[Federal Register Volume 84, Number 32 (Friday, February 15, 2019)]
[Proposed Rules]
[Pages 4614-4675]
[FR Doc No: 2018-27979]

Vol. 84

Friday,

No. 32

February 15, 2019

Part II

 Securities and Exchange Commission

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17 CFR Part 240

 Risk Mitigation Techniques for Uncleared Security-Based Swaps;
Proposed Rule

Federal Register / Vol. 84 , No. 32 / Friday, February 15, 2019 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84861; File No. S7-28-18]
RIN 3235-AL83

Risk Mitigation Techniques for Uncleared Security-Based Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing rules that would require the application
of specific risk mitigation techniques to portfolios of security-based
swaps not submitted for clearing. In particular, the proposal would
establish requirements for each registered security-based swap dealer
(``SBS dealer'') and each registered major security-based swap
participant (``major SBS participant'') (each SBS dealer and each major
SBS participant hereafter referred to as an ``SBS Entity'' and together
referred to as ``SBS Entities'') with respect to, among other things,
reconciling outstanding security-based swaps with applicable
counterparties on a periodic basis, engaging in certain forms of
portfolio compression exercises, as appropriate, and executing written
security-based swap trading relationship documentation with each of its
counterparties prior to, or contemporaneously with, executing a
security-based swap transaction. In addition, the Commission is
proposing an interpretation to address the application of the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements to cross-border security-based swap
activities and is proposing to amend Rule 3a71-6 to address the
potential availability of substituted compliance in connection with
those requirements. Moreover, the proposed rules would make
corresponding changes to the recordkeeping, reporting, and notification
requirements applicable to SBS Entities. Finally, the Commission is
requesting comment on how certain aspects of the proposed rules address
how a security-based swap data repository (``SDR'') could potentially
satisfy its obligation to verify the terms of each security-based swap
with both counterparties to the transaction.

DATES: Comments should be received on or before April 16, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-28-18 on the subject line; or

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-28-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the SEC's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Carol McGee, Assistant Director, or
Andrew Bernstein, Senior Special Counsel, at<PHONE_NUMBER>, Office of
Derivatives Policy, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-8010.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment the following new rules:

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           Commission reference                 CFR citation (17 CFR)
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Securities Exchange Act of 1934
 (``Exchange Act''): \1\
  Rule 15Fi-3.............................  Sec.   240.15Fi-3.
  Rule 15Fi-4.............................  Sec.   240.15Fi-4.
  Rule 15Fi-5.............................  Sec.   240.15Fi-5.
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    The Commission also is proposing for comment amendments to:
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    \1\ 15 U.S.C. 78a et seq.

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           Commission reference                 CFR citation (17 CFR)
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Exchange Act:
  Rule 3a71-6.............................  Sec.   240.3a71-6.
  Rule 15Fi-1.............................  Sec.   240.15Fi-1.
  Rule 17a-3 \2\..........................  Sec.   240.17a-3.
  Rule 17a-4..............................  Sec.   240.17a-4.
  Rule 18a-5 (proposed)...................  Sec.   240.18a-5 (proposed).
  Rule 18a-6 (proposed)...................  Sec.   240.18a-6 (proposed).
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    Finally, the Commission is requesting comment under:
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    \2\ In April 2014, the Commission proposed new Rules 18a-5 and
18a-6, and amendments to existing Rules 17a-3 and 17a-4. See
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers, Exchange Act
Release No. 71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014) (``SBS
Books and Records Proposing Release''). Although those proposed
rules and rule amendments have not yet been adopted by the
Commission, all of the relevant proposals included in this release
are based on the proposed regulatory text contained in the SBS Books
and Records Proposing Release.

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           Commission reference                CFR or U.S.C. citation
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Exchange Act:
  Section 13(n)(5)(B).....................  15 U.S.C. 78m(n)(5).
  Rule 13n-4(b)(3)........................  17 CFR 240.13n-4(b)(3).
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Table of Contents

I. Proposed Rules and Rule Amendments
    A. Background
    B. Rule 15Fi-3 (Portfolio Reconciliation)
    1. Overview of Portfolio Reconciliation
    2. Scope of the Portfolio Reconciliation Requirements
    3. Proposed Rule 15Fi-3(a): Portfolio Reconciliation With Other
SBS Entities
    4. Proposed Rule 15Fi-3(a): Resolution of Discrepancies With
Other SBS Entities
    5. Proposed Rule 15Fi-3(b): Portfolio Reconciliation With Other
Counterparties
    6. Reporting of Valuation Disputes
    7. Application of Proposed Rule 15Fi-3 to Cleared Security-Based
Swaps
    8. Comments Requested
    C. Rule 15Fi-4 (Portfolio Compression)
    1. Overview of Portfolio Compression
    2. Scope of Proposed Rule 15Fi-4--Portfolio Compression
Exercises
    3. Scope of Proposed Rule 15Fi-4--Bilateral Offset
    4. Application of Proposed Rule 15Fi-4 to Cleared Security-Based
Swaps
    5. Comments Requested
    D. Rule 15Fi-5 (Trading Relationship Documentation)
    1. Overview of Trading Relationship Documentation
    2. Scope of Proposed Rule 15Fi-5
    3. Proposed Rule 15Fi-5(b)(4): Documenting Valuation
Methodologies

    4. Proposed Rule 15Fi-5(b)(5) and (6): Other Disclosure
Requirements
    5. Proposed Rule 15Fi-5(c): Audit of Security-Based Swap Trading
Relationship Documentation
    6. Exceptions to the Trading Relationship Documentation
Requirements
    7. Comments Requested
    E. Verification of Transaction Data by SDRs
    1. Reconciliation of Terms Submitted to an SDR
    2. Documentation of Regulatory Reporting Obligations
    3. Comments Requested
    F. Recordkeeping Requirements
    1. Proposed Amendments to Recordkeeping Rules
    2. Comments Requested
II. Cross-Border Application of Rules 15Fi-3 Through 15Fi-5
    A. Background on the Cross-Border Application of Title VII
Requirements
    B. Proposed Cross-Border Interpretation
    C. Comments Requested
III. Availability of Substituted Compliance for Rules 15Fi-3 Through
15Fi-5
    A. Existing Substituted Compliance Rule
    B. Proposed Amendment to Rule 3a71-6
    1. Basis for Substituted Compliance in Connection With the
Portfolio Reconciliation, Portfolio Compression, and Trading
Relationship Documentation Requirements
    2. Comparability Criteria, and Consideration of Related
Requirements
    3. Comments Requested
IV. General Request or Comment
V. Paperwork Reduction Act
    A. Summary of Collections of Information
    1. Proposed Rule 15Fi-3: Portfolio Reconciliation
    2. Proposed Rule 15Fi-4: Portfolio Compression
    3. Proposed Rule 15Fi-5: Written Trading Relationship
Documentation
    4. Proposed Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6:
Books and Records Requirements
    5. Proposed Amendment to Rule 3a71-6: Substituted Compliance
    B. Proposed Use of Information
    1. Proposed Rule 15Fi-3: Portfolio Reconciliation
    2. Proposed Rule 15Fi-4: Portfolio Compression
    3. Proposed Rule 15Fi-5: Written Trading Relationship
Documentation
    4. Proposed Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6:
Books and Records Requirements
    5. Proposed Amendment to Rule 3a71-6: Substituted Compliance
    C. Respondents
    D. Total Annual Recordkeeping Burden
    1. Portfolio Reconciliation Activities Generally
    2. Establishing, Maintaining, and Enforcing Written Policies and
Procedures
    3. Reporting of Certain Valuation Disputes
    4. Proposed Rule 15Fi-4: Portfolio Compression
    5. Proposed Rule 15Fi-5: Written Trading Relationship
Documentation
    6. Proposed Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6:
Books and Records Requirements
    7. Proposed Amendment to Rule 3a71-6: Substituted Compliance
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Request for Comment
VI. Economic Analysis
    A. Broad Economic Considerations
    B. Economic Baseline
    1. Security-Based Swap Market Activity and Participants
    a. Available Data From the Security-Based Swap Market
    b. Affected SBS Entities
    c. Other Market Participants
    d. Outstanding Positions
    2. Current Portfolio Reconciliation Practices
    3. Current Portfolio Compression Practices
    4. Current Trading Relationship Documentation Practices
    C. Economic Costs and Benefits, Including Impact on Efficiency,
Competition, and Capital Formation
    1. Effects on Efficiency, Competition, and Capital Formation
    a. Broad Market Effects
    b. Substituted Compliance
    2. Portfolio Reconciliation
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    3. Portfolio Compression
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    4. Trading Relationship Documentation
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    5. Recordkeeping Requirements
    a. Requirements
    b. Benefits
    c. Costs
    d. Alternatives
    6. Cross-Border Application of Rules 15Fi-3 Through 15Fi-5.
    a. Requirements
    b. Benefits
    c. Costs
    D. Request for Comment
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Act Certification
IX. Statutory Basis and Text of Proposed Rules

I. Proposed Rules and Rule Amendments

A. Background

    Section 15F(i)(1) of the Exchange Act, as added by Section 764(a)
of Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''),\3\ requires each SBS Entity to
conform with such standards as may be prescribed by the Commission, by
rule or regulation, that relate to timely and accurate confirmation,
processing, netting, documentation, and valuation of all security-based
swaps.\4\ Section 15F(i)(2) of the Exchange Act provides that the
Commission shall adopt rules governing documentation standards for SBS
Entities.\5\
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    \3\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise
indicated, references to ``Title VII'' in this release are to
Subtitle B of Title VII of the Dodd-Frank Act.
    \4\ 15 U.S.C. 78o-10(i)(1).
    \5\ 15 U.S.C. 78o-10(i)(2).
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    The Commission previously adopted rules requiring SBS Entities to
provide trade acknowledgments and to verify those trade acknowledgments
with their counterparties to security-based swap transactions,\6\ but
has not proposed rules concerning portfolio reconciliation, portfolio
compression, or trading relationship documentation. By contrast, the
Commodity Futures Trading Commission (``CFTC'') has implemented rules
setting forth standards for the timely and accurate confirmation of
swaps, addressing the reconciliation and compression of swap
portfolios, and setting forth requirements for documenting the swap
trading relationship between swap dealers or major swap participants
(each swap dealer and each major swap participant hereafter referred to
as a ``Swap Entity'' and together referred to as ``Swap Entities'') and
their counterparties.\7\
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    \6\ See Trade Acknowledgment and Verification of Security-Based
Swap Transactions, Exchange Act Release No. 78011 (June 8, 2016), 81
FR 39807 (June 17, 2016) (``Trade Acknowledgment and Verification
Adopting Release'').
    \7\ See Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation
Requirements for Swap Dealers and Major Swap Participants, 77 FR
55904 (Sept. 11, 2012) (``CFTC Risk Mitigation Adopting Release'').
The European Commission (``EC'') has implemented similar measures.
See Commission Delegated Regulation (EU) No. 149/2013 (Dec. 18,
2012) supplementing Regulation (EU) No. 648/2012 of the European
Parliament and of the Council with regard to regulatory technical
standards on indirect clearing arrangements, the clearing
obligation, the public register, access to a trading venue, non-
financial counterparties, and risk mitigation techniques for over-
the-counter (``OTC'') derivatives contracts not cleared by a central
counterparty (Feb. 23, 2013), available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0011:0024:en:PDF. Regulatory
authorities in other jurisdictions (e.g., the Hong Kong Monetary
Authority and the Monetary Authority of Singapore) have also
proposed requirements similar to those adopted by the CFTC and the
EC. In addition, the Canadian Securities Administrators (``CSA'')
published a consultation paper in 2016 proposing a requirement that
financial institutions enter into a written agreement documenting
the material terms and conditions of any non-centrally cleared
derivative, including standards related to the maintenance, review,
and contents of that documentation. See CSA Consultation Paper 95-
401--Margin and Collateral Requirements for Non-Centrally Cleared
Derivatives (Jul. 7, 2016), available at: http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20160707_95-401_collateral-requirements-cleared-derivatives.pdf.

