affected by the final
registration rule implementing the general statutory prohibition.
However, taking into account commenter concerns, final rules allow SBS
Entities to permit disqualified associated entity persons associated
with them when they file applications to register with the Commission
to effect or be involved in effecting security-based swaps on their
behalf if the statutory disqualification(s) occurred prior to the
compliance date of final registration rules. This aspect of the final
rules benefits primarily those SBS Entities that associate with
disqualified entities for their security-based swap dealing and would
have had to incur costs of discontinuing current associations with
disqualified entities and associating with different non-disqualified
entities for the purposes of security-based swap transactions. This
treatment of associated persons seeks to reduce potential costs for SBS
Entities.
---------------------------------------------------------------------------

    \311\ See SIFMA letter at 8.
---------------------------------------------------------------------------

    The Commission recognizes that this exception may reduce potential
counterparty benefits of a general prohibition on disqualified persons
effecting or being involved in effecting security-based swaps on behalf
of SBS Entities. We note that final rules require SBS Entities to
provide a list of associated entities subject to statutory
disqualification seeking to avail themselves of this relief, which will
facilitate ongoing Commission supervision of SBS Entities, including as
it pertains to disqualified entities. We also note that currently
inter-dealer transactions account for over 60% of single-name CDS
transactions, which reflects the central position of a small number of
dealers, each of which may intermediate trades between many hundreds of
counterparties. As a practical matter, SBS Entities may be able to
easily reassign or disassociate from disqualified natural persons,
whereas disassociating from disqualified entity persons may require
significant business restructuring by SBS Entities. In light of the
above considerations and of the central position of SBS Entities in
security-based swap markets, this provision considers counterparty
protections of the general prohibition and the risk of market
disruptions.
iii. Senior Officer Certification and Nonresident Entity Certification
    The Senior Officer Certification and Nonresident Entity
Certification requirements facilitate the Commission's ongoing
oversight of resident and nonresident SBS Entities. The Senior Officer
Certification requires senior officers to certify that SBS Entities
have developed and implemented written policies and procedures
reasonably designed to prevent violations of federal securities laws
and rules thereunder. While the substantive requirement to develop and
implement policies and procedures stems from pending business conduct
rules, the certification ensures senior officers have reviewed the SBS
Entity's policies and procedures, which may facilitate Commission
oversight of SBS Entities.
    Further, to effectively fulfill its regulatory oversight
responsibilities with respect to nonresident SBS Entities registered
with it, the Commission must have access to those entities' records and
the ability to examine them. The required certification and opinion of
counsel regarding the nonresident SBS Entity's ability to provide
prompt access to books and records and to be subject to onsite
inspection and examination will facilitate ongoing supervision.
iv. Other Direct Benefits
    SBS Entity registration will be implemented with fillable forms
with a graphical user interface on the EDGAR

Web site.\312\ Collecting the data in a structured format will allow
the Commission to make the data public in a manner that will enable
users of that data to retrieve, search, and analyze the data through
automated means. This format may lower costs of analyzing possible
counterparty risks arising from prior misconduct and other registration
information of a large group of potential counterparties. This may
enable counterparties and the marketplace to expend less time and money
to independently obtain and compile information on individual SBS
Entities. In addition, final registration forms require SBS Entities to
list UICs for both SBS Entities and for their control affiliates, if
such entities have UICs. The Commission has elsewhere stated that the
use of a single identifying code is designed to facilitate the
performance of market analysis studies, surveillance activities, and
systemic risk monitoring by relevant authorities through the
streamlined presentation of security-based swap transaction data.\313\
By securing information regarding SBS Entities with the use of UICs and
through EDGAR Commission staff should be able to more efficiently
retrieve and analyze the data it needs to effectively carry out its
mission with respect to SBS Entity activities, including oversight,
risk assessment, and examination priorities.
---------------------------------------------------------------------------

    \312\ As described in Section II.A.1., we are also developing a
batch filing process utilizing the eXtensible Markup Language
(``XML'') tagged data format that firms could use to upload
application information to the EDGAR system should they choose to do
so instead of utilizing fillable forms.
    \313\ See Regulation SBSR Adopting Release, at 14709.
---------------------------------------------------------------------------

