resumed its normal operations would be part of the reporting sides'
reporting obligations under Rule 901. The requirement to disseminate
transaction reports held in queue should not present any costs in
addition to those already contained in Rule 902. The Commission
believes that the systems of the SDR would already have to account for
system upgrades and maintenance, power outages, system overloads or
other malfunctions or contingencies and as a result there would not be
any additional quantifiable costs to also account for normal closing
hours. Furthermore, to the extent that market participants have already
expended resources in anticipation of the adoption of Regulation SBSR,
the costs could be significantly lower. As a result, the Commission's
estimates should be viewed as an upper bound of the potential costs of
Regulation SBSR.
    After reviewing comment letters received in response to the
Regulation SBSR Proposing Release and the Cross-Border Proposing
Release, the Commission continues to believe that these cost estimates
pertaining to Rule 904, as adopted, remain valid. The Commission has
received no comments to the contrary.
b. Error Reporting--Rule 905
    Rule 905 requires any counterparty to a security-based swap that
discovers an error in previously-reported information to take action to
ensure that corrected information is provided to the registered SDR to
which the initial transaction was reported. The rule also requires a
registered SDR to verify any error reports that it receives and correct
and, if necessary, publicly disseminate a corrected transaction report.
This rule should enhance the overall reliability of security-based swap
transaction data that must be maintained by registered

SDRs. For registered SDRs, the ability to verify disputed information,
process a transaction report cancellation, accept a new security-based
swap transaction report, and update relevant records are all
capabilities that the registered SDR must implement to comply with its
obligations under Regulation SBSR. Likewise, to comply with Rule 905, a
registered SDR must disseminate a corrected transaction report in
instances where the initial report included erroneous primary trade
information. This will allow market observers to receive updated
transaction information from the same source that publicly disseminated
the original transaction and allow them to integrate updated
transaction information into their understanding of the security-based
swap market.
    Requiring participants to promptly correct erroneous transaction
information should help ensure that the Commission and other relevant
authorities have an accurate view of risks in the security-based swap
market. Correcting inaccurate security-based swap transaction data held
by a registered SDR also could benefit market participants by helping
them to accurately value the security-based swaps they carry on their
books.
    The Commission believes that the costs of requirements under these
rules will be related to developing and publicly providing the
necessary protocols for carrying out error correction and reporting.
    Rule 905(a), as adopted, establishes procedures for correcting
errors in reported and disseminated security-based swap information,
recognizing that any system for transaction reporting must accommodate
for the possibility that certain data elements may be incorrectly
reported. Rule 905(b), as adopted, sets forth the duties of a
registered SDR to verify disputed information and make necessary
corrections. If the registered SDR either discovers an error in a
transaction on its system or receives notice of an error from a
counterparty, Rule 905(b)(1) requires the registered SDR to verify the
accuracy of the terms of the security-based swap and, following such
verification, promptly correct the erroneous information contained in
its system. Rule 905(b)(2) will further require that, if the erroneous
transaction information contained any data that fall into the
categories enumerated in Rule 901(c) as information required to be
reported, the registered SDR would be required to publicly disseminate
a corrected transaction report of the security-based swap promptly
following verification of the trade by the counterparties to the
security-based swap.
    The Commission continues to believe that promptly submitting an
amended transaction report to the appropriate registered SDR after
discovery of an error as required under Rule 905(a)(2) will impose
costs on reporting sides. Likewise, the Commission continues to
believes that promptly notifying the relevant reporting side after
discovery of an error as required under Rule 905(a)(1) will impose
costs on non-reporting-party participants.
    With respect to reporting side, the Commission continues to believe
that Rule 905(a) will impose an initial, one-time cost associated with
designing and building the reporting entity's reporting system to be
capable of submitting amended security-based swap transactions to a
registered SDR. In addition, reporting sides will face ongoing costs
associated with supporting and maintaining the error reporting
function.\1313\
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    \1313\ The Commission continues to believe that the actual
submission of amended transaction reports required under Rule
905(a)(2) would not result in material, independent costs because
this would be done electronically though the reporting system that
the reporting party must develop and maintain to comply with Rule
901. The costs associated with such a reporting system are addressed
in the Commission's analysis of Rule 901. See supra Section
XXII(C)(1)(b).
---------------------------------------------------------------------------

    The Commission continues to believe that designing and building
appropriate reporting system functionality to comply with Rule
905(a)(2) will be a component of, and represent an incremental ``add-
on'' to, the cost to build a reporting system and develop a compliance
function as required under Rule 901.
    The Commission estimates this incremental burden to be equal to 5%
of the one-time and annual costs associated with designing and building
a reporting system that is in compliance with Rule 901,\1314\ plus 10%
of the corresponding one-time and annual costs associated with
developing the reporting side's overall compliance program required
under Rule 901.\1315\ Thus, for reporting sides, the Commission
estimates that Rule 905(a) will impose an initial (first-year)
aggregate cost of $3,547,500, which is approximately $11,825 per
reporting side,\1316\ and an ongoing aggregate annual cost of
$1,192,500, which is approximately $4,000 per reporting side.\1317\
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    \1314\ See Regulation SBSR Proposing Release, 75 FR 75271-72.
    \1315\ See id.
    \1316\ This figure is calculated as follows: [((($49,000 one-
time reporting system development costs) x (0.05)) + (($2,500 annual
maintenance of reporting system) x (0.05)) + (($54,000 one-time
compliance program development) x (0.1)) + (($38,500 annual support
of compliance program) x (0.1))) x (300 reporting sides)] =
$3,547,500, or $11,825 per reporting side.
    \1317\ This figure is calculated as follows: [((($2,500 annual
maintenance of reporting system) x (0.05)) + ((38,500 annual support
of compliance program) x (0.1))) x (300 reporting sides)] =
$1,192,500, or approximately $4,000 per reporting side.
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    With regard to participants who are not assigned the duty to report
a particular transaction, the Commission believes that Rule 905(a) will
impose an initial and ongoing cost associated with promptly notifying
the relevant reporting side after discovery of an error as required
under Rule 905(a)(1). The Commission estimates that such annual cost
will be approximately $64,000,000, which corresponds to approximately
$13,000 per participant.\1318\ This figure is based on the Commission's
estimates of (1) 4,800 participants; and (2) 1.14 transactions per day
per participant.\1319\
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    \1318\ This figure is based on the following: [(1.14 error
notifications per non-reporting-side participant per day) x (365
days/year) x (Compliance Clerk (0.5 hours/report) at $64 per hour) x
(4,800 participants)] = $63,912,960, or approximately $64,000,000,
which corresponds to approximately $13,000 per participant.
    \1319\ This figure is based on the following: [((2 million
estimated annual security-based swap transactions)/(4,800
participants))/(365 days/year)] = 1.14 transactions per day.
---------------------------------------------------------------------------

    Rule 905 also imposes duties on security-based swap counterparties
and registered SDRs to correct errors in reported and disseminated
information.
    The costs associated with establishing these capabilities,
including systems development, support, and maintenance, are largely
addressed in the Commission's analysis of those rules.\1320\ The
Commission estimates that to develop and publicly provide the necessary
protocols for carrying out these functions would impose on each
registered SDR a cost of approximately $200,000.\1321\ The Commission
estimates that to review and update such protocols will impose an
annual cost on each registered SDR of $400,000.\1322\
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    \1320\ See SDR Adopting Release, Sections VIII and IX.
    \1321\ This figure is based on the following: [(Sr. Programmer
(80 hours) at $303 per hour) + (Compliance Manager (160 hours) at
$283 per hour) + (Compliance Attorney (250 hours) at $334 per hour)
+ (Compliance Clerk (120 hours) at $64 per hour) + (Sr. Systems
Analyst (80 hours) at $260 per hour) + (Director of Compliance (40
hours) at $446 per hour) = $199,340, or approximately $200,000 per
registered SDR.
    \1322\ This figure is based on the following: [(Sr. Programmer
(160 hours) at $303 per hour) + (Compliance Manager (320 hours) at
$283 per hour) + (Compliance Attorney (500 hours) at $334 per hour)
+ (Compliance Clerk (240 hours) at $64 per hour) + (Sr. Systems
Analyst (160 hours) at $260 per hour) + (Director of Compliance (80
hours) at $446 per hour)] = $398,680, or approximately $400,000 per
registered SDR.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the initial aggregate

annual cost on registered SDRs under Rule 905, as adopted, will be
approximately $6,000,000, which corresponds to approximately $600,000
for each registered SDR.\1323\ The Commission further estimates that
the ongoing aggregate annual cost on registered SDRs under Rule 905, as
adopted, will be approximately $4,000,000, which corresponds to
approximately $400,000 for each registered SDR.
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    \1323\ This figure is based on the following: [($199,340 to
develop protocols) + ($398,680 for annual support)) x (10 registered
SDRs)] = $5,980,200, or approximately $6,000,000, which corresponds
to approximately $600,000 per registered SDR.
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c. Other Participants' Duties--Rule 906
    Rule 906(a) requires a registered SDR to send a notice to security-
based swap counterparties that are participants of that SDR about any
UIC information missing from transaction reports. Rule 906(a) also
obligates such participants to provide the missing UIC information to
the registered SDR upon receipt of such notice. Rule 906(a) is designed
to enable a registered SDR to obtain a complete record of the necessary
information for each security-based swap transaction and thereby enable
the Commission and other relevant authorities to obtain a comprehensive
picture of security-based swap transactions, which will facilitate
surveillance and supervision of the security-based swap markets. More
complete security-based swap records may provide the Commission
necessary information to investigate specific transactions and market
participants.
    Rule 906(b) is designed to enhance the Commission's ability to
monitor and surveil the security-based swap markets by requiring each
participant of a registered SDR to report the identity of its ultimate
parent and any affiliates that also are participants of that registered
SDR. Obtaining this ultimate parent and affiliate information will be
helpful for understanding the risk exposures of not only individual
participants, but also for related participants operating within a
larger financial group. The Commission expects these costs of requiring
participants to provide ultimate parent and affiliate information to
registered SDRs will be modest and, in any event, believes that the
costs of providing this information are justified. Having information
on the ultimate parent and affiliate would enhance the ability of the
Commission to monitor security-based swap exposures within ownership
groups, allowing it to better assess the overall risk exposure of these
groups. The Commission is also attempting to reduce these burdens by
requiring participants to report the identity only of their ultimate
parent(s) but not any intermediate parent(s). The Commission further
notes that a participant is not required to provide any information
about an affiliate, other than its counterparty ID.\1324\ The
participant is not required to provide any transaction or other
information on the affiliate's behalf.
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    \1324\ The Commission does not believe that the change in Rule
906(b) from ``participant ID'' to ``counterparty ID'' will result in
any change in the cost to participants. The information to be
provided is similar in scope and will, in the Commission's
estimation, better accomplish the objective of ensuring that a
registered SDR can identify each counterparty to a security-based
swap.
---------------------------------------------------------------------------