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    Accordingly, the Commission is today proposing requirements
applicable to SBS Entities addressing, among other things, reconciling
and compressing portfolios of uncleared security-based swaps and
executing written trading relationship documentation with each
counterparty prior to or contemporaneously with executing an uncleared
security-based swap. In developing this proposal, we have consulted and
coordinated with the CFTC, the prudential regulators,\8\ and foreign
regulatory authorities in accordance with the consultation mandate of
the Dodd-Frank Act.\9\ We also have consulted and coordinated with
foreign regulatory authorities through Commission staff participation
in numerous bilateral and multilateral discussions with foreign
regulatory authorities addressing the regulation of OTC
derivatives.\10\ Through these multilateral and bilateral discussions
and the Commission staff's participation in various international task
forces and working groups, we have gathered information about foreign
regulatory reform efforts and their effect on, and relationship with,
the U.S. regulatory regime. The Commission has taken, and will continue
to take, these discussions into consideration in developing rules,
forms, and interpretations for implementing Title VII of the Dodd-Frank
Act.
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    \8\ For purposes of this statement, the term ``prudential
regulator'' is defined in Section 1a(39) of the CEA, 7 U.S.C.
1a(39), and that definition is incorporated by reference into
Section 3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant
to that definition, the Board of Governors of the Federal Reserve
System (``Federal Reserve Board''), the Office of the Comptroller of
the Currency, the Federal Deposit Insurance Corporation (``FDIC''),
the Farm Credit Administration, or the Federal Housing Finance
Agency (collectively, the ``prudential regulators'') is the
``prudential regulator'' of an SBS Entity if the entity is directly
supervised by that regulator. Separately, we are proposing a
definition of ``prudential regulator,'' to be used for purposes of
the proposed portfolio reconciliation and trading relationship
documentation requirements. See infra note 48. That proposed
definition also references Section 3(a)(74) of the Exchange Act and
includes the same list of agencies as noted above.
    \9\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.''
    In addition, Section 752(a) of the Dodd-Frank Act provides, in
part, that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.''
    \10\ Staff participates in a number of international standard-
setting bodies and workstreams working on OTC derivatives reforms.
For example, Commission staff participated in the International
Organization of Securities Commissions' (``IOSCO'') preparation of a
report regarding risk mitigation standards for non-centrally cleared
OTC derivatives. See Risk Mitigation Standards for Non-centrally
Cleared OTC Derivatives (Jan. 28, 2015), available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD469.pdf. IOSCO developed
those standards in consultation with the Basel Committee on Banking
Supervision and the Committee on Payments and Market
Infrastructures.
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    Finally, the Commission recognizes that the CFTC rules pertaining
to portfolio reconciliation, portfolio compression, and written trading
relationship documentation have been in effect since 2012, and that any
SBS Entity that also is registered with the CFTC as a Swap Entity will
already have incurred systems and compliance costs in connection with
the corresponding CFTC requirements. In order to minimize compliance
burdens on such potential dual registrants in connection with the rules
we are proposing today, we have attempted to harmonize this proposal
with the existing CFTC rules wherever possible. There are, however, a
limited number of provisions where we preliminarily believe it is
appropriate to diverge from a particular aspect of the CFTC rules. Each
of those differences is described below, along with the preliminary
reasons for the different approaches. To the extent that no such
substantive difference is described, it is because we have
preliminarily determined that none exists. However, below we welcome
and solicit comment on any potential substantive differences between
the proposed rules and the corresponding CFTC rules, as well as on the
decision to harmonize with the CFTC, both as an overall approach and
with respect to any specific provisions of the proposed rules.

B. Rule 15Fi-3 (Portfolio Reconciliation)

1. Overview of Portfolio Reconciliation
    In the Trade Acknowledgement and Verification Adopting Release, the
Commission noted the importance of confirming trades in a timely
manner, explaining that the process of confirming the terms of a
transaction is essential for SBS Entities ``to effectively measure and
manage market and credit risk.'' \11\ The Commission further explained
that ``a backlog of unconfirmed trades could hinder the settlement
process, particularly if errors go undetected or a counterparty
disputes the terms of a transaction.'' \12\ Such disruptions in the
settlement process could, in turn, lead to broader market instability
in the case of a credit event involving a reference entity on which
many different counterparties have, in the aggregate, a large notional
outstanding exposure.\13\
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    \11\ Trade Acknowledgement and Verification Adopting release, 81
FR at 39833.
    \12\ Id.
    \13\ Id.
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    In this regard, portfolio reconciliation addresses many of these
same issues, but unlike the confirmation process, which occurs at the
outset of a transaction, reconciliation operates throughout the life of
the transaction. If a security-based swap transaction is accurately
confirmed by both parties during the trade acknowledgement and
verification process, reconciliation helps to identify any
discrepancies in terms that do not remain constant throughout the life
of a trade. Furthermore, if a discrepancy is not identified during the
trade acknowledgement and verification process, it could be identified
during a subsequent reconciliation exercise.
    The Commission preliminarily believes that portfolio reconciliation
serves as an important mechanism for promoting risk mitigation by
requiring security-based swap counterparties to have established
processes for identifying and resolving discrepancies involving key
terms of their transactions. To illustrate this point, if a term
necessary for calculating the market value of a security-based swap is
not properly confirmed during the trade acknowledgment and verification
process, such as due to some form of systems or human error, that
discrepancy could lead to complications at various points throughout
the life of the transaction, which could become particularly
problematic if it remains undetected until such time as the parties are
required to perform on their obligations.\14\ Thus, portfolio
reconciliation could help to mitigate the possibility of a discrepancy
unexpectedly affecting performance under the security-based swap
transaction by increasing the likelihood

that the parties are and remain in agreement with respect to all
material terms.
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    \14\ See Summary of OTC Commitments, Attachment to the July 31,
2008 letter from the Operations Management Group to Timothy
Geithner, President, Federal Reserve Bank of New York (``FRBNY''),
available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2008/CommitmentSummaryTable.pdf (``Positive
affirmation of trade economics is a key risk mitigation technique
for OTC derivatives because it assures that each counterparty's risk
management system accurately reflect the economic details of trades
that have not yet been matched.''). Although this particular
commitment was made in the context of the trade affirmation process,
we believe that the same basic principle supports the need to
reconcile terms throughout the life of a trade, even if a term is
accurately reflected in a firm's system as a result of the
affirmation process. This is particularly true for terms that do not
remain constant during the life of a trade.
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    This practice is particularly relevant with respect to terms used
to perform a valuation of the financial instrument. Specifically,
unresolved discrepancies regarding the value of a security-based swap
can lead to, among other things, difficulties in the application of any
processes that depend on the valuation being accurate, such as
determining the amount of margin that must be posted or collected
during the life of a security-based swap transaction. In the aggregate,
such errors and other complications could result in significant
uncollateralized exposure in the uncleared security-based swap markets
(or alternatively, potentially inefficient overcollateralization).
    In addition, valuation discrepancies identified during
reconciliation could help to identify problems with one or both of the
counterparties' internal valuation systems and models, or possibly even
with a firm's internal controls. For example, in a report analyzing
federal assistance to American International Group, Inc. (``AIG'')
following the events of September 2008, the General Accountability
Office (``GAO'') noted that in structuring this relief one of the many
open issues the FRBNY had to address was the number of collateral
disputes AIG had with its counterparties.\15\ GAO further explained
that ``[t]o the extent that lower valuations (more CDO value lost)
produced greater collateral postings, counterparties had an interest in
seeking lower valuations. Similarly, to the extent that higher
valuations (less CDO value lost) meant smaller collateral postings, AIG
had an interest in seeking higher valuations.'' \16\
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    \15\ See GAO, Financial Crisis: Review of Federal Reserve System
Financial Assistance to American International Group, Inc., GAO-11-
616 (Sept. 2011), available at http://www.gao.gov/assets/590/585560.pdf (``According to information we reviewed, on a
[collateralized debt obligation (``CDO'')] portfolio of $71 billion
. . . , AIG and its counterparties had valuation differences
totaling $4.3 billion. Among a group of 15 counterparties, 9 had
valued their assets differently than AIG.'').
    \16\ Id. at 82.
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    In light of this information, the Commission preliminarily believes
that the use of portfolio reconciliation to help maintain an agreed-
upon valuation of a security-based swap throughout the lifecycle of a
transaction should be a hallmark of prudent risk mitigation practices
within the operations of an SBS Entity. Accordingly, the Commission is
proposing new Rule 15Fi-3 under the Exchange Act,\17\ which generally
would require those entities, in connection with security-based swaps
not submitted for clearing, to (1) engage in portfolio reconciliation
with counterparties who are SBS Entities and (2) establish, maintain,
and follow written policies and procedures reasonably designed to
ensure that they engage in portfolio reconciliation with counterparties
who are not SBS Entities. In both cases, the frequency of the portfolio
reconciliation would be based on the number of outstanding transactions
with the applicable counterparty.
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    \17\ Unless otherwise noted, all references to rules (both
proposed and existing) without an accompanying statutory reference
are to rules adopted (or proposed to be adopted) under the Exchange
Act.
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2. Scope of the Portfolio Reconciliation Requirements
    For purposes of proposed Rule 15Fi-3,\18\ the Commission is
proposing to amend existing Rule 15Fi-1 to add a definition of
``portfolio reconciliation.'' \19\ As proposed, this term would be
defined to mean any process by which the counterparties to one or more
uncleared security-based swaps:
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    \18\ The corresponding CFTC rule is 17 CFR 23.502. The structure
of the CFTC rule, including the subsections, mirrors the structure
of proposed Rule 15Fi-3.
    \19\ See proposed Rule 15Fi-1(l). The corresponding CFTC
definition is in 17 CFR 23.500(i).
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    (i) Exchange the material terms of all security-based swaps in the
security-based swap portfolio between the counterparties;
    (ii) Exchange each counterparty's valuation of each security-based
swap in the security-based swap portfolio between the counterparties as
of the close of business on the immediately preceding business day; and
    (iii) Resolve any discrepancy in valuations or material terms.
    For purposes of this proposed definition, the Commission also is
proposing to amend Rule 15Fi-1 to add the terms ``security-based swap
portfolio,'' which would be defined to mean all security-based swaps
currently in effect between a particular SBS Entity and a particular
counterparty,\20\ and ``valuation,'' which would be defined to mean the
current market value or net present value of a security-based swap.\21\
Both of these definitions help to establish the scope of the portfolio
reconciliation requirements in proposed Rule 15Fi-3, with the former
defining which security-based swaps are subject to the rule and the
latter defining one of the two categories of information that must be
exchanged during a reconciliation (the other being ``material terms'').
Moreover, for consistency with the corresponding CFTC rules applicable
to Swap Entities, these definitions are substantively identical to the
CFTC's corresponding definitions, which we preliminarily believe are
appropriately scoped and clear for purposes of proposed Rule 15Fi-3.
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    \20\ See proposed Rule 15Fi-1(o). The corresponding CFTC
definition is in 17 CFR 23.500(k)
    \21\ See proposed Rule 15Fi-1(q). The corresponding CFTC
definition is in 17 CFR 23.500(m).
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    With respect to the phrase ``material terms,'' the proposed
definition would follow a similar approach to the one taken by the CFTC
in that it would base the definition on the terms required to be
reported to an SDR pursuant to Regulation SBSR.\22\ Unlike the approach
taken by the CFTC, however, which has adopted a single definition of
``material terms,'' the definition in proposed Rule 15Fi-1(i) would be
bifurcated depending on whether a security-based swap transaction had
already been included in a security-based swap portfolio and reconciled
pursuant to proposed Rule 15Fi-3.\23\ With respect to any security-
based swap that has not yet been reconciled as part of a security-based
swap portfolio, ``material terms'' would be defined to mean each term
that is required to be reported to a registered SDR pursuant to Rule
901 under the Exchange Act.\24\ With respect to all other security-
based swaps within a security-based swap portfolio, the definition of
``material terms'' would continue to be based on the reporting
requirements in Rule 901, but would exclude any term that is not
relevant to the ongoing rights and obligations of the