2. Indirect Benefits
    The final registration rules create an SBS Entity registration
regime, which facilitates the application of substantive requirements
of Title VII to registered SBS Dealers and Major SBS Participants. The
rules adopted in the Intermediary Definitions Adopting Release
identified the dealing volume and other criteria for an SBS Entity
determination. The final registration rules and forms rely on the
adopted intermediary definitions and facilitate the application of
Title VII requirements, such as capital and margin requirements,
external business conduct rules, recordkeeping, and reporting
requirements, to those entities that meet the dealing and major
participant activity thresholds.
    Security-based swaps are more opaque and complex products than
corporate bonds or equity. While sophisticated security-based swap
market participants are likely to have the ability and resources to
evaluate these complex products, less sophisticated market participants
may be less able to overcome informational asymmetries when transacting
with SBS Entities. As discussed above, informational asymmetry can
negatively affect market participation and lower the amount of trading.
Final registration rules will facilitate application of the Title VII
regime with resulting benefits of increasing counterparty protection,
transparency and regulatory oversight of SBS Entities.
    Since substantive requirements for SBS Entities have not yet been
adopted, the Commission cannot currently evaluate the combined economic
effects of facilitating the Title VII regime through registration.
Importantly, registration requirements may ultimately impact the number
of entities acting as dealers and major participants and providing
liquidity to the SBS market, which may affect the programmatic benefits
and costs of the substantive Title VII requirements. We note that the
required certifications in the Registration rulemaking may directly
affect which nonresident SBS Entities can register and be subject to
the substantive requirements of Title VII (see Section V.E. on
Efficiency, Competition and Capital Formation).

D. Costs of Registration

1. Direct Compliance Costs
    As discussed in section IV above, the Commission estimates that SBS
Entities would incur costs of direct compliance associated with: (i)
Researching and completing the forms, (ii) reviewing, completing and
submitting the required certifications, and documenting the review
process, (iii) obtaining or compiling the required questionnaires or
employment applications, having the CCO review the questionnaires and
certify that no relevant associated person is subject to statutory
disqualification, (iv) the requirements that nonresident SBS Entities
obtain an agreement for U.S. service of process and an opinion of
counsel stating that they can provide the Commission with access to
records, and (v) the requirement to retain manually signed signature
pages.\314\
---------------------------------------------------------------------------

    \314\ See Registration Proposing Release, 76 FR at 65813 through
65818. All hourly cost figures are based upon data from SIFMA's
Management & Professional Earnings in the Securities Industry 2013
(modified by the SEC staff to account for an 1,800-hour-work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead).
---------------------------------------------------------------------------

    The Commission estimates that filing forms SBSE would incur a cost
of approximately $47,544,\315\ filing forms SBSE-A would incur a cost
of approximately $336,770,\316\ and filing forms SBSE-BD would incur a
cost of approximately $47,544.\317\ The Commission further estimates
that the total cost associated with the Senior Officer Certification
would be approximately $666,875 for all entities.\318\ The Commission
estimates the combined annual cost to SBS Entities of amending their
applications if they find that the information therein has become
inaccurate at approximately $46,695 annually.\319\
---------------------------------------------------------------------------

    \315\ This figure is calculated as follows: (Compliance manager
(42 hours) at $283 per hour) x 4 SBS entities = $47,544.
    \316\ This figure is calculated as follows: (Compliance manager
(34 hours) at $283 per hour) x 35 SBS entities = $336,770.
    \317\ This figure is calculated as follows: (Compliance manager
(10\1/2\ hours) at $283 per hour) x 16 SBS entities = $47,544.
    \318\ This figure is calculated as follows: (CCO (5 hours + 20
hours) at $485 per hour) x 55 SBS Entities = $666,875. We continue
to believe the pay for a CCO likely would be similar to the amount
paid to other senior officers. For purposes of this estimate we
assume that those a senior officer may consult with are paid at
approximately the same level. See Registration Proposing Release 76
FR at 65816.
    \319\ This figure is calculated as follows: (Compliance manager
(1 hour) at $283 per hour) x 3 amendments x 55 SBS Entities =
$46,695.
---------------------------------------------------------------------------

    Next, we estimate costs from associated person certifications.
Section IV.D.3. of this release estimated that the total upfront burden
to all SBS Entities to have their CCOs (or designees) review and sign
each associated person's employment record and/or conduct whatever
review may be necessary to assure that each associated natural person
is not subject to statutory disqualification would be approximately
23,157 hours, which we estimate may cost up to $11,231,145 for all SBS
Entities.\320\ The cost of initial certifications for associated entity
persons is estimated at $1,360,425.\321\
---------------------------------------------------------------------------

    \320\ This figure is calculated as follows: (CCO at $485 per
hour) x 23,157 hours = $11,231,145. For purposes of this estimate we
assume that designees are paid at approximately the same level as
the CCO. If CCO designees, such as attorneys, bear the brunt of the
burden or are compensated at significantly lower hourly rates in
some SBS Entities, this assumption may lead us to overestimate the
compliance cost. We recognize that the job title of the designee,
extent of delegation and related costs will vary depending on the
supervisory structure and complexity of each SBS Entity. We believe
it is reasonable to interpret this figure as an upper bound on the
potential cost of CCO certification.
    \321\ This figure is estimated as follows: (CCO at $485 per
hour) x 2,805 hours = $1,360,425. Similar to the initial burden
calculated above, we assume that CCO designees are paid at
approximately the same level as CCOs. We believe it is reasonable to
interpret this figure as an upper bound on the potential cost of CCO
certification.
---------------------------------------------------------------------------

