recommends that the Commission build into the MAT determination process
a framework for identifying what types of package transactions exist
for prospectively MAT SBS and then develop tailored rules around the
execution of such transactions.
---------------------------------------------------------------------------

    \249\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

    Rule 815(d) is closely modeled on Sec.  37.9(d) and is designed to
balance the goal of promoting transparency in the

SBS market through required methods of execution against the market
efficiency of allowing multiple instruments to trade as a package using
flexible methods of execution.\250\ As noted in the Proposing Release,
a rule that was too lenient could subvert the goal of promoting
transparency and competition through all-to-all trading, while a rule
that was too strict could cause market participants to break the
package into its individual components, thereby increasing transaction
costs and reducing the economic purpose and efficiency of the package
transaction.\251\
---------------------------------------------------------------------------

    \250\ To the extent that counterparties may be facilitating a
package transaction that involves a ``swap,'' as defined in section
1(a)(47) of the CEA, 7 U.S.C. 1a(47), or any contract for the
purchase or sale of a commodity for future delivery (or option on
such a contract), or any component agreement, contract, or
transaction over which the Commission does not have exclusive
jurisdiction, the Commission does not opine on whether such activity
complies with other applicable law and regulations.
    \251\ See Proposing Release, supra note 1, 87 FR at 28896.
---------------------------------------------------------------------------

    The Commission agrees with a commenter's suggestions that Proposed
Rule 815(d)(2) and (3) should be modified to narrow the scope of the
package-transaction exception. Accordingly, the Commission is modifying
these rules so that neither an SBS that is intended to be cleared (even
if it is not required to be cleared) nor a swap subject to a CFTC trade
execution requirement would create an exception from required methods
of execution for a Required Transaction that is part of the same
package. For purposes of exempting a Required Transaction in a package
transaction from the required means of execution, there is no reason to
distinguish mandatorily cleared SBS from voluntarily cleared SBS, or
cleared swaps from cleared SBS. Therefore, the Commission is adding the
words ``and is not intended to be cleared'' to Rule 815(d)(2) so that
it covers only a Required Transaction that is executed as a component
of a package transaction that includes a component security-based swap
that is subject exclusively to the Commission's jurisdiction but is not
subject to the clearing requirement under section 3C of the SEA and is
not intended to be cleared. And the Commission is adding new subsection
(iv) to Rule 815(d)(3) to provide that a Required Transaction in a
package transaction is ineligible to be treated as a Permitted
Transaction if it is ``[a] Required Transaction that is executed as a
component of a package transaction in which all other non-SBS
components are swaps that are subject to a trade execution requirement
under the CFTC's rules.''
    With respect to the suggestion that the Commission take a different
approach from that of the CFTC and develop tailored rules for SBS, the
package-transaction rule is not the appropriate place to recognize the
differences between the swaps and the SBS market. Rather, the clearing
determinations and MAT determinations will necessarily consider the
trading characteristics of a given SBS, and both these determinations
will have to be made before the package transaction exception would
ever potentially be relevant to a transaction in that SBS.
    For the foregoing reasons, the Commission is adopting Rule 815(d)
with the modifications to paragraph (d)(2) and (d)(3), as described
above.
5. Rule 815(e)
    Proposed Rule 815(e) is modeled on Sec.  37.9(e), which requires
SEFs to maintain rules and procedures for resolution of operational and
clerical error trades, which could be for swaps that otherwise would be
subject to required methods of execution. Proposed Rule 815(e) would
also require an SBSEF to maintain rules and procedures that facilitate
the resolution of error trades and sets forth certain requirements
designed to promote resolution in a fair, transparent, and consistent
manner. Definitions of the terms ``correcting trade,'' ``error trade,''
and ``offsetting trade'' would be included in Rule 802 rather than in
Rule 815(e).\252\
---------------------------------------------------------------------------

    \252\ See Proposed Rule 802 (defining ``correcting trade'' as a
trade executed and submitted for clearing to a registered clearing
agency with the same terms and conditions as an error trade other
than any corrections to any operational or clerical error and the
time of execution); Proposed Rule 802 (defining ``error trade'' as
any trade executed on or subject to the rules of an SBSEF that
contains an operational or clerical error); Proposed Rule 802
(defining ``offsetting trade'' as a trade executed and submitted for
clearing to a registered clearing agency with terms and conditions
that economically reverse an error trade that was accepted for
clearing). These definitions are modeled on the definitions of the
same terms in Sec.  37.9(e)(1).
---------------------------------------------------------------------------

    The Commission received one comment letter on this provision.\253\
The commenter states that, with respect to a cleared SBS, correcting an
error trade that was rejected by a clearing agency is not feasible
unless the rejected error trade is declared by the SBSEF void ab
initio. Otherwise, the commenter states, the parties might be
encumbered by unresolved obligations related to the rejected SBS trade,
and this might further prevent a timely and efficient resolution of the
error. For this reason, the commenter recommends that the SBSEF should
be able to declare void ab initio any trade rejected by a clearing
agency.\254\
---------------------------------------------------------------------------

    \253\ See Bloomberg Letter, supra note 18, at 3, 14.
    \254\ See id.
---------------------------------------------------------------------------

    The CFTC's rules for addressing error trades are well articulated
and well understood by the market, and they continue to serve as an
appropriate model for the Commission's rules. Furthermore, because most
if not all SBSEFs also will be registered with the CFTC as SEFs, close
harmonization in this regard would allow dually registered entities to
employ the same procedures for addressing error trades, whether they
arise in the context of swap trading or SBS trading. Therefore, the
rules for addressing error trades should not differ between the SBS
regime and the swaps regime. While the Commission appreciates the
difficulties that might arise in trying to correct an error trade that
has been rejected by a clearing agency, under Proposed Rule 815(e), an
SBSEF would be required to adopt rules and procedures for addressing
such situations, which it could do by, among other things, declaring
trades rejected by a clearing agency as void ab initio, as it would be
required to do for non-error trades that are rejected for clearing
under Rule 815(g). For the foregoing reasons, the Commission is
adopting Rule 815(e) as proposed.
6. Rule 815(f)
    Rule 815(f) is modeled on Sec.  37.9(f), which addresses
counterparty anonymity and is widely referred to as the prohibition on
``post-trade name give-up'' (``PTNGU''). Proposed Rule 815(f) would
generally prohibit any person, directly or indirectly (including
through a third-party service provider), from disclosing the identity
of a counterparty to an SBS that is executed anonymously on an SBSEF
and intended to be cleared and requires the SBSEF to establish and
maintain rules to that effect. Furthermore, it provides that ``executed
anonymously'' as used in the rule includes an SBS that is pre-arranged
or pre-negotiated anonymously, including by an SBSEF participant.
Finally, Rule 815(f) provides that, for a package transaction that
includes a component SBS that is not intended to be cleared, disclosing
the identity of a counterparty would not violate the rule.
    The Commission received several comments on Proposed Rule
815(f).\255\ Most of the commenters support the

rule.\256\ Several commenters state that they strongly support the
proposal harmonizing with the CFTC rules to prohibit PTNGU for SBSs
executed anonymously on SBSEFs and that are intended to be
cleared.\257\ One commenter asserts that PTNGU has no legitimate
purpose for centrally cleared financial instruments, since trading
counterparties face the central clearinghouse and do not have any
credit, operational, or legal exposure to each other post-trade.\258\
This commenter states that PTNGU functions as a source of uncontrolled
information leakage since a market participant has no control over who
it will be matched with when executing through a pre-trade anonymous
trading protocol, such as an order book. Accordingly, a buy-side firm
must be comfortable potentially sharing its trading activity with every
other participant on the trading venue, including other buy-side firms
before using an anonymous order book with PTNGU. The commenter
considers this an unattractive proposition for buy-side firms that
completely undermines the anonymous nature of the trading protocol and
deters access and participation. The commenter also argues that PTNGU
is a discriminatory practice that impedes market participant access to
trading venues by allowing dealers to monitor whether buy-side firms
have started to transact in anonymous order books and use this
information as a policing mechanism to deter buy-side access and
participation.\259\ The commenter also states that Rule 815(f)(3) \260\
is drafted to prevent evasion by voice brokers. Other commenters
express similar views.\261\
---------------------------------------------------------------------------

    \255\ See Bloomberg Letter, supra note 18, at 14-15, Citadel
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at
10-12, WMBAA Letter, supra note 18, at 5.
    \256\ See Bloomberg Letter, supra note 18, at 14-15, Citadel
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at
10-12.
    \257\ See Citadel Letter, supra note 18, at 10; SIFMA AMG
Letter, supra note 18, at 10.
    \258\ See Citadel Letter, supra note 18, at 10.
    \259\ See Citadel Letter, supra note 18, at 11. This commenter
also cites news articles relating the accounts of buy-side firms of
dealers contacting them to get them not to join SEF platforms. See
id. at 11 n.20.
    \260\ Rule 815(f)(3) provides that SBSs that are ``executed
anonymously'' include SBSs that are pre-arranged or pre-negotiated
anonymously, which would include voice broker trades.
    \261\ See SIFMA AMG Letter, supra note 18, at 10 (stating that
PTNGU for anonymously traded cleared SBSs is unnecessary and does
not provide any advantages to clients, but rather leads to
uncontrolled information leakage); Bloomberg Letter, supra note 18,
at 15 (stating that prohibiting PTNGU facilitates and promotes
trading on SBSEFs and promotes pre-trade price transparency by
encouraging more participants to bid anonymously, whereas the
practice of requiring disclosure of one counterparty's name to the
other counterparty increases the risk of information leakage and can
deter participation by liquidity seekers on SBSEFs).
---------------------------------------------------------------------------

    Another commenter states that if the Commission prohibits PTNGU,
its policy would mirror the CFTC's approach and that certain traders
would be more likely to participate on venues that offer anonymous
execution, including order book functionality.\262\ This, in turn, the
commenter argues, could result in deeper liquidity pools on SBSEFs and
promote the development, innovation, and growth of the SBS market.\263\
The commenter asserts that the Commission's rules should be designed to
better promote the development, innovation, and growth of the swaps
market, with the intent of attracting liquidity formation onto SBSEFs,
in a manner that adds to efficiency for the market and market
participants.
---------------------------------------------------------------------------

    \262\ See SIFMA AMG Letter, supra note 18, at 10.
    \263\ See id. at 11.
---------------------------------------------------------------------------

    One commenter also states that PTNGU was a more important feature
of the market when few swaps were centrally cleared and market
participants needed to know their counterparty's identity to manage the
associated credit risk; however, with the prevalence of central
clearing, the need for PTNGU is diminished for cleared swaps.\264\
---------------------------------------------------------------------------

    \264\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    A few commenters, while generally supportive of the rule, suggest
some modifications to it.\265\ One commenter argues that Rule 815(f)(4)
\266\ is overbroad and may significantly limit the scope of the
prohibition.\267\ Specifically, this commenter states that many
security-based swaps are transacted as part of a package transaction
with other instruments (e.g., single-name CDS and index CDS). The
commenter argues that, at a minimum, any exception for package
transactions should only apply to packages that include a component
that is not an SBS intended to be cleared or a swap that is intended to
be cleared. The commenter expresses concern that the current language
would appear to exempt packages containing CFTC-regulated swaps, even
if those instruments should be subject to an equivalent prohibition
(notwithstanding the working of the corresponding CFTC exception for
packages). The commenter encourages the Commission to work with the
CFTC to avoid creating a loophole for common packages containing swaps
and security-based swaps that are all intended to be cleared.
Furthermore, the commenter questions the need for Rule 815(f)(4) at
all. The commenter states that, as proposed, the prohibition on PTNGU
applies only to security-based swaps that are executed anonymously and
intended to be cleared. The commenter argues that PTNGU could still be
used for the uncleared security-based swap leg of a package transaction
containing both a cleared security-based swap and an uncleared
security-based swap, even without Rule 815(f)(4).
---------------------------------------------------------------------------

    \265\ See Bloomberg Letter, supra note 18, at 15, Citadel
Letter, supra note 18, at 11, WMBAA Letter, supra note 18, at 5.
    \266\ Rule 815(f)(4) provides that, for a package transaction
that includes a component transaction that is not an SBS intended to
be cleared, disclosing the identity of a counterparty shall not
violate the other provisions in the rule that prohibit the
disclosure of the identity of a counterparty for SBSs executed
anonymously.
    \267\ See Citadel Letter, supra note 18, at 11.
---------------------------------------------------------------------------

