[Federal Register Volume 76, Number 39 (Monday, February 28, 2011)]
[Proposed Rules]
[Pages 10948-11070]
[FR Doc No: 2011-2696]

Vol. 76

Monday,

No. 39

February 28, 2011

Part II

Securities and Exchange Commission

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17 CFR Parts 240, 242, and 249

Registration and Regulation of Security-Based Swap Execution
Facilities; Proposed Rule

Federal Register / Vol. 76 , No. 39 / Monday, February 28, 2011 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

[Release No. 34-63825; File No. S7-06-11]
RIN 3235-AK93

Registration and Regulation of Security-Based Swap Execution
Facilities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; proposed interpretation.

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SUMMARY: In accordance with Section 763 (``Section 763'') of Title VII
(``Title VII'') of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), the Securities and
Exchange Commission (``SEC'' or ``Commission'') is proposing Regulation
SB SEF under the Securities Exchange Act of 1934 (``Exchange Act'')
that is designed to create a registration framework for security-based
swap execution facilities (``SB SEFs''); establish rules with respect
to the Dodd-Frank Act's requirement that a SB SEF must comply with the
fourteen enumerated core principles (``Core Principles'') and enforce
compliance with those principles; and implement a process for a SB SEF
to submit to the Commission proposed changes to the SB SEF's rules. The
Commission also is proposing an interpretation of the definition of
``security-based swap execution facility'' set forth in Section
3(a)(77) of the Exchange Act to provide guidance on the characteristics
of those systems or platforms that would satisfy the statutory
definition. In addition, the Commission is proposing to amend Rule 3a-1
under the Exchange Act to exempt a registered SB SEF from the Exchange
Act's definition of ``exchange'' and to add Rule 15a-12 under the
Exchange Act to exempt, subject to certain conditions, a registered SB
SEF from regulation as a broker pursuant to Section 15(b) of the
Exchange Act.

DATES: Comments should be submitted on or before April 4, 2011.

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 e-mail to<EMAIL_ADDRESS>Please include
File Number S7-06-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F St., NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-11. This file number
should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St., NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.

FOR FURTHER INFORMATION CONTACT: Nancy J. Burke-Sanow, Assistant
Director, at<PHONE_NUMBER>; David Liu, Senior Special Counsel, at
(312) 353-6265; Constance Kiggins, Special Counsel,<PHONE_NUMBER>;
Molly Kim, Special Counsel, at<PHONE_NUMBER>; Leah Mesfin, Special
Counsel, at<PHONE_NUMBER>; Susie Cho, Special Counsel, at (202) 551-
5639; Michou Nguyen, Special Counsel,<PHONE_NUMBER>; Heidi Pilpel,
Special Counsel,<PHONE_NUMBER>; Steven Varholik, Special Counsel, at
(202) 551-5615; Sarah Schandler, Special Counsel, at<PHONE_NUMBER>;
and Iliana Lundblad, Attorney, at<PHONE_NUMBER>; Office of Market
Supervision, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing new Regulation
SB SEF under the Exchange Act governing the registration and regulation
of SB SEFs, an interpretation with respect to the definition of a SB
SEF and new Form SB SEF for applicants to register with the Commission
as SB SEFs. The Commission also is proposing certain exemptions to
facilitate the trading of security-based swaps (``SB swaps'') on SB
SEFs.

I. Introduction

    On July 21, 2010, the President signed the Dodd-Frank Act into
law.\1\ The Dodd-Frank Act was enacted, among other things, to promote
the financial stability of the United States by improving
accountability and transparency of the nation's financial system.\2\
Title VII of the Dodd-Frank Act provides the Commission and the
Commodity Futures Trading Commission (``CFTC'') with the authority to
regulate over-the-counter (``OTC'') derivatives in light of the recent
financial crisis, which demonstrated the need for enhanced regulation
of the OTC derivatives market. The Dodd-Frank Act is intended to
strengthen the existing regulatory structure concerning, and to provide
the Commission and the CFTC with effective regulatory tools to oversee,
the OTC swaps markets, which have grown exponentially in recent years
and are capable of affecting significant sectors of the U.S. economy.
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Pub. L. 111-203, H.R. 4173).
    \2\ See Public Law 111-203 Preamble.
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    The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps,'' and the CFTC and
the Commission will jointly regulate ``mixed swaps.'' \3\ The Dodd-
Frank Act amends

the Exchange Act to require, among other things, the following with
respect to transactions in SB swaps regulated by the Commission: (1)
Transactions in SB swaps must be cleared through a clearing agency if
they are of a type that the Commission determines must be cleared,
unless an exemption from mandatory clearing applies; \4\ (2) if the SB
swap is subject to the clearing requirement, the transaction must be
executed on an exchange or on a SB SEF registered under Section 3D of
the Exchange Act or a SB SEF exempt from registration under Section
3D(e) of the Exchange Act, unless no SB SEF or exchange makes such SB
swap available for trading or the SB swap transaction is subject to the
clearing exception in Section 3C(g) of the Exchange Act; \5\ and (3)
transactions in SB swaps (whether cleared or uncleared) must be
reported to a registered security-based swap data repository (``SDR'')
or the Commission.\6\
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    \3\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board of Governors
of the Federal Reserve System (``Federal Reserve''), shall further
define the terms ``swap,'' ``security-based swap,'' ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' ``eligible contract
participant,'' and ``security-based swap agreement.'' These terms
are defined in Sections 721 and 761 of the Dodd-Frank Act and, with
respect to the term ``eligible contract participant,'' in Section
1a(18) of the Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(18), as
re-designated and amended by Section 721 of the Dodd-Frank Act.
Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to
adopt a rule to further define the terms ``swap,'' ``swap dealer,''
``major swap participant,'' and ``eligible contract participant'' to
include transactions and entities that have been structured to evade
Title VII of the Dodd-Frank Act. Section 761(b) of the Dodd-Frank
Act provides that the Commission may adopt a rule to further define
the terms ``security-based swap,'' ``security-based swap dealer,''
``major security-based swap participant,'' and ``eligible contract
participant,'' with regard to security-based swaps, for the purpose
of including transactions and entities that have been structured to
evade Title VII of the Dodd-Frank Act. Finally, Section 712(a) of
the Dodd-Frank Act provides that the Commission and CFTC, after
consultation with the Federal Reserve, shall jointly prescribe
regulations regarding ``mixed swaps,'' as may be necessary to carry
out the purposes of Title VII. To assist the Commission and the CFTC
in further defining the terms specified above, and to prescribe
regulations regarding ``mixed swaps'' as may be necessary to carry
out the purposes of Title VII, the Commission and the CFTC have
sought comment from interested parties. See Securities Exchange Act
Release Nos. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010) (File No. S7-39-10) (proposed rulemaking regarding definitions
contained in Title VII of the Dodd-Frank Act relating to
participants). The Commission also will propose rules regarding
definitions contained in Title VII of the Dodd-Frank Act relating to
products in a separate proposed rulemaking. See also Securities
Exchange Act Release No. 62717 (August 13, 2010), 75 FR 51429
(August 20, 2010) (File No. S7-16-10) (advance joint notice of
proposed rulemaking regarding definitions contained in Title VII of
the Dodd-Frank Act).
    \4\ See Public Law 111-203, Sec.  763(a) (adding Section
3C(a)(1) of the Exchange Act).
    \5\ See Public Law 111-203, Sec.  763(a) (adding Section 3C(h)
of the Exchange Act). See also Public Law 111-203, Sec.  761(a)
(adding Section 3(a)(77) of the Exchange Act), defining the term
``security-based swap execution facility.'' The Dodd-Frank Act
amends the CEA to provide for a similar regulatory framework with
respect to transactions in swaps regulated by the CFTC.
    \6\ See Public Law 111-203, Sec.  761(a)(75) (adding Section
3(a)(75) of the Exchange Act) (defining the term ``security-based
swap data repository''). The registration of an SDR and the
reporting of SB swaps are the subject of separate Commission
rulemakings. See Securities Exchange Act Release Nos. 63347
(November 19, 2010), 75 FR 77306 (December 10, 2010) (File No. S7-
35-10) (``SDR Release'') and 63346 (November 19, 2010), 75 FR 75208
(December 2, 2010) (File No. S7-34-10) (``Reporting and
Dissemination Release'').
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II. Regulatory Framework of Security-Based Swap Execution Facilities

    Currently, SB swaps trade in the OTC market, rather than on
regulated markets. Although some SB swaps have moved to centralized
clearing, prior to the enactment of the Dodd-Frank Act, centralized
clearing of SB swaps was not required. The current market for SB swaps
is opaque, with little, if any, pre-trade transparency (the ability of
market participants to see trading interest prior to a trade being
executed) or post-trade transparency (the ability of market
participants to see transaction information after a trade is executed).
A key goal of the Dodd-Frank Act is to bring trading of SB swaps onto
regulated markets,\7\ as reflected in the statutory requirement that,
subject to certain exceptions, any SB swap subject to mandatory
clearing must be traded on a SB SEF or an exchange, unless no SB SEF or
exchange makes such SB swap available for trading.
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    \7\ See Public Law 111-203, preamble.
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    Section 763 of the Dodd-Frank Act amends the Exchange Act by adding
various new statutory provisions to govern the regulation of SB
SEFs.\8\ Section 3C(h) of the Exchange Act specifies that transactions
in SB swaps that are subject to the clearing requirement of Section
3C(a)(1) of the Exchange Act must be executed on an exchange or on a SB
SEF registered with the Commission (or a SB SEF exempt from
registration), unless no exchange or SB SEF makes the SB swap available
to trade (referred to as the ``mandatory trade execution requirement'')
or the SB swap transaction is subject to the clearing exception in
Section 3C(g) of the Exchange Act (``end-user exception'').\9\ Further,
Section 3D(a)(1) of the Exchange Act states that no person may operate
a facility for the trading or processing of SB swaps, unless the
facility is registered as a SB SEF or as a national securities exchange
under that section.\10\ Under Section 3D(b) of the Exchange Act, a SB
SEF registered with the Commission may make SB swaps available for
trading and facilitate trade processing of SB swaps.\11\ Section 3D(c)
of the Exchange Act requires a national securities exchange, to the
extent it also operates a SB SEF and uses the same electronic trade
execution system for listing and executing trades in SB swaps, to
identify whether electronic trading of SB swaps is taking place on or
through the exchange or the SB SEF.\12\
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    \8\ See Public Law 111-203, Sec.  763 (adding Sections 3C and 3D
of the Exchange Act).
    \9\ See Public Law 111-203, Sec.  763 (adding Section 3C(h) of
the Exchange Act).
    \10\ See Public Law 111-203, Sec.  763(a) (adding Section
3D(a)(1) of the Exchange Act). The Commission views this requirement
as applying only to facilities that meet the definition of
``security-based swap execution facility'' in Section 3(a)(77) under
the Exchange Act. SB swaps that are not subject to the mandatory
trade execution requirement would not have to be traded on a
registered SB SEF and could be traded in the over-the-counter
(``OTC'') market for SB swaps.
    \11\ See Public Law 111-203, Sec.  763(c) (adding Section 3D(b)
of the Exchange Act).
    \12\ See Public Law 111-203, Sec.  763(c) (adding Section 3D(c)
of the Exchange Act).
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    Section 3D(d) of the Exchange Act specifies that to be registered
and maintain registration, a SB SEF must comply with fourteen Core
Principles enumerated therein and any requirement that the Commission
may impose by rule or regulation.\13\ The Core Principles applicable to
SB SEFs are captioned: (1) Compliance with Core Principles; (2)
Compliance with Rules; (3) Security-Based Swaps Not Readily Susceptible
to Manipulation; (4) Monitoring of Trading and Trade Processing; (5)
Ability to Obtain Information; (6) Financial Integrity of Transactions;
(7) Emergency Authority; (8) Timely Publication of Trading Information;
(9) Recordkeeping and Reporting; (10) Antitrust Considerations; (11)
Conflicts of Interest; (12) Financial Resources; (13) System
Safeguards; and (14) Designation of Chief Compliance Officer.\14\ As a
result, a registered SB SEF would have certain regulatory obligations
with respect to overseeing its market and the participants that trade
on its facility. Further, Section 3D(f) of the Exchange Act states that
the Commission shall prescribe rules governing the regulation of SB
SEFs.\15\ Finally, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\16\
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    \13\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(1)(A) of the Exchange Act).
    \14\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(1)-(14) of the Exchange Act).
    \15\ See Public Law 111-203, Sec.  763(c) (adding Section 3D(f)
of the Exchange Act).
    \16\ See Public Law 111-203, Sec.  761(a) (adding Section
3(a)(77) of the Exchange Act).
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    As regulated markets for the trading of SB swaps, SB SEFs, as well
as exchanges that post or trade SB swaps (``SBS exchanges''), are
intended to play an important role in enhancing the transparency and
oversight of the market for SB swaps. SB SEFs should help further the
statutory objective of greater transparency and a more competitive
environment for the trading of SB swaps by providing a venue for
multiple parties to execute trades in SB swaps and also by serving as a
conduit for information regarding trading interest in SB swaps. As a
result of the Dodd-Frank Act's provisions relating to SB SEFs, the
Commission would have access to information on the trading of SB swaps
that occurs on SB SEFs and information regarding trading by their
participants. In addition, because SB SEFs would have certain
regulatory obligations arising from their Core

