[Federal Register Volume 81, Number 33 (Friday, February 19, 2016)]
[Rules and Regulations]
[Pages 8597-8637]
[FR Doc No: 2016-03178]

Vol. 81

Friday,

No. 33

February 19, 2016

Part II

Securities and Exchange Commission

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17 CFR Part 240

Security-Based Swap Transactions Connected With a Non-U.S. Person's
Dealing Activity That Are Arranged, Negotiated, or Executed by
Personnel Located in a U.S. Branch or Office or in a U.S. Branch or
Office of an Agent; Security-Based Swap Dealer De Minimis Exception;
Final Rule

Federal Register / Vol. 81 , No. 33 / Friday, February 19, 2016 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-77104; File No. S7-06-15]
RIN 3235-AL73

Security-Based Swap Transactions Connected With a Non-U.S.
Person's Dealing Activity That Are Arranged, Negotiated, or Executed by
Personnel Located in a U.S. Branch or Office or in a U.S. Branch or
Office of an Agent; Security-Based Swap Dealer De Minimis Exception

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting amendments to Exchange Act rules 3a71-3 and
3a71-5 that address the application of the de minimis exception to
security-based swap transactions connected with a non-U.S. person's
security-based swap dealing activity that are arranged, negotiated, or
executed by personnel of such person located in a U.S. branch or
office, or by personnel of such person's agent, located in a U.S.
branch or office.

DATES: Effective Date: April 19, 2016. Compliance Date: The later of
(a) February 21, 2017 or (b) the SBS Entity Counting Date, as defined
in Section VII of the Supplementary Information.

FOR FURTHER INFORMATION CONTACT: Carol McGee, Assistant Director,
Richard Gabbert, Senior Special Counsel, or Margaret Rubin, Special
Counsel, Office of Derivatives Policy, at<PHONE_NUMBER>, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is amending Exchange Act rule
3a71-3 (addressing the cross-border implementation of the de minimis
exception to the ``security-based swap dealer'' definition and the
definition of certain terms) and Exchange Act rule 3a71-5 (regarding
availability of an exception from the dealer de minimis analysis for
cleared anonymous transactions that fall within rule 3a71-
3(b)(1)(iii)(C)).

Table of Contents

I. Background
    A. Scope of This Rulemaking
    B. The Dodd-Frank Act
    C. Relevant Proposing Releases
    D. Relevant CFTC Guidance
    E. Overview of Comments Received
II. Economic Considerations and Baseline Analysis
    A. Baseline
    1. Available Data Regarding Security-Based Swap Activity
    2. Security-Based Swap Market: Market Participants and Dealing
Structures
    3. Security-Based Swap Market: Levels of Security-Based Swap
Trading Activity
    4. Global Regulatory Efforts
    5. Cross-Market Participation
    B. Economic Considerations
III. Overview of Prior Proposals
IV. Final Rules
    A. Overview
    B. Statutory Scope and Policy Concerns Arising From Security-
Based Swap Dealing Activity in the United States
    1. Territorial Application of ``Security-Based Swap Dealer''
Definition
    2. Policy Concerns Associated With Security-Based Swap Dealing
Activity in the United States
    3. Existing Regulatory Frameworks and Security-Based Swap Dealer
Regulation
    C. Application of the Dealer De Minimis Exception to Non-U.S.
Persons Using Personnel Located in a U.S. Branch or Office To
Arrange, Negotiate, or Execute Security-Based Swap Transactions
    1. ``Arranging, Negotiating, or Executing'' a Security-Based
Swap Transaction
    2. ``Located in a U.S. Branch or Office''
    3. ``Personnel of Such Non-U.S. Person'' or ``Personnel of an
Agent''
    4. Exception for Transactions Involving Certain International
Organizations
    D. Availability of the Exception for Cleared Anonymous
Transactions
V. Economic Analysis
    A. Assessment Costs
    1. Costs Associated With Increase in Number of Firms Performing
Analysis
    2. Costs Associated With Determining the Location of Relevant
Personnel Who Arrange, Negotiate, or Execute a Transaction
    B. Programmatic Costs and Benefits
    1. Benefits and Costs of the Final Rules
    2. Effects of Rule Amendments on Efficiency, Competition, and
Capital Formation
    C. Alternatives Considered
    1. Retention of the Definition of ``Transaction Conducted Within
the United States''
    2. Limited Exception From Title VII Requirements for
Transactions Arranged, Negotiated, and Executed by Personnel Subject
to Existing Domestic or Foreign Regulatory Requirements
    3. Non-Inclusion of Security-Based Swap Transactions Involving
Dealing Activity in the United States in the De minimis Threshold
Calculations
    4. Exception for Transactions Entered Into Anonymously on an
Exchange and Cleared
    5. Exception for Transactions Cleared Through Foreign Clearing
Agencies
    6. Exception for Transactions Arranged, Negotiated, or Executed
in the United States Merely to Accommodate Foreign Clients' Needs
When Foreign Markets Are Closed
VI. Regulatory Flexibility Act Certification
VII. Effective Date and Implementation
    Statutory Basis and Text of Final Rules

I. Background

A. Scope of This Rulemaking

    In April 2015, the Commission proposed to amend certain rules and
to re-propose a rule regarding the application of Title VII of the
Dodd-Frank Act \1\ (``Title VII'') to cross-border security-based swap
transactions and persons engaged in those transactions.\2\ The proposed
amendments included rules regarding the application of the de minimis
exception to the dealing activity of non-U.S. persons carried out, in
relevant part, by personnel located in the United States,\3\ and the
application of Regulation SBSR \4\ to such transactions and to
transactions effected by or through a registered broker-dealer, along
with certain related issues. We also re-proposed a rule regarding the
application of business conduct requirements to the foreign business
and U.S. business of registered security-based swap dealers.\5\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise
indicated, references to Title VII in this release are to Subtitle B
of Title VII.
    \2\ Application of Certain Title VII Requirements to Security-
Based Swap Transactions Connected With a Non-U.S. Person's Dealing
Activity That Are Arranged, Negotiated, or Executed by Personnel
Located in a U.S. Branch or Office or in a U.S. Branch or Office of
an Agent, Exchange Act Release No. 74834 (April 29, 2015), 80 FR
27443 (May 13, 2015) (``U.S. Activity Proposing Release'').
    \3\ In this release, unless otherwise noted, we use the terms
``personnel located in the United States'' or ``personnel located in
a U.S. branch or office'' interchangeably to refer to personnel of
the non-U.S. person engaged in security-based swap dealing activity
who are located in a U.S. branch or office, or to personnel of an
agent of such non-U.S. person who are located in a U.S. branch or
office.
    \4\ Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information; Final Rule, Exchange Act Release No. 74244
(February 11, 2015), 80 FR 14563 (March 19, 2015) (``Regulation SBSR
Adopting Release'').
    \5\ Each of these issues had previously been considered in our
May 23, 2013 proposal, in which we proposed rules regarding the
application of Title VII in the cross-border context more generally.
See Cross-Border Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78
FR 30967 (May 23, 2013) (``Cross-Border Proposing Release'').
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    In this release, we are adopting rule amendments relating
specifically to the first of these issues: The application of the de
minimis exception to non-U.S. persons that are engaged in dealing
activity with other non-U.S. persons using personnel located in the
United States. Consistent with the proposal, these amendments focus on
the activity of the person or persons acting in a dealing capacity in
the transaction. Specifically, Exchange Act rule 3a71-3(b)(1)(iii)(C)
requires a non-U.S. person to include in its de minimis calculation

any transaction with a non-U.S.-person counterparty that is, in
connection with its dealing activity, arranged, negotiated, or executed
by personnel of the non-U.S. person located in a U.S. branch or office
or by personnel of the non-U.S. person's agent located in a U.S. branch
or office. This test (``U.S. Activity Test'') focuses on the location
of the personnel acting on behalf of the non-U.S. person engaged in
dealing activity. This approach focuses on the activities of non-U.S.
persons that are most likely to raise the types of concerns addressed
by Title VII security-based swap dealer regulation. At the same time,
it avoids the unnecessary complexity of the initially proposed
application of the de minimis exception to transactions between two
non-U.S. persons based on the location of dealing activity. The final
rules do not require a non-U.S. person engaging in dealing activity to
consider the location of any activity carried out by or on behalf of
its counterparty in determining whether the transaction needs to be
included in its own de minimis calculation.
    We are not addressing in this release any of the other elements of
the April 2015 proposal. We anticipate addressing the remaining issues
(including the application of business conduct standards, of Regulation
SBSR to certain transactions, and the application of clearing and trade
execution requirements more generally) in subsequent releases.\6\
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    \6\ Cf. Letter from Citadel, dated February 2, 2016, at 12
(urging the Commission to address the scope of the Title VII
mandatory clearing or trading requirement ``in the context of those
specific rulemakings, rather than in an overarching cross-border
rule'').
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    Further, we note that these rules complete our rulemaking
implementing the de minimis exception for security-based swap dealers.
However, in the Intermediary Definitions Adopting Release we adopted
rule 3a71-2 establishing a phase-in period in connection with a
person's status as a security-based swap dealer and other regulatory
requirements arising from dealer status.\7\ We established a $3 billion
notional threshold for the de minimis exception with respect to single-
name credit default swaps (``CDS''), subject to a phase-in level of $8
billion.\8\ During the phase-in period Commission staff will study the
security-based swap market as it evolves under the new regulatory
framework, resulting in a report that will consider the operation of
the ``security-based swap dealer'' and ``major security-based swap
participant'' definitions. As we explained in the Intermediary
Definitions Adopting Release, at the end of the phase-in period, we
will take into account the report, as well as public comment on the
report, in determining whether to terminate the phase-in period or
propose any changes to the rules implementing the de minimis exception,
including any increases or decreases to both the $3 billion threshold
for credit default swaps and the $150 million threshold for other types
of security-based swaps.\9\
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    \7\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' Exchange
Act Release No. 66868 (April 27, 2012), 77 FR 30595, 30640 (May 23,
2012) (``Intermediary Definitions Adopting Release'').
    \8\ See Exchange Act rule 3a71-2. The threshold and phase-in
levels for other types of security-based swaps are $150 million and
$400 million, respectively. See id.
    \9\ See Intermediary Definitions Adopting Release, 77 FR 30640-
41 and n.523.
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B. The Dodd-Frank Act

