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

    \875\ See supra Section XII(A)(1)(a).
    \876\ For each registered broker-dealer, the on-going cost per
year is obtained by summing up its components = $200,000 + $77,000 +
$1,000 + $38,500 = $316,500. The on-going cost per year for all
registered broker-dealers is estimated to be (20 registered broker-
dealers x $316,500) = $6,330,000.
    \877\ See Regulation SBSR Adopting Release, 80 FR at 14676.
---------------------------------------------------------------------------

2. Amendments to Rule 905(a)
    The amendments to Rule 905(a) adopted herein provide that any
counterparty or other person having a duty to report a security-based
swap that discovers an error in information previously reported
pursuant to Regulation SBSR must correct such error in accordance with
the procedures laid out in Rule 905(a). As the Commission noted in the
Regulation SBSR Adopting Release, requiring participants to promptly
correct erroneous transaction information should help ensure that the
Commission and other relevant authorities have an accurate view of the
risks in the security-based swap market.
    In the Regulation SBSR Adopting Release, the Commission estimated
that Rule 905(a) will impose an initial, one-time burden associated
with designing and building a reporting side's reporting system to be
capable of submitting amended security-based swap transaction
information to a registered SDR.\878\ The Commission stated its belief
that designing and building appropriate reporting system functionality
to comply with Rule 905(a)(2) will be a component of, and represent an
incremental ``add-on'' to, the cost to build a reporting system and
develop a compliance function as required under Rule 901.\879\
Specifically, the Commission estimated that, based on discussions with
industry participants, the incremental burden will be equal to 5% of
the one-time and annual burdens associated with designing and building
a reporting system that is in compliance with Rule 901, plus 10% of the
corresponding one-time and annual burdens associated with developing
the reporting side's overall compliance program required under Rule
901.\880\ This estimate was based on similar calculations contained in
the Regulation SBSR Proposing Release,\881\ updated to reflect new
estimates relating to the number of reportable events and the number of
reporting sides.\882\
---------------------------------------------------------------------------

    \878\ See 80 FR at 14714.
    \879\ See id.
    \880\ See id.
    \881\ See 75 FR at 75254.
    \882\ See Regulation SBSR Adopting Release, 80 FR at 14701-702.
---------------------------------------------------------------------------

    The Commission continues to believe that the above methodology is
applicable to error reporting by platforms and registered clearing
agencies under the amendment to Rule 905(a). Thus, for these new
respondents, the Commission estimates that Rule 905(a) will impose an
initial (first-year) aggregate cost of $165,550, or $11,825 per
respondent,\883\ and an ongoing aggregate annualized cost of $55,650,
which is $3,975 per respondent.\884\
---------------------------------------------------------------------------

    \883\ See Regulation SBSR Proposing Release, 75 FR at 75254-55.
This figure is calculated as follows: [((($49,000 for one-time
development of reporting system) x (0.05)) + (($2,500 annual
maintenance of reporting system) x (0.05)) + (($54,000 one-time
compliance program development) x (0.1)) + (($38,500 annual support
of compliance program) x (0.1))) x 14 reporting entities (10
platforms + 4 registered clearing agencies)] = $165,550, which is
$11,825 per platform or registered clearing agency.
    \884\ See Regulation SBSR Proposing Release, 75 FR at 75254-55.
This figure is calculated as follows: [(($2,500 annual maintenance
of reporting system) x (0.05)) + (($38,500 annual support of
compliance program) x (0.1))) x 14 reporting entities (10 platforms
+ 4 registered clearing agencies)] = $55,650, which is $3,975 per
platform or registered clearing agency.
---------------------------------------------------------------------------

    The Commission estimates that four unregistered foreign dealing
entities will engage in ANE activity and incur a duty to report as a
result of new Rules 901(a)(2)(ii)(E)(2) and (3).\885\ These
unregistered persons also will incur costs associated with error
reporting under Rule 905. As noted in Section XII(A)(1)(d), supra,
these unregistered persons are part of the subset of 300 respondents
that were identified in the Regulation SBSR Adopting Release as not
likely to register as security-based swap dealers or major security-
based swap participants. Because the Commission already accounted for
the programmatic costs of building and maintaining error reporting
capabilities incurred by these 300 respondents in the Regulation SBSR
Adopting Release,\886\ the amendments to Rule 905(a) will not result in
additional programmatic costs for the four unregistered persons.
---------------------------------------------------------------------------