Principles, such as monitoring trading, assuring the ability to obtain
information, and establishing and enforcing rules and procedures to
ensure the financial integrity of SB swaps entered on or though the SB
SEF, these facilities can play an important role in helping to oversee
the market for SB swaps on an ongoing basis and allowing regulators to
quickly assess information regarding the potential for systemic risk
across trading venues.
    The Commission is mindful that any rules that the Commission may
adopt regarding the regulation of SB SEFs could impact the incentives
for existing or prospective platforms for the trading of SB swaps to
enter or withdraw from this market. On the other hand, the rules to be
adopted by the Commission for the trading of SB swaps should be
sufficient to fulfill the objectives of the Dodd-Frank Act to promote
financial stability and transparency. The Commission also is mindful
that, both over time and as a result of Commission proposals to
implement the Dodd-Frank Act, the further development of the SB swap
market may alter some of the specific calculus for future regulation of
SB SEFs.
    The Commission notes that the CFTC is proposing rules relating to
swap execution facilities (``SEFs'') as required under Section 733 of
the Dodd-Frank Act.\17\ Because there are differences between the
markets and products that the Commission and the CFTC currently
regulate, the approach that each agency may take regarding the
regulation of SB SEFs and SEFs, respectively, also may differ in
various respects. The Commission recognizes that commenters may respond
to the Commission's proposals by referring to the CFTC's proposals and
welcomes commenters' views and suggestions on the impact of any
differences between the Commission and CFTC approaches to the
regulation of SB SEFS and SEFs. The Commission is particularly
interested in whether its proposed rulemaking would result in any
duplicative or inconsistent efforts on the part of market participants
subject to both regulatory regimes or would result in gaps between
those regimes.
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    \17\ See Public Law 111-203, Sec.  733 (adding Section 5h of the
CEA). See also 76 FR 1214 (January 7, 2011) (``Notice of proposed
SEF rulemaking by the CFTC'').
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    Further, the Commission is aware that regulators in other countries
are considering reform of their swaps and derivatives markets and are
interested in achieving a consistent approach to swaps regulation
between the United States, Europe and other jurisdictions to mitigate
the risk of regulatory arbitrage.\18\ Although the Commission must be
guided by the requirements of the Dodd-Frank Act in crafting proposed
rules applicable to markets that trade SB swaps and the participants in
those markets, the Commission recognizes that the particular rules that
it may adopt under the Dodd-Frank Act may impact the incentives of
market participants with respect to where they choose to engage in the
trading of SB swaps.
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    \18\ See, e.g., Committee of European Securities Regulators
(``CESR''), CESR Technical Advice to the European Commission in the
context of the MiFID Review and Responses to the European Commission
for Additional Information, dated October 13, 2010, available at
http://www.cesr-eu.org/index.php?page=contenu_groups&id=61&docmore=1.
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    Commenters are urged to consider generally the role that regulation
may play in fostering or limiting the development of the market for SB
swaps (or, vice versa, the role that market developments may play in
changing the nature and implications of regulation) and specifically to
focus on this issue with respect to the proposals to establish a
framework for the trading of SB swaps. In addition, commenters are
urged to consider the effect of the Commission's proposals relating to
SB SEFs on the global swaps and derivatives markets and to offer
specific comments regarding how the proposals compare with the existing
or proposed regulations of other jurisdictions.

III. The Definition of Security-Based Swap Execution Facilities

    Since the enactment of the Dodd-Frank Act in July 2010, the
Commission has engaged in a number of outreach programs relating to the
legislation's rulemaking mandates, including trading of SB swaps on
regulated markets.\19\ On September 15, 2010, the staff of the
Commission and of the CFTC conducted a joint roundtable to discuss
issues related to the formation and regulation of SEFs and SB SEFs
(``Roundtable'').\20\ Topics discussed at the Roundtable included the
scope of the definition of a SEF and SB SEF; registration of these
facilities; products that would trade on a SEF and SB SEF; block
trades; access to SEFs and SB SEFs; and cross-market issues.\21\ The
purpose of the Roundtable was to provide a forum for the discussion of
these issues and to assist SEC and CFTC staff as they developed
proposed rules to meet the Dodd-Frank Act's mandate to bring the
trading of swaps and SB swaps subject to the mandatory clearing
requirement onto organized markets. Panelists at the Roundtable
provided comments on their experience with the current market structure
for the trading of swaps and SB swaps and offered their views and
suggestions on ways that that structure could change as a result of the
legislation. Pursuant to the Commission's outreach, a range of
individuals and entities, including swap dealers, brokers, end-users,
academics and others, have expressed their views on a variety of
topics, such as the scope of activities or the nature of platforms that
should fall within the statutory definition of ``security-based swap
execution facility.'' \22\
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    \19\ See, e.g., Implementing the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Transparency, Public Input on SEC
Regulatory Initiatives under the Dodd-Frank Act Title VII--Wall
Street Transparency and Accountability, Mandatory Exchange Trading
and Swap Execution Facilities, available at http://www.sec.gov/spotlight/dodd-frank.shtml.
    \20\ See Securities Exchange Release No. 62864 (September 8,
2010), 75 FR 55574 (September 13, 2010) (File No. 4-612). Webcast
available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
    \21\ See Press Release issued by the Commission on September 8,
2010, ``SEC, CFTC To Host Joint September Roundtables On Swap and
Security-Based Swap Matters'' (File No. 2010-166), available at
http://www.sec.gov/news/press/2010/2010-166.htm.
    \22\ See, e.g., http://www.sec.gov/spotlight/dodd-frank.shtml.
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    Many letters from market participants advocated for a flexible
interpretation of the statutory definition of SB SEF.\23\ In their
letters, they argued that the definition of SB SEF should permit many
different types of existing and new trading and execution
platforms.\24\ Certain market participants noted that the SB swap
market is more customized and illiquid than the cash equities market
and argued that a broad range of trading models would be necessary to
address the SB swap market's unique characteristics and to allow this
market to develop properly.\25\
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    \23\ See, e.g., letter from Ben Macdonald, Global Head Fixed
Income, Bloomberg LP, to Commission, dated September 22, 2010
(``Bloomberg Letter''), at 2; letter from Richard H. Baker,
President and CEO, Managed Funds Association, to Elizabeth M.
Murphy, Secretary, Commission, dated September 22, 2010 (``MFA
Letter''), at 16; letter from Ernest C. Goodrich, Jr., Managing
Director--Legal Department, and Marcelo Riffaud, Managing Director--
Legal Department, Deutsche Bank AG, to David A. Stawick, Secretary,
CFTC, and Elizabeth M. Murphy, Secretary, Commission, dated October
6, 2010 (``Deutsche Bank Letter''), at 5-6 and 8-9; and letter from
Larry Tabb, CEO and Founder, Andy Nybo, Head of Derivatives, and
Kevin C. McPartland, Senior Analyst, TABB Group, to Gary Gensler,
Chairman, CFTC, and Mary Schapiro, Chairman, Commission, dated
August 23, 2010 (``TABB Letter''), at 2.
    \24\ See, e.g., Bloomberg Letter, id., at 2; MFA Letter, id., at
16; and Deutsche Bank Letter, id., at 7.
    \25\ See, e.g., Bloomberg Letter, supra note 23, at 2, and
Deutsche Bank Letter, supra note 23, at 6-7. See also infra, Section
III.B for a discussion of the Commission's interpretation of the
definition of SB SEF.

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    Although many commenters who expressed a view regarding the
definition of SB SEF favored allowing multiple platforms,\26\ some
commenters expressed concern about some types of platforms that
potentially could meet the definition of SB SEF. One commenter believed
that allowing multiple request for quote (``RFQ'') platforms,\27\
without a price mechanism that aggregates prices across platforms, to
meet the definition of SB SEF, could lead to a fragmented market, which
could discourage competition.\28\ Another commenter suggested that
permitting an RFQ platform to be treated as a SB SEF could be viewed as
preserving the status quo of a dealer-dominated market and believed
that the Dodd-Frank Act envisioned that SB swaps would be traded on a
facility akin to a limit order book platform.\29\
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    \26\ See supra note 23 and accompanying text.
    \27\ In referring to a RFQ platform, the Commission means a
trading platform where a customer who wishes to execute a SB swap
disseminates a request for quote to one or more dealers and one or
more of those dealers respond to the request with an executable
quote.
    \28\ See, e.g., Commentary by S. ``Vish'' Viswanathan,
Professor, Fuqua School of Business, Duke University, at the
Roundtable. Webcast available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
    \29\ See Commentary by Heather Slavkin, Senior Legal Policy
Advisor for the Office of Investment, AFL-CIO, at the Roundtable.
Webcast available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml. See also infra, Section III.B discussing the
Commission's interpretation taking into account concerns raised by
commenters.
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    The Commission also received other specific views about platforms
that commenters believed should or should not be included in the
definition of SB SEF. For example, one commenter believed that
platforms that would not trade or execute SB swap transactions, such as
pure trade processing facilities, would not meet the statutory
definition of SB SEF.\30\ A market participant, however, stated that in
its view the statutory definition of SB SEF would encompass pure trade
processing facilities.\31\
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    \30\ See letter from Mark D. Young, Skadden, Arps, Slate,
Meagher & Flom LLP, to David A. Stawick, Secretary, CFTC, and
Elizabeth M. Murphy, Secretary, Commission, dated September 22,
2010, at 3.
    \31\ See Meetings with SEC Officials: Memorandum from the
Division of Trading and Markets regarding an August 25, 2010 Meeting
with representatives of MarkitSERV, dated September 2, 2010,
MarkitSERV PowerPoint Presentation, dated August 25, 2010 at p. 5-6,
available at http://www.sec.gov/comments/s7-16-10/s71610-96.pdf.
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    The information presented at the Roundtable and received from the
public has helped to inform the proposals relating to SB SEFs that are
part of this rulemaking. The Commission is mindful that there exists a
wide range of views on the part of market participants and others about
the nature of the activities or systems that would constitute, and the
scope of activities permitted by, a SB SEF and therefore encourages
interested persons to provide their views and suggestions, as well as
any materials or data to support their positions, on this aspect of the
proposed rulemaking. The Commission believes that the prudent course is
to take where appropriate a deliberate and attentive approach to its
regulation of SB SEFs that is informed by the state of development of
SB swap trading on regulated markets. The Commission emphasizes,
however, that any actions it may take now or in the future would be
designed to further the overall objectives of the Dodd-Frank Act.?>

