market participants at a competitive disadvantage or advantage? If so,
please explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the transaction-level requirements?
What would be the market impacts and competitiveness effects of
alternatives to the proposed approach discussed in this release?
5. Application of Entity-Level Rules
(a) Introduction
    As noted above, by their very nature, entity-level requirements
apply to the operation of a security-based swap dealer as a whole. The
Commission recognizes that the capital, margin, and other entity-level
requirements that it adopts could have a substantial impact on
international commerce and the relative competitive position of
intermediaries operating in various, or multiple, jurisdictions. In
particular, if these requirements are substantially more or less
stringent than corresponding requirements, if any, that apply to
intermediaries operating in security-based swap markets outside the
United States, depending on how the rules are written, these
differences could impact the ability of firms based in the United
States to participate in non-U.S. markets, access to U.S. markets by
foreign-based firms, and how and whether international firms make use
of global ``booking entities'' to centralize risks related to security-
based swaps, among other possible impacts. These issues have been the
focus of numerous comments to the Commission and other regulators, as
discussed above, as well as Congressional inquiries and other public
dialogue.
(b) Proposed Approach
    The Commission is not proposing to provide specific relief for
foreign security-based swap dealers from Title VII entity-level
requirements, although, as discussed in Section XI below, under a
Commission substituted compliance determination, a foreign security-
based swap dealer would be able to satisfy relevant Title VII entity-
level requirements by substituting compliance with corresponding
requirements under a foreign regulatory system.\556\ The Commission
preliminarily believes that entity-level requirements are core
requirements of the Commission's responsibility to ensure the safety
and soundness of registered security-based swap dealers.\557\ The
Commission preliminarily believes that it would not be consistent with
this mandate to provide a blanket exclusion to foreign security-based
swap dealers from entity-level requirements applicable to such
entities.\558\
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    \556\ See Section XI, infra.
    \557\ See note 419, supra.
    \558\ We preliminarily believe that the proposed approach with
respect to entity-level requirements is not being applied to persons
who are ``transact[ing] a business in security-based swaps without
the jurisdiction of the United States,'' within the meaning of
Section 30(c) of the Exchange Act. See Section II.B.2(a), supra.
However, the Commission also preliminarily believes that the
proposed approach with respect to entity-level requirements is
necessary or appropriate to help prevent the evasion of the
particular provisions of the Exchange Act that were added by the
Dodd-Frank Act that are being implemented by the proposed approach
and prophylactically will help ensure that the purposes of those
provisions of the Dodd-Frank Act are not undermined. See Section
II.B.2(e), supra; see also Section II.B.2(c), supra.
    For example, if entity-level requirements do not apply to the
entire business of a registered foreign security-based swap dealer,
then U.S. security-based swap dealers would have an incentive to
evade the full application of the entity-level requirements by
moving their operations outside the United States. In this event,
assuming the scope of the security-based swap dealers dealing
activity remained unchanged, the risk presented by the entity to its
U.S. counterparties and the U.S. financial system would remain
unchanged. If, for instance, Title VII margin requirements did not
apply to the entire entity, these entities could accumulate risk
through their non-U.S. dealing activity and transmit that risk to
U.S. counterparties in contravention of the purposes of the
financial responsibility framework established by the Dodd-Frank
Act. See Section III.C.3(b)ii, supra.
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    For example, capital requirements play an essential role in
ensuring the safety and soundness of security-based swap dealers. As
discussed above, the Commission's proposed capital rules for nonbank
security-based swap dealers are modeled on the net liquid assets test
found in the capital requirements applicable to broker-dealers.\559\ We
believe that this capital standard is necessary to ensure the safety
and soundness of nonbank security-based swap dealers, and thus we are
not proposing to exclude foreign nonbank security-based swap dealers
from our capital rules. In addition, we believe that the capital,
margin, and other entity-level requirements proposed and adopted by the
Commission work together to provide a comprehensive regulatory scheme
that is vital for ensuring the safety and soundness of registered
security-based swap dealers, and that the benefits of Title VII's
entity-level requirements are equally important to both foreign and
U.S. dealers registered with the Commission. As a result, we are not
proposing to provide specific relief from individual entity-level
requirements for foreign dealers.
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    \559\ See Section III.C.3(b)i, supra.
---------------------------------------------------------------------------

    We do, however, recognize the concerns raised by commenters
regarding the application of entity-level requirements to foreign
security-based swap dealers.\560\ We preliminarily believe that these
concerns are largely addressed through the Commission's overall
proposed approach to substituted compliance in the context of Title
VII, which is discussed in detail in Section XI below. In general, the
Commission is proposing a framework under which it may permit a
registered foreign security-based swap dealer (or class thereof) to
satisfy the capital, margin, and other requirements in Section 15F of
the Exchange Act, and the rules and regulations thereunder, by

complying with the corresponding requirements established by its
foreign financial regulatory authority,\561\ subject to certain
conditions.\562\ We preliminarily believe that providing foreign
security-based swap dealers with the possibility of substituted
compliance in this way will help address concerns related to
competitiveness and overlapping regulations related to entity-level
requirements, while still ensuring that registered foreign security-
based swap dealers are subject to appropriate regulatory oversight.
---------------------------------------------------------------------------

    \560\ See, e.g., Davis Polk Letter II at 4-20; Sullivan &
Cromwell Letter at 14-15.
    \561\ Section 3(a)(52) of the Exchange Act, 15 U.S.C.
78c(a)(52), defines ``foreign financial regulatory authority'' as
``any (A) foreign securities authority, (B) other governmental body
or foreign equivalent of a self-regulatory organization empowered by
a foreign government to administer or enforce its laws relating to
the regulation of fiduciaries, trusts, commercial lending,
insurance, trading in contracts of sale of a commodity for future
delivery, or other instruments traded on or subject to the rules of
a contract market, board of trade, or foreign equivalent, or other
financial activities, or (C) membership organization a function of
which is to regulate participation of its members in activities
listed above.'' The term ``foreign securities authority'' is defined
in Section 3(a)(50) of the Exchange Act as ``any foreign government,
or any governmental body or regulatory organization empowered by a
foreign government to administer or enforce its laws as they relate
to securities matters.''
    \562\ Proposed Rule 3a71-5 under the Exchange Act. As discussed
in Section II.C.3(b) above, the Commission has authority to
establish capital and margin requirements only for registered
nonbank security-based swap dealers. For treatment of the capital
and margin requirements for foreign bank security-based swap
dealers, see Prudential Regulator Margin and Capital Proposal, 76 FR
27564.
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Request for Comment
    The Commission requests comment on all aspects of the proposed
interpretive guidance regarding the proposed provision of substituted
compliance for certain requirements in Section 15F of the Exchange Act
for foreign security-based swap dealers, including the following:
     What types of conflicts might a foreign security-based
swap dealer face if subjected to capital requirements in more than one
jurisdiction? In what situations would compliance with more than one
capital requirement be difficult or impossible?
     Should the Commission provide specific relief to foreign
security-based swap dealers with respect to entity-level requirements?
If so, please indicate the specific relief that should be provided and
the rationale for providing such relief.
     Would the provision of relief from entity-level
requirements undermine the Commission's efforts to set capital
requirements to ensure the safety and soundness of security-based swap
dealers, as required by Section 15F(e)(2)(C) of the Exchange Act? Why
or why not?
     Should the Commission treat margin as an entity-level
requirement or a transaction-level requirement? If only a transaction-
level requirement, why?
     Should the Commission consider providing relief for
foreign security-based swap dealers from the statutory disqualification
requirement in Section 15F(b)(6) of the Exchange Act with respect to
their transactions with non-U.S. persons? For example, should the
Commission permit associated persons of a foreign security-based swap
dealer that are subject to a statutory disqualification to conduct
security-based swap activity with non-U.S. persons outside the United
States? If so, why?
     The CFTC has proposed an interpretation that categorizes
certain entity-level requirements and transaction-level requirements
differently when compared to the Commission's proposed approach.\563\
For example, the CFTC has proposed classifying margin requirements
applicable to uncleared swaps as a transaction-level requirement, where
the Commission has proposed categorizing margin as an entity-level
requirement. Should the Commission adopt portions of the CFTC's
approach to categorization? If so, which requirements should be re-
categorized and why?
---------------------------------------------------------------------------

    \563\ See CFTC Cross-Border Proposal, 77 FR 41223-27.
---------------------------------------------------------------------------

     What would be the market impact of the proposed approach
to applying entity-level requirements to registered foreign security-
based swap dealers? How would the proposed application of the entity-
level requirements affect the competitiveness of U.S. entities in the
global marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed approach place any market
participants at a competitive disadvantage or advantage? If so, please
explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the entity-level requirements? What
would be the market impacts and competitiveness effects of alternatives
to the proposed approach discussed in this release?

D. Intermediation

1. Introduction
    Security-based swap dealers currently use a variety of business
models and legal structures to do business with customers in
jurisdictions around the world. For instance, many security-based swap
dealers with global businesses use local personnel to provide security-
based swap services to customers in a particular jurisdiction while
booking transactions originated from multiple jurisdictions in a single
entity (i.e., a centralized booking model). Some security-based swap
dealers also use unique organizational structures to provide local
customers with access to market or product specialists in other
jurisdictions. As discussed below, commenters have indicated that, in
the U.S. market, these scenarios are particularly prevalent in the case
of foreign security-based swap dealers seeking access to U.S. customers
or providing non-U.S. customers with expertise from employees located
in the United States.\564\
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    \564\ See, e.g., IIB Letter at 15 (``Perhaps more commonly, a
foreign bank may transact in swaps as a dealer with U.S. customers
through a separate U.S. branch, agency, or affiliate that
intermediates the transactions as agent for the foreign bank. This
is often because, to facilitate strong relationships with U.S.
customers, the personnel who solicit and negotiate with U.S.
customers and commit a foreign bank to swaps are located in the
U.S.'').
---------------------------------------------------------------------------

    In the following discussion, we briefly describe comments received
regarding various intermediation models. Throughout this release we use
the term ``intermediation'' generally to refer to origination activity
(e.g., solicitation and negotiation of transactions) in connection with
a security-based swap transaction.
2. Comment Summary
    Commenters stated that foreign security-based swap dealers use
different types of business models to service U.S. customers and
provide their global customer base with specialized information, while
at the same time reducing both customer costs and entity risks through
centralized netting and risk management of their global security-based
swap businesses.\565\ In

support of these perceived benefits, commenters have urged the
Commission not to apply Title VII to cross-border transactions in a way
that would either prohibit or disincentivize the existing security-
based swap dealing business models of foreign security-based swap
dealers.\566\
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    \565\ See, e.g., IIB Letter at 6 (``Globally, there are a number
of paradigms under which swap activity is conducted. To achieve the
benefits of reduced risk and increased liquidity and efficiency
associated with netting and margining on a portfolio basis, foreign
banks (like their U.S. domestic counterparts) typically seek to
transact with swap counterparties globally, to the extent feasible,
through a single, highly creditworthy entity. In many cases,
however, the personnel who have relationships with U.S. customers or
who manage the market risk of the foreign bank's swap portfolio are
located regionally, outside the jurisdiction in which the foreign
bank is domiciled. In some cases, entities other than the foreign
bank (such as a U.S. branch, agency, or affiliate) transact with
local customers in order to satisfy unique customer documentation,
insolvency, tax, regulatory, or other considerations.); Davis Polk
Letter I at 2-3 (suggesting that ``operating and managing a global
swaps business out of a single booking entity presents many
advantages from the perspective of foreign banks, customers and
supervisors,'' including reduction in system risk, maximization of
benefits of counterparty netting for customers, and consolidated
supervision); Cleary IV at 3-4 (stating that the represented firms
``conduct their swap dealing businesses through a variety of
structures, based on multiple and in many cases interdependent
legal, strategic and business considerations that pre-date Dodd-
Frank,'' and urging the Commissions to address a number of ``common
cross-border transaction structures'').
    \566\ See, e.g., IIB Letter at 6-7 (``[T]he Commissions should
establish a framework for cross-border swap activities that
preserves and leverages the strengths of existing market practices
and home country supervision and regulation.''); Cleary IV at 3-4
(urging the Commissions to give consideration to a number of common
cross-border transaction structures in deciding how to implement
Title VII).
---------------------------------------------------------------------------