    One commenter argues that the Commission should take an
evolutionary approach to the prohibition on name give-up, which
initially should apply only to Required Transactions, and not Permitted
Transactions on an SBSEF where clearing may not be certain leading up
to or at the time of trade execution.\268\ This commenter believes that
this approach would encourage liquidity formation and further
development of less liquid SBSs where an SBSEF trading mandate is not
required.
---------------------------------------------------------------------------

    \268\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    One commenter suggests that the Commission augment the rule with a
prohibition on trade-relationship documentation for SBS that are
intended to be cleared and grant the SBSEF the ability to void ab
initio trades rejected from clearing to avoid the necessity of post-
trade name disclosure in case of an error trade.\269\
---------------------------------------------------------------------------

    \269\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

    The Commission agrees with commenters that prohibiting post-trade
name give-up for cleared trades is reasonably necessary to facilitate
and promote trading on SBSEFs, and Proposed Rule 815(f) would
accomplish these goals.
    The Commission disagrees with the comment that Rule 815(f)(4) is
overbroad and unnecessary. The Commission finds that Rule 815(f)(4) is
necessary and important to provide clarity about the application of the
PTNGU prohibition to package transactions and also to provide
consistency with the CFTC's approach. Narrowing the exception in Rule
815(f)(4) as suggested by one commenter so that it would not apply if a
component of a package transaction were a cleared swap would cause the
Commission's approach to PTNGU to differ from that of the CFTC and
create the potential for different PTNGU rules to apply to different
components of the same package transaction. That is, if the Commission
modified Rule 815(f)(4) as the commenter suggests, in the case of a
package transaction comprising an

SBS that is intended to be cleared and a swap that is intended to be
cleared, Rule 815(f)(4) would prohibit PTNGU, but Sec.  37.9(f)(4)
would permit PTNGU.\270\ To avoid this situation, the Commission
declines to modify Rule 815(f)(4) as suggested.
---------------------------------------------------------------------------

    \270\ Section 37.9(f)(4) provides, in relevant part, that
``[f]or a package transaction that includes a component transaction
that is not a swap intended to be cleared, disclosing the identity
of a counterparty shall not violate'' the prohibition against PTNGU.
17 CFR 37.9(f)(4).
---------------------------------------------------------------------------

    Further, the Commission disagrees with the comment that the
prohibition on PTNGU should initially apply only to Required
Transactions. The prohibition on PTNGU is designed to promote pre-trade
price transparency by encouraging a greater number, and a more diverse
set, of market participants to anonymously post bids and offers on
regulated markets, and it does so by preventing the sharing of the
names of counterparties where such sharing is unnecessary--namely, when
a transaction is cleared. Whether clearing the transaction is required
or voluntary is not relevant to the purposes of prohibiting PTNGU. With
regards to trades rejected from clearing, the prohibition on PTNGU
would apply to all trades that are intended to be cleared, not just
those that are successfully cleared, so that prohibition would also
apply to a trade that is submitted but then rejected for clearing. For
the foregoing reasons, the Commission is adopting Rule 815(f), as
proposed, with minor technical modifications.\271\
---------------------------------------------------------------------------

    \271\ The Commission has corrected a reference in paragraph
(f)(2) to a ``security-based swap execution facility'' to refer
instead to a ``security-based swap.'' The Commission has also
changed first instance of the word ``paragraph'' in paragraph (f)(4)
to ``paragraphs.''
---------------------------------------------------------------------------

7. Rule 815(g)
    One commenter states that in order to protect counterparty
anonymity in the event of an SBS that is executed anonymously and
intended to be cleared, but is nonetheless rejected for clearing, the
SBSEF should declare the trade void ab initio.\272\ The commenter
suggests that the Commission augment the rule to prohibit trade
relationship documentation for SBS that are intended to be cleared and
to grant SBSEFs the ability to declare trades rejected from clearing
void ab initio in order to avoid post-trade name disclosure in the case
of a rejected trade.
---------------------------------------------------------------------------

    \272\ See Bloomberg Letter, supra note 18, at 14-15. See also
Citadel Letter, supra note 18, at 5 (stating that the CFTC guidance
regarding trades that are void ab initio has eased trading of
cleared swaps on SEFs and ``facilitated the entry of new liquidity
providers that do not have legacy bilateral trading documentation in
place with clients'').
---------------------------------------------------------------------------

    The Commission agrees that declaring such trades void ab initio,
which helps prevent trades rejected from clearing from effectively
becoming bilateral transactions where the identity of counterparties
might be disclosed. This approach is also consistent with practices in
the swaps market with respect to such trades.\273\ Therefore, the
Commission is amending Rule 815 to add a new paragraph (g), which
specifies that SBSEFs shall establish and enforce rules that provide
that a security-based swap that is intended to be cleared at the time
of the transaction, but is not accepted for clearing at a registered
clearing agency, shall be void ab initio. In light of new paragraph
(g), the Commission is generally of the view that it would not be
consistent with the impartial-access requirements of Rule 819(c) for an
SBSEF to permit its members to require bilateral relationship
documentation from their counterparties with respect to SBS that are
intended to be cleared.\274\ Consequently, the Commission finds that it
is not necessary to include a prohibition on trade relationship
documentation in Rule 815 for SBS that are intended to be cleared.
---------------------------------------------------------------------------

    \273\ See CFTC, Division of Clearing and Risk and Division of
Market Oversight Staff Guidance on Swaps Straight-Through Processing
(Sept. 26, 2013), available at<EMAIL_ADDRESS>(``CFTC 2013 STP Guidance'').
    \274\ See also infra section VI.B.3.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission adopting Rule 815(f)(1)
through (4), with minor technical modifications,\275\ and is also
adding a new paragraph (g), as discussed above.
---------------------------------------------------------------------------

    \275\ See supra note 271.
---------------------------------------------------------------------------

F. Rule 816--Trade Execution Requirement and Exemptions Therefrom

    Section 3C of the SEA \276\ sets out a procedure whereby an SBS
becomes subject to mandatory clearing. Section 3C(h) of the SEA
provides that, if a transaction involving an SBS is subject to the
mandatory clearing requirement, the counterparties shall execute the
transaction on an exchange, on an SBSEF registered under section 3D of
the SEA, or on an SBSEF that is exempt from registration under section
3D(e) of the SEA, unless no national securities exchange or SBSEF makes
the SBS available to trade or the SBS transaction is subject to an
exception from the clearing requirement under section 3C(g) of the SEA.
This obligation under section 3C(h) is commonly referred to as the
``trade execution requirement.''
---------------------------------------------------------------------------

    \276\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------

    Proposed Rule 816 of Regulation SE establishes procedures for an
SBSEF to make an SBS ``available to trade'' (assuming it is also
subject to the clearing requirement), thereby activating the trade
execution requirement with respect to that SBS. Rule 816 also includes
three proposed exemptions from the trade execution requirement.
    Paragraphs (a) through (d) of Rule 816 are modeled on Sec.  37.10
of the CFTC's rules and establish a process whereby an SBS product is
MAT by an SBSEF. An SBSEF may list an SBS that is subject to mandatory
clearing, but listing the product does not by itself subject the
product to the trade execution requirement in section 3C(h) of the SEA.
Only if a product that is subject to mandatory clearing is listed and a
MAT determination has been made would the SBS then become subject to
the trade execution requirement. A MAT determination would have to be
made and filed by an SBSEF pursuant to Rule 816 to trigger the trade
execution requirement, similar to the MAT process of Sec.  37.10.
1. General Comments on Harmonization With CFTC MAT Process
    Several commenters cite efforts by the CFTC to review its MAT
process as an indication that the Commission should take a different
approach for making MAT determinations rather than align with the
CFTC's current rule.\277\ One commenter cites to the findings of the
Market Risk Advisory Committee (``MRAC''), an advisory committee that
provided recommendations to the CFTC, and states that the MRAC and the
CFTC raised concerns regarding the current MAT process for swaps.\278\
This commenter states that reforming the MAT process was included as an
agenda item in the CFTC 2021 fall rulemaking agenda and that, for this
reason, the Commission should align the MAT process for SBS with the
recommendations made by the MRAC or, in the alternative, coordinate
with the CFTC to ensure that the MAT process is aligned and conducted
in a manner that allows input from a variety of stakeholders and the
Commission. Another commenter also urges the Commission to review the
CFTC MRAC's recommendations with an eye towards adopting a more
flexible regime given the unique characteristics of the

SBS market.\279\ One commenter strongly recommends that the Commission
refrain from adopting a MAT determination process that is based on the
existing CFTC process, but rather coordinate with the CFTC as it
considers potential reforms to improve its MAT process.\280\
---------------------------------------------------------------------------

    \277\ See Bloomberg Letter, supra note 18, at 15-16; ISDA-SIFMA
Letter, supra note 18, at 5.
    \278\ See Bloomberg Letter, supra note 18, at 15-16.
    \279\ See ISDA-SIFMA Letter, supra note 18, at 5.
    \280\ See ICI Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    It is appropriate for Regulation SE to establish a MAT SBS process
that aligns with the CFTC's process as closely as possible. While
commenters state that the CFTC may be considering changes to its MAT
process, the CFTC has not yet proposed any such changes, so it is not
certain that the CFTC would adopt the recommendations of the MRAC,
either in whole or in part, or with modification, or when the CFTC
might act if it does make changes to its MAT process. Additionally,
because no MAT determination can be made with respect to an SBS unless
and until the Commission has made a mandatory clearing determination as
to that SBS, the Commission would have the opportunity, if and when it
makes a mandatory clearing determination with respect to an SBS, or
category of SBS, to consider whether changes to the process for a MAT
determination with respect to that SBS would be appropriate. Further,
in the event that the CFTC does move forward with changes to its MAT
process, the Commission will have the opportunity to reassess its own
MAT process and to consider further harmonization with the CFTC regime,
as appropriate. For the present, the CFTC's procedures are well
articulated and well understood by SBS markets, so closely harmonizing
with these procedures would yield comparable regulatory benefits while
minimizing burdens on SBSEFs. In particular, even though the SEF and
SBSEF markets differ in ways that are relevant to the application of
the criteria for MAT determinations, the criteria themselves are
equally applicable to the SEF and SBSEF markets. Thus, the Commission
is adopting the rule as proposed, without any different or additional
criteria that would have to be considered by an SBSEF in order to MAT
an SBS product.
2. Rule 816(a)
    Paragraph (a)(1) of Rule 816 provides that an SBSEF that makes an
SBS available to trade in accordance with paragraph (b) of the rule
must submit to the Commission its determination with respect to that
SBS, pursuant to the procedures under Rule 806 (voluntary submission
for Commission review and approval) or Rule 807 (self-
certification).\281\ Paragraph (a)(2) provides that an SBSEF that makes
an SBS available to trade must demonstrate that it lists or offers that
SBS for trading on its trading system or platform.
---------------------------------------------------------------------------

    \281\ See supra sections IV.C (discussing Rule 806) and IV.D
(discussing Rule 807).
---------------------------------------------------------------------------

    The Commission received a number of comments on Rule 816(a).\282\
Many commenters raise concerns about an SBSEF having the sole ability
to make a MAT determination and generally advocate that the Commission
and other market participants have a greater role in making MAT
determinations.\283\ One commenter states that experience with the
existing CFTC regime suggests that the scope of the trade execution
requirement should not be determined solely by the SBSEFs.\284\ This
commenter states that the trade execution requirement is a key pillar
of the G20 post-crisis reforms and recommends that the Commission also
be able to propose MAT determinations for public comment, based on its
independent assessment of the criteria set forth in Rule 816(b). One
commenter asserts that it has long believed that a MAT determination
should not rest solely with a single SBSEF.\285\ This commenter states
that such an approach risks introducing commercial and other motives
beyond an objective assessment of the factors set forth in the rule.
---------------------------------------------------------------------------