    As we have previously noted, Title VII of the Dodd-Frank Act
provides for a comprehensive new regulatory framework for swaps and
security-based swaps.\10\ Under this framework, the Commodity Futures
Trading Commission (``CFTC'') regulates ``swaps'' while the Commission
regulates ``security-based swaps,'' and the Commission and CFTC jointly
regulate ``mixed swaps.'' Security-based swap transactions are largely
cross-border in practice,\11\ and the various market participants and
infrastructures operate in a global market. A key part of this
framework is the regulation of security-based swap dealers, which may
transact extensively with counterparties established or located in
other jurisdictions and, in doing so, may conduct sales and trading
activity in one jurisdiction and book the resulting transactions in
another. These market realities and the potential impact that these
activities may have on U.S. persons and potentially the U.S. financial
system have informed our consideration of these rules.
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    \10\ See U.S. Activity Proposing Release, 80 FR 27446.
    \11\ See Section II.A.3, infra, regarding the preponderance of
cross-border activity in the security-based swap market.
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    In developing these final rules, we have consulted and coordinated
with the CFTC and the prudential regulators \12\ in accordance with the
consultation mandate of the Dodd-Frank Act.\13\ We also have consulted
and coordinated with foreign regulatory authorities through Commission
staff participation in numerous bilateral and multilateral discussions
with foreign regulatory authorities addressing the regulation of OTC
(over-the-counter) derivatives.\14\ Through these discussions and the
Commission staff's participation in various international task forces
and working groups,\15\ we have gathered information about foreign
regulatory reform efforts and their impact on and relationship with the
U.S. regulatory regime. The Commission has taken and will continue to
take these discussions into consideration in developing rules, forms,
and interpretations for implementing Title VII of the Dodd-Frank
Act.\16\
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    \12\ The term ``prudential regulator'' is defined in section
1a(39) of the Commodity Exchange Act, 7 U.S.C. 1a(39), and that
definition is incorporated by reference in section 3(a)(74) of the
Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to the definition, the
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Farm Credit Administration, or the Federal Housing
Finance Agency (collectively, the ``prudential regulators'') is the
``prudential regulator'' of a security-based swap dealer or major
security-based swap participant if the entity is directly supervised
by that regulator.
    \13\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.'' See Letter
from Managed Funds Association, dated July 13, 2015 (``MFA
Letter''), at 4 (emphasizing need for Commission and its U.S.
counterparts to develop a single, harmonized approach to cross-
border derivatives regulation).
    \14\ For example, senior representatives of authorities with
responsibility for regulation of OTC derivatives have met on a
number of occasions to discuss international coordination of OTC
derivatives regulations. See, e.g., Report of the OTC Derivatives
Regulators Group to G20 Leaders on Cross-Border Implementation
Issues November 2015 (November 2015), available at<EMAIL_ADDRESS>    \15\ Commission representatives participate in the Financial
Stability Board's Working Group on OTC Derivatives Regulation
(``ODWG''), both on the Commission's behalf and as the
representative of the International Organization of Securities
Commissions (``IOSCO''), which is co-chair of the ODWG. A Commission
representative serves as one of the co-chairs of the IOSCO Task
Force on OTC Derivatives Regulation. Commission representatives
participate in joint working groups of the Committee on Payments and
Market Infrastructures (``CPMI'') and IOSCO that examine key data
elements of OTC derivatives transactions and participated in the
Financial Stability Board's review of OTC derivatives trade
reporting. Commission representatives also participate in
international working groups that impact OTC derivatives financial
market infrastructures, such as CPMI-IOSCO joint working groups that
assess legal and regulatory frameworks for central counterparties
and trade repositories and that examine central counterparty
resilience and recovery.
    \16\ See Section 752(a) of the Dodd-Frank Act (providing in part
that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.'').

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C. Relevant Proposing Releases

    As discussed in further detail below, we have twice proposed rules
related to the application of the dealer de minimis calculations to
security-based swap transactions that involve activity in the United
States. In both proposals, we discussed the global nature of the
security-based swap market and explained our view that dealing activity
carried out by a non-U.S. person through a branch, office, affiliate,
or agent acting on its behalf in the United States may raise concerns
that Title VII addresses, even if a significant proportion--or all--of
those transactions involve non-U.S.-person counterparties.\17\
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    \17\ See Cross-Border Proposing Release, 78 FR 31000-01; U.S.
Activity Proposing Release, 80 FR 27463.
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    We initially proposed to require any non-U.S. person engaged in
dealing activity to include in its de minimis calculation any
``transaction conducted within the United States.'' \18\ Thus, under
the Cross-Border Proposing Release, a non-U.S. person engaged in
security-based-swap dealing activity would have been required to
include in its de minimis calculation any dealing transaction entered
into with another non-U.S. person that was conducted in the United
States by either the non-U.S. person engaged in dealing activity or its
counterparty. In our April 2015 proposal, we proposed a modified
approach to applying the dealer de minimis exception to transactions
between two non-U.S. persons based on activity in the United States
that focused exclusively on the location of personnel engaged in
relevant activity in connection with a non-U.S. person's dealing
activity.\19\
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    \18\ Cross-Border Proposing Release, 78 FR 30999-31000.
    \19\ See U.S. Activity Proposing Release, 80 FR 27459.
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D. Relevant CFTC Guidance

    As discussed in our April 2015 proposal, the CFTC's Division of
Swap Dealer and Intermediary Oversight issued a Staff Advisory (``CFTC
Staff Advisory'') in November 2013 that addressed the applicability of
the CFTC's transaction-level requirements to certain activity by non-
U.S. registered swap dealers arranged, negotiated, or executed by
personnel or agents of the non-U.S. swap dealer located in the United
States.\20\ The CFTC subsequently solicited and received public comment
on various aspects of the CFTC Staff Advisory,\21\ and we discussed
these comments in our April 2015 proposal.\22\ On August 13, 2015, the
CFTC staff extended no-action relief related to the CFTC Staff Advisory
until the earlier of September 30, 2016, or the effective date of any
CFTC action addressing related issues.\23\
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    \20\ See CFTC Staff Advisory No. 13-69, ``Division of Swap
Dealer and Intermediary Oversight Advisory: Applicability of
Transaction-Level Requirements to Activity in the United States''
(November 14, 2013), available at<EMAIL_ADDRESS>    In the Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations (July 17, 2013), 78 FR
45292 (July 26, 2013) (``CFTC Cross-Border Guidance''), the CFTC
defined transaction-level requirements to include the following: (i)
Required clearing and swap processing; (ii) margining (and
segregation) for uncleared swaps; (iii) mandatory trade execution;
(iv) swap trading relationship documentation; (v) portfolio
reconciliation and compression; (vi) real-time public reporting;
(vii) trade confirmation; (viii) daily trading records; and (ix)
external business conduct standards. See CFTC Cross-Border Guidance,
78 FR 45333.
    \21\ See Request for Comment on Application of Commission
Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S.
Counterparties Involving Personnel or Agents of the Non-U.S. Swap
Dealers Located in the United States, 79 FR 1347 (January 8, 2014)
(``CFTC Request for Comment'').
    \22\ See U.S. Activity Proposing Release, 80 FR 27461-63.
    \23\ See Extension of No-Action Relief: Transaction-Level
Requirements for Non-U.S. Swap Dealers, CFTC Letter No. 15-48
(August 13, 2015), available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

E. Overview of Comments Received

    As we discuss in more detail below, we received fifteen comment
letters in response to our U.S. Activity Proposing Release. These
comment letters address a range of issues, including the scope of the
proposed U.S. Activity Test and concerns about its use as a trigger for
the counting of transactions toward the de minimis thresholds of non-
U.S. persons, as well as other issues--such as external business
conduct, regulatory reporting and public dissemination, and mandatory
trade execution and clearing--that we anticipate addressing in
subsequent releases. Several commenters expressed support for our
proposed U.S. Activity Test, and one commenter expressed general
support for the rules proposed in the U.S. Activity Proposing
Release.\24\ Several commenters, however, raised concerns about the use
of the U.S. Activity Test to identify transactions that non-U.S.
persons are required to include in their dealer de minimis
calculations, arguing, among other things, that capturing these
transactions would not advance the mitigation of risk, which commenters
identified as the principal concern of Title VII dealer regulation,\25\
would impose excessive costs on market participants,\26\ and would
cause market fragmentation and decreased liquidity for U.S. market
participants.\27\
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    \24\ See Letter from Chris Barnard, dated June 26, 2015 (``Chris
Barnard Letter''), at 2.
    \25\ See, e.g., Letter from International Swaps and Derivatives
Association (``ISDA''), dated July 13, 2015 (``ISDA Letter''), at 5-
6.
    \26\ See Letter from Institute of International Bankers, dated
July 13, 2015 (``IIB Letter''), at 7; ISDA Letter at 6; Letter from
Securities Industry and Financial Markets Association and Financial
Services Roundtable, dated July 13, 2015 (``SIFMA/FSR Letter''), at
6; Letter from HSBC, dated July 13, 2015 (``HSBC Letter''), at 1-3;
Letter from Securities Industry and Financial Markets Association,
dated January 13, 2015 (``SIFMA Sequencing Letter''), at 5.
    \27\ See, e.g., SIFMA/FSR Letter at 2, 6; IIB Letter at 2; ISDA
Letter at 5.
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II. Economic Considerations and Baseline Analysis

    These final rules will determine when a non-U.S. person engaged in
dealing activity and whose obligations under a security-based swap are
not guaranteed by a U.S. person and that is not a conduit affiliate is
required to include in its dealer de minimis threshold calculations
transactions with another non-U.S. person.\28\ To provide context for
understanding our final rules and the related economic analysis that
follows, this section provides an overview of the current state of the
security-based swap market and the existing regulatory framework; it
also identifies economic considerations that we believe underlie the
likely economic effects of these rules.
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    \28\ Pursuant to Exchange Act rules 3a71-3(b)(1)(ii) and
(iii)(B), any transaction of a non-U.S. person engaged in dealing
activity and that is a conduit affiliate or whose counterparty to
the security-based swap has rights of recourse against a U.S. person
that is controlling, controlled by, or under common control with the
non-U.S. person is already required to be counted toward the non-
U.S. person's de minimis thresholds regardless of where personnel of
the non-U.S. person arranges, negotiates, or executes the
transactions.
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A. Baseline

    To assess the economic impact of the final rules described in this
release, we are using as our baseline the security-based swap market as
it exists at the time of this release, including applicable rules we
have already adopted but excluding rules that we have proposed but not
yet finalized.\29\ The analysis includes the statutory provisions that
currently govern the security-based swap market pursuant to the Dodd-
Frank Act and rules adopted in the Intermediary Definitions Adopting
Release, the Cross-Border

Adopting Release,\30\ the SDR Rules and Core Principles Adopting
Release,\31\ the SBS Entity Registration Adopting Release,\32\ and the
Regulation SBSR Adopting Release,\33\ as these final rules--even if
compliance is not yet required--are part of the existing regulatory
landscape that market participants expect to govern their security-
based swap activity. The following sections describe current security-
based swap market activity, participants, common dealing structures,
counterparties, and patterns of cross-border and cross-market
participation.
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    \29\ We also considered, where appropriate, the impact of rules
and technical standards promulgated by other regulators, such as the
CFTC and the European Securities and Markets Authority, on practices
in the security-based swap market.
    \30\ See Application of ``Security-Based Swap Dealer'' and
``Major-Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No.
72472 (June 25, 2014), 79 FR 47277 (August 12, 2014 (republication))
(``Cross-Border Adopting Release'').
    \31\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246
(February 11, 2015), 80 FR 14437 (March 19, 2015) (``SDR Rules and
Core Principles Adopting Release'').
    \32\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, Exchange Act Release No.
75611 (August 5, 2015), 80 FR 48963 (August 14, 2015) (``SBS Entity
Registration Adopting Release'').
    \33\ See Regulation SBSR-Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(February 11, 2015), 80 FR 14563 (March 19, 2015) (``Regulation SBSR
Adopting Release'').
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1. Available Data Regarding Security-Based Swap Activity
    Our understanding of the market is informed in part by available
data on security-based swap transactions, though we acknowledge that
limitations in the data limit the extent to which we can quantitatively
characterize the market.\34\ Because these data do not cover the entire
market, we have developed an understanding of market activity using a
sample of transactions data that includes only certain portions of the
market. We believe, however, that the data underlying our analysis here
provide reasonably comprehensive information regarding single-name CDS
transactions and the composition of participants in the single-name CDS
market.
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    \34\ We also rely on qualitative information regarding market
structure and evolving market practices provided by commenters, both
in letters and in meetings with Commission staff, and knowledge and
expertise of Commission staff.
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    Specifically, our analysis of the state of the current security-
based swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2008 to 2014. According to data
published by the Bank for International Settlements (``BIS''), the
global notional amount outstanding in single-name CDS was approximately
$9.04 trillion,\35\ in multi-name index CDS was approximately $6.75
trillion, and in multi-name, non-index CDS was approximately $611
billion. The total gross market value outstanding in single-name CDS
was approximately $366 billion, and in multi-name CDS instruments was
approximately $227 billion.\36\ The global notional amount outstanding
in equity forwards and swaps as of December 2014 was $2.50 trillion,
with total gross market value of $177 billion.\37\ As these figures
show (and as we have previously noted), although the definition of
security-based swaps is not limited to single-name CDS, single-name CDS
contracts make up a majority of security-based swaps, and we believe
that the single-name CDS data are sufficiently representative of the
market to inform our analysis of the state of the current security-
based swap market.\38\
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    \35\ The global notional amount outstanding represents the total
face amount used to calculate payments under outstanding contracts.
The gross market value is the cost of replacing all open contracts
at current market prices.
    \36\ See semi-annual OTC derivatives statistics at December
2014, Table 19, available at http://www.bis.org/statistics/dt1920a.pdf (accessed July 29, 2015).
    \37\ These totals include both swaps and security-based swaps,
as well as products that are excluded from the definition of
``swap,'' such as certain equity forwards.
    \38\ While other repositories may collect data on transactions
in total return swaps on equity and debt, we do not currently have
access to such data for these products (or other products that are
security-based swaps). Consistent with the Cross-Border Proposing
Release, we believe that data related to single-name CDS provide
reasonably comprehensive information for purposes of this analysis,
as such transactions appear to constitute roughly 74 percent of the
security-based swap market as measured on the basis of gross
notional outstanding. See Cross-Border Proposing Release, 78 FR
31120 n.1301.
    Also consistent with our approach in that release, with the
exception of the analysis regarding the degree of overlap between
participation in the single-name CDS market and the index CDS market
(cross-market activity), our analysis below does not include data
regarding index CDS as we do not currently have sufficient
information to classify index CDS as swaps or security-based swaps.
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    We note that the data available to us from TIW do not encompass
those CDS transactions that both: (i) Do not involve U.S.
counterparties; \39\ and (ii) are based on non-U.S. reference entities.
Notwithstanding this limitation, the TIW data should provide sufficient
information to permit us to identify the types of market participants
active in the security-based swap market and the general pattern of
dealing within that market.\40\
---------------------------------------------------------------------------