    Rule 906(c) is designed to enhance the overall reliability
security-based swap transaction data that is required to be reported to
a registered SDR pursuant to Rule 901 by requiring registered security-
based swap dealers and registered major security-based swap
participants to establish, maintain, and enforce written policies and
procedures addressing compliance with Regulation SBSR. Rule 901(a)
should result in reliable reporting of security-based swap transaction
data by requiring key participants to focus internal procedures on the
reporting function. Reliable reporting would benefit counterparties,
relevant authorities, and the market generally, by reducing the
likelihood of errors in regulatory and publicly disseminated data. This
could allow relevant authorities and the public to have confidence in
the data and minimize the need to make corrections in the future.
    The Commission believes that the costs of requirements under these
rules will be related to developing the written policies and procedures
necessary to satisfy Rule 901's reporting requirements. Once
development is complete, SDRs will face ongoing costs associated with
maintaining and enforcing these policies and procedures.
    Rule 906(a) requires a registered SDR, once a day, to send a report
to each participant identifying, for each security-based swap to which
that participant is a counterparty, any security-based swap(s) for
which the registered SDR lacks counterparty ID and (if applicable)
broker ID, trading desk ID, and trader ID. Rule 906(a) requires a
participant that receives such a report to provide the missing
information to the registered SDR within 24 hours. Rule 906(b) requires
participants to provide a registered SDR with information identifying
the participant's affiliate(s) that are also participants of the
registered SDR, as well as its ultimate parent(s). Additionally, under
Rule 906(b), participants are required to promptly notify the
registered SDR of any changes to the information previously provided.
Rule 906(c) requires a participant that is a registered security-based
swap dealer or registered major security-based swap participant to
establish, maintain, and enforce written policies and procedures that
are reasonably designed to ensure compliance with any security-based
swap transaction reporting obligations in a manner consistent with
Regulation SBSR.
    Rule 906(a) requires a participant that receives a daily report
from a registered SDR to provide the missing UICs to the registered SDR
within 24 hours. The Commission believes that Rule 906(a) will result
in an initial and ongoing aggregate annual cost for all participants
since even participants that are the reporting side for some
transactions will be the non-reporting side for other transactions. The
Commission estimates that Rule 906(a) will result in an initial and
ongoing aggregate annual cost for participants of approximately
$12,800,000, which corresponds to a cost of approximately $2,700 per
participant.\1325\ This figure was based on the Commission's
preliminary estimates of (1) 4,800 participants and (2) 1.14
transactions per day per participant.\1326\
---------------------------------------------------------------------------

    \1325\ This figure is based on the following: [(1.14 missing
information reports per participant per day) x (365 days/year) x
(Compliance Clerk (0.1 hours) at $64 per hour) x (4,800
participants)] = $12,782,592, or approximately $12,800,000, which
corresponds to approximately $2,700 per participant.
    \1326\ This figure is based on the following: [((2 million
estimated annual security-based swap transactions)/(4,800
participants))/(365 days/year)] = 1.14 transactions per day. See
supra Section XXI.
---------------------------------------------------------------------------

    Rule 906(b) requires every participant to provide a registered SDR
an initial parent/affiliate report, using ultimate parent IDs and
counterparty IDs, and updating that information, as necessary. The
Commission continues to believe that the cost for each participant to
submit an initial or update report will be $32.\1327\ The Commission
estimates that each participant will submit two reports each
year.\1328\ In addition, the Commission estimates that there may be
4,800 security-based swap participants and that each one may connect to
two registered SDRs. Accordingly, the Commission estimates that the
initial and ongoing aggregate annual cost

associated with Rule 906(b) will be $614,400, which corresponds to $128
per participant.\1329\
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    \1327\ This figure is based on the following: [(Compliance Clerk
(0.5 hours) at $64 per hour) x (1 report)] = $32.
    \1328\ During the first year, the Commission believes each
participant would submit its initial report and one update report.
In subsequent years, the Commission estimates that each participant
would submit two update reports.
    \1329\ This figure is based on the following: [($32/report) x (2
reports/year/registered SDR connection) x (2 registered SDR
connections/participant) x (4,800 participants)] = $614,400, which
corresponds to $128 per participant.
---------------------------------------------------------------------------

    Rule 906(c) requires each participant of a registered SDR that is a
registered security-based swap dealer or registered major security-
based swap participant to establish, maintain, and enforce written
policies and procedures that are reasonably designed to ensure
compliance with any security-based swap transaction reporting
obligations in a manner consistent with Regulation SBSR.\1330\ Rule
906(c) also requires the review and updating of such policies and
procedures at least annually. The Commission continues to estimate that
developing and implementing written policies and procedures as required
under the Rule 906 could result in a one-time initial cost to each
registered security-based swap dealer or registered major security-
based swap participant of approximately $58,000.\1331\ This figure
includes the estimated cost to develop a set of written policies and
procedures, program systems, implement internal controls and oversight,
train relevant employees, and perform necessary testing.\1332\ In
addition, the Commission estimates that the annual cost to maintain
such policies and procedures, including a full review at least
annually, as required under the adopted rule, will be approximately
$34,000 for each registered security-based swap dealer or registered
major security-based swap participant.\1333\ This figure is based on an
estimate of the cost to review existing policies and procedures, make
any necessary updates, conduct ongoing training, maintain relevant
systems and internal controls systems, and perform necessary testing.
---------------------------------------------------------------------------

    \1330\ As is explained in the Paperwork Reduction Act
discussion, the Commission estimates that there will be
approximately 50 registered security-based swap dealers and 5
registered major security-based swap participants for a total of 55
respondents. See supra Section XXII(C)(1)(b)(i).
    \1331\ The Commission derived its estimate from the following:
[(Sr. Programmer (40 hours) at $303 per hour) + (Compliance Manager
(40 hours) at $283 per hour) + (Compliance Attorney (40 hours) at
$334 per hour) + (Compliance Clerk (40 hours) at $64 per hour) +
(Sr. Systems Analyst (32 hours) at $260 per hour) + (Director of
Compliance (24 hours) at $446 per hour)] = $58,384, or approximately
$58,000 per covered participant.
    \1332\ See Cross-Border Proposing Release, 78 FR 30994, note
256.
    \1333\ The Commission derived its estimate from the following:
[(Sr. Programmer (8 hours) at $303 per hour) + (Compliance Manager
(24 hours) at $283 per hour) + (Compliance Attorney (24 hours) at
$334 per hour) + (Compliance Clerk (24 hours) at $64 per hour) +
(Sr. Systems Analyst (16 hours) at $260 per hour) + (Director of
Compliance (24 hours) at $446 per hour)] = $33,632, or approximately
$34,000 per covered participant.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the initial aggregate
annual cost associated with Rule 906(c) would be approximately
$5,060,000, which corresponds to $92,000 per covered participant.\1334\
The Commission further estimates that the ongoing aggregate annual cost
associated with Rule 906(c) will be approximately $1,870,000, which
corresponds to $34,000 per covered participant.\1335\
---------------------------------------------------------------------------

    \1334\ The Commission derived its estimate from the following:
[($58,000 + $34,000) x (55 covered participants)] = $5,060,000, or
approximately $92,000 per covered participant.
    \1335\ The Commission derived its estimate from the following:
[($34,000) x (55 covered participants)] = $1,870,000.
---------------------------------------------------------------------------

    Rule 906(a) requires a registered SDR, once a day, to send a report
to each participant identifying, for each security-based swap to which
that participant is a counterparty, the security-based swap(s) for
which the registered SDR lacks counterparty ID and (if applicable)
broker ID, branch ID, execution agent ID, trading desk ID, and trader
ID. Under Rule 906(a), a participant that receives such a report will
be required to provide the missing ID information to the registered SDR
within 24 hours.
    The Commission believes that each registered SDR would face a one-
time, initial cost of approximately $33,000 to create a report template
and develop the necessary systems and processes to produce a daily
report required by Rule 906(a).\1336\ The Commission further believes
that there will be an ongoing annual cost for a registered SDR to
generate and issue the daily reports, and to enter into its systems the
ID information supplied by participants in response to the daily
reports, of approximately $30,000.\1337\
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    \1336\ The Commission derived its estimate from the following:
[(Senior Systems Analyst (40 hours) at $260 per hour) + (Sr.
Programmer (40 hours) at $303 per hour) + (Compliance Manager (16
hours) at $283 per hour) + (Director of Compliance (8 hours) at $446
per hour) + (Compliance Attorney (8 hours) at $334)] = $33,288, or
approximately $33,000 per registered SDR.
    \1337\ The Commission derived its estimate from the following:
[(Senior Systems Analyst (24 hours) at $260 per hour) + (Sr.
Programmer (24 hours) at $303 per hour) + (Compliance Clerk (260
hours) at $64 per hour)] = $30,152, or approximately $30,000 per
registered SDR.
---------------------------------------------------------------------------

    The Commission continues to estimate that the initial aggregate
annual cost for registered SDRs associated with Rule 906(a) would be
approximately $630,000, which corresponds to $63,000 per registered
SDR.\1338\ The Commission estimates that the ongoing aggregate annual
cost for registered SDRs associated with Rule 906(a) will be
approximately $300,000, which corresponds to $30,000 per for registered
SDR.
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    \1338\ The Commission derived its estimate from the following:
[($33,288 + $30,152) x (10 registered SDRs)] = $634,400, or
approximately $630,000, which corresponds to $63,440, or
approximately $63,000 per registered SDR.
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d. Registered SDR Policies and Procedures--Rule 907
    Rule 907(a) requires a registered SDR to establish and maintain
written policies and procedures with respect to the receipt, reporting,
and dissemination of security-based swap transaction data pursuant to
Regulation SBSR. Under Rules 907(a)(1) and (2), a registered SDR's
policies and procedures must specify the data elements of a security-
based swap that must be reported and the reporting format that must be
used for submitting information. Under Rule 907(a)(3), the registered
SDR's policies and procedures must specify procedures for reporting
life cycle events and corrections to previously submitted information.
Rule 907(a)(4) requires policies and procedures for flagging
transactions having special characteristics. Rules 907(a)(5) requires
policies and procedures for assigning UICs in a manner consistent with
Rule 903. Rule 907(a)(6) requires policies and procedures for
periodically obtaining from each of its participants the ultimate
parent and affiliate information required to be submitted to the SDR by
Rule 906(b).
    By requiring SDRs to establish and maintain policies and procedures
pursuant to Rule 907(a)(1), SDRs likely will have to consult with their
participants in devising flexible and efficient methods of obtaining
high quality transaction data from market participants. This rule
allows SDRs to adjust their policies and procedures as market
conventions and technologies change. For example, registered SDRs will
have the flexibility to incorporate new reporting methodologies more
quickly. In addition, Rule 907(a)(1) should reduce the likelihood that
financial innovation that leads to a new security-based swap products
will disrupt regulatory reporting and public dissemination of
transaction information related to the new product.
    At the same time, the Commission believes that there are benefits
to enforcing minimum standards for reporting transaction information,
standards that will be established as a result of the requirement that
SDRs develop policies and procedures in accordance with Rule 907. As
noted in

Section XXII(B)(1)(a)(iii), the Commission anticipates that a small
number of registered SDRs will serve the security-based swap market.
These SDRs may enjoy market power relative to their participants, and
we believe that imposing minimum standards on them is reasonable to
mitigate the risk that imperfect competition leads to low quality data
collection.
    Further, the requirement in Rule 907(c) that a registered SDR make
publicly available on its Web site the policies and procedures required
by Regulation SBSR will allow the public to better understand and
interpret the data publicly disseminated by SDRs. For example, under
Rule 907(a)(4)(i), a registered SDR will have policies and procedures
that identify the characteristics of a security-based swap that could,
in the fair and reasonable estimation of the registered SDR, cause a
person without knowledge of these characteristics to receive a
distorted view of the market. Making publicly available a description
of the flags that it requires will allow the public to interpret the
flags they observe in publicly disseminated data. Rule 907(d) requires
registered SDRs to review, and update as necessary, the policies and
procedures required by Regulation SBSR at least annually, and indicate
the date on which they were last reviewed.
    Finally, Rule 907(e) requires a registered SDR to provide to the
Commission, upon request, information or reports related to the
timeliness, accuracy, and completeness of data reported to the
registered SDR pursuant to Regulation SBSR and the registered SDR's
policies and procedures established thereunder. Rule 907(e) will assist
the Commission in examining for compliance with Regulation SBSR and in
bringing enforcement or other administrative actions as necessary or
appropriate. Required data submissions that are untimely, inaccurate,
or incomplete could diminish the value of publicly disseminated reports
that are designed to promote transparency and price discovery.
    The Commission believes that the costs of requirements under Rule
907(a) are related to developing policies and procedures. Rules 907(c)
and 907(d) require a registered SDR to update its policies and
procedures as necessary and to post these policies and procedures on
its Web site. Rule 907(e) requires a registered SDR to provide the
Commission with information related to the timeliness, accuracy, and
completeness of data reported to it pursuant to Regulation SBSR and the
registered SDR's policies and procedures established thereunder.
    Under Regulation SBSR, registered SDRs have the flexibility to
determine the precise means through which they will accept reports of
security-based swap transaction data. Rather than setting--by rule--a
fixed schedule of data elements that must be reported as well as the
specific reporting language or reporting protocols that must be used,
Regulation SBSR instead requires registered SDRs to establish and
maintain policies and procedures that detail these requirements.
Persons seeking to register as SDRs may have ongoing discussions with
their participants--both before and after registration--about the
appropriate means of permitting reporting in a manner that captures all
the elements required by Rule 901 while minimizing the administrative
burden on reporting sides. Also, the data elements necessary to
understand a trade could evolve over time as new contracts are
developed, or that the most efficient means of reporting also could
evolve as new technologies or reporting languages are devised. In light
of these considerations, the Commission believes that registered SDRs
and, to the extent that SDRs seek discussion with them, market
participants will be in a better position to define the necessary
reporting elements over time as the security-based swap market evolves.
    As discussed above in Section IV, the Commission considered the
alternative of requiring reporting parties to use a single reporting
language or protocol in submitting data to registered SDRs, and three
commenters encouraged the use of the FpML standard.\1339\
---------------------------------------------------------------------------