    \282\ See Bloomberg Letter, supra note 18, at 15-16; Citadel
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 4-10;
ISDA-SIFMA Letter, supra note 18, at 4-5; MFA Letter, supra note 18,
at 9; SIFMA AMG Letter, supra note 18, at 6-8; WMBAA Letter, supra
note 18, at 5; Tradeweb Letter, supra note 18, at 3-4.
    \283\ See Citadel Letter, supra note 18, at 15-16; see Bloomberg
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 5-8;
ISDA-SIFMA Letter, supra note 18, at 4-5.
    \284\ See Citadel Letter, supra note 18, at 15-16.
    \285\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Another commenter states that it does not believe that a trading
venue should be solely responsible for identifying the types of
products that should be subject to a trade execution requirement.\286\
Instead, the commenter states that a Commission-led process is more
appropriate. The commenter argues that a Commission-led process would
ensure that the views of all relevant market participants (including
SBSEFs) are considered in making a MAT determination. In addition, the
commenter asserts that the Commission is likely to have better access
to data regarding the overall SBS market than any individual trading
venue will have. The commenter requests that the Commission provide in
Regulation SE that MAT determinations are to be made by the Commission
following a notice and comment rulemaking process that takes into
account the views of SBSEFs and other market participants.
---------------------------------------------------------------------------

    \286\ See Tradeweb Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

    Because no MAT determination can be made for an SBS until the
Commission has made a mandatory clearing determination for that SBS,
the MAT-determination process is, in that sense, inherently a
Commission-led process. Moreover, because the SBSEFs will have direct
experience with the trading of SBSs on SBSEFs, they will be best
positioned make the initial decision as to whether it is appropriate to
submit a MAT determination for an SBS. However, the Commission would
still play a primary role in the MAT process, as it will have the
opportunity to review all SBSEF MAT determinations, whether they are
self-certified or voluntarily filed for Commission approval, to
determine whether those determinations are adequately supported by
evidence and consistent with the SEA and the rules thereunder,
including the six factors to be considered for MAT determinations under
Rule 816(b), which are discussed below. In the absence of such
evidence, the Commission can decline to approve or can stay and then
object to a MAT petition, which will ultimately allow the Commission to
prevent an inappropriate MAT determination from taking effect.
    Some commenters also recommend that the MAT process provide other
market participants the ability to provide comment on any MAT
proposal.\287\ One commenter proposes that market participants have a
meaningful opportunity to review and opine on a petitioning SBSEF's
proposed MAT determination.\288\ This commenter argues that the MAT
factors are intended to measure trading liquidity that is available and
that this assessment should include the perspectives of market
participants.\289\ Another commenter also states that it has long
believed that market participants should have the ability or a forum to
comment on proposed MAT determinations.\290\ One commenter recommends
that, in order to support the MAT process and to guard against
inappropriate MAT determinations, the Commission permit market
participants and other interested parties to participate in the MAT
analysis by introducing a public notice and

comment period into the MAT assessment timeline.\291\ This commenter
states that this would provide market participants, who would be those
most affected by a MAT determination, with the opportunity to identify
specific aspects of individual SBS products that may limit their
liquidity, which would help ensure each MAT determination is
appropriate for the relevant SBS product. Another commenter states that
one of the shortcomings of the MAT process is that it puts too much
responsibility in the hands of the trading platform and does not
require, or even consider, input from market participants.\292\ This
commenter states that the implications of this outcome are even more
evident in the context of an SBS MAT determination, as such a
determination would only be relevant to a small segment of the global
SBS market, which the commenter states is much smaller and less liquid
than its swaps counterpart.
---------------------------------------------------------------------------

    \287\ See SIFMA AMG Letter, supra note 18, at 7; MFA Letter,
supra note 18, at 9; ICI Letter, supra note 18, at 5, 7-8.WMBAA
Letter, supra note 18, at 5.
    \288\ See SIFMA AMG Letter, supra note 18, at 7.
    \289\ See id.
    \290\ See WMBAA Letter, supra note 18, at 5.
    \291\ See MFA Letter, supra note 18, at 9.
    \292\ See ISDA-SIFMA Letter, supra note 18, at 4-5.
---------------------------------------------------------------------------

    One commenter also states that the proposed approach will give
SBSEFs the sole ability to dictate the scope of SBSEF trading for
market participants based on the commercial interests of SBSEFs.\293\
This commenter recommends that the Commission require a 30-day public
comment period for all MAT determinations. The commenter expresses
concern that, under the proposal, it would be possible for a MAT
determination to become effective without an opportunity for public
comment and that the MAT process would be controlled almost entirely by
one segment of the SBS markets, the SBSEFs. The commenter states that
market participants can provide the Commission with invaluable
commentary, insights, and data on the potential effects of proposed
rules, as well as help to ensure that rules are implemented in a fair
and orderly manner. The commenter asserts that, because MAT
determinations are data intensive, 30 days would give market
participants sufficient time to analyze the data presented by the
SBSEF, prepare their own data and analyses, and comment effectively on
operational and technological implications. This commenter also
recommends that the Commission consider creating an advisory board to
provide recommendations both to the Commission and to SBSEFs on SBSs
that should be added to or removed from the list of SBSs that are
subject to the trade execution requirements.\294\ The commenter states
that the advisory board should have appropriate expertise and balanced
representation, including from the buy side, sell side, and other
stakeholders. The commenter asserts that this would help further
address some of their concerns about the MAT process and ensure that
the SBSs made subject to the trade execution requirement are only the
most liquid. Furthermore, the commenter argues that the advisory board
could also help the Commission assess the functioning of the MAT
determination process and of the overall SBS regulatory framework and
provide recommendations for improvement.\295\
---------------------------------------------------------------------------

    \293\ See ICI Letter, supra note 18, at 5, 7-8.
    \294\ See id. at 9-10.
    \295\ See id.
---------------------------------------------------------------------------

    Another commenter states that the process for MAT determinations
should include input from both market participants and the
Commission.\296\ The commenter states that market participants may
trade on multiple venues and in multiple jurisdictions and have a
greater or different perspective from the SBSEF making the MAT
determination. Additionally, the commenter states that the Commission's
input should be considered as well.
---------------------------------------------------------------------------

    \296\ See Bloomberg Letter, supra note 18, at 15-16.
---------------------------------------------------------------------------

    The Commission will have sufficient opportunity to assess self-
certified MAT determinations for consistency with the criteria of Rule
816(b), as well as with the SEA and the other regulations thereunder,
while also permitting SBSEFs to use a self-certification process
closely aligned with Sec.  40.6. The CFTC's procedures are well
articulated and well understood by SEFs, and closely harmonizing with
these procedures should yield comparable regulatory benefits while
minimizing burdens on SBSEFs. Certain MAT determinations of dually
registered SEF/SBSEFs may apply to SBSs and swaps that are related and
that related MAT determinations will thus have to be filed with both
the SEC and CFTC. Adding a default comment period or otherwise altering
the standard so that the Commission reviews all MAT determinations by
SBSEFs, as commenters requested, would significantly alter the timing
of self-certified SBSEF MAT determinations compared to their SEF
equivalents. By contrast, closely harmonizing the SEC's filing
procedures and standards of review with the CFTC's would allow dually
registered entities to submit related MAT determinations to both
agencies for review. Moreover, if the Commission exercises its
authority to stay the effectiveness of a self-certified MAT
determination and seek public comment--i.e., with respect to a rule
that is novel, complex, inadequately explained, or potentially
inconsistent with the SEA or the regulations thereunder, including
Regulation SE--market participants would be able to convey their
concerns regarding that rule to the Commission.
    For SBS MAT determinations submitted under the Rule 806 process
that present novel or complex issues or meet other criteria under Rule
806(d), the initial 45-day review period for rule approval submissions
may be extended for an additional 45 days. The Commission recognizes
the importance of public input regarding any MAT determination, and not
only does Rule 808(b) provide that the Commission make publicly
available on its website Rule 806 filings, such as an SBSEF's MAT
filing, but the Commission is also, as discussed below, delegating to
its staff the authority to make filings under Rule 806 available on the
Commission's website, which will expedite the process of providing
interested persons with the ability to review a MAT-determination
filing so that they can communicate their views to the Commission.
Thus, in either process, if MAT petitions present novel or complex
issues, the Commission will have sufficient time to receive and
consider public comment for those submissions. Further, accepting
public comment from all interested market participants in the context
of a specific MAT determination would more efficiently aid the
Commission's review of SBSEF MAT-determination filings than forming a
formal advisory board to offer opinions on adding or removing SBS from
the list of products that have been MAT.
    Several commenters question the extent of the Commission's role in
the MAT determination process.\297\ One commenter cites the lack of
Commission authority to delay or decline an SBSEF submission for a MAT
determination, particularly without comment from market participants,
as the basis for its concerns about the proposed MAT process.\298\
Another commenter recommends that the Commission enhance its oversight
by ensuring that it has a more meaningful ability to review and reject
MAT determinations, as well as the ability to initiate determinations
itself as appropriate.\299\ This commenter also expresses concern that
the Commission would not have adequate time to consider, or authority
to

challenge, the basis for a MAT determination. The Commission, however,
does have the authority to prevent an SBSEF MAT determination under
either Rule 806 or Rule 807 from taking effect. As noted above, under
Rule 806, the Commission has a 45-day period to consider a submission
under Rule 806, which could be extended for another 45 days. The
Commission can, if it finds the determination to be inconsistent with
the SEA or the rules thereunder, notify the SBSEF that it will not, or
is unable to, approve the new rule or rule amendment. Under Rule 807,
MAT determinations cannot go into effect for at least 10 business days,
during which the Commission has the opportunity to determine whether
the determination presents novel or complex issues, if it is
inadequately explained, or if it is potentially inconsistent with the
SEA or the rules thereunder. If the Commission determines that any of
these concerns is present, the Commission can stay the MAT
determination for a 90-day period for further review. Within those 90
days, the Commission will have the opportunity to object to the
proposed certification on the grounds that the proposed rule or rule
amendment is inconsistent with the SEA or the Commission's rules
thereunder, thereby preventing the self-certified MAT determination
from going into effect. Therefore, the processes for submitting MAT
determinations do afford the Commission sufficient time and authority
to review and, where appropriate, decline to approve, or object to, MAT
determinations.
---------------------------------------------------------------------------

    \297\ See SIFMA AMG Letter, supra note 18, at 6; ICI Letter,
supra note 18, at 6-7.
    \298\ See SIFMA AMG Letter, supra note 18, at 6.
    \299\ See ICI Letter, supra note 18, at 5-8.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting Rule
816(a) as proposed.
3. Rule 816(b)
    Paragraph (b) of Rule 816 sets forth six factors that an SBSEF
shall consider, as appropriate, when making a MAT determination for an
SBS product, which are the same six factors enumerated in the CFTC
rule. Those factors are: (1) whether there are ready and willing buyers
and sellers; (2) the frequency or size of transactions; (3) the trading
volume; (4) the number and types of market participants; (5) the bid/
ask spread; and (6) the usual number of resting firm or indicative bids
and offers.
    The Commission received several comments on the factors for making
a MAT determination described in Rule 816(b).\300\ Several commenters
express concern that the factors for consideration enumerated in Rule
816(b) are not mandatory.\301\ One commenter states that the rule
requires that an SBSEF's submission consider the factors in the rule,
as appropriate, when making a MAT determination.\302\ This commenter
proposes that all of the MAT factors must be considered for mandatory
SBSEF trading. This commenter also urges the Commission to assess the
MAT factors on the basis of the current trading activity of the
relevant SBSs on the SBSEF against stringent standards, and in the
aggregate, in order to determine whether there is proven liquidity on
SBSEFs to support mandatory SBSEF trading. The commenter also proposes
that the Commission expand the MAT factors to require evidence
demonstrating that the SBSEF has the requisite infrastructure to
support mandatory SBSEF trading by: (a) adding an assessment of
technological readiness, and (b) requiring threshold numbers of SBSEFs
as well as liquidity providers on the SBSEF transacting in the relevant
SBS. The commenter argues that, while the expansion of MAT factors may
be viewed as requiring more intervention and resources by the
Commission, the revised approach will ultimately lead to a streamlined
process, while at the same time avoiding a potential sacrifice of
liquidity if a particular SBS is mandated for SBSEF trading
prematurely.
---------------------------------------------------------------------------

    \300\ See SIFMA AMG Letter, supra note 18, at 6-8; ICI Letter,
supra note 18, at 5; MFA Letter, supra note 18, at 9; WMBAA Letter,
supra note 18, at 5.
    \301\ See SIFMA AMG Letter, supra note 18, at 7-8; ICI Letter,
supra note 18, at 5; WMBAA Letter, supra note 18, at 5.
    \302\ See SIFMA AMG Letter, supra note 18, at 6-8.
---------------------------------------------------------------------------