    The Commission further estimates that the total initial cost for
all

nonresident SBS Entities to complete and file Schedule F would be
approximately $9,339 \322\ in addition to initial outside legal costs
of approximately $550,000 estimated in Section IV.D.4. The total annual
cost for all nonresident SBS Entities to amend and file Schedule F on
an ongoing basis would be approximately $1,273.50 \323\ in addition to
outside legal costs of approximately $28,938. Lastly, the annual costs
of retaining manually signed signature pages for all SBS Entities would
be approximately $2,547 \324\ and the total annual cost of filing the
withdrawal form for all SBS Entities would be approximately $283.\325\
---------------------------------------------------------------------------

    \322\ This figure is estimated as follows: (Compliance manager
at $283 per hour) x 1\1/2\ hours x 22 SBS Entities = $9,339.
    \323\ This figure is estimated as follows: ((Compliance manager
at $283 per hour) x 1\1/2\ hours x 2 SBS Entities to amend for
changes to agent for service of process) + ((Compliance manager at
$283 per hour) x 1\1/2\ hours x 1 SBS Entities to amend for changes
in foreign law) = $1,273.50.
    \324\ This figure is estimated as follows: (Compliance manager
at $283 per hour) x (10 minutes x 55 SBS Entities)/60 minutes = $283
* approximately 9 hours = $2,547.
    \325\ This figure is estimated as follows: (Compliance manager
at $283 per hour) x 1 hour = $283.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that total initial quantifiable
cost of registration of $14,249,642 \326\ and ongoing costs of
$79,736.50 \327\ for all SBS Entities.
---------------------------------------------------------------------------

    \326\ This figure is estimated as follows: (Cost of filing forms
SBSE, SBSE-A, SBSE-BD ($47,544 + $336,770 + $47,544)) + (Cost of
Senior Officer Certification on form SBSE-C ($666,875)) + (Cost of
associated person certifications on form SBSE-C ($11,231,145 +
$1,360,425)) + (Cost of nonresidents filing Schedule F ($9,339)) +
Cost of outside counsel ($550,000)) = $14,249,642.
    \327\ This figure is estimated as follows: (Amending application
forms ($46,695)) + (Amending Schedule F (1,273.50)) + (Opinion of
counsel and agent for service of process ($25,000+$3,938)) +
(Retaining manually signed pages ($2,547)) + (Filing withdrawal form
($283)) = $79,736.50.
---------------------------------------------------------------------------

2. Other Direct Costs
    The final registration rules would also entail a number of indirect
costs for SBS Entities. While these costs are difficult to quantify
with any degree of certainty as outlined in section V.A. and are,
therefore, discussed qualitatively below, we recognize that they may be
as, if not more, significant than the direct costs quantified above.
i. Costs Related to the Disciplinary History Disclosure Requirement
    Final registration rules require SBS Entities to disclose
disciplinary history, including that of control affiliates, to the
Commission. Since SBS Entity disclosures made during the registration
process will be publicly available to investors, market participants
will be able to easily access and compare such data for all SBS
Entities. To the extent that market participants rely on disciplinary
history information in counterparty choices and to the extent that
market participants cannot easily observe this information for all
participants (such as participants not otherwise registered with the
Commission as broker-dealers or the CFTC as swap entities and for
control affiliates), SBS Entities with prior disciplinary history may
suffer a reputational loss and decreased customers and profits.
    We have also received comment that entities with extensive control
affiliates may face a higher compliance burden.\328\ The commenter did
not provide specific comments on the burden estimates in the
Registration Proposing Release or provide any data regarding control
affiliates; no such data is public or otherwise available to the
Commission. Tailored registration forms are intended to reduce burdens
for cross-registered entities. However, we recognize that some entities
may have extensive control affiliate structures and, therefore, face a
higher compliance burden. If such control affiliates have adverse
disciplinary histories, some SBS Entities may also face greater
reputational costs of making affiliate disciplinary history information
public.
---------------------------------------------------------------------------

    \328\ See SIFMA Letter, at 4.
---------------------------------------------------------------------------