A. Current SB Swap Market

1. Trading Models
    Unlike the markets for cash equity securities and listed options,
the market for SB swaps currently is characterized by bilateral
negotiation in the OTC swap market; is largely decentralized; many
instruments are not standardized; and many SB swaps are not centrally
cleared. The lack of uniform rules concerning the trading of SB swaps
and the one-to-one nature of trade negotiation in SB swaps has resulted
in the formation of distinct types of venues for the trading of these
securities, ranging from bilateral negotiations carried out over the
telephone, to single-dealer RFQ platforms, to multi-dealer RFQ
platforms, to central limit order books outside the United States, and
others, as more fully described below. The use of electronic media to
execute transactions in SB swaps varies greatly across trading venues,
with some venues being highly electronic whereas others rely almost
exclusively on non-electronic means such as the telephone. The reasons
for use of, or lack of use of, electronic media vary from such factors
as user preference to limitations in the existing infrastructure of
certain trading platforms. The description below of the ways in which
SB swaps may be traded is based in part on discussions with market
participants. The Commission solicits comments on the accuracy of this
description.
    The Commission uses the term ``bilateral negotiation'' to refer to
the model whereby one party uses the telephone, e-mail or other
communications to contact directly a potential counterparty to
negotiate a SB swap. Once the terms are agreed, the SB swap transaction
is executed and the terms are memorialized.\32\ In a bilateral
negotiation, there may be no pre-trade or post-trade transparency
available to the marketplace because only the two parties to the
transaction are aware of the terms of the negotiation and the final
terms of the agreement. Further, no terms of the proposed transaction
are firm until the transaction is executed. However, reputational costs
generally serve as a deterrent to either party's failing to honor any
quoted terms. Dealer to customer bilateral negotiation currently is
used for all SB swap asset classes, and particularly for trading in
less liquid SB swaps, in situations where the parties prefer a
privately negotiated transaction, such as in executing block trades, or
in other circumstances in which it is not cost effective for a party to
the trade to use one of the execution methods described below.
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    \32\ For further discussion, see, e.g., Securities Exchange Act
Release No. 63727 (January 14, 2011), 76 FR 3859 (January 21, 2011)
(proposing rules for the trade acknowledgement and verification of
security-based swaps).
---------------------------------------------------------------------------

    Another model for the trading of SB swaps is the single-dealer RFQ
electronic trading platform. In a single-dealer RFQ platform, a dealer
may post indicative quotes for SB swaps in various SB swap asset
classes that the dealer is willing to trade. Only the dealer's approved
customers would have access to the platform. When a customer wishes to
transact in a SB swap, the customer requests an executable quote, the
dealer provides one, and if customer accepts the dealer's quote, the
transaction is executed electronically. If the dealer repeatedly
responds to requests for executable quotes with quotes that are
significantly less favorable than the dealer's indicative quotes posted
on the single-dealer electronic trading platform, volume on the
platform presumably would diminish and participants may no longer
transact there. This type of platform generally provides pre-trade
transparency in the form of indicative quotes on a pricing screen, but
only from one dealer to its customer. Currently, there is no post-trade
reporting of transactions on single-dealer platforms and thus there is
no post-trade transparency.
    A variant of the single-dealer model is an aggregator-type platform
that combines two or more single-dealer RFQ platforms. In such a
platform, a customer who has access to the platform, which is
determined solely at the discretion of its operator and of the dealers
involved, may see indicative quotes from multiple dealers at once
instead of seeing quotes only from one

dealer as in the single-dealer RFQ platform. Although a participant can
simultaneously view quotes from multiple dealers, the participant can
request a firm quote from only one dealer at a time. One feature of the
aggregated single-dealer platform as compared to the bilateral
negotiation and single-dealer models described above is the ability of
a participant in the aggregated single-dealer platform to see
indicative quotes from multiple dealers. However, customers are not
afforded an opportunity to send RFQs to multiple dealers at the same
time to promote competitive pricing. Also, like the single-dealer
electronic platform, there is no post-trade reporting of transactions
and thus there is no post-trade transparency.
    A third model is the multi-dealer RFQ electronic trading
platform.\33\ In a multi-dealer RFQ system, a requester can send an RFQ
to solicit quotes on a certain SB swap from multiple dealers at the
same time. Currently, dealers on a multi-dealer RFQ platform generally
require the platform to set limits on the number of dealers to whom a
customer may send an RFQ, and also may limit which dealers may
participate on the platform. These platforms are sometimes owned by
dealers themselves. After the RFQ is submitted, the recipients have a
prescribed amount of time in which to respond to the RFQ with a quote.
Responses to the RFQ are firm. The requestor then has the opportunity
to review the responses and accept the best quote. A multi-dealer RFQ
platform provides a certain degree of pre-trade transparency, depending
on its characteristics. But to the extent that a requester is
restricted by platform rules to soliciting quotes from a limited number
of dealers, the customer's pre-trade transparency is restricted to that
number of quotes it receives in response to its RFQ. In some instances
requestors may prefer to limit the number of recipients of an RFQ as a
way to protect proprietary trading strategies as dissemination of their
interest to multiple dealers may increase hedging costs to dealers, and
thus costs to the requestors as reflected in the prices from the
dealers. Pre-trade transparency may also exist through the platform's
dissemination of composite indicative quotes to all participants prior
to trades. Post-trade transparency may exist if the platform chooses to
disseminate information regarding executed transactions.
---------------------------------------------------------------------------

    \33\ The single-dealer RFQ platform is an example of a system
that permits customers to submit an RFQ to a single dealer, which is
distinct from a multi-dealer RFQ platform that permits customers to
solicit quotes from multiple dealers simultaneously instead of one
dealer. The multi-dealer RFQ platform differs from a single-dealer
aggregator platform because a participant in the aggregated single-
dealer platform may only send a request to one dealer at a time and
thus would not have the ability to interact with the bids or offers
of multiple dealers simultaneously.
---------------------------------------------------------------------------

    A fourth model for the trading of SB swaps is a limit order book
system or similar system, which the Commission understands is not yet
in operation for the trading of SB swaps in the United States but
exists for the trading of SB swaps in Europe. Today, securities and
futures exchanges in the United States display a limit order book in
which firm bids and offers are posted for all participants to see, with
the identity of the parties withheld until a transaction occurs. Bids
and offers are then matched based on price-time priority or other
established parameters and trades are executed accordingly. The quotes
on a limit order book system are firm. A limit order book system may be
a more suitable model for the trading of more liquid, rather than less
liquid, SB swaps. In general, a limit order book system also provides
greater pre-trade transparency than the three platforms described above
because all participants can view bids and offers before placing their
bids and offers. However, broadly communicating trading interest,
particularly about a large trade, may increase hedging costs, and thus
costs to investors as reflected in the prices from the dealers. The
system can also provide post-trade transparency, to the extent that
participants can see the terms of executed transactions.
    A fifth type of trading, which the Commission herein refers to as
``brokerage trading,'' is used by brokers to execute SB swap trades on
behalf of customers, often in larger sized transactions. In such a
system, a broker receives a request from a customer (which may be a
dealer) who seeks to execute a specific type of SB swap. The broker
then interacts with other customers to fill the request and execute the
transaction. The mode of interaction can vary depending on the size of
the trade and the type of SB swap being traded. In some cases, the
interaction is done purely by voice over the telephone, while in other
cases, the interaction is electronic or a hybrid of voice and an
electronic system. The level of automation and use of electronic means
also vary depending on the technological state and functionality of the
broker's platform.\34\ This model often is used by dealers that seek to
transact with other dealers through the use of an interdealer broker as
an intermediary. In this model, there may be pre-trade transparency to
the extent that participants are able to see bids and offers of other
participants and post-trade transparency to the extent that
participants can see the terms of executed transactions.
---------------------------------------------------------------------------

    \34\ The Commission understands that a small portion of the
brokerage trading in the United States is currently highly automated
and has characteristics of a limit order book. However, while depth
of the order book may be displayed, generally there may be only one
bid or offer, and sometimes only one side of the market would be
displayed (i.e., a bid without an offer and vice versa). Because the
volume in some SB swaps may be low, the electronic systems
maintained by wholesale brokers would not necessarily include a
matching engine that would provide for price-time priority or other
execution parameters, unlike other types of electronic limit order
books. Although the wholesale brokers' systems are electronic, the
customer would need to perform some steps manually (e.g., hit the
bid or lift the offer) to execute a trade.
---------------------------------------------------------------------------

    The five foregoing examples represent broadly the various types of
models for the trading of OTC swaps in existence today. These examples
may not represent every single method in existence today and the
discussion above is intended to give an overview of the models without
providing the nuances of each particular type.
2. The SB Swap Market and the Commission's Approach to SB SEF
Definitions
    In the Commission's view, the diverse nature of these examples
demonstrates the extent to which, when compared with the equities
markets, certain aspects of the SB swap market are still evolving.\35\
In considering ways in which the Commission could approach the
definition of SB SEF, the Commission has sought to facilitate
competition and innovations in the SB swap market that could be used to
promote more efficient trading in organized, transparent and regulated
trading venues. The Commission does not believe it should simply
overlay the same regulatory structure that is currently in place for
equities, given important differences in the nature and maturity of the
SB swap and equities markets. However, the Commission does believe that
certain elements of equity

market structure may be directly relevant to the SB swap market.
---------------------------------------------------------------------------

    \35\ For example, data from the Depository Trust and Clearing
Corporation covering the period from March 22, 2010 to June 20, 2010
for single name credit default swaps revealed the following: Out of
998 types of swaps (i.e., a swap based on one reference entity),
only 55 had 10 or more trades per day (34 trades being the highest),
and 827 of the swaps had 5 or fewer trades per day (531 of those
only had 2 or fewer trades per day). In the data set, ``trades per
day'' includes all tenors (e.g., duration or expiry) in swaps of the
same reference entity. See http://www.dtcc.com/downloads/products/derivserv/CDS_Snapshot_Analysis_Sep17-2010.pdf; see also http://www.dtcc.com/products/derivserv/data_table_snap0002.php and http://www.dtcc.com/products/deriserv/data_table_snapshot.php.
---------------------------------------------------------------------------

    Furthermore, rather than proposing a rule that would establish a
prescribed configuration for SB SEFs that would meet the statutory
definition of SB SEF, the Commission proposes to provide baseline
principles interpreting the definition of SB SEF, consistent with the
requirements of the Exchange Act, as amended by the Dodd-Frank Act,
which any entity would need to be able to meet to register as a SB SEF.
Such an approach is designed to allow flexibility to those trading
venues that seek to register with the Commission as a SB SEF and to
permit the continued development of organized markets for the trading
of SB swaps. This more flexible approach also would allow the
Commission to monitor the market for SB swaps and propose adjustments,
as necessary, to any interpretation that it may adopt as this market
sector continues to evolve.
    However, the Commission recognizes that, consistent with the Dodd-
Frank Act, the interpretation of the definition of SB SEF should: (1)
Encourage the migration of trading SB swaps from the OTC market to SB
SEFs (or exchanges), (2) provide a meaningful distinction between a SB
SEF and an OTC trading venue, (3) promote further transparency of the
SB swap market, and (4) to facilitate competition and innovation in the
SB swap markets that could be used to promote more efficient trading in
organized, transparent, and regulated trading venues. In addition, the
interpretation of the definition of SB SEF should complement other
aspects of proposed SB swap regulations, including those related to
post trade transparency, mandatory clearing, and the general
requirement that SB swaps that are subject to mandatory clearing only
be traded on an exchange or SB SEF, unless no exchange or SB SEF makes
the SB swap available to trade.