    One commenter also expresses concern that the factors in Rule
816(b) are neither mandatory nor based on calculated thresholds, and
that they would permit SBSEFs to assert that an SBS should be MAT even
absent objective evidence of a sufficiently liquid trading market.\303\
This commenter states that this could have negative consequences for
buy-side participants such as funds--requiring SBSs with insufficient
liquidity to be traded via order book or an RFQ system, which would
raise a significant risk of revealing advisers' sensitive portfolio
management strategies. This commenter also states that, without
requiring SBSEFs to consider any objective factors (e.g., threshold
levels), it is not clear how the Commission could ever find that a MAT
determination is inconsistent with the SEA or the Commission's rules.
This commenter recommends that the Commission enhance the MAT
determination factors by: clarifying that all factors must be
evaluated, rather than just one or a subset; adding as a factor the
number of SBSEFs that list the SBS; requiring that at least two SBSEFs
list the SBS; and requiring a minimum amount of trading history (e.g.,
that an SBS has been listed for at least 90 days). The commenter also
recommends that the Commission make the MAT determination factors more
robust by establishing at least some objective mandatory criteria. The
commenter argues that adopting these recommendations would provide the
Commission with greater authority to reject a MAT determination and
would address the conflict raised by an SBSEF's commercial incentive to
make an SBS MAT, as well as ensure that there is enough liquidity in an
SBS before it is subject to a MAT determination. The commenter urges
that a more robust MAT determination process is critical to bring
consistency to the SBS market over time, as having objective standards
would avoid MAT determinations based on subjective assessments of
liquidity that may change over time.
---------------------------------------------------------------------------

    \303\ See ICI Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

    The Commission's approach of requiring the MAT factors to be
considered as appropriate, rather than mandating the consideration of
all the factors, is consistent with the approach the CFTC has taken.
The CFTC adopted its approach to provide more flexibility so that its
markets could accommodate swaps with different trading characteristics
that can be supported in a centralized trading environment.\304\ And a
similarly flexible approach is appropriate for the different SBSs that
would be traded on its SBSEFs, as the appropriate thresholds on any of
the factors may vary depending on the SBS and over time. Adopting
specific thresholds would create excessive rigidity at the outset. MAT
submissions, under Rules 806(a)(5) and 807(a)(6), would be required to
contain an explanation and analysis of the SBSEF's determination,
including a discussion of the factors enumerated in the rule, and how
it complies with the SEA and the Commission's regulations thereunder.
Rule 816(b) requires SBSEFs to consider all the factors enumerated in
the rule, as appropriate. However, such consideration, to be
meaningful, generally should discuss the factors in the context of the
general market, relative to some outside benchmark. And the SBSEF would
have the burden of providing support for any assertions it makes
regarding the adequacy of any of the factors it considers, with

reference to some external, objective standard. The explanations and
analyses provided by the SBSEF generally should provide adequate
justification as to how all the factors considered apply to the SBS MAT
determination, as well as to why any factors enumerated in Rule 816(b)
that are not addressed are not relevant. A failure, on the part of the
SBSEF, to address any factors that are relevant or to adequately
support its assertions would be a basis for the Commission to find that
a MAT determination is inconsistent with the SEA and its rules.
---------------------------------------------------------------------------

    \304\ See 2013 CFTC Final MAT Rules Release, supra note 9, 78 FR
at 33613.
---------------------------------------------------------------------------

    One commenter, while supporting harmonization with the CFTC's MAT
standards, expresses concern with the current framework for determining
whether mandatorily cleared SBS should also be mandated for SBSEF
trading through the MAT process. This commenter urges that there be a
substantive analysis of whether an SBS has sufficient liquidity
available to market participants on the SBSEF. The commenter states
that, absent a robust MAT process requiring the SBSEF to demonstrate
that voluntary exchange trading has met minimum liquidity and other
standards, an absence of liquidity for the newly MAT-ed product on the
SBSEF could shut out asset managers from accessing liquidity for their
clients once OTC trading is prohibited. To this end, the commenter
recommends that the Commission specify that the MAT standards are not
synonymous with the clearing requirement standards. The commenter
asserts that its assessment reflects the fact that necessary market
conditions that make central clearing appropriate are different from
the necessary market conditions that make mandatory SBSEF execution
appropriate.\305\
---------------------------------------------------------------------------

    \305\ See SIFMA AMG Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    Another commenter, while generally supporting the Commission's
approach to MAT determinations and the six factors enumerated in the
rule, urges the Commission to take a cautious approach in its
assessment of whether a MAT determination is appropriate. Specifically,
the commenter recommends that the Commission carefully consider each
factor, individually and collectively, in assessing whether a
particular SBS has sufficient liquidity to support mandatory SBSEF
trading. The commenter also cautions that the Commission should avoid
broad MAT categorizations for specific types of SBS when individual SBS
products within each category may be more or less suitable for a MAT
designation.\306\
---------------------------------------------------------------------------

    \306\ See MFA Letter, supra note 18, at 9.
---------------------------------------------------------------------------

    From the factors enumerated in Rule 816(b), it is clear that
additional factors, beyond the fact that a product is subject to
mandatory clearing, will need to be considered in determining whether
an SBS is suitable to be MAT, and these factors are directly relevant
to the liquidity of trading in a given SBS: whether there are willing
buyers and sellers, the frequency and size of transactions, the trading
volume, the number and types of market participants, the bid/ask
spread, and the usual number of resting firm or indicative bids and
offers. Adopting specific thresholds, however, would be too rigid an
approach to accommodate the different kinds of SBSs that may be traded
on an SBSEF, particularly at this early stage. As stated above, the
Commission or its staff will review SBS products on a case-by-case
basis, and for SBS products presenting novel or complex issues there
will be an extended period for the Commission to review the submission
and consider public comments on the appropriateness of a MAT
determination on a case-by-case basis, taking into account the facts
and circumstances of the SBS subject to the determination, including
when a filing seeks to include a broad category of SBS within a MAT
determination.
    The Commission has carefully considered the concerns raised by
commenters regarding the determination of when an SBS is appropriate
for a MAT determination by an SBSEF, and the Commission is adopting
Rule 816(b) as proposed. The Commission appreciates that a MAT
determination for an SBS will be consequential for market participants,
and that the enumerated factors in Rule 816(b) are important components
of an analysis of whether an SBS is appropriate for a MAT
determination. Rule 816(b) will require SBSEFs to consider each of the
factors enumerated in Rule 816(b), as appropriate. As noted above, a
flexible approach to the enumerated factors will accommodate the
different kinds of SBSs that will be traded on SBSEFs. While the rule
does not require that every factor be considered in every case, to the
extent that a factor is relevant and an SBSEF's MAT determination
submission fails to sufficiently address that factor, the Commission
would be in a position to either disapprove the submission, if made
under Rule 806, or stay and ultimately object to the submission, if
self-certified under Rule 807.
    Furthermore, the rules for filing MAT determinations require SBSEFs
to provide, among other things, an explanation and analysis of the
proposed MAT determination, including a discussion of its compliance
with the SEA, the Core Principles for SBSEFs, and the Commission's
rules thereunder. In the case of a MAT determination, the SBSEF
generally should do more than simply state that it is consistent with
the SEA and the Commission's rules thereunder, but should also provide
supporting analysis, and supporting documentation as appropriate, for
its conclusion. If an SBSEF fails to provide adequate explanation or
analyses of the MAT determination, it would be difficult for the
Commission to find that the determination is consistent with the SEA
and the Commission's rules thereunder. Thus, MAT determination filings
generally should be accompanied with adequate discussion and support
for a MAT determination based on all relevant factors in Rule 816(b),
including discussion supporting a conclusion that the SBS product
subject to the MAT determination achieves the appropriate thresholds
for that category of products. Furthermore, for MAT determinations
presenting novel or complex issues, there will be an extended period
for the Commission to solicit and consider public comments on, among
other things, the appropriateness of the factors considered.
    For the reasons discussed above, the Commission is adopting Rule
816(b) as proposed.
4. Rule 816(c)
    Paragraph (c) of Rule 816 provides that, upon a determination that
an SBS has been MAT on an SBSEF or SBS exchange,\307\ all other SBSEFs
and SBS exchanges shall comply with the requirements of section 3C(h)
of the SEA in listing or offering that SBS for trading.
---------------------------------------------------------------------------

    \307\ An SBS exchange, like all national securities exchanges,
must submit any rule change--including a rule change to list a new
derivative securities product and/or to MAT an SBS product--pursuant
to SEA Rule 19b-4, 17 CFR 240.19b-4. The proposed rule text did not
establish a new procedure for SBS exchanges to list or MAT SBS
products. See Proposing Release, 87 FR at 28898 n.107.
---------------------------------------------------------------------------

    The Commission received no comments on Rule 816(c) and the
Commission is adopting Rule 816(c) as proposed for the reasons stated
in the Proposing Release.
5. Rule 816(d)
    Paragraph (d) of Rule 816 provides that the Commission may issue a

determination that an SBS is no longer MAT upon determining that no
SBSEF or SBS exchange lists that SBS for trading.
    The Commission received one comment on Rule 816(d).\308\ This
commenter recommends that the Commission modify its proposed approach
to removing an SBS from the trade execution requirement. The commenter
states that the proposed approach raises a significant risk that an SBS
may be required to be traded on an SBSEF merely because it is listed on
one SBSEF, even if there is no liquidity to sustain trading in that
SBS, which could be detrimental for both buy-side and sell-side market
participants. To ensure that there is adequate liquidity in MAT SBSs,
the commenter recommends that the Commission adopt a process for
removing an SBS from the MAT scope that is similar to the process for
making a MAT determination. The commenter also urges the Commission,
given the industry's recent experience with the COVID-19 crisis, and
consistent with the MRAC Report, to consider the implications that a
temporary outage at one or more SBSEFs or a major market disruption
would have for SBSs subject to the trade execution requirement. For
this reason, the commenter recommends that the Commission consider the
circumstances under which it would allow for a temporary suspension of
the trade execution requirement and any possible terms for such a
suspension, as well as any other relief measures the Commission may be
able to provide.\309\
---------------------------------------------------------------------------

    \308\ See ICI Letter, supra note 18, at 9.
    \309\ See id.
---------------------------------------------------------------------------

    The commenter's concern that an SBS may be required to be traded on
an SBSEF merely because a single SBSEF has listed that SBS, even if
there is no liquidity to sustain trading in that SBS, is addressed by
the requirements in Rule 816(b) that must be met by an SBSEF before it
submits a MAT determination under Rule 806 or Rule 807, as well as by
the Commission's ability to disapprove, or stay and then object to, any
MAT determination by an SBSEF. In considering an SBSEF's MAT
submission, the Commission will generally consider how many SBSEFs list
and trade a given SBS, as well as the liquidity and trading
characteristics of that SBS. Further, to the extent market
circumstances change to make a previous MAT determination unsuitable
for then-prevailing market conditions, and if the SBSEF that has made a
MAT determination is unwilling to withdraw that determination, the
Commission would be able to grant exemptive relief (including on an
emergency basis) pursuant to its authority in section 36 of the SEA in
order to address that situation.\310\ For these reasons, the Commission
would have the ability to address market circumstances that disrupt the
ability of market participants to trade SBS in compliance with the
trade execution requirement.
---------------------------------------------------------------------------

    \310\ See 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    Therefore, the Commission is adopting Rule 816(d) as proposed.
6. Rule 816(e)
    Paragraph (e) of Proposed Rule 816 has no analog in Sec.  37.10,
but instead is adapted from 17 CFR 36.1 of the CFTC's rules, which sets
out certain exemptions from the trade execution requirement. The
exemptions incorporated into Sec.  36.1 result from the CFTC's many
years of experience in administering the CEA's trade execution
requirement.
    Paragraph (e)(1) of Rule 816 provides that an SBS transaction that
is executed as a component of a package transaction and that also
includes a component transaction that is the issuance of a bond in a
primary market is exempt from the trade execution requirement in
section 3C(h) of the SEA. In addition, paragraph (e)(1) provides that,
for purposes of paragraph (e), a package transaction consists of two or
more component transactions executed between two or more counterparties
where: at least one component transaction is subject to the trade
execution requirement in section 3C(h) of the SEA; execution of each
component transaction is contingent upon the execution of all other
component transactions; and the component transactions are priced or
quoted together as one economic transaction with simultaneous or near-
simultaneous execution of all components.
    Paragraph (e)(2) of Rule 816, which is adapted from Sec.  36.1(b),
provides that section 3C(h) of the SEA does not apply to an SBS
transaction that qualifies for an exception \311\ under section 3C(g)
of the SEA, or any exemption from the clearing requirement that is
granted by the Commission, for which the associated requirements are
met.\312\ Unlike the CFTC, the Commission does not have a specific rule
to cite to regarding exemptions from the clearing requirement, so Rule
816(e)(2) would refer only generally to such exemptions.
---------------------------------------------------------------------------