    \1339\ See DTCC II at 16; ISDA I at 4; ISDA/SIFMA I at 8.
---------------------------------------------------------------------------

    While specifying a single, acceptable standard would remove any
ambiguity surrounding data formats that reporting parties could use for
transaction reports, the Commission has chosen not to adopt such an
approach, for three reasons. First, market participants may have
preferences over the different open-source structured data formats
available. By allowing registered SDRs to choose from among formats
widely used by participants, the adopted approach allows SDRs to
coordinate with their participants to select standards that allow
reporting parties to efficiently carry out their obligations under Rule
901. Second, allowing SDRs flexibility in the formats they accept
should help ensure that they can accommodate innovations in the
security-based swap market that lead to changes in data elements that
must be reported under Rule 901. Third, the Commission believes that,
so long as registered SDRs can make security-based swap transaction
data accessible to the Commission using a uniform format and taxonomy,
it may not be necessary to require reporting sides to report
transaction data to registered SDRs using a single format or taxonomy.
This approach gives a registered SDR the opportunity to differentiate
its services by offering reporting sides the ability to report using
different formats and taxonomies, if the SDR can convert these
transaction reports into the uniform format and taxonomy pursuant to
which the Commission will require the SDR to make transaction data
accessible to the Commission.
    The Commission believes that ten registered SDRs will be subject to
Rule 907, and that developing and implementing written policies and
procedures as required under Rule 907, will result in an initial, one-
time cost to each registered SDR of approximately $4,100,000.\1340\
This figure includes the estimated cost to develop a set of written
policies and procedures, program systems, implement internal controls
and oversight, train relevant employees, perform necessary testing,
monitor participants, and compile data. In addition, the Commission
believes that its estimate for maintaining such policies and
procedures, including a full review at least annually; making its
policies and procedures publicly available on its Web site; and
providing the Commission, upon request, information or reports related
to the timeliness, accuracy, and completeness of data reported to it
pursuant to Regulation SBSR, and the registered SDR's policies and
procedures is reasonable. As a result, the Commission believes its
preliminary estimate of approximately $8,200,000 for each registered
SDR is valid.\1341\ This figure

is based on an estimate of the cost to review existing policies and
procedures, make necessary updates, conduct ongoing training, maintain
relevant systems and internal controls systems, perform necessary
testing, monitor participants, and collect data.\1342\ Accordingly, the
Commission estimates that the initial annual cost associated with Rule
907 will be approximately $12,250,000 per registered SDR, which
corresponds to an initial annual aggregate cost of approximately
$122,500,000.\1343\ The Commission estimates that the ongoing annual
cost associated with Rule 907 will be approximately $8,200,000 per
registered SDR, which corresponds to an ongoing annual aggregate cost
of approximately $82,000,000.\1344\ These figures are based, in part,
on the Commission's experience with other rules that require entities
to establish and maintain compliance with policies and
procedures.\1345\
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    \1340\ The Commission derived its estimate from the following:
[(Sr. Programmer (1,667 hours) at $303 per hour) + (Compliance
Manager (3,333 hours) at $283 per hour) + (Compliance Attorney
(5,000 hours) at $334 per hour) + (Compliance Clerk (2,500 hours) at
$64 per hour) + (Sr. Systems Analyst (1,667 hours) at $260 per hour)
+ (Director of Compliance (833 hours) at $446 per hour)] =
$4,083,278, or approximately $4,100,000 per registered SDR. The
Commission believes that potential SDRs that have similar policies
and procedures in place may find that these costs would be lower,
while potential SDRs that do not have similar policies and
procedures in place may find that the potential costs would be
higher.
    \1341\ The Commission derived its estimate from the following:
[(Sr. Programmer (3,333 hours) at $303 per hour) + (Compliance
Manager (6,667 hours) at $283 per hour) + (Compliance Attorney
(10,000 hours) at $334 per hour) + Compliance Clerk (5,000 hours) at
$64 per hour) + (Sr. Systems Analyst (3,333 hours) at $260 per hour)
+ (Director of Compliance (1,667 hours) at $446 per hour)] =
$8,166,722, or approximately $8,200,000 per registered SDR. The
Commission believes that potential SDRs that have similar policies
and procedures in place may find that these costs would be lower,
while potential SDRs that do not have similar policies and
procedures in place may find that the potential costs would be
higher.
    \1342\ In the Regulation SBSR Proposing Release, the Commission
also included ``calculate and publish block trade thresholds'' as
one of the items in the list of items that an SDR would need to
undertake on an ongoing basis with respect to its policies and
procedures under Rule 907. See Regulation SBSR Proposing Release, 75
FR 75276-77. Although the Commission is not adopting Rule 907(b) at
this time, the costs discussed herein pertain to all of the policies
and procedures of a registered SDR. The Commission does not believe
that not adopting Rule 907(b), which applies only to policies and
procedures relating to block trades, would have had a measureable
impact on the costs related to developing the policies and
procedures of the registered SDR. As a result, the Commission
believes that its cost estimate continues to be valid.
    \1343\ The Commission derived its estimate from the following:
[((4,083,278) + ($8,166,722)) x (10 registered SDRs)] =
$122,500,000, or approximately $123,000,000.
    \1344\ The Commission derived its estimate from the following:
[($8,166,722) x (10 registered SDRs)] = $81,667,220, or
approximately $82,000,000.
    \1345\ See Cross-Border Proposing Release, 78 FR 30994, note
256.
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    Finally, the Commission continues to believe that the Rule 907(e)
requirement that a registered SDR must provide to the Commission, upon
request, such information as the Commission determines necessary or
appropriate for the Commission to perform the duties of the Commission,
registered SDRs will incur costs. The Commission notes, however, that
any such costs are already covered by rules governing SDRs adopted in
the SDR Adopting Release and, thus, do not need to be separately
considered here. Specifically, Rule 13n-5(b) requires a registered SDR
to establish, maintain, and enforce written policies and procedures
reasonably designed to satisfy itself that the transaction data that
has been submitted to the SDR is complete and accurate, and also to
ensure that the transaction data and positions that it maintains are
complete and accurate.\1346\ The Commission further believes that these
capabilities will enable a registered SDR to provide the Commission
information or reports as may be requested pursuant to Rule 907(e). The
Commission believes that Rule 907(e) will not impose any costs on a
registered SDR beyond those imposed by Rule 13n-5(b). Furthermore, to
the extent that market participants have already expended resources in
anticipation of the adoption of Regulation SBSR, the costs could be
significantly lower. As a result, the Commission's estimates should be
viewed as an upper bound of the potential costs of Regulation SBSR.
---------------------------------------------------------------------------

    \1346\ See SDR Adopting Release, Rules 13n-5(b)(1)(iii) and 13n-
5(b)(3).
---------------------------------------------------------------------------

    After reviewing comment letters received in response to the
Regulation SBSR Proposing Release and the Cross-Border Proposing
Release, as well as evaluating the most recent data available to the
Commission, the Commission continues to believe that these cost
estimates related to Rule 907, as adopted, remain valid.
e. SIP Registration by Registered SDRs--Rule 909
    Rule 909 requires a registered SDR to register with the Commission
as a SIP. SIP registration of a registered SDR will help ensure fair
access to important security-based swap transaction data reported to
and publicly disseminated by the registered SDR. Specifically,
requiring a registered SDR to register with the Commission as a SIP
will subject it to Section 11A(b)(5) of the Exchange Act,\1347\ which
provides that a registered SIP must notify the Commission whenever it
prohibits or limits any person's access to its services. If the
Commission finds that the person has been discriminated against
unfairly, the Commission can require the SIP to provide access to that
person.\1348\ Section 11A(b)(6) of the Exchange Act \1349\ also
provides the Commission authority to take certain regulatory action as
may be necessary or appropriate against a registered SIP.\1350\
Potential users of security-based swap market data will benefit from
the Commission having the additional authority over a registered SDR/
SIP provided by Sections 11A(b)(5) and 11A(b)(6) to help ensure that
these persons offer their security-based swap market data on terms that
are fair and reasonable and not unreasonably discriminatory.
---------------------------------------------------------------------------

    \1347\ 15 U.S.C. 78k-1(b)(5).
    \1348\ See 15 U.S.C. 78k-1(b)(5)(B).
    \1349\ 15 U.S.C. 78k-1(b)(6).
    \1350\ See supra note 994.
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    Because the Commission is adopting a revised Form SDR that
incorporates certain requests for information derived from Form SIP and
will not require submission of a separate Form SIP, all programmatic
costs of completing Form SDR are included in the Commission's SDR
Adopting Release.\1351\ As proposed and re-proposed, Regulation SBSR
would have required the use of a separate form, existing Form SIP, for
this purpose. In response to comments, however, the Commission is
adopting a revised Form SDR that incorporates certain requests for
information derived from Form SIP, and will not require submission of a
separate Form SIP. All programmatic costs of completing Form SDR are
scored in the SDR Adopting Release.\1352\ Therefore, final Rule 909
itself imposes no programmatic costs on registered SDRs.
---------------------------------------------------------------------------

    \1351\ See SDR Adopting Release, Section VIII(D)(1).
    \1352\ See id.
---------------------------------------------------------------------------

7. Definitions--Rule 900
    The Commission believes that Rule 900 will not entail any material
costs to market participants. Rule 900 defines terms used in Regulation
SBSR and does not, in itself, impose any obligations or duties. To the
extent that the scope of a particular definition subjects a person to
one or more provisions of Regulation SBSR, the costs and benefits of
that rule are assessed (and, where feasible, calculated) in light of
the scope of persons affected. With respect to the definition of ``U.S.
person,'' the Commission believes that the Commission's Title VII rules
would benefit from having the same terms throughout and could,
therefore, reduce assessment costs for market participants that might
be subject to these rules.