parties and the valuation of the security-based swap.\25\
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    \22\ 17 CFR 242.900 to 242.909.
    \23\ CFTC Rule 23.500(g) defines ``material terms'' to include
the minimum primary economic terms (as defined in Appendix 1 of part
45 of the CFTC's regulations) of a swap, other than the 24 specific
data fields identified in that rule. See 17 CFR 23.500(g). Among the
excluded fields are: (1) The status of either counterparty as a swap
dealer, major swap participant, financial entity, or U.S. person;
(2) an indication that the swap will be allocated and certain
information regarding the agent and the original swap; (3) an
indication that the swap is a multi-asset swap and a further
indication of its primary and secondary asset class; (4) an
indication that the swap is a mixed swap and the identification of
any non-CFTC registered swap data repository to which it is also
reported (if applicable); (5) the block trade indicator, execution
timestamp, and timestamp for submission to a swap data repository;
(6) the clearing indicator and clearing venue; and (7) certain
information regarding the application of the end user exception from
mandatory clearing.
    \24\ See proposed Rule 15Fi-1(i)(1) (referencing 17 CFR
242.901).
    \25\ See proposed Rule 15Fi-1(i)(2).
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    The Commission preliminarily believes that the data set submitted
to an SDR under Rule 901 is an appropriate measure for determining
which terms should be reconciled pursuant to proposed Rule 15Fi-3. As
noted above, the Commission believes that one of the fundamental goals
of the portfolio reconciliation process is to help ensure that both
counterparties to a security-based swap are in agreement on all of the
terms necessary for developing a comprehensive understanding of each of
their rights and obligations under the security-based swap, and that
they remain in such agreement throughout the life of the transaction.
To effect that objective, we are proposing that the term ``portfolio
reconciliation'' be defined in part as the exchange of the ``material
terms'' of all security-based swaps in the security-based swap
portfolio between the counterparties. Similarly, in adopting Regulation
SBSR the Commission explained that the Title VII regulatory reporting
requirement ``is designed to allow the Commission and other relevant
authorities to have access to comprehensive information about security-
based swap activity in registered SDRs.'' \26\ The Commission therefore
preliminarily believes that the terms that must be reported to an SDR
under Regulation SBSR are a good proxy for identifying the ``material
terms'' that should be subject to the portfolio reconciliation
requirements.
---------------------------------------------------------------------------

    \26\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information; Final Rule, Exchange Act Release
No. 74244 (Feb. 11, 2015), 80 FR 14563, 14646 (Mar. 19, 2015)
(``Regulation SBSR Adopting Release'').
---------------------------------------------------------------------------

    The Commission also preliminarily believes that basing the
definition of ``material terms'' on what is required to be reported to
an SDR provides certainty for SBS Entities regarding what information
must be reconciled, which should in turn reduce the burdens on those
entities without lessening the benefits of the proposed rule (which are
described earlier in this section and in the Economic Analysis section
below). Furthermore, the proposed approach is designed to allow
affected counterparties to leverage the same systems used for SDR
reporting for purposes of the portfolio reconciliation requirements,
should such synergies exist. Moreover, this proposed approach would
promote the same policy goals that underpin a particular requirement
imposed on SDRs to verify the terms of each security-based swap with
both counterparties to the transaction, as discussed in detail in
Section I.E below.
    The Commission preliminarily believes that the proposed rule is
reasonably tailored to avoid unnecessary burdens while still promoting
important risk mitigation goals inherent to the portfolio
reconciliation process. That said, certain terms of a security-based
swap transaction may be material the first time that a transaction is
reconciled, but might not be material during a subsequent
reconciliation. This could be true, for example, with respect to any
term of a transaction that does not affect any ongoing rights or
obligations of the parties and that has no effect on the valuation of
the security-based swap. Accordingly, the definition of ``material
terms'' in proposed Rule 15Fi-1(i)(2) provides that with respect to any
subsequent reconciliations, SBS Entities may exclude any term that is
not relevant to the ongoing rights and obligations of the parties and
the valuation of the security-based swap, regardless of the fact that
the term was required to be reported to an SDR under Regulation
SBSR.\27\ For example, the Commission preliminarily believes that the
24 terms excluded from the CFTC definition could be excluded from the
proposed definition of ``material terms'' in the context of security-
based swaps that have previously been reconciled.\28\
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    \27\ The Commission does not, however, believe that a term would
be appropriately excluded from the definition of ``material terms''
if it was resubmitted to an SDR because of an error in how it was
initially reported or due to a lifecycle event. In those
circumstances, the Commission preliminarily believes that such term
would continue to be material for the same reasons that every term
subject to a reporting requirement under Rule 901 would be material
the first time that a transaction is reconciled. Once the updated
term is reconciled, however, an SBS Entity would be able to exclude
that term from subsequent reconciliations to the extent that it
determines that it is not relevant to the ongoing rights and
obligations of the parties and the valuation of the security-based
swap.
    \28\ See supra note 23 (discussing CFTC Rule 23.500(g)). We
further recognize that when the CFTC adopted amendments to Rule
23.500(g) to exclude these terms, it noted that ``removal of these
terms from reconciliations would alleviate the burden of resolving
discrepancies in terms of a swap that are not relevant to the
ongoing rights and obligations of the parties and the valuation of
the swap without impairing the [CFTC's] regulatory mission.'' See
Definitions of ``Portfolio Reconciliation'' and ``Material Terms''
for Purposes of Swap Portfolio Reconciliation, 81 FR 27309, 27311
(May 6, 2016).
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    Finally, the Commission recognizes that our proposed definition of
``material terms'' would differ from the corresponding CFTC definition
in that Swap Entities would never need to reconcile the 24 terms
excluded from the definition of ``material terms'' in CFTC Rule
23.500(g). Nevertheless, we are proposing to require all reported terms
to be reconciled at least initially because, among other things, such
requirement could potentially help to address an issue related to how
registered SDRs can verify the information that they receive, as
discussed in detail in Section I.E below. However, below we solicit
comment on our approach, and particularly welcome comments on any
trade-offs that may exist as between our efforts to address the SDR-
related issue and any additional burdens resulting from a definition of
``material terms'' that departs from the corresponding CFTC rule,
particularly in the context of CFTC-regulated Swap Entities that also
may register with the Commission as SBS Entities.
3. Proposed Rule 15Fi-3(a): Portfolio Reconciliation With Other SBS
Entities
    The Commission is proposing to bifurcate proposed Rule 15Fi-3 based
on the particular type of counterparty with which the SBS Entity
transacts. For transactions between two SBS Entities, proposed Rule
15Fi-3(a) would require the two sides to engage in portfolio
reconciliation at frequencies that are based on the size of the
security-based swap portfolio between the two parties, expressed in
ranges (or tiers).\29\
---------------------------------------------------------------------------

    \29\ See proposed Rule 15Fi-3(a).
---------------------------------------------------------------------------

    Under this tiered approach, if the two SBS Entity counterparties
maintain a security-based swap portfolio that includes 500 or more
security-based swaps, portfolio reconciliation would need to occur once
each business day for as long as the portfolio exceeds this threshold.
If a security-based swap portfolio between two SBS Entities includes
more than 50 but fewer than 500 security-based swaps on any business
day during a week, portfolio reconciliation would be required to occur
on a weekly basis. For a security-based swap portfolio between two SBS
Entities that includes no more than 50 security-based swaps at any time
during the calendar quarter, portfolio reconciliation would be required
on a quarterly basis.\30\
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    \30\ See proposed Rule 15Fi-3(a)(3). For the avoidance of doubt,
if a security-based swap portfolio between two SBS Entity
counterparties crosses from one threshold to another, both sides
would be required to comply with the proposed rule as of the date
that the requirement applies. For example, if two SBS Entities that
have long maintained a portfolio of 50 or fewer security-based swaps
(and accordingly reconcile on a quarterly basis) exceed the 50
transaction threshold, the two sides would become subject to the
weekly reconciliation requirement as of the first day that the
portfolio exceeds 50 security-based swaps (or the daily
reconciliation requirement if the portfolio increases to 500 or more
security-based swaps). By contrast, if two SBS Entities that
maintain a security-based swap portfolio of more than 500
transactions fall below that threshold, they could begin reconciling
on a weekly basis as of the first business day after the date on
which they were able to verify that their security-based swap
portfolio has fallen below 500 transactions.

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

    The Commission preliminarily believes that the proposed tiering of
obligations, whereby the frequency of the portfolio reconciliation
would be based on the number of outstanding transactions with the
applicable counterparty, represents a reasonable attempt to calibrate
the costs to the benefits expected from reconciling a person's
security-based swap portfolio at regular intervals. All other things
being equal, a larger and more complex portfolio represents a greater
potential for loss than a smaller, less complex portfolio. Therefore,
the proposed rule would require more frequent reconciliation of the
larger, more complex portfolio. We also note that the CFTC has adopted
rules that utilize identical levels as our proposal, and that
divergence from those thresholds could lead to additional costs and
other inefficiencies for SBS Entities that are also registered with the
CFTC as Swap Entities.\31\
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    \31\ When it adopted the same numerical thresholds in 2012, the
CFTC noted that the requirement to reconcile portfolios with 500 or
more swaps on a daily basis was consistent with the commitments made
by the OTC Derivatives Steering Group's 14 major dealers (``G-14
dealers'') in December 2008 as well as international regulatory
efforts underway at the time of the CFTC's release. See CFTC Risk
Mitigation Adopting Release, 77 FR at 55928 nn. 35 and 36. See also
Summary of OTC Commitments, Attachment to the June 2, 2009 letter
from G-14 dealers and certain buy-side participants to William C.
Dudley, President, FRBNY, available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2009/060209table.pdf
(committing, ``[b]y June 30, 2009, [to] execute daily collateralized
portfolio reconciliations for collateralized portfolios in excess of
500 trades between [Operations Management Group] dealers as detailed
in the December 31, 2008 Collateral Update letter''). See also
Attachment to the Mar. 31, 2011 letter from the G-14 dealers and
certain buy-side participants to William C. Dudley, President,
FRBNY, available at: https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2011/SCL0331.pdf (``We commit to reduce the
threshold for routine portfolio reconciliation of collateralized
portfolios from those exceeding 1,000 transactions to those
exceeding 500 transactions starting June 30, 2011. These portfolios
will be reconciled at least monthly.'') (internal citation omitted).
---------------------------------------------------------------------------

    In addition to the requirements regarding the frequency of the
reconciliation, proposed Rule 15Fi-3(a)(1) would require SBS Entities
to agree in writing with each of their counterparties on the terms of
the portfolio reconciliation including, if applicable, agreement on the
selection of any third party service provider who may be performing the
reconciliation.\32\ In practice, the Commission notes that an SBS
Entity could satisfy such requirement by including the terms governing
the portfolio reconciliation process in the written security-based swap
trading relationship documentation that the SBS Entity executes with
its counterparty which, pursuant to proposed Rule 15Fi-5 would be
required to be executed prior to, or contemporaneously with, the two
parties executing any new security-based swap transaction.\33\ This
practice should help to ensure that portfolio reconciliation begins
without delay after execution of the transaction and is designed to
minimize the number of disagreements regarding the portfolio
reconciliation process itself.
---------------------------------------------------------------------------

    \32\ Proposed Rule 15Fi-3(a)(2) provides that portfolio
reconciliation may be performed either on a bilateral basis by the
counterparties or by a third party selected by the counterparties in
accordance with paragraph (a)(1) of the proposed rule. The
Commission notes that CFTC Rule 23.502(a)(2), which is comparable to
proposed Rule 15Fi-3(a)(2), uses the term ``qualified third party.''
When it adopted the above provision in 2012, the CFTC explained that
it ``expects that parties will determine if the third-party is
qualified based on their own policies.'' See CFTC Risk Mitigation
Release, 77 FR at 55929. In addition, the CFTC's portfolio
reconciliation requirements for transactions between Swap Entities
and counterparties that are not Swap Entities do not require the
relevant third party to be ``qualified'' and, instead, provide that
``[t]he portfolio reconciliation may be performed on a bilateral
basis by the counterparties or by one or more third parties selected
by the counterparties.'' See 17 CFR 23.502(b)(2) (emphasis added).
Accordingly, the Commission has decided not to refer to a
``qualified third party'' and, instead, uses the term ``third party
selected by the counterparties'' for purposes of proposed Rule 15Fi-
3(a)(2). We preliminarily believe that it is sufficient for our
purposes to refer solely to the fact that a third party has been
selected.
    \33\ Once the two parties have agreed in writing on the terms of
the portfolio reconciliation for the first time, the requirement
could then be satisfied in connection with any new security-based
swap transaction executed by the two sides merely by agreeing in
writing to abide by the existing agreement regarding the
reconciliation process.
---------------------------------------------------------------------------