B. Scope of SB SEF Definition

    As noted above, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\36\
---------------------------------------------------------------------------

    \36\ As discussed infra Section XXI, an entity that meets the
definition of SB SEF would be required to register as a SB SEF or a
national securities exchange (unless exempted under Section 3D(e) of
the Exchange Act if the Commission finds that the facility is
subject to comparable, comprehensive supervision and regulation on a
consolidated basis by the CFTC). A registered SB SEF would be
required to satisfy all 14 Core Principles and any rules promulgated
by the Commission, including proposed Rule 811(a)(3), which provides
for certain requirements relating trading on a SB SEF. See Public
Law 111-203, Sec.  763(c) (adding Section 3D(a)(1) and (d)(1) of the
Exchange Act).
---------------------------------------------------------------------------

    A key issue noted at the Roundtable and raised by market
participants generally regarding Dodd-Frank Act implementation is the
scope of the definition of ``security-based swap execution facility.''
\37\ SB swap industry participants have expressed an interest in, and
offered their views on, the parameters of the definition of SB SEF.\38\
Such participants asserted that the interpretation of the definition of
SB SEF is a significant issue for the SB swap industry because, under
the mandatory trade execution requirement in Section 3C(h) of the
Exchange Act, a SB swap subject to mandatory clearing must be executed
on a SB SEF or on an exchange, if made available for trading. The
discussion below sets forth the Commission's preliminary view as to the
meaning of the various elements of this definition.
---------------------------------------------------------------------------

    \37\ See, e.g., Bloomberg Letter, supra note 23, at 2, and MFA
Letter, supra note 23, at 16.
    \38\ See supra notes 23 to 25.
---------------------------------------------------------------------------

    The ``multiple participant to multiple participant'' requirement in
the definition of SB SEF prescribes that ``multiple participants have
the ability to execute or trade security-based swaps by accepting bids
and offers made by multiple participants in the facility or system.''
\39\ Consistent with this requirement, the Commission proposes to
interpret the definition of SB SEF to mean a system or platform that
allows more than one participant to interact with the trading interest
of more than one other participant on that system or platform. The
Commission notes that this definition can be satisfied by various types
of platforms, but some platforms that are currently used to trade SB
swaps in the OTC market would not meet this definition, and would not
be considered SB SEFs. As noted above, the Commission is aware that the
movement of SB swaps trading onto regulated platforms is still in an
emergent stage. Therefore, in considering ways in which the Commission
could approach the definition of SB SEF, the Commission has sought to
facilitate competition and innovations in the SB swaps market that
could be used to promote more efficient trading in organized,
transparent and regulated trading venues to support the Dodd-Frank
Act's goal of moving the trading of SB swaps onto regulated markets.
---------------------------------------------------------------------------

    \39\ See Public Law 111-203, Sec.  763(a) (adding Section 3(77)
of the Exchange Act).
---------------------------------------------------------------------------

    Under this proposed interpretation, if a system or platform were to
allow an individual participant (of which there must be more than one
on the system, but which do not need to be acting simultaneously) to
send, at the same time, a single RFQ to all other liquidity providing
participants on that system or platform and view responses from those
participants, the Commission believes that such a model would satisfy
the requirements of the statutory definition, even if the quote
requesting participants are acting at different times. A key element to
this model is that the SB SEF would not be able to limit the number of
liquidity providing participants from whom a participant could request
a quote on the SB SEF.\40\
---------------------------------------------------------------------------

    \40\ See infra Section VIII.C.
---------------------------------------------------------------------------

    The Commission further believes that the requirements of the
statutory definition would be met if the system or platform not only
provided the quote requesting participant with the ability to send a
single RFQ to all liquidity providing participants, but also provided
the quote requesting participant with the ability to choose to send an
RFQ to fewer than all liquidity providing participants. In the
Commission's view, a system or platform that affords a quote requesting
participant the ability to send an RFQ to all participants, but also
permits the quote requesting participant to choose to send an RFQ to
fewer participants, would satisfy the statutory definition because
multiple participants would have the ability to execute or trade SB
swaps by accepting bids or offers made by multiple participants. The
person exercising investment discretion for the transaction, whether it
is the participant itself or the participant's customer, would be the
person that would have the ability to choose to send the RFQ to less
than all participants, as they would be in the best position to
determine the impact on their interest of a broad or narrow
dissemination of their RFQ.\41\
---------------------------------------------------------------------------

    \41\ Regardless of the number of participants to which a RFQ was
sent, the response(s) to that RFQ would be required to be included
in the composite indicative quote of the SB SEF. See infra note 152
and accompanying text.
---------------------------------------------------------------------------

    Under the proposed interpretation of the definition of SB SEF, a SB
SEF would be able to offer functionality to a participant (or a
participant's customer) enabling that participant to choose to send a
single RFQ to any number of specific liquidity providing participants
on the SB SEF, including just a single liquidity provider. The

Commission requests comment on whether in addition to providing this
flexibility to investors initiating RFQs, the interpretation should
also set a floor for the minimum number of liquidity providers that
must be included in an RFQ (and, if so, what that minimum number should
be). Commenters should be mindful that in proposing its interpretation
of the definition of SB SEF, the Commission is trying to balance the
above-stated goal of encouraging SB swap trading to move onto regulated
markets with the goal of promoting greater transparency in the trading
of SB swaps.
    On the one hand, providing investors as much choice as possible in
determining how to route an RFQ on a SB SEF may incentivize investors
to trade on a SB SEF when they otherwise might not have made that
choice. Since those investors that have a fiduciary duty must seek best
execution for a transaction, they may have a natural incentive to route
to multiple dealers. However, this incentive may be impacted by the
liquidity characteristics of the SB swap. Market participants,
including dealers and buy-side customers, have raised concerns
regarding pre-trade transparency of SB swap trades, particularly block
trades. They believe that if other market participants know the terms
of a trade prior to the time it is executed, those other market
participants could attempt to profit from the information about the
trade to the detriment of the initiator of the trade.\42\ Therefore,
particularly for illiquid SB swaps, an investor may determine that it
is in its best interest not to broadly project its trading intention,
and may choose to send a RFQ to one dealer.\43\ Other investors could
still benefit by the request because the response to that RFQ would
become part of the composite indicative quote of that SB SEF.\44\
Providing investors the choice to send a RFQ to only one dealer on a SB
SEF--as long as they have the ability to send it to more than one if
they chose to--may encourage investors to execute trades on a SB SEF
even with respect to SB swaps that are not required to be traded on a
SB SEF or an exchange, thus supporting the development of trading on
regulated platforms and venues in the United States, rather than in
other jurisdictions.
---------------------------------------------------------------------------

    \42\ See discussion in Section VIII.C and D infra.
    \43\ See Reporting and Dissemination Release, supra note 6, at
89-93.
    \44\ See discussion of proposed Rule 811(d)(5) in Section VIII.C
infra.
---------------------------------------------------------------------------

    On the other hand, requiring that all RFQs on a SB SEF be sent to
more than one dealer could force competition among dealers more than if
RFQs to a single dealer were permitted. This competition may lead to
lower spreads as dealers compete with each other on price. Further,
this competition may provide for a more robust composite indicative
quote because a greater number of responses would be incorporated into
the composite. In addition, requiring that RFQs be sent to more than
one dealer provides for the possibility that a response from a dealer
other than the one with whom the investor may have ``pre-arranged'' the
transaction will result in a better price. However, market participants
have expressed a concern that requiring a broad level of pre-trade
transparency, particularly for illiquid products, may not lead to
better prices and in certain circumstances may lead to worse prices
provided by dealers if dealer hedging is made more difficult after the
intent to trade has been projected to the entire market.
    In addition, the Commission proposes to interpret the statutory
requirement that ``multiple participants have the ability to execute or
trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system'' to require a SB SEF to provide
at least a basic functionality to allow any participant on the SB SEF
the ability to make and display executable bids or offers accessible to
all other participants on the SB SEF, if the participant chooses to do
so. The Commission preliminarily believes that such a requirement would
allow for increased price transparency beyond what would be found in
the bilateral OTC market, if a market participant chooses to utilize
the functionality to display a bid or offer.
    Under the proposed interpretation of the definition of SB SEF
(either with or without the additional requirement for a minimum number
of liquidity providers to be included in every RFQ), the traditional
bilateral negotiation model, as described above, would not fall within
the definition of SB SEF because there would be only one party able to
seek a quote and only one party that is able to provide a quote in
response. The Commission believes that the inclusion of the phrase
``through any means of interstate commerce'' in the definition of SB
SEF would not, by itself, support the proposition that bilateral
negotiation would satisfy the definition's terms; the trading system or
platform would still need to meet the other requirements of the
definition, specifically, the requirement that multiple participants
have the ability to execute or trade SB swaps by accepting bids and
offers made by multiple participants in the facility or system
(``multiple participant to multiple participant requirement'').
    Likewise, a platform where there is a single dealer interacting
with multiple customers on the other side of the transaction would not
appear to meet the ``multiple participant to multiple participant''
requirement because the dealer is only one person. This would be true
for aggregated single-dealer platforms as well, because a participant
on such a platform may only submit one request at a time and receive
only one response at a time, on a dealer-by-dealer basis.
    The Commission proposes that the definition of SB SEF cannot be
satisfied by the simple aggregation of trading interest across trading
systems or platforms to meet the ``multiple participant to multiple
participant'' requirement. That is, each trading method--when viewed in
isolation--would need to individually meet the ``multiple participant
to multiple participant'' requirement on its own. Thus, an entity that
relies on a bilateral negotiation system with one participant on each
end of the telephone or similar communication system, but with several
such conversations occurring simultaneously, could not claim to meet
the definition of SB SEF by asserting that when those conversations are
viewed in the aggregate, i.e., bilateral negotiation between persons A
and B to facilitate one transaction, and bilateral negotiation between
persons C and D, to facilitate a separate transaction, that the
``multiple participant to multiple participant'' requirement is
met.\45\ Two independent single-dealer platforms also may not be
construed in the aggregate in order to meet the ``multiple participant
to multiple participant'' requirement. In each of these situations,
there is no opportunity for interaction among participants, except on a
``one participant to one participant'' basis.
---------------------------------------------------------------------------

    \45\ However, as discussed further below in the discussion of
the application of the definition of SB SEF to wholesale brokers, if
person A negotiates with persons B, C and D as part of the same
transaction, the ``multiple participant to multiple participant''
requirements may be able to be met. See infra note 46 and
accompanying text.
---------------------------------------------------------------------------

    However, a system or platform that provides for an auction for a
class of SB swaps to be held at a prescribed time and that allows
multiple participants to interact with each other, with trades executed
pursuant to a pre-determined algorithm, could meet the proposed
interpretation of the definition of SB SEF. In addition, the Commission
believes that a limit order book system as described above for the
trading of SB swaps could satisfy the proposed interpretation of the
definition of SB

SEF. Such a model generally would allow interaction between multiple
(i.e., two or more) firm orders or bids and offers. Moreover, to
satisfy the definition of SB SEF, a system or platform would not need
to be limited to only one type of trading model. An entity that wishes
to register as a SB SEF could operate different trading models for
different SB swap products, as long as each trading system or platform
on its own meets the interpretation of the definition of SB SEF that
the Commission may adopt. For example, a SB SEF could operate both a
multi-dealer RFQ mechanism for the trading of less liquid SB swaps and
a limit order book for the trading of more liquid SB swaps.
    The Commission has considered whether brokerage trading, as
described above, would satisfy its proposed interpretation of the
definition of SB SEF. On the one hand, brokerage trading relies to a
certain degree on ``voice'' communication, such as telephonic
communication between the broker and its customers. On the other hand,
the wholesale broker \46\ acts as an intermediary between various
potential participants to a SB swap transaction, and may utilize
electronic systems to display trading interest with which various
participants could interact to transact in SB swaps. In some respects,
the wholesale broker's role is similar to that of a floor broker on an
exchange, in which the floor broker may use voice communication to find
trading interest on the floor that can interact with an order from its
customer. If after the wholesale broker receives a request from a
customer (of which there must be more than one, but which do not need
to be acting simultaneously) to execute a trade in a SB swap, and the
broker then submits that request to all participants on the system or
platform (or to less than all participants, if the customer has chosen
to have the request sent to less than all participants), the Commission
preliminarily believes that such a model could satisfy the Commission's
proposed interpretation of the definition of SB SEF. Thus, the
brokerage trading model may be able to satisfy the Commission's
proposed interpretation of the definition of SB SEF to the extent that
multiple participants would have access to the system or platform and
their trading interest could interact with bids and offers of multiple
other participants in that system or platform. Unless explicitly
requested by the customer, for any given transaction if a wholesale
broker typically acts only as the intermediary between a given customer
and a single counterparty to facilitate the negotiation of a bilateral
contract, the Commission does not believe this wholesale broker would
meet the proposed interpretation of the definition of SB SEF. Because
of the different variations of the wholesale broker system, however,
each system would have to be evaluated on its own merits to determine
whether it would meet the Commission's proposed interpretation of the
definition of SB SEF.
---------------------------------------------------------------------------

    \46\ For purposes of this proposing release, the term
``wholesale brokers'' generally refers to brokers that intermediate
transactions in SB swaps between dealers or between dealers and end
users.
---------------------------------------------------------------------------