    \39\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This physical address
is designated the registered office location by TIW. When an account
reports a registered office location, we have assumed that the
registered office location reflects the place of domicile for the
fund or account. When an account does not report a registered office
location, we have assumed that the settlement country reported by
the investment adviser or parent entity to the fund or account is
the place of domicile. Thus, for purposes of this analysis, we have
classified accounts as ``U.S. counterparties'' when they have
reported a registered office location in the United States. We note,
however, that this classification is not necessarily identical in
all cases to the definition of ``U.S. person'' under Exchange Act
rule 3a71-3(a)(4).
    \40\ The challenges we face in estimating measures of current
market activity stem, in part, from the absence of comprehensive
reporting requirements for security-based swap market participants.
The Commission has adopted rules regarding trade reporting, data
elements, and public reporting for security-based swaps that are
designed to, when fully implemented, provide the Commission with
additional measures of market activity that will allow us to better
understand and monitor activity in the security-based swap market.
See Regulation SBSR Adopting Release, 80 FR 14699-14700.
---------------------------------------------------------------------------

    One commenter recommended that we collect a more complete set of
data to more precisely estimate the number of non-U.S. persons that
would be affected by the proposed rules.\41\ Given the absence of
comprehensive reporting requirements for security-based swap
transactions, and the fact that the location of personnel that arrange,
negotiate, or execute a security-based swap transaction is not
currently available in TIW, a more precise estimate of the number of
non-U.S. persons affected by this rule is not currently feasible.
However, because we assume that all transactions by dealers classified
as non-U.S. persons with other persons classified as non-U.S. persons
on U.S. reference entities are arranged, negotiated, or executed by
personnel located in the United States, we believe our analysis of the
available data reflects a reasonable estimate for identifying broad
market effects and estimating the number of firms that would likely
assess the location of their dealing activity.\42\
---------------------------------------------------------------------------

    \41\ See ISDA Letter at 3, 7 (arguing that the Commission lacks
complete data to estimate the number of non-U.S. persons that use
U.S. personnel to arrange, negotiate, or execute security-based swap
transactions or the number of registered U.S. broker-dealers that
intermediate these transactions and that this ``makes it difficult
or impossible for the Commission to formulate a useful estimate of
the market impact, cost and benefits of the Proposal''; suggesting
that the Commission ``gather[ ] more robust and complete data prior
to finalizing a rulemaking that will have meaningful impact on a
global market.'').
    \42\ See Section V.A.1, infra.

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

2. Security-Based Swap Market: Market Participants and Dealing
Structures
a. Security-Based Swap Market Participants
    Activity in the security-based swap market is concentrated among a
relatively small number of entities that act as dealers in this market.
In addition to these entities, thousands of other participants appear
as counterparties to security-based swap contracts in our sample, and
include, but are not limited to, investment companies, pension funds,
private (hedge) funds, sovereign entities, and industrial companies. We
observe that most non-dealer users of security-based swaps do not
engage directly in the trading of swaps, but trade through banks,
investment advisers, or other types of firms acting as dealers or
agents. Based on an analysis of the counterparties to trades reported
to the TIW, there are 1,875 entities that engaged directly in trading
between November 2006 and December 2014.\43\
---------------------------------------------------------------------------

    \43\ These 1,875 entities, which are presented in more detail in
Table 1, below, include all DTCC-defined ``firms'' shown in TIW as
transaction counterparties that report at least one transaction to
TIW as of December 2014. The staff in the Division of Economic and
Risk Analysis classified these firms, which are shown as transaction
counterparties, by machine matching names to known third-party
databases and by manual classification. See, e.g., Cross-Border
Proposing Release, 78 FR 31120 n.1304. Manual classification was
based in part on searches of the EDGAR and Bloomberg databases, the
SEC's Investment Adviser Public Disclosure database, and a firm's
public Web site or the public Web site of the account represented by
a firm. The staff also referred to ISDA protocol adherence letters
available on the ISDA Web site.
---------------------------------------------------------------------------

    As shown in Table 1, below, close to three-quarters of these
entities (DTCC-defined ``firms'' shown in TIW, which we refer to here
as ``transacting agents'') were identified as investment advisers, of
which approximately 40 percent (about 30 percent of all transacting
agents) were registered as investment advisers under the Investment
Advisers Act of 1940 (``Investment Advisers Act'').\44\ Although
investment advisers comprise the vast majority of transacting agents,
the transactions they executed account for only 11.5 percent of all
single-name CDS trading activity reported to the TIW, measured by
number of transaction-sides (each transaction has two transaction
sides, i.e., two transaction counterparties). The vast majority of
transactions (83.7 percent) measured by number of transaction-sides
were executed by ISDA-recognized dealers.
---------------------------------------------------------------------------

    \44\ See 15 U.S.C. 80b1-80b21. Transacting agents participate
directly in the security-based swap market, without relying on an
intermediary, on behalf of principals. For example, a university
endowment may hold a position in a security-based swap that is
established by an investment adviser that transacts on the
endowment's behalf. In this case, the university endowment is a
principal that uses the investment adviser as its transacting agent.

 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                 November 2006 Through December 2014, Represented by Each Counterparty Type \45\
----------------------------------------------------------------------------------------------------------------
                   Transacting agents                          Number            Percent       Transaction share
----------------------------------------------------------------------------------------------------------------
Investment Advisers....................................              1,425               76.0              11.5%
    --SEC registered...................................                571               30.5               7.7%
Banks..................................................                252               13.4               4.3%
Pension Funds..........................................                 27                1.4               0.1%
Insurance Companies....................................                 38                2.0               0.2%
ISDA-Recognized Dealers \46\...........................                 17                0.9              83.7%
Other..................................................                116                6.2               0.2%
                                                        --------------------------------------------------------
        Total..........................................              1,875               99.9               100%
----------------------------------------------------------------------------------------------------------------

    Principal holders of CDS risk exposure are represented by
``accounts'' in the TIW.\47\ The staff's analysis of these accounts in
TIW shows that the 1,875 transacting agents classified in Table 1
represent 10,900 principal risk holders. Table 2, below, classifies
these principal risk holders by their counterparty type and whether
they are represented by a registered or unregistered investment
adviser.\48\ For instance, banks in Table 1 allocated transactions
across 327 accounts, of which 23 were represented by investment
advisers. In the remaining 304 instances, banks traded for their own
accounts. Meanwhile, ISDA-recognized dealers in Table 1 allocated
transactions across 75 accounts.
---------------------------------------------------------------------------

    \45\ Adjustments to these statistics from the proposal reflect
updated classifications of counterparties and transactions
classification resulting from further analysis of the TIW data.
    \46\ For the purpose of this analysis, the ISDA-recognized
dealers are those identified by ISDA as belonging to the G14 or G16
dealer group during the period: JP Morgan Chase NA (and Bear
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS,
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Credit
Agricole, Wells Fargo and Nomura. See, e.g., http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf.
    \47\ ``Accounts'' as defined in the TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person''
provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also do not
necessarily represent separate legal persons. One entity or legal
person may have multiple accounts. For example, a bank may have one
DTCC account for its U.S. headquarters and one DTCC account for one
of its foreign branches.
    \48\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and may
include investment advisers registered with a state or a foreign
authority.

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap
Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting
                              Agent, From November 2006 Through December 2014 \49\
----------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------
Account holders by type                 Number     Represented by a
                                                     registered
                                                 investment adviser
                                       Represented by an
                                         unregistered
                                      investment adviser
                                        Participant is
                                       transacting agent
                                             \50\
----------------------------------------------------------------------------------------------------------------
Private Funds......................      3,168      1,569        50%      1,565        49%         34         1%
DFA Special Entities...............      1,141      1,088        95%         33         3%         20         2%
Registered Investment Companies....        800        768        96%         30         4%          2         0%
Banks (non-ISDA-recognized dealers)        327         17         5%          6         2%        304        93%
Insurance Companies................        232        150        65%         21         9%         61        26%
ISDA-Recognized Dealers............         75          0         0%          0         0%         75       100%
Foreign Sovereigns.................         72         53        74%          3         4%         16        22%
Non-Financial Corporations.........         61         43        70%          3         5%         15        25%
Finance Companies..................         13          6        46%          0         0%          7        54%
Other/Unclassified.................      5,011      3,327        66%      1,452        29%        232         5%
                                    ----------------------------------------------------------------------------
    All............................     10,900      7,021        64%      3,113        29%        766         7%
----------------------------------------------------------------------------------------------------------------

    Among the accounts, there are 1,141 Dodd-Frank Act-defined special
entities and 800 investment companies registered under the Investment
Company Act of 1940.\51\ Private funds comprise the largest type of
account holders that we were able to classify, and, although not
verified through a recognized database, most of the funds we were not
able to classify appear to be private funds.\52\
---------------------------------------------------------------------------

    \49\ Adjustments to these statistics from the proposal reflect
updated counterparty and transaction classification resulting from
additional analysis of the TIW data.
    \50\ This column reflects the number of participants who are
also trading for their own accounts.
    \51\ See 15 U.S.C. 80a1-80a64. There remain approximately 5,000
DTCC ``accounts'' unclassified by type. Although unclassified, each
was manually reviewed to verify that it was not likely to be a
special entity within the meaning of the Dodd-Frank Act and instead
was likely to be an entity such as a corporation, an insurance
company, or a bank.
    \52\ For the purposes of this discussion, ``private fund''
encompasses various unregistered pooled investment vehicles,
including hedge funds, private equity funds, and venture capital
funds.
[GRAPHIC] [TIFF OMITTED] TR19FE16.001

b. Participant Domiciles
    As depicted in Figure 1 above, the domiciles of new accounts
participating in the market have shifted over time. It is unclear
whether these shifts represent changes in the types of participants
active in this market, changes in reporting, or changes in transaction
volumes in particular underliers. For example, the increased percentage
of new entrants that are foreign accounts may reflect an increase in
participation by foreign account holders in the security-based swap
market, and the increased percentage of the subset of new entrants that
are foreign accounts managed by U.S. persons also may reflect more
specifically the flexibility with which market participants can
restructure their market participation in response to regulatory
intervention, competitive pressures, and other stimuli.\54\ On the
other hand, apparent changes in the percentage of new accounts with
foreign domiciles may reflect improvements in reporting by market
participants to TIW, an increase in the percentage of transactions
between U.S. and non-U.S. counterparties, and/or increased transactions
in single-name CDS on U.S. reference entities by foreign persons.\55\
---------------------------------------------------------------------------