    Finally, the Commission has preliminarily determined not to propose
the CFTC's definition of ``business day'' and to rely on the definition
in existing Rule 15Fi-1, which was adopted in 2016 in connection with
the trade acknowledgement and verification requirements in Rule 15Fi-2.
That definition includes ``any day other than a Saturday, Sunday, or
legal holiday.'' \34\ Specifically, we believe that the existing
definition of ``business day'' is broadly consistent with other uses of
the term within the Commission's rules.\35\ We also do not believe it
necessary to have two different definitions of the same term
promulgated under the same legal authority (i.e., Section 15F(i) of the
Exchange Act), one for purposes of the portfolio reconciliation rules
and the other for purposes of the trade acknowledgement and
verification rules.\36\ Moreover, we believe that this definition
provides market participants with the flexibility to determine which
holidays are ``legal holidays'' for purposes of the portfolio
reconciliation requirements in proposed Rule 15Fi-3, which should be
particularly useful given the cross-border nature of the OTC
derivatives market.\37\ However, below we solicit comment on our
approach.
---------------------------------------------------------------------------

    \34\ Under this proposal, the definition of ``business day''
currently in Rule 15Fi-1(a) would be renumbered as proposed Rule
15Fi-1(b).
    \35\ See, e.g., 17 CFR 270.2a-7(a)(4) (``Business day means any
day other than Saturday, Sunday, or any customary business
holiday.'') and 17 CFR 230.261(b) (``Business day [means] [a]ny day,
except Saturdays, Sundays or United States federal holidays.'').
    \36\ By contrast, the applicable definition of ``business day''
for purposes of the CFTC's portfolio reconciliation rules is
contained in CFTC Rule 1.3(b), and includes ``any day other than a
Sunday or holiday.'' That definition also provides instructions for
computing time periods for CFTC rules that include notice
requirements.
    \37\ As a reminder, the proposal would require SBS entities to
agree in writing with each of their counterparties on the terms of
the portfolio reconciliation pursuant to proposed Rule 15Fi-3(a)(1)
(in the case of security-based swap portfolios with other SBS
Entities) and Rule 15Fi-3(b)(1) (in the case of security-based swap
portfolios with all other counterparties). Accordingly, such
agreement between an SBS Entity and its counterparty could include a
determination as to which holidays would be considered ``legal
holidays'' for purposes of any applicable portfolio reconciliation
exercises involving those two parties.
---------------------------------------------------------------------------

4. Proposed Rule 15Fi-3(a): Resolution of Discrepancies With Other SBS
Entities
    Proposed Rule 15Fi-3(a) also would require each SBS Entity to take
additional actions in the event of a discrepancy with a counterparty
that is an SBS Entity. First, proposed Rule 15Fi-3(a)(4) would require
the two SBS Entities to resolve immediately any discrepancy in a
material term, whether identified directly as part of the portfolio
reconciliation or otherwise. We preliminarily believe that this
timeframe is appropriate given the ongoing nature of security-based
swap transactions, as well as the potential for disagreements between
the counterparties regarding the terms of a transaction to compound
over the course of the security-based swap transaction. We have not,
however, proposed a fixed definition of ``immediately'' as we believe
that the amount of time that will be needed to resolve a discrepancy
will depend on the particular facts and circumstances involved,
including the complexity of the material term in question and the

magnitude of the discrepancy. We have, however, solicited comment on
this approach.
    At the same time, we also recognize that discrepancies related to
the valuation of a security-based swap could be particularly difficult
to resolve in a short period of time. Accordingly, proposed Rule 15Fi-
3(a)(5) would require SBS Entities to have policies and procedures
reasonably designed to resolve valuation discrepancies no later than
five business days from the date they were discovered, which we
preliminarily believe to be both a reasonable and appropriate amount of
time to resolve such discrepancies. As a condition to this requirement,
however, proposed Rule 15Fi-3(a)(5) would require each SBS Entity to
establish, maintain, and follow written policies and procedures
reasonably designed to identify how it will comply with any variation
margin requirements under Section 15F(e) of the Exchange Act \38\ and
any related regulations pending resolution of the valuation
discrepancy. Although we preliminarily believe that counterparties
should be given sufficient time to resolve valuation discrepancies, we
also believe it to be important for those counterparties to take
reasonable steps during the pendency of the resolution to ensure that
they are continuing to manage their credit risk to each other by way of
exchanging variation margin.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78o-10(e).
---------------------------------------------------------------------------

    Moreover, proposed Rule 15Fi-3(a)(5) provides that for purposes of
the requirement to resolve valuation discrepancies within five business
days of being identified, a difference between the lower valuation and
the higher valuation of less than 10% of the higher valuation need not
be deemed a discrepancy. This 10% threshold would apply on a
transaction-by-transaction basis and not on a portfolio level. As
discussed in the immediately preceding paragraph, the Commission
recognizes that valuation discrepancies could be challenging and costly
to resolve. Accordingly, we preliminarily believe that providing SBS
Entities with a clear understanding of exactly which valuation
discrepancies would need to be resolved within five business days will
help focus the internal resources of both counterparties on the largest
discrepancies. At the same time, however, the Commission believes that,
in most cases, prudent risk mitigation of a firm's security-based swap
portfolio and proper governance over an entity's operations would
involve ensuring that, at least to a certain degree, most valuation
discrepancies are ultimately resolved.\39\
---------------------------------------------------------------------------

    \39\ For the avoidance of doubt, an SBS Entity that identifies a
valuation discrepancy in excess of 10% would be in compliance with
the proposed rule if it resolves such discrepancy to a level below
10%, even if the entire discrepancy is not completely eliminated.
Thus, an SBS Entity would not be required to reduce an 11% valuation
discrepancy down to zero, in contrast to an SBS Entity with a 9%
valuation discrepancy, who would have no further obligations under
proposed Rule 15Fi-3(a)(5).
---------------------------------------------------------------------------

5. Proposed Rule 15Fi-3(b): Portfolio Reconciliation With Other
Counterparties
    Proposed Rule 15Fi-3(b) would establish reconciliation requirements
for security-based swap portfolios between an SBS Entity and a
counterparty that is not an SBS Entity. Although there is some broad
similarity between proposed Rule 15Fi-3(b) and the rules applicable to
security-based swap portfolios between two SBS Entities, we have
preliminarily determined to take a more streamlined approach with
respect to security-based swaps between an SBS Entity and its non-SBS
Entity counterparties, similar to the CFTC's approach. This approach
reflects our preliminary view that a dealer-to-dealer portfolio may be
associated with a degree of market interconnectedness and volume that
could potentially carry considerable market-wide risks, at least as
compared to a security-based swap portfolio that involves only one SBS
Entity. Moreover, the Commission preliminarily believes it to be
appropriate to impose more prescriptive requirements in cases where
both entities are subject to the SEC's requirements for registered
entities. Accordingly, there are differences in both the application of
the portfolio reconciliation requirements with non-SBS Entity
counterparties as well as in the thresholds governing the frequency of
the required reconciliation exercises.
    Specifically, the proposal would require each SBS Entity to
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it engages in portfolio
reconciliation with non-SBS Entity counterparties as set forth in the
rule.\40\ This is in contrast to proposed Rule 15Fi-3(a), which
expressly requires portfolio reconciliation with respect to
transactions where both counterparties are SBS Entities. In addition,
the policies and procedures would require that the portfolio
reconciliation be performed no less frequently than: (1) Once each
calendar quarter for each security-based swap portfolio that includes
more than 100 security-based swaps at any time during the calendar
quarter and (2) once annually for each security-based swap portfolio
that includes no more than 100 security-based swaps at any time during
the calendar year.\41\
---------------------------------------------------------------------------

    \40\ See proposed Rule 15Fi-3(b). Additionally, proposed Rule
15Fi-3(b) contains a slight deviation from corresponding CFTC Rule
23.502(b) to eliminate language that we believe to be redundant. We
do not intend for such clarification to signify any substantive
differences between proposed rule Rule15Fi-3(b) and CFTC Rule
23.502(b).
    \41\ See proposed Rule 15Fi-3(b)(3).
---------------------------------------------------------------------------

    As we previously explained, the Commission preliminarily believes
that basing the required frequency of the portfolio reconciliation on
the number of outstanding transactions with the applicable counterparty
represents a reasonable attempt to calibrate the costs to the benefits
expected from reconciling a person's security-based swap portfolio at
regular intervals. As we also noted above, all other things being equal
a larger and more complex portfolio represents a greater potential for
loss than a smaller, less complex portfolio. As before, in selecting
the specific levels we recognize that the CFTC has adopted rules with
identical thresholds and frequencies and that divergence from those
thresholds could lead to additional costs and other inefficiencies for
SBS Entities that are also registered with the CFTC as Swap
Entities.\42\
---------------------------------------------------------------------------

    \42\ See supra note 31 (discussing how the CFTC arrived at
setting the numerical thresholds for the requirement to engage in
portfolio reconciliation as between two Swap Entities.).
---------------------------------------------------------------------------

    In addition, paragraph (b)(1) of proposed Rule 15Fi-3 would require
that the applicable policies and procedures be reasonably designed to
ensure that each SBS Entity agrees in writing with each of its non-SBS
Entity counterparties on the terms of the portfolio reconciliation
including, if applicable, agreement on the selection of any third party
service provider who may be performing the reconciliation, and
paragraph (b)(2) provides that under such required policies and
procedures, the portfolio reconciliation may be performed on a
bilateral basis by the counterparties or by one or more third parties
selected by the counterparties.\43\ To the extent that the
counterparties elect to use a third party to provide these services,
the policies and procedures should be reasonably designed to ensure
that the SBS Entity and its counterparty agree on the selection of that
third party in writing in accordance with the requirements set forth in
proposed Rule 15Fi-3(b)(1).\44\
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    \43\ See proposed Rules 15Fi-3(b)(1) and (2).
    \44\ See proposed Rule 15Fi-3(b)(2). As noted in the discussion
of the corresponding provision in Rule 15Fi-3(a)(1), an SBS Entity
could in practice satisfy such requirement by including the terms
governing the portfolio reconciliation process in the written
security-based swap trading relationship documentation that it
executes with its counterparty which, pursuant to proposed Rule
15Fi-5 would be required to be executed prior to, or
contemporaneously with, the two parties executing any new security-
based swap transaction. In addition, once the two parties have
agreed in writing on the terms of the portfolio reconciliation for
the first time, the requirement could then be satisfied in
connection with any new security-based swap transaction executed by
the two sides merely by agreeing in writing to abide by the existing
agreement regarding the reconciliation process. See supra notes 32
and 33 and accompanying text.