    The Commission's proposed interpretation of the definition of SB
SEF would result in permitting to be registered as SB SEFs systems or
platforms for the trading of SB swaps with a variety of features, and
not just those systems or platforms with exchange-like features (for
example, systems requiring all trading interest to be firm and
displayed to all participants in the market). The concern with taking
the latter approach is that the market for many SB swaps is fairly
illiquid.\47\ However, in the context of SB swaps that are subject to
the mandatory clearing requirement, the Exchange Act requires that the
trading of SB swaps must occur on a SB SEF or on an exchange, if the SB
swap is made available for trading (unless certain exceptions apply).
Thus, requiring every registered SB SEF to operate like a national
securities exchange could result in (1) cleared SB swaps not being made
available to trade on an exchange or SB SEF, with the result that SB
swaps would continue to trade in the OTC SB swap market; or (2) if SB
swaps subject to mandatory clearing are made available to trade on an
exchange or SB SEF, the continued development of the SB swap market
could be hindered, if participants are unwilling to display two-sided
firm quotes to participants or if the requirement to do so results in
bid-offer spreads that are so wide as to not be economical). If the
definition of SB SEF is too narrowly construed, this could provide a
disincentive for SB swap trading activity to move from the OTC swap
market to regulated markets. A broader interpretation of the definition
of SB SEF could have the beneficial result of increasing the proportion
of trading occurring on regulated markets. Conversely, if the
definition of SB SEF is too broadly construed, the Commission's
regulatory scheme may not adequately advance the Dodd-Frank Act's goal
of greater transparency. The Commission's proposed interpretation of
the definition of SB SEF is intended to balance these concerns,
promoting transparency as well as providing incentives for market
participants to trade SB swaps on regulated markets pursuant to
Commission rules and oversight, rather than in the OTC swap market.
---------------------------------------------------------------------------

    \47\ See supra note 35.
---------------------------------------------------------------------------

    The Commission notes that no matter what other functionality a SB
SEF puts in place (for example, a multi-dealer electronic RFQ
mechanism), it also would be required to provide a basic functionality
to allow any participant on the SB SEF the ability to make and display
executable bids or offers accessible to all other participants on the
SB SEF, if the market participant chooses to do so.
    Considering the early stage of development of the regulatory
framework for the SB swap market and the existing structure of the SB
swap market, the Commission is mindful that its interpretation of the
definition of SB SEF, and the rules it is proposing herein to implement
the Dodd-Frank Act, could have unforeseen consequences, either
beneficial or undesirable, with respect to the shape that this market
will take. In the Commission's view, it is important that the
regulatory structure will provide incentives for the trading of SB
swaps on regulated markets that are designed to foster greater
transparency and competition that are subject to Commission oversight,
while at the same time allow for the continued efficient innovation and
evolution of the SB swap market. The Commission therefore is seeking
where appropriate to take a deliberate and attentive approach to the
regulation of SB SEFs that is informed by the state of development of
the trading of SB swaps on regulated markets.

C. Request for Comments

    The Commission seeks commenters' views and suggestions on its
proposed interpretation of the definition of SB SEF. Comment is
requested on whether the Commission's proposed interpretation, which
would require an RFQ to be sent to all participants but would allow the
quote requesting participant to query less than all participants, is
appropriate, or whether it is too narrow or too broad. Are there other
interpretations of the statutory definition that would promote price
transparency and competition, as well as incenting market participants
to trade on SB SEFs rather than in the OTC market? If so, please
explain. Does the proposed ability of the quote requesting participant
to choose to send a RFQ to less than all participants, raise any
concerns? Should the decision to

exercise the ability to choose to send a RFQ to less than all
participants be required on a transaction-by-transaction basis? Why or
why not? When should the opt-out feature be permitted other than on a
transaction-by-transaction basis? What would be the potential benefits
or costs of allowing an RFQ to be submitted to only one participant?
What would be the potential benefits or costs of requiring that an RFQ
be sent to more than one participant? If the Commission were to require
that an RFQ be sent to more than one participant, how many should be
the minimum? Should the Commission require that an RFQ be sent to two
participants? Five participants (which is the number proposed by the
CFTC)? \48\ Or some other number of participants? Which approach--
allowing a RFQ to be sent to one participant or requiring a minimum
number greater than one--would better promote transparency? Which
approach would encourage greater trading of SB swaps on SB SEFs? What
impact, if any, would the various approaches have on market
participants' incentives to trade within the United States or in other
jurisdictions? How should the Commission weigh the possibility that
trading may move to other jurisdictions in determining how best to
regulate markets within the United States? What would be the costs and
benefits to such an approach? What if only a small number of dealers
were willing to provide quotes on the platform or in a particular SB
swap?
---------------------------------------------------------------------------

    \48\ See Notice of proposed SEF rulemaking by the CFTC, supra
note 17 (requiring that RFQs be disseminated to at least five
participants).
---------------------------------------------------------------------------

    Should the proposed interpretation that affords the ability to opt
to have a RFQ sent to less than all participants be limited to block
trades? Should a proposed interpretation that affords the ability to
opt to have a RFQ sent to one participant be limited to block trades?
What would be the benefits and costs of allowing the opt-out
flexibility, to any number of participants, for block trades? For non-
block trades? Are there factors that would cause a different result for
block trades versus non-block trades? Would the flexibility for
participants to choose to send a RFQ to less than all participants,
including to just one participant, help to address concerns about the
impact of pre-trade transparency on dealers' incentives or ability to
provide competitive prices, as discussed more fully in Section VIII.C?
If so, how so? If not, why not?
    The Commission also is interested in learning commenters' views on
whether the market for SB swaps would be enhanced or adversely affected
by its proposed interpretation of the definition of SB SEF and, if so,
in what ways.
    Should there be a requirement that the execution of trades or the
submission of bids and offers be done electronically?
    Would the proposed requirement that an SB SEF provide functionality
to allow any participant on an SB SEF to make and display executable
bids or offers accessible to all market participants on the SB SEF, if
the market participants choose to do so, be beneficial? What, if any,
impact would requiring this functionality have on access to the SB SEF,
or liquidity of the SB swaps traded on the SB SEF? Should the proposed
requirement be modified? If so, how? What would be the advantages and
disadvantages of such a proposal? Do commenters believe that market
participants would utilize this functionality? Should the Commission
require any particular method of displaying such bids or offers? For
example, should the Commission require that the SB SEF post all of
these executable bids and offers on a centralized screen visible by all
participants? What would be the advantages and disadvantages of having
such a centralized screen? What other method could be utilized to
display such bids and offers?
    In addition, the Commission requests comment on the consequences of
its proposed interpretation of the definition of SB SEF on existing
platforms that may seek to register as a SB SEF and on those platforms
that would not be able to meet the proposed interpretation of the
definition of SB SEF. What kinds of changes would existing platforms
need to make to their current structure to fall within the proposed
interpretation of the definition of SB SEF? Are there existing
platforms that would not be able to restructure to meet the proposed
interpretation, e.g., single-dealer RFQ platforms? If so, what impact,
if any, would that outcome have on the market for SB swaps? Are single-
dealer platforms likely to become obsolete as trading of certain SB
swaps moves to SB SEFs? Or, are such platforms likely to continue to
exist to support the OTC market? What impact would the proposed
interpretation have on competition among existing trading platforms and
liquidity in SB swaps as trading of certain SB swaps moves to SB SEFs?
Are new platforms likely to emerge to trade SB swaps?
    The Commission is interested in learning commenters' views on the
effect on the SB swap market if certain trading platforms would not
meet the proposed interpretation of the definition of SB SEF and would
not be able to register as a SB SEF, and therefore no longer would be
able to trade SB swaps that are subject to mandatory clearing and are
made available to trade on a SB SEF or an exchange. Are there any types
of trading venues so critical to the proper functioning of the SB swap
market that the Commission should consider expanding the proposed
interpretation of the definition of SB SEF so that such entities could
qualify as SB SEFs? If so, what trading platforms are they and what
kinds of conditions should they be subject to? Should any such
expansion of the proposed interpretation of the definition of SB SEF to
cover such platforms be temporary and, if so, for how long? What would
be the impact of such action on any platform that could meet an
unexpanded definition of SB SEF? Market participants have expressed
concern about the trading of illiquid SB swaps once platforms are
configured to meet the statutory definition of SB SEF, particularly in
light of the mandatory trade execution requirement. The Commission
requests comment on the effect of its proposed interpretation of the
definition of SB SEF on the trading of illiquid SB swaps. Would a
multi-dealer RFQ system as discussed above sufficiently accommodate the
trading of illiquid SB swaps? If not, what other models could meet the
statutory definition of SB SEF and accommodate the trading of illiquid
SB swaps? Would an interpretation of the definition of SB SEF that
would allow an investor to choose to send an RFQ to one participant
effectively accommodate the trading of illiquid SB swaps? Would an
interpretation of the definition of SB SEF that would require that an
RFQ be sent to more than one participant effectively accommodate the
trading of illiquid SB swaps? In responding to these questions, the
Commission requests that commenters take into account the Commission's
discussion of SB swaps that are made available to trade in Section
VIII.B below.
    The discussion above contains several examples of trading models
that the Commission believes would meet the statutory definition of SB
SEF. Are there other trading models not discussed above that would meet
the statutory definition of SB SEF? The discussion above also contains
several examples of trading models that the Commission believes would
not meet the statutory definition of SB SEF. Are there other models
that should be excluded from the proposed interpretation?
    The Commission seeks commenters' views on the role of wholesale
brokers in the SB swap market and its view that trading of SB swaps by
such brokers

potentially could satisfy the proposed interpretation of the definition
of SB SEF. As noted above, the Commission has identified bilateral
negotiation, e.g., a trade occurring between two parties via the
telephone, as a model that would not meet its proposed interpretation
of the definition of a SB SEF. The Commission understands that
wholesale brokers often act as intermediaries in executing SB swap
transactions and may engage in bilateral negotiation when they attempt
to complete an order. The Commission further understands that the
orders that wholesale brokers attempt to fill may be large and that, as
a result, they may interact with multiple participants in attempting to
execute the transactions. The Commission also understands that these
brokers may also maintain electronic systems for the display of trading
interest that their customers can access. Do commenters agree that
bilateral negotiation by wholesale brokers, by itself, should not meet
the proposed interpretation of the definition of SB SEF? Is the
Commission's view correct that there are ways in which wholesale
brokers could restructure their operations to meet the proposed
interpretation of the definition of SB SEF? How would such platforms or
systems be structured to meet the proposed interpretation? What would
be the impact on the SB swap market of any restructuring of a wholesale
broker's business to meet the Commission's proposed interpretation of
the definition of SB SEF, particularly in light of the fact that trades
in SB swaps today frequently occur through bilateral negotiation? For
those wholesale brokers that currently effect transactions in SB swaps,
would the modifications that a wholesale brokerage firm would be
required to make to satisfy the proposed interpretation of the
definition of SB SEF, the proposed rules implementing the Core
Principles, and the proposed registration requirements be too costly or
otherwise impracticable to meet so that the firm would find it
difficult to register as a SB SEF? The Commission recognizes that
wholesale brokerage activities differ from dealer to customer
activities in effecting SB swap transactions. Certain proposed
requirements discussed below, such as impartial access, may affect
wholesale brokers differently than SB SEFs that are not operated by
such brokers. Comment is requested on any such different impact on
wholesale brokers that intend to operate SB SEFs, including the costs
and benefits of such impact. Should the Commission view wholesale
brokers' SB SEF operations differently than the operations of other SB
SEFs? If so, how so?
    Another example of a trading platform that could meet the proposed
interpretation of the definition of SB SEF would include a multi-dealer
RFQ model. Do commenters agree that the definition of SB SEF should
cover these types of trading platforms? If so, why? If not, why not?
    Market participants also have expressed concern about any proposed
interpretation of the definition of SB SEF that would result in others
discerning their proprietary trading strategies. What would be the
impact of the Commission's proposed interpretation of the definition of
SB SEF on these concerns? Would one or more of the models discussed
above that would meet the proposed interpretation of the definition of
SB SEF provide an adequate level of comfort for these market
participants? If not, is there a model that would meet the statutory
definition of a SB SEF and yet account for these market participants'
concerns?
    As noted above, the Commission recognizes that the regulatory
framework for the SB swap market is still in its early stages of
development. What would be the impact on innovation in the SB swap
market as a result of the proposed interpretation of the definition of
SB SEF?
    For example, under the proposed interpretation of the definition of
a SB SEF, the SB SEF must provide a mechanism for the dissemination of
firm quotes, if any, submitted by participants in the SB SEF. This
functionality would allow a ``limit order-book'' model to emerge in
parallel with other trading models on the SB SEF, including RFQ
mechanisms, provided that each model meets all SB SEF requirements
discussed above. The proposed interpretation is based on the premise
that allowing more than one type of trading model to qualify as a SB
SEF would, among other things, provide investors with more choices as
well as encourage more types of SB swaps to trade on venues regulated
by the Commission. Is there any scenario where this flexibility could
impact competition or innovation because dealers may have their own
preferences for one model over another? If so, under what scenario
could this occur, and what consequences could result? For example,
would the concentration of trading in the SB swap market raise concerns
that, and provide incentives for, market participants that have a
significant portion of the trading volume for certain types of SB swaps
in one type of market structure to resist trading those SB swaps in a
market structure that might otherwise be more efficient for that
particular product?
    The Commission also is interested in learning whether its proposed
interpretation of the definition of SB SEF would influence market
participants' decisions regarding the jurisdiction in which to execute
their SB swap trades. Would the proposed interpretation affect a market
participant's decision as to the jurisdiction in which to execute SB
swaps transactions? If so, how? What other factors might also influence
that decision, and how would those factors weigh against this factor?
The Commission seeks commenters' views on whether, the ways in which,
and to whom any migration to a different jurisdiction would be
beneficial or adverse.
    Commenters are urged, when considering all questions regarding the
Commission's proposed interpretation of the definition of SB SEF, to
take into account the rules being proposed by the Commission to
implement the Core Principles, particularly the rules regarding the
treatment and interaction of trading interest on a SB SEF, as discussed
below.\49\ The 14 Core Principles set forth in Section 3D(d) of the
Exchange Act are integral to the regulation of a SB SEF. The
Commission, in Sections VIII to XXII of this release, is proposing
various rules to implement these Core Principles, as well as proposed
registration requirements. The Commission also is interested in
commenters' views on whether the Commission's proposed interpretation
of the definition of SB SEF, along with its proposed rules implementing
the Core Principles and proposed registration requirements, in the
aggregate, are too permissive, are appropriate, or are too burdensome
at this stage of development of the SB swap market. If commenters
believe that the proposals in the aggregate are too permissive, the
Commission is interested in being informed of ways in which they could
be enhanced. If commenters believe that the proposals in the aggregate
are too burdensome, the Commission is interested in being informed of
ways in which they could be modified.
---------------------------------------------------------------------------