    \53\ See note 39, supra (explaining how domiciles for firms were
identified for purposes of this analysis).
    \54\ See Charles Levinson, ``U.S. banks moved billions in trades
beyond the CFTC's reach,'' Reuters (August 21, 2015), available at:
http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821.
    \55\ As noted above, the available data do not include all
security-based swap transactions but only transactions in single-
name CDS that involve either (1) at least one account domiciled in
the United States (regardless of the reference entity) or (2)
single-name CDS on a U.S. reference entity (regardless of the U.S.-
person status of the counterparties).
---------------------------------------------------------------------------

c. Market Centers
    A market participant's domicile, however, does not necessarily
correspond to where it engages in security-based swap activity. In
particular, financial groups engaged in security-based swap dealing
activity operate in multiple market centers and carry out such activity
with counterparties around the world.\56\ Several commenters noted that
many market participants that are engaged in dealing activity prefer to
use traders and manage risk for security-based swaps in the
jurisdiction where the underlier is traded.\57\ Thus, although a
significant amount of the dealing activity in security-based swaps on
U.S. reference entities involves non-U.S. dealers, we understand that
these dealers tend to carry out much of the security-based swap trading
and related risk-management activities in these security-based swaps
within the United States.\58\ Some dealers have explained that being
able to centralize their trading, sales, risk management and other
activities related to U.S. reference entities in U.S. operations (even
when the resulting transaction is booked in a foreign entity) improves
the efficiency of their dealing business.\59\
---------------------------------------------------------------------------

    \56\ See U.S. Activity Proposing Release, 80 FR 27449-52.
    \57\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at
5. One commenter indicated that a significant number of interdealer
transactions between two non-U.S. dealers involve trades arranged,
negotiated, or executed within the United States, although this
commenter did not specifically identify what underliers these trades
involved. See MFA/AIMA Letter at 7, note 34.
    \58\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at
5.
    \59\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at
5.
---------------------------------------------------------------------------

    Consistent with these operational concerns and the global nature of
the security-based swap market, the available data appear to confirm
that participants in this market are in fact active in market centers
around the globe. Although, as noted above, the available data do not
permit us to identify the location of personnel in a transaction, TIW
transaction records indicate that firms that are likely to be security-
based swap dealers operate out of branch locations in key market
centers around the world, including New York, London, Tokyo, Hong Kong,
Chicago, Sydney, Toronto, Frankfurt, Singapore and the Cayman
Islands.\60\
---------------------------------------------------------------------------

    \60\ TIW transaction records contain a proxy for the domicile of
an entity, which may differ from branch locations, which are
separately identified in the transaction records.
---------------------------------------------------------------------------

    Given these market characteristics and practices, participants in
the security-based swap market may bear the financial risk of a
security-based swap transaction in a location different from the
location where the transaction is arranged, negotiated, or executed, or
where economic decisions are made by managers on behalf of beneficial
owners. And market activity may occur in a jurisdiction other than
where the market participant or its counterparty books the transaction.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a counterparty located in a
jurisdiction that is different from the market center or centers in
which it participates.
d. Common Business Structures for Firms Engaged in Security-Based Swap
Dealing Activity
    A financial group that engages in a global security-based swap
dealing business in multiple market centers may choose to structure its
dealing business in a number of different ways. This structure,
including where it books the transactions that constitute that business
and how it carries out market-facing activities that generate those
transactions, reflects a range of business and regulatory
considerations, which each financial group may weigh differently.
    A financial group may choose to book all of its security-based swap
transactions, regardless of where the transaction originated, in a
single, central booking entity. That entity generally retains the risk
associated with that transaction, but it also may lay off that risk to
another affiliate via a back-to-back transaction or an assignment of
the security-based swap.\61\ Alternatively, a financial group may book
security-based swaps arising from its dealing business in separate
affiliates, which may be located in the jurisdiction where it
originates the risk associated with the security-based swap or,
alternatively, the jurisdiction where it manages that risk.\62\ Some
financial groups may book transactions originating in a particular
region to an affiliate established in a jurisdiction located in that
region.\63\
---------------------------------------------------------------------------

    \61\ See U.S. Activity Proposing Release, 80 FR 27463; Cross-
Border Proposing Release, 78 FR 30977-78.
    \62\ See, e.g., HSBC Letter at 2; SIFMA/FSR Letter at 6-7.
    \63\ There is some indication that this booking structure is
becoming increasingly common in the market. See, e.g., ``Regional
swaps booking replacing global hubs,'' Risk.net (September 4, 2015),
available at: http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Such a development may
be reflected in the increasing percentage of new entrants that have
a foreign domicile, as described above in Section II.A.2.b.
---------------------------------------------------------------------------

    Regardless of where a financial group determines to book its
security-based swaps arising out of its dealing activity, it is likely
to operate offices that perform sales or trading functions in one or
more market centers in other jurisdictions. Maintaining sales and
trading desks in global market centers permits the financial group to
deal with counterparties in that jurisdiction or in a specific
geographic region, or to ensure that it is able to provide liquidity to
counterparties in other jurisdictions,\64\ for example, when a
counterparty's home financial markets

are closed.\65\ A financial group engaged in a security-based swap
dealing business also may choose to manage its trading book in
particular reference entities or securities primarily from a trading
desk that can take advantage of local expertise in such products or
that can gain access to better liquidity, which may permit it to more
efficiently price such products or to otherwise compete more
effectively in the security-based swap market.\66\ Some financial
groups prefer to centralize risk management, pricing, and hedging for
specific products with the personnel responsible for carrying out the
trading of such products to mitigate operational risk associated with
transactions in those products.\67\
---------------------------------------------------------------------------

    \64\ These offices may be branches or offices of the booking
entity itself, or branches or offices of an affiliated agent, such
as, in the United States, a registered broker-dealer.
    \65\ See SIFMA/FSR Letter at 3; HSBC Letter at 2.
    \66\ See HSBC Letter at 2.
    \67\ See note 59, supra.
---------------------------------------------------------------------------

    The financial group affiliate that books these transactions may
carry out related market-facing activities, whether in its home
jurisdiction or in a foreign jurisdiction, using either its own
personnel or the personnel of an affiliated or unaffiliated agent. For
example, the financial group may determine that another affiliate in
the financial group employs personnel who possess expertise in relevant
products or who have established sales relationships with key
counterparties in a foreign jurisdiction, making it more efficient to
use the personnel of the affiliate to engage in security-based swap
dealing activity on its behalf in that jurisdiction.\68\ In these
cases, the affiliate that books these transactions and its affiliated
agent may operate as an integrated dealing business, each performing
distinct core functions in carrying out that business.
---------------------------------------------------------------------------

    \68\ See HSBC Letter at 2.
---------------------------------------------------------------------------

    Alternatively, the financial group affiliate that books these
transactions may in some circumstances determine to engage the services
of an unaffiliated agent through which it can engage in dealing
activity. For example, a financial group may determine that using an
interdealer broker may provide an efficient means of participating in
the interdealer market in its own, or in another, jurisdiction,
particularly if it is seeking to do so anonymously or to take a
position in products that trade relatively infrequently.\69\ A
financial group may also use unaffiliated agents that operate at its
direction. Such an arrangement may be particularly valuable in enabling
a financial group to service clients or access liquidity in
jurisdictions in which it has no security-based swap operations of its
own.
---------------------------------------------------------------------------

    \69\ We understand that interdealer brokers may provide voice or
electronic trading services that, among other things, permit dealers
to take positions or hedge risks in a manner that preserves their
anonymity until the trade is executed. These interdealer brokers
also may play a particularly important role in facilitating
transactions in less-liquid security-based swaps.
---------------------------------------------------------------------------

    We understand that financial group affiliates (whether affiliated
with U.S.-based financial groups or not) that are established in
foreign jurisdictions may use any of these structures to engage in
dealing activity in the United States, and that they may seek to engage
in dealing activity in the United States to transact with both U.S.-
person and non-U.S.-person counterparties. In transactions with non-
U.S.-person counterparties, these foreign affiliates may affirmatively
seek to engage in dealing activity in the United States because the
sales personnel of the non-U.S.-person dealer (or of its agent) in the
United States have existing relationships with counterparties in other
locations (such as Canada or Latin America) or because the trading
personnel of the non-U.S.-person dealer (or of its agent) in the United
States have the expertise to manage the trading books for security-
based swaps on U.S. reference securities or entities. We understand
that some of these foreign affiliates engage in dealing activity in the
United States through their personnel (or personnel of their
affiliates) in part to ensure that they are able to provide their own
counterparties, or those of financial group affiliates in other
jurisdictions, with access to liquidity (often in non-U.S. reference
entities) during U.S. business hours, permitting them to meet client
demand even when the home markets are closed.\70\ In some cases, such
as when seeking to transact with other dealers through an interdealer
broker, these foreign affiliates may act, in a dealing capacity, in the
United States through an unaffiliated, third-party agent.
---------------------------------------------------------------------------

    \70\ See IIB Letter at 18-19.
---------------------------------------------------------------------------

e. Current Estimates of Number of Security-Based Wwap Dealers
    As discussed above, security-based swap activity is concentrated in
a relatively small number of dealers, which already represent a small
percentage of all market participants active in the security-based swap
market.\71\ Based on analysis of 2014 data, our earlier estimates of
the number of entities likely to register as security-based swap
dealers remain largely unchanged.\72\ Of the approximately 50 entities
that we estimate may potentially register as security-based swap
dealers, we believe it is reasonable to expect 22 to be non-U.S.
persons.\73\ Under the rules as they currently exist, we identified
approximately 170 entities engaged in single-name CDS activity, with
all counterparties, of $2 billion or more. Of those entities, 155 would
be expected to incur assessment costs to determine whether they meet
the ``security-based swap dealer'' definition. Approximately 57 of
these entities are non-U.S. persons.\74\
---------------------------------------------------------------------------

    \71\ See II.A.2.a,, supra.
    \72\ See U.S. Activity Proposing Release, 80 FR 27452.
    \73\ These estimates are based on the number of accounts in TIW
data with total notional volume in excess of de minimis thresholds,
increased by a factor of two, to account for any potential growth in
the security-based swap market, to account for the fact that we are
limited in observing transaction records for activity between non-
U.S. persons to those that reference U.S. underliers, and to account
for the fact that we do not observe security-based swap transactions
other than in single-name CDS. See U.S. Activity Proposing Release,
80 FR 27452. See also Intermediary Definitions Adopting Release, 77
FR 30725 n.1457.
    \74\ Adjustments to these statistics from the proposal reflect
further analysis of the TIW data. Cf. U.S. Activity Proposing
Release, 80 FR 27452 (providing an estimate of 56 entities that are
non-U.S. persons).
---------------------------------------------------------------------------

    Many of these dealers are already subject to other regulatory
frameworks under U.S. law based on their role as intermediaries or on
the volume of their positions in other products, such as swaps.
Available data supports our prior estimates, based on our experience
and understanding of the swap and security-based swap market, that of
the 55 firms that might register as security-based swap dealers or
major security-based swap participants, approximately 35 would also be
registered with the CFTC as swap dealers or major swap
participants.\75\ Based on our analysis of TIW data and filings with
the Commission, we estimate that 16 market participants expected to
register as security-based swap dealers have already registered with
the Commission as broker-dealers and are thus subject to Exchange Act
and Financial Industry Regulatory Authority (``FINRA'') requirements
applicable to such entities. Finally, as we discuss below, some dealers
may be subject to similar

requirements in one or more foreign jurisdictions.\76\
---------------------------------------------------------------------------