    A number of commenters recommended that a foreign dealer that
engages in security-based swap transactions with U.S. counterparties,
but only through U.S. registered swap or security-based swap dealers,
should not be subject to security-based swap dealer registration.\567\
One commenter stated that in such situations, the Commission should
either not require security-based swap dealer registration of the non-
U.S. security-based swap dealer at all, or require a limited
registration, whereby the non-U.S. security-based swap dealer would be
subject to only capital and related prudential requirements and be
permitted to rely on comparable home country regulation.\568\ In
situations where a foreign security-based swap dealer uses a U.S.
domiciled subsidiary or affiliate as its agent to solicit and negotiate
the terms of security-based swap transactions, several commenters
suggested that the Commission allow for a bifurcated registration and
regulation framework allowing the foreign security-based swap dealer to
comply with Title VII's requirements by registering both the foreign
dealer and its agent in limited capacities and allocating the
compliance responsibilities between the two entities.\569\ Other
commenters remarked that the foreign security-based swap dealer should
remain ultimately responsible for ensuring compliance with all the
applicable Title VII requirements whether or not the regulated
activities were carried out by the foreign security-based swap dealer
or its agent.\570\
---------------------------------------------------------------------------

    \567\ See, e.g., Financial Services Roundtable Letter at 25
(suggesting that ``entities that would meet the definition of `swap
dealer' based on their non-U.S. activity, but that act in the U.S.
only on an intermediated basis through a regulated U.S. swap dealer,
should not be subject to U.S. regulation''); Davis Polk Letter II at
4, 7 (discussing reasons to exclude dealing activities with U.S.-
registered swap dealers, including because ``a swap between a
foreign dealer and a U.S. registered swap dealer would be already
subject to Title VII by the virtue of the latter's involvement'').
    \568\ See Cleary Letter IV at 3-4 (recommending that the
Commission either adopt an approach similar to the broker-dealer
registration regime, ``under which a non-U.S. swap dealer
transacting with U.S. persons . . . intermediated by an affiliated
U.S.-registered swap dealer'' would not have to register as a swap
dealer or a major swap participant, or adopt a limited registration
approach whereby ``the non-U.S. swap dealer would be subject to U.S.
swap dealer registration and regulation solely with respect to the
capital and related prudential requirements relevant to its status
as a swap counterparty, which requirements could be satisfied
through compliance with comparable home country requirements'').
    \569\ See, e.g., Soci[eacute]t[eacute] G[eacute]n[eacute]rale
Letter I at 4-6 (suggesting a bifurcated registration model allowing
foreign banks to centrally book their U.S. swap and security-based
swap business with a registered ``Foreign Swap Dealer'' who is
responsible for obligations associated with a booking entity (e.g.,
complying with capital requirements), while complying with most of
Title VII's regulations through a U.S. domiciled, registered ``Non-
Booking Swap Dealer''); and Davis Polk Letter II at 4-22 (proposing
two registration scenarios, including one that would require a
foreign bank to register with the Commission solely as a booking
center for security-based swap transactions, while a U.S. affiliate
of a foreign bank would also register with the Commission, and the
foreign bank's obligations under Title VII would be divided between
the two registered entities).
    \570\ See, e.g., Cleary Letter IV at 12 (recommending a limited
designation registration whereby ``the branch, department or
division of a registrant involved in the regulated swap activity
should be responsible for compliance with Dodd-Frank's
requirements,'' but allowing for the outsourcing of ``performance
(but not responsibility for due performance) of those requirements
to a U.S. affiliate that is registered as an introducing broker,
futures commission merchant (``FCM'') and/or securities broker-
dealer''); Rabobank Letter at 3 (suggesting that ``the non-U.S.
branch registrant would use one or more U.S. affiliates as agents in
arranging swaps with U.S. persons and would be permitted to delegate
certain compliance functions to its U.S. affiliates, although such
delegation would not relieve the non-U.S. branch registrant of its
ultimate compliance responsibilities'').
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3. Discussion
    The Commission is not at this time proposing any specific rules
regarding security-based swap dealing activities undertaken through
intermediation. At the same time, we recognize the importance of
intermediation, particularly with respect to foreign security-based
swap dealers accessing U.S. customers or product specialists located in
the United States. Based on the Commission's experience in the
securities markets, we expect that many foreign security-based swap
dealers will operate within the U.S. market by utilizing their U.S.
affiliates or other U.S. entities as agents \571\ in the United States,
while booking transactions facilitated by such U.S. personnel in a
central booking entity located abroad. We preliminarily believe that
the approach proposed in this release for the cross-border regulation
of security-based swap dealing activity will not impede the use of
these types of intermediation business models by foreign security-based
swap dealers. More specifically, we believe that the Commission's
proposed approach to the application of transaction-level requirements
related to Foreign Business \572\ and proposed framework for
substituted compliance on entity-level requirements \573\ should help
to address commenter concerns that a foreign security-based swap dealer
engaging in Foreign Business would be subject to potentially
duplicative and conflicting transaction-level requirements in a foreign
jurisdiction with respect to its Foreign Business.
---------------------------------------------------------------------------

    \571\ The Commission previously proposed new Rule 15Fh-2(d),
which would provide that the term ``security-based swap dealer''
would include, where relevant, an ``associated person'' of the
security-based swap dealer. See External Business Conduct Standards
Proposing Release, 76 FR 42402. Section 3(a)(70) of the Exchange
Act, as added by Section 761(a)(6), defines the term ``person
associated with a security-based swap dealer or major security-based
swap participant'' as ``(i) any partner, officer, director, or
branch manager of such security-based swap dealer or major security-
based swap participant (or any person occupying a similar status or
performing similar functions); (ii) any person directly or
indirectly controlling, controlled by, or under common control with
such security-based swap dealer or major security-based swap
participant; or (iii) any employee of such security-based swap
dealer or major security-based swap participant.'' The term does not
include, however, any person associated with a security-based swap
dealer or major security-based swap participant ``whose functions
are solely clerical or ministerial.'' See id.
    As the Commission noted, to the extent that a security-based
swap dealer acts through, or by means of, an associated person of
that security-based swap dealer, the associated person must comply
as well with the applicable business conduct standards. See External
Business Conduct Standards Proposing Release, 76 FR 42402-3. In
support of this position, the Commission cited Section 20(b) of the
Exchange Act, which provides that ``[i]t shall be unlawful for any
person, directly or indirectly, to do any act or thing which it
would be unlawful for such person to do under the provisions of this
title or any rule or regulation thereunder through or by means of
any other person.''
    \572\ See Section III.C.4, supra.
    \573\ See Section III.C.5, supra, and Section XI, infra.
---------------------------------------------------------------------------

    While the foreign security-based swap dealer would remain
responsible for ensuring that all relevant Title VII requirements
applicable to a given security-based swap transaction are fulfilled,
the dealer and its agent(s) may choose to allocate the specific
responsibilities such as taking responsibility that all U.S. external

business conduct requirements are complied with, margin is collected
and segregated, and required trading records are maintained and
available, to be undertaken by each entity depending on the
intermediation model it adopts.\574\
---------------------------------------------------------------------------

    \574\ The agent, in these circumstances, would need to consider
whether it separately would need to register as a security-based
swap dealer (if, for example, the agent acted as principal in a
security-based swap with the counterparty, and then entered into a
back-to-back transaction with the booking entity), a broker (e.g.,
by soliciting or negotiating the terms of security-based swap
transactions), or other regulated entity. Further, the allocation of
functions between a foreign security-based swap dealer and a U.S.
agent would not affect the aggregation calculation for determining
whether the foreign security-based swap dealer exceeded the de
minimis threshold. See Section III.B.3(c), supra.
---------------------------------------------------------------------------

    Further, although a foreign security-based swap dealer could use an
entity that is not a security-based swap dealer to act as its agent,
the foreign security-based swap dealer would nonetheless be responsible
for ensuring compliance with all the requirements applicable to
security-based swap dealers under Title VII (and the federal securities
laws) whether or not the regulated activities were carried out by the
foreign security-based swap dealer or its non-security-based swap
dealer agent.\575\
---------------------------------------------------------------------------

    \575\ See note 574, supra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed
approach to intermediation. In addition, the Commission requests
comment in response to the following questions:
     Should the Commission revise our proposed approach to
address directly the concerns of entities using the intermediation
model to access the U.S. market? If so, what type of approach should
the Commission use to address these concerns consistent with the
protection of counterparties' interests and the purposes of Title VII?
     Should the Commission adopt a model on intermediation
similar to the approach laid out in Rule 15a-6(a)(3) (17 CFR 240.15a-
6(a)(3)) governing foreign broker-dealers, which would permit non-U.S.
persons to conduct security-based swap dealing activity within the
United States without registering with the Commission if those
transactions were intermediated by a registered U.S. security-based
swap dealer? If so, how would it work in the security-based swap
context, and how would it address Title VII policy concerns?
     What would be the market impact of the proposed approach
to intermediation? How would the application of the proposed approach
to intermediation affect the competitiveness of U.S. entities in the
global marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed approach place any market
participants at a competitive disadvantage or advantage? If so, please
explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the proposed approach to
intermediation? What would be the market impacts and competitiveness
effects of alternatives to the proposed approach discussed in this
release?

E. Registration Application Re-Proposal

1. Introduction
    As discussed in Section XI.C below, the Commission is proposing a
rule that would create a framework under which the Commission would
consider permitting a foreign security-based swap dealer, where
appropriate, to rely on a substituted compliance determination by the
Commission with respect to certain of the requirements in Section 15F
of the Exchange Act and the rules and regulations thereunder.\576\ In
discussing the application of this proposed framework below, the
Commission indicated that certain entity-level requirements under
Section 15F of the Exchange Act may be candidates for substituted
compliance determinations.\577\
---------------------------------------------------------------------------

    \576\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \577\ See Section III.C.5, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the most appropriate
time for a foreign security-based swap dealer to notify the Commission
of its intention to avail itself of an existing substituted compliance
determination \578\ would be at the time the foreign security-based
swap dealer files an application to register with the Commission as a
security-based swap dealer.\579\ As part of its application, the
foreign security-based swap dealer would already be providing the
Commission with detailed information in support of its application. The
intent of a foreign security-based swap dealer to avail itself of a
previously granted substituted compliance determination would be
relevant to the Commission's review of such application because it
would impact how the Commission will conduct oversight of the security-
based swap dealer. In addition, if a security-based swap dealer
determines, after it registered with the Commission, that it intends to
rely on a substituted compliance determination, proposed Rule 15Fb2-3
would require that it promptly update its application.\580\
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    \578\ The Commission is proposing to establish a separate
process whereby foreign security-based swap dealers may request that
the Commission make a substituted compliance determination with
respect to a particular foreign jurisdiction. See Section XI, infra.
    \579\ The Commission's Registration Proposing Release does not
use the term ``foreign security-based swap dealer,'' but rather
references a ``nonresident security-based swap dealer.'' Proposed
Rule 15Fb2-4(a) under the Exchange Act defines the term
``nonresident security-based swap dealer'' as a security-based swap
dealer that is incorporated or organized any place that is not in
the United States or that has its principal place of business in any
place not in the United States. See Registration Proposing Release,
76 FR 65799-801.
    The definition of ``nonresident security-based swap dealer'' in
proposed Rule 15Fb2-4(a) is similar to, but potentially broader
than, the definition of ``foreign security-based swap dealer'' in
proposed Rule 3a71-3(a)(3) under the Exchange Act because it uses
``or'' instead of ``and'' in the definition. As a result, proposed
Rule 15Fb2-4(a) would treat a U.S. corporation as a nonresident
person if its principal place of business were outside the United
States, whereas proposed Rule 3a71-3(a)(3) would not treat such an
entity as a U.S. security-based swap dealer and, therefore, it would
not be able to avail itself of substituted compliance determinations
applicable to foreign security-based swap dealers.
    The Commission preliminarily believes that defining the term
``foreign security-based swap dealer'' more narrowly for purposes of
the proposals in this release is appropriate because proposed Rule
15Fb2-4(a) uses the term ``nonresident security-based swap dealer''
only for determining whether a nonresident security-based dealer
would be required to appoint an agent for service of process in the
United States and provide assurance that the Commission would have
prompt access to books and records in the foreign jurisdiction. In
proposed Rule 3a71-3(a)(3), by contrast, the definition of ``foreign
security-based swap dealer'' would be used to determine who would be
eligible to take advantage of the proposed substituted compliance
framework, as well as how customer protection and segregation
requirements would be applied. The Commission does not believe that
it is appropriate to treat an entity as a foreign security-based
swap dealer for these purposes if its principal place of business
were outside the United States but it were incorporated in the
United States, because of its connection to the U.S. security-based
swap market. Nonetheless, the Commission would still want the
assurances required of a ``nonresident security-based swap dealer''
described above, even if the dealer is incorporated in the United
States but has a principal place of business outside the United
States.
    \580\ See Registration Proposing Release, 76 FR 65822.
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    Accordingly, the Commission preliminarily believes it is
appropriate to require foreign security-based swap dealers to provide
additional information in their applications for registration as
security-based swap dealers, as described below.
    The Commission previously proposed Form SBSE, Form SBSE-A, and Form
SBSE-BD for the purpose of registering security-based swap dealers and
major security-based swap participants.\581\ All of these forms are
generally based on Form BD, which is the consolidated form used by
broker-dealers to register