D. Effects on Efficiency, Competition, and Capital Formation

1. Introduction
    Section 3(f) of the Exchange Act \1353\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, also to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation (``ECCF''). In addition, Section 23(a)(2) of the Exchange Act
\1354\ requires the Commission, when making rules under

the Exchange Act, to consider the impact of such rules on competition.
Section 23(a)(2) also prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \1353\ 15 U.S.C. 78c(f).
    \1354\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Regulation SBSR's effects on efficiency, competition, and capital
formation are often closely related to one another, and it is difficult
to distinguish between the effects of the final rules on each of these
elements. For example, elements of a security-based swap market
structure that foster competition between liquidity suppliers may
result in narrower spreads and higher trading volume, eventually
resulting in greater price efficiency. Similarly, a security-based swap
market that provides low-cost opportunities for firms to hedge
commercial and financial risks as a result of low implicit transaction
costs may encourage capital formation by allowing these firms to share
risks with market participants that are better able to bear them,
thereby reducing their need to engage in precautionary savings.
However, as the last example indicates, the final rules' effects on
capital formation often arise indirectly through their effects on
efficiency and competition.
    The following discussion of the effects of Regulation SBSR on
efficiency, competition, and capital formation considers the regime
that Regulation SBSR establishes for regulatory reporting and public
dissemination as well as the particular means of implementation that
the Commission has chosen, relative to alternative means of
implementation considered. Because the various elements of these rules
will affect the behavior of counterparties, infrastructure providers,
and market participants in general, the Commission has considered the
economic effects at each of these levels, including cases in which
policy alternatives that may be privately efficient for individual
actors, may nevertheless fail to be efficient for the overall market.
    Regulation SBSR establishes a regime for regulatory reporting and
public dissemination of security-based swap transaction data. Under the
final rules, the Commission and other relevant authorities will have
access to detailed information about security-based swap transaction
activity and about the risk exposures of security-based swap
counterparties to both reference entities and to each other. At the
same time, the public will enjoy unprecedented access to pricing and
volume data of security-based swap transactions. Post-trade
transparency in the security-based swap market will reduce information
asymmetries, thereby allowing even small counterparties to base their
trading decisions on information about activity in the broader market,
which they would not be able to observe without post-trade
transparency. Moreover, public dissemination of security-based swap
transactions could be used as an input to economic decisions in other
markets (e.g., the corporate equity or bond markets).
2. Regulatory Reporting
    As a result of the final rules, the Commission and other relevant
authorities will have access, through registered SDRs, to comprehensive
information about the security-based swap market. This information
should improve relevant authorities' ability to oversee the security-
based swap market both for systemic risk purposes and to detect, deter,
and address market abuse.
    Regulatory access to security-based swap data will facilitate
monitoring of risk exposures with implications for financial stability
that market participants do not internalize. For example, Regulation
SBSR will provide relevant authorities with visibility into the
security-based swap positions of a participant's ultimate parent.
Regulation SBSR also will allow relevant authorities to detect unusual
activity at a very granular level, by trading desk or even individual
trader. Similarly, by filtering exposures to single-name CDS via the
product ID, relevant authorities will be able to better understand any
potential risk to financial stability that could arise if a corporate
default triggers CDS payouts between counterparties. Information about
the activity and exposures of security-based swap market participants
could allow the Commission or other relevant authorities to take
actions that reduce the likelihood of disruption to the smooth
functioning of financial markets or to reduce the magnitude of such
disruptions when they do occur.\1355\ If such disruptions also impair
capital formation by reducing the ability or willingness of financial
intermediaries or other market participants to borrow or lend, then
market oversight that reduces financial instability may also facilitate
capital formation.
---------------------------------------------------------------------------

    \1355\ See supra Section XXII(B)(1)(d) (describing current state
of efficiency in the security-based swap market).
---------------------------------------------------------------------------

    The opacity of the security-based swap market can contribute to
uncertainty during periods of financial crisis. In the absence of
information about the outstanding obligations between counterparties to
security-based swaps, financial market participants may face
uncertainty over the extent to which large financial institutions are
exposed to each other's credit risk. This environment may create
incentives for financial market participants to reduce risk exposures
and seek safer assets (such as cash or Treasury securities), which
could lead to a significant reduction in investment in capital
goods.\1356\ Under a robust regime of regulatory reporting, the
Commission and other relevant authorities will have greater means to
identify the extent of the relevant exposures and the interrelatedness
of risks in the security-based swap market, which could be particularly
important in times of financial stress. Providing relevant authorities
access to information about outstanding obligations that result from
security-based swap activity could allow these authorities to assist in
the event of counterparty default. This knowledge could reduce market
participants' uncertainty in times of stress, if, for example, it
suggests to them a more orderly wind-down of risk exposures of the
defaulting counterparty. To the extent that reduced uncertainty results
in more efficient risk-sharing it may reduce market participants'
demand for safe assets, as described above, and hence may improve the
environment for capital formation.
---------------------------------------------------------------------------

    \1356\ If financial market participants invest their money in
cash or Treasury securities, rather than riskier assets such as
stocks or corporate bonds, this may make it more difficult for
companies to raise capital and invest in capital goods.
---------------------------------------------------------------------------

    Regulatory reporting will also enable the Commission and other
relevant authorities to improve their monitoring of market practices.
This could have direct effects on competition in the security-based
swap market. Absent regulation by the Commission and other relevant
authorities, potential market participants may consider the potential
costs of market abuse to be a barrier that discourages their entry into
the security-based swap market. The knowledge that the Commission and
other relevant authorities are able to conduct surveillance on the
basis of regulatory reporting may lower their barriers to entry since
surveillance and the resulting increased probability of detection may
deter potential market abuse in the security-based swap market. This
could result in broader participation and improved efficiency,
competition, and capital formation due to the availability of more
risk-sharing opportunities between market participants.

3. Public Dissemination
    Regulation SBSR establishes a requirement for public dissemination
of security-based swap transaction information. Currently, public
access to security-based swap transaction information is limited to
aggregate pricing and volume data made available by clearing agencies
and DTCC-TIW, as well as infrequent reporting by large multilateral
organizations. There is no comprehensive or widely available source of
transaction-by-transaction pricing and volume information.
    The Commission believes that public availability of pricing and
volume data for individual security-based swaps, as required by Title
VII, should promote efficiency and competition by enabling information
produced by activity in the security-based swap markets to be used as
an input to myriad economic decisions, when currently limited
transaction information is generally available only to large dealers
who observe customer order flow.\1357\ Thus, smaller market
participants, being able to view all security-based swap transactions
disseminated by registered SDRs, can observe from recently executed
prices whether there may be profitable opportunities to enter the
market, thereby increasing competition. In addition, a firm may use
information about the pricing of CDS written on its debt to decide on
the appropriate opportunity cost of capital to apply to the cash flows
of new investment projects, thereby promoting efficiency. Similarly, a
lender may use information about credit risk embedded in the pricing of
CDS written on a borrower's existing debt to inform the lender's
decision of whether or not to extend additional financing, thereby also
promoting efficiency.
---------------------------------------------------------------------------

    \1357\ See supra Section XXII(B)(1)(d) (discussing sources of
security-based swap information and efficiency in the current
security-based swap market).
---------------------------------------------------------------------------

    As discussed in Section XXII(C)(2)(a), public dissemination of
security-based swap transactions also may promote better valuation of
underlying and related assets by allowing for the inclusion of last-
sale information into valuation models. Models without the input of
last-sale information could be imprecise or be based on assumptions
subject to the evaluator's discretion without having last-sale
information to help identify or correct flawed assumptions. As a
result, otherwise identical market participants holding the same asset
but using different valuation models might arrive at significantly
different valuations. This could result in these market participants
developing very different views of their risk exposures, resulting in
inefficient economic decisions. The Commission anticipates that market
observers will incorporate last-sale information that is publicly
disseminated by registered SDRs into their valuation models for the
same and related assets. Such last-sale information will assist them in
developing and validating their pricing models and improve the accuracy
of the valuations that they use for a variety of purposes, such as
making new investment decisions or managing the risk of existing
positions. Efficient allocation of capital relies on accurate valuation
of asset prices. Overvaluation of assets could result in a
misallocation of capital, as investors seek to purchase or hold an
asset that cannot deliver the anticipated risk-adjusted return. By the
same token, undervalued assets represent investment opportunities that
might go unpursued, because investors do not realize that a more
attractive risk-adjusted return may be available. To the extent that
post-trade transparency enables asset valuations to move closer to
their fundamental values, capital should be more efficiently allocated.
    Information revealed through public dissemination of security-based
swap transaction details takes on two key characteristics. First, use
of a piece of information by one economic agent does not necessarily
preclude use of the same information by another. Second, once
information is made public under Regulation SBSR, it is, by definition,
non-excludable. Dissemination cannot be limited only to those that have
direct access to the information (such as dealers who observe
significant order flow) or to larger market participants who are
willing to pay for the information. These characteristics make it
difficult for parties who report transaction data to capture the value
that market participants and market observers may gain from receipt of
publicly disseminated security-based swap data. As a result, public
dissemination of security-based swap transaction information is prone
to inefficient supply--for example, parties have an incentive to make
incomplete reports of their activity. By establishing minimum
requirements for what is reported and publicly disseminated, the
Commission believes that Regulation SBSR will limit the degree of this
inefficient supply.
    Public dissemination will also likely affect efficiency and
competition within the security-based market. A primary economic effect
of the final rules on public dissemination of transaction information
is to reduce the degree of information asymmetry between market
participants. Information asymmetries are currently endemic in the
security-based swap market. Large dealers can observe a significant
amount of order flow provided by their customers and know the prices at
which their various customers have traded with them. Other market
participants, including the customers of large dealers, generally do
not know the prices that other market participants have paid or would
be willing to pay for particular security-based swaps, what products
are being transacted, or in what volumes. Large dealers collectively,
who are able to observe their customers' orders and executions, may be
able use this information to adjust the prices that they quote to
extract profits at the expense of their customers.\1358\ Customers,
with very limited ability to obtain information about the prices or
sizes of others' transactions, are in an inferior bargaining position
to the dealers that they face. To the extent that dealer private
information counters the incentives for market participants to
efficiently share risks using security-based swaps, it represents a
dead-weight loss and not a simple reallocation of gains from trade
between dealers and their customers.\1359\ Post-trade transparency
increases the bargaining power of customers because knowledge of last-
sale prices in the same or similar instruments allows them to establish
a baseline for negotiations with any dealer.
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    \1358\ See, e.g., Bessembinder et al., supra note 1259.
    \1359\ A dead-weight loss means that the economy in aggregate is
worse off. If market participants do not share risks efficiently as
a result of their inferior bargaining position relative to dealers,
then risks are not transferred to those market participants who are
in the best position to bear them. A dead-weight loss results when
the benefits that accrue to dealers as a result of their private
information are less than the costs of inefficient risk sharing, or
when dealers do not benefit at the equal expense of other market
participants.
---------------------------------------------------------------------------

    Post-trade transparency in other financial markets has been shown
to improve competition and efficiency by decreasing implicit
transaction costs and improving the bargaining power of investors and
other non-dealers. For example, a number of studies of the corporate
bond market have found that post-trade transparency, resulting from the
introduction of FINRA's TRACE system, reduced implicit transaction
costs.\1360\ Reduced implicit transaction costs could encourage market
entry, particularly of smaller dealers and non-dealers, and potentially
increase risk sharing and price competition, thereby promoting
efficiency. To the extent that the current security-based swap market

is similar to the corporate bond market prior to the introduction of
TRACE, post-trade transparency could have similar effects in the
security-based swap market.\1361\
---------------------------------------------------------------------------

    \1360\ See Edwards, et al., supra note 1223.
    \1361\ In the Regulation SBSR Proposing Release, the Commission
requested comment on whether post-trade transparency would have a
similar effect on the security-based swap market as it has in other
securities markets--and if not, why not. See 75 FR 75226. No
commenters responded to the Commission's request.
---------------------------------------------------------------------------