    \75\ Based on our analysis of 2014 TIW data and the list of swap
dealers provisionally registered with the CFTC, and applying the
methodology used in the Intermediary Definitions Adopting Release,
we estimate that substantially all registered security-based swap
dealers would also be registered as swap dealers with the CFTC. See
U.S. Activity Proposing Release, 80 FR 27458; SBS Entity
Registration Adopting Release, 80 FR 49000. See also CFTC list of
provisionally registered swap dealers, available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.
    \76\ See, e.g., ISDA Letter at 5, 6.
---------------------------------------------------------------------------

3. Security-Based Swap Market: Levels of Security-Based Swap Trading
Activity
    As already noted, firms that act as dealers play a central role in
the security-based swap market. Based on an analysis of 2014 single-
name CDS data in TIW, accounts of those firms that are likely to exceed
the security-based swap dealer de minimis thresholds and trigger
registration requirements intermediated transactions with a gross
notional amount of approximately $8.5 trillion, over 60 percent of
which was intermediated by top 5 dealer accounts.\77\
---------------------------------------------------------------------------

    \77\ Commission staff analysis of TIW transaction records
indicates that approximately 99 percent of single-name CDS price-
forming transactions in 2014 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of
counterparties. Approximately 35 percent of accounts of firms expected
to register as security-based dealers and observable in TIW have
entered into security-based swaps with over 1,000 unique counterparty
accounts as of year-end 2014.\78\ Approximately 9 percent of these
accounts transacted with 500-1,000 unique counterparty accounts;
another 35 percent transacted with 100-500 unique accounts, and only 22
percent of these accounts intermediated swaps with fewer than 100
unique counterparties in 2014. The median dealer account transacted
with 453 unique accounts (with an average of approximately 759 unique
accounts). Non-dealer counterparties transact almost exclusively with
these dealers. The median non-dealer counterparty transacted with 3
dealer accounts (with an average of approximately 4 dealer accounts) in
2014.
---------------------------------------------------------------------------

    \78\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, we may infer that entities and financial
groups, which may have multiple accounts, transact with at least as
many counterparties as the largest of their accounts in terms of
number of counterparties.
---------------------------------------------------------------------------

    Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to the TIW between January 2008 and December 2014, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty.
    Figure 2 also shows that the portion of the notional volume of
North American corporate single-name CDS represented by interdealer
transactions has remained fairly constant and that interdealer
transactions continue to represent a significant majority of trading
activity, even as notional volume has declined over the past six
years,\79\ from more than $6 trillion in 2008 to less than $3 trillion
in 2014.\80\
---------------------------------------------------------------------------

    \79\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
    \80\ This estimate is lower than the gross notional amount of
$8.5 trillion noted above as it includes only the subset of single-
name CDS referencing North American corporate documentation. See
note 77 and accompanying text, supra.
---------------------------------------------------------------------------

    The high level of interdealer trading activity reflects the central
position of a small number of dealers, each of which intermediates
trades with many hundreds of counterparties.\81\ While we are unable to
quantify the current level of trading costs for single-name CDS, those
dealers appear to enjoy market power as a result of their small number
and the large proportion of order flow they privately observe.
---------------------------------------------------------------------------

    \81\ One commenter criticized the analysis in the U.S. Activity
Proposing Release as ``appear[ing] to suffer from certain defects''
because the data implied that security-based swap dealing was not a
``customer-driven business.'' See Letter from Citadel, dated July
13, 2015 (``Citadel Letter''), at 9. We note that our current
estimate of the relative size of the interdealer business, based on
our updated analysis, is somewhat lower than the 80 percent figure
cited by the commenter. Nonetheless, we continue to estimate that
interdealer transactions comprise the majority of price-forming
transactions. Accordingly, it remains our view that dealers play a
central role in the security-based swap market.

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

[GRAPHIC] [TIFF OMITTED] TR19FE16.002

    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data we analyzed was
between counterparties domiciled in the United States and
counterparties domiciled abroad, as shown in Figure 3 below. Using the
self-reported registered office location of the TIW accounts as a proxy
for domicile, we estimate that only 12 percent of the global
transaction volume by notional volume between 2008 and 2014 was between
two U.S.-domiciled counterparties, compared to 48 percent entered into
between one U.S.-domiciled counterparty and a foreign-domiciled
counterparty and 40 percent entered into between two foreign-domiciled
counterparties.\83\
---------------------------------------------------------------------------

    \82\ Adjustments to these statistics from the proposal reflect
additional analysis of TIW data. Cf. U.S. Activity Proposing Release
80 FR 27453 (showing slightly different values for 2012 through
2014). For the purposes of this analysis, we assume that same-day
cleared transactions reflect inter-dealer activity.
    \83\ For purposes of this discussion, we have assumed that the
registered office location reflects the place of domicile for the
fund or account, but we note that this domicile does not necessarily
correspond to the location of an entity's sales or trading desk. See
U.S. Activity Proposing Release, 80 FR 27541 n.44. See also note 39,
supra.
---------------------------------------------------------------------------

    If we consider the number of cross-border transactions instead from
the perspective of the domicile of the corporate group (e.g., by
classifying a foreign bank branch or foreign subsidiary of a U.S.
entity as domiciled in the United States), the percentages shift
significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to 32
percent, and to 51 percent for transactions entered into between a
U.S.-domiciled counterparty and a foreign-domiciled counterparty. By
contrast, the proportion of activity between two foreign-domiciled
counterparties drops from 40 percent to 17 percent. This change in
respective shares based on different classifications suggests that the
activity of foreign subsidiaries of U.S. firms and foreign branches of
U.S. banks accounts for a higher percentage of security-based swap
activity than U.S. subsidiaries of foreign firms and U.S. branches of
foreign banks. It also demonstrates that financial groups based in the
United States are involved in an overwhelming majority (approximately
83 percent) of all reported transactions in North American corporate
single-name CDS.
    Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS: Of transactions on North American corporate single-
name CDS between two ISDA-recognized dealers and their branches or
affiliates, 65 percent of transaction notional volume involved at least
one account of an entity with a U.S. parent.
    In addition, we note that a significant majority of North American
corporate single-name CDS transactions occur in the interdealer market
or between dealers and non-U.S.-person non-dealers, with the remaining
(and much smaller) portion of the market consisting of transactions
between dealers and U.S.-person non-dealers. Specifically, 79.5 percent
of North American corporate single-name CDS transactions involved
either two ISDA-recognized dealers or an ISDA-recognized dealer and a
non-U.S.-person non-dealer. Approximately 20 percent of such
transactions involved an ISDA-recognized dealer and a U.S.-person non-
dealer.

[GRAPHIC] [TIFF OMITTED] TR19FE16.003

4. Global Regulatory Efforts
    In 2009, the G20 Leaders--whose membership includes the United
States, 18 other countries, and the European Union (``EU'')--addressed
global improvements in the OTC derivatives markets. They expressed
their view on a variety of issues relating to OTC derivatives
contracts. In subsequent summits, the G20 Leaders have returned to OTC
derivatives regulatory reform and encouraged international consultation
in developing standards for these markets.\84\
---------------------------------------------------------------------------

    \84\ See, e.g., G20 Leaders' Final Declaration, November 2011,
para. 24, available at: https://g20.org/wp-content/uploads/2014/12/Declaration_eng_Cannes.pdf.
---------------------------------------------------------------------------

    Many security-based swap dealers likely will be subject to foreign
regulation of their security-based swap activities that are similar to
regulations that may apply to them pursuant to Title VII, even if the
relevant foreign jurisdictions do not classify certain market
participants as ``dealers'' for regulatory purposes. Some of these
regulations may duplicate, and in some cases conflict with, certain
elements of the Title VII regulatory framework.\85\
---------------------------------------------------------------------------

    \85\ Several commenters raised concerns about the potential for
overlap or conflict of Title VII security-based swap dealer
requirements and similar requirements under foreign law. See Citadel
Letter at 8; Letter from ICI Global, dated July 13, 2015 (``ICI
Global Letter''), at 8; SIFMA/FSR Letter at 9; IIB Letter at 4, 6;
ISDA Letter at 5, 10.
---------------------------------------------------------------------------

    Foreign legislative and regulatory efforts have focused on five
general areas: Moving OTC derivatives onto organized trading platforms,
requiring central clearing of OTC derivatives, requiring post-trade
reporting of transaction data for regulatory purposes and public
dissemination of anonymized versions of such data, establishing or
enhancing capital requirements for non-centrally cleared OTC
derivatives transactions, and establishing or enhancing margin and
other risk mitigation requirements for non-centrally cleared OTC
derivatives transactions. The rules being adopted in this release will
affect a person's obligations with respect to the latter three of these
requirements, as a person's status as a security-based swap dealer will
affect its post-trade reporting obligations under Regulation SBSR,\86\
and, as proposed, would subject it to capital, margin, and other risk
mitigation requirements under the Title VII dealer framework, such as
trade acknowledgement and verification requirements.\87\
---------------------------------------------------------------------------

    \86\ See Regulation SBSR, Rule 901(a)(2)(ii).
    \87\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (October 18, 2012), 77 FR 70213 (November 23,
2012) (``Capital, Margin, and Segregation Proposing Release'');
Trade Acknowledgment and Verification of Security-Based Swap
Transactions, Exchange Act Release No. 63727 (January 14, 2011), 76
FR 3859 (January 21, 2011). The Commission anticipates that it may
address the impact, if any, of a person's status as a registered
security-based swap dealer on the first two of those requirements
(application of the clearing requirement and trade execution
requirement) in a subsequent release or releases.
---------------------------------------------------------------------------

    Foreign jurisdictions have been actively implementing regulations
in connection with each of these three categories of requirements.
Regulatory transaction reporting requirements are in force in a number
of jurisdictions including the EU, Hong Kong SAR, Japan, Australia,
Brazil, Canada, China, India, Indonesia, South Korea, Mexico, Russia,
Saudi Arabia, and Singapore; other jurisdictions are in the process of
proposing legislation and rules to implement these requirements.\88\ In
addition, a number of major foreign jurisdictions have initiated the
process of implementing margin and other risk mitigation requirements
for non-centrally cleared OTC derivatives transactions.\89\ Several
jurisdictions

have also taken steps to implement the Basel III recommendations
governing capital requirements for financial entities, which include
enhanced capital charges for non-centrally cleared OTC derivatives
transactions.\90\
---------------------------------------------------------------------------

    \88\ Information regarding ongoing regulatory developments
described in this section was primarily obtained from progress
reports on implementation of OTC derivatives market reforms
published by the Financial Stability Board. These are available at:
http://www.financialstabilityboard.org/list/fsb_publications/index.htm.
    \89\ In November 2015, the Financial Stability Board reported
that 12 member jurisdictions participating in its tenth progress
report on OTC derivatives market reforms had in force a legislative
framework or other authority to require exchange of margin for non-
centrally cleared transactions and had published implementing
standards or requirements for consultation or proposal. A further 11
member jurisdictions had a legislative framework or other authority
in force or published for consultation or proposal. See Financial
Stability Board, OTC Derivatives Market Reforms Tenth Progress
Report on Implementation (November 2015), available at http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf.
    \90\ In November 2015, the Financial Stability Board reported
that 18 member jurisdictions participating in its tenth progress
report on OTC derivatives market reforms had in force standards or
requirements covering more than 90 percent of transactions that
require enhanced capital charges for non-centrally cleared
transactions. A further three member jurisdictions had a legislative
framework or other authority in force and had adopted implementing
standards or requirements that were not yet in force. An additional
three member jurisdictions had a legislative framework or other
authority in force or published for consultation or proposal. See
Financial Stability Board, OTC Derivatives Market Reforms Tenth
Progress Report on Implementation (November 2015), available at
http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf.
---------------------------------------------------------------------------