    \885\ See supra Section II(A)(4)(d) for a discussion of how
these dealing entities are identified in the TIW data.
    \886\ See 80 FR at 14714.
---------------------------------------------------------------------------

    The Commission estimates that 20 registered broker-dealers,
excluding SB SEFs, will incur a duty to report security-based swap
transactions because of new Rule

901(a)(2)(ii)(E)(4).\887\ Thus, these registered broker-dealers are
subject to the amendment to Rule 905(a) adopted herein and will incur
costs associated with error reporting.
---------------------------------------------------------------------------

    \887\ See supra Section XII(A)(1)(d).
---------------------------------------------------------------------------

    The Commission continues to believe that the cost estimation
methodology previously applied in the Regulation SBSR Adopting Release
is applicable to error reporting by registered broker-dealers.\888\
Thus, for registered broker-dealers, the Commission estimates that the
amendment to Rule 905(a) will impose an initial (first-year) aggregate
cost of $236,500, or $11,825 per respondent,\889\ and an ongoing
aggregate annualized cost of $79,500, or $3,975 per respondent.\890\
---------------------------------------------------------------------------

    \888\ See 80 FR at 14714.
    \889\ See Regulation SBSR Proposing Release, 75 FR at 75254-55.
This figure is calculated as follows: [((($49,000 for one-time
development of reporting system) x (0.05)) + (($2,500 annual
maintenance of reporting system) x (0.05)) + (($54,000 one-time
compliance program development) x (0.1)) + (($38,500 annual support
of compliance program) x (0.1))) x 20 registered broker-dealers] =
$236,500, which is $11,825 per registered broker-dealer.
    \890\ See Regulation SBSR Proposing Release, 75 FR at 75254-55.
This figure is calculated as follows: [(($2,500 annual maintenance
of reporting system) x (0.05)) + (($38,500 annual support of
compliance program) x (0.1))) x 20 registered broker-dealers] =
$79,500, which is $3,975 per registered broker-dealer.
---------------------------------------------------------------------------

    Rule 905(a)(1) as amended herein states that, if a person that was
not the reporting side for a security-based swap transaction discovers
an error in the information reported with respect to such security-
based swap, that person shall promptly notify the person having the
duty to report the security-based swap of the error. Clients of
registered broker-dealers likely will incur costs, because Rule
905(a)(1) requires them to notify registered broker-dealers of errors
in transaction reports made by the registered broker-dealers pursuant
to Rule 901(a)(2)(ii)(E)(4). As stated in Section XII(A)(1)(d), supra,
the Commission estimates that registered broker-dealers will incur the
duty to report 540 security-based swap transactions per year under Rule
901(a)(2)(ii)(E)(4). Assuming that each of the 540 transactions is
reported in error, the upper bound estimate of the annual cost
associated with this obligation is approximately $17,280, which
corresponds to roughly $576 per respondent.\891\
---------------------------------------------------------------------------

    \891\ These figures are based on the assumption that
approximately 540 additional security-based swap transactions per
year will have to be reported by registered broker-dealers pursuant
to Rule 901(a)(2)(ii)(E)(4), and that these trades involve 30
entities with reporting duties. Using cost estimated provided in the
Regulation SBSR Adopting Release, if each trade is reported in
error, then the aggregate annual cost of error notification is 540
errors x Compliance Clerk at $64 per hour x 0.5 hours per report =
$17,280, or $576 per participant. See Regulation SBSR Adopting
Release, 80 FR at 14714. Salary figures are taken from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified to account for a 1,800-hour work-week and multiplied by
5.35 to account for bonuses, firm size, employee benefits, and
overhead.
---------------------------------------------------------------------------