    Regulation SBSR will permit all market observers for the first time
to see last-sale information of security-based swap transactions,
thereby reducing the information asymmetry between dealers and non-
dealers.\1362\ Non-dealers may be able to use publicly disseminated
information to negotiate more favorable prices from dealers or to
decline to enter into security-based swaps offered at unfavorable
prices, thereby improving the efficiency of risk sharing in the
security-based swap market. Additionally, public dissemination could
assist dealers in deriving better quotations, as knowledge of the
prices and volumes at which other market participants have executed
transactions could serve as a valuable input for quotations in the same
or similar instruments.\1363\ As a result, dealers will have a better
sense of the market and may not need to build large margins into their
quotations to compensate for uncertainty in providing quotations.
Increased competition from new entrants and quotations that more
accurately reflect fundamental value could lead to lower implicit
transaction costs for security-based swaps, which will encourage
efficient risk sharing and promote price efficiency.\1364\
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    \1362\ A similar information asymmetry, but to a lesser and
varying degree, exists between larger and smaller dealers, and it
would also be reduced.
    \1363\ See supra Section XXII(B)(2)(a) (discussing the benefits
of improved valuation).
    \1364\ See Edwards, et al., supra note 1223.
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    The Commission recognizes, however, that the final rules will not
eliminate entirely the informational advantage of large intermediaries.
These market participants will still have the advantage of seeing order
flows or inquiries that are not ultimately executed and disseminated.
They also will be able to see their completed transactions against
customers in real time, while market observers who consume the
transaction data that is publicly disseminated by registered SDRs might
not--during the interim phase of Regulation SBSR--learn of these
transactions until up to 24 hours after they are executed. In addition,
an executing intermediary may derive an informational advantage from
knowing the identities of both its counterparties and other customers
who submit orders or make inquiries about liquidity.
    The Commission also acknowledges that implementing post-trade
transparency in the security-based swap market could cause some market
participants to execute fewer security-based swaps in the U.S. market
or to exit the U.S. market completely and execute their transactions in
foreign markets instead. To the extent that such events occur, these
could be viewed as costs of the final rules that could have a
detrimental impact on efficiency, competition, and capital formation.
For example, certain market participants that are currently active in
the market might not find it desirable for information about their
security-based swaps to be publicly known. If market participants
respond to the final rules by reducing their trading activity or
exiting the market, or if the final rules raise barriers to entry, the
result could be reduced competition between the remaining market
participants. Besides reduced price competition, exit by certain
participants from the market also could result in a less efficient
allocation of credit risk. This could have implications for capital
formation if market participants engage in precautionary savings and
self-insurance rather than hedging their risks by using capital
resources offered by third parties through security-based swaps.\1365\
---------------------------------------------------------------------------

    \1365\ The Commission notes there are also plausible cases in
which Regulation SBSR might increase the efficiency of risk
allocation while also reducing transaction volume. Market
participants might determine, as a result of observing publicly
disseminated price and volume data, that engaging in a security-
based swap transaction is an inefficient means of managing financial
or commercial risks.
---------------------------------------------------------------------------

    Public dissemination of security-based swap transactions also may
promote efficient valuation of various financial instruments. As a
result of the final rules, all market participants and market observers
will have the benefit of knowing how counterparties to a particular
security-based swap valued the security-based swap at a specific moment
in the recent past, and can incorporate this last-sale information into
their own valuations for that security-based swap, as well as any
related or underlying instrument.\1366\ To the extent that last-sale
information results in valuations that are more informationally
efficient, they may help improve financial stability by making risk
management by financial institutions more efficient. This in turn could
enhance the ability of market participants to accurately measure
financial exposures to each of their counterparties.
---------------------------------------------------------------------------

    \1366\ See supra Section XXII(C)(2).
---------------------------------------------------------------------------

    Public dissemination of security-based swap transaction information
could improve the efficiency of the security-based swap market through
more efficient deployment of assets used as collateral for security-
based swap transactions. Appropriate collateral allocation is dependent
on accurate valuation of security-based swaps. As the value of a
security-based swap changes, the likelihood of one party having to make
a payout to the other party also changes, which could impact the amount
of collateral that one counterparty owes to the other. Hence,
misvaluation of a security-based swap contract could lead to
inefficient allocation of collateral across counterparties. To the
extent that public dissemination of security-based swap transactions
will help enable better valuations, instances of overcollateralization
or undercollateralization should decrease. Furthermore, the better
investors can judge the performance of collective investment vehicles
because of better valuations, the more efficiently they can allocate
their investment capital among available funds.
    Post-trade transparency of security-based swaps should promote more
efficient valuation of securities on which security-based swaps are
based. A clear example of this is the market for single-name CDS, where
post-trade transparency may lead to better estimates of the
creditworthiness of debt issuers. All other things being equal, CDS
protection on a more creditworthy issuer costs less than CDS protection
on a less creditworthy issuer. Furthermore, the cost of CDS protection
on a single issuer may change over time, reflecting, in part, the
financial position of the issuer. Mandatory post-trade transparency of
CDS transactions will offer market participants and market observers
the ability to dynamically assess the market's view of the
creditworthiness of the reference entities that underlie CDS contracts,
thus promoting efficiency in the market for cash bonds. For example,
public dissemination of transactions in CDS on reference entities that
issue TRACE-eligible debt securities will help reinforce the pricing
signals derived from individual transactions in debt securities
generated by TRACE. Market participants can arbitrage disparities in
prices reflected in TRACE and as suggested in last-sale information of
related CDS, helping create more overall efficiency in the market for
credit. Similarly, public dissemination of transactions in single-name
CDS should

reinforce the pricing signals derived from public dissemination of
index CDS transactions. Post-trade transparency of security-based swap
CDS under Regulation SBSR could indirectly bring greater transparency
into the market for debt instruments (such as sovereign debt
securities) that are not subject to mandatory public dissemination
through TRACE or any other means.
    Finally, business owners and managers can use information gleaned
from the publicly disseminated security-based swap transaction data to
make more-informed investment decisions in physical assets and capital
goods, as opposed to investment in financial assets, thereby promoting
efficient resource allocation and capital formation in the real
economy. Transparent security-based swap prices may also make it easier
for firms to obtain new financing for business opportunities, by
providing information and reducing uncertainty about the value and
profitability of a firm's investments.\1367\
---------------------------------------------------------------------------

    \1367\ See Bond, et al., note 1258, supra.
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4. Implementation of Regulatory Reporting and Public Dissemination
a. Role of Registered SDRs
    In adopting Regulation SBSR, the Commission has attempted to design
the duties of registered SDRs to promote efficiency of the reporting
and public dissemination requirements and thereby minimize any adverse
impacts on competition and capital formation. At the same time, the
Commission acknowledges that, to the extent that the final rules place
regulatory obligations on registered SDRs, these obligations may
constitute a barrier to entry that, at the margin, reduces competition
between registered SDRs. Regulation SBSR requires a registered SDR to
publicly disseminate specified information about reported security-
based swap transactions immediately upon receipt. The Commission
believes that this requirement will help promote an efficient
allocation of public dissemination responsibilities for a number of
reasons. First, registered SDRs--because of their role in the
regulatory reporting function--already possess all of the information
necessary to carry out public dissemination and would not have to
collect additional information from other parties. Second, placing the
duty to publicly disseminate on registered SDRs eliminates the need for
the development of other infrastructure and mechanisms for public
dissemination of security-base swap transaction information in addition
to the infrastructure that is required to support regulatory
reporting.\1368\ Third, users of publicly disseminated security-based
swap data will be required to consolidate transaction data from only a
small number of registered SDRs, rather than a potentially larger
number of dissemination agents that might exist under an alternative
regime. Under Rules 907(a)(1) and 907(a)(2), registered SDRs have the
flexibility to determine the precise means through which they will
accept reports of security-based swap transaction data. This degree of
flexibility has implications for the efficiency of data collection.
Registered SDRs could choose to innovate and adopt new reporting
formats that could lower costs to market participants while maintaining
the required level of information and data integrity. Moreover, in an
effort to attract business, registered SDRs could decide to accept data
from market participants in a wide variety of formats, taking on
additional data management and systems burdens. Indeed, such an outcome
could represent an efficient allocation of the costs of data
management, in which a handful of registered SDRs invest in
technologies to transform data rather than approximately 300 reporting
sides making similar changes to their systems in an effort to provide
identical reports to each SDR. The Commission acknowledges, however,
that the same features that support a market structure that yields only
a handful of registered SDRs could temper the incentives of these
registered SDRs to compete on reporting efficiency. For example,
registered SDRs could decide to accept data from customers in only one
specific format. The Commission further anticipates efficiency gains if
data elements necessary to understand a trade evolve over time as new
security-based swap contracts are developed. Additionally, this
approach may support competition among security-based swap
counterparties by maintaining low barriers to entry with respect to
reporting obligations under Regulation SBSR.
---------------------------------------------------------------------------

    \1368\ See supra Section XXII(C)(2)(c).
---------------------------------------------------------------------------

    Further, the final rules do not presume a market structure for
registered SDRs. On one hand, this means that market participants, the
Commission, and other relevant authorities cannot rely on efficiency
gains from receiving security-based swap transaction data from a
single, consolidated source, but must instead consolidate fragmented
data from multiple SDRs. On the other hand, a monopoly in the market
for SDR services could preclude innovations that may lead to higher
quality outputs or lower costs for reporting parties, SDR participants
more generally, the Commission, and other relevant authorities.
b. Interim Phase of Reporting Requirements and Block Rules
    As discussed above in Section VII, the Commission is adopting rules
for regulatory reporting and public dissemination of security-based
swaps that are intended only as the interim phase of implementation of
these Title VII requirements. At a later date, the Commission
anticipates seeking additional comment on potential block thresholds
and associated block rules (such as the time delay for disseminating
block trades and the time period for the mandatory reporting and public
dissemination of non-block trades).
    Immediately implementing a complete regime that includes block
trade thresholds and final reporting timeframes could improve
efficiency, competition, and capital formation by increasing price
transparency in the security-based swap market sooner. Several
commenters, however, argued that requiring post-trade transparency for
security-based swaps with incorrectly designed block trade thresholds
could significantly damage the market,\1369\ and the Commission is
concerned that disruptions to the market that could result from
establishing block trading rules without the benefit of comprehensive
data analysis could cause certain market participants to limit their
security-based swap activity or to withdraw from the market entirely.
This in turn could lead to reduced competition, higher prices, and
inefficient allocations of risk and capital.
---------------------------------------------------------------------------

    \1369\ See supra note 486.
---------------------------------------------------------------------------

    Currently, there are no data that can be used to directly assess
the impact of mandated post-trade transparency of security-based swap
transactions on market behavior, because there is no widely available
post-trade data to which the security-based swap market can
react.\1370\ The Commission anticipates that the initial phase of
Regulation SBSR will yield at least some useful data about how much
time market participants believe they need to hedge transactions and
how other

market participants react when they see transactions of different sizes
with different delays after the time of execution. The phased approach
is designed to introduce mandatory post-trade transparency in the
security-based swap market while allowing the Commission sufficient
time to gather and analyze data regarding potential block thresholds
and dissemination delays.
---------------------------------------------------------------------------

    \1370\ The Commission's economic analysis of the effects of
post-trade transparency on the security-based swap market has
included indirect evidence from the swap market and from the
security-based swap market. See Analysis of Post-Trade Transparency;
Hedging Analysis.
---------------------------------------------------------------------------