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

    Finally, proposed Rule 15Fi-3(b)(4) would require each SBS Entity
to establish, maintain, and follow written procedures reasonably
designed to resolve any discrepancies in the valuation or a material
term of each security-based swap identified as part of a portfolio
reconciliation or otherwise with a non-SBS Entity counterparty in a
timely fashion.\45\ We are reluctant to provide a fixed definition of
``timely fashion'' in the context of resolving discrepancies with
counterparties who are not SBS Entities due to the fact that such
counterparties may vary considerably in terms of their size,
sophistication, and background. Although it may be possible to resolve
most valuation discrepancies with large hedge funds and pension funds
within the five-business-day period applicable to transactions between
two SBS Entities, that timeframe may be much more challenging with
respect to transactions with smaller buy-side firms. Accordingly, below
we request comment on the amount of time SBS Entities should be
provided to resolve discrepancies in the valuation or a material term
with respect to transactions with a non-SBS Entity counterparty.
Commenters are particularly encouraged to explain how any recommended
time period appropriately balances the importance of quickly resolving
valuation discrepancies to the greatest extent possible, with an
understanding that more complex discrepancies could involve the need
for additional discussion and time for resolution.
---------------------------------------------------------------------------

    \45\ Similar to the requirement in paragraph (a) of the proposed
rule for portfolio reconciliation with counterparties that are also
SBS Entities, proposed Rule 15Fi-3(b)(4) provides that a difference
between the lower valuation and the higher valuation of less than
10% of the higher valuation need not be deemed a discrepancy for
purposes of that paragraph. See supra note 39 and accompanying text
(discussing the 10% threshold in the context of Rule 15Fi-3(a)(5)).
---------------------------------------------------------------------------

6. Reporting of Valuation Disputes
    Valuation is one of the most fundamental elements for determining
the economic rights and obligations of each of the counterparties to a
security-based swap transaction. For example, market participants
manage their credit risks to their counterparties by exchanging margin
with each other in an amount determined using the value of the
underlying security-based swap. If those valuations are not accurate
for any reason, such as human or system errors, problems with the
valuation methodology, or an issue affecting the timeliness of the
calculation, that error could result in one of the counterparties
having an uncollaterialized credit exposure and a potential for loss in
the event of a default.
    Given those risks, proposed Rule 15Fi-3(c) would require each SBS
Entity to promptly notify the Commission of any security-based swap
valuation dispute in excess of $20,000,000 (or its equivalent in any
other currency), at either the transaction or portfolio level,\46\ if
not resolved within: (1) Three business days, if the dispute is with a
counterparty that is an SBS Entity; or (2) five business days, if the
dispute is with a counterparty that is not an SBS Entity. Such
notification would be required to be in a form and manner acceptable to
the Commission,\47\ and would also be required to be sent to any
applicable prudential regulator (i.e., in the case of any SBS Entity
that is also a bank).\48\
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    \46\ The language ``at either the transaction or portfolio
level'' is not included in CFTC Rule 23.502(c), which is the
corresponding requirement applicable to Swap Entities. The specific
requirements as to the operation of CFTC Rule 23.502(c) are
contained in the rules of the National Futures Association
(``NFA''), which the CFTC has authorized to, among other things,
receive and review notices of reportable swap valuation disputes.
See Performance of Certain Functions by the National Futures
Association Related to Notices of Swap Valuation Disputes Filed by
Swap Dealers and Major Swap Participants, 81 FR 3390 (Jan. 21,
2016). A detailed discussion of the NFA requirements, including with
respect to whether notices of swap valuation disputes should be
filed at either the transaction or portfolio level, is set forth at
the end of this Section I.B.6.
    \47\ With respect to the language addressing the form and manner
of submitting such notices, our intention is to provide SBS Entities
with flexibility to determine the most efficient and cost-effective
means of making such submissions, so long as it is deemed to be
acceptable by the Commission. At the same time, we also understand
that SBS Entities may prefer to have more specific direction as to
how to report these disputes to the Commission (and any applicable
prudential regulator). Accordingly, below we solicit comment on the
form of notice that would be required to be submitted pursuant to
the proposal.
    \48\ Additionally, the Commission is proposing to amend Rule
15Fi-1 to add the term ``prudential regulator,'' which would be
defined to have the same meaning given to the term in Section
3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74), and would
include the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the Farm Credit Association, and the Federal
Housing Finance Agency, as applicable to the specific type of SBS
Entity. See proposed Rule 15Fi-1(m).
---------------------------------------------------------------------------

    We note that the CFTC has adopted a nearly identical requirement
with the same $20,000,000 threshold and timeframes, and that divergence
from those requirements could lead to additional costs and other
inefficiencies for SBS Entities that are also registered with the CFTC
as Swap Entities.\49\ In addition, when the CFTC adopted this
requirement, it explained that ``the $20,000,000 materiality threshold
for reporting is sufficiently high to eliminate unnecessary `noise'
from over-reporting, but not so high as to eliminate reporting that the
[CFTC] may find of regulatory value, such as a large number of
relatively small disputes that in aggregate could provide the [CFTC]
with information regarding a widespread market disruption.'' \50\ We
preliminarily concur with that justification, and also note that such
notifications could assist the Commission in identifying potential
issues with respect to an SBS Entity's internal valuation methodology.
That said, we also invite public comment as to whether the dollar
threshold or reporting periods should be modified in any way.\51\
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    \49\ See CFTC Risk Mitigation Adopting Release 77 FR at 55914.
    \50\ Id. The CFTC has a nearly identical requirement in its Rule
23.502(c), except that it also requires Swap Entities to send such
notices to the Commission when the dispute involves a swap that is
also a security-based swap agreement, of which a material term is
based on the price, yield, value, or volatility of any security or
any group or index of securities, or any interest therein. See 17
CFR 23.502(c) (citing the inclusion of security-based swap
agreements in the definition of ``swap'' in 7 U.S.C. 1a(47)(v)).
Because there is no corresponding inclusion of swap agreements in
the definition of ``security-based swap agreement'' in Section
3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)), proposed Rule 15Fi-
3(c) does not contain a requirement to provide notices of any
security-based swap valuation disputes to the CFTC.
    \51\ We have preliminarily determined not to provide a fixed
definition of the term ``promptly'' in the context of when the SBS
Entity would need to provide the Commission of an applicable
security-based swap valuation dispute. Although we would expect that
SBS Entities would be able to provide these notices to the
Commission as soon as the disputes exceed the applicable timeframes
(e.g., the beginning of fourth business day in the case of a dispute
between two SBS Entities), we also understand that some notices may
take longer to prepare, such as in cases when the counterparties are
unable to agree even on the size of the dispute.
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    Finally, the Commission notes that on January 2, 2018, the NFA's
Interpretive Notice entitled, ``NFA Compliance Rule 2-49: Swap
Valuation Dispute Filing Requirements'' went into effect.\52\ Among
other things, that interpretive notice describes the types of disputes
that would trigger a notice requirement. Specifically, if the swap
dealer and its counterparty exchange collateral, NFA

Interpretive Notice to Rule 2-49 provides that the swap dealer would be
required to file notice of any dispute regarding (1) the amount of
initial margin to be posted or collected pursuant to a collateralized
eligible master netting agreement \53\ if the dispute exceeds the $20
million reporting threshold and (2) the amount of variation margin to
be posted or collected pursuant to such master netting agreement if the
dispute exceeds the $20 million reporting threshold. Because master
netting agreements by definition operate at the portfolio level, such
notices also would apply to the relevant swap portfolio.
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    \52\ See NFA Interpretive Notice to Rule 2-49, available at:
https://www.nfa.futures.org/rulebook/rules.aspx?Section=9&RuleID=9072.
    \53\ NFA Interpretive Notice to Rule 2-49 defines
``collateralized eligible master netting agreement'' to include an
eligible master agreement, including any applicable schedule and
credit support annex.
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    To the extent that a swap dealer and its counterparty do not
exchange collateral, NFA Interpretive Notice to Rule 2-49 requires the
swap dealer to submit a notice to the NFA upon being notified by its
counterparty that such counterparty is disputing any valuation provided
by the swap dealer if the dispute exceeds the $20 million reporting
threshold. Such notices would either be at the portfolio or transaction
level, depending on the particular valuation in question. That is, if
the counterparty disputes a valuation provided by the swap dealer
related to a particular transaction, the notice provided by the swap
dealer to the NFA also would need to be at the transaction level. By
contrast, if the counterparty disputes a portfolio valuation provided
by the swap dealer, the notice provided by the swap dealer to the NFA
also would need to be at the portfolio level.\54\
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    \54\ See id. See also Transcript of the NFA Swap Valuation
Dispute Notices and Swap Dealer Risk Data Reports Webinar (Oct. 12,
2017), available at: https://www.nfa.futures.org/members/member-resources/files/transcripts/svdwebinar-transcriptoct2017.pdf.
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    NFA Interpretive Notice to Rule 2-49 also provides that swap
dealers should not file a daily notice of a previously reported dispute
even if the valuation dispute amount changes. Instead, swap dealers are
required to notify the NFA of certain changes to the dispute amount on
the 15th (or the following business day if the 15th is a weekend or
holiday) and last business day of each month by amending any previously
filed notice where the dispute amount has increased in $20 million
incremental bands.\55\ NFA Notice to Interpretive Rule 2-49 also
requires swap dealers to file termination notices of disputes that are
no longer reportable under CFTC Rule 23.502(c).\56\ In addition, on
July 20, 2017, NFA issued a Notice to Members (I-17-13) outlining the
types of disputes that must be reported under the Interpretive Notice
to Rule 2-49 and specifying the information that will be required in
NFA's dispute form.\57\ Below we solicit comment on whether the
Commission should incorporate some or all of the NFA's approach,
including with respect to any of the specific requirements described
above, directly into proposed Rule 15Fi-3(c).
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    \55\ See NFA Interpretive Notice to Rule 2-49, supra note 52.
NFA Interpretive Notice to Rule 2-49 provided an example of a swap
dealer that filed a notice of a $30 million dispute, noting that an
amended notice updating the dispute amount would be required if that
dispute increases to $40 million or more and each subsequent $20
million increment (i.e., the dispute amount increases to $60 million
or more, $80 million or more, etc.), or if the amount decreases at
these $20 million increments.
    \56\ See id. Under NFA Interpretive Notice to Rule 2-49, the
termination notice would be due on the 15th (or the following
business day if the 15th is a weekend or holiday) and the last
business day of the month based on the dispute amount on the
reporting date.
    \57\ See NFA Notice to Members I-17-30, available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4827. That notice
provided that all swap valuation disputes must include: (1) The swap
dealer's NFA ID and legal entity identifier (``LEI''), (2) the
dispute reportable date, (3) the dispute type, (4) the dispute
termination date, (5) the receiver/payer, (6) the disputed amount,
in U.S. Dollars (``USD''), (7) the counterparty name, and (8)
counterparty LEI or Privacy Law Identifier. For initial and
variation margin disputes, the swap dealer would also be required to
provide (1) the unique swap identifier, (2) the base currency
notional amount, (3) the base currency code, (4) the notional value
USD equivalent, (5) the asset type, and (6) the product type. For
disputes where no collateral is exchange, the notice also would need
to include the credit support annex/netting agreement ID.
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7. Application of Proposed Rule 15Fi-3 to Cleared Security-Based Swaps
    Pursuant to proposed Rule 15Fi-3(d), the new requirements regarding
portfolio reconciliation would not apply to a ``clearing transaction''
which, pursuant to existing Rule 15Fi-1(c) under the Exchange Act, is
defined as a security-based swap that has a clearing agency as a direct
counterparty.\58\ Notwithstanding this provision, the Commission
understands that some parties may offer portfolio reconciliation
services with respect to OTC derivative transactions novated to a
clearing agency. Although the Commission recognizes the importance of
reconciling the terms of security-based swap transactions between a
clearing member (either acting on its own behalf or for the benefit of
a customer) and the clearing agency, we preliminarily believe that the
issue of reconciling the terms of cleared trades is more appropriately
addressed by the rules governing a clearing agency's risk management
practices, as well as by the documentation governing the relationship
between a clearing agency and its members.
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    \58\ See proposed Rule 15Fi-3(d). Under existing Rule 15Fi-1(b)
under the Exchange Act (which would be renumbered as Rule 15Fi-1(c)
under the proposed rules), the term ``clearing agency'' means a
clearing agency registered with the Commission pursuant to Section
17A of the Exchange Act and provides central counterparty services
for security-based swap transactions. See also Trade Acknowledgement
and Verification Adopting release, 81 FR at 39820-21 (explaining the
agency and principal models of clearing in the context of providing
a comparable exception from the trade acknowledgement and
verification requirements).
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8. Comments Requested
    The Commission generally requests comments on all aspects of
proposed Rule 15Fi-3, as well as any definitions in Rule 15Fi-1 that
are used in proposed Rule 15Fi-3. In addition, the Commission requests
comments on the following specific issues:
     Do commenters agree with the three activities comprising
the scope of the Commission's proposed definition of ``portfolio
reconciliation''? Why or why not?
     Do you agree that the scope of the proposed definition of
``material terms'' for purposes of the portfolio reconciliation
requirements in proposed Rule 15Fi-3 should be coterminous with the
terms of a security-based swap that must be reported to an SDR under
Regulation SBSR? Why or why not? Do you believe that there are any
terms that must be reported to an SDR that should not be subject to the
proposed portfolio reconciliation requirements? If so, which term(s)
and why?
     As opposed to using a fixed definition of ``material
terms,'' should the Commission adopt a more flexible definition? For
example, are there other uses of materiality, such as with regard to
the disclosure of information in registration statements (including
accounting statements) or proxy solicitations that would be useful to
include? Why or why not?
     Do you agree with the Commission's preliminary approach of
allowing SBS Entities to exclude certain information from the
definition of ``material terms'' after a transaction is reconciled the
first time so long as the excluded terms are not relevant to the
ongoing rights and obligations of the parties and the valuation of the
security-based swap? Alternatively, should the definition be revised to
conform to the corresponding CFTC definition, which excludes certain
terms for purposes of all portfolio reconciliations? Why or why not?
With respect to either approach, which terms should be excluded and
why? For example, should the final definition include as rule text some
or all of the specific data elements