5. Cross-Market Participation
    As noted above, persons registered as security-based swap dealers
and major security-based swap participants are likely also to engage in
swap activity, which is subject to regulation by the CFTC.\91\ This
overlap reflects the relationship between single-name CDS contracts,
which are security-based swaps, and index CDS contracts, which may be
swaps or security-based swaps. A single-name CDS contract covers
default events for a single reference entity or reference security.
Index CDS contracts and related products make payouts that are
contingent on the default of index components and allow participants in
these instruments to gain exposure to the credit risk of the basket of
reference entities that comprise the index, which is a function of the
credit risk of the index components. A default event for a reference
entity that is an index component will result in payoffs on both
single-name CDS written on the reference entity and index CDS written
on indices that contain the reference entity. Because of this
relationship between the payoffs of single-name CDS and index CDS
products, prices of these products depend upon one another,\92\
creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \91\ See note 75 and accompanying text, supra. See also U.S.
Activity Proposing Release, 80 FR 27458; SBS Entity Registration
Adopting Release, 80 FR 49000.
    \92\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., George Casella and Roger L. Berger,
``Statistical Inference'' (2002), at 171.
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 4,500 TIW accounts that participated in the
market for single-name CDS in 2014 revealed that approximately 3,000 of
those accounts, or 67 percent, also participated in the market for
index CDS. Of the accounts that participated in both markets, data
regarding transactions in 2014 suggest that, conditional on an account
transacting in notional volume of index CDS in the top third of
accounts, the probability of the same account landing in the top third
of accounts in terms of single-name CDS notional volume is
approximately 64 percent; by contrast, the probability of the same
account landing in the bottom third of accounts in terms of single-name
CDS notional volume is only 10 percent.\93\
---------------------------------------------------------------------------

    \93\ The Commission recently revised its methodology for
estimating cross-market participation of TIW accounts. This has
resulted in an increase in the reported number of accounts that
participated in both markets relative to previous Commission
releases.
---------------------------------------------------------------------------

    Similarly, since the payoffs of security-based swaps are dependent
upon the value of underlying securities, activity in the security-based
swap market can be correlated with activity in underlying securities
markets. Security-based swaps may be used in order to hedge or
speculate on price movements of reference securities or the credit risk
of reference securities. For instance, prices of both CDS and corporate
bonds are sensitive to the credit risk of underlying reference
securities. As a result, trading across markets may sometimes result in
information and risk spillovers between these markets, with
informational efficiency, pricing, and liquidity in the security-based
swap market affecting informational efficiency, pricing, and liquidity
in markets for related assets, such as equities and corporate
bonds.\94\
---------------------------------------------------------------------------

    \94\ See SBS Entity Registration Adopting Release, 80 FR 49003.
Empirical evidence on the direction and significance of the CDS-bond
market spillover is mixed. See also Massimo Massa & Lei Zhang, CDS
and the Liquidity Provision in the Bond Market (INSEAD Working Paper
No. 2012/114/FIN, 2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2164675 (considering whether the presence of
CDS improves pricing and liquidity of investment grade bonds in
2001-2009); Sanjiv Ranjan Das, Madhu Kalimipalli & Subhankar Nayak,
Did CDS Trading Improve the Market for Corporate Bonds?, 111 J. Fin.
Econ. 495 (2014) (considering the effects of CDS trading on the
efficiency, pricing error and liquidity of corporate bond markets);
Martin Oehmke & Adam Zawadowski, The Anatomy of the CDS Market
(Working Paper, 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023108 (suggesting a standardization and
liquidity role of CDS markets and documenting cross-market arbitrage
links between the CDS market and the bond market); and Ekkehart
Boehmer, Sudheer Chava, & Heather Tookes, Related Securities and
Equity Market Quality: The Cases of CDS, forthcoming, J. Fin. &
Quant. Analysis (2015) (providing evidence that firms with traded
CDS contracts on their debt experience significantly lower liquidity
and price efficiency in equity markets when these firms are closer
to default and in times of high market volatility).
---------------------------------------------------------------------------

B. Economic Considerations

    These final rules, together with our previously adopted rules
defining ``security-based swap dealer'' and applying that definition in
the cross-border context, define the scope of entities that are subject
to the Title VII dealer requirements. Although these final rules do not
define specific substantive requirements, the scope of the definition
will play a central role in determining the overall costs and benefits
of particular regulatory requirements, and of the Title VII regulatory
framework as a whole.\95\ In evaluating the expected benefits and costs
of our final rules in this context, we have identified several economic
considerations relevant to our analysis that have informed our final
rule, in light of the establishment in Title VII of the Dodd-Frank Act
of a statutory framework to reduce risk, increase transparency, and
promote market integrity within the financial system.\96\
---------------------------------------------------------------------------

    \95\ See Cross-Border Adopting Release, 79 FR 47327 (stating
that the registration and regulation of entities as security-based
swap dealers and major security-based swap participants would lead
to programmatic costs and benefits).
    \96\ See Intermediary Definitions Adopting Release, 77 FR 30596.
---------------------------------------------------------------------------

    First, as we have previously noted, the security-based swap market
is a global market.\97\ A significant proportion of single-name CDS
transactions on U.S. reference entities is between counterparties that
are based in different jurisdictions, and these counterparties may use
personnel located in other jurisdictions to perform various functions
in connection with these transactions.\98\ Moreover, dealers that carry
out a global business, as noted above, have significant flexibility in
choosing how to structure their business.\99\ In determining the scope
of the rules specifying which transactions non-U.S. persons must
include in their dealer de minimis calculations, we are aware both that
non-U.S. persons engage in security-based swap dealing activity with
other non-U.S. persons in the

United States and that U.S. financial groups may choose to restructure
their business to ensure that transactions with non-U.S. persons that
involve dealing activity in the United States are booked in non-U.S.-
person affiliates.\100\ Thus, the scope of our final framework could
have a significant effect on the number of persons that ultimately
register as security-based swap dealers and the proportion of security-
based swap dealing activity carried out in the United States that will
ultimately be carried out by such dealers.
---------------------------------------------------------------------------

    \97\ See Cross-Border Adopting Release, 79 FR 47282.
    \98\ See Section II.A.3, supra.
    \99\ See Section II.A.2d, supra.
    \100\ See Cross-Border Adopting Release, 79 FR 47285 (noting
that ``market participants may shift their behavior'' in response to
our cross-border application of Title VII requirements).
---------------------------------------------------------------------------

    Second, the final scope of our rules, and market participants'
reactions to our rules (including rules already adopted as part of the
Intermediary Definitions Adopting Release, and the Cross-Border
Adopting Release) may affect competition between U.S.-person and non-
U.S.-person dealers when they engage in security-based swap
transactions with non-U.S. persons. In particular, without these rules,
competitive disparities might arise between U.S.-person dealers, which
would be subject to these rules, and non-U.S.-person dealers, which may
not be, even if the non-U.S.-person dealers engage in dealing activity
at levels exceeding the relevant de minimis thresholds using personnel
located in the United States. This disparity in treatment likely would
produce disparities in the costs that different types of dealers might
bear, with significant effects on the structure and integrity of the
security-based swap market.
    Under currently existing rules, for example, even if a U.S.-person
dealer and a non-U.S.-person dealer both engaged in dealing activity in
the United States in connection with transactions involving non-U.S.-
person counterparties, the non-U.S.-person dealer would be more likely
to be able to engage in this activity without registering as a
security-based swap dealer,\101\ which would permit it, unlike the
U.S.-person dealer, to avoid the costs associated with Title VII dealer
requirements, including compliance with registration, books and
records, and capital and margin requirements. To the extent that the
non-U.S.-person dealer does not incur these costs, it would be likely
to be able to offer more competitive pricing to its non-U.S.-person
counterparties.
---------------------------------------------------------------------------

    \101\ We note that, under Exchange Act rule 3a71-3, a non-U.S.-
person affiliate of a U.S. person is not required to include such
transactions in its dealer de minimis threshold calculations if that
non-U.S. person's counterparties do not have recourse to a U.S.
person under the terms of the security-based swap and the non-U.S.
person is not a conduit affiliate. See Exchange Act rule 3171-
3(b)(1)(ii) and (iii) (applying the de minimis exception to cross-
border dealing activity of conduit affiliates and non-U.S. persons).
---------------------------------------------------------------------------

    Similarly, a non-U.S. person seeking to trade in a security-based
swap on a U.S. reference entity may prefer to enter into the
transaction with a non-U.S.-person dealer rather than a U.S.-person
dealer not only because the non-U.S.-person dealer may offer more
competitive prices, but also because the non-U.S. counterparty may
itself incur lower costs in transacting with a non-U.S. person dealer.
For example, a non-U.S.-person counterparty may find transacting with
the non-U.S.-person dealer that is not required to register as a
security-based swap dealer to be more attractive because a transaction
with that dealer may not involve a requirement to post collateral
consistent with Title VII margin requirements, particularly if it can
do so without surrendering the benefits associated with facing
personnel located in the United States.
    In addition, under currently existing rules, financial groups that
use non-U.S. persons to carry out their dealing business with non-U.S.-
person counterparties may be able to use profits from that dealing
business to subsidize their dealing business with U.S.-person
counterparties carried out through a registered security-based swap
dealer. This cross-subsidization would allow them to gain further
competitive advantage over financial groups whose dealers are U.S.
persons, even with respect to transactions with U.S.-person
counterparties.
    These competitive disparities likely would create an incentive for
financial groups (whether based in the United States or abroad) to book
security-based swap transactions with non-U.S.-person counterparties in
a non-U.S.-person affiliate while continuing to use affiliates or
agents that are located in the United States to engage in dealing
activity with those counterparties. As discussed further below, market
participants may respond in different ways to these incentives, but any
such response likely would lead to significant changes in market
structure, exacerbating market fragmentation. The final amendments
reflect our consideration of the likely competitive effects of the
scope of Title VII dealer requirements on participants in the security-
based swap market.
    Third, as just noted, the scope of our rules may provide incentives
for market fragmentation and negatively affect liquidity and pricing in
the U.S. market. Subjecting certain transactions but not others to
regulatory requirements, including the security-based swap dealer de
minimis counting requirements, may lead certain dealers to seek to
limit dealing activity with certain counterparties, to cease dealing
with certain counterparties altogether, or to restructure their dealing
business to minimize the volume that it carries out in a firm that is
required to register as a security-based swap dealer.\102\ One
commenter noted that requiring certain transactions but not others to
be subject to Title VII requirements may lead dealers to quote less
competitive prices to counterparties for transactions that are subject
to these requirements,\103\ and it appears that some U.S.-based
financial groups, in response to similar regulatory reforms, have
already restructured their swap business to book their transactions in
non-U.S.-person affiliates.\104\ Such responses by market participants
are likely to fragment security-based swap liquidity into two pools,
one for U.S. persons and the other for non-U.S. persons, even if non-
U.S.-person dealers continue to engage in security-based swap dealing
activity with non-U.S. persons (including other dealers) in the United
States. This fragmentation could adversely affect the security-based
swap market's ability to efficiently allocate risk among its
participants,\105\ as discussed further below.\106\
---------------------------------------------------------------------------