    The Commission acknowledges that allowing up to 24 hours for
reporting a security-based swap means that market participants not
involved in that particular transaction, and other market observers,
will not have access to information about the transactions for up to 24
hours after the initial execution, depending upon the specific time
when the transaction is reported. This delay could impact the
development of more vigorous price competition in the security-based
swap market because market participants who are involved in
transactions would have access to potentially market-moving information
up to 24 hours before those who are not. The Commission believes,
however, that allowing up to 24 hours for transactions to be reported
and publicly disseminated still represents a significant improvement
over the status quo, where market participants report transactions to
data repositories only on a voluntary basis and information about
transaction is not publicly disseminated.
c. Use of UICs and Rule 903
    Regulation SBSR requires the use of several UICs in the reporting
of security-based swap transactions. Use of UICs improves efficiency of
data intake by registered SDRs and data analysis by relevant
authorities and other users of data, as the reported security-based
swap transaction information can be readily aggregated by UIC along
several dimensions (e.g., product ID, trading desk ID, or trader ID).
The efficiency gain in aggregation applies primarily at the SDR level
in cases where the SDR uses its own UICs that are not otherwise applied
at other SDRs (assuming that no IRSS exists to provide such UICs). To
the extent that multiple SDRs were to use the same UICs--because they
use UICs provided by an IRSS, such as the GLEIS, or because SDRs agree
to recognize UICs assigned by another SDR \1371\--the efficiency gain
would extend to aggregation across SDRs, although this is not required
under Regulation SBSR. The efficiency gains described in this section
may be limited to regulatory reporting and only extend to public
dissemination to the extent that the relevant information is being
publicly disseminated. Additionally, minimizing the operational risks
arising from inconsistent identification of persons, units of persons,
products, or transactions by counterparties and market infrastructure
providers would enhance efficiency.
---------------------------------------------------------------------------

    \1371\ For example, assume that a person becomes a participant
of a registered SDR and obtains UICs for its trading desks and
individual traders from that SDR. Later, that person becomes a
participant at a second registered SDR. The second SDR could issue
its own set of UICs for this person's trading desks and individual
traders, or it could recognize and permit use of the same UICs that
had been assigned by the first registered SDR.
---------------------------------------------------------------------------

    Under Rule 903(b), as adopted, a registered SDR may permit
information to be reported to it, and may publicly disseminate
information, using codes in place of certain data elements only if the
information necessary to interpret such codes is widely available to
users of the information on a non-fee basis. If information to
understand embedded codes is not widely available on a non-fee basis,
information asymmetries would likely continue to exist between large
market participants who pay for the codes and other market
participants. Rents paid for the use of codes could decrease
transparency and increase barriers to entry to the security-based swap
market, because the cost of necessary licenses may reduce the
incentives for smaller potential market participants to enter the
market. Preventing this barrier to entry from forming should help
promote competition by facilitating the entry of new market
participants.
    One commenter suggested that alternatives could be developed to the
status quo of using fee-based codes in security-based swap market
data.\1372\ The Commission welcomes the development of such
alternatives, and believes that Rule 903(b), as adopted, may encourage
such development.
---------------------------------------------------------------------------

    \1372\ See Bloomberg Letter at 2 (stating that it would be
possible to develop a public domain symbology for security-based
swap reference entities that relied on products in the public domain
to ``provide an unchanging, unique, global and inexpensive
identifier'').
---------------------------------------------------------------------------

d. Rules Assigning the Duty To Report
    Rule 901(a) assigns the reporting obligation for security-based
swaps other than clearing transactions and platform-executed
transactions that are submitted to clearing. The reporting hierarchy in
Rule 901(a) is designed to increase efficiency for market participants,
as well as the Commission and other relevant authorities, by locating
the duty to report with counterparties who are most likely to have the
resources and who are best able to support the reporting function.
Furthermore, Rule 901(a) seeks to increase efficiency by leveraging
existing infrastructure to support security-based swap reporting, where
practicable.
    The Commission anticipates that the majority of security-based
swaps covered by Rule 901(a), as adopted, will include a registered
security-based swap dealer or registered major security-based swap
participant on at least one side. Many of the entities that are likely
to register as security-based swap dealers or major security-based swap
participants already have committed time and resources building the
infrastructure to support reporting security-based swaps and some
reporting to DTCC-TIW is occurring on a voluntary basis.\1373\
Moreover, many such entities currently report swaps pursuant to the
CFTC's swap data reporting rules. Rule 901(a) is designed, as much as
practicable, to allow these market participants to use these existing
reporting capabilities and to minimize the chance that a market
participant with limited involvement in the security-based swaps market
might incur the duty to report. This approach could lead to lower
barriers to entry into the market compared to the approach contemplated
in the SBSR Proposing Release.\1374\ Also, by reducing infrastructure
costs imposed on smaller market participants, this approach also could
promote competition by reducing the likelihood that these smaller
entrants without existing reporting capabilities would be required to
incur fixed costs necessary to develop reporting capabilities. Finally,
to the extent that non-registered persons are not required to devote
resources to support transaction reporting--because reporting is
carried out instead by registered security-based swap dealers and
registered major security-based swap participants who, due to economies
of scale and the presence of existing reporting capabilities, are
likely to face relatively lower costs of reporting--such resources
could be put to more efficient uses.\1375\
---------------------------------------------------------------------------

    \1373\ As discussed in Section XXII(B)(1), supra, the data in
DTCC-TIW are self-reported and the vast majority of trades involves
at least one dealer as a counterparty. Further, both transaction
counterparties submit records for confirmation, covering all likely
registrants.
    \1374\ See Cross-Border Proposing Release, 78 FR 31194.
    \1375\ See supra Section XXII(C) (discussing the costs that
reporting sides are likely to incur).
---------------------------------------------------------------------------

    The Commission recognizes that this approach puts smaller market
participants on the same rung of the hierarchy with entities that
likely meet

the definition of ``security-based swap dealer'' and will have to
register with the Commission as such in the future. In theory, this
could force these smaller market participants into a negotiation with
the ``likely dealers,'' because Rule 901(a)(2)(ii)(E)(1) requires both
sides to select the reporting side. The Commission believes that this
outcome will be unlikely in practice. The Commission understands that
voluntary reporting practices in the security-based swap market are
broadly consistent with the principle behind the reporting hierarchy in
Rule 901(a)(2)(ii): That the more sophisticated market participant
should report the transaction. Moreover, market participants who are
active in the security-based swap market are likely also to be active
in the swap market, where CFTC rules have established a reporting
hierarchy that assigns the heaviest reporting duties to swap dealers
and major swap participants.\1376\ Because practices have already been
established for larger market participants to assume reporting duties,
it is likely that these practices will be applied in the security-based
swap market even before the Commission adopts registration rules for
security-based swap dealers and major security-based swap participants.
---------------------------------------------------------------------------

    \1376\ See 17 CFR 45.8 (providing a hierarchy for regulatory
reporting of swaps); 17 CFR 43.3(a).
---------------------------------------------------------------------------

    One of the general principles underlying Rule 901(a) is that, if a
person has the duty to report information under Regulation SBSR, it
should also have the ability to choose the registered SDR to which it
reports. The Commission believes that this approach will promote
efficiency and competition, because it enables each person with a duty
to report a security-based swap to connect and report transactions to
the registered SDR (or SDRs) that offer it the highest quality services
and/or the lowest fees to the extent that there is more than one SDR.
Two commenters believed that the Commission could promote competition
by allowing a counterparty to a security-based swap--typically a
security-based swap dealer--to choose the registered SDR that receives
information reported under Regulation SBSR.\1377\ The Commission agrees
with the views of the commenters that allowing a counterparty to choose
the registered SDR that received information reported under Regulation
SBSR could promote competition. Rule 901(a), as adopted, reflects this
approach by allowing the person with the duty to report to choose the
registered SDR to which it reports.
---------------------------------------------------------------------------

    \1377\ See DTCC VI at 8-9; DTCC VIII; MarkitSERV III at 4-5.
---------------------------------------------------------------------------

    Finally, the Commission believes that, if Rule 901(a) affects
capital formation at all, it would be in only a limited and indirect
way. The Commission does not see--and no commenter has presented any
evidence to suggest--that the economic considerations of how, where,
and by whom security-based swap transactions will be reported to
registered SDRs will have any direct bearing on how, how often, and at
what prices market participants might be willing to transact. As
mentioned above, by placing the reporting duty on the person with the
most direct access to required information, Rule 901(a) is designed to
minimize reporting burdens, which could facilitate a more efficient
allocation of capital by reducing expenditures on security-based swap
reporting infrastructure.
e. Embargo Rule
    Rule 902(d), the Embargo Rule, prohibits the release of security-
based swap transaction information to persons (other than a
counterparty or post-trade processor) until that information has been
transmitted to a registered SDR. The Embargo Rule is designed to
promote competition among market participants in the security-based
swap market by prohibiting persons who obtain knowledge of a security-
based swap transaction shortly after execution from providing
information about that transaction to third parties before that
information is provided to a registered SDR so that it can be publicly
disseminated. In the absence of the Embargo Rule, selected third
parties who are told about executions could obtain an informational
advantage relative to other market participants, reducing the ability
of these other market participants to compete in the market. The
potential benefits of Regulation SBSR with respect to competition would
suffer in the absence of the Embargo Rule, because market participants
who gain earlier access to information could maintain a high degree of
information asymmetry in the market.
    Rule 902(d), as adopted, includes a carve-out for post-trade
processors, such as entities involved in comparing or clearing
transactions. This carve-out is designed to promote efficiency in the
processing of security-based swap transactions by recognizing that the
policy goals of the Embargo Rule are not served by impeding the ability
of security-based swap counterparties to obtain post-trade processing
services. Post-trade processors must obtain information about a
transaction to carry out their functions, even if the transaction has
not yet been reported to a registered SDR. In the absence of the carve-
out, efficiency could be harmed if post-trade processors were barred
from obtaining information about the transaction until it had been
publicly disseminated by a registered SDR. Without this carve-out,
Regulation SBSR could cause the services and functions provided by
post-trade processors to be delayed. This could result in a disruption
of current market practices, where post-trade processors provide a
variety of services to security-based swap counterparties, and thus a
reduction in security-based swap market efficiency.
5. Impact of Cross-Border Aspects of Regulation SBSR
a. General Considerations
    The security-based swap market is global in nature, and dealers and
other market participants are highly interconnected within this global
market. This interconnectedness provides a myriad of paths for
liquidity and risk to move throughout the financial system and makes it
difficult, in many cases, to precisely identify the impact of a
particular entity's activity on financial stability or liquidity. As a
corollary to this, it is difficult to isolate risk and liquidity
problems to one geographical segment of the market. Further, as we
noted in Section XXII(B)(1), security-based swap market participants in
one jurisdiction can conduct activity through branches or subsidiaries
located in another. These features of the market form the basis of the
Commission's analysis of the effects of rule 908 on competition,
efficiency and capital formation.
b. Regulatory Reporting and Public Dissemination
    Rule 908(a) generally applies regulatory reporting and public
dissemination requirements depending on the characteristics of the
counterparties involved in a transaction. The regulatory reporting
requirement allows the Commission and other relevant authorities the
ability to monitor risk and conduct market surveillance. Because the
security-based swap market represents a conduit through which financial
risks from foreign markets can manifest themselves in the United
States, the Commission believes that it is appropriate to focus on
those transactions that are likely to serve as routes for risk
transmission to the United States, either because a direct or indirect
counterparty is a U.S. person, is registered with the