    \49\ See infra Section VIII (discussing Core Principle 2 and the
requirements relating to a SB SEF's trading rules).
---------------------------------------------------------------------------

    The Commission is interested in learning commenters' views on
whether the combination of the proposed interpretation of the
definition of SB SEF, its proposed rules implementing the Core
Principles, and its proposed registration requirements would be too

onerous and thus would make it impractical or economically infeasible
for entities that currently trade SB swaps to modify their procedures,
personnel, systems or platform in order to operate as a SB SEF. If this
is the case, the Commission seeks commenters views on ways that its
proposed interpretation of the definition of SB SEF, its proposed rules
implementing the Core Principles, or its proposed registration
requirements could be modified so that entities that currently trade SB
swaps could continue to do so and at the same time the statutory
requirements of the Dodd-Frank Act relating to SB SEFs would be met. In
particular, the Commission requests comment on the question of whether
it should adopt a phased approach to the implementation and/or
application of the proposed rules, whereby certain provisions would
become operational only when certain designated timing, volume,
liquidity, or other thresholds were met.\50\ The Commission seeks
commenters' views on the steps it could take to facilitate the
transition to a more regulatory environment for those entities that
currently trade SB swaps and expect to register as SB SEFs.\51\
---------------------------------------------------------------------------

    \50\ See infra the discussion in Section XXV regarding a phased
approach to implementation.
    \51\ See infra Section XXI.A.2 seeking commenters' views on a
possible phased-in approach to any rules that the Commission may
adopt with respect to SB SEFs.
---------------------------------------------------------------------------

IV. Exemption From the Definition of Exchange for Security-Based Swap
Execution Facilities

    An entity that meets the definition of SB SEF in Section 3(a)(77)
of the Exchange Act may also meet the definition of ``exchange'' set
forth in Section 3(a)(1) of the Exchange Act,\52\ certain of the terms
of which have been interpreted by the Commission in Rule 3b-16 of the
Exchange Act.\53\ The Commission believes that Congress did not intend
that entities that meet the definition of SB SEF in Section 3(a)(77) of
the Exchange Act and that comply with Section 3D of the Exchange Act
and the rules and regulations promulgated by the Commission (including
the requirement to register as a SB SEF) also would be subject to
various requirements applicable to exchanges, including registration as
a national securities exchange.\54\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78c(a)(1). The term ``exchange'' means any
organization, association, or group of persons, whether incorporated
or unincorporated, which constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as
that term is generally understood, and includes the market place and
the market facilities maintained by such exchange.
    \53\ 17 CFR 240.3b-16 defines the phrase ``market place or
facilities for bringing together purchasers or sellers of securities
or for otherwise performing with respect to securities the functions
commonly performed by a stock exchange'' to mean an organization,
association or group of persons that (1) brings together the orders
for securities of multiple buyers and sellers; and (2) uses
established, non-discretionary methods (whether by providing a
trading facility or by setting rules) under which such orders
interact with each other, and the buyers and sellers entering such
orders agree to the terms of the trade.
    \54\ See, e.g., Section 6 of the Exchange Act, 15 U.S.C. 78f,
which, among other things, requires a national securities exchange
to enforce compliance by its members and their associated persons
with the Exchange Act and rules and regulations thereunder, as well
as with the exchange's rules. National securities exchanges are
self-regulatory organizations (``SROs'') for purposes of the
Exchange Act and are subject to the requirements of Sections 17 and
19 of the Exchange Act, 15 U.S.C. 78q and78s. Section 17(a)(1)
requires national securities exchanges to make and keep records for
prescribed periods, and to furnish such records to the Commission as
well as any related reports. Section 19(b) requires, among other
things, SROs to file proposed rule changes with the Commission.
---------------------------------------------------------------------------

    Section 3(a)(77) of the Exchange Act defines a SB SEF as a trading
system or platform in which multiple participants have the ability to
execute or trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of interstate
commerce, including any trading facility, that: (1) Facilitates the
execution of SB swaps between persons; and (2) is not a national
securities exchange (emphasis added).\55\ Further, Section 3C(h) of the
Exchange Act provides that transactions involving SB swaps subject to
the clearing requirement be executed on either (1) an exchange or (2) a
SB SEF registered under Section 3D of the Exchange Act or exempt from
registration (unless no exchange or SB SEF makes the SB swap available
to trade or the SB swap transaction is subject to a clearing
exception).\56\ Finally, Section 3D(a)(1) of the Exchange Act provides
that no person may operate a facility for the trading or processing of
SB swaps, unless the facility is registered as a SB SEF or as a
national securities exchange.\57\ The Commission interprets these
provisions to mean that an entity that is registered as a SB SEF cannot
also be a national securities exchange; that an exchange and a SB SEF
registered under Section 3D of the Exchange Act (or exempt from such
registration) are separate categories of regulated entities for the
trading of SB swaps; and that an entity registered as a SB SEF would
not also be required to register as a national securities exchange.
---------------------------------------------------------------------------

    \55\ See Public Law 111-203, Sec.  761(a) (adding Section 3a(77)
of the Exchange Act).
    \56\ See Public Law 111-203, Sec.  763(a) (adding Section 3C(h)
of the Exchange Act). The Commission notes that in this section
Congress chose to use the term ``exchange'' as opposed to ``national
securities exchange.'' An exchange only becomes a ``national
securities exchange'' upon registration with the Commission pursuant
to Section 6 of the Exchange Act.
    \57\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(a)(1) of the Exchange Act).
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    Section 36 of the Exchange Act \58\ gives the Commission broad
authority to exempt any person, security, or transaction from any
provision of the Exchange Act and any rule or regulation thereunder.
Such an exemption may be subject to conditions. Using this authority,
the Commission is proposing to amend Rule 3a1-1 of the Exchange Act
\59\ by adding paragraph (a)(4) to exempt any SB SEF from the
definition of ``exchange,'' if such SB SEF provides a marketplace
solely for the trading of SB swaps (and no other security) and complies
with the provisions of proposed Regulation SB SEF.\60\ The effect of
this exemption would be that an entity that registers as a SB SEF would
not also have to register as a national securities exchange.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78mm.
    \59\ 17 CFR 240.3a1-1.
    \60\ See proposed Rule 3a1-1(a)(4).
---------------------------------------------------------------------------

    The Commission preliminarily believes that this proposed exemption
is necessary and appropriate in the public interest and is consistent
with the protection of investors because it would effectuate the intent
of the Dodd-Frank Act, as expressed in Sections 3(a)(77), 3C(h) and
3D(a)(1) of the Exchange Act, and it would eliminate what the
Commission believes would be a largely duplicative oversight of SB
SEFs. The Commission believes that Congress specifically provided a
comprehensive regulatory framework for SB SEFs in the Exchange Act, as
amended by the Dodd-Frank Act, and therefore that such entities that
are registered as SB SEFs should not also be required to register and
be regulated as national securities exchanges. The Commission notes
that a registered SB SEF that chose to provide a marketplace for the
trading of any security other than a SB swap would not be in compliance
with the exemption in proposed Rule 3a1-1(a)(4). Also, as the SB swaps
markets continue to evolve, the Commission will continue to assess the
appropriateness of, and/or take action with respect to, the proposed
exemption from the definition of exchange.
    The Commission requests comment on the proposed exemption in Rule
3a1-1(a)(4). Is the exemption necessary or appropriate? Are the
conditions to the proposed exemption appropriate or should there be any
additional

conditions? What are the benefits or drawbacks of the proposed
exemption?
    The definition of ``security-based swap execution facility'' and
the definition of ``exchange'' (certain terms of which have been
interpreted by Rule 3b-16 under the Exchange Act) are similar in that
they both include the concept of multiple participants and multiple
buyers and sellers, respectively. However, these definitions are not
identical. It is possible that an entity that trades SB swaps would
meet the criteria of Rule 3b-16 but not the definition of SB SEF
contained in Section 3(a)(77) of the Exchange Act. If such an entity
trades SB swaps that are subject to mandatory clearing and that are
made available to trade on an exchange or SB SEF, it would be required
to register as a national securities exchange, absent a limited volume
exemption pursuant to Section 5 of the Exchange Act.\61\ Should the
Commission permit such a platform to register as a SB SEF pursuant to
Section 3D(a)(1) of the Exchange Act? \62\ Should the Commission
instead provide an exemption from the definition of exchange for such
an entity? If so, why, and what should be the conditions to any such
exemption? What would be the benefits or drawbacks of any such
exemption?
---------------------------------------------------------------------------

    \61\ The trading of a SB swap on an ATS when that SB swap is
subject to mandatory clearing and is made available to trade on a SB
SEF or a national securities exchange would not satisfy the
requirement of Section 3C(h) of the Exchange Act. Section 3C(h) of
the Exchange Act states that, with respect to transactions involving
SB swaps subject to the clearing requirement of subsection (a)(1) of
Section 3C of the Exchange Act, the counterparties shall (A) execute
the transaction on an exchange; or (B) execute the transaction on a
SB SEF registered under Section 3D of the Exchange Act or a SB SEF
that is exempt from registration under section 3D(e) of the Exchange
Act. Although, as noted above, Section 3C(h) uses the term
``exchange'' as opposed to ``national securities exchange,'' an ATS
would not satisfy this requirement because an ATS is exempt from the
definition of exchange pursuant to Rule 3a1-1 under the Exchange
Act.
    \62\ Section 3D(a)(1) of the Exchange Act states that ``no
person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a
security-based swap execution facility or as a national securities
exchange under this section.'' Section 3(a)(77) of the Exchange Act
defines ``security-based swap execution facility'' to mean a trading
system or platform in which multiple participants have the ability
to execute or trade SB swaps by accepting bids and offers made by
multiple participants in the facility or system, through any means
of interstate commerce, including any trading facility, that (A)
facilitates the execution of SB swaps between persons; and (B) is
not a national securities exchange. The Commission interprets these
two provisions, taken together, to require registration as a SB SEF
or a national securities exchange for any entity that meets the
definition of SB SEF in Section 3(a)(77) of the Exchange Act.
---------------------------------------------------------------------------