    \311\ Section 3C(g) of the SEA is entitled ``Exceptions,'' not
``Exemptions.''
    \312\ As with section 2(h)(8) of the CEA, section 3C(h) of the
SEA provides that the trade execution requirement does not apply to
SBS that are excepted from the clearing requirement pursuant to
section 3C(g) of the SEA. However, the Commission could, like the
CFTC, grant exemptions from the clearing requirement pursuant to
other statutory authority, such as section 36 of the SEA.
---------------------------------------------------------------------------

    Paragraph (e)(3) of Rule 816, which is adapted from Sec.  36.1(c),
provides that section 3C(h) of the SEA does not apply to an SBS
transaction that is executed between counterparties that qualify as
``eligible affiliate counterparties.'' \313\ Counterparties would be
``eligible affiliate counterparties'' for purposes of Rule 816(e)(3)
if: (i) one counterparty, directly or indirectly, holds a majority
ownership interest in the other counterparty, and the counterparty that
holds the majority interest in the other counterparty reports its
financial statements on a consolidated basis under Generally Accepted
Accounting Principles (``GAAP'') or International Financial Reporting
Standards (``IFRS''), and such consolidated financial statements
include the financial results of the majority-owned counterparty; or
(ii) a third party, directly or indirectly, holds a majority ownership
interest in both counterparties, and the third party reports its
financial statements on a consolidated basis under GAAP or IFRS, and
such consolidated financial statements include the financial results of
both of the counterparties. In addition, for purposes of Rule
816(e)(3), a counterparty or third party directly or indirectly would
hold a majority ownership interest if it directly or indirectly holds a
majority of the equity securities of an entity, or the right to receive
upon dissolution, or the contribution of, a majority of the capital of
a partnership.
---------------------------------------------------------------------------

    \313\ Section 36.1(c) provides that section 2(h)(8) of the CEA
does not apply to a swap transaction that is executed between
counterparties that have eligible affiliate counterparty status
pursuant to paragraph (a) of Sec.  50.52 of the CFTC's rules, which
provides an exception from the clearing requirement for inter-
affiliate swaps, subject to conditions. Counterparties to a swap
that have eligible affiliate counterparty status may rely on the
Sec.  36.1(c) even if they clear the swap transaction. Since the
Commission does not have an equivalent to Sec.  50.52 to reference,
the Commission is instead defining the term ``eligible affiliate
counterparties'' directly in Rule 816(e)(3). These definitions are
closely modeled on the equivalent definitions used in Sec.  50.52,
which are incorporated into Sec.  36.1(c).
---------------------------------------------------------------------------

    The Commission received comments on Rule 816(e).\314\ One commenter
supports the proposed carve-out for package transactions.\315\ Another
commenter, however, states that the CFTC's rules for package
transactions were ``developed by the CFTC, initially via staff no-
action relief, after SEFs had adopted various MAT determinations and
market participants had provided input to the CFTC regarding the
particular types of package transactions

common in the market for the relevant types of MAT swaps.'' \316\ The
commenter states that it is for this reason that particular types of
package transactions addressed by the CFTC generally focus on
transactions common in the interest-rate swaps market, which make up
the majority of MAT swaps. In addition, the commenter asserts that the
current state of the CFTC's rules in this area reflect the culmination
of a phased implementation approach developed over time via no-action
letters. The commenter argues that, in light of this, it would be
better for the Commission to tailor its rules for package transactions
to address the particular market dynamics relevant to the SBS market
instead of those in the swaps market. The commenter recommends that the
Commission build into the MAT determination process a framework for
identifying what types of package transactions exist for prospective
MAT SBS and then develop tailored rules around the execution of such
transactions.\317\
---------------------------------------------------------------------------

    \314\ See ISDA-SIFMA Letter, supra note 18, at 9-10; SIFMA AMG
Letter, supra note 18, at 6.
    \315\ See SIFMA AMG Letter, supra note 18, at 6.
    \316\ ISDA-SIFMA Letter, supra note 18, at 9.
    \317\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

    The Commission does not agree that it is necessary to tailor the
Commission's rules for package transactions to address the particular
market dynamics relevant to the SBS market, because no MAT
determinations for SBS have been made, and no MAT determinations can
yet be made because no SBS are required to be cleared. Moreover, the
Commission does not yet have a sufficient basis on which to tailor the
rules for package transactions to address SBS market dynamics, because
the market dynamics relevant to trading of SBS on SBSEFs have yet to
develop. It would be preferable to address those dynamics with respect
to package transactions if and when it becomes necessary or appropriate
to do so, because, at that point, the Commission and commenters would
be better informed about the nature of trading various SBS on SBSEFs.
In the meantime, it is desirable for Rule 816(e) to be harmonized with
Sec.  36.1 of the CFTC's rules to promote similar treatment of package
trades, whether they involve SBS or swaps, as this will facilitate the
participation of current SEF participants on SBSEFs. If, after SBSEFs
have become operational and MAT determinations have been made, the
Commission observes that the rules for package transactions are no
longer suitable for the SBS market, the Commission could consider
amending Rule 816(e) at that time.
    For the reasons discussed above, the Commission is adopting Rule
816(e) as proposed.

G. Rule 817--Trade Execution Compliance Schedule

    Proposed Rule 817 is modeled on Sec.  37.12 of the CFTC's rules,
which is designed to inform market participants of the precise date on
which the trade execution requirement for a particular product
commences.\318\ Accordingly, paragraph (a) of Rule 817 provides that an
SBS transaction shall be subject to the requirements of section 3C(h)
of the SEA upon the later of (1) a determination by the Commission that
the SBS is required to be cleared as set forth in section 3C(a) or any
later compliance date that the Commission may establish as a term or
condition of such determination or following a stay and review of such
determination pursuant to section 3C(c) of the SEA and Rule 3Ca-1
thereunder; and (2) 30 days after the available-to-trade determination
submission or certification for that SBS is, respectively, deemed
approved under Rule 806 or deemed certified under Rule 807. Paragraph
(b) of Rule 817 also provides that a counterparty may voluntarily
comply with the trade execution requirement sooner than required by
paragraph (a).
---------------------------------------------------------------------------

    \318\ Rule 3Ca-1 under the SEA provides that the Commission may
determine, following a submission from a clearing agency, that an
SBS (or a group, category, type, or class of SBS) must be cleared.
This determination could follow a stay of the clearing requirement
for additional review. 17 CFR 240.3Ca-1.
---------------------------------------------------------------------------

    The Commission received several comment letters about the
sufficiency of the time period allotted for compliance with a MAT
determination.\319\ One commenter encourages the Commission to provide
an extended duration of time until any MAT determination becomes
effective so that asset managers and other market participants have
adequate time to make the necessary operational and market structure
arrangements to accommodate the trade execution requirement.\320\
Another commenter urges the Commission to ensure that all SBSEFs and
market participants have adequate time to prepare for the operational
and market conditions that come along with a MAT determination.\321\
---------------------------------------------------------------------------

    \319\ See Bloomberg Letter, supra note 18, at 16; ICI Letter,
supra note 18, at 8-9; ISDA-SIFMA Letter, supra note 18, at 5, SIFMA
AMG Letter, supra note 18, at 7; WMBAA Letter, supra note 18, at 5.
    \320\ See SIFMA AMG Letter, supra note 18, at 7.
    \321\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Some commenters recommend that a MAT determination not be effective
for at least 90 days.\322\ One commenter emphasizes that, after a MAT
determination, market participants should be provided with sufficient
time to comply with any new trade execution requirement, and that
commenter believes that market participants would benefit from 90 days
to comply.\323\ Another commenter, citing its experience with the MAT
requirement, states that it has observed that 30 days provides
insufficient time to adjust trading protocols and ensure a smooth
transition to trading on SEFs.\324\ In this regard, the commenter asks
the Commission to extend the time between when a MAT determination is
made and when it becomes effective from the proposed 30 days to 90
days. The commenter also asserts that this is consistent with the
recommendations of the CFTC MRAC report that examined the
appropriateness, efficacy, and sustainability of the MAT process.
---------------------------------------------------------------------------

    \322\ See Bloomberg Letter, supra note 18, at 16; ICI Letter,
supra note 18, at 8; ISDA-SIFMA Letter, supra note 18, at 5.
    \323\ See Bloomberg Letter, supra note 18, at 16.
    \324\ See ISDA-SIFMA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

    Another commenter also cites the CFTC MRAC's report in recommending
that the Commission provide 90 days after a MAT determination is final
before it becomes effective. This commenter emphasizes that market
participants will need an adequate compliance period after a mandatory
clearing determination is made and after the SBS is first made
available to trade on an SBSEF to prepare. The commenter expresses
concern that, under the proposed approach, if an SBS is made available
to trade fewer than 30 days before a mandatory clearing determination,
then the SBS would be subject to mandatory trading on an SBEF with a
less than 30-day compliance period. This commenter urges the Commission
to clarify that the scope of eligible SBS for MAT determination is
limited to only those that have already been determined to be subject
to mandatory clearing. This commenter also asserts that, even when an
SBS is already subject to mandatory clearing, the proposed 30-day
compliance period would still be inadequate given the complex
operational and technological steps that must be taken to trade a new
SBS on an SBSEF. The commenter states that market participants such as
regulated funds will need time to onboard to an SBSEF if necessary, and
to further update their systems, processes, and procedures to transact
via an SBSEF's order book or RFQ system.\325\
---------------------------------------------------------------------------

    \325\ See ICI Letter, supra note 18, at 3, 8.

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

    The Commission has considered commenters' requests for an extended
compliance period for the mandatory trading requirement once a MAT
determination has been made with respect to an SBS. The presence of
ready and willing buyers and sellers and the number and types of market
participants, among other things, are relevant factors in a MAT
determination under Rule 816(b).\326\ As noted above, the extent to
which a MAT determination is likely to be disruptive to the market for
a given SBS is best addressed in the context of making the MAT
determination, which, as discussed above, allows for the Commission
oversight of the determination through its review and approval or
disapproval of a filing under Rule 806, or through staying and seeking
public comment on a self-certification under Rule 807.\327\ Further,
with respect to the suggestion that the Commission clarify that the
scope of eligible SBS for MAT determination is limited to only those
that have already been determined to be subject to mandatory clearing,
a MAT determination filing would not have any relevance until there are
any SBSs subject to the clearing requirement.
---------------------------------------------------------------------------

    \326\ See supra section V.F.3.
    \327\ See supra section V.F.2.
---------------------------------------------------------------------------

    It is not necessary to revise the 30-day period for compliance with
a MAT determination, because the readiness of the market to comply with
a MAT determination for a particular SBS would be relevant to the MAT
determination itself, including the analysis of the six factors
enumerated in Rule 816(b), and because an analysis of that readiness
would best be undertaken based on the facts and circumstances attending
a specific MAT determination.
    For the reasons discussed above, the Commission is adopting Rule
817 as proposed.

VI. Implementation of Core Principles

    Section 3D(d) of the SEA \328\ sets forth 14 Core Principles with
which SBSEFs must comply. These provisions, with one exception,
correspond to the 15 Core Principles for SEFs set forth in section
5h(f) of the CEA.\329\
---------------------------------------------------------------------------

    \328\ 15 U.S.C. 78c-4(d).
    \329\ Compare 7 U.S.C. 7b-3(f) (enumerating 15 Core Principles
for SEFs), with 15 U.S.C. 78c-4(d) (enumerating 14 Core Principles
for SBSEFs). CEA Core Principle 6 for SEFs (Position Limits or
Accountability) has no analog in the SEA, so the numbering of the
subsequent Core Principles between the two statutes differs by one.