3. Amendments to Rule 906(c)
    Existing Rule 906(c) requires each participant of a registered SDR
that is a registered security-based swap dealer or registered major
security-based swap participant to establish, maintain, and enforce
written policies and procedures that are reasonably designed to ensure
compliance with any security-based swap transaction reporting
obligations in a manner consistent with Regulation SBSR. Rule 906(c)
also requires each such participant to review and update the required
policies and procedures at least annually. The amendment to Rule 906(c)
adopted herein extends these same requirements to participants of a
registered SDR that are platforms, registered clearing agencies, and
registered broker-dealers.
    The Commission continues to believe that the cost estimation
methodology previously applied in the Regulation SBSR Adopting Release
is applicable to the adoption and maintenance of policies and
procedures.\892\ Thus, for registered clearing agencies and platforms,
the Commission estimates that the amendments to Rule 906(c) will impose
an initial (first-year) aggregate cost of $1,288,000, or $92,000 per
registered clearing agency or platform,\893\ and an ongoing aggregate
annualized cost of $476,000, or $34,000 per registered clearing agency
or platform.\894\ In addition, for registered broker-dealers likely to
become participants solely as a result of making a report to satisfy an
obligation under Rule 901(a)(2)(ii)(E)(4) (a ``respondent broker-
dealer''), the Commission estimates that the amendments to Rule 906(c)
will impose an initial (first-year) aggregate cost of $1,840,000, or
$92,000 per respondent broker-dealer,\895\ and an ongoing aggregate
annualized cost of $680,000, or $34,000 per respondent broker-
dealer.\896\ The Commission does not believe that the amendments to
Rule 906(c) will impose any economic costs beyond the paperwork burdens
described herein and in Section XI(D)(2)(c), supra.
---------------------------------------------------------------------------

    \892\ See Regulation SBSR Adopting Release, 80 FR at 14716.
    \893\ See id. This figure is based on the following: [(($58,000
for one time developing of written policies and procedures) +
($34,000 for annual updates to policies and procedures)) x 14
registered clearing agencies and platforms] = $1,288,000, which is
$92,000 per registered clearing agency or platform.
    \894\ See Regulation SBSR Adopting Release, 80 FR at 14716. This
figure is based on the following: [($34,000 for annual updates to
policies and procedures) x 14 registered clearing agencies and
platforms] = $476,000, which is $34,000 per registered clearing
agency or platform.
    \895\ See Regulation SBSR Adopting Release, 80 FR at 14716. This
figure is based on the following: [(($58,000 for one time developing
of written policies and procedures) + ($34,000 for annual updates to
policies and procedures)) x 20 respondent broker-dealers] =
$1,840,000, which is $92,000 per respondent broker-dealer.
    \896\ See Regulation SBSR Adopting Release, 80 FR at 14716. This
figure is based on the following: [($34,000 for annual updates to
policies and procedures) x 20 respondent broker-dealers] = $680,000,
which is $34,000 per respondent broker-dealer.
---------------------------------------------------------------------------

4. Amendments That Subject Additional Cross-Border Security-Based Swaps
to Regulation SBSR
a. ANE Transactions Involving Unregistered Entities
    New Rule 908(a)(1)(v) provides that any security-based swap
transaction connected with a non-U.S. person's security-based swap
dealing activity that is arranged, negotiated, or executed by U.S.
personnel is subject to regulatory reporting and public dissemination
under Regulation SBSR.
    Several commenters expressed concern about the complexities and
expense of implementing the adopted rules.\897\ One commenter stated
there would be significant costs associated with reporting because
market participants that have already designed and implemented
reporting systems based on the CFTC's cross-border guidance and the
rules of other jurisdictions would need to modify their systems to
comply with the Commission's proposed rules.\898\
---------------------------------------------------------------------------