    \102\ See IIB Letter at 2-3; ISDA Letter at 5; SIFMA/FSR Letter
at 6. See Section V.B, infra, for further discussion of potential
effects of the final rules on non-U.S. persons' incentives to use
personnel located in U.S. branches or offices to arrange, negotiate,
or execute security-based swap transactions. See also HSBC Letter at
2 (discussing the possibility of moving security-based swap trading
relationships with non-U.S. customers from a U.S.-based affiliate to
a registered security-based swap dealer affiliate while noting the
impracticability of this response).
    \103\ See IIB Letter at 15 (explaining that a dealer may widen
its bid-ask spread for security-based swaps that are subject to
public dissemination requirements to account for the risk that, due
to the requirements the dealer may not be able to hedge the
security-based swap before it is publicly disclosed).
    \104\ See Charles Levinson, ``U.S. banks moved billions in
trades beyond CFTC's reach,'' Reuters (August 21, 2015), available
at: http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821.
    \105\ See note 27, supra (citing IIB Letter at 2).
    \106\ See Section V.B.2, infra.
---------------------------------------------------------------------------

    Depending on the final scope of Title VII application, the nature
of the fragmentation could have a particularly deleterious effect on
pricing and liquidity for U.S. persons seeking to enter into security-
based swap transactions. To the extent that dealers seek to carry out
transactions with other dealers in affiliates that are not subject

to Title VII security-based swap dealer requirements, the large
interdealer market, which accounts for a large majority of all
security-based swap transactions,\107\ could shift to non-U.S. dealers
that are not required to register as security-based swap dealers under
currently existing rules. Such a shift likely would exacerbate the
effects of market fragmentation on U.S. market participants, as
security-based swap activity would be split into two very different
pools: One very large pool of transactions unregulated by Title VII
(interdealer trades, carried out primarily by unregistered non-U.S.
persons, and transactions between unregistered non-U.S.-person dealers
and non-U.S.-person non-dealers) and one much smaller pool limited to
transactions between registered dealers (whether U.S. persons or non-
U.S. persons) and U.S.-person counterparties.\108\ The final amendments
reflect our consideration of the relationship between the scope of
Title VII dealer requirements and market fragmentation, including
related effects on market liquidity and pricing, particularly for U.S.
market participants.
---------------------------------------------------------------------------

    \107\ See Section III.A.3, supra, for an analysis of the
proportion of the security-based swap market that constitutes
interdealer transactions. For the purposes of this analysis we
classify any security-based swap transaction between two ISDA-
recognized dealers as interdealer activity.
    \108\ Reducing the ability of market participants to find
counterparties may increase bid-ask spreads. See, e.g., Darrell
Duffie, Nicolae Garleanu and Lasse Heje Pedersen, ``Over-the-Counter
Markets'' Econometrica, Vol. 73, No. 6 (2005).
---------------------------------------------------------------------------

    Fourth, in addition to creating an incentive for market
fragmentation, applying Title VII dealer requirements only to certain
transactions carried out in the United States could affect the
integrity of the U.S. security-based swap market as well as our ability
to monitor the activity of participants in that market. To the extent
that subjecting transactions involving dealing activity carried out by
personnel located in the United States increases the likelihood that a
non-U.S. person must register as a dealer, Title VII dealer
recordkeeping requirements may enhance our ability to evaluate dealers'
records for evidence of market manipulation or other abusive practices
within the United States. For example, such records, when combined with
information from other sources available to the Commission,\109\ could
help reveal situations where a registered security-based swap dealer is
engaging in abusive or manipulative conduct with respect to a series of
transactions in which it lays off risk from a transaction with a U.S.-
person counterparty to a non-U.S.-person via an affiliated non-U.S.-
person dealer, using personnel located in a U.S. branch or office.
Absent these final amendments, the affiliated non-U.S.-person dealer
might not need to register, which would inhibit our ability to evaluate
the affiliated non-U.S.-person dealer's records for the offsetting
transaction with the non-U.S.-person counterparty, or related
transactions, effected by the same personnel located in a U.S. branch
or office that effected the transaction with the U.S.-person
counterparty. The final amendments thus reflect our consideration of
the impact that the scope of Title VII dealer requirements under our
final rules may have on our ability to detect abusive and manipulative
practices in the security-based swap market.
---------------------------------------------------------------------------

    \109\ Such information may include records of transactions
reported to a swap data repository pursuant to rule 901(a)(2)(ii),
which subjects all transactions that include a registered security-
based swap dealer on a transaction side to regulatory reporting
requirements.
---------------------------------------------------------------------------

    Finally, the global security-based swap market is highly
interconnected and highly concentrated.\110\ As we have previously
described, most market participants have only a few counterparties, but
dealers can have hundreds of counterparties, consisting of both non-
dealing market participants (including registered investment companies
and private funds) and other dealers.\111\ Furthermore, as we have
described above, a majority of security-based swap trades are dealer-
to-dealer, rather than dealer-to-non-dealer or non-dealer-to-non-
dealer, and a large fraction of single-name CDS volume is between
counterparties domiciled in different jurisdictions.\112\ This
interconnectedness facilitates the use of security-based swaps as a
tool for sharing financial and commercial risks. The global scale of
the security-based swap market allows counterparties to access
liquidity across jurisdictional boundaries, providing U.S. market
participants with opportunities to share these risks with
counterparties around the world.\113\
---------------------------------------------------------------------------

    \110\ See Section II.A.2.a., supra. See also Cross-Border
Adopting Release, 79 FR 47283.
    \111\ See Cross-Border Adopting Release, 79 FR 47283. Based on
an analysis of 2014 transaction data by staff in the Division of
Economic and Risk Analysis, the median account associated with
market participants recognized by ISDA as dealers had 453
counterparties. The median of all other accounts (i.e., those more
likely to belong to non-dealers) was 3 counterparties. See Section
0, supra.
    \112\ See Section II.A.3, supra. See also Cross-Border Adopting
Release, 79 FR 47283.
    \113\ See Cross-Border Adopting Release, 79 FR 47283.
---------------------------------------------------------------------------

    However, as we have also noted, these opportunities for
international risk sharing also represent channels for risk
transmission.\114\ In other words, the interconnectedness of security-
based swap market participants provides paths for both liquidity and
risk to flow throughout the system, meaning that it can be difficult to
isolate risks to a particular entity or geographic segment. Because
dealers facilitate the great majority of security-based swap
transactions, with bilateral relationships that extend to potentially
thousands of counterparties, liquidity problems or other forms of
financial distress that begin in one entity or one corner of the globe
can potentially spread throughout the network, with dealers as a
central conduit.\115\
---------------------------------------------------------------------------

    \114\ See id. As discussed in more detail below, several
commenters argued that the Commission should not finalize the
proposed rules because they encompassed transactions that pose no
risk to the United States. See notes 159-160 and accompanying text,
infra (citing IIB Letter at 3, 5; ISDA Letter at 4, 5-6, SIFMA/FSR
Letter at 5; and HSBC Letter at 3).
    \115\ We have previously stated that spillover and contagion
risks are important characteristics of the security-based swap
market that are important considerations in our rulemaking. See
Cross-Border Adopting Release, 79 FR 47284. In particular, given the
structure of the security-based swap market and the concentration of
security-based swap dealing activities among a relatively small
number of firms, ``the failure of a single large firm active in the
security-based swap market can have consequences beyond the firm
itself,'' including that risk may eventually ``spill over into other
jurisdictions and even other markets in which security-based swap
dealers participate.'' See id.
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    As we have previously recognized, a non-U.S.-person dealer
affiliated with a U.S. financial group may pose ``reputational risk''
to its U.S. parent, irrespective of the existence of any explicit
guarantee from a U.S. person.\116\ This risk may affect the U.S.
financial system in a number of ways. Specifically, if market
participants generally expect a U.S. financial group to provide support
to a foreign affiliate engaged in security-based swap dealing activity
for reasons other than fulfilling obligations arising from an express
guarantee from the U.S. financial group, financial contagion may spread
to U.S. financial markets through the U.S. financial group, regardless
of whether the U.S. parent financial group decides to support its
foreign affiliate. If the U.S. financial group supports its foreign
affiliate by bringing the foreign affiliate's liabilities onto its
balance sheet, the resulting capital deficiencies on the parent's
balance sheet may reduce its creditworthiness and increase the U.S.
financial group's risk of default. Alternatively, if the financial
group acts contrary to the expectations of market participants by
deciding not to support the foreign affiliate, this could be

viewed as a negative signal by investors about the U.S. financial
group's risk of default. Consequently, even though the U.S. financial
group is not exposed to any counterparty credit risk arising from its
foreign affiliate's security-based swap transactions, it may still be
exposed to reputational risk from its foreign affiliates engaged in
security-based swap activity. The final amendments reflect our
consideration of the likely effects of the scope of Title VII dealer
requirements on the degree of reputational risk posed to U.S. persons
by their foreign affiliates.\117\
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    \116\ See U.S. Activity Proposing Release, 80 FR 27482.
    \117\ See Section IV.B.2, infra (noting, among other things,
that, as the market develops, foreign affiliates that might
otherwise avoid Title VII dealer requirements, including margin, may
be required to register as security-based swap dealers because they
arrange, negotiate, or execute transactions in connection with their
dealing activity using personnel located in the United States).
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    Another potential channel of the propagation of risk is through
liquidity shocks from the failure of one market participant to other
participants in the same market.\118\ In a highly concentrated market,
the failure of a key liquidity provider poses a particularly high risk
of propagating this kind of shock not only to its counterparties but to
other participants, including other dealers. To the extent that U.S.
persons are significant participants in the market, the liquidity shock
may propagate to these U.S. persons, and from these U.S. persons to the
U.S. financial system as a whole, even if the liquidity shock
originates with the failure of a non-U.S. person liquidity provider. As
already discussed, the security-based swap market is highly
concentrated, with a relatively small number of dealers responsible for
most of the activity in the market. Moreover, security-based swap
activity carried out in U.S. market centers largely involves security-
based swaps on U.S. reference entities,\119\ and the overwhelming
majority of non-dealer counterparties to these transactions are U.S.
persons; similarly, a significant proportion of the dealers active in
this market are either U.S. persons or foreign affiliates of U.S.
financial groups.\120\ In light of these market characteristics, we
have considered the potential propagation of such risks through the
failure of one or more non-U.S. persons engaged in dealing activity in
the United States.\121\
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    \118\ See Cross-Border Adopting Release, 79 FR 47284 (noting
that ``the failure of a single large firm active in the security-
based swap market can have consequences beyond the firm itself'' and
that ``[o]ne firm's default may reduce the willingness of dealers to
trade with, or extend credit to, both non-dealers and other
dealers'').
    \119\ See note 57 and accompanying text, supra.
    \120\ See Section II.A.3, supra.
    \121\ For more on liquidity shocks and contagion, see Rodrigo
Vald[eacute]s, ``Emerging Market Contagion: Evidence and Theory''
(1996). See also Guillermo Calvo and Enrique Mendoza, ``Contagion,
Globalization, and the Volatility of Capital Flows,'' Capital Flows
and the Emerging Economies (2000).
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III. Overview of Prior Proposals