V. Conditional Exemption From Regulation as Brokers for Security-Based
Swap Execution Facilities

    An entity that meets the definition of ``security-based swap
execution facility'' in Section 3(a)(77) of the Exchange Act also would
meet the definition of ``broker'' set forth in Section 3(a)(4) of the
Exchange Act.\63\ The term ``broker'' is generally defined to mean any
person engaged in the business of effecting transactions in securities
for the account of others.\64\ A SB SEF is defined as a trading system
or platform in which multiple participants have the ability to execute
or trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of interstate
commerce, including any trading facility, that: (A) Facilitates the
execution of SB swaps between persons; and (B) is not a national
securities exchange.\65\ A SB SEF, by facilitating the execution of SB
swaps between persons, also would be engaged in the business of
effecting transactions in securities for the account of others and
therefore would meet the statutory definition of ``broker.'' Absent an
exception or exemption, a SB SEF that effects transactions in SB swaps
would be required to register as a broker pursuant to Sections 15(a)(1)
and (b) of the Exchange Act \66\ and to comply with the reporting and
other requirements applicable to brokers under the Exchange Act and
rules and regulations thereunder.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78c(a)(4).
    \64\ Id. The term ``security'' in Section 3(a)(10) of the
Exchange Act includes a ``security-based swap.'' See 15 U.S.C.
78c(a)(10).
    \65\ See Public Law 111-203, Sec.  761(a) (adding Section
3(a)(77) of the Exchange Act).
    \66\ 15 U.S.C. 78o(a)(1) and (b). Section 15(a)(1) generally
provides that, absent an exception or exemption, a broker or dealer
that uses the mails or any means of interstate commerce to effect
transactions in, or to induce or attempt to induce the purchase or
sale of, any security must register with the Commission. Section
15(b) generally provides the manner of registration of brokers and
dealers and other requirements applicable to registered brokers and
dealers.
---------------------------------------------------------------------------

    As the Commission noted in its discussion regarding the exemption
from the definition of ``exchange'' for SB SEFs, the Exchange Act, as
amended by the Dodd-Frank Act, sets forth a comprehensive regulatory
framework for SB SEFs. The Commission believes that this framework
indicates that Congress did not intend for entities that meet the
definition of SB SEF in Section 3(a)(77) of the Exchange Act and that
comply with Section 3D of the Exchange Act and the rules and
regulations thereunder (including the registration as a SB SEF) also to
be subject to all of the requirements set forth in the Exchange Act and
the rules and regulations thereunder applicable to brokers.\67\ As
discussed above, the Exchange Act, as amended, establishes the
statutory structure for SB SEFs to register with the Commission and for
the Commission to adopt rules and regulations that require these
entities to comply with the Core Principles and enforce compliance with
those Core Principles and any rules or regulations that the Commission
may adopt.
---------------------------------------------------------------------------

    \67\ Brokers and dealers must comply with the Exchange Act
provisions and rules and regulations thereunder applicable to them.
See, e.g., Section 15 of the Exchange Act, 15 U.S.C. 78o, and rules
and regulations thereunder. For example, brokers and dealers must
comply with a number of regulations that govern their conduct, such
as rules relating to customer confirmations and disclosure of credit
terms in margin transactions. See 17 CFR 240.10b-10 and 17 CFR
240.10b-16. They also must comply with a number of financial
responsibility regulations, such as the net capital and customer
protection rules. See 17 CFR 240.15c3-1 and 17 CFR 240.15c3-3. Among
other things, registered brokers and dealers also must make and keep
current books and records relating to their business and detailing,
among other things, securities transactions, money balances, and
securities positions; keep records for required periods and furnish
copies of those records to the Commission on request; and file
certain financial reports with the Commission. See 17 CFR 240.17a-3,
17 CFR 240.17a-4, and 17 CFR 240.17a-5.
---------------------------------------------------------------------------

    Section 36 of the Exchange Act gives the Commission broad authority
to exempt any person, security, or transaction from provisions of the
Exchange Act and the rules thereunder.\68\ Such an exemption may be
subject to conditions.\69\ Using this authority, as well as its
authority to establish procedures regarding the registration of
brokers, the Commission is proposing Rule 15a-12 under the Exchange Act
to allow a SB SEF that is a broker solely due to its activity with
respect to SB swaps executed on or through the SB SEF to satisfy the
requirement to register as a broker by registering as a SB SEF. Such
person, however, must not engage in any activity that would require
registration as a broker other than facilitating the trading of SB
swaps on or through the SB SEF in a manner consistent with Regulation
SB SEF. For example, acting as an agent to a counterparty to a SB swap
trade or acting in a discretionary manner with respect to the execution
of a SB swap trade would indicate that such person may be acting as a
broker and, if the person is acting as a broker, it would be required
to register as such, unless an exemption or exception from registration
was available. If an entity, such as an inter-dealer broker, for
example, elects not to separate its inter-

dealer broker from its SB SEF or create a subsidiary for its SB SEF,
and instead chooses to operate the SB SEF as the same entity as the
broker, the inter-dealer broker would not qualify for the exemption.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78mm.
    \69\ See id.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to conditionally exempt
any SB SEF from the Exchange Act and the rules and regulations
thereunder applicable to brokers, except Exchange Act Sections
15(b)(4), 15(b)(6), and 17(b).\70\ Under the proposed Rule, three key
provisions of the Exchange Act that serve as the basis for Commission
examination and enforcement of the Federal securities laws with respect
to a registered broker would continue to apply to a SB SEF that relies
on the exemption in proposed Rule 15a-12. Section 17(b) of the Exchange
Act \71\ authorizes the Commission to conduct reasonable periodic,
special, or other examinations, of ``[a]ll records'' maintained by
entities described in Section 17(a),\72\ including registered
brokers.\73\ These examinations may be conducted ``at any time, or from
time to time,'' as the Commission ``deems necessary or appropriate in
the public interest, for the protection of investors, or otherwise in
furtherance of the purposes of [the Exchange Act].'' \74\ Proposed Rule
15a-12 also would not exempt a broker that registers as a SB SEF from
the statutory disqualification provisions in Sections 15(b)(4) and (6)
of the Exchange Act, both with respect to itself and with respect to
its associated persons.\75\ Further, pursuant to proposed Rule 15a-
12(d), a broker registered under Section 15a-12(a) of the Exchange Act
that does not engage in any activity other than the facilitating and
trading of SB swaps on or through the SB SEF in a manner consistent
with Regulation SB SEF would be exempt from the Securities Investor
Protection Act (``SIPA''), including membership in the Securities
Investor Protection Corporation.\76\
---------------------------------------------------------------------------

    \70\ See proposed Rule 15a-12(c).
    \71\ 15 U.S.C. 78q(b). See also 15 U.S.C. 78m(h)(4).
    \72\ 15 U.S.C. 78q(a).
    \73\ 15 U.S.C. 78q(b).
    \74\ Id.
    \75\ 15 U.S.C. 78o(b)(4) and (6). See also 15 U.S.C. 78c(a)(18)
(defining ``person associated with a broker or dealer'' or
``associated person of a broker or dealer'').
    \76\ Section 36 of the Exchange Act gives the Commission broad
authority to exempt any person, security, or transaction from any of
the provisions of the Exchange Act. This authority would include the
ability of the Commission to grant an exemption under Section 36
from certain requirements of SIPA. See Securities Exchange Act
Release No. 40594 (October 23, 1998), 63 FR 59362, 59366, n. 31
(November 3, 1998).
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    The Commission believes that the exemption in proposed Rule 15a-12
under the Exchange Act is necessary and appropriate in the public
interest and consistent with the protection of investors because it
would eliminate what the Commission believes would be unnecessary
additional regulation of SB SEFs. Because SB SEFs would be required to
register as such under Section 3D of the Exchange Act, it would be
unnecessary for them also to be subject to statutory and regulatory
provisions governing brokers, subject to certain exceptions set forth
in the proposed rule. The Commission believes that Congress
specifically provided a comprehensive regulatory framework for SB SEFs
in the Exchange Act, as amended by the Dodd-Frank Act, and therefore
that such entities generally should not also be regulated as brokers
where such regulation would be duplicative and unnecessary. As such,
the Commission preliminarily believes that the broker registration and
oversight process can be accomplished largely through the entity's
registration as a SB SEF. In this regard, the Commission also believes
that it would be unnecessary and inconsistent with the comprehensive
regulatory framework for SB SEFs to require a SB SEF, which would not
be a custodian of customer funds or securities and would not otherwise
operate as a broker, to comply with SIPA. SIPA is a comprehensive
regulatory scheme for the orderly liquidation of failed broker-dealers
and the return of customer property. If additional regulation is
developed for brokers, any application of such regulation to SB SEFs
would be proposed by rule. Any order, such as a suspension of the
registration or trading of a security pursuant to Sections 12(j) or
12(k) of the Exchange Act,\77\ if applicable to a SB SEF, would specify
that it would be applicable to a SB SEF.
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    \77\ 15 U.S.C. 78l(j) and (k).
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    The Commission notes that it is not exempting SB SEFs from
registration as brokers; rather, it is proposing to eliminate an
additive layer of regulation that the Commission believes is not
necessary in light of its regulatory oversight of SB SEFs. The
Commission does not believe, however, that it would be in the public
interest to exempt SB SEFs from the examination requirements of Section
17(b) of the Exchange Act, the statutory disqualification provisions of
Sections 15(b)(4) and (6) of the Exchange Act.
    The Commission requests comment on all aspects of its proposed
rule. Specifically, the Commission requests comment on the scope, form,
and conditions of the proposed exemption. Is the exemption necessary?
Should the Commission add additional conditions to its exemption,
including requiring compliance with any other statutory provisions or
any other rules or regulations applicable to brokers? If so, which
ones, and why? Should the Commission exempt SB SEFs from the provisions
of SIPA? If not, why not?
    The Commission seeks comment on whether there is a need for SB SEFs
to become members of a national securities association. Would it be
beneficial to require SB SEFs to become members of a national
securities association to provide an additional level of regulatory
oversight in addition to oversight by the Commission? Why or why not?
Should the proposed exemption include a condition requiring SB SEFs to
comply with Section 15(b)(8) under the Exchange Act,\78\ which requires
a registered broker to be a member of a registered national securities
association unless such broker effects transactions solely on a
national securities exchange of which it is a member? What would be the
advantages or disadvantages of such membership?
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    \78\ 15 U.S.C. 78o(b)(8).
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    As noted above, the proposed Rule would not apply in those
instances when the SB SEF is engaging in activity that is not solely
related to the execution of SB swaps on or through the facility, e.g.,
when the broker provides services such as acting as an agent to a
counterparty to an SB swap trade or acts in a discretionary manner with
respect to the execution of SB swap trades. In such instances, should
the broker be required to comply with all Exchange Act and Commission
requirements relating to brokers? If so, how would the broker be able
to separate its brokerage function from its activities as a SB SEF?
What potential conflict concerns would be raised, if any, if an entity
that was engaged in brokerage activity in SB swaps on a SB SEF were
affiliated with that SB SEF, or if an entity were engaging in brokerage
activity in SB swaps on a SB SEF in the same legal entity that operates
the SB SEF? If commenters believe that such activity would raise
concerns, should the Commission require the entity's brokerage
activities and its SB SEF activities to be conducted on separate legal
entities? Or, should the Commission impose requirements on the ability
of a broker to be affiliated with a SB SEF? If so, what conditions
should the Commission impose, and how would they address any potential
conflict concerns?
    Are there any potential conflict concerns raised if a wholesale
broker is affiliated with a SB SEF, or is operating

in the same legal entity as a SB SEF? If so, what are those concerns,
and what are commenters views on whether and how such concerns should
be addressed?
    What would be the effect of having SB SEFs join a registered
securities association without having a comparable SRO for security-
based swap dealers (``SB swap dealers'') or major security-based swap
participants (``major SB swap participants'')? Because SB SEFs would be
subject to regulatory obligations, should the Commission provide
guidance on the acceptable scope of any outsourcing of regulatory
matters that the SB SEF could undertake?