    \897\ See IIB Letter at 16 (stating that regulatory reporting of
transactions where neither reporting side includes a U.S. person,
guaranteed affiliate, or registered security-based swap dealer would
come with significant cost); ISDA I at 11 (stating that expanding
the reporting requirements to non-U.S. trades would be burdensome
and costly); SIFMA-AMG I at 2 (stating that requiring the reporting
of transactions that were arranged, negotiated or executed in the
United States would increase the transactional burdens on ``an
already taxed system''); SIFMA/FSR Letter at 12 (taking the view
that monitoring for conduct in the United States and building the
infrastructure needed for reporting based purely on conduct will be
an unnecessary expense for security-based swap market participants
since the information being added to the public dissemination stream
would not be informative or could give a distorted view of market
prices and would result in data at SDRs that has minimal U.S.
nexus).
    \898\ See IIB Letter at 16. The commenter stated that, to modify
its systems in connection with the U.S. personnel test, a non-U.S.
dealing entity (including one operating below the de minimis
threshold) ``would need to install or modify a trade capture system
capable of tracking, on a dynamic, trade-by-trade basis, the
location of front-office personnel. The non-U.S. SBSD would then
need to feed that data into its reporting system and re-code that
system to account for the different rules that apply to non-U.S. SBS
depending on whether they are arranged, negotiated or executed by
U.S. personnel. The non-U.S. SBSD would also need to train its front
office personnel in the use of this new trade capture system and
develop policies, procedures, and controls to require, track, and
test the proper use of that system. In addition, the non-U.S. SBSD
would need to seek and obtain waivers from non-U.S. counterparties--
to the extent such waivers are even permitted--with respect to
privacy, blocking and secrecy laws in local jurisdictions.'' Id. In
the U.S. Activity Adopting Release, the Commission addressed
generally the costs that firms would incur as a result of firms
having to register as security-based swap dealers. See 81 FR at
8629-31.

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

    The Commission agrees that market participants will incur costs to
comply with the reporting requirements of Rule 908(a)(1)(v). However,
the Commission notes that all ANE transactions where a U.S. person is
on one side as either a direct or indirect counterparty are already
subject to regulatory reporting under the rules adopted in the
Regulation SBSR Adopting Release. Thus, only a small number of ANE
transactions--which the Commission estimates will result in at most
1,080 reportable events per year--will be subject to regulatory
reporting as a result of new Rule 908(a)(1)(v); accordingly, the
attendant costs of complying with Rule 908(a)(1)(v) will also be
relatively small. The Commission understands that market participants
may have to incur costs to modify their existing reporting systems to
comply with the Commission's rules.\899\ However, to the extent that
these rules and rules in other jurisdictions require the collection of
the same or similar information, the system modification costs will be
minimized.\900\
---------------------------------------------------------------------------

    \899\ See IIB Letter at 16.
    \900\ See supra Section II(A)(6).
---------------------------------------------------------------------------

    The Commission believes that the reporting and public dissemination
of all ANE transactions will provide benefits to the Commission and
relevant authorities and to market participants. The Commission also
believes that requiring the public dissemination of these transactions
could help to increase price competition and price efficiency in the
security-based swap market and enable all market participants to have
more comprehensive information with which to make trading and valuation
determinations. Publicly disseminating these transactions also could
reduce implicit transaction costs.\901\ In addition, the amendments
being adopted today reflect the Commission's assessment of the impact
that the scope of security-based swap transactions subject to
regulatory reporting may have on the ability of the Commission and
other relevant authorities to detect emerging risks and abusive trading
in the security-based swap market. Regulatory reporting of these
transactions to a registered SDR should enhance the Commission's
ability to oversee relevant activity related to security-based swap
dealing occurring within the United States as well as to monitor market
participants for compliance with specific Title VII requirements
(including the requirement that a person register with the Commission
as a security-based swap dealer if it exceeds the de minimis
threshold).\902\ The reporting of these transactions also will enhance
the Commission's ability to monitor manipulative and abusive practices
involving security-based swap transactions or transactions in related
underlying assets, such as corporate bonds or other securities
transactions that result from dealing activity, or other relevant
activity, in the U.S. market.\903\
---------------------------------------------------------------------------