excluded from the CFTC's definition? Which ones and why? By contrast,
are there any terms that would be excluded for purposes of subsequent
reconciliations under the proposed approach that should also be
excluded from the initial reconciliation? Which ones and why?
     Do commenters agree with the decision to use the existing
definition of ``business day'' (as currently in effect for the
security-based swap trade acknowledgement and verification
requirements) for purposes of the portfolio reconciliation requirements
in proposed Rule 15Fi-3? If not, why not and how should that definition
be modified for purposes of the proposed portfolio reconciliation
requirements? For example, should the definition specify which
jurisdiction's legal holidays are the default for specifying which
holidays are not included in the definition of ``business days''? Would
the differences between the proposed definition of ``business day'' and
the corresponding CFTC definition (which includes ``any day other than
a Sunday or holiday'') create any practical difficulties for dual SEC-
CFTC registrants? If so, what are they? Should the Commission instead
adopt a definition of ``business day'' that mirrors the CFTC
definition? Why or why not?
     Do commenters agree with the proposed approach of basing
the required frequency of portfolio reconciliation in proposed Rule
15Fi-3 on the type of counterparty involved (i.e., its status as an SBS
Entity) and on the size of the security-based swap portfolio? If not,
why not? If commenters believe that the proposed approach should be
retained, should any of the particular frequencies proposed (e.g.,
daily, weekly, quarterly, or annually) be modified to be either more or
less frequent?
     Proposed Rule 15Fi-3 permits the portfolio reconciliation
exercises required thereunder to be performed by a third party, with
the only qualification being that the selection of that third party has
been agreed to by both of the parties in writing. As an alternative
approach, should the Commission instead establish specific requirements
for qualifying third parties that offer portfolio reconciliation
services used for compliance with the rule? If so, how should a third
party be deemed to be qualified to provide portfolio reconciliation
services and who should make such a determination?
     Should the Commission's rules require two SBS Entities to
resolve a discrepancy in a material term ``immediately''? Why or why
not? Should the Commission define or provide an interpretation of the
term ``immediately,'' such as ``without undue delay,'' or, as an
alternative, specify a fixed period of time in the rule text within
which SBS Entities would be required to comply with proposed Rule 15Fi-
3(a)(4)? Why or why not and, if so, how much time should be provided?
     Are there any current industry practices that relate to
how counterparties to swaps and security-based swaps resolve
discrepancies in a material term in the case of a dealer-to-dealer
transaction? If any such practices exist, please describe them,
including with regard to the length of time that it typically takes to
resolve these types of discrepancies. Are there particular material
terms for which a discrepancy typically takes a longer (or shorter)
amount of time to resolve? If so, which ones?
     Should the Commission require SBS Entities to have
policies and procedures reasonably designed to resolve any discrepancy
in a valuation (with another SBS Entity) identified as part of a
portfolio reconciliation or otherwise as soon as possible, but in any
event within five business days after the date on which the discrepancy
is first identified? Why or why not? Should SBS Entities be provided
with more days to resolve these discrepancies? Should they have fewer
days?
     Are there any current industry practices that relate to
how counterparties to swaps and security-based swaps resolve valuation
discrepancies in the case of a dealer-to-dealer transaction? If any
such practices exist, please describe them, including with regard to
the length of time that it typically takes to resolve these types of
discrepancies. Are there particular circumstances that typically make
valuation disputes more (or less) difficult and time-consuming to
resolve? If so, which ones?
     Should the Commission require SBS Entities to have
policies and procedures reasonably designed to resolve any discrepancy
in a valuation or material term with a counterparty that is not an SBS
Entity (identified either as part of a portfolio reconciliation or
otherwise) in a timely fashion? Why or why not? Should the Commission
define or provide an interpretation of the term ``timely fashion,'' or,
as an alternative, specify a fixed period of time in the rule text
within which SBS Entities would be required to comply with proposed
Rule 15Fi-3(b)(4)? Why or why not and, if so, how much time should be
provided? In suggesting potential timeframes, we note that the period
for resolving discrepancies in a valuation or material term with non-
SBS Entities should likely not be shorter than the five business days
provided in the parallel requirement applicable to valuation
discrepancies between two SBS Entities. Should the Commission look at
any other similar provisions under the federal securities laws
addressing dispute resolution procedures as a guide for determining the
amount of time that an SBS Entity should be provided to resolve
discrepancies pursuant to proposed Rule 15Fi-3(b)(4)? If so, which
ones?
     Are there any current industry practices that relate to
how counterparties to swaps and security-based swaps resolve
discrepancies in a valuation or material term in the case of a
transaction between a dealer and a non-dealer? If any such practices
exist, please describe them, including with regard to the length of
time that it typically takes to resolve these types of discrepancies.
Are there particular terms for which a discrepancy typically takes a
longer (or shorter) amount of time to resolve? If so, which ones? In
this context, should valuation discrepancies be treated differently
than discrepancies in some (or all) material terms? If so, which ones
and why?
     Do you agree with the Commission's proposed approach of
deeming valuation differences of less than 10% not to be discrepancies
for purposes of requiring resolution under either proposed Rule 15Fi-
3(a)(5) or (b)(4)? If not, why not and how should the rules address the
resolution of valuation differences? Should the threshold be based on
the actual dollar amount of the valuation difference (or the related
currency equivalent) instead of being expressed as a percentage of the
difference of the two amounts?
     How has the 10% threshold functioned in the context of
CFTC rules applicable to Swap Entities? Has that threshold been under-
inclusive, in the sense that it may not identity a sufficient number of
swap valuation discrepancies that could affect performance under the
swap transaction? Why or why not? By contrast, has the CFTC's 10%
threshold been over-inclusive, in the sense that it has captured swap
valuation discrepancies that typically would not affect performance
under the swap transaction? Why or why not?
     Proposed Rule 15Fi-3(c) would require SBS Entities to
promptly notify the Commission, in a form and manner acceptable to the
Commission, and any applicable prudential regulator of any security-
based swap valuation dispute in excess of $20,000,000 (or its

equivalent in any other currency) if not resolved within either three
business days, if the dispute is with a counterparty that is an SBS
Entity, or five business days, if the dispute is with a counterparty
that is not an SBS Entity. Do commenters agree with this requirement?
Why or why not? As an alternative, should the Commission instead
require SBS Entities to make and keep records of these unresolved
disputes? Why or why not? Is $20,000,000 the appropriate threshold for
notifying the Commission of unresolved disputes? If not, should the
threshold be higher or lower? Should the threshold instead be expressed
as a percentage? Do commenters agree with the proposed timeframes for
submitting such a report? If not, should they be increased or
decreased?
     Should the Commission establish a specific process for how
SBS Entities would need to provide notices of valuation disputes to the
Commission pursuant to proposed Rule 15Fi-3(c)? If so, how should such
notices be provided? For example, should the Commission require that
such notices be submitted in electronic format through the EDGAR system
(or any successor system thereto, as designated by the Commission)? Why
or why not? Alternatively, should the Commission create a dedicated
email box to accept such notices in letter format? Why or why not?
Should these notices be submitted on a confidential basis? If so, how
would that affect the potential delivery options?
     As discussed above, the NFA has issued an interpretive
notice to NFA Compliance Rule 2-49 and a separate notice to its members
that, together, specify the timing, frequency, and contents for
submitting notices of swap valuation disputes pursuant to CFTC Rule
23.502(c).\59\ Should the Commission consider incorporating some or all
of those requirements into proposed Rule 15Fi-3(c) at adoption? If so,
which ones and why, and should any of the requirements promulgated by
the NFA be modified as part of the process of incorporating them into
the Commission's rules to account for differences between the swap and
security-based swap markets?
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    \59\ See supra notes 52-57 and accompanying text.
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     Do commenters agree with the proposed exception from the
reconciliation requirement for clearing transactions? Why or why not?
Because the definition of ``clearing transactions'' only includes
transactions cleared at a clearing agency registered with the
Commission pursuant to Section 17A of the Exchange Act, security-based
swaps cleared at a foreign clearing agency that is not registered with
the Commission would not be deemed to be ``cleared'' for these
purposes, and would therefore be subject to proposed Rule 15Fi-3.
Should the Commission modify the scope of the exception for cleared
security-based swaps, such as by including transactions that are
cleared at a clearing agency that is not registered with the Commission
pursuant to Section 17A of the Exchange Act, whether because of an
applicable exemption from registration or because the Exchange Act does
not cover the activities of the clearing agency? Why or why not?
     With respect to any Swap Entity that could potentially
register with the Commission as an SBS Entity, would the portfolio
reconciliation protocols (or any other applicable documentation)
already in existence with respect to CFTC Rule 23.502 satisfy the
requirements in proposed Rule 15Fi-3? Why or why not? Should proposed
Rule 15Fi-3 be modified to account for the way that market participants
have designed their existing protocols (or any other applicable
documentation) to be compliant with the CFTC's rules? Why or why not?
For the purposes of compliance with the proposed portfolio
reconciliation rules, should the Commission allow compliance with the
CFTC's parallel requirements for some period of time to allow dual SEC-
CFTC registrants to conform their existing portfolio reconciliation
protocols (or any other applicable documentation) following the
adoption of proposed Rule 15Fi-3? If so, on what factors should that
reliance be conditioned and how long of a compliance period should be
provided? In the alternative, should the Commission delay compliance
with, or establish phased compliance deadlines for, some or all of
these requirements? Please explain the nature of any compliance
challenges (including any additional documentation requirements), and
the basis for any suggested compliance period.
     As previously noted, proposed Rule 15Fi-3 has been
designed to be as consistent as possible with CFTC Rule 23.502, which
imposes portfolio reconciliation requirements on Swap Entities, in
order to avoid requiring dual SEC-CFTC registrants to incur additional
systems or compliance costs due to differences between the two
agencies' approaches. To the extent that any such differences remain,
should the Commission consider, for any firm dually-registered as both
an SBS Entity and Swap Entity (regardless of whether such firm is also
registered with the Commission as a broker-dealer or with the CFTC as a
futures commission merchant), permitting such firm to comply with
proposed Rule 15Fi-3 on an ongoing basis by complying with CFTC Rule
23.502, as if such rule applied to security-based swaps? If so, what
conditions, if any, should be placed on such reliance?
     Should SBS dealers and major SBS participants be treated
the same for purposes of the portfolio reconciliation requirements in
proposed Rule 15Fi-3? Why or why not?