VI. Access to Security-Based Swap Execution Facilities

    The Dodd-Frank Act does not define the categories of market
participants that may have access to trading on a registered SB SEF or
the terms of such access. For the purposes of providing guidance on
this issue and to ensure that SB SEFs grant access to their markets in
a manner that is consistent with the Core Principles in Section 3D of
the Exchange Act, the Commission is proposing Rule 809 and 811(b).
Proposed Rule 809 would set forth the categories of persons that would
be permitted to have direct access to trading on a registered SB SEF as
a participant and also the terms and conditions that the SB SEF would
need to adopt for granting such access.\79\ Proposed Rule 811(b) would
elaborate on the standards for providing impartial access.\80\ The
purpose of the proposed rules is to ensure that access to SB SEFs is
granted in a manner that strikes an appropriate balance between the
statutory requirements of impartial access (Core Principle 2) and
financial integrity of transactions (Core Principle 6) for SB SEFs.
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    \79\ See proposed Rule 809.
    \80\ See proposed Rule 811(b).
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    The Commission understands that, currently, trades in SB swaps
occur among dealers on OTC inter-dealer markets, and between dealers
and end-user customers on single- or multi-dealer OTC dealer-to-
customer markets or through bilateral negotiations. In addition,
trading of SB swaps in these OTC markets is dominated by a small number
of large swap dealers.\81\ When a small group of market participants
dominates much of the trading in SB swaps, and exerts control over
access to the SB swaps market, it raises concerns about open access and
competition. If SB SEFs are controlled by a small group of dealers who
also dominate trading in the market for SB swaps, the dealers may have
economic incentives to exert undue influence to restrict the level of
access to SB SEFs and thus impede competition by other market
participants in order to increase their ability to maintain higher
profit margins.\82\ At the same time, in the absence of clearing or
other financial safeguards, counterparties assess the degree of credit
risk posed by each other, and enter into SB swap transactions only with
other persons deemed to have an acceptable level of credit risk.
Therefore, in the OTC market for SB swaps, open access and containing
counterparty credit risk may be viewed as competing and potentially
conflicting goals.
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    \81\ See Office of the Comptroller of the Currency (``OCC''),
Quarterly Report on Bank Trading and Derivatives Activities, First
Quarter 2010 (``Derivatives activity in the U.S. banking system
continues to be dominated by a small group of large financial
institutions. Five large commercial banks represent 97% of the total
banking industry notional amounts * * *.''). Several commenters on
proposed Regulation MC, however, took issue with this statistic
because the OCC data included information about U.S. dealers only.
See, e.g., Letter from Barry L. Zubrow, Executive Vice President &
Chief Risk Officer, JP Morgan Chase & Co., to Elizabeth M. Murphy,
Secretary, Commission, and David A. Stawick, Secretary, CFTC, dated
November 17, 2010.
    \82\ In addition, these market participants might be motivated
to restrict the scope of SB swaps that are made available for
trading at SB SEFs if there is a strong economic incentive to keep
such SB swaps in the OTC market. Conflicts of interest concerns
relating to SB SEFs are discussed in greater depth in the release
proposing Regulation MC, which recently was published by the
Commission as part of a rulemaking mandated by Section 765 of the
Dodd-Frank Act. See Securities Exchange Act Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC
Proposing Release''). Section 765 of the Dodd-Frank Act requires the
Commission to adopt rules to mitigate specified conflicts of
interest relating to SB SEFs, security-based swap clearing agencies,
and SBS exchanges.
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    The Dodd-Frank Act addresses these competing concerns in several
ways. Section 3C(a)(1) of the Exchange Act requires the mandatory
clearing of SB swaps that the Commission determines must be
cleared.\83\ With respect to trading on SB SEFs, the Dodd-Frank Act
requires SB SEFs to establish rules for both impartial access to their
markets and the financial integrity of transactions on their markets,
including with respect to clearance and settlement. Specifically, Core
Principle 2 requires SB SEFs to provide market participants with
impartial access to the market.\84\ Under Core Principle 6, SB SEFs are
required to establish and enforce rules and procedures for ensuring the
financial integrity of SB swaps entered on or through the facilities of
the SB SEF, including the clearance and settlement of SB swaps pursuant
to Section 3C(a)(1) of the Exchange Act.\85\ The Commission does not
believe that the requirement for impartial access to a SB SEF under
Core Principle 2 means that it must allow unfettered access to any and
all persons. Rather, the requirements of Core Principle 6 that SB SEFs
ensure the financial integrity of transactions on their markets,
particularly with respect to the mandatory clearing requirement, permit
SB SEF to have minimum standards for access to their markets, though
such access must be provided on an impartial basis.
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    \83\ See Public Law 111-203, Sec.  763(a) (adding Section
3C(a)(1) of the Exchange Act). Section 3C(a)(1) makes it unlawful
for a person to engage in a SB swap unless the SB swap is submitted
for clearing to a registered clearing agency, if the SB swap is
required to be cleared.
    \84\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(2) of the Exchange Act).
    \85\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(6) of the Exchange Act). Section 3C(a)(1) makes it unlawful
for a person to engage in a SB swap unless the SB swap is submitted
for clearing to a registered clearing agency, if the SB swap is
required to be cleared. See Public Law 111-203, Sec.  763(a) (adding
Section 3C(a)(1) of the Exchange Act).
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    In recognition of the challenges in striking the balance between
impartial access and financial integrity goals of the Dodd-Frank Act,
and in view of the current dominance of trading in SB swaps in the OTC
market by a small number of dealers, the Commission is proposing Rule
809 and Rule 811(b) to establish certain baseline principles for
granting access to SB SEFs in compliance with the requirements of both
Core Principles 2 and 6. Specifically, proposed Rule 809(a) through (c)
and proposed Rule 811(b) would require that SB SEFs enact and apply
objective standards for access to their markets, in compliance with the
impartial access requirement of Core Principle 2. Proposed Rule 809(a)
and (c)(1) through (4) would establish certain minimum, objective
standards for SB SEF participants, in compliance with the financial
integrity of transactions requirements of Core Principle 6.

A. Impartial Access

    Proposed Rule 809(a) would provide that only registered SB swap
dealers, major SB swap participants, or brokers (as defined in section
3(a)(4) of the Exchange Act), or eligible contract participants \86\
would be eligible to

become participants in a SB SEF. Proposed Rule 809(b) would require a
SB SEF to permit all eligible persons that meet the requirements for
becoming a participant under Rule 809(a) and the SB SEF's rules to
become participants in the SB SEF, consistent with the requirements for
impartial access in Core Principle 2 and proposed Rule 811(b).\87\
Proposed Rule 809(b) would, however, permit a SB SEF to choose to not
permit any eligible contract participants that are not registered with
the Commission as a SB swap dealer, major SB swap participant, or
broker (as defined in section 3(a)(4) of the Act \88\) (``non-
registered ECP''), to become participants in the SB SEF. Thus, under
the proposed rule, while a SB SEF could choose to not allow any non-
registered ECPs to become participants, if the SB SEF chose to permit
such non-registered ECPs to become participants in the SB SEF, it could
not selectively prohibit certain non-registered ECPs from becoming
participants if they otherwise satisfied the SB SEF's requirements. In
effect, proposed Rule 809(b) would limit the discretion involved in
admitting participants to a SB SEF because it would impose an
affirmative requirement on SB SEFs to grant qualified persons access to
their markets as participants.\89\
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    \86\ The term ``eligible contract participant'' is defined in
Section 3(a)(65) of the Exchange Act as having the same meaning as
in Section 1a of the CEA (7 U.S.C. 1a). As discussed above, this
term may be further defined by the Commission and the CFTC pursuant
to various sections of the Dodd-Frank Act. See supra note 3.
    \87\ Core Principle 2 requires a SB SEF to establish and enforce
compliance with rules relating to any limitation on access to the
facility and to provide market participants with impartial access to
the market. See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(2) of the Exchange Act).
    \88\ 15 U.S.C. 78c(a)(4).
    \89\ This proposed requirement is analogous to the fair access
requirement for national securities exchanges under Section 6(b)(2)
of the Exchange Act, which also imposes an affirmative duty to admit
qualified broker-dealers as members. See 15 U.S.C. 78f(b)(2). ``The
rules of the exchange [must] provide that any registered broker or
dealer or natural person associated with a registered broker or
dealer may become a member of such exchange * * *.''
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    Proposed Rule 809(c) would require a SB SEF to establish rules
setting forth requirements for eligible persons to become participants
in the SB SEF consistent with the SB SEF's obligations under the
Exchange Act and the rules thereunder, and includes certain enumerated
minimum standards.\90\ Proposed Rule 809(c), by requiring a SB SEF to
codify its standards for becoming a participant in its market, would
make the process of admitting participants transparent and rules-based,
and thereby more objective. In addition, such rules would have to be
consistent with proposed Rule 811(b), which would require every SB SEF
to establish fair, objective, and not unreasonably discriminatory
standards for granting impartial access to trading on the facility.\91\
Proposed Rule 811(b) would require that a SB SEF may not unreasonably
prohibit or limit any person with respect to access to the services
offered by the SB SEF by applying those standards in an unfair or
unreasonably discriminatory manner.\92\ Proposed Rule 811(b)(3) also
would require every SB SEF to make and keep records of all grants,
denials, or limitations of access and to report that information on
proposed Form SB SEF \93\ and in the annual compliance report of the
Chief Compliance Officer (``CCO'') pursuant to proposed Rule 823(c).
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    \90\ See proposed Rule 809(c)(1)-(4) and infra notes 105-109 and
accompanying text for a discussion of those proposed provisions.
    \91\ See proposed Rule 811(b)(1).
    \92\ See proposed Rule 811(b)(2).
    \93\ The Commission is proposing that SB SEFs register on Form
SB SEF. See infra Section XXII for a discussion of proposed Form SB
SEF.
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    As was the case when the Commission adopted Regulation ATS,\94\
these provisions are based on the principle that qualified market
participants should have fair access to the nation's securities
markets. Under the proposal, a SB SEF would have flexibility in
establishing standards for impartial access so long as those standards
are fair and objective and do not unreasonably discriminate, and the SB
SEF does not apply the standards in an unfair or unreasonably
discriminatory manner. For example, a SB SEF could establish objective
minimum capital or credit requirements for participants, as long as
they were not designed to, and did not have the effect of, unreasonably
discriminating among persons seeking access to the SB SEF.\95\
Similarly, a SB SEF could reasonably deny access to participants based
on an unfavorable disciplinary history. Provided that these or other
standards are objective and applied consistently to all potential
participants, a SB SEF could be considered to be granting or denying
access fairly. A denial of access might be unreasonable, however, if it
were based solely, for example, on the business activities of a
prospective participant that are unrelated to trading on the SB
SEF.\96\
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    \94\ 17 CFR 242.300 et seq. See Securities Exchange Act Release
No. 40760, (December 8, 1998), 63 FR 70844 (``ATS Adopting
Release'') at notes 245 to 256.
    \95\ See infra Section XII for a discussion of the ability of a
SB SEF to impose higher capital requirements.
    \96\ The Commission also discussed fair access at length in the
ATS Adopting Release. See supra note 94 at note 245.
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    The Commission believes that impartial access to SB SEFs would work
in conjunction with rules proposed by the Commission to mitigate
conflicts of interest that could arise when a small number of market
participants, including their related persons, exercise control or
undue influence over a SB SEF either through ownership of voting
interests or participation in the governance of the SB SEF.\97\ The
Commission requests comment, however, on the extent to which both types
of rules are necessary to ensure fair access to SB SEFs.
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    \97\ See Regulation MC Proposing Release, supra note 82.
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B. Financial Integrity

    As noted above, proposed Rule 809(a) would permit only persons that
are registered with the Commission as SB swap dealers, major SB swap
participants, or brokers, or persons that are eligible contract
participants (as defined in section 3(a)(65) of the Act) to become
participants of a SB SEF.\98\ Permitting registered SB swap dealers,
major SB swap participants, and brokers to become participants would
support the SB SEF's duty to ensure the financial integrity of
transactions, including the clearance and settlement of SB swaps, under
Core Principle 6.\99\ Registered SB swap dealers, major SB swap
participants, and brokers are all subject to, or would be subject to,