    Should certain entities choose to restructure their dealing in
order to avoid SBS Entity registration and the requirement to provide
disciplinary history information, they would incur costs of forgone
profits that stem from having to reduce transaction volume from current
levels to levels below the de minimis threshold, and/or costs of moving
their security-based swap dealing abroad and outside of the reach of
Title VII requirements that include registration. In short, we expect
that SBS Entities affected by the disciplinary history requirement will
trade off the costs of disclosure with the costs of restructuring,
including opportunity costs of lost transaction volume. If certain SBS
Entities choose to exit, security-based swap transactions and dealing
may become more concentrated. Further, such public disclosure may deter
SBS Entities that have significant disciplinary histories from entering
the market. However, security-based swap transactions may become
concentrated among regulated entities with less severe disciplinary
history, which may be less likely to pose risk to counterparties.
ii. Costs Related to Certifications
    Final rules include a certification that a senior officer, after
due inquiry, has reasonably determined that an SBS Entity has developed
and implemented written policies and procedures reasonably designed to
prevent violations of federal securities laws and rules thereunder, and
that the senior officer has documented the process by which he or she
reached such determination. Final rules also include a certification
regarding statutorily disqualified associated persons. In addition to
the direct burden estimated in Section V.D.1 above, we recognize that
the certifications will increase senior officer liability risk and may
lead SBS Entities to acquire additional insurance coverage. It is
possible, therefore, that the certification requirements may result in
liability insurance costs that are above what they would have been in
the absence of the rule. The Commission is unable to estimate these
costs given that it lacks specific information regarding current
insurance costs for SBS Entities, the amount of the demand that there
will be for increased coverage, and thereby the potential increases
associated with the rule.
    In addition to liability insurance costs, certification
requirements may affect the structure and levels of senior officer
compensation. While the level and structure of a senior officer's pay
package generally depends on factors such as the level of risk inherent
in the entity's activities, the entity's growth prospects, and the
scarcity and specificity of senior officer talent needed by the entity,
it may also reflect personal preferences influenced by characteristics
of the senior officer, including aversion to risk. In particular, risk
aversion may lead senior officers to prefer pay packages with
predictable payments, rather incentive-based compensation or pay
packages that otherwise reflect underlying uncertainty.\329\
---------------------------------------------------------------------------

    \329\ Executives typically have personal preferences regarding
the form of compensation received. To the extent that executives
have different levels of risk aversion, they can arrive at different
personal valuations of the same performance-based compensation
package. Hence, more risk-averse executives may require additional
compensation when paid in the form of less certain performance-based
compensation
---------------------------------------------------------------------------

    For senior officers with established compensation packages,
heightened liability risk may create an incentive to negotiate changes
to the composition of their compensation packages. Because of the
increased uncertainty arising from liability risk, risk-averse officers
may lower the value that they attach to the

incentive-based component of their pay and may as a result demand an
offset to bear the increased uncertainty. The offset could come in the
form of a smaller portion of pay being comprised of incentive-based
compensation, or through an increase in expected total compensation,
which would come at a greater cost to SBS Entities. The extent of any
such increase would depend on the structure and conditions of the labor
market for senior officers in SBS Entities as well as other economic
factors, including the negotiating environment and particular
preferences of senior officers, which will likely vary among SBS
Entities and are difficult to quantify with any degree of certainty.
iii. Costs Related to the Associated Person Requirements
    The associated person certification requires SBS Entities to
certify that their associated persons, which include natural persons
and legal entities, effecting or involved in effecting security-based
swaps on their behalf are not subject to statutory disqualification. As
we have noted in sections V.B and V.C.1.ii, Exchange Act Section
15F(b)(6) generally prohibits SBS Entities from permitting statutorily
disqualified associated persons to effect or be involved in effecting
security-based swaps on their behalf; however, the Commission has
granted temporary relief from the prohibition.
    All SBS entities will incur direct compliance costs of making the
certification required in these final rules in section V.D.1 and
V.D.2.ii. SBS Entities that are associating with disqualified persons
for the purposes of effecting or being involved in effecting security-
based swaps will also incur costs of disassociating with or reassigning
such disqualified persons, as well as costs of associating with new
persons not subject to disqualification for the purposes of effecting
or being involved in effecting security-based swaps.
    Importantly, final rules allow SBS Entities, when registering with
the Commission, to permit associated disqualified entity persons to
effect security based swaps, provided that the disqualification has
occurred prior to the compliance date of registration rules. This
exception is aimed at mitigating possible business disruptions \330\
for SBS Entities which may currently be associating with disqualified
entities with potential follow-on effects for security based swap
markets as a whole. The Commission recognizes that permitting some
associated persons that are entities to effect or be involved in
effecting security-based swaps on behalf of SBS Entities may pose risks
of repeated misconduct and other violations. As discussed in section
II.B.i, the Commission retains full enforcement authority with respect
to such associated entity persons, and would be able to take action
against entities and individuals based on violative conduct. Lastly,
current market conditions reflect the state of the world with temporary
blanket relief from the general prohibition on associated disqualified
persons effecting or being involved in effecting security-based swaps
on behalf of SBS Entities. Relative to that scenario, final
registration rules implement the general statutory prohibition while
providing limited relief to SBS Entities, when registering with the
Commission, if associated entity persons were disqualified prior to the
compliance date of the final rules.
---------------------------------------------------------------------------

    \330\ See SIFMA letter at 8.
---------------------------------------------------------------------------