with the Commission, states, and SROs.\582\ Forms SBSE-A and SBSE-BD
are shorter forms that have been modified to provide a more streamlined
application process for entities that are registered or registering
with the CFTC or registered or registering with the Commission as a
broker-dealer.\583\ Each of these forms is designed to be used to
gather information concerning a registrant's business operations to
facilitate the Commission's initial registration decisions, as well as
ongoing examination and monitoring of registration.'' \584\ While the
Commission received four comments on the Registration Proposing
Release, only one specifically expressed views on the Forms SBSE, SBSE-
A, and SBSE-BD.\585\
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    \581\ See id. at 65784.
    \582\ See id. at 65802.
    \583\ See id. at 65804-5.
    \584\ See id. at 65802.
    \585\ See SIFMA Letter II. SIFMA indicated that it appreciated
``the Commission's attempts to minimize registration burdens by
aligning its proposed registration requirements for SBSDs and MSBSPs
with those the CFTC is proposing for swap dealers and major swap
participants as well as by creating a streamlined registration
process for entities already registered with the Commission or the
CFTC,'' and was ``generally pleased that the Commission elected to
make its existing broker-dealer registration forms the basis for its
proposed registration requirements for SBSDs and MSBSPs'' because
``[m]arket participants are familiar with these requirements and
may, in some cases, be registering broker-dealers as SBSDs.''
However, SIFMA did object to ``several of the required disclosures
on proposed Form SBSE,'' which are substantially similar to
disclosures required on Form BD, which it claimed would ``impose
significant burdens on registrants.''
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2. Discussion
    To address the Commission's proposed rule regarding substituted
compliance, the Commission is re-proposing Forms SBSE, SBSE-A, and
SBSE-BD to add two questions to Form SBSE and Form SBSE-A, add one
question to all three Forms, and to modify Schedule F to all the Forms.
In addition, we are proposing one new instruction to the Forms, which
is unrelated to substituted compliance, to clarify that if an
application is not filed properly or completely, it may be delayed or
rejected.\586\ Key differences from the originally proposed forms are
discussed more fully below. The Commission is not proposing to modify
or eliminate any of the other Forms, or any of the rules, proposed in
the Registration Proposing Release.
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    \586\ See Instruction B.1.b. on Forms SBSE, SBSE-A, and SBSE-BD.
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    Re-proposed Forms SBSE and SBSE-A would include two new questions,
question 3 (which has three parts) and question 6.\587\ The new
question 3.A. would ask whether an applicant is a foreign security-
based swap dealer that intends to work with the Commission and its
primary regulator to have the Commission determine whether the
requirements of its primary regulator's regulatory system are
comparable to the Commission's, or avail itself of a substituted
compliance determination previously granted by the Commission with
respect to the requirements of Section 15F of the Exchange Act and the
rules and regulations thereunder. If the applicant responds in the
affirmative to either part of the question, new question 3.B. would
require that the applicant identify the foreign financial regulatory
authority that serves as the applicant's primary regulator and for
which the Commission has made, or may make, a substituted compliance
determination. If the applicant indicates that it is relying on a
previously granted substituted compliance determination, new question
3.C. would require the applicant to describe how it satisfies any
conditions the Commission may have placed on the use of such
substituted compliance determination. New question 3 would elicit basic
information from an applicant to inform the Commission with respect to
its intent to rely upon a substituted compliance determination.
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    \587\ The Commission is not proposing to add these questions to
the Form SBSE-BD, because that form is only applicable to entities
that are already registered as broker-dealers. These firms would not
be eligible to rely on a substituted compliance determination
because the substituted compliance determination only is with
respect to the requirements in Section 15F of the Exchange Act, not
the requirements in the Exchange Act to which registered broker-
dealers are subject.
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    New question 6 would ask whether the applicant is a U.S. branch of
a non-resident entity. If the applicant responds in the affirmative,
the applicant would need to identify the non-resident entity and its
location. This question would provide the Commission with information
regarding whether the firm would be subject to the rules of the foreign
regulator or the rules of one of the U.S. banking regulators, which
would, in turn, elicit which rules may be applicable to the entity's
U.S. security-based swap business.
    Re-proposed Forms SBSE and SBSE-A would also include new question
17, which would be identified as new question 15 in re-proposed Form
SBSE-BD. This new question would ask if the applicant is registered
with or subject to the jurisdiction of a foreign financial regulatory
authority. If the applicant answered this question in the affirmative,
it would be directed to provide additional information on Schedule F as
discussed below. This question would apply to all applicants, not just
foreign security-based swap applicants, and would provide the
Commission with information regarding other regulatory schemes that may
be applicable to an applicant.
    The proposed revisions to Schedule F would divide Schedule F into
two sections. Section I would include the full text of the originally
proposed Schedule F. Section II would elicit additional information
regarding foreign regulators with which the applicant may be registered
or that otherwise have jurisdiction over the applicant.
    The Commission preliminarily believes that modifying Forms SBSE,
SBSE-A, and SBSE-BD (including the changes to Schedule F), as described
above, would be appropriate because it would provide foreign security-
based swap dealers with a convenient and cost-effective way of
informing the Commission of their intention to rely on or seek a
substituted compliance determination, as discussed above. In addition,
we believe these modifications to our original proposal would provide
the Commission with additional information necessary to make a
determination as to whether it is appropriate to grant or institute
proceedings to deny registration to a person applying to become a non-
resident security-based swap dealer.
Request for Comment
    The Commission requests comment on all aspects of the proposed
modifications and additions to proposed Forms SBSE, SBSE-A and SBSE-BD
(including the proposed changes to Schedule F). The Commission also
specifically requests comment on the following:
     Please explain whether Form SBSE and Form SBSE-A are the
appropriate places to identify whether an entity is intending to rely
on a substituted compliance determination. If not, please explain why
and what other method of notifying the Commission might be appropriate
as well as when such notification to the Commission should be required
to be made.
     Please explain whether Forms SBSE, SBSE-A, and SBSE-BD
(and Schedule F) are the appropriate places to identify whether an
entity is subject to oversight by a foreign regulator, and if so, which
regulators. If so, why? If not, why not?
     Should any additional questions be added to Form SBSE to
elicit information related to a registrant's reliance on a substituted
compliance determination?
     Should any additional questions be added to Form SBSE-A to
elicit information related to a registrant's

reliance on a substituted compliance determination?
     Should Form SBSE-BD also be modified to include any of the
additional questions the Commission is proposing to include in re-
proposed Form SBSE or Form SBSE-A? If so, which questions and why?
     The Commission previously indicated in the Intermediary
Definitions Adopting Release that it would consider applications for
limited purpose designations from the major security-based swap
participant and security-based swap dealer definitions under Rules
3a67-1(b) and 3a71-1(c) under the Exchange Act, respectively,\588\ and
requested comment on this topic in the Registration Proposing
Release.\589\ Since that time, we have adopted and proposed, both
jointly with the CFTC and individually, various rules that further
clarify the regulations that will be applicable to security-based swap
dealers,\590\ and today we propose a substituted compliance framework
to potentially address the concerns of foreign security-based swap
dealers. Given these developments, are there any situations addressed
by previous comments where limited registration designation would no
longer be appropriate? Are there any situations, addressed by previous
comments or otherwise, where a limited registration designation may be
appropriate for security-based swap dealers? If so, in what situations
would a limited registration designation be warranted, and how should
the registration forms be amended to facilitate such limited
registration? If not, why not?
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    \588\ As we noted in the Intermediary Definitions Adopting
Release, 77 FR 30643-46 and 30696-97, the Commission will consider
limited designation applications on an individual basis through
analysis of the unique circumstances of each applicant, given that
the types of entities that engage in security-based swap
transactions are diverse and their organization and activities are
varied. Any particular limited designation application will be
analyzed in light of the unique circumstances presented by the
applicant, and must demonstrate full compliance with the
requirements that apply to the type, class, or category of security-
based swap, or the activities involving security-based swaps, that
fall within the security-based swap dealer or major security-based
swap participant designation. A key challenge that any applicant for
a limited purpose designation will face is the need to demonstrate
that the applicant can comply with the statutory and regulatory
requirements applicable to security-based swap dealers or major
security-based swap participants while subject to a limited
designation. Regardless of the type of limited designation being
requested, the Commission will not designate a person as a security-
based swap dealer or major security-based swap participant in a
limited capacity unless it can demonstrate that it can fully comply
with the applicable requirements.
    \589\ See Registration Proposing Release, 76 FR 65795. The
Commission received one comment on this topic, from SIFMA (see note
585, supra). SIFMA indicated that it ``SIFMA strongly believes that
the Commission should allow for limited SBSD or MSBSP registration
along a number of dimensions.'' For instance, SIFMA suggested that
the Commission allow entities to separately register individual
trading desks, allow an entity to register as an SBSD in one class
or type of security-based swap but not another (e.g., ``an entity
that acts as a dealer in single-name credit default swaps but not
total return swaps on single securities should be able to register
as an SBSD in the former but not the latter''), and ``allow entities
to register as an SBSD or MSBSP for their activities with U.S.
persons, keeping activities with non-U.S. persons outside the scope
of registration and related regulation.''
    \590\ See, e.g., the Product Definitions Adopting Release, 77 FR
48208, and the Capital, Margin, and Segregation Proposing Release,
77 FR 70214.
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IV. Major Security-Based Swap Participants