    \901\ See U.S. Activity Proposal, 80 FR at 27483-84.
    \902\ See id. at 27483.
    \903\ See id.
---------------------------------------------------------------------------

b. Transactions Executed on a Platform or By or Through a Registered
Broker-Dealer
    New Rule 908(a)(1)(iii) requires any security-based swap
transaction that is executed on a platform having its principal place
of business in the United States both to be reported to a registered
SDR and to be publicly disseminated pursuant to Regulation SBSR. New
Rule 908(a)(1)(iv) requires the reporting and public dissemination of
any security-based swap transaction that is effected by or through a
registered broker-dealer (including a registered SB SEF). The
Commission notes that many security-based swaps that are executed on
platforms or by or through a registered broker-dealer are already
subject to Regulation SBSR because they meet one or both prongs of
existing Rule 908(a)(1)--i.e., there is a direct or indirect
counterparty that is a U.S. person on either or both sides of the
transaction or the security-based swap is accepted for clearing by a
clearing agency having its principal place of business in the United
States.\904\ Thus, new Rules 908(a)(1)(iii) and (iv) extend regulatory
reporting and public dissemination to an additional number of uncleared
security-based swaps: Those involving only non-U.S. persons. The costs
of reporting these additional cross-border security-based swaps are
considered in the Commission's analysis of the amendments to Rule
901(a)(2)(ii)(E), which assigns the duty to report those cross-border
security-based swaps.\905\ Thus, new Rules 908(a)(1)(iii) and (iv) do
not independently impose any additional reporting costs.
---------------------------------------------------------------------------

    \904\ See Rule 908(a)(2) (stating that a security-based swap
that is not included within Rule 908(a)(1) shall be subject to
regulatory reporting but not public dissemination if there is a
direct or indirect counterparty on either or both sides of the
transaction that is a registered security-based swap dealer or a
registered major security-based swap participant).
    \905\ See supra Section XII(A)(1).
---------------------------------------------------------------------------

    One commenter suggested that new Rule 908(a)(1)(iv) could provide
incentives for non-U.S. counterparties to avoid transacting through
registered broker-dealers, resulting in market fragmentation that would
lead to adverse effects on risk management, market liquidity, and U.S.
jobs.\906\ The Commission acknowledges that market fragmentation could
result if non-U.S. counterparties avoid transacting through registered
broker-dealers. However, as discussed above, because of the small
number of security-based swaps that are subject to Rule 908(a)(1)(iv),
any market fragmentation due to the avoidance of registered broker-
dealers by non-U.S. counterparties would be limited. To the extent that
adverse effects on risk management, market liquidity, and U.S. jobs
flow from market fragmentation, the Commission does not believe these
effects should be significant, given the limited fragmentation that
will likely arise as a result of the rule.
---------------------------------------------------------------------------

    \906\ See IIB Letter at 16-17.
---------------------------------------------------------------------------

5. Amendments to Rule 908(b)
    Rule 908(b) clarifies the types of persons that can incur duties
under Regulation SBSR. In the Regulation SBSR Proposed Amendments
Release, the Commission proposed to amend Rule 908(b) by adding
platforms and registered clearing agencies to the list of persons that
might incur obligations under Regulation SBSR.\907\ The Commission has
adopted these changes to Rule 908(b), as discussed in Section IX(F)(1),
supra.
---------------------------------------------------------------------------

    \907\ See 80 FR at 14759.
---------------------------------------------------------------------------

    The Commission also is adopting new Rule 908(b)(5) to include a
non-U.S. person that, in connection with such person's security-based
swap dealing activity, arranged, negotiated, or executed a security-
based swap using U.S. personnel. Because existing Rule 908(b)(2) covers
a non-U.S. person that is registered as a security-based swap dealer,
the effect of new Rule 908(b)(5) is to cover a foreign dealing entity
that engages in ANE activity but that does not meet the de minimis
threshold and thus would not have to register as a security-based swap
dealer.