    In addition to these considerations, we received comment that some
SBS Entities may be unable to perform employee background checks
necessary to ascertain statutory disqualification status of persons
located in some foreign jurisdictions.\331\ If some SBS entities
associate with persons in jurisdictions with blocking laws, privacy
laws, secrecy laws and other legal barriers for the purposes of
effecting security-based swaps, they may be unable to obtain requisite
employee personally identifiable information in order to perform the
statutory disqualification check, make the certification, and register
as SBS Entities, or provide information to the SEC. The statutory
disqualification requirement may, therefore, impose costs on such
entities, requiring them to use other employees to effect their
security-based swap transactions, to withdraw associated persons from
the reach of jurisdictions with blocking laws, privacy laws, secrecy
laws and other legal barriers, or decrease U.S. security-based swap
volume below the thresholds. The Commission does not, among other
things, have data on the locations of SBS Entity employees effecting
security-based swaps in various foreign jurisdictions, their statutory
disqualification status, the relative expertise of SBS Entities'
employees outside these foreign jurisdictions, or profitability of
current dealing activity at volumes in excess of the thresholds. We
are, therefore, unable to quantitatively estimate the number of SBS
Entities that may be affected or their costs of using other persons,
relocating associated persons outside of these foreign jurisdictions or
decreasing activity below the thresholds. The commenter did not provide
any data to quantify the effects of possible conflicts with blocking
laws, privacy laws, secrecy laws and other legal barriers as they
pertain to employee questionnaires and a statutory disqualification
determination, and such data are not otherwise publicly available.
Based on FINRA's experience with low incidence of disqualification
review applications by broker dealers seeking to associate with
disqualified natural persons, we believe that, as a practical matter,
SBS Entities may frequently be able to reassign or disassociate from
disqualified employees. The Commission is not adopting an exception for
natural persons at this time.
---------------------------------------------------------------------------

    \331\ See IIB Letter, at 19.
---------------------------------------------------------------------------

    The Commission has received comment that implementing the statutory
prohibition on disqualified persons effecting or involved in effecting
security-based swaps absent a Commission rule or order may cause
business disruptions.\332\ The commenter did not provide data on the
number of associated persons that may be affected or the extent of
potential business disruptions. Based on somewhat analogous data from
the NFA and FINRA, the Commission estimates that, on an annual basis,
fewer than five SBS Entities would seek relief for natural persons
subject to statutory disqualification to effect or be involved in
effecting security-based swaps and fewer than two SBS Entities would
seek relief for disqualified associated entities.\333\ Registration
rules also

provide relief to SBS Entities, when registering with the Commission,
associating with disqualified entities for the purpose of effecting
security-based swaps if disqualification occurred prior to the
compliance date of registration rules. We note that, as a practical
matter, SBS Entities may be easily able to reassign or disassociate
from disqualified natural persons, and SBS Entities currently
intermediating large volumes of security-based swaps would be able to
take advantage of the exception above. Finally, SBS Entities seeking to
associate with disqualified persons may apply to the Commission for
relief under Exchange Act Section 15F(b)(6).
---------------------------------------------------------------------------

    \332\ See SIFMA letter, at 8.
    \333\ While the incidence of statutory disqualification is
difficult to quantify, we draw on data concerning an analogous
statutory disqualification review process for broker-dealers. In
2014, FINRA received 24 MC-400 applications for natural persons and
10 MC-400A applications for entities. In total, FINRA has received
177 MC-400 and 63 MC-400A applications during the same five year
period (2010-2014). FINRA currently oversees approximately 4,000
currently registered broker-dealers and 272,000 registered
representatives. As discussed earlier, the Commission anticipates 55
SBS Entities may register with the Commission with 423 associated
persons per entity (23,265 associated persons in total). Therefore,
we expect significantly fewer applications in security-based swap
markets.
    Another somewhat analogous scenario is swap dealer statutory
disqualification. According to NFA staff, between October 11, 2012
and July 22, 2015, 11 applications had been made by Swap Entities to
the NFA for the NFA to provide notice to the Swap Entity that, had
the person applied for registration as an associated person, the NFA
would have granted such registration. See CFTC staff No-Action
Letter No. 12-15<EMAIL_ADDRESS>at 5-8. The Commission
has estimated that up to 55 SBS Entities may seek registration,
while the CFTC has provisionally registered 112 Swap Entities
(https://www.nfa.futures.org/NFA-swaps-information/regulatory-info-sd-and-msp/SD-MSP-registry.HTML; last accessed July 24, 2015). Using
the above data from the NFA concerning 11 applications over
approximately 2.78 years, results in an estimate of approximately 2
applications per year (11*55/112)/2.78~=1.94).
    The Commission, however, recognizes that the number of
applications received by the NFA may only present a partial picture
of the potential impact of a disqualification because, inter alia,
(1) the CFTC defines ``associated person'' of a Swap Entity to be
limited solely to natural persons, not entities (see 17 CFR
1.3(aa)(6)); (2) in CFTC Regulation 23.22(b), 17 CFR 23.22(b), the
CFTC provided an exception from the prohibition set forth in CEA
Section 4s(b)(6), 7 U.S.C. 6s(b)(6), for any person subject to a
statutory disqualification who is already listed as a principal,
registered as an associated person of another CFTC registrant, or
registered as a floor broker or floor trader.
---------------------------------------------------------------------------