Commission as a security-based swap dealer or major security-based swap
participant, or if the transaction is submitted to a clearing agency
having its principal place of business within the United States. A
regulatory reporting requirement that did not include within its scope
such transactions would provide the Commission with such an incomplete
view of transaction activity with potential to undermine the stability
of U.S. financial markets that it would likely undermine the beneficial
effects of a regulatory requirement on efficiency, competition and
capital formation.
    Under Regulation SBSR, as adopted, many of the provisions of
Regulation SBSR will apply to a cross-border security-based swap if one
of the direct counterparties, even if a non-U.S. person, is guaranteed
by a U.S. person. For example, Rule 908(a)(1)(i) requires regulatory
reporting of a security-based swap if there is a direct or indirect
counterparty that is a U.S. person on either or both sides of the
transaction. Because guarantees extended by U.S. persons on
transactions executed abroad can nevertheless import risk into the
United States, regulatory reporting of security-based swaps should
extend to any security-based swap transaction having an indirect
counterparty (i.e., a guarantor) that is a U.S. person. This will
improve the Commission's ability to monitor risks posed by activity
guaranteed by U.S. persons and, as a result, reduce any adverse impacts
on efficiency, competition, and capital formation that might arise
without this ability or that might arise from attempts by certain
market participants to shift activity into guaranteed foreign
subsidiaries in order to evade Regulation SBSR.
    Under the approach taken in this release, market participants could
avoid regulatory reporting and public dissemination requirements by
shifting activity into unguaranteed foreign subsidiaries, assuming
there was no other basis for Regulation SBSR to apply, such as the
direct counterparty being a U.S. person. Thus, the Commission's action
in distinguishing between guaranteed and unguaranteed foreign
subsidiaries of U.S. parent entities could affect how these parent
entities allocate capital across the organization. For example, a U.S.
parent could separately capitalize a foreign subsidiary to engage in
transactions with non-U.S. persons. If the U.S. parent takes such
action solely as a response to Title VII regulation, it is unlikely
that such a move would improve the efficiency with which the parent
allocates its capital.
    The primary economic effects of public dissemination of transaction
information are related to improving market transparency. Rule 908(a)
defines a scope of transactions subject to this requirement in the
cross-border context that considers the benefits of public
dissemination, including effects on efficiency, competition, and
capital formation. The scope defined by Rule 908(a) also considers the
potential costs that market participants could incur if counterparties
restructure their operations so that their activity falls outside of
the scope of Regulation SBSR and continues in a more opaque market.
Such a response could result in lessened competition in the security-
based swap market within the United States, less efficient risk-sharing
and pricing, and impaired capital formation.
    The public dissemination requirements under Regulation SBSR could
affect the behavior of foreign market participants in ways that reduce
market access for U.S. persons. For example, some non-U.S. persons
might seek to minimize their contact with U.S. persons in an effort to
avoid having their transactions publicly disseminated. Moreover, to the
extent that the Commission's rules treat the foreign business of U.S.
persons and non-U.S. persons differently from their respective U.S.
business, market participants could perceive an incentive to
restructure their business to separate their foreign and U.S.
operations.
    Programmatic benefits of this scope, beyond those already noted as
benefits of regulatory reporting, are related to the ability of market
observers to condition their beliefs about the security-based swap
market on realized transaction prices.\1378\ Post-trade transparency in
the U.S. security-based swap market could have spillover benefits in
foreign markets, even if those foreign markets impose no (or only
limited) post-trade transparency requirements.\1379\ Post-trade
transparency provided by Regulation SBSR will make transaction data
available to any market observer in the world. These data will also
allow global market observers to use security-based swap prices as an
input for valuation models and trading decisions for the same or
related instruments, thereby improving the efficiency of these
processes.\1380\
---------------------------------------------------------------------------

    \1378\ The effects of public dissemination are discussed more
generally in Section XXII(C)(2); the economic effects of Rule 908
that relate to efficiency, competition, and capital formation are
examined in Section XXII(D)(4)(i).
    \1379\ See Edwards, et al., supra note 1223. (presenting a model
implying, and finding empirical evidence in TRACE data for, what the
authors term a ``liquidity externality,'' i.e., improved market
quality in certain securities that were not yet TRACE-eligible, when
related securities had become subject to TRACE post-trade
transparency).
    \1380\ See supra Section XXII(C)(2)(a) (discussing the benefits
of improved valuation).
---------------------------------------------------------------------------

    Relevant authorities in other jurisdictions are currently engaged
in implementing their own regulatory reforms of the OTC derivatives
markets that could apply to participants in those foreign markets.
Regulatory differences among jurisdictions in the global security-based
swap markets could create incentives for business restructuring. To the
extent that such restructuring results from regulatory incentives
rather than economic fundamentals, efficiency in the real economy could
be reduced. Conflicting regulations or unnecessary duplication of
regulation also might lead to fragmented markets.\1381\
---------------------------------------------------------------------------

    \1381\ See, e.g., Arnoud W.A. Boot, Silva Dezelan, and Todd T.
Milbourn, ``Regulatory Distortions in a Competitive Financial
Services Industry,'' Journal of Financial Services Research, Vol.
17, No. 1 (2000) (showing that, in a simple industrial organization
model of bank lending, a change in the cost of capital resulting
from regulation results in a greater loss of profits when regulated
banks face competition from non-regulated banks than when
regulations apply equally to all competitors); Victor Fleischer,
``Regulatory Arbitrage,'' 89 Texas Law Review 227 (March 4, 2010)
(discussing how, when certain firms are able to choose their
regulatory structure, regulatory burdens are shifted onto those
entities that cannot engage in regulatory arbitrage).
---------------------------------------------------------------------------

    Even if the substance of statutory and regulatory efforts across
jurisdictions is comparable, different jurisdictions may impose new
regulatory requirements on different timelines. To the extent that
these timelines or the underlying requirements differ, market
participants might have the opportunity to take advantage of these
differences by making strategic choices, at least in the short term,
with respect to their transaction counterparties and business models.
For example, at a larger scale, firms may choose whether to participate
in or withdraw from the U.S. security-based swap market. As a result of
exits, registered security-based swap dealers that are U.S. persons
might have less access to foreign markets, unless they were to
restructure their business to conduct foreign transactions through
unguaranteed foreign subsidiaries whose transactions with non-U.S.
persons would not be subject to the regulatory reporting and public
dissemination under Regulation SBSR.
    These potential restructurings could impact competition in the U.S.
market. On one hand, the ability to restructure one's business rather
than exit the U.S. market entirely to avoid application of Title VII to
an entity's non-U.S. operations could reduce the number of entities
that exit the market, thus

mitigating the negative effects on competition described above. On the
other hand, non-registered U.S. persons may find that the only non-U.S.
person registered security-based swap dealers that are willing to deal
with them are those whose security-based swap business is sufficiently
large to afford the compliance costs associated with regulatory
reporting and public dissemination requirements. To the extent that
smaller dealers have an incentive to exit the market, the overall level
of competition in the market could decline.
    The Commission is mindful that, in the near term and until full
implementation of comparable requirements for regulatory reporting and
public dissemination of security-based swaps in other jurisdictions,
the rules may generate incentives for market participants to
restructure and reduce contact with U.S. market participants. As a
result, for example, U.S. market participants seeking to hedge risk
could face higher prices for hedging or fewer opportunities to hedge at
all, which could impede capital formation. Another result could be
inefficiency in risk allocation, because those market participants who
are best placed to take on risks shared through security-based swap
activity might be discouraged from doing so because of perceived
necessity to avoid regulatory reporting and public dissemination
requirements under Title VII. Furthermore, U.S. market participants
that are able to restructure their business across national boundaries
to avoid regulation are likely to be the largest financial institutions
that can bear the greatest risks. The remaining firms will likely be
smaller and have less capital with which to offer liquidity to the
market.
    Restructuring of business lines to take advantage of low-
transparency regimes also would impede transparency, as fewer
transactions would be subject to public dissemination under Regulation
SBSR. Market participants who had relocated abroad would still be able
to free-ride on price formation generated by the public dissemination
of others' transactions in the same or similar instruments while not
contributing any transactions of their own. The value of regulatory
reporting and public dissemination in the U.S. market would be reduced
to the extent that liquidity migrates to jurisdictions that are less-
transparent.\1382\
---------------------------------------------------------------------------

    \1382\ By the same token, regulatory reporting and public
dissemination in the U.S. security-based swap market could have
spillover benefits in foreign markets that trade the same or similar
instruments as the U.S. market, even if those foreign markets impose
no (or only limited) requirements. See supra note 1259.
---------------------------------------------------------------------------

c. Substituted Compliance
    Rule 908(c) provides that the Title VII requirements relating to
regulatory reporting and public dissemination of security-based swaps
may be satisfied by compliance with the rules of a foreign jurisdiction
if the Commission issues an order determining that the jurisdiction has
requirements that comparable to those of Regulation SBSR. Rule 908(c)
is designed to promote efficiency, competition, and capital formation
in the security-based swap market, to the extent practical, given the
state of regulatory reform of the OTC derivatives market being applied
by specific foreign jurisdictions.
    The Commission believes a regulatory regime that allows for
substituted compliance under comparable foreign rules promotes
efficiency by reducing the need for certain market participants to
double report security-based swaps (i.e., once to a foreign trade
repository or foreign regulatory authority and again to a registered
SDR). Substituted compliance also has the potential to improve market
and price efficiency by reducing or even eliminating instances of the
same transaction being publicly disseminated under two separate
systems. The Commission assumes that market observers will obtain and
utilize last-sale information about security-based swaps from any
available sources around the globe. Without substituted compliance, a
security-based swap that met the jurisdictional requirements of Rule
908(a)(2) of Regulation SBSR as well as the public dissemination rules
of a foreign jurisdiction would be publicly disseminated in both
jurisdictions. It might be difficult or impossible for market observers
to understand that the two trade reports represent the same
transaction, which would thus distort their view of the market. If the
Commission were to issue a substituted compliance order with respect to
that jurisdiction, market observers would see only a single report
(emanating from the foreign jurisdiction) of that transaction.
    While the rules governing substituted compliance are not designed
to promote efficiency at the regulatory level, they are designed at
least to minimize detractions from regulatory efficiency. Under
substituted compliance, certain cross-border transactions that
otherwise would be reported to an SEC-registered SDR would instead be
reported to a foreign trade repository or foreign regulatory authority.
Final Rule 908(c) requires, among other things, direct electronic
access to the foreign security-based swap data in order to make a
substituted compliance determination. However, there could be some
difficulties in normalizing and aggregating the data from SEC-
registered SDRs with the data from the foreign trade repositories or
foreign regulatory authorities.
    Overall, the Commission believes that, on balance, there will be
certain positive impacts on efficiency from allowing substituted
compliance. The principle behind this approach is that the Commission
would grant substituted compliance with respect to regulatory reporting
and public dissemination of security-based swaps in another
jurisdiction only if the requirements of that jurisdiction are
comparable to otherwise applicable requirements in Regulation SBSR. If
a foreign jurisdiction does not have a comparable regime for regulatory
reporting and public dissemination of security-based swaps, allowing
the possibility of substituted compliance could, on balance, erode any
impacts of Regulation SBSR on efficiency, to the extent that the
foreign jurisdiction's regulatory outcomes for regulatory reporting and
public dissemination differ from those under Regulation SBSR. This
result could be viewed as privately efficient by market participants
who might otherwise restructure their activities to avoid public
dissemination. However, the result also would be that many transactions
with significant connections to the U.S. market would remain opaque,
thus reducing opportunities for greater price competition and price
discovery. Moreover, granting substituted compliance in such cases
could provide incentives for foreign jurisdictions to impose lower
regulatory standards for security-based swaps than those mandated by
Title VII. Under the rules, as adopted, the Commission may not grant
substituted compliance unless the foreign jurisdiction's rules are
comparable to otherwise applicable requirements.
    Under Rule 908(c), the Commission could make a determination of
comparability for regulatory reporting and public dissemination either
separately or together. A few commenters argued that the Commission
should separate them, which would, for example, permit substituted
compliance for regulatory reporting for a foreign jurisdiction, but not
for public dissemination.\1383\ The Commission agrees with the
commenter's suggestions and has determined to take such an approach.