    The Exchange Act excepts from designation as a ``security-based
swap dealer'' an entity that engages in a ``de minimis'' quantity of
security-based swap dealing activity with or on behalf of
customers.\122\ Under the final rules adopted in the Intermediary
Definitions Adopting Release, a person may take advantage of that
exception if, in connection with CDS that constitute security-based
swaps, the person's dealing activity over the preceding 12 months does
not exceed a gross notional amount of $3 billion, subject to a phase-in
level of $8 billion.\123\ The phase-in level will remain in place
until--following a study regarding the definitions of ``security-based
swap dealer'' and ``major security-based swap participant''--we either
terminate the phase-in period or establish an alternative threshold
following rulemaking.\124\
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    \122\ See Exchange Act section 3(a)(71)(D).
    \123\ See Exchange Act rule 3a71-2(a)(1)(i). Lower thresholds
are set forth in connection with dealing activity involving other
types of security-based swaps. See Exchange Act rule 3a71-
2(a)(1)(ii).
    \124\ See Intermediary Definitions Adopting Release, 77 FR
30640-41. Exchange Act rule 3a71-2 establishes a phase-in period
during which the de minimis threshold for CDS will be $8 billion and
during which Commission staff will study the security-based swap
market as it evolves under the new regulatory framework, resulting
in a report that will consider the operation of the ``security-based
swap dealer'' and ``major security-based swap participant''
definitions. In that release we explained that, at the end of the
phase-in period, we will take into account the report, as well as
public comment on the report, in determining whether to terminate
the phase-in period or propose any changes to the rule implementing
the de minimis exception, including any increases or decreases to
the $3 billion threshold. See id. at 30640.
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    As noted above, we have twice proposed rules to address the
application of the security-based swap dealer de minimis exception to
transactions between two non-U.S. persons on the basis of activity in
the United States.\125\ In the Cross-Border Proposing Release, we
stated that a non-U.S. person engaged in dealing activity through a
U.S. branch, office, or affiliate or by a non-U.S. person that
otherwise engages in security-based swap dealing activity in the United
States, particularly at levels exceeding the relevant de minimis
thresholds, may raise concerns that Title VII addresses, even if a
significant proportion--or all--of its transactions involve non-U.S.-
person counterparties.\126\ Accordingly, we initially proposed to
require any non-U.S. person to include in its de minimis calculation
any security-based swap transaction connected with its dealing
activities that is a ``transaction conducted within the United
States.'' \127\ We proposed to define ``transaction conducted within
the United States'' as any ``security-based swap transaction that is
solicited, negotiated, executed, or booked within the United States, by
or on behalf of either counterparty to the transaction, regardless of
the location, domicile, or residence status of either counterparty to
the transaction.'' \128\ Thus, under this initially proposed
definition, a non-U.S. person engaged in dealing activity would have
been required to include in its de minimis calculation any dealing
transaction entered into with another non-U.S. person that was
conducted in the United States by either the non-U.S. person engaged in
dealing activity or its counterparty or an agent of either the dealer
or the counterparty.\129\ Given the number of concerns raised by
commenters in connection with this element of the Cross-Border
Proposing Release, we subsequently determined that final resolution of
this issue would benefit from further consideration and public
comment.\130\ Accordingly, we did not address this issue in our Cross-
Border Adopting Release.
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    \125\ See Cross-Border Proposing Release, 78 FR 30999; U.S.
Activity Proposing Release, 80 FR 27444.
    \126\ See Cross-Border Proposing Release, 78 FR 31000-01.
    \127\ See initially proposed Exchange Act rule 3a71-3(b)(1)(ii).
    \128\ See initially proposed Exchange Act rule 3a71-3(a)(5). See
also Cross-Border Proposing Release, 78 FR 30999-31000.
    \129\ The initially proposed definition of ``transaction
conducted within the United States'' did not include submitting a
transaction for clearing in the United States, reporting a
transaction to a security-based swap data repository in the United
States, or performing collateral management activities (such as
exchanging margin) within the United States. See Cross-Border
Proposing Release, 78 FR 31000.
    \130\ See, e.g., Cross-Border Adopting Release, 79 FR 47280.
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    In light of comments received on the initial proposal, subsequent
regulatory and other developments in the security-based swap market,
and further consideration of policy concerns arising from these
transactions, we proposed a modified approach in April 2015 that would
amend Exchange Act rule 3a71-3 to address the regulatory concerns
associated with dealing activity in the United States while mitigating
many of the concerns expressed by commenters on the initial proposal.
The modified approach did

not include the initially proposed defined term ``transaction conducted
in the United States'' and would not require a non-U.S. person engaging
in dealing activity to consider the location of its non-U.S.-person
counterparty or that counterparty's agent in determining whether the
transaction needs to be included in its own de minimis calculation.
Instead, we proposed to require a non-U.S. person to include in its de
minimis calculation any transaction connected with its security-based
swap dealing activity that it enters into with a non-U.S.-person
counterparty only when the transaction is arranged, negotiated, or
executed by personnel of the non-U.S. person located in a U.S. branch
or office, or by personnel of such person's agent located in a U.S.
branch or office.\131\
---------------------------------------------------------------------------

    \131\ See proposed Exchange Act rule 3a71-3(b)(1)(iii)(C).
---------------------------------------------------------------------------

    Various statutory and policy concerns underpinned our proposed
revisions to the initial approach. We noted in the U.S. Activity
Proposing Release that requiring non-U.S. persons to include such
transactions in their de minimis threshold calculations would help to
ensure that all persons that engage in significant relevant dealing
activity, including activity engaged in by personnel located in a U.S.
branch or office, are required to register as security-based swap
dealers and to comply with relevant Title VII requirements applicable
to security-based swap dealers.\132\ We also explained that subjecting
security-based swap activity involving activity in the United States to
Title VII, even when a transaction is between two non-U.S. persons, is
consistent with Section 30(c) of the Exchange Act and is appropriate
under a territorial approach.\133\ We also noted that the modified
approach would prevent market participants from engaging in significant
dealing activity in the United States while avoiding Title VII by
booking such transactions in non-U.S. person dealers who are not
conduit affiliates and whose obligations under such transactions are
not guaranteed by a U.S. person.\134\
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    \132\ See U.S. Activity Proposing Release, 80 FR 27467.
    \133\ See id. at 27464.
    \134\ See id. at 27465. As we have stated elsewhere, the
transactions of a guaranteed non-U.S. person exist, at least in
part, within the United States, and the economic reality of these
transactions is substantially identical to transactions entered into
directly by a U.S. person (including through a foreign branch). See
Regulation SBSR Adopting Release, 80 FR 14651. See also Cross-Border
Adopting Release, 79 FR 47289-90.
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IV. Final Rules

A. Overview

    Having carefully considered comments received in response to our
proposal as well as the objectives of Title VII dealer regulation and
recent regulatory and market developments (including market
participants' responses to the implementation of regulatory reforms of
the OTC derivatives markets),\135\ we are amending Exchange Act rules
3a71-3 and 3a71-5 in a manner generally consistent with the amendments
proposed in our U.S. Activity Proposing Release.\136\ As discussed in
the proposal, Exchange Act rule 3a71-3, as amended, focuses on certain
activity carried out, at least in part, by personnel located in the
United States in connection with a non-U.S. person's dealing activity,
but it does not require a non-U.S. person engaging in dealing activity
to consider the location of its non-U.S.-person counterparty or that
counterparty's agent in determining whether the transaction needs to be
included in its own de minimis calculation. Specifically, the amendment
to final rule 3a71-3(b) requires a non-U.S. person to include in its de
minimis calculation any transaction connected with its security-based
swap dealing activity that it enters into with a non-U.S.-person
counterparty only when the transaction is arranged, negotiated, or
executed by that person's personnel who are located in a U.S. branch or
office, or by its agent's personnel who are located in a U.S. branch or
office.\137\ Final Exchange Act rule 3a71-5(c) makes the exception for
cleared anonymous transactions unavailable for trades that non-U.S.
persons are required to count under proposed Exchange Act rule 3a71-
3(b)(1)(iii)(C).\138\ The following sections discuss these rules, as
well as guidance regarding the application of Exchange Act rule 3a71-
3(b)(1)(iii)(C) to specific categories of transactions raised by
commenters.
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    \135\ See note 164, infra (noting our understanding that some
U.S.-based financial groups have restructured their swap business to
book their transactions in non-U.S. person affiliates).
    \136\ See Exchange Act rule 3a71-3(b)(1)(iii)(C); Exchange Act
rule 3a71-5(c).
    \137\ See Exchange Act rule 3a71-3(b)(1)(iii)(C). The final rule
does not incorporate a broker-dealer exception as requested by some
commenters, but it does except transactions connected with the
dealing activity of those international organizations excluded from
the definition of U.S. person in Exchange Act rule 3a71-
3(a)(4)(iii). See Section IV.C.4, infra.
    \138\ See Exchange Act rule 3a71-5(c).
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B. Statutory Scope and Policy Concerns Arising from Security-Based Swap
Dealing Activity in the United States

1. Territorial Application of ``Security-Based Swap Dealer'' Definition
    Some commenters have suggested that the modified approach to the de
minimis exception set forth in our U.S. Activity Proposing Release
would impose U.S. regulation on transactions and market participants
lacking a sufficient ``nexus'' to the United States or to the U.S.
financial system and, consequently, would produce few or no
benefits.\139\ Several commenters argued that the primary focus of the
security-based swap dealer registration regime is on protecting U.S.
market participants, and the market as a whole, against risk and that
these transactions lack a sufficient ``nexus'' to the United States and
to the U.S. financial system because they do not give rise to risk in
the United States.\140\ One commenter further argued that the proposed
rule was inconsistent with the concept of a de minimis threshold,
stating that, under the Commission's rules, the

threshold is ``based on the aggregate notional size of security-based
swaps, not the extent of U.S. involvement,'' suggesting, in the
commenter's view, that ``the threshold is concerned with risk posed to
the entity, not the extent of involvement by the entity.''\141\
Accordingly, these commenters argued that imposing security-based swap
dealer regulation on non-U.S. persons on the basis of transactions with
other non-U.S. persons--even if arranged, negotiated, or executed by
personnel located in the United States--is inappropriate.\142\
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    \139\ See ISDA Letter at 4-5 (arguing that the proposed rule
would capture firms that ``have no material connection with the
United States''); SIFMA/FSR Letter at 5 (arguing that ``[a] non-U.S.
entity should not be required to count a security-based swap toward
its security-based swap dealer de minimis threshold solely on the
basis of the conduct of its or its agent's U.S.-located personnel,''
as ``such transactions between non-U.S. persons, where none of the
risks of the transactions reside in the United States, do not have a
sufficient nexus to the United States to be included in a
determination of whether a non-U.S. entity should need to register
with the Commission''). We discuss the benefits of the final rule
below. See Sections IV.B.2 and V.B, infra.
    \140\ See SIFMA/FSR Letter at 5; IIB Letter at 5-6 (arguing that
the ``Commission's policy interests in regulating the [security-
based swap] and its counterparties are much more limited than if one
of the parties was a U.S. person, guaranteed affiliate or conduit
affiliate,'' as only the sales and trading activity at the inception
of the transaction is occurring in the United States and the risks
of such transactions ``do not flow back to the U.S. financial
system''); HSBC Letter at 3 (arguing that subjecting foreign
subsidiaries to entity-level dealer requirements would not provide
additional benefits ``since no risk-based nexus would exist between
those subsidiaries and the U.S. financial system,'' particularly
given that the Commission could use existing recordkeeping
requirements to access the books and records relating to
transactions involving U.S. activity); ISDA Letter at 5-6 (arguing
that the Commission's principal concern in regulating these entities
is risk mitigation and that such transactions do not transmit risk
into the U.S. financial system). Other commenters, in the context of
discussing the Commission's proposed approach to the clearing and
trade execution requirements, argued that these types of
transactions do pose counterparty credit risk to the U.S. financial
system. See MFA Letter at 6 (disagreeing with our preliminary view
that counterparty credit risk and operational risk of such
transactions reside primarily outside the United States); Citadel
Letter at 6-7 (discussing the significant risks to the U.S.
financial system posed by ``offshore'' transactions).
    \141\ See SIFMA/FSR Letter at 6.
    \142\ See, e.g., id. at 5.
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    To the extent that these comments are directed at whether
transactions arising from this activity or persons engaged in this
activity fall within the scope of Title VII,\143\ we reiterate our view
that it is consistent with a territorial approach to the application of
the Exchange Act to require non-U.S. persons that use personnel located
in the United States to arrange, negotiate, or execute a security-based