iv. Costs for Nonresident SBS Entities
    Under the final rules, nonresident SBS Entities will have to
provide an opinion of counsel that they can, as a matter of law,
provide the Commission with prompt access to books and records and
submit to onsite inspection, and certify that, as a matter of law, they
can and will provide prompt access to books and records for the
purposes of facilitating Commission oversight, inspections and
examinations. As recognized in the Registration Proposing Release and
discussed by commenters, blocking laws, privacy laws, secrecy laws and
other legal barriers in some foreign jurisdictions may make such
certification and, hence, SBS Entity registration impossible for some
nonresident SBS Entities.\334\
---------------------------------------------------------------------------

    \334\ See Registration Proposing Release, at 65800. Also see,
e.g., SIFMA Letter, at 9-10, and IIB Letter, at 19.
---------------------------------------------------------------------------

    Nonresident SBS Entities precluded from registration due to
blocking laws, privacy laws, secrecy laws and other legal barriers will
bear the cost of lowering or restructuring their market activity below
the SBS Dealer and Major SBS Participant annual thresholds that trigger
registration requirements. Alternatively, nonresident SBS Entities that
are unable to make the books and records certification may be able to
relocate or otherwise restructure, such that they are no longer subject
to foreign blocking laws, privacy laws, secrecy laws and other legal
barriers that are not consistent with the required certification, and
therefore continue U.S. security-based swap dealing in excess of the
thresholds triggering registration requirements. The cost of the books
and records certification to nonresident SBS Entities would thus
include the costs of such potential relocation or restructuring, which
depend on the legal and regulatory frameworks in various foreign
jurisdictions and the organizational complexity of entities that may
seek SBS Entity registration, including those currently unregistered
with the Commission.
    Based on internal analysis of TIW data, as well as a review of CFTC
staff no action letters, the Commission estimates that nonresident U.S.
persons unable to make the books and records certification and register
as SBS Entities currently account for approximately 18% of overall
security-based swap dealing activity.\335\ The anticipated implications
of this registration requirement for efficiency, competition and
capital formation are discussed in Section V.E.
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    \335\ More specifically, since we expect a large number of U.S.
SBS Entities will have cross-registered as Swap Entities, we
considered foreign jurisdictions where CFTC staff provided no-action
relief for trade repository reporting requirements as they apply to
swap dealers (available at<EMAIL_ADDRESS>to inform our analysis.
These no-action letters identify a set of ``Enumerated
Jurisdictions'' where blocking laws, privacy laws, secrecy laws and
other legal barriers may inhibit compliance with regulatory
requirements. We then matched the ``Enumerated Jurisdictions'' to
the domicile classifications in the set of the 55 entities we
anticipate will register as SBS Entities to identify the subset of
affected entities. We estimate that this subset currently accounts
for approximately 18% of overall dealing activity. This estimate is
based on current market activity and could differ if affected
nonresident SBS Entities seeking registration with the Commission
are able to change their residency before the compliance date of
final registration rules.
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3. Indirect Costs
    As discussed in Sections V.A. and V.C.2. above, final registration
rules create a population of SBS Entity registrants with activity and
position volumes determined in the adopted intermediary definitions,
which will be subject to ongoing Commission oversight and pending
substantive Title VII requirements, including capital and margin,
external business conduct, recordkeeping and reporting requirements.
Entities choosing to register with the Commission as SBS Entities will
incur the costs of compliance with substantive rules, as well as costs
relating to Commission inspections and examinations. While the costs of
pending Title VII rules will be evaluated in each substantive
rulemaking, the Commission recognizes that registration facilitates the
application of the substantive rules to SBS Entities and therefore SBS
Entities registering with the Commission will incur additional costs
related to other Title VII rules.

E. Effects on Efficiency, Competition and Capital Formation

    Final registration rules may impose a burden on competition for
smaller SBS Entities to the extent that they impose relatively fixed
costs, which could represent a higher percentage of net income for
smaller SBS Entities. However, registration costs may impact SBS
Entities already registered as broker dealers with the Commission or
swap entities with the CFTC to a lesser degree because we have
accommodated cross-registered entities by providing separate and
tailored forms that minimize duplicate disclosures. Indeed, based on an
analysis of TIW data and the current population of registered broker
dealers, swap dealers, and OTC derivative dealers, of the fifty SBS
Dealers and up to five Major SBS Participants that may seek to register
with the Commission as SBS Entities, we anticipate that up to four will
not have already registered as broker dealers or as swap dealers.\336\
Our assessment is that all other registrants will be able to take
advantage of the streamlined registration forms SBSE-A and SBSE-BD.
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    \336\ See also Registration Proposing Release, at 65808.
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    Beyond the cost of completing and submitting registration forms,
some SBS Entities may be unable or unwilling to make the senior
officer, associated person, books and records certifications and
disciplinary history disclosures, and those SBS Entities could consider
exiting the U.S. SBS market. We do not believe that the direct
registration costs quantified in section V.D.1 would be high enough to
materially affect the application for registration or prompt large
scale exit by SBS Entities. However, reputational costs and direct
burdens of disciplinary history disclosures, including those affecting
control affiliates, books and records requirements and certifications
for nonresident SBS Entities, and statutory disqualification
requirements may impose significant and, possibly,