Permitting substituted compliance for regulatory reporting but not for
public dissemination might be privately efficient for firms, who would
be obligated to report transactions to a foreign jurisdiction for
regulatory purposes, but would be obligated to only report to a
registered SDR only those data elements necessary for public
dissemination under Regulation SBSR. The Commission could, for
instance, permit transactions to be reported into a foreign
jurisdiction with no or only limited public dissemination requirements.
---------------------------------------------------------------------------

    \1383\ See supra note 917.
---------------------------------------------------------------------------

    One commenter correctly pointed out that there are a few classes of
security-based swap for which Regulation SBSR requires regulatory
reporting but not public dissemination and argued, therefore, that the
Commission should permit itself to grant substituted compliance for
regulatory reporting only (and not public dissemination) for these
classes.\1384\ The Commission agrees with the commenter and is adopting
Rule 908(c) with certain revisions that will allow the Commission to
issue a substituted compliance order with respect to regulatory
reporting but not public dissemination in such cases.\1385\ This
revision should increase the scope of transactions that may enjoy the
efficiency benefits of substituted compliance discussed above.
---------------------------------------------------------------------------

    \1384\ See IIB Letter at 25. See also Rule 902(c).
    \1385\ See supra Section XV(E)(6).
---------------------------------------------------------------------------

E. Aggregate Quantifiable Total Costs

    Based on the foregoing, the Commission estimates that Regulation
SBSR will impose an initial one-time cost of approximately $194,500,000
on all entities.\1386\ The Commission estimates that Regulation SBSR
will impose a total ongoing annual aggregate cost of approximately
$275,500,000 for all entities.\1387\ With regard to registered SDRs,
the Commission estimates that Regulation SBSR will impose an initial
aggregate one-time cost of approximately $63,700,000,\1388\ and an
ongoing aggregate annual cost of approximately $98,800,000.\1389\
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    \1386\ The Commission derived its estimate from the following:
[($360,000 (Rule 901 one-time costs on registered SDRs)) +
($20,000,000 (Rule 902 one-time costs on registered SDRs)) +
($2,000,000 (Rule 905 one-time costs on registered SDRs)) +
($330,000 (Rule 906 one-time costs on registered SDRs)) +
($41,000,000 (Rule 907 one-time costs on registered SDRs)) +
($3,190,000 (Rule 906 one-time costs on covered participants) +
($121,800,000 (Rule 901 one-time costs on reporting sides) +
($720,200 (Rule 903 one-time costs on SDR participants)) +
($3,547,500 (Rule 905 one-time costs on reporting sides) +
($1,540,000 (Rule 908(c) one-time costs on requesting entities)] =
$194,487,700, or approximately $194,500,000.
    \1387\ The Commission derived its estimate from the following:
[($455,000 (Rule 901 ongoing annual costs on registered SDRs)) +
($12,000,000 (Rule 902 ongoing annual costs on registered SDRs)) +
($45,000 (Rule 904 ongoing annual costs on registered SDRs)) +
($4,000,000 (Rule 905 ongoing annual costs on registered SDRs)) +
($300,000 (Rule 906 ongoing annual costs on registered SDRs)) +
($82,000,000 (Rule 907 ongoing annual costs on registered SDRs)) +
($1,870,000 (Rule 906 ongoing annual costs on covered participants))
+ ($95,700,000 (Rule 901 ongoing annual costs on reporting sides)) +
($2,352,000 (Rule 903 one-time costs on SDR participants)) +
($1,192,500 (Rule 905 ongoing annual costs on reporting sides)) +
($64,000,000 (Rule 905 ongoing annual costs on non-reporting sides))
+ ($13,400,000 (Rule 906 ongoing annual costs on all participants))
+ ($1,540,000 (Rule 908(c) costs of requests in the first year)] =
$275,444,500 or approximately $275,500,000.
    \1388\ The Commission derived its estimate from the following:
[($360,000 (Rule 901 one-time costs on registered SDRs)) +
($20,000,000 (Rule 902 one-time costs on registered SDRs)) +
($2,000,000 (Rule 905 one-time costs on registered SDRs)) +
($330,000 (Rule 906 one-time costs on registered SDRs)) +
($41,000,000 (Rule 907 one-time costs on registered SDRs))] =
$63,690,000 or approximately $63,700,000.
    \1389\ The Commission derived its estimate from the following:
[($455,000 (Rule 901 ongoing annual costs on registered SDRs)) +
($1,000,000 (Rule 902 ongoing annual costs on registered SDRs)) +
($45,000 (Rule 904 ongoing annual costs on registered SDRs)) +
($4,000,000 (Rule 905 ongoing annual costs on registered SDRs)) +
($300,000 (Rule 906 ongoing annual costs on registered SDRs)) +
($82,000,000 (Rule 907 ongoing annual costs on registered SDRs))] =
$98,800,000.
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XXIII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires federal agencies,
in promulgating rules, to consider the impact of those rules on small
entities. Section 603(a) of the Administrative Procedure Act,\1390\ as
amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules, or proposed rule
amendments, to determine the impact of such rulemaking on ``small
entities.'' \1391\ Section 605(b) of the RFA \1392\ states that this
requirement shall not apply to any proposed rule or proposed rule
amendment which, if adopted, would not have a significant economic
impact on a substantial number of small entities.
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    \1390\ 5 U.S.C. 603(a).
    \1391\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451
(January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
    \1392\ 5 U.S.C. 605(b).
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    In developing the final rules contained in Regulation SBSR, the
Commission has considered their potential impact on small entities. For
purposes of Commission rulemaking in connection with the RFA, a small
entity includes: (1) When used with reference to an ``issuer'' or a
``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \1393\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\1394\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\1395\
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    \1393\ See 17 CFR 240.0-10(a).
    \1394\ 17 CFR 240.17a-5(d).
    \1395\ See 17 CFR 240.0-10(c).
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    The Regulation SBSR Proposing Release stated that, based on input
from security-based swap market participants and its own information,
the Commission preliminarily believed that the majority of security-
based swap transactions have at least one counterparty that is either a
security-based swap dealer or major security-based swap participant,
and that these entities, whether registered broker-dealers or not,
would exceed the thresholds defining ``small entities'' set out
above.\1396\ Thus, the Commission noted that it preliminarily believed
that neither of these types of entities would likely qualify as small
entities for purposes of the RFA.\1397\ Moreover, in the Regulation
SBSR Proposing Release, the Commission noted that, even in cases where
one of the counterparties to a security-based swap was outside of the
categories of security-based swap dealer or major security-based swap
participant, the Commission preliminarily did not believe any such
entities would be ``small entities'' as defined in Commission Rule 0-
10.\1398\ In this regard, the Commission noted that feedback from
industry participants and the Commission's own information about the
security-based swap market (including a survey conducted by the Office
of the Comptroller of the Currency) indicated that only persons or
entities with assets significantly in excess of $5 million participate
in the

security-based swap market.\1399\ As a result, the Commission stated
its preliminarily belief that the vast majority of, if not all,
security-based swap transactions are between large entities for
purposes of the RFA.\1400\
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    \1396\ See Regulation SBSR Proposing Release, 75 FR 75282.
    \1397\ See id.
    \1398\ See id. at 75283.
    \1399\ See id.
    \1400\ See id.
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    Similarly, in the Regulation SBSR Proposing Release, the Commission
stated its preliminarily belief that the entities likely to register as
SDRs would not be small entities.\1401\ Based on input from security-
based swap market participants and its own information, the Commission
stated its preliminarily belief that most if not all the registered
SDRs would be part of large business entities, and that all registered
SDRs would have assets exceeding $5 million and total capital exceeding
$500,000.\1402\ On this basis, the Commission preliminarily believed
that the number of security-based swap transactions involving a small
entity as that term is defined for purposes of the RFA would be de
minimis and that no aspect of proposed Regulation SBSR would be likely
to alter the type of counterparties presently engaging in security-
based swap transactions.\1403\ Therefore, the Commission preliminarily
did not believe that proposed Regulation SBSR would impact any small
entities.\1404\
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    \1401\ See id.
    \1402\ See id.
    \1403\ See id.
    \1404\ See id.
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    As a result, in the Regulation SBSR Proposing Release, the
Commission certified that Regulation SBSR would not have a significant
economic impact on a substantial number of small entities for purposes
of the RFA and requested written comments regarding this
certification.\1405\ Specifically, the Commission requested that
commenters describe the nature of any impact on small entities,
indicate whether they believe that participants and registered SDRs are
unlikely to be small entities, and provide empirical data to support
their responses.\1406\ The Commission did not receive any comments
contrary to its conclusion.
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    \1405\ See id.
    \1406\ See id.
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    The Commission continues to believe that few if any security-based
swap counterparties that would incur duties under Regulation SBSR, as
adopted, are ``small entities'' as defined in Commission Rule 0-10.
Feedback from industry participants and the Commission's own
information about the security-based swap market indicate that only
persons or entities with assets significantly in excess of $5 million
participate in the security-based swap market.\1407\ The Commission
continues to believe that the vast majority of, if not all, security-
based swap transactions are between large entities for purposes of the
RFA.
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    \1407\ See id. See also Cross-Border Proposing Release, 78 FR
31205.
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    Based on input from security-based swap market participants and its
own information, the Commission continues to believe that registered
SDRs would be part of large business entities, and that all registered
SDRs would have assets exceeding $5 million and total capital exceeding
$500,000. Therefore, the Commission continues to believe that none of
the registered SDRs would be small entities.
    The Commission believes that the number of security-based swap
transactions involving a small entity as that term is defined for
purposes of the RFA would be de minimis. Moreover, the Commission does
not believe that any aspect of Regulation SBSR would be likely to alter
the type of counterparties presently engaging in security-based swap
transactions. Therefore, the Commission does not believe that
Regulation SBSR would impact any small entities.
    For the foregoing reasons, the Commission certifies that Regulation
SBSR would not have a significant economic impact on a substantial
number of small entities for purposes of the RFA.

XXIV. Statutory Basis and Text of Final Rules

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly Sections 3C(e), 11A(b), 13(m)(1), 13A(a), 23(a)(1), 30(c),
and 36(a), 15 U.S.C. 78c-3(e), 78k-1(b), 78m(m)(1), 78m-1(a),
78w(a)(1), 78dd(c), and 78mm(a) thereof, the Commission is adopting
Rules 900, 901, 902, 903, 904, 905, 906, 907, 908, and 909 under the
Exchange Act.

List of Subjects in 17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
1. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-l(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37, unless otherwise noted.

0
2. The heading for part 242 is revised as set forth above.

0
3. Add Sec. Sec.  242.900, 242.901, 242.902, 242.903, 242.904, 242.905,
242.906, 242.907, 242.908, and 242.909 under an undesignated center
heading to read as follows:

Regulation SBSR--Regulatory Reporting and Public Dissemination of
Security-Based Swap Information

Sec.
242.900 Definitions
242.901 Reporting obligations.
242.902 Public dissemination of transaction reports.
242.903 Coded information.
242.904 Operating hours of registered security-based swap data
repositories.
242.905 Correction of errors in security-based swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of registered security-based swap
data repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap data repository as a
securities information processor.

Sec.  242.900  Definitions.

    Terms used in Sec. Sec.  242.900 through 242.909 that appear in
Section 3 of the Exchange Act (15 U.S.C. 78c) have the same meaning as
in Section 3 of the Exchange Act and the rules or regulations
thereunder. In addition, for purposes of Regulation SBSR (Sec. Sec.
242.900 through 242.909), the following definitions shall apply:
    (a) Affiliate means any person that, directly or indirectly,
controls, is controlled by, or is under common control with, a person.
    (b) Asset class means those security-based swaps in a particular
broad category, including, but not limited to, credit derivatives and
equity derivatives.
    (c) [Reserved].
    (d) Branch ID means the UIC assigned to a branch or other
unincorporated office of a participant.
    (e) Broker ID means the UIC assigned to a person acting as a broker
for a participant.
    (f) Business day means a day, based on U.S. Eastern Time, other
than a Saturday, Sunday, or a U.S. federal holiday.
    (g) Clearing transaction means a security-based swap that has a
registered clearing agency as a direct counterparty.
    (h) Control means, for purposes of Sec. Sec.  242.900 through
242.909, the

possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise. A person