A. Introduction

    Title VII defines a new type of entity regulated by the Commission,
the ``major security-based swap participant.'' \591\ The statutory
definition of major security-based swap participant encompasses persons
whose security-based swap activities do not cause them to be dealers,
but nonetheless could pose a high degree of risk to the U.S. financial
system generally.\592\ This term was further defined in the
Intermediary Definitions Adopting Release, focusing on the potential
market impact and risks associated with a person's security-based swap
positions.\593\ In this respect, the major security-based swap
participant definition differs from the security-based swap dealer
definition, which generally focuses on a person's activities and how it
holds itself out to the market. The amount or significance of those
activities is relevant only in the context of the de minimis
exception.\594\ As a result, we believe that the cross-border issues
that are raised by the definition of major security-based swap
participant differ from those raised by the definition of security-
based swap dealer. The application of the major security-based swap
participant definition to cross-border activities was not addressed in
the Intermediary Definitions Adopting Release.\595\
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    \591\ See Section 3(a)(67) of Exchange Act, 15 U.S.C.
78c(a)(67), as added by Section 761(a) of the Dodd-Frank Act.
    \592\ As discussed in the Intermediary Definitions Adopting
Release, the tests of the major security-based swap participant
definition use terms--particularly ``systemically important,''
``significantly impact the financial system'' or ``create
substantial counterparty exposure''--that denote a focus on entities
that pose a high degree of risk through their security-based swap
activities. See Intermediary Definitions Adopting Release, 77 FR
30661 n.761. In addition, the link between the major participant
definitions and risk was highlighted during the congressional debate
on the statute. See 156 Cong. Rec. S5907 (daily ed. July 15, 2010).
    \593\ See Intermediary Definitions Adopting Release, 77 FR
30661. Under Rule 3a67-1 under the Exchange Act, 17 CFR 240.3a67-1,
a major security-based swap participant is any entity that maintains
security-based swap positions exceeding one of the following three
thresholds: (1) $1 billion current uncollateralized exposure or $2
billion combined current uncollateralized exposure and potential
future exposure in a major category of security-based swaps
(excluding certain hedging positions); (2) $2 billion current
uncollateralized exposure or $4 billion combined current
uncollateralized exposure and potential future exposure in all
security-based swaps; or (3) highly leveraged financial entities
with $1 billion current uncollateralized exposure or $2 billion
combined current uncollateralized exposure and potential future
exposure in a major category of security-based swaps. See
Intermediary Definitions Adopting Release, 77 FR 30751-54.
    \594\ See Intermediary Definitions Adopting Release, 77 FR
30661.
    \595\ The Commission indicated that the cross-border application
of the major security-based swap participant definition would be
addressed in a separate release. See Intermediary Definitions
Adopting Release, 77 FR 30692 n.1181.
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B. Comment Summary

    A variety of commenters provided their views on the application of
the major security-based swap participant definition and its related
thresholds in the cross-border context, generally suggesting that the
major participant tests focus on the systemic risk that an entity's
swap transactions poses to the U.S. market.\596\ Commenters further
suggested that major security-based swap participant threshold
calculations should exclude security-based swap transactions that do
not involve a U.S. counterparty.\597\ Several FPSFIs further

requested specific exclusions from the major security-based swap
participant definition, suggesting that as a matter of comity, swap
transactions involving foreign central banks as a counterparty,\598\
international financial institutions, and/or foreign SWFs should be
excluded from the major participant definitions.\599\
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    \596\ See, e.g., Financial Services Roundtable Letter at 25
(stating that ``non-US entities should not be subject to regulation
as major participants unless their activities in US markets exceed
the relevant thresholds, even if their aggregate global activity
would exceed those thresholds'' and warning that ``the regulatory
burden is sufficiently high that such entities may choose to exit
the US markets, or deny US market participants access to non-US
markets, rather than submit to regulation''); APG Asset Management
Letter at 4 (recommending that the thresholds be amended to exclude
from the computations the outward credit exposures of the computing
party to non-U.S. persons, and supporting the CFTC's statement in
its proposed registration release that the major participant
analysis should be focused on an entity's activities with U.S.
counterparties or using U.S. mails or instrumentalities); and AIMA
Letter at 4-5 (suggesting that in the case of managed funds, only
U.S. funds or funds otherwise regulated in the U.S. should be
subject to potential major participant designation).
    \597\ See, e.g., Jones Day Letter at 7-8 (recommending that
``[f]oreign swap transactions not involving a U.S. counterparty,
i.e., between two foreign counterparties[,] are more appropriately
the province of the supervisory authorities in the relevant non-U.S.
jurisdiction and should, therefore, be excluded from calculations of
substantial swap positions''); Milbank Tweed Letter at 3 (``Clearly,
the thresholds should not be applied to a non-U.S. participant's
transactions with all of its counterparties. Equally, all
transactions with U.S. counterparties can reasonably be included. To
take account of transactions with non-U.S. counterparties that might
meet the `direct and significant connection' standard, we suggest
the Commissions consider including only those transactions by a
potential non-U.S. major swap participant that are with non-U.S.
registered swap dealers or non-U.S. registered major swap
participants.'').
    \598\ For this purpose, we consider the Bank for International
Settlements, in which the Federal Reserve and foreign central banks
are members, to be a foreign central bank. See http://www.bis.org/about/orggov.htm.
    \599\ See, e.g., Norges Bank Letter at 4-5 (recommending
exemptions for foreign governments and their agencies); KfW letter
at 8 (FPSFIs); World Bank Group Letter II at 1-2 (multilateral
development institutions); China Investment Letter at 2 (SWFs); and
GIC Letter at 2, 5-6 (SWFs).
---------------------------------------------------------------------------

    Certain entities managed or controlled by foreign governments also
have asked for exemptions or exclusions from Commission registration or
the Dodd-Frank Act's substantive requirements. For example, SWFs
commented that they believe SWFs should be excluded from the definition
of major security-based swap participant and thus the related
regulatory obligations.\600\ These entities argued that the Commission
should not subject SWFs to registration requirements based on
principles of international comity and cooperation and noted that SWFs
are typically subject to comparable home country supervision that would
render SEC regulation largely duplicative. They also argued that
excluding SWFs from the major security-based swap participant
definition would not increase systemic risks given that SWFs make long-
term investments across diverse asset classes, use swaps or security-
based swaps to hedge portfolio risks rather than generate returns, and
are more likely to ensure that risk management measures are in place
because of SWFs' heightened concerns regarding reputational risk.\601\
---------------------------------------------------------------------------

    \600\ See China Investment Letter at 2-4 (further explaining
that exempting SWFs from the definition of MSBSP would not result in
reduced transparency, given that the SWF would still have to comply
with a number of other Dodd-Frank Act requirements) and GIC Letter
at 2, 5-6.
    \601\ See China Investment Letter at 3-4 and GIC Letter at 3.
---------------------------------------------------------------------------

    Another entity, which operates with an explicit government
guarantee of its swap and security-based swap obligations, argued that
it should be excluded from the major participant definition due to its
lack of risk to the market resulting from this government support.\602\
---------------------------------------------------------------------------

    \602\ See KfW Letter at 8.
---------------------------------------------------------------------------

C. Proposed Approach

    In light of the comments received on the application of the major
security-based swap participant definition in the cross-border context
and the principles discussed above,\603\ the Commission is proposing a
rule and interpretive guidance regarding the application of the major
security-based swap participant definition to cross-border activities.
---------------------------------------------------------------------------

    \603\ See Section II.C, supra.
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1. In General
    The Commission is proposing a rule under which a U.S. person would
consider all security-based swap transactions entered into by it, while
a non-U.S. person would consider only transactions entered into with
U.S. persons,\604\ when determining whether the person falls within the
major security-based swap participant definition.\605\ Under this
proposed approach, a non-U.S. person would calculate its security-based
swap positions under the three prongs of the major security-based swap
participant definition \606\ based solely on its transactions with U.S.
persons (including foreign branches of U.S. banks). All security-based
swap transactions by a non-U.S. person with other non-U.S. person
counterparties, regardless of whether they are conducted within the
United States or whether the non-U.S. person counterparties are
guaranteed by a U.S. person, would be excluded from the major security-
based swap participant analysis.
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    \604\ Proposed Rule 3a67-10(a)(2) under the Exchange Act
(defining the term ``U.S. person'' by cross-reference to the
definition of U.S. person in proposed Rule 3a71-3(a)(7) under the
Exchange Act, as discussed in Section III.B.5, supra).
    \605\ Proposed Rule 3a67-10(c) under the Exchange Act.
    \606\ See Rule 3a67-1 under the Exchange Act, 17 CFR 240.3a67-1;
see also note 593, supra.
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    The proposed rule would use the same definition of ``U.S. person''
as proposed in the context of foreign security-based swap dealer
registration.\607\ As previously discussed, this definition generally
follows a territorial approach to defining U.S. person.\608\ The
proposed approach to the U.S. person definition is intended to identify
individuals or legal persons that, by virtue of their location within
the United States or their legal or other relationship with the United
States, are likely to impact the U.S. financial market and the U.S.
financial system.\609\ Therefore, we preliminarily believe that
requiring a non-U.S. person to take into account its security-based
swap positions with U.S. persons, as proposed to be defined, for
purposes of the major security-based swap participant definition would
provide an appropriate indication of the degree of default risk posed
by such non-U.S. person's security-based swap positions to the U.S.
financial system, which we view as the focus of the major security-
based swap participant definition.\610\ Consistent with the rules
further defining the definition of major security-based swap
participant adopted in the Intermediary Definitions Adopting Release,
such risk to the U.S. financial system would be measured by calculating
such non-U.S. person's aggregate outward exposures \611\ to U.S.
persons (that is, what such non-U.S. person owes, or potentially could
owe, on its security-based swaps with U.S. persons).\612\ If such non-
U.S. person's aggregate outward exposures to U.S. persons exceed one of
the thresholds set forth in the rules further defining ``major
security-based swap

participant,'' \613\ the non-U.S. person would be required to register
as a major security-based swap participant.
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    \607\ Proposed Rule 3a67-10(a)(2) under the Exchange Act; see
also proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed
in Section III.B.5, supra.
    \608\ See Section III.B.5, supra, (discussing the definition of
``U.S. person'').
    \609\ Id.
    \610\ See Section 3(a)(67) of Exchange Act, 15 U.S.C.
78c(a)(67). In particular, one of the thresholds of the statutory
definition of major security-based swap participant focuses on the
serious adverse effects on the financial stability of the U.S.
banking system or financial markets as a result of substantial
counterparty exposure created by a person's security-based swap
positions. See Section 3(a)(67)(A)(ii)(II) of the Exchange Act, 15
U.S.C. 78c(a)(67)(A)(ii)(II). In addition, Section 3(a)(67)(B) of
the Exchange Act requires the Commission to define the term
``substantial position'' in Sections 3(a)(67)(A)(ii)(I) and (III) of
the Exchange Act at the threshold that the Commission determines to
be prudent for the effective monitoring, management, and oversight
of entities that are systemically important or can significantly
impact the financial system of the United States. See Section
3(a)(67)(B) of the Exchange Act, 15 U.S.C. 78c(a)(67)(B).
    \611\ See Intermediary Definitions Adopting Release, 77 FR
30666-71; Rules 3a67-3(b) and (c) under the Exchange Act, 17 CFR
240.3a67-3(b) and (c).
    \612\ The determination of whether a security-based swap
transaction must be included in a non-U.S. person's major security-
based swap participant calculation is based on the U.S. person
status of the non-U.S. person's counterparty to such transaction,
regardless of whether the counterparty is a security-based swap
dealer, end user, CCP, or other market participant. For example,
where a non-U.S. person enters into a security-based swap
transaction with a security-based swap dealer, and that transaction
is submitted for clearing and novated from the dealer to a CCP, the
non-U.S. person would look to the U.S. person status of the CCP that
became its counterparty as a result of such novation when
determining whether the transaction must be included in such non-
U.S. person's major security-based swap participant calculation.
    \613\ See Rule 3a67-3 and Rule 3a67-5 under the Exchange Act, 17
CFR 240.3a67-3 and 17 CFR 240.3a67-5 (defining ``substantial
position'' and ``substantial counterparty exposure'').
---------------------------------------------------------------------------