prohibitive costs on some SBS Entities. Such costs could lead to fewer
intermediaries competing for security-based swap business in the U.S.
market. At the same time, mitigating this potential impact, these
requirements may offer a degree of counterparty protection and enable
market participants to make more informed counterparty choices,
potentially leading to increases in market participation and liquidity
in security-based swaps.
    While programmatic costs and benefits of the substantive Title VII
requirements will be assessed in each of the substantive rulemakings,
we recognize that some SBS Entities may determine the registration
requirements, substantive requirements and transparency of the Title
VII regime are not cost-effective for them, and may withdraw from U.S.
security-based swap markets or lower their dealing activity below the
minimum thresholds which trigger registration.
    Some SBS entities outside of foreign jurisdictions with blocking
laws, privacy laws, secrecy laws and other legal barriers may associate
with persons in jurisdictions with blocking laws, privacy laws, secrecy
laws and other legal barriers for the purposes of effecting security-
based swaps. Affected SBS Entities may be unable to perform background
checks necessary to ascertain statutory disqualification status of
associated persons located in these foreign jurisdictions. Should
affected SBS Entities choose not to use other employees or entities to
effect their security-based swap transactions or to withdraw associated
persons from certain foreign jurisdictions, they may decrease U.S.
security-based swap volume below the thresholds. This requirement may,
therefore, preclude some SBS Entities from registering and place
affected SBS Entities at a competitive disadvantage. Furthermore,
depending on the specificity and scarcity of skills necessary to
profitably effect security-based swaps, entities affected by foreign
jurisdictions with blocking laws, privacy laws, secrecy laws and other
legal barriers may choose to associate with different personnel for the
purposes of effecting security-based swaps.
    As indicated by commenters,\337\ some nonresident SBS Entities
meeting registration thresholds may be unable to satisfy the access to
records requirement due to blocking laws, privacy laws, secrecy laws
and other legal barriers. The unavailability of substituted compliance
with respect to registration of SBS Entities, the requirement to
provide an opinion of counsel indicating that the entity can, as a
matter of law, provide the Commission with prompt access to its books
and records, and the requirement to certify that the entity can and
will provide the Commission with prompt access to its books and records
may have competitive effects. In particular, foreign SBS Entities from
certain jurisdictions may be forced to withdraw from U.S. security-
based swap markets or decrease their security-based swap market
participation below the threshold levels if laws or other barriers in
their local jurisdictions preclude them from complying with Title VII
registration requirements, which may lead to differential market access
and create competitive disadvantages for some non-resident SBS
Entities.
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    \337\ See letters from SIFMA, Futures Industry Association, and
The Financial Services Roundtable Letter; Institute of International
Bankers Letter; European Commission Letter.
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    As discussed above, the Commission estimates that SBS Entities with
up to 18% market share may be affected by the books and records
requirement in foreign jurisdictions with blocking laws, privacy laws,
secrecy laws and other legal barriers. The feasibility and costs of
potential organizational restructuring--relocating, spinning off or in
other ways severing an affiliation with a subsidiary, such that they
are no longer subject to these foreign laws and other barriers and can
make the books and records certification--are unclear. Due to the high
concentration of dealing activity in security-based swap markets among
large entities, the potential decrease in volume by affected SBS
Entities may be significant. Potential withdrawal of affected SBS
Entities from U.S. security-based swap markets may increase the market
share and pricing power of remaining SBS Entities, which may result in
higher costs of risk mitigation through security-based swaps for firms
and market participants. If SBS Entities meeting registration
thresholds are precluded from registration due to conflicts with
foreign blocking laws, privacy laws, secrecy laws and other legal
barriers, the total volume of trading and liquidity in security-based
swap markets may decrease, which may be accompanied by lower price
discovery and informational efficiency in security-based swap markets,
as well as higher transaction costs for customers of dealers. However,
SBS Entities currently participating in U.S. security-based swap market
with lower transaction volumes may be able to capture the newly opened
market share. Further, the newly available market share may encourage
new entry. Thus, the overall effects of the books and records and
associated person certification requirements on U.S. security-based
swap market competition are unclear, and depend on whether affected
volume is captured by existing dealers with large market share,
existing dealers with small market share, or new entrants.
    As discussed above, in adopting these final rules, we are required
to consider, in addition to competition, the impact of these rules on
efficiency and capital formation. In many respects, the effect of these
rules on efficiency and capital formation are expected to flow from
their effects on competition. For example, markets that are
competitive, with equal access by financial intermediaries to swaps,
security-based swaps, and underlying reference securities, promote
informational efficiencies, increased hedging opportunities, and
therefore the efficient allocation of capital. In evaluating the
economic effects of our rules, we have been mindful of the close
relationship between single-name and index CDS contracts, as well as
the linkages between security-based swaps and their underlying
reference securities. Rules that facilitate access to CFTC-regulated
and SEC-regulated swap and security-based swap markets should increase
hedging opportunities for financial market intermediaries; such hedging
opportunities reduce risks and allow intermediaries to facilitate a
greater volume of financing activities, including issuance of equity
and debt securities, and therefore contribute to capital formation.
    This may be particularly true in underlying securities markets,
where potential pricing and liquidity effects in security-based swap
markets may feed back and impact the market for reference entity
securities. Security-based swap markets may enable better risk
mitigation by investors in underlying reference securities, such as CDS
hedging of credit risk of corporate bond investments. The possible
contraction in security-based swap market participation by affected SBS
Entities in or associating with persons in jurisdictions with blocking
laws, privacy laws, secrecy laws and other legal barriers may adversely
impact underlying reference security markets, including pricing and
liquidity in corporate bond markets. This may have a negative effect on
the ability of firms to raise debt capital in order to finance real
investment. However, the spillover from deterioration in security-based
swap markets into underlying reference security markets may also be
positive.