------------------------------------------------------------------------
          Core principle title                 CEA #           SEA #
------------------------------------------------------------------------
Compliance with Core Principles.........               1               1
Compliance with Rules...................               2               2
(Security-Based) Swaps Not Readily                     3               3
 Susceptible to Manipulation............
Monitoring of Trading and Trade                        4               4
 Processing.............................
Ability to Obtain Information...........               5               5
Position Limits or Accountability.......               6             n/a
Financial Integrity of Transactions.....               7               6
Emergency Authority.....................               8               7
Timely Publication of Trading                          9               8
 Information............................
Recordkeeping and Reporting.............              10               9
Antitrust Considerations................              11              10
Conflicts of Interest...................              12              11
Financial Resources.....................              13              12
System Safeguards.......................              14              13
Designation of Chief Compliance Officer.              15              14
------------------------------------------------------------------------

    It continues to be appropriate to closely harmonize with the CFTC
rules that implement the SEF Core Principles, although there are some
instances where close harmonization is not practicable. Where there are
substantive differences between an existing CFTC rule and the SEC rule
being adopted, the discussion below addresses those differences. The
discussion below will also address where there is not, or at least
there is not intended to be, a difference between the SEC rule and the
analogous existing CFTC rule.
    Part 37 of the CFTC's rules includes an appendix B, setting forth
``Guidance on, and Acceptable Practices in, Compliance with Core
Principles.'' The introduction to appendix B provides that the guidance
for the Core Principle is illustrative only and ``is not intended to be
used as a mandatory checklist.'' \330\ Where the CFTC has included
guidance and/or accepted practices pertaining to a Core Principle for
SEFs, the discussion below addresses how (if at all) the Commission has
incorporated the substance of these statements into Regulation SE.
---------------------------------------------------------------------------

    \330\ 17 CFR appendix-B-to-part-37 1.
---------------------------------------------------------------------------

A. Rule 818--Core Principle 1--Compliance With Core Principles

    Core Principle 1 \331\ requires an SBSEF, to be registered and
maintain registration as an SBSEF, and to comply with the Core
Principles and any requirement that the Commission may impose by rule
or regulation. Core Principle 1 also provides that an SBSEF shall have
reasonable discretion in establishing the manner in which it complies
with the Core Principles.\332\ Proposed Rule 818, like Sec.  37.100 of
the CFTC's rules, repeats the relevant statutory text of the Core
Principle.
---------------------------------------------------------------------------

    \331\ Section 3D(d)(1) of the SEA, 15 U.S.C. 78c-4(d)(1).
    \332\ CEA Core Principle 1 is substantively identical. See 7
U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

    The Commission received no comments on Proposed Rule 818 and is
adopting Rule 818 as proposed for the reasons stated in the Proposing
Release.

B. Rule 819--Core Principle 2--Compliance With Rules

    Core Principle 2 requires an SBSEF to establish and enforce
compliance with any rule that is established by the SBSEF, including
the terms and conditions of the SBS that it trades or processes, and
any limitation on access to the SBSEF.\333\ It further requires the
SBSEF to establish and enforce trading, trade processing, and
participation rules that will deter abuses, and to have the capacity to
detect, investigate, and enforce those rules, including the means to
provide market participants with impartial access to the market and to
capture information that may be used in establishing whether rule
violations have occurred. Finally, Core Principle 2 requires an SBSEF
to establish rules governing the operation of the facility, including
rules specifying trading procedures to be used in entering and
executing orders traded or posted on the

facility, including block trades. Core Principle 2 for SEFs \334\ is
substantively identical, except that it includes an additional
paragraph requiring a SEF to provide in its rules that, when a swap
dealer or major swap participant enters into or facilitates a swap that
is subject to the mandatory clearing requirement, the swap dealer or
major swap participant shall be responsible for compliance with the
trade execution requirement.\335\
---------------------------------------------------------------------------

    \333\ Section 3D(d)(2) of the SEA, 15 U.S.C. 78c-4(d)(2).
    \334\ 7 U.S.C. 7b-3(f)(2).
    \335\ See 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

    As described in the Proposing Release, the Commission modeled Rules
819 (a) through (g) on subpart C of part 37 of the CFTC's rules,\336\
and Rules 819 (h) through (k) on other parts of the CFTC's rules.\337\
---------------------------------------------------------------------------

    \336\ See Proposing Release, supra note 1, 87 FR at 28901-05.
    \337\ See id. at 28905-09.
---------------------------------------------------------------------------

1. Rule 819(a)--General
    Paragraph (a) of Proposed Rule 819, like Sec.  37.200 of the CFTC's
rules,\338\ would repeat the statutory text of Core Principle 2.\339\
The Commission did not receive any comments on Proposed Rule 819(a). It
is appropriate to repeat the statutory text of Core Principle 2 in Rule
819(a) and is adopting Rule 819(a) as proposed, except that it is
deleting the words ``including block trades,'' in light of its decision
not to adopt a definition of ``block trade.'' \340\
---------------------------------------------------------------------------

    \338\ 17 CFR 37.200; see also Proposing Release, supra note 1,
87 FR at 28901.
    \339\ See Proposing Release, supra note 1, 87 FR at 28902.
    \340\ See supra section V.E.1(c).
---------------------------------------------------------------------------

2. Rule 819(b)--Operation of Security-Based Swap Execution Facility and
Compliance With Rules
    Paragraph (b) of Proposed Rule 819 is closely modeled on Sec.
37.201 of the CFTC's rules,\341\ and would require an SBSEF to specify
trading procedures (including for block trades, if offered) and to
establish and impartially enforce compliance with the rules of the
SBSEF.\342\ The Commission did not receive any comments on Proposed
Rule 819(b). It is appropriate for an SBSEF to specify trading
procedures and to establish and impartially enforce compliance with its
rules, and the Commission is adopting Rule 819(b) as proposed, except
that it is deleting the words ``including block trades, if offered,''
in light of its decision not to adopt a definition of ``block trade,''
\343\ which will have no effect on the requirement as compared to the
proposed rule.
---------------------------------------------------------------------------

    \341\ 17 CFR 37.201; see also Proposing Release, supra note 1,
87 FR at 28901.
    \342\ See Proposing Release, supra note 1, 87 FR at 28902.
    \343\ See supra section V.E.1(c).
---------------------------------------------------------------------------

3. Rule 819(c)--Access Requirements
    Paragraph (c) of Proposed Rule 819 is closely modeled on Sec.
37.202 of the CFTC's rules,\344\ and would require an SBSEF, consistent
with section 3D(d)(2)(B)(i) of the SEA,\345\ to provide any ECP and any
independent software vendor with impartial access to its market(s) and
market services, including any indicative quote screens or any similar
pricing data displays. An SBSEF will also be required to establish
nondiscriminatory fee structures for ECPs and independent software
vendors based on the level of access to or services provided by the
SBSEF. Rule 819 further requires an SBSEF to establish and impartially
enforce rules governing any decision to allow, deny, suspend, or
permanently bar an ECP's access to the SBSEF, including when a decision
is made as part of a disciplinary or emergency action taken by the
SBSEF.
---------------------------------------------------------------------------

    \344\ 17 CFR 37.202; see also Proposing Release, supra note 1,
87 FR at 28901.
    \345\ 15 U.S.C. 78c-4(d)(2)(B)(i) (``a security-based swap
execution facility shall . . . establish and enforce trading, trade
processing, and participation rules that will deter abuses and have
the capacity to detect, investigate, and enforcement those rules,
including means . . . to provide market participants with impartial
access to the market'').
---------------------------------------------------------------------------

    Several commenters express general support for the adoption of
impartial access standards for SBSEFs.\346\ One commenter specifically
supports the Commission's close harmonization with CFTC rules.\347\
---------------------------------------------------------------------------

    \346\ See Citadel Letter, supra note 18, at 6-7; SIFMA AMG
Letter, supra note 18, at 4; MFA Letter, supra note 18, at 10.
    \347\ See MFA Letter, supra note 18, at 10.
---------------------------------------------------------------------------

    One commenter expresses support for Proposed Rule 819(c), but
states that the Commission's proposal does not provide market
participants with sufficient clarity regarding how Proposed Rule 819(c)
will be interpreted and applied in practice, and the commenter
encourages the Commission to provide in the final rule that access to
SBSEFs should be based on ``objective, pre-established'' criteria, and
that any ECP should be able to demonstrate financial soundness by
showing that it is a clearing member or that it has clearing
arrangements in place with a clearing member.\348\
---------------------------------------------------------------------------

    \348\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    This commenter states that the CFTC has provided market
participants with extensive guidance regarding impartial access and
encourages the Commission to provide similar clarity when finalizing
the SBSEF rules, including guidance with respect to membership
criteria, trading protocols and functionality, and fee arrangements.
Specifically, this commenter urges the Commission to provide in the
final rule that an SBSEF may not limit membership to (i) self-clearing
members; (ii) registered security-based swap dealers; (iii) banks or
liquidity providers with a minimum amount of Tier 1 capital; (iv)
liquidity providers that have been ``enabled'' by, or have bilateral
documentation with, a minimum number of other liquidity providers; or
(v) liquidity providers with a minimum amount of transaction
volume.\349\
---------------------------------------------------------------------------

    \349\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

    This commenter also states that SBSEFs should not be permitted to
apply trading protocols in a manner that results in impermissible
discrimination among market participants. Specifically, the commenter
states that SBSEFs should not allow participants to selectively
restrict their trading with other SBSEF participants through
``enablement mechanisms''; that market participants should be permitted
to act as both liquidity providers and liquidity takers on an SBSEF;
that all SBSEF participants should be permitted to both send and
receive RFQs (instead of only designated liquidity providers being
eligible to receive RFQs); and that SBSEFs should not be permitted to
require participants to have bilateral documentation in place to trade
cleared security-based swaps, as this could provide a pretext for some
participants to restrict trading with other participants. This
commenter further states that SBSEFs should not be permitted to use fee
arrangements to effect otherwise impermissible discrimination with
respect to access.\350\
---------------------------------------------------------------------------

    \350\ See id.
---------------------------------------------------------------------------

    Another commenter also urges the Commission to incorporate the
CFTC's impartial access requirement guidance with respect to SBSEFs,
which would assist market participants in interpreting how the
impartial access rules should work. Coordination of impartial access
``not only affects an entity operating both an SEF and SBSEF but also
their clients, many of whom use the same individual traders to trade
both instrument types.\351\ One commenter specifically encourages the
Commission to address the potential use of restrictive requirements to
obtain access to SBSEFs and to make clear that an SBSEF's reasonable
discretion in establishing access criteria must be impartial,

transparent, and applied in a fair and nondiscriminatory manner.\352\
---------------------------------------------------------------------------

    \351\ See MFA Letter, supra note 18, at 10.
    \352\ See SIFMA AMG Letter, supra note 18, at 4.
---------------------------------------------------------------------------

    One commenter states that the trading documentation requirement of
Rule 15Fi-5 may at times conflict with the impartial access requirement
of Proposed Rule 819(c) because it is unlikely that all SBSEF members
trading cleared swaps will have trading relationship documentation with
all other members trading cleared SBS.\353\ This commenter encourages
the Commission to adopt the CFTC guidance regarding enablement
mechanisms and states that such mechanisms were historically used to
eliminate credit risk, but that no such risk exists if an SBSEF
intended to be cleared is void ab initio if rejected for clearing.
---------------------------------------------------------------------------

    \353\ See Bloomberg Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

    The Commission agrees with commenters that impartial access to an
SBSEF encompasses both impartial access to membership in an SBSEF and
the ability to fully interact on the SBSEF's order book or RFQ system,
and that an SBSEF's rules must incorporate impartial criteria for this
access. The Commission expects that most, if not all, entities that
will seek SBSEF registration with the SEC are or will also be
registered as SEFs with the CFTC and that ensuring consistency of
access to SBSEFs and SEFs will provide market participants with greater
certainty about permissible practices regarding access to these
platforms.\354\ Efforts to undermine the principle of impartial access
may take myriad forms over time. The text of Rule 819(c) is consistent
with the text of Sec.  37.202 of the CFTC's regulations and emphasizes
the general principal that access to an SBSEF and its services must be
impartial. The Commission does not find it necessary to describe within
819(c) specific practices that would violate its requirements. For the
purposes of the Commission's review process for a denial or limitation
of access or membership that is inconsistent with Rule 918(c), the
Commission will apply a standard of review consistent with standards of
review that the Commission uses in similar contexts.\355\
---------------------------------------------------------------------------

    \354\ See Proposing Release, supra note 1, 87 FR at 28876.
    \355\ See Rule 819(c)(4). The Commission is adopting Rule 819(c)
with the addition of paragraph (c)(4). The Commission notes that the
CFTC has a standard of review applicable to its process. See 17 CFR
9.2(c); 17 CFR 9.33(c).
---------------------------------------------------------------------------