C. Rule 15Fi-4 (Portfolio Compression)

1. Overview of Portfolio Compression
    Portfolio compression generally refers to a post-trade processing
exercise that allows two or more market participants to eliminate
redundant derivatives transactions within their portfolios in a manner
that does not change their net exposure. Compression exercises
typically take place in ``cycles,'' whereby each participating
counterparty designates particular contracts within its portfolio as
being eligible for compression and specifies its risk tolerances with
respect to the composition of its derivatives portfolio following
completion of the cycle.\60\ Following an analysis of the submitted
contracts, counterparties may be provided with the option of
terminating or modifying those contracts and replacing them with a
smaller number of substantially similar contracts. In most cases, the
gross notional value of the replacement and remaining contracts is
reduced, although the counterparty's net exposure typically remains the
same.\61\
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    \60\ See, e.g., ISDA Study, Interest Rate Swaps Compression: A
Progress Report, (Feb. 2012), available at: http://www2.isda.org/attachment/NDAzMw==/IRS%20compression%20progress%20report%20-%20Feb%202012.pdf.
    \61\ In 2011, the Commission issued an order granting temporary
exemptions from the requirement to register as a clearing agency
under Section 17A of the Exchange Act for entities providing certain
clearing services for security-based swaps including, among other
things, tear-up and compression services. That order contains
general descriptions of the portfolio compression process, based on
discussions between Commission staff and market participants prior
to the issuance of the exemptive order. 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 (Jul. 1, 2011), 76 FR 39963 (Jul. 7, 2011) (``Clearing
Services Exemptive Order'').
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    By reducing the total number of open contracts, portfolio
compression is intended to help market participants manage their post-
trade risks in a number of important ways. For example, two or more
counterparties

that are active in the OTC derivatives markets might have built up
positions in the same (or comparable) products that, when analyzed at
the portfolio level across all applicable counterparties, offset each
other. Eliminating these offsetting and redundant uncleared derivatives
transactions through compression--as measured both by the number of
contracts and total notional value--reduces a market participant's
gross exposure to its direct counterparties, including by eliminating
all exposure to certain counterparties.\62\ Reducing the total number
of outstanding contracts within a derivatives portfolio also provides
important operational benefits and efficiencies for market participants
in that there are fewer open contracts to manage, maintain, and settle,
resulting in fewer opportunities for processing errors, failures, or
other problems that could develop throughout the lifecycle of a
transaction.\63\ Accordingly, the Commission preliminarily believes
that the use of portfolio compression by SBS Entities, where
appropriate given the circumstances (and to the extent that such
activity is not already occurring), should provide important processing
improvements consistent with the overall framework of Section 15F(i) of
the Exchange Act.\64\
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    \62\ See Darrell Duffie, Ada Li, and Theo Lubke, Policy
Perspectives of OTC Derivatives Market Infrastructure, FRBNY Staff
Report No. 424, dated Jan. 2010, as revised Mar. 2010, available at:
http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``FRBNY
OTC Derivatives Report'') (``In some types of derivatives that are
not cleared, major market participants tend to build offsetting
positions with different counterparties, long with one set of
counterparties, and short with the others. In many cases, these
offsetting positions are redundant. They serve no useful business
purpose and create counterparty risk. Market participants should
continue to engage in regular market-wide portfolio compression
exercises in order to eliminate these redundant positions.''). See
also, John Kiff, et al., Credit Derivatives: Systemic Risks and
Policy Options, IMF Working Paper No. 254 (Nov. 2009), available at:
http://www.imf.org/external/pubs/ft/wp/2009/wp09254.pdf
(``Multilateral netting, typically operationalized via `tear-up' or
`compression' operations that eliminate redundant contracts, reduces
both individual and system counterparty credit risk.'').
    \63\ See Portfolio compression platform launched to reduce CDS
operational risk, Hedgeweek (Sept. 8, 2008) (explaining that a
portfolio compression platform ``reduces operational risk while
leaving market risk profiles unchanged,'' which is achieved ``by
terminating existing trades and replacing them with a smaller number
of new replacement trades that carry the same risk profile and cash
flows as the initial portfolio but have less capital exposure'').
    \64\ See 15 U.S.C. 78o-8 (requiring SBS Entities to ``conform
with such standards as may be prescribed by the Commission, by rule
or regulation, that relate to timely and accurate confirmation,
processing, netting, documentation, and valuation of all security-
based swaps'').
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2. Scope of Proposed Rule 15Fi-4--Portfolio Compression Exercises
    For purposes of proposed Rule 15Fi-4 under the Exchange Act, the
phrase ``portfolio compression exercise'' would generally refer to an
exercise by which security-based swap counterparties wholly terminate
or change the notional value of some or all of the security-based swaps
submitted by the counterparties for inclusion in the portfolio
compression exercise and, depending on the methodology employed,
replace the terminated security-based swaps with other security-based
swaps whose combined notional value (or some other measure of risk) is
less than the combined notional value (or some other measure of risk)
of the terminated security-based swaps in the exercise.\65\ In order to
incorporate that concept into the proposal, the Commission is proposing
to amend Rule 15Fi-1 to create definitions for both ``bilateral
portfolio compression exercise'' \66\ and ``multilateral portfolio
compression exercise.'' \67\ These two definitions are nearly
identical, with the sole difference being that the former would apply
to a portfolio compression exercise that includes only two security-
based swap counterparties, while the latter would refer to a portfolio
compression exercise that includes more than two security-based swap
counterparties.\68\
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    \65\ The corresponding CFTC rule is 17 CFR 23.503. The structure
of the CFTC rule, including the subsections, mirrors the structure
of proposed Rule 15Fi-4.
    \66\ See proposed Rule 15Fi-1(a). The corresponding CFTC
definition is in 17 CFR 23.500(b).
    \67\ See proposed Rule 15Fi-1(j). The corresponding CFTC
definition is in 17 CFR 23.500(h).
    \68\ As noted below in Section I.C.4, proposed Rule 15Fi-4 is
applicable only to uncleared security-based swaps.
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    Under proposed Rule 15Fi-4(a), SBS Entities would be required to
establish, maintain, and follow written policies and procedures for
periodically engaging in both bilateral portfolio compression exercises
and multilateral portfolio compression exercises, in each case when
appropriate, with any counterparties that are SBS Entities.\69\ To the
extent that an SBS Entity transacts with counterparties that are not
SBS Entities, proposed Rule 15Fi-4(b) provides that the policies and
procedures required under the proposed rule would require that
portfolio compression exercises occur when appropriate \70\ and only to
the extent requested by any such counterparty.\71\
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    \69\ See proposed Rules 15Fi-4(a)(2) and (3).
    \70\ CFTC Rule 23.503(b), which is the corresponding CFTC
compression rule applicable to transactions with counterparties that
are not SBS Entities does not contain the caveat that the
compression or offset covered by the applicable policies and
procedures would only need to occur ``when appropriate.'' Rather, we
preliminarily believe it to be prudent to allow an SBS Entity to
engage in bilateral offset or compression exercises (to the extent
requested by its non-SBS Entity counterparty) only in circumstances
when doing so was appropriate for the SBS Entity in light of the
particular facts and circumstances involved, recognizing of course
that such discretion should not be used by the SBS Entity
arbitrarily not to honor the request by its counterparty. Below we
solicit comment on this difference.
    \71\ See proposed Rule 15Fi-4(b). As we noted in discussing the
proposed portfolio reconciliation requirements, the Commission
preliminarily believes it to be appropriate to impose more
prescriptive requirements in cases where both entities are subject
to the SEC's requirements for registered entities.
    \72\ The one exception to this statement is the requirement in
both proposed Rules 15Fi-4(a)(2) and (a)(3) that such policies and
procedures address the evaluation of portfolio compression exercises
that are initiated, offered, or sponsored by any third party. The
Commission preliminarily believes that the decision of which party
to use (or not use) to conduct a compression exercise is of critical
importance to the overall determination of whether to participate in
compression. Although the Commission takes no position with respect
to the type or identity of the party used to conduct a compression
exercise, we recognize that a number of parties are currently
offering such services, including third-party vendors and some self-
regulatory organizations (e.g., clearing agencies). The Commission
also understands that there may be some instances where compression
could be performed without the use of a third-party service
provider.
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    The proposed definitions of ``bilateral portfolio compression
exercise'' and ``multilateral portfolio compression exercise'' are
designed to be sufficiently broad as to provide market participants
with maximum flexibility when complying with proposed Rule 15Fi-4,
while also retaining the key elements necessary to achieve the
important risk reducing benefits previously discussed--namely the
reduction of counterparty and operational risk achieved by terminating
offsetting security-based swap transactions. Accordingly, we are not
proposing specific requirements as to the contents of the policies and
procedures created to comply with these rules.\72\ In addition, for
consistency with the rules applicable to Swap Entities, these
definitions are substantively identical to the CFTC's corresponding
definitions, which we preliminarily believe are appropriately scoped
and clear for purposes of proposed Rule 15Fi-4.

    Rather, the Commission recognizes that a decision to engage in a
process that could ultimately result in the termination or modification
of existing contracts, and the potential entry into new ones, should be
made in accordance with policies and procedures that are tailored to
the specific risks and operations of the relevant SBS Entity. Such
policies and procedures should, in the Commission's view, be permitted
to take into account the specific risk tolerances of the regulated
entity, including with respect to such areas as operational, funding,
liquidity, and credit risk, and also reflect the possibility that firms
may have legitimate business reasons for maintaining certain offsetting
security-based swap positions, even if in theory they could be
compressed.
    For example, the Commission understands that an SBS Entity might be
unable to participate in a particular portfolio compression exercise
that could result in it transacting with certain counterparties (e.g.,
because a counterparty poses an unacceptable level of credit risk), or
in certain types of transactions. To the extent that such limitations
exist and are reflected in the policies and procedures required
pursuant to proposed Rules 15Fi-4(a) and (b), an SBS Entity would be in
compliance with the proposed rules so long as it follows those policies
and procedures, even if it determines not to engage in a particular
compression exercise.
    Finally, in comparing the requirements we are proposing today with
respect to bilateral and multilateral compression exercises with those
previously adopted by the CFTC, we note two differences that we believe
to be minor and technical in nature. First, CFTC Rule 23.503(a)(3)(i)
requires that any policies and procedures related to multilateral
portfolio compression address, among other things, participation in all
multilateral portfolio compression exercises required by CFTC
regulation or order. We have preliminarily determined not to include a
comparable requirement in proposed Rule 15Fi-4(a)(3). Although the
Commission would expect that any comprehensive policy or procedure
would, as a matter of course, reflect any applicable laws and
regulations expressly mandating participation in certain types of
portfolio compression exercises, there are currently no Commission
regulations or orders mandating participation in any particular type of
portfolio compression exercise, and we are reluctant to include a
requirement that could lead to confusion by suggesting that such
regulations or orders exist.
    Second, CFTC Rule 23.503(a)(3)(ii) requires that any policies and
procedures related to multilateral portfolio compression exercises
evaluate, among other things, any services that are initiated, offered,
or sponsored by any third party.\73\ The CFTC did not, however, include
such a requirement in the corresponding requirement related to policies
and procedures addressing bilateral portfolio compression
exercises.\74\ Although the inclusion of a specific requirement in the
rule should not be interpreted as creating an exhaustive list of what
we would expect to see included in the policies and procedures, we
understand that bilateral portfolio compression services are currently
being offered by third-party vendors. Evaluating those services would
seem to be a natural part of the process of broadly analyzing the
applicability of bilateral compression in general. Therefore, we are
proposing to expressly include a similar requirement in both proposed
Rules 15Fi-4(a)(2) (policies and procedures regarding bilateral
compression) and 15Fi-4(a)(3) (policies and procedures regarding
multilateral compression).
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    \73\ See 17 CFR 23.503(a)(3)(ii).
    \74\ See 17 CFR 23.503(a)(2).
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3. Scope of Proposed Rule 15Fi-4--Bilateral Offset
    As we previously noted, the Commission has preliminarily made the
determination not to suggest a preference as to the use of any
particular type of compression, or as to the type or identity of the
party conducting the exercise and has, instead, proposed broad
definitions of the terms ``bilateral portfolio compression exercise''
and ``multilateral portfolio compression exercise.'' In addition, the
Commission recognizes that there may be other ways for market
participants to reduce the size of their derivatives portfolios that
may not be considered to be ``portfolio compression exercises'' for
purposes of those two proposed definitions.
    In light of those considerations, proposed Rule 15Fi-4(a)(1) would
require each SBS Entity to establish, maintain, and follow written
policies and procedures for terminating each ``fully offsetting
security-based swap'' that it maintains with another SBS Entity in a
timely fashion, when appropriate.\75\ To the extent that an SBS Entity
transacts with a counterparty that is not an SBS Entity, the
requirements of proposed Rule 15Fi-4(b) would be identical to those in
proposed Rule 15Fi-4(a)(1), except that the required policies and
procedures would only need to address engaging in bilateral offset when
appropriate and to the extent requested by the counterparty. The
Commission preliminarily believes that by not proposing prescriptive
requirements as to the form of bilateral offset that would need to be
reflected in an SBS Entity's policies and procedures, the proposed rule
would allow the counterparties flexibility in the manner in which they
reduce the size of their security-based swap portfolios in light of
each counterparty's unique risks and operations.
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    \75\ The Commission also is proposing to amend Rule 15Fi-1 to
add the term ``fully offsetting security-based swaps,'' which would
be defined as ``security-based swaps of equivalent terms where no
net cash flow would be owed to either counterparty after the offset
of payment obligations thereunder.'' See proposed Rule 15Fi-1(h).
For consistency with the rules applicable to Swap Entities, this
definition is substantively identical to the CFTC's corresponding
definition in 17 CFR 23.500(f), which we preliminarily believe is
appropriately scoped and clear for purposes of proposed Rule 15Fi-4.
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    In addition, the proposed rules regarding bilateral offset have
been designed to reflect the Commission's understanding that firms may
have legitimate business reasons for maintaining fully offsetting
security-based swap transactions. As such, proposed Rules 15Fi-4(a)(1)
and (b) would require a firm's policies and procedures to address the
termination of fully offsetting security-based swaps only ``when
appropriate.''
    Finally, for purposes of proposed Rules 15Fi-4(a)(1) and (b), the
Commission would generally consider an SBS Entity to have terminated
each fully offsetting security-based swap in a ``timely fashion'' so
long as (1) termination of the offsetting security-based swaps occurs
within a period that is reasonable in light of the circumstances of
each particular transaction and (2) the relevant SBS Entity is
otherwise in compliance with its policies and procedures regarding
bilateral offset.
4. Application of Proposed Rule 15Fi-4 to Cleared Security-Based Swaps
    Pursuant to proposed Rule 15Fi-4(c), the new requirements regarding
portfolio compression would not apply to a ``clearing transaction''
which, pursuant to existing Rule 15Fi-1(c) under the Exchange Act, is
defined as a security-based swap that has a clearing agency as a direct
counterparty.\76\ Notwithstanding this provision, the Commission
recognizes that portfolio compression is not limited to uncleared