Sophisticated institutional investors transact across CDS and bond
markets to trade on information pertaining to the credit risk of
underlying reference debt. A potential negative shock to security-based
swap market liquidity and dealing by nonresident SBS Entities may, in
fact, drive sophisticated institutions to search for liquidity pools
and lower price impact of informed trades to reference security
markets.\338\ If institutions begin to trade more actively in
underlying reference security markets, such as corporate bond markets
as a result, there may be positive effects on liquidity and
informational efficiency of corporate bond markets. This may enable
firms to raise more debt at potentially lower costs to finance real
investment.\339\ However, to the extent that potential exit of SBS
Entities due to foreign blocking laws, privacy laws, secrecy laws and
other legal barriers and registration requirements creates
opportunities for SBS Entities with smaller market share to capture
more volume or opens up the opportunity for new entry, effects on
security-based swap and reference security markets may differ from the
scenario above.
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    \338\ Some SBS Entities may also move their security-based swap
transactions to foreign SBS markets with potential implications for
foreign reference security markets. Also see Section V.B.3 on cross-
market participation.
    \339\ See Section V.B.3 above.
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    Finally, as noted above, we estimate that entities in foreign
jurisdictions with blocking laws, privacy laws, secrecy laws and other
legal barriers currently account for 18% of security-based swap
transaction activity, and the inability of these entities to make the
required books and records certifications can potentially impose
significant burdens on either the security-based swap market or certain
participants. In crafting our final rules, we have attempted to
minimize business disruptions and competitive burdens where possible.
As we have discussed above, the Commission's inspection and examination
authority is vital to proper oversight of SBS Dealers and Major SBS
Participants, and any limitation on oversight of non-U.S. registered
SBS entities would raise significant challenges to the Commission's
effective regulation of these firms. Given our Exchange Act mandate to
ensure the maintenance of fair, orderly, and efficient markets, and
given our belief that examination authority and access to books and
records is essential to enabling effective market oversight, the
Commission believes that any burden on competition that results from
the provisions in this rule is necessary and appropriate in furtherance
of the purposes of the Exchange Act and thus consistent with Exchange
Act Section 23(a)(2).

F. Registration Rule Alternatives

1. Associated Person Certification Requirement
    The Commission has evaluated alternatives to the associated person
certification requirement, including narrowing the definition of
associated persons to natural persons similar to the CFTC's approach.
This alternative involves interpreting the prohibition under Exchange
Act Section 15F(b)(6) to apply only to natural persons and providing
blanket relief allowing SBS Entities to associate with disqualified
persons that are not natural persons regardless of the nature or timing
of disqualification, or any other factors. Under this alternative,
treatment of associated entities would be identical for SBS Entities
dually-registered with the CFTC, creating potential economies of scope
for dual registrants in associating with persons that are entities.
Further, this approach could eliminate associated person certification
costs and barriers to entry for SBS Entities associating with
disqualified entities. However, the Commission would not be able to
prohibit those disqualified entities that pose a risk to counterparties
and integrity of security-based swap markets from effecting or being
involved in effecting security-based swaps on behalf of SBS Entities.
Further, statutory disqualification and an inability to continue
associating with SBS Entities creates a disincentive against underlying
misconduct for associated persons, and a blanket exception for
disqualified associated persons that are entities may reduce the