    The costs incurred by an unregistered non-U.S. person that falls
under Rule 908(b)(5) include the costs of setting up reporting
infrastructure and compliance systems, which have been discussed in
connection with the adoption of new Rules 901(a)(2)(ii)(E)(2) and
(3).\908\ Once an unregistered non-U.S. person's reporting
infrastructure and compliance systems are in place, the marginal cost
of reporting an individual transaction would be minimal \909\ when
compared to the costs of putting those systems in place and maintaining
them over time.\910\
---------------------------------------------------------------------------

    \908\ See supra Section XII(A)(1)(d).
    \909\ See infra Section XII(B)(1) (discussing the costs incurred
by unregistered non-U.S. persons to assess whether they engage in
ANE transactions and thus could incur reporting duties under Rule
901(a)(2)(ii)(E)).
    \910\ See Regulation SBSR Adopting Release, 80 FR at 14702.
---------------------------------------------------------------------------

6. Other Conforming Amendments
    As discussed in Section V(A), supra, the Commission today is
adopting amendments to Rule 900(u) to expand the definition of
``participant'' to include platforms, registered clearing agencies that
are required to report alpha dispositions pursuant to new Rule
901(e)(1)(ii), and registered broker-dealers that incur the duty to
report security-based swap transactions pursuant to new Rule
901(a)(2)(ii)(E)(4).
    Existing Rule 906(b) generally requires a participant of a
registered SDR to provide the identity of its ultimate parent and any
affiliates that also are participants of that registered SDR. In the
Regulation SBSR Proposed Amendments Release, the Commission proposed to
amend Rule 906(b) to except platforms and registered clearing agencies
from this requirement. In the U.S. Activity Proposal, the Commission
further proposed to amend Rule 906(b) to except from this requirement a
registered broker-dealer that becomes a participant solely as a result
of making a report to satisfy an obligation under Rule
901(a)(2)(ii)(E)(4). The Commission also proposed similar amendments to
existing Rule 907(a)(6), which requires a registered SDR to have
policies and procedures for periodically obtaining from each
participant information that identifies the participant's ultimate
parent(s) and any participant(s) with which the participant is
affiliated, to avoid extending these policies and procedures to cover
platforms, registered clearing agencies, and registered broker-dealers
(assuming that they are not counterparties to security-based swap
transactions). For the reasons discussed above,\911\ the Commission is
adopting these amendments. Accordingly, platforms, registered clearing
agencies, and registered broker-dealers (assuming they are not
counterparties to security-based swap transactions) will not incur
costs to report ultimate parent and affiliate information and,
registered SDRs will not incur costs to extend the scope of their
policies and procedures.
---------------------------------------------------------------------------

    \911\ See supra Sections V (excepting platforms and registered
clearing agencies from Rule 906(b)) and IX (excepting registered
broker-dealers from Rule 906(b) if they become participants solely
as a result of making a report to satisfy an obligation under Rule
901(a)(2)(ii)(E)(4)).
---------------------------------------------------------------------------

    Existing Rule 906(c) requires certain participants of a registered
SDR to establish, maintain, and enforce written policies and procedures
that are reasonably designed to ensure that the participant complies
with any obligations to report information to a registered SDR in a
manner consistent with Regulation SBSR. Rule 906(c) also requires
participants covered by the rule to review and update their policies
and procedures at least annually. In the Regulation SBSR Proposed
Amendments Release, the Commission proposed to amend Rule 906(c) by
extending this requirement to platforms and registered clearing
agencies. In the U.S. Activity Proposal, the Commission proposed to
amend Rule 906(c) by extending this requirement to a registered broker-
dealer that incurs reporting obligations solely because it effects
transactions between two unregistered non-U.S. persons that do not fall
within proposed Rule 908(b)(5). In this release, the Commission is
adopting the amendments to Rule 906(c) as proposed.
    The Commission continues to estimate that the cost associated with
establishing such policies and procedures, for each covered
participant, will be approximately $58,000 and the cost associated with
annual updates will be approximately $34,000.\912\ Accordingly, the
Commission estimates that the initial aggregate annual cost associated
with the amendments to Rule 906(c) will be approximately $3,128,000,
which corresponds to $92,000 per covered participant.\913\ The
Commission further estimates that the ongoing aggregate annual cost
associated with the amendment Rule 906(c) will be approximately
$1,156,000,\914\ which corresponds to $34,000 per covered participant.
The Commission believes that the costs imposed on participants by these
amendments are necessary because written policies and procedures that
are reasonably designed to ensure that covered participants comply with
any obligations to report information to a registered SDR in a manner
consistent with Regulation SBSR will enhance the overall reliability of
security-based swap transaction data reported to registered SDRs.
---------------------------------------------------------------------------