    Given the focus of the major security-based swap participant
definition on the degree of risk to the U.S. financial system,\614\ the
Commission preliminarily believes that the location in which security-
based swap transactions are conducted is not relevant to the
calculation of a person's security-based swap positions for purposes of
determining such person's status as a major security-based swap
participant. Such an approach would differ from the approach we are
proposing with respect to the security-based swap dealer definition,
where we would count transactions connected with security-based swap
dealing activity conducted within the United States toward a potential
security-based swap dealer's de minimis threshold even if the
transactions were with non-U.S. persons.\615\ This difference in
approach is driven by the different focuses of the statutory
definitions of the terms security-based swap dealer and major security-
based swap participant. While the statutory major security-based swap
participant definition is focused specifically on risk,\616\ the
statutory security-based swap dealer definition is focused on, in
addition to risk, the nature of the activities undertaken by an entity,
its interactions with counterparties, and its role within the security-
based swap market.\617\ These different statutory emphases lead us to
treat major security-based swap participants differently from security-
based swap dealers with respect to whether activities conducted within
the United States should be counted toward their respective thresholds.
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    \614\ See note 610, supra.
    \615\ See Section III.B.6, supra.
    \616\ See note 610, supra.
    \617\ See note 177 and accompanying text, supra.
---------------------------------------------------------------------------

    In addition, as stated above, the U.S. person definition applies to
the entire entity, including its branches and offices that may be
located in a foreign jurisdiction.\618\ Therefore, under the proposed
approach, a non-U.S. person would need to include its security-based
swap transactions with foreign branches of U.S. banks when calculating
its security-based swap positions for purposes of the major security-
based swap participant definition.
---------------------------------------------------------------------------

    \618\ See Section III.B.5, supra.
---------------------------------------------------------------------------

    Some commenters on the CFTC Cross-Border Proposal have suggested
that a non-U.S. person should be allowed to exclude swap transactions
with foreign branches of U.S. banks for purposes of determining whether
it is a major swap participant because otherwise non-U.S. persons would
have a strong incentive to limit or even stop trading with U.S. banks
that operate outside the United States via foreign branches.\619\ We
are mindful of these concerns. However, because foreign branches are
not separate legal persons,\620\ the Commission believes that the
potential losses that a U.S. bank would suffer due to a non-U.S. person
counterparty's default, and the potential impact on the U.S. banking
system and the U.S. financial system generally, would not differ
depending on whether the non-U.S. person counterparty entered into the
security-based swap with the home office of the U.S. bank or with a
foreign branch of the U.S. bank. Therefore, the Commission
preliminarily believes that it is appropriate to require a non-U.S.
person to include its security-based swap transactions with foreign
branches of U.S. banks for purposes of determining its major security-
based swap participant status.
---------------------------------------------------------------------------

    \619\ See, e.g., Citigroup Letter at 3.
    \620\ See Section III.B.5, supra.
---------------------------------------------------------------------------

    By contrast, the Commission preliminarily believes that a non-U.S.
person (the ``potential non-U.S. person major security-based swap
participant'') does not need to include its security-based swap
transactions with non-U.S. person counterparties in determining whether
it is a major security-based swap participant. As stated above, the
focus of the major security-based swap participant definition is on the
degree of risk posed by a person's security-based swap positions to the
U.S. financial system.\621\ In the case of transactions with non-U.S.
person counterparties, the risk that a potential non-U.S. person major
security-based swap participant will not pay what it owes (or
potentially could owe) under its security-based swaps to its non-U.S.
counterparties is not transmitted directly and fully to the U.S.
financial system in the way that such risk would be transmitted if the
potential non-U.S. person major security-based swap participant engaged
in security-based swap transactions with U.S. person counterparties.
Instead, the non-U.S. person counterparties bear the direct and full
risk of loss.\622\ We recognize that there may be indirect spillover
effects related to the security-based swap positions arising from the
activity conducted by a potential non-U.S. person major security-based
swap participant and a non-U.S. person counterparty (e.g., a U.S.
person that has an ownership interest in such a non-U.S. person
counterparty would potentially face losses on the value of its
investment in such a non-U.S. person counterparty due to failure of the
potential non-U.S. person major security-based swap participant), but
the Commission preliminarily believes that the major security-based
swap participant tests do not need to address the potential indirect
spillover risk to the U.S. financial system from foreign investments by
U.S. persons in non-U.S. persons, or other non-security-based swap
activities by U.S. persons with non-U.S. persons.\623\
---------------------------------------------------------------------------

    \621\ See note 610, supra.
    \622\ This is the case even if the non-U.S. person
counterparties' obligations under the security-based swaps with the
potential non-U.S. person major security-based swap participant are
guaranteed by a U.S. person. As discussed in more detail below, the
Commission proposes to address the risk posed by a non-U.S. person's
security-based swap positions guaranteed by a U.S. person to the
U.S. financial system through its treatment of guarantees for
purposes of the major security-based swap participant definition.
See Section IV.C.2(a), infra.
    \623\ The Commission preliminarily believes that such risk is
more appropriately addressed under Titles I and II of the Dodd-Frank
Act.
---------------------------------------------------------------------------

    The Commission recognizes that this proposed approach results in
different treatment of U.S. and non-U.S. persons under the major
security-based swap participant definition (i.e., a non-U.S. person
would consider its security-based swap transactions with only U.S.
persons, while a U.S. person would consider all of its security-based
swap transactions). However, the Commission preliminarily believes that
this approach is appropriate in light of the focus in the major
security-based swap participant definition on the U.S. financial
system. More specifically, the need for separate analysis of U.S. and
non-U.S. entities results from the fact that all of a U.S. person's
security-based swap transactions are part of and create risk to the
U.S. financial system, regardless of whether such entity's
counterparties are U.S. persons or non-U.S. persons. The same is not
true of non-U.S. persons, however, because the security-based swap
transactions entered into by a non-U.S. person with other non-U.S.
persons are not fundamentally part of the U.S. financial system, while
such non-U.S. person's security-based swap transactions with U.S.
persons would directly impact the U.S. financial system. Thus, we
preliminarily believe that the statutory major security-based swap
participant definition's focus on the U.S. financial system, justifies
treating U.S. and non-U.S. persons differently for purposes of the
major participant analysis based on

the disparate impacts of their security-based swap transactions on the
U.S. financial system.
    We recognize that a non-U.S. person's transactions with other non-
U.S. person counterparties could still have an impact on the U.S.
financial system, including where those transactions threatened the
financial integrity of a non-U.S. person counterparty and such person
had significant security-based swap positions with U.S. persons.
However, the amount of risk the non-U.S. person poses to the U.S.
financial system would most directly stem from the size of its direct
positions with U.S. persons. As a result, the Commission preliminarily
believes it is appropriate to limit the international application of
the major security-based swap participant definition to a non-U.S.
person's security-based swaps entered into with U.S. persons.
2. Guarantees
    The application of the major security-based swap participant
definition to security-based swap positions guaranteed by a parent,
other affiliate, or guarantor raises unique issues in the cross-border
context. These issues were not addressed in the Intermediary
Definitions Adopting Release.\624\
---------------------------------------------------------------------------

    \624\ In the Intermediary Definitions Adopting Release, the
Commissions stated they intended to address guarantees provided to
non-U.S. entities, and guarantees by non-U.S. holding companies, in
separate releases. See Intermediary Definitions Adopting Release, 77
FR 30689 n.1134. In this release, we are not altering the
interpretive approach with respect to the attribution of guarantees
that was adopted by the Commissions in the Intermediary Definitions
Adopting Release, but rather we are proposing an interpretive
approach that would apply the principles adopted in the Intermediary
Definitions Adopting Release in the cross-border context.
---------------------------------------------------------------------------

    As a general principle, the Commission and the CFTC did note in the
Intermediary Definitions Adopting Release that an entity's security-
based swap positions are attributed to a parent, other affiliate, or
guarantor for purposes of the major participant analysis to the extent
that the counterparties to those positions have recourse to that
parent, other affiliate, or guarantor in connection with the
position.\625\ Positions are not attributed in the absence of
recourse.\626\ The Commission and the CFTC further stated that
attribution of these positions for purposes of the major participant
definitions is intended to reflect the risk focus of the major
participant definitions by providing that entities will be regulated as
major participants when they pose a high level of risk in connection
with the swap and security-based swap positions they guarantee.
---------------------------------------------------------------------------

    \625\ See Intermediary Definitions Adopting Release, 77 FR
30689, and the accompanying note 1132 on that page.
    \626\ See id. As indicated in note 160 above, the term
``guarantee'' as used in this release refers to a contractual
agreement pursuant to which one party to a security-based swap
transaction has recourse to its counterparty's parent, other
affiliate, or guarantor with respect to the counterparty's
obligations owed under the transaction.
---------------------------------------------------------------------------

    The application of these general principles in the cross-border
context is discussed below, including the attribution of guaranteed
security-based swap positions to U.S. persons and non-U.S. persons,
respectively, when they provide guarantees on performance of the
security-based swap obligations of other persons, the limited
circumstances where attribution of guaranteed security-based swap
positions is not required, and operational compliance.
(a) Guarantees Provided by U.S. Persons to Non-U.S. Persons
    One cross-border issue that arises from the general approach to
guarantees set forth in the Intermediary Definitions Adopting Release
is how the attribution of guarantees for purposes of the major
security-based swap participant definition would apply to a guarantee
provided by a U.S. person for performance on the obligations of a non-
U.S. person, such as a U.S. holding company providing a guarantee on
the obligations of a foreign subsidiary. As noted in the Intermediary
Definitions Adopting Release, the attribution of guaranteed positions
for purposes of the major participant definitions is intended to
reflect the risk that a guarantor might pose to, and the systemic
impact of such risk may impose on, the U.S. financial system as a
result of the guarantees that it provides.\627\ The Commission
preliminarily believes that these risk concerns are the same when U.S.
persons act as guarantors for foreign persons regardless of whether the
underlying security-based swap transactions that they guarantee are
entered into with U.S. persons or non-U.S. persons, given that the risk
borne by the U.S. person guarantor would not be impacted by the status
of the guaranteed non-U.S. person's counterparty as either a U.S.
person or non-U.S. person. As a result, the Commission is proposing
that, other than in the limited circumstances described below,\628\ all
security-based swaps entered into by a non-U.S. person and guaranteed
by a U.S. person be attributed to such U.S. person guarantor for
purposes of determining such U.S. person guarantor's major security-
based swap participant status, regardless of whether the underlying
transaction was entered into with a U.S. person counterparty or non-
U.S. person counterparty.\629\
---------------------------------------------------------------------------

    \627\ See id.
    \628\ See Section IV.C.2(c), infra (discussing the limited
circumstances where attribution of guaranteed security-based swap
positions to the guarantor would not apply).
    \629\ In all circumstances where a U.S. person guarantor is
required to attribute to itself all security-based swap transactions
entered into by the guaranteed non-U.S. person, the guaranteed non-
U.S. person would still be required to consider those security-based
swap transactions that it enters into with U.S. person
counterparties for purposes of determining whether it is a major
security-based swap participant pursuant to the proposed Rule 3a67-
10(c)(2) under the Exchange Act. See Section IV.C.1, supra
(discussing proposed Rule 3a67-10(c) under the Exchange Act). Once
the guaranteed non-U.S. person becomes a major security-based swap
participant and registers with the Commission, the U.S. guarantor
would no longer be required to attribute to itself the security-
based swap positions entered into by the guaranteed non-U.S. person.
See Intermediary Definitions Adopting Release, 77 FR 30689. This
same result would also occur where a guaranteed non-U.S. person
becomes subject to capital regulation by the Commission or the CFTC
(e.g., a registered major swap participant, swap dealer, security-
based swap dealer, futures commission merchant, or broker-dealer).
See id.
---------------------------------------------------------------------------