    The Commission is aware of the CFTC staff guidance on impartial
access related to Sec.  37.202 of the CFTC's regulations.\356\ The
Commission finds it is appropriate to similarly provide guidance as to
certain criteria or practices that are inconsistent with Rule 819(c)'s
requirement to provide impartial access. The Commission agrees that it
is inconsistent with providing impartial access for an SBSEF to limit
membership based on an ECP's status, such as by limiting membership to
(1) self-clearing members; (2) registered security-based swap dealers;
(3) banks or liquidity providers with a minimum amount of Tier 1
capital; (4) liquidity providers that have been ``enabled'' by, or have
bilateral documentation with, a minimum number of other liquidity
providers; or (5) liquidity providers with a minimum amount of
transaction volume.\357\ Access to an SBSEF generally should be
determined, for example, on an SBSEF's ``impartial evaluation of an
applicant's disciplinary history and financial and operational
soundness against objective, pre-established criteria.'' \358\ As one
example of such criteria, any ECP should be able to demonstrate
financial soundness either by showing that it is a clearing member of a
clearing agency that clears products traded on that SBSEF or by showing
that it has clearing arrangements in place with such a clearing
member.\359\
---------------------------------------------------------------------------

    \356\ See Division of Clearing and Risk, Division of Market
Oversight and Division of Swap Dealer and Intermediary Oversight
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities, CFTC (Nov. 14, 2013), available at<EMAIL_ADDRESS>    \357\ See Citadel Letter, supra note 18, at 6. Membership
requirements based on any combination of these factors would
similarly be inconsistent with providing impartial access.
    \358\ See 2013 CFTC Final SEF Rules Release, supra note 9, at 78
FR at 33598 (discussing ``impartial access'' to swap execution
facilities).
    \359\ See id. Similarly, it is not consistent with impartial
access for an SBSEF to require that an ECP have clearing
arrangements in order to trade security-based swaps that are not
intended to be cleared. In such a case, the SBSEF's standards of
financial soundness should be objective and impartial and should
have a relevant relationship to trading on the SBSEF.
---------------------------------------------------------------------------

    Further, providing impartial access as required by Proposed Rule
819(c) means providing all of an SBSEF's market participants--dealers
and non-dealers alike--with the ability to fully interact on the order
book or RFQ system as liquidity providers, liquidity takers, or both,
including viewing, placing, or responding to all indicative or firm
bids and offers and to place, receive, and respond to RFQs. Therefore,
it would be incompatible with impartial access for an SBSEF's rules to
permit mechanisms, schemes, functionalities, counterparty filters, or
other arrangements that prevent an SBSEF participant from interacting
or trading with, or viewing the bids and offers (firm or indicative)
displayed by, any other market participant on that SBSEF, whether by
means of any condition or restriction on its ability or authority to
display a quote to any other market participant or to respond to any
quote issued by any other market participant on that SBSEF with respect
to security-based swap transactions that are intended to be cleared.
    It is also inconsistent with impartial access for an SBSEF's rules
to require bilateral documentation or to permit bilateral enablements
in order to trade security-based swaps that are intended to be cleared,
because providing for such documentation or enablements solely to
address occasional trade rejections by a clearing agency would undercut
the ability of all ECPs to post or interact with interest on security-
based swaps that are intended to be cleared, and because such
documentation or enablements are unnecessary in light of the provisions
of Rule 815(g), which, as discussed supra section V.E.7, would require
an SBSEF's rules to provide that a trade that is intended to be cleared
at the time of the transaction, but is not accepted for clearing by a
registered clearing agency, is void ab initio. Providing that such
trades are void ab initio also reflects the economic reality that an
uncleared transaction is significantly different from a cleared
transaction in terms of the credit risk faced by the counterparties.
Lastly, it is inconsistent with impartial access for an SBSEF to employ
fee structures that would have a disproportionate or adverse effect on
certain market participants based on their status, as described
above,\360\ with respect to the ability to fully interact on the order
book or RFQ system as liquidity providers, liquidity takers, or both,
including viewing, placing, or responding to all indicative or firm
bids and offers and to place, receive, and respond to RFQs.
---------------------------------------------------------------------------

    \360\ See supra note 357 and accompanying text.
---------------------------------------------------------------------------

    With respect to the comment that the documentation requirements of
Rule 15Fi-5 may, at times, conflict with the impartial access
requirement of Proposed Rule 819(c), no such conflict exists, because
Rule 15Fi-5(a)(1)(ii) provides that the rule does not apply to cleared
swaps, and Rule 15Fi(a)(1)(iii) further provides that the rule does not
apply to security-based swap transactions executed anonymously on an
SBSEF or a national securities

exchange, provided that certain conditions are met.\361\
---------------------------------------------------------------------------

    \361\ See 17 CFR 240.15Fi-5(a)(1)(ii) and (iii). Rule 15Fi-
5(a)(1)(iii) provides in part that SBSs executed anonymously on an
SEF or a national securities exchange are exempt from the provisions
of Rule 15Fi-5, provided that: (1) the SBSs are intended to be
cleared and are actually submitted for clearing to a clearing
agency; (2) all terms of the SBSs conform to the rules of the
clearing agency; and (3) upon acceptance of such an SBS by the
clearing agency the original SBS is extinguished; the original SBS
is replaced by equal and opposite SBS with the clearing agency; and
all terms of the SBS conform to the product specifications of the
cleared SBS established under the clearing agency's rules. See 17
CFR 240.15Fi-5(a)(1)(iii).
---------------------------------------------------------------------------

4. Rule 819(d)--Rule Enforcement Program
    Paragraph (d) of Proposed Rule 819 is closely modeled on Sec.
37.203. Paragraph (d)(1) of Proposed Rule 819 would require an SBSEF to
prohibit abusive trading practices generally, enumerating certain
practices in particular.\362\ Paragraph (d)(2) would require an SBSEF
to have arrangements and resources for effective enforcement of its
rules, including the authority to collect information and documents on
both a routine and non-routine basis and to supervise its market to
determine whether a rule violation has occurred. Paragraph (d)(3) would
require an SBSEF to establish and maintain sufficient compliance staff
and resources to ensure that it can conduct effective audit trail
reviews, trade practice surveillance, market surveillance, and real-
time market monitoring. Paragraph (d)(4) would require an SBSEF to
maintain an automated trade surveillance system that meets certain
criteria. Paragraph (d)(5) would require real-time market monitoring of
all trading activity on the SBSEF. The SBSEF would also be required to
have the authority to adjust trade prices or cancel trades when
necessary to mitigate market disrupting events caused by malfunctions
in its system(s) or platform(s) or errors in orders submitted by
members. Paragraph (d)(6) is modeled on Sec.  37.203(f), again using
the same structure and rule text. Like Sec.  37.203(f), Rule 819(d)(6)
addresses investigations and investigation reports and includes
provisions relating to procedures, timeliness, the reporting
requirements when a reasonable basis does or does not exist for finding
a violation, and warning letters.\363\
---------------------------------------------------------------------------

    \362\ To promote uniformity throughout proposed Regulation SE,
it is appropriate to denote all persons who have a right to
participate in an SBSEF's market as ``members.''
    \363\ Rule 819(d)(6)(v) provides that the rules of an SBSEF may
authorize its compliance staff to issue a warning letter to a person
or entity under investigation or to recommend that a disciplinary
panel take such an action, and that no more than one warning letter
could be issued to the same person or entity found to have committed
the same rule violation within a rolling 12-month period.
---------------------------------------------------------------------------

    The Commission did not receive any comments on Rule 819(d) and is
adopting Rule 819(d) as proposed, except that, in light of its decision
not to adopt a definition of ``block trade,'' \364\ the Commission is
deleting the words ``block trades or other types of'' from the phrase
``pre-arranged trading (except for block trades or other types of
transactions approved by or certified to the Commission pursuant to
Sec.  242.806 or Sec.  242.807, respectively).'' While the deletion of
this text would remove an automatic exemption for block trades from the
prohibition against pre-arranged trading that an SBSEF's rules would be
required to include, it is appropriate given that a definition of block
trade has not been adopted. At such time as the Commission adopts a
definition of block trade, an SBSEF could submit a rule change under
Rule 806 or Rule 807 to address trades that meet the definition of
block trade.
---------------------------------------------------------------------------

    \364\ See supra section V.E.1(c).
---------------------------------------------------------------------------

5. Rule 819(e)--Regulatory Services Provided by a Third Party
    Paragraph (e) of Proposed Rule 819 is modeled on Sec.  37.204 and
would allow an SBSEF to contract with a regulatory services provider.
If it does so, the SBSEF would have to ensure that such provider has
the capacity and resources necessary to provide timely and effective
regulatory services, retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on
its behalf, hold regular meetings with the regulatory service provider,
and conduct periodic reviews of the adequacy and effectiveness of
services provided on its behalf. The SBSEF would at all times remain
responsible for the performance of any regulatory services received and
retain exclusive authority in all substantive decisions made by its
regulatory service provider.
    One commenter states that SBSEFs should be able to use regulatory
service providers and that the types of regulatory service providers
permitted under Proposed Rule 819(e)(1) are appropriate.\365\ Another
commenter also supports the use of regulatory service providers but
believes that the Commission should include DCMs among the types of
entities permitted to act as regulatory service providers, as they are
``uniquely qualified'' and are permitted to act as regulatory service
provider under the CFTC SEF regime.\366\ This commenter states that
DCMs have well-established regulatory protocols and are subject to CFTC
oversight, conduct regulatory activities similar to registered futures
associations, have developed expertise in securities markets, and are
permitted to list futures on individual stocks and to list swap
contracts for trading.\367\
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    \365\ See Bloomberg Letter, supra note 18, at 16.
    \366\ See ICE Letter, supra note 18, at 3.
    \367\ See id. at 3-4 (also stating that, for example, ICE
Futures U.S., Inc. is a DCM that provides regulatory services to
SEFs).
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    The Commission agrees that SBSEFs should be able to contract with
DCMS for the provision of regulatory services. As the commenter states,
DCMs have well-established regulatory protocols and are subject to CFTC
oversight, and they are permitted to act as regulatory service
providers for SEFs. Additionally, permitting an SBSEF to use the same
regulatory service provider as an affiliated SEF may create
efficiencies for both the SBSEF and SEF, while maintaining regulatory
oversight of the entity that is providing the regulatory services.
While the CFTC's regulation for SEFs does not contain a reciprocal
provision permitting national securities exchanges to perform
regulatory services for SEFs, harmonization in practical terms with
this aspect of the CFTC regime--i.e., so that DCMs can perform
regulatory services for both SBSEFs and SEFs--is appropriate in light
of the relative size of the SBSEF market compared to the swaps market
and because most if not all entities that will seek to register as
SBSEFs are already registered as SEFs. Significantly, regardless of the
type of entity acting as regulatory service provider for an SBSEF, the
SBSEF will at all times remain responsible for the performance of any
regulatory services received and retain exclusive authority in all
substantive decisions made by its regulatory service provider.
Accordingly, the Commission is adopting Rule 819(e) as amended to
permit SBSEFs to contract with DCMs for the provision of services to
assist in complying with the SEA and Commission rules thereunder, as
approved by the Commission.\368\
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    \368\ Specifically, the Commission is adding to Rule 819(e) the
language ``a board of trade designated as a contract market (under
section 5 of the Commodity Exchange Act)''--in other words, a DCM--
to the list of entities with which an SBSEF may enter into a
contract for the provision of regulatory services.
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6. Rule 819(f)--Audit Trail
    Paragraph (f) of Proposed Rule 819 is modeled on Sec.  37.205,
using the same paragraph structure and rule text. Paragraph (f) would
require an SBSEF to