swaps and that compression services may be offered either by a clearing
agency itself or by a third-party vendor that works collaboratively
with the clearing agency.\77\ Although the risk-reducing benefits that
could be realized through the compression of cleared security-based
swaps, we preliminarily believe that the issue of whether and when
compression should occur within a clearing agency is best addressed by
the rules governing the clearing agency's risk management practices, as
well as by the documentation governing the relationship between the
clearing agency and its members.\78\
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    \76\ See supra note 58 and accompanying text.
    \77\ Notwithstanding the applicability of the requirements of
proposed Rule 15Fi-4, the Commission reminds any third parties
performing compression or offset services to keep in mind any
potential requirements under other provisions of the securities
laws. For example, the Commission has stated that the provision of
tear-up and compression services for security-based swaps would
qualify these participants as clearing agencies and therefore
trigger the statutory requirement to register as clearing agencies
pursuant to Section 17A of the Exchange Act, absent exemptive relief
(which the Commission provided on a conditional temporary basis in
July 2011). See Clearing Services Exemptive Order, 76 FR at 39964.
    \78\ The corresponding CFTC rule is 17 CFR 23.503(c).
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5. Comments Requested
    The Commission generally requests comments on all aspects of
Proposed Rule 15Fi-4 (and any related definitions). In addition, the
Commission requests comments on the following specific issues:
     Do commenters agree with the scope of the Commission's
approach of proposing broad definitions of ``bilateral portfolio
compression exercise'' and ``multilateral portfolio compression
exercise''? Why or why not?
     Should SBS Entities be required to have policies and
procedures in place for terminating fully offsetting security-based
swaps in a timely fashion? Why or why not? Do you agree with the
proposed interpretation of the term ``timely fashion'' to mean that the
relevant security-based swaps should be terminated within a period that
is reasonable in light of the circumstances of each particular
transaction (so long as the relevant SBS Entity is otherwise in
compliance with its policies and procedures regarding bilateral
offset)? Why or why not? Should the Commission instead specify a fixed
period of time for the required termination of these security-based
swaps? Why or why not?
     With respect to any Swap Entity that could potentially
register with the Commission as an SBS Entity, would the portfolio
compression protocols (or any other applicable documentation) already
in existence with respect to CFTC Rule 23.503 satisfy the requirements
in proposed Rule 15Fi-4? Why or why not? Should proposed Rule 15Fi-4 be
modified to account for the way that market participants have designed
their existing protocols (or any other applicable documentation) to be
compliant with the CFTC's rules? Why or why not? For the purposes of
compliance with the proposed portfolio compression rules, should the
Commission allow compliance with the CFTC's parallel requirements for
some period of time to allow dual SEC-CFTC registrants to conform their
existing portfolio compression protocols (or any other applicable
documentation) following the adoption of proposed Rule 15Fi-4? If so,
on what factors should that reliance be conditioned and how long of a
compliance period should be provided? In the alternative, should the
Commission delay compliance with, or establish phased compliance
deadlines for, some or all of these requirements? Please explain the
nature of any compliance challenges (including any additional
documentation requirements), and the basis for any suggested compliance
period.
     As previously noted, proposed Rule 15Fi-4 has been
designed to be as consistent as possible with CFTC Rule 23.503, which
imposes portfolio compression requirements on Swap Entities, in order
to avoid requiring dual SEC-CFTC registrants to incur additional
systems or compliance costs due to differences between the two
agencies' approaches. To the extent that any such differences remain,
should the Commission consider, for any firm dually-registered as both
an SBS Entity and Swap Entity (regardless of whether such firm is also
registered with the Commission as a broker-dealer or with the CFTC as a
futures commission merchant), permitting such firm to comply with
proposed Rule 15Fi-4 on an ongoing basis by complying with CFTC Rule
23.503, as if such rule applied to security-based swaps? If so, what
conditions, if any, should be placed on such reliance?
     Do commenters agree with the proposed exception from the
compression requirements in proposed Rule 15Fi-4 for clearing
transactions? Why or why not? Because the definition of ``clearing
transactions'' only includes transactions cleared at a clearing agency
registered with the Commission pursuant to Section 17A of the Exchange
Act, security-based swaps cleared at a foreign clearing agency that is
not registered with the Commission would not be deemed to be
``cleared'' for these purposes, and would therefore be subject to
proposed Rule 15Fi-4. Should the Commission modify the scope of the
exception for cleared security-based swaps, such as by including
transactions that are cleared at a clearing agency that is not
registered with the Commission pursuant to Section 17A of the Exchange
Act, whether because of an applicable exemption from registration or
because the Exchange Act does not cover the activities of the clearing?
Why or why not?
     Proposed Rule 15Fi-4(b) requires each SBS Entity to
establish, maintain, and follow written policies and procedures for
periodically terminating fully offsetting security-based swaps and for
engaging in bilateral or multilateral portfolio compression exercises
with respect to security-based swaps in which its counterparty is an
entity other than an SBS Entity, ``when appropriate'' and to the extent
requested by any such counterparty. CFTC Rule 23.503(b) does not
contain the ``when appropriate'' qualifier and provides only that a
Swap Entity's policies and procedures address engaging in bilateral
offset or compression exercises ``to the extent requested'' by a
counterparty that is not a Swap Entity. Would the Commission's proposed
approach create any practical difficulties for dual SEC-CFTC
registrants? If so, what are they? Should the Commission instead strike
the ``when appropriate'' qualifier in order to mirror the corresponding
CFTC requirement? Why or why not? To the extent that the Commission
were to follow the approach of CFTC Rule 23.503(b), should there be a
reasonableness standard to address situations when a request by a non-
SBS Entity counterparty to engage in bilateral offset or compression
exercises would be not be reasonable, such as a situation when doing so
could be detrimental to the SBS Entity? If so, under what conditions
should an SBS Entity be able to refuse a request from a non-SBS Entity
counterparty to engage in such activity pursuant to proposed Rule 15Fi-
4(b)?
     What practices, if any, are currently being used (or are
currently under consideration) by market participants with respect to
the use of portfolio compression across asset classes? For example,
could a compression exercise occur with respect to two or more
counterparties maintaining portfolios of both single-name credit
default swaps (``CDS'') and index CDS? If so, should the Commission
modify proposed Rule 15Fi-4, or provide related interpretive guidance
to accommodate portfolio compression across asset classes?

     Should SBS dealers and major SBS participants be treated
the same for purposes of the portfolio compression requirements in
proposed Rule 15Fi-4? Why or why not?

D. Rule 15Fi-5 (Trading Relationship Documentation)

1. Overview of Trading Relationship Documentation
    Section 15F(i)(2) of the Exchange Act provides that the Commission
shall adopt rules governing documentation standards for SBS Entities.
Just as portfolio reconciliation is designed to allow counterparties to
manage their internal risks by better ensuring agreement with respect
to the terms of the transaction (and thereby avoiding complications at
various points throughout the life of the transaction),\79\ requiring
each SBS Entity to document the terms of the trading relationship with
each of its counterparties before executing a new security-based swap
transaction should promote sound collateral and risk management
practices by enhancing transparency and legal certainty regarding each
party's rights and obligations under the transaction. This, in turn,
should help to reduce counterparty credit risk and promote certainty
regarding the agreed-upon valuation and other material terms of a
security-based swap.\80\ Having adequate written documentation prior
to, or contemporaneously with, executing a security-based swap should
also facilitate the ability of the counterparties to engage in
portfolio reconciliation, as would be required under these proposed
rules, in an efficient and cost-effective manner.
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    \79\ See supra Section I.B.1.
    \80\ See, e.g., Sylvie A. Durham, Terminating Derivatives
Transactions: Risk Mitigation and Close-Out Netting Sec.  8:1 (Nov.
2010) (``[L]egal contractual provisions are the foundation on which
the rights and obligations of the parties are based, and sound
collateral and risk management practices may be ineffective if the
legal rights of the parties are not clearly set forth.'').
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2. Scope of Proposed Rule 15Fi-5
    In light of the important risk mitigating factors described above,
the Commission is proposing Rule 15Fi-5, which establishes certain
requirements for SBS Entities related to the use of written trading
relationship documentation in connection with their security-based swap
transactions.\81\ Specifically, proposed Rule 15Fi-5(a)(2) would
require each SBS Entity to establish, maintain, and follow written
policies and procedures reasonably designed to ensure that it executes
written security-based swap trading relationship documentation with
each of its counterparties prior to, or contemporaneously with,
executing a security-based swap with any counterparty.\82\ The proposed
rule would further require that the policies and procedures required
thereunder be approved in writing by a senior officer of the SBS
Entity, and that a record of the approval be retained.\83\
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    \81\ The corresponding CFTC rule is 17 CFR 23.504. The structure
of the CFTC rule, including the subsections, mirrors the structure
of proposed Rule 15Fi-5.
    \82\ Among other exceptions discussed below in Section I.D.6,
proposed Rule 15Fi-5 is applicable only to uncleared security-based
swaps.
    \83\ See proposed Rule 15Fi-5(b)(2). For purposes of this
requirement, the Commission preliminarily views the term ``senior
officer'' as covering only the most senior executives in the
organization, such as a firm's chief executive officer, chief
financial officer, chief legal officer, chief compliance officer,
president, or other person at a similar level. This approach is
similar to how the Commission has previously interpreted the term in
the context of other requirements applicable to SBS Entities. See
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48964, 48968 n. 29 (Aug.14, 2015) (``SBS
Entity Registration Adopting Release''). By contrast, CFTC Rule
23.504 uses the term ``senior management,'' which is not further
defined in either CFTC Rules 23.500 or 23.504. We preliminarily view
this difference as a clarification and do not believe that it
represents a substantive difference between the two sets of rules,
but below we solicit comment on this issue.
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    Pursuant to proposed Rule 15Fi-5(b)(1), the required policies and
procedures would require that the security-based swap trading
relationship documentation be in writing. The policies and procedures
would also require that the documentation include all terms governing
the trading relationship between the SBS Entity and its counterparty,
including, without limitation, terms addressing payment obligations,
netting of payments, events of default or other termination events,
calculation and netting of obligations upon termination, transfer of
rights and obligations, allocation of any applicable regulatory
reporting obligations (including pursuant to Regulation SBSR),
governing law, valuation, and dispute resolution.\84\
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    \84\ We note that CFTC Rule 23.504 does not contain a comparable
provision to the requirement in proposed Rule 15Fi-5(b)(1) that the
trading relationship documentation address ``applicable regulatory