(b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and
Guarantees Provided by Non-U.S. Persons to Non-U.S. Persons
    Another cross-border issue related to the Commission's approach to
the attribution of guarantees is how guarantees provided by non-U.S.
persons are treated for purposes of the major security-based swap
participant definition. As previously noted, the statutory major
security-based swap participant definition's focus on the accumulation
of security-based swap risk by non-U.S. persons is primarily centered
on the impact such risk could have on the U.S. financial system.\630\
Where a non-U.S. person provides a guarantee on performance of the
security-based swap obligations of a U.S. person (e.g., a non-U.S.
holding company providing a guarantee on performance of the obligations
owed by its U.S. subsidiary under security-based swaps entered into by
the U.S. subsidiary), the counterparties of such U.S. person would be
taking the credit risk of the non-U.S. person guarantor as well as the
U.S. person. If the non-U.S. person guarantor defaults, the full amount
of risk accumulated under the guaranteed U.S. person's security-based
swap positions would impact the U.S. financial system. As a result,
subject to the limited circumstances described in the Intermediary
Definitions Adopting Release,\631\ a non-U.S. person providing

a guarantee on performance of the security-based swap obligations of a
U.S. person would attribute to itself all of the U.S. person's
security-based swap positions that are guaranteed by the non-U.S.
person guarantor for purposes of determining the non-U.S. person
guarantor's major security-based swap participant status.\632\
---------------------------------------------------------------------------

    \630\ See note 610, supra.
    \631\ See Intermediary Definitions Adopting Release, 77 FR 30730
(discussing the limited circumstances where attribution of
guaranteed security-based swap positions of a U.S. person to the
guarantor would not apply).
    \632\ See note 629, supra.
---------------------------------------------------------------------------

    By contrast, where a non-U.S. person provides a guarantee on
performance of the security-based swap obligations of another non-U.S.
person (e.g., a non-U.S. holding company providing a guarantee on
performance of the obligations owed by its non-U.S. subsidiary under
security-based swaps entered into by the non-U.S. subsidiary), the
ultimate counterparty credit risk associated with the transaction would
generally reside outside of the United States with the non-U.S.
guarantor. In this scenario, the potential impact on the U.S. financial
system would be limited to transactions entered into by the guaranteed
non-U.S. person with U.S. person counterparties. Therefore, the
Commission preliminarily believes that, other than in the limited
circumstances described below,\633\ where a non-U.S. person guarantees
performance on the security-based swap transactions of another non-U.S.
person, the non-U.S. guarantor need only attribute to itself such
guaranteed security-based swap transactions entered into with U.S.
person counterparties for purposes of determining its major security-
based swap participant status.\634\
---------------------------------------------------------------------------

    \633\ See Section IV.C.2(c), infra (discussing the limited
circumstances where attribution of guaranteed security-based swap
positions of a non-U.S. person to the guarantor would not apply).
    \634\ Where a non-U.S. person guarantor is required to attribute
to itself the security-based swap positions entered into by a non-
U.S. person that are guaranteed by the first non-U.S. person, the
guaranteed non-U.S. person also would be required to consider all
security-based swap transactions entered into by itself with U.S.
person counterparties for purposes of determining its major
security-based swap participant status in accordance with proposed
Rule 3a67-10(c)(2) under the Exchange Act. See Section IV.C.1, supra
(discussing proposed Rule 3a67-10(c) under the Exchange Act). Once
the guaranteed non-U.S. person becomes a major security-based swap
participant and registers with the Commission, the non-U.S.
guarantor would no longer be required to attribute to itself the
security-based swap positions entered into by the guaranteed non-
U.S. person. See Intermediary Definitions Adopting Release, 77 FR
30689.
---------------------------------------------------------------------------

(c) Limited Circumstances Where Attribution of Guaranteed Security-
Based Swap Positions Does Not Apply
    In addition to setting forth general principles regarding the
attribution of guaranteed swap or security-based swap positions to the
guarantor for the major participant definitions, the Intermediary
Definitions Adopting Release also provided interpretive guidance
related to the limited circumstances under which attribution of
guaranteed swap or security-based swap positions is not required.\635\
Specifically, it stated that even in the presence of a guarantee, it is
not necessary to attribute a person's swap or security-based swap
positions to a parent or other guarantor if the person already is
subject to capital regulation by the Commission or the CFTC (i.e., swap
dealers, security-based swap dealers, major swap participants, major
security-based swap participants, FCMs, and broker-dealers) or if the
person is a U.S. entity regulated as a bank in the United States.\636\
In providing this interpretive guidance, the Commission and the CFTC
explained that the positions of those regulated entities already will
be subject to capital and other requirements, making it unnecessary to
separately address, via major participant regulations, the risks
associated with guarantees of those positions of a regulated
entity.\637\
---------------------------------------------------------------------------

    \635\ See Intermediary Definitions Adopting Release, 77 FR
30689.
    \636\ Id. This interpretive guidance applies to both U.S.
persons and non-U.S. persons that are subject to registration and
regulation in the enumerated categories.
    \637\ See Intermediary Definitions Adopting Release, 77 FR
30689.
---------------------------------------------------------------------------

    The Intermediary Definitions Adopting Release did not address the
application of the interpretive guidance regarding attribution of
guaranteed positions where a guarantee is provided to support a non-
U.S. person's performance on the obligations under security-based swaps
in the cross-border context. The Commission preliminarily believes that
the interpretation jointly adopted by the Commission and the CFTC in
the Intermediary Definitions Adopting Release regarding security-based
swap positions of a person subject to capital regulation by the CFTC or
the Commission should equally apply to a non-U.S. person whose
security-based swap positions are guaranteed by another person.
Therefore, the Commission is proposing to interpret that it is not
necessary to attribute a non-U.S. person's security-based swap
positions to a parent or other guarantor if such non-U.S. person
already is subject to capital regulation by the Commission or the CFTC
(i.e., swap dealers, security-based swap dealers, major swap
participants, major security-based swap participants, FCMs and broker-
dealers).
    In addition, in the cross-border context and with respect to a non-
U.S. person, if such non-U.S. person is not subject to capital
regulation by the Commission or the CFTC, consistent with the rationale
for the approach to attribution of security-based swap positions of a
person that is a U.S. entity regulated as a bank in the United States,
it would not be necessary to attribute such non-U.S. person's security-
based swap positions to its guarantor if such non-U.S. person is
subject to capital standards that are consistent with the capital
standards such non-U.S. person would have been subject to if such non-
U.S. person were a bank subject to the prudential regulators' capital
regulation. Therefore, the Commission preliminarily believes that it is
not necessary to attribute such non-U.S. person's security-based swap
positions to its guarantor for purposes of determining the guarantor's
major security-based swap participant status, if such non-U.S. person
is subject to capital standards adopted by its home country supervisor
that are consistent in all respects with the Capital Accord of the
Basel Committee on Banking Supervision (the ``Basel Accord'').\638\
This proposed approach also is consistent with the capital standards
proposed by the prudential regulators for a foreign bank that is a swap
dealer, major swap participant, security-based swap dealer or major
security-based swap participant, which require such foreign bank to
comply with regulatory capital rules already made applicable to such
foreign bank as part of the existing prudential regulatory regime.\639\
The Commission preliminarily believes that security-based swap
positions of a non-U.S. person subject to foreign regulatory capital
requirements consistent with the Basel Accord would be subject to risk-
based capital requirements that take into account the unique risks
(including the

credit risk, market risk, and other risks) arising from security-based
swap transactions, in such a way as to make it unnecessary to
separately address, via major security-based swap participant
regulation, the risks associated with guarantees of those security-
based swap positions.
---------------------------------------------------------------------------

    \638\ This is consistent with the capital standards of the
prudential regulators with respect to foreign banks that are bank
holding companies subject to the Federal Reserve Board of Governors'
supervision. See Sec.  225.2(r)(3) of the Regulation Y (``For
purposes of determining whether a foreign banking organization
qualifies under paragraph (r)(1) of this section: (A) A foreign
banking organization whose home country supervisor . . . has adopted
capital standards consistent in all respects with the Capital Accord
of the Basle Committee on Banking Supervision (Basle Accord) may
calculate its capital ratios under the home country standard . .
.''), 12 CFR 225.2(r)(3).
    \639\ See Prudential Regulator Margin and Capital Proposal, 76
FR 27582 (``The proposed rule generally requires a covered swap
entity to comply with regulatory capital rules already made
applicable to that covered swap entity as part of its prudential
regulatory regime. . . . In the case of a foreign bank or the U.S.
branch or agency of a foreign bank, the capital rules that are made
applicable to such covered entity pursuant to Sec.  225.2(r)(3) of
the Board's Regulation Y, 12 CFR 225.2(r)(3) . . .'').
---------------------------------------------------------------------------

(d) Operational Compliance
    Finally, the Commission believes that it is necessary to provide
interpretive guidance regarding operational compliance and the special
issues that may result from the attribution of security-based swap
positions to a parent or guarantor. As the Commission and the CFTC
noted in the Intermediary Definitions Adopting Release, these include
issues regarding the application of the transaction-focused
requirements applicable to registered major participants (e.g., certain
requirements related to trading records and transaction confirmations),
given that the entity that is the direct counterparty to the swap or
security-based swap may be better positioned to comply with those
requirements.\640\ In the Intermediary Definitions Adopting Release,
the Commission and the CFTC stated that ``an entity that becomes a
major participant by virtue of swaps or security-based swaps directly
entered into by others must be responsible for compliance with all
applicable major participant requirements with respect to those swaps
or security-based swaps (and must be liable for failures to comply),
but may delegate operational compliance with transaction-focused
requirements to entities that directly are party to the transactions.
The entity that is the major participant, however, cannot delegate
compliance duties with the entity-level requirements applicable to
major participants (e.g., requirements related to registration and
capital).'' \641\
---------------------------------------------------------------------------

    \640\ Intermediary Definitions Adopting Release, 77 FR 30689.
    \641\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the same approach should
apply in the cross-border context when the guarantor and the guaranteed
person are located in different jurisdictions (e.g., U.S. holding
companies that act as guarantors of the security-based swap obligations
of their non-U.S. dealing subsidiaries). In each case, the major
security-based swap participant may delegate compliance duties for
transaction-focused requirements to the entities that are
counterparties to the transactions, but the major security-based swap
participant would remain responsible for ensuring that the Title VII
requirements applicable to such transactions are fulfilled. However,
major security-based swap participants must comply with all relevant
entity-level requirements themselves that are not transaction-focused,
such as registration and capital. Entity-level requirements that have a
transaction focus, such as margin, may be delegated to the guaranteed
entities that directly are party to the transactions. However, the
major security-based swap participants would remain responsible for
ensuring compliance with these requirements.
3. Foreign Public Sector Financial Institutions (FPSFIs)
    The proposed approach to the cross-border application of the major
security-based swap participant definition described above provides a
general framework for applying the definition to non-U.S. persons. That
framework does not separately address questions raised by commenters
regarding how the major security-based swap participant definition
applies to FPSFIs. Specifically, some commenters requested explicit
exclusions from the major security-based swap participant definition
for these types of entities.\642\
---------------------------------------------------------------------------

    \642\ See note 599, supra.
---------------------------------------------------------------------------

    We note that FPSFIs encompass a wide range of institutions and
organizations, ranging from divisions of foreign central banks, to
international financial institutions established under treaties, to
multilateral development banks formed, owned, and controlled by
sovereign members, to sovereign wealth funds and other investment
corporations owned by foreign governments. Some FPSFIs' obligations are
guaranteed or backed by foreign governments; others may not be. The
purposes and activities of these institutions and organizations vary.
For example, some FPSFIs (such as the Bank for International
Settlements) provide banking services to foreign central banks who are
their members. Some FPSFIs provide credits and grants to promote
economic development in developing countries (e.g., multilateral
development banks) or distribute funds of regional recovery programs to
promote regional economies (e.g., KfW for the European Recovery
Program). Other FPSFIs conduct investment activities around the world
and their exclusive customers are the foreign governments to which they
are linked. Depending on their purposes and activities, FPSFIs may
engage in different types of swaps or security-based swaps to various
degrees, although the Commission is not aware of data reflecting the
nature and amount of such transactions across the FPSFI population. One
commenter stated that it enters into swaps to manage interest rates and
foreign exchange risks but does not use swaps to generate returns.\643\
---------------------------------------------------------------------------

    \643\ See China Investment Letter at 3-4. Cf. World Bank Letter
II states that ``not all multilateral development banks use
derivatives in their development operations, or do so only on a
limited basis.'' See World Bank Letter II at 1 n.1.
---------------------------------------------------------------------------