capture and retain all audit trail data necessary to detect,
investigate, and prevent customer and market abuses, and imposes other
requirements on the SBSEF's audit trail pertaining to the records that
must be kept, electronic analysis capability, safe-storage capability,
and enforcement of the audit trail requirements.
    The Commission did not receive any comments on Proposed Rule
819(f). An audit trail is a crucial component of a trading venue's
ability to ensure compliance with its rules. These requirements should
be modeled on the parallel CFTC regulations regarding SEFs, as most, if
not all, entities that will register as SBSEFs will be SEFs registered
with the CFTC, and that consistent requirements will promote a
consistent approach to compliance. Accordingly, the Commission is
adopting Rule 819(f) as proposed, with minor technical
modifications.\369\
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    \369\ The Commission has corrected a reference to Core Principle
9 and corrected the phrase ``account(s) owner(s)'' to read
``account's owner(s).''
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7. Rule 819(g)--Disciplinary Procedures and Sanctions
    Paragraph (g) of Proposed Rule 819 is based on Sec.  37.206 of the
CFTC's rules and generally tracks all of its rule text but would
include additional language derived from guidance in appendix B of part
37 of the CFTC's rules. Converting the guidance to rule text, and thus
grouping conceptually related items together, yields the most coherent
and readable ruleset, instead of incorporating the guidance into a
stand-alone section of the rules. Accordingly, paragraph (g)(1)(i) of
Proposed Rule 819 is taken from Sec.  37.206(a) and would require an
SBSEF to establish and maintain sufficient enforcement staff and
resources to effectively and promptly prosecute possible rule
violations within the disciplinary jurisdiction of the SBSEF.
Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B
guidance and would provide, respectively, that:
     The enforcement staff of an SBSEF shall \370\ not include
members or other persons whose interests conflict with their
enforcement duties.
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    \370\ In this bullet and the next bullet, the word used in the
corresponding CFTC guidance was ``should,'' but the Commission
proposed to replace ``should'' with ``shall'' in both places to
convert the guidance into an enforceable rule.
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     A member of the enforcement staff shall not operate under
the direction or control of any person or persons with trading
privileges at the SBSEF.
     The enforcement staff of an SBSEF may operate as part of
the SBSEF's compliance department.
    Paragraph (g)(2) of Rule 819 is modeled on Sec.  37.206(b) and
would require an SBSEF to establish one or more disciplinary panels
that are authorized to fulfill their obligations under Proposed Rule
819. Section 37.206(b) provides that disciplinary panels must meet the
composition requirements of part 40. To help ensure fairness and
prevent special treatment or preference of any person or member and to
provide for consistency in the makeup of members of SBSEF major
disciplinary committees and hearing panels, the Commission proposed
instead to require the disciplinary panels established under Proposed
Rule 819(g)(2) to meet the composition requirements of Rule 834(d),
which apply to each major disciplinary committee and hearing panel of
an SBSEF.\371\
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    \371\ Proposed Rule 834(d) would require each SBSEF and SBS
exchange to ensure that its disciplinary processes preclude any
member, or group or class of its members, from dominating or
exercising disproportionate influence on the disciplinary process,
and that each major disciplinary committee or hearing panel include
sufficient different groups or classes of its members so as to
ensure fairness and to prevent special treatment or preference for
any person or member in the conduct of the responsibilities of the
committee or panel. See infra section VIII.
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    Paragraphs (g)(3) through (8) of Proposed Rule 819 have no parallel
in Sec.  37.206 itself but derive from the guidance in appendix B
pertaining to Sec.  37.206, following the paragraph structure and
wording of the guidance closely. Paragraph (g)(3) would impose
procedural requirements relating to the notice of charges made to a
respondent. Paragraph (g)(4) would provide that a respondent has a
right to representation. Paragraph (g)(5) would provide that a
respondent must be given adequate time to respond to any charges.
Paragraph (g)(6) would state that the rules of an SBSEF may provide
that, if a respondent admits or fails to deny any of the charges, a
disciplinary panel may find that the violations alleged in the notice
of charges have been committed. Paragraph (g)(6) would further state
that, if the SBSEF's rules so provide, then: (i) The disciplinary panel
may impose a sanction for each violation found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and (iii) The
rules of the SBSEF may provide that, if a respondent fails to request a
hearing within the period of time stated in the notice, the respondent
will be deemed to have accepted the sanction.
    Paragraph (g)(7) of Proposed Rule 819 would provide that, where a
respondent has requested a hearing on a charge that is denied, or on a
sanction set by the disciplinary panel, the respondent shall be given
an opportunity for a hearing in accordance with the rules of the SBSEF.
Paragraph (g)(8) would address settlement offers.
    Paragraph (g)(9) of Proposed Rule 819 returns to the text of Sec.
37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is
modeled on Sec.  37.206(c)(1) and would require an SBSEF to have rules
requiring a hearing to be fair, conducted before members of the
disciplinary panel, and promptly convened after reasonable notice to
the respondent. The Commission proposed an additional provision, which
derives from the guidance, that an SBSEF need not apply the formal
rules of evidence for a hearing; nevertheless, the procedures for the
hearing may not be so informal as to deny a fair hearing.
    Paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 are also
adapted from the guidance in appendix B of part 37. Paragraph
(g)(9)(ii) would bar a member of the disciplinary panel for the hearing
from having a financial, personal, or other direct interest in the
matter under consideration. Paragraph (g)(9)(iii) would address the
respondent's access to evidence in the SBSEF's possession. Paragraph
(g)(9)(iv) would provide that the SBSEF's enforcement and compliance
staffs shall \372\ be parties to the hearing, and the enforcement staff
shall present their case on those charges and sanctions that are the
subject of the hearing. Paragraph (g)(9)(v) would provide that the
respondent shall be entitled to appear personally at the hearing, to
cross-examine any persons appearing as witnesses at the hearing, to
call witnesses, and to present such evidence as may be relevant to the
charges. Paragraph (g)(9)(vi) would provide that the SBSEF shall
require persons within its jurisdiction who are called as witnesses to
participate in the hearing and produce evidence.
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    \372\ The CFTC's guidance in appendix B that is adapted into
paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 uses the
word ``should'' here and in other similar instances. The Commission
uses the word ``shall'' in such instances instead.
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    Paragraph (g)(9)(vii) of Proposed Rule 819 is modeled on the text
of Sec.  37.206(c)(2) and would require that, if the respondent has
requested a hearing, a copy of the hearing shall be made and shall
become a part of the record of the proceeding. Paragraph (g)(9)(vii)
would not require the record to be transcribed

unless the transcript is requested by Commission staff or the
respondent, the decision is appealed pursuant to the rules of the
SBSEF, or the decision is reviewed by the Commission pursuant to Sec.
201.442.\373\ In all other instances, a summary record of a hearing is
permitted.
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    \373\ See infra section XIV.E (discussing Rule 442, which
establishes the right to appeal to the Commission certain actions
taken by an SBSEF and sets out certain procedural matters relating
to any such appeal).
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    Paragraph (g)(10) of Proposed Rule 819 is modeled on Sec.
37.206(d) and would provide that, promptly following a hearing
conducted in accordance with the rules of the SBSEF, the disciplinary
panel shall render a written decision based upon the weight of the
evidence contained in the record of the proceeding and shall provide a
copy to the respondent. The written decision must include six
enumerated elements, all of which are closely modeled on those in Sec.
37.206(d).
    Paragraph (g)(11) of Proposed Rule 819 would address emergency
disciplinary actions and is drawn from the guidance in appendix B of
part 37. It would provide that an SBSEF may impose a sanction,
including suspension, or take other summary action against a person or
entity subject to its jurisdiction upon a reasonable belief that such
immediate action is necessary to protect the best interest of the
market place. Furthermore, any emergency disciplinary action would have
to be taken in accordance with an SBSEF's procedures that provide for
notice (if practicable), rights for representation in all proceedings,
an opportunity for a hearing as soon as reasonably practicable, and the
rendering of a written decision promptly following the hearing based
upon the weight of the evidence contained in the record. Proposed Rule
819(g)(11) would seek to balance the need to allow an SBSEF to take
summary action against the need to afford due process to
respondents.\374\
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    \374\ Compare Proposed Rule 819(g)(11)(i) (allowing an SBSEF to
impose a sanction, including suspension, or take other summary
action against a person or entity subject to its jurisdiction upon a
reasonable belief that such immediate action is necessary to protect
the best interest of the market place), with Proposed Rule
819(g)(11)(ii)(A) (providing that, if practicable, a respondent
should be served with a notice before the action is taken, or
otherwise at the earliest possible opportunity).
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    Paragraph (g)(12) of Proposed Rule 819 also is drawn from the
appendix B guidance and would provide that, if the rules of the SBSEF
permit appeals,\375\ the SBSEF shall establish an appellate panel that
is authorized to hear appeals. The composition of the panel would have
to be consistent with Rule 834(d) \376\ and could not include any
members of the SBSEF's compliance staff or any person involved in
adjudicating any other stage of the same proceeding. Promptly following
the appeal or review proceeding, the appellate panel would be required
to issue a written decision and to provide a copy to the respondent. As
to the Commission's process of reviewing disciplinary actions, the
Commission will apply a standard of review consistent with standards of
review that the Commission uses in similar contexts.\377\
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    \375\ Neither Sec.  37.206 nor the associated guidance from
appendix B requires a SEF to allow appeals. The guidance states,
rather, that a SEF's rules ``may permit'' appeals and includes
certain procedural requirements only if the rules of a swap
execution facility permit appeals. The Commission adhered to this
permissive approach in the proposal but sought comment on whether
the final rules should require an SBSEF to create an appeals
procedure.
    \376\ See infra section VIII.D.
    \377\ See Rule 819(g)(14); see also supra note 355.
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    Paragraph (g)(13) of Proposed Rule 819 is adapted partly from Sec.
37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i)
is drawn from Sec.  37.206(e) and would provide that all disciplinary
sanctions imposed by an SBSEF or its disciplinary panels shall be
commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other members.
All disciplinary sanctions, including sanctions imposed pursuant to an
accepted settlement offer, would have to take into account the
respondent's disciplinary history. In the event of demonstrated
customer harm, any disciplinary sanction would have to include full
customer restitution, except where the amount of restitution or to whom
it should be provided cannot be reasonably determined. Paragraph
(g)(13)(i) is adapted from the appendix B guidance and would allow an
SBSEF to adopt a summary fine schedule for violations of rules relating
to the failure to timely submit accurate records required for clearing
or verifying each day's transactions.
    The Commission received no comments on Proposed Rule 819(g) and,
apart from the addition of paragraph (g)(14) regarding Commission
review,\378\ is adopting Rule 819(g) as proposed for the reasons stated
in the Proposing Release.
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    \378\ See supra note 377 and accompanying text.
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8. Rule 819(h)--Activities of Security-Based Swap Execution Facility's
Employees, Governing Board Members, Committee Members, and Consultants
    Paragraph (h) of Proposed Rule 819 would generally prohibit persons
who are employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Proposed Rule 819(h) is modeled
on Sec.  1.59 of the CFTC's rules, which requires a SEF (among other
CFTC-regulated entities) to place restrictions on trading by its
governing board members, committee members, consultants, and employees
and to prohibit any such person from disclosing any material, non-
public information obtained as a result of their official duties with
the SRO.
    Paragraph (h)(2)(i) of Proposed Rule 819 would require an SBSEF to
maintain in effect rules that, at a minimum, prohibit an employee of
the SBSEF from trading, directly or indirectly, any ``covered
interest.'' Proposed Rule 819(h)(1)(i) would define ``covered
interest'' to mean, with respect to an SBSEF: an SBS that trades on the
SBSEF; a security of an issuer that has issued a security that
underlies an SBS that is listed on the SBSEF; or a derivative based on
a security that falls within the immediately preceding prong. The
opportunity to observe order submission and trading in an SBS on an
SBSEF could yield material non-public information about the future
performance not just of that SBS, but of all securities issued by that
entity.\379\
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    \379\ The single-name CDS market, in particular, is a market for
assessing the creditworthiness of particular issuers. Non-public
information derived from activity on the SBSEF pertaining to the
market's assessment of an issuer's creditworthiness is likely to be
material to the markets for that issuer's cash securities as well as
to markets for derivatives based on the issuer's cash securities
(e.g., single-stock options).
---------------------------------------------------------------------------

    Paragraph (h)(2)(ii), modeled on Sec.  1.59(b)(1)(ii), would
prohibit an SBSEF employee from disclosing to any other person any
material non-public information that the employee obtains as a result
of their employment at the SBSEF, and where the employee has or should
have a reasonable expectation that the information disclosed may assist
another person in trading any covered interest. In addition, paragraph
(h)(2)(ii), like Sec.  1.59(b)(1)(ii), would provide an exception for
disclosures made in the course of an employee's duties, or disclosures
made to another SBSEF, court of competent jurisdiction, or
representative of any agency or department of the Federal or State

government acting in their official capacity.
    Paragraph (h)(3) of Proposed Rule 819, modeled on Sec.  1.59(b)(2),
would allow an SBSEF to adopt rules setting forth circumstances under
which exemptions from the employee trading prohibition may be granted.
In particular, paragraph (h)(3) would include the following possible
carve-outs from the employee trading prohibition: (1) participation by
an employee in a ``pooled investment vehicle'' where the employee has
no direct or indirect control with respect to transactions executed for
or on behalf of such vehicle; (2) trading by an employee in a