    Several commenters requested that FPSFIs be excluded from the major
security-based swap participant definition. They provided various
reasons and basis to support their requests. Some FPSFIs commented that
they are subject to exceptionally high risk controls and have extremely
strong capital bases and therefore pose no risk to systemic
stability.\644\ Others argued that they already are subject to
comparable or comprehensive substantive regulation of their respective
governments in their home countries and therefore, subjecting them to
the major security-based swap participant regulation would create
regulatory duplication or conflicts.\645\ One FPSFI argued that it only
conducts swap activities with dealers, which would be regulated under
Title VII, and therefore it is not necessary to subject it to
duplicative regulation and supervision.\646\ Another FPSFI, which
operates with an explicit government guarantee of its swap and
security-based swap obligations, argued that it should be excluded from
the major participant definition due to its lack of risk to the market
resulting from this government support.\647\ Intergovernmental
organizations, such as multilateral development banks, argued that
multilateral development institutions are never subject to national
regulations and their privileges and immunities should be fully
respected.\648\
---------------------------------------------------------------------------

    \644\ See BIS Letter II at 3 and World Bank Letter I at 7.
    \645\ See GIC Letter at 3-4 and KfW Letter at 3 and 8.
    \646\ See China Investment Letter at 3-4.
    \647\ See KfW Letter at 8.
    \648\ See World Bank Letter II at 2-3.
---------------------------------------------------------------------------

    After considering the concerns of these commenters, we recognize
that FPSFIs raise unique and complex issues because of the diversity of
the special purposes they are serving, their differing governance
structures and sources of financial strength, and their supranational,
intergovernmental, or sovereign nature. The Commission also recognizes
that we have received relatively little information from commenters
regarding the types, levels, and natures of security-based swap
activity that FPSFIs regularly engage in (although some information has
been

received regarding their swap transactions) and that, consequently, the
Commission has comparatively little basis on which to understand their
roles in the security-based swap markets and, as appropriate, exclude
them from the major security-based swap participant definition.
Therefore, we are not proposing to specifically address the treatment
of FPSFIs at this time. Instead, we are soliciting comment to help
determine the basis on which it may be appropriate to exclude FPSFIs
from the proposed rule regarding application of the major security-
based swap participant definition to non-U.S. persons. In particular,
we invite public comment regarding the types, levels, and nature of the
security-based swap activity that various types of FPSFIs may engage in
on a regular basis, the roles of FPSFIs in the security-based swap
market, the mitigating factors and reasons that FPSFIs may not pose
systemic risk as a result of their security-based swap activity, and
whether it would be more appropriate for the Commission to address
FPSFI concerns on an individual basis. We also request considerations,
information, and data regarding potential definitions of a FPSFI for
purposes of the major security-based swap definition. Responses that
are supported by empirical data and analysis are encouraged in
assisting the Commission in considering whether excluding FPSFIs from
the definition of the major security-based swap participant is
warranted.

D. Title VII Requirements Applicable to Major Security-Based Swap
Participants

1. Transaction-Level Requirements Related to Customer Protection
(a) Overview
    As previously noted, the Dodd-Frank Act is generally concerned with
the protection of the U.S. financial system and counterparties in the
U.S. security-based swap market.\649\ This general principle is
particularly relevant to the customer protection, including
segregation, requirements in Title VII, which are focused on the
protection of the counterparties or customers of security-based swap
dealers. As a result, the Commission preliminarily believes that it is
not necessary to the objective of Title VII to subject foreign major
security-based swap participants to certain of the customer protection
requirements in Title VII with respect to their transactions with non-
U.S. persons. Accordingly, the Commission is proposing rules that would
identify specific transaction-level requirements that would not apply
to foreign major security-based swap participants with respect to their
transactions with non-U.S. persons.
---------------------------------------------------------------------------

    \649\ See note 4, supra.
---------------------------------------------------------------------------

(b) Proposed Rules
    The proposed rules would provide that foreign major security-based
swap participants would not be subject, solely with respect to their
transactions with non-U.S. persons, to certain of the transaction-level
requirements that apply to major security-based swap participants.\650\
Specifically, under the proposed rules registered foreign major
security-based swap participants would not have to comply with business
conduct standards as described in Section 15F(h) of the Exchange Act,
and the rules and regulations thereunder, other than the rules and
regulations prescribed by the Commission relating to diligent
supervision pursuant to Section 15F(h)(1)(B) \651\ and the rules and
regulations thereunder, with respect to their transactions with non-
U.S. persons.\652\ In addition, under the proposed rules, registered
foreign major security-based swap participants that are not registered
broker-dealers would not have to comply with requirements related to
the segregation of assets held as collateral in Section 3E of the
Exchange Act and the rules and regulations thereunder with respect to
their transactions with non-U.S. persons.\653\
---------------------------------------------------------------------------

    \650\ Proposed Rule 3a67-10(b) and proposed Rule 18a-4(f) under
the Exchange Act.
    \651\ 15 U.S.C. 78o-10(h)(1)(B).
    \652\ See Section III.C.3(a)(i), supra. As discussed previously,
Section 15F(h)(1)(B) requires security-based swap dealers to conform
with such business conduct standards relating to diligent
supervision as the Commission shall prescribe.
    \653\ See proposed Rule 18a-4(f) under the Exchange Act.
---------------------------------------------------------------------------

    Our rationale for this proposed approach to the application of
transaction-level requirements for foreign major security-based swap
participants is substantially the same as that discussed previously in
the context of foreign security-based swap dealers.\654\ This rationale
includes our belief that applying these customer protections and
segregation requirements to security-based swap transactions with non-
U.S. persons outside the United States would not advance the objectives
of Title VII to protect the U.S. financial system or U.S.
counterparties. At the same time, this approach would preserve customer
protections for U.S. person counterparties who would expect to benefit
from the protections afforded by Title VII.
---------------------------------------------------------------------------

    \654\ See generally Section III.C.4(b), supra. In addition, all
``nonresident major security-based swap participants,'' as defined
in proposed Rule 15Fb2-4(a) under the Exchange Act, would be
required: (1) To appoint and identify to the Commission an agent in
the United States (other than the Commission or a Commission member,
official or employee) for service of process; (2) to certify that
the firm can, as a matter of law, provide the Commission with prompt
access to its books and records and can, as a matter of law, submit
to onsite inspection and examination by the Commission; and (3) to
provide the Commission with an opinion of counsel concurring that
the firm can, as a matter of law, provide the Commission with prompt
access to its books and records and can, as a matter of law, submit
to onsite inspection and examination by the Commission. See proposed
Rule 15Fb2-4(b) under the Exchange Act, as discussed in the
Registration Proposing Release, 76 FR 65799-801.
---------------------------------------------------------------------------

(2) Entity-Level Requirements
    Entity-level requirements in Title VII primarily address concerns
relating to the major security-based swap participant as a whole, with
a particular focus on safety and soundness of the entity to reduce
systemic risk in the U.S. financial system. The most significant
entity-level requirements are capital and margin requirements. Because
these requirements address the financial, operational, and business
integrity of the entity engaged in security-based swap activity, the
Commission preliminarily believes that a registered foreign major
security-based swap participant should be required to adhere to these
standards. As noted above, other requirements that the Commission
believes should apply at the entity, rather than the transactional,
level include, but are not limited to, risk management procedures,
books and records requirements, conflicts of interest systems and
procedures, and designation of a chief compliance officer.\655\ These
entity-level requirements ensure the safety and soundness of the entire
registrant and are thus distinguishable from the transaction-level
requirements discussed above, which apply to transactions with
individual counterparties and thus may be applied differently based on
the U.S. person status of a counterparty.
---------------------------------------------------------------------------

    \655\ See Section III.C.3(b), supra.
---------------------------------------------------------------------------

3. Substituted Compliance
    The Commission is not proposing, at this time, to establish a
policy and procedural framework under which we would consider
permitting compliance by a foreign major security-based swap
participant with comparable regulatory requirements in a foreign
jurisdiction to substitute for compliance with requirements of the
Exchange Act, and the rules and regulations thereunder, applicable to
major security-based swap

participants, as it is proposing to do for foreign security-based swap
dealers.\656\
---------------------------------------------------------------------------

    \656\ See Section XI.C, infra.
---------------------------------------------------------------------------

    Unlike foreign security-based swap dealers whose primary businesses
are in securities, security-based swaps, swaps, banking and other
financial and investment banking activities, the non-U.S. persons that
may need to register as nonbank major security-based swap participants
may engage in a diverse range of business activities different from,
and broader than, the activities conducted by broker-dealers or
security-based swap dealers (otherwise they may be required to register
as a security-based swap dealer and/or broker-dealer) or the activities
conducted by banks. For example, as stated in the Capital, Margin and
Segregation Proposing Release, persons that may need to register as
nonbank major security-based swap participants may engage in commercial
activities that require them to have substantial fixed assets to
support manufacturing and/or result in them having significant assets
comprised of unsecured receivables.\657\ Therefore, it is not clear
what types of entity-level regulatory oversight, if any, especially
with respect to capital and margin, a foreign major security-based swap
participant would be subject to in the foreign regulatory system.
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    \657\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70315.
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    Accordingly, in light of the limited information currently
available to us regarding what types of foreign entities may become
major security-base swap participants, if any, and the foreign
regulation of such entities, we are not, at this time, proposing to
extend the proposed policy and procedural framework for substituted
compliance to foreign major-security-based swap participants.
Nevertheless, we will continue to consider the appropriateness of
permitting substituted compliance for major security-based swap
participants in light of comments received on this proposal and market
developments more generally and will consider what further steps to
take, if any, at adoption. In this regard, we request considerations,
information, and data regarding potential foreign major security-based
swap participants. Responses that are supported by empirical data and
analysis are encouraged in assisting the Commission in considering
whether permitting substituted compliance by foreign major security-
based swap participants would be warranted.
Request for Comment
    The proposed rules and interpretations regarding the application of
the major security-based swap participant definition and transaction-
level and entity-level requirements to registered major security-based
swap participants discussed above represent the Commission's
preliminary views. The Commission seeks comment on the proposed rules
and interpretations in all aspects. Interested persons are encouraged
to provide supporting data and analysis and, when appropriate, suggest
modifications to proposed rule text and interpretations. Responses that
are supported by data and analysis provide great assistance to the
Commission in considering the practicality and effectiveness of the
proposed application as well as considering the benefits and costs of
proposed requirements. In addition, the Commission seeks comment on the
following specific questions:
     Should the major security-based swap participant
definition focus only on a non-U.S. person's security-based swap
transactions entered into with U.S. persons, or should the major
security-based swap participant definition incorporate some or all of a
non-U.S. person's other security-based swap transactions? Which
transactions? For example, should a non-U.S. person include security-
based swap transactions with non-U.S. person counterparties guaranteed
by U.S. persons in such non-U.S. person's major security-based swap
participant calculation? Why or why not?
     Should the proposed approach toward determining whether a
non-U.S. person should count its security-based swap transactions that
are cleared through CCPs be adopted? Why or why not? Should the
Commission adopt a different approach to the treatment of security-
based swap transactions cleared through CCPs for purposes of the cross-
border application of the major security-based swap participant test?
If so, how should cleared transactions be treated for purposes of the
cross-border application of the major security-based swap participant
test?
     Should a non-U.S. person be permitted to exclude its
security-based swap transactions entered into with foreign branches of
U.S. banks from the calculation for purposes of determining whether it
is a major security-based swap participant? Why? If a non-U.S. person's
security-based swaps with foreign branches of U.S. banks are not
required to be considered in determining such non-U.S. person's major
security-based swap participant status, how should the risk (in terms
of outward exposures) that such non-U.S. person poses to U.S. banks be
addressed?
     Should the Commission permit a non-U.S. person to exclude
from its major security-based swap participant calculations its
security-based swap positions arising from transactions with the
foreign branches of U.S. banks if such non-U.S. person is subject to
capital standards adopted by its home country supervisor that are
consistent in all respect with the Basel Accord? Are there other
conditions or standards the Commission should consider that a non-U.S.
person may satisfy or comply with that should allow a non-U.S. person
to exclude its security-based swap positions arising from transactions
with foreign branches of U.S. banks from its major security-based swap
participant calculation?
     Are there competitiveness concerns related to the proposed
different treatment of U.S. persons and non-U.S. persons for purposes
of calculating their status under the major security-based swap
participant definition? If so, what are these concerns, and how should
they be addressed?
     Should the proposed approach towards the attribution of
security-based swap positions guaranteed by U.S. persons and non-U.S.
persons be altered? What justifications would support an alternate
approach?
     Should the Commission adopt the proposed approach to the
attribution of guaranteed security-based swap positions whereby the
positions of guaranteed entities subject to capital standards adopted
by its home country supervisor that are consistent in all respects with
the Basel Accord would not need to be attributed? Is Basel Accord
capital standard an appropriate standard for determining whether it is
not necessary to attribute guaranteed security-based swap positions to
a guarantor, or should another standard be used? Is this proposed
standard clear, or is additional guidance necessary? In addition to the
proposed capital standard, should the Commission's approach to the
attribution of guaranteed security-based swap positions also include a
requirement that the guaranteed entities be subject to effective
capital oversight by its home country supervisor as determined by the
Commission in order not to attribute the guaranteed security-based swap
positions to the guarantor?
     Are there FPSFIs that would fall within the definition of
major security-based swap participant based on the proposed rules and
interpretive guidance? If so, should the Commission

provide relief to such FPSFIs? If so, what type of relief, what types
of entities should be eligible for such relief, and what factors would
justify such relief? Would it be more appropriate for the Commission to
address these concerns on an individual basis?
     Should the Commission adopt the proposed approach to the
application of certain customer protection requirements and segregation
requirements to foreign major security-based swap participants with
respect to their transactions with non-U.S. persons? If so, are there
other transaction-level requirements that should be included within
this proposed approach?
     Should substituted compliance be provided to foreign major
security-based swap participants with respect to entity-level
requirements? Transaction-level requirements? If so, how should the
Commission make such a determination? In particular, what standard
should be used for determining whether existing regulation merits a
substituted compliance determination?
     What would be the market impact of the proposed approach
to major security-based swap participants? How would the application of
the proposed approach affect the competitiveness of U.S. entities in
the global marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed approach place any market
participants at a competitive disadvantage or advantage? If so, please
explain. Would the proposed approach be a more general burden on
competition? If so, please explain. What other measures should the
Commission consider to implement the proposed approach to major
security-based swap participants? What would be the market impacts and
competitiveness effects of alternatives to the proposed approach
discussed in this release?

V. Security-Based Swap Clearing Agencies

A. Introduction

    Title VII of the Dodd-Frank Act adds a number of provisions to the
Exchange Act relating to the registration and regulation of clearing
agencies that provide clearance and settlement services for security-
based swaps.\658\ Such provisions augment the Commission's existing
authority to register and regulate clearing agencies in Section 17A of
the Exchange Act.\659\ In particular, Section 17A(g) of the Exchange
Act, as added by Section 763(b) of the Dodd-Frank Act, requires
clearing agencies that use interstate commerce to perform the functions
of a clearing agency with respect to security-based swaps to register
with the Commission.\660\ Section 17A(k) of the Exchange Act, as added
by Section 763(b) of the Dodd-Frank Act, provides the Commission with
authority to exempt a security-based swap clearing agency from
registration if the Commission determines that the clearing agency is
subject to comparable, comprehensive supervision and regulation by the
CFTC or the appropriate government authorities in the home country of
the clearing agency.\661\ The Dodd-Frank Act also added provisions to
Section 17A of the Exchange Act relating to voluntary clearing agency
registration and the establishment of clearing agency standards.\662\
Finally, Section 17A(j) requires the Commission to adopt rules
governing persons that are registered as clearing agencies for
security-based swaps.\663\
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    \658\ See Section 763(b) of the Dodd-Frank Act.
    \659\ See 15 U.S.C 78q-1 and 17 CFR 240.17Ab2-1.
    \660\ 15 U.S.C. 78q-1(g). Note that Section 929W of the Dodd-
Frank Act added another subsection (g) to Section 17A of the
Exchange Act. The subsection (g) added by Section 763(b) of the
Dodd-Frank Act is the focus of the discussion in this section.
    \661\ 15 U.S.C. 78q-1(k). The exemptive authority contained in
Section 17A(k) of the Exchange Act only pertains to clearing
agencies that would be required to register under Section 17A of the
Exchange Act for the clearing of security-based swaps. It does not
alter the Commission's existing exemptive authority found in Section
17A(b)(1) and Section 36 of the Exchange Act.
    \662\ Section 17A(h) of the Exchange Act, as added by Section
763(b) of the Dodd-Frank Act, permits a person, in certain cases, to
voluntarily register as a clearing agency with the Commission. 15
U.S.C. 78q-1(h). Section 17A(i) of the Exchange Act, as added by
Section 763(b) of the Dodd-Frank Act, requires security-based swap
clearing agencies to comply with standards established by the
Commission. 15 U.S.C. 78q-1(i).
    \663\ 15 U.S.C. 78q-1(j).
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    Because of the global nature of the security-based swap market, the
Commission recognizes that there may be some uncertainty regarding when
a foreign security-based swap clearing agency \664\ that provides
central counterparty (``CCP'') services \665\ for security-based swaps
would be required to register with the Commission as a clearing agency.
Accordingly, we are proposing interpretive guidance regarding the
application of the registration requirement in Section 17A(g) of the
Exchange Act for security-based swap clearing agencies that act as
CCPs.\666\ We also address our exemptive authority under Section 17A(k)
to exempt a foreign security-based swap clearing agency from the
registration requirement in Section 17A(g).\667\ In addition, we
discuss the potential application of alternative standards to certain
foreign clearing agency registrants.
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    \664\ In using the terms ``foreign'' and ``non-resident'' in
connection with a security-based swap clearing agency, the
Commission means a security-based swap clearing agency that is not a
U.S. person, as that term is defined in proposed Rule 3a71-3(a)(7)
under the Exchange Act, as discussed in Section III.B.5, supra. In
this regard, the Commission notes that legal persons that have their
principal place of business in the United States would be considered
``U.S. persons'' under the proposed definition regardless of their
place of incorporation or organization. See proposed Rule 3a71-
3(a)(7)(i)(B) under the Exchange Act.
    \665\ As discussed more fully below, generally speaking, a CCP
is an entity that interposes itself between the counterparties to a
securities transaction. See 17 CFR 240.17Ad-22(a)(1).
    \666\ In this section, the Commission is proposing interpretive
guidance only regarding the registration requirement in Section
17A(g) of the Exchange Act as it applies to clearing agencies that
provide CCP services. The Commission is not addressing the
registration requirement in Section 17A(b) of the Exchange Act,
which was unchanged by the Dodd-Frank Act. The Commission also is
not addressing the registration of clearing agencies that provide
other types of services for security-based swaps and other
securities. Elsewhere, the Commission has provided a temporary
exemption from the clearing agency registration requirements to
clearing agencies that provide non-CCP types of clearance and
settlement services for security-based swaps. See Order Pursuant to
Section 36 of the Securities Exchange Act of 1934 Granting Temporary
Exemptions from Clearing Agency Registration Requirements under
Section 17A(b) of the Exchange Act for Entities Providing Certain
Clearing Services for Security-Based Swaps, Exchange Act Release No.
64796 (July 1, 2011). Accordingly, the Commission expects to address
clearing agencies that provide non-CCP services in a future release.
    \667\ The Commission also has adopted final rules to exempt
transactions by CCPs in security-based swaps from all provisions of
the Securities Act, other than the anti-fraud provisions in Section
17(a), as well as from Exchange Act registration requirements and
provisions of the Trust Indenture Act. See Exemptions for Security-
Based Swaps issued by Certain Clearing Agencies, Securities Act
Release No. 9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012). The
exemption is conditioned on the CCP being registered or exempt from
registration with the Commission, on the determination that the
security-based swap is required to be cleared or that the CCP is
permitted to clear it pursuant to its rules, that the security-based
swap is sold only to an ECP, and that certain information be made
available to a counterparty or to the public.
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    The proposed interpretation discussed below represents the
Commission's preliminary views regarding the application of the
registration requirement in Section 17A(g) for security-based swap
clearing agencies acting as CCPs in the cross-border context. Our
proposal reflects a balancing of the principles described above,
including, in particular, the goal of the Dodd-Frank Act to address the
risk to the U.S. financial system.\668\ We

recognize, however, that the proposed interpretation represents one of
a number of possible alternative approaches in applying Title VII in
the cross-border context. Accordingly, the Commission invites comment
regarding all aspects of the proposal discussed below, including
potential alternative approaches. Responses that are supported by data
and analysis provide great assistance to the Commission in considering
the practicality and effectiveness of the proposed application as well
as considering the benefits and costs of proposed requirements.
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    \668\ See Section II.C, supra. In addition, as noted above, to
promote effective and consistent global regulation of swaps and
security-based swaps, the Dodd-Frank Act requires the Commission and
the CFTC to consult and coordinate with foreign regulatory
authorities on the ``establishment of consistent international
standards'' with respect to the regulation of swaps and security-
based swaps. Public Law 111-203 section 752(a).
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B. Proposed Title VII Approach

1. Clearing Agency Registration
    Section 17A(g) of the Exchange Act, entitled ``Registration
Requirement,'' provides that ``[i]t shall be unlawful for a clearing
agency, unless registered with the Commission, directly or indirectly
to make use of the mails or any means or instrumentality of interstate
commerce to perform the functions of a clearing agency with respect to
a security-based swap.'' \669\ The Commission preliminarily believes
that Title VII was intended to apply to clearing agencies that perform
clearing agency functions within the United States, regardless of their
principal place of business or their place of incorporation or
organization.\670\ For reasons discussed below, the proposed
interpretive guidance would provide that a security-based swap clearing
agency performs the functions of a CCP within the United States if it
has a U.S. person as a member.
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    \669\ 15 U.S.C. 78q-1(g).
    \670\ See Section II.B, supra.
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(a) Clearing Agencies Acting as CCPs
    Clearing agencies are broadly defined under the Exchange Act and
undertake a variety of functions.\671\ One such function is to act as a
CCP,\672\ which is an entity that interposes itself between the
counterparties to a securities transaction. For example, when a
security-based swap contract between two counterparties that are
members of a CCP is executed and submitted for clearing, it is
typically replaced by two new contracts--separate contracts between the
CCP and each of the two original counterparties. At that point, the
original counterparties are no longer counterparties to each other.
Instead, each acquires the CCP as its counterparty, and the CCP assumes
the counterparty credit risk of each of the original counterparties
that are members of the CCP. Structured and operated appropriately,
CCPs may improve the management of counterparty risk and may provide
additional benefits such as multilateral netting of trades.\673\
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    \671\ Section 3(a)(23)(A) of the Exchange defines the term
``clearing agency'' to mean any person who: (i) acts as an
intermediary in making payments or deliveries or both in connection
with transactions in securities; (ii) provides facilities for
comparison of data respecting the terms of settlement of securities
transactions, to reduce the number of settlements of securities
transactions, or for the allocation of securities settlement
responsibilities; (iii) acts as a custodian of securities in
connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned, or pledged by bookkeeping entry, without
physical delivery of securities certificates (such as a securities
depository); or (iv) otherwise permits or facilitates the settlement
of securities transactions or the hypothecation or lending of
securities without physical delivery of securities certificates
(such as a securities depository). 15 U.S.C. 78c(a)(23)(A).
    \672\ See Clearing Agency Standards Adopting Release, 77 FR
66221 n.17 (``[a]n entity that acts as a CCP for securities
transactions is a clearing agency as defined in the Exchange Act and
is required to register with the Commission'').
    \673\ See id.