    \912\ See Regulation SBSR Adopting Release, 80 FR at 14716.
    \913\ The Commission derived its estimate from the following:
[($58,000 + $34,000) x 34 covered participants (10 platforms + 4
registered clearing agencies + 20 registered broker-dealers)] =
$3,128,000, or approximately $92,000 per covered participant.
    \914\ The Commission derived its estimate from the following:
[$34,000 x 34 covered participants (10 platforms + 4 registered
clearing agencies + 20 registered broker-dealers)] = $1,156,000, or
approximately $34,000 per covered participant.
---------------------------------------------------------------------------

    Finally, existing Rule 901(d)(9) requires the reporting, if
applicable, of the platform ID for a platform on which a security-based
swap was executed. In the U.S. Activity Proposal, the Commission
proposed to amend Rule 901(d)(9) to require the reporting, if
applicable, of the broker ID of a registered broker-dealer (including a
registered SB SEF) that is required by Rule 901(a)(2)(ii)(E)(4) to
report a security-based swap effected by or through the registered
broker-dealer.\915\ As discussed above, the Commission has adopted the
requirements that the registered broker-dealer effecting the
transaction report the transaction.
---------------------------------------------------------------------------

    \915\ As described above, final Rule 901(a)(2)(ii)(E)(4)
requires a registered broker-dealer to report the information in
Rules 901(c) and 901(d) for any transaction between two unregistered
non-U.S. persons that do not fall within Rule 908(b)(5) where the
transaction is effected by or through the registered broker-dealer.
---------------------------------------------------------------------------

    As discussed in Section XII(A)(1)(d), supra, the Commission
estimates that a maximum of 20 registered broker-dealers, excluding
registered SB SEFs, will incur a reporting duty and together will
report 540 security-based swaps per year. These 20 registered broker-
dealers are subject to the amendment to Rule 901(d)(9) adopted herein.
To comply with the amendment, a registered broker-dealer likely will
build and maintain its reporting infrastructure to include the
functionality to capture and incorporate its broker ID into transaction
reports. The Commission believes that the cost of creating this
functionality is part of the start-up cost of building the broker-
dealer's reporting infrastructure,\916\ while the cost of maintaining
this functionality is part of

the annual ongoing cost of the broker-dealer's reporting
infrastructure.\917\
---------------------------------------------------------------------------

    \916\ See supra Section XII(A)(1)(d), where the Commission
estimates the total start-up cost to be $521,500 per registered
broker-dealer and $10,430,000 in aggregate, across all registered
broker-dealers.
    \917\ See supra Section XII(A)(1)(d), where the Commission
estimates the ongoing cost per year to be $316,500 per registered
broker-dealer, and $6,330,000 for all registered broker-dealers.
---------------------------------------------------------------------------

7. Discussion of Comments Received
    The Commission received a number of comments relating to its
analysis of the programmatic costs and benefits associated with the
amendments described above.
    One commenter stated that the Commission lacks complete data to
estimate the number of non-U.S. persons that engage in ANE transactions
or the number of registered broker-dealers that intermediate security-
based swap transactions, and recommended that the Commission collect a
more complete set of data to more precisely estimate the number of non-
U.S. persons that would be affected by the proposed rules. The
commenter further argued that the lack of complete data made it
difficult for the Commission to estimate the market impact, costs, and
benefits associated with amendments that apply Regulation SBSR to ANE
transactions and transactions intermediated by registered broker-
dealers.\918\
---------------------------------------------------------------------------

    \918\ See ISDA I at 3, 7. This commenter also argued that the
data available to the Commission at the time of the proposal would
not have allowed the Commission to precisely estimate, among other
things, the number of non-U.S. persons that carry out dealing
activity using personnel in the United States. See id. at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that there are limitations in the TIW
data but believes that the data do allow the Commission to arrive at a
reasonable estimate of the number of non-U.S. persons affected by the
newly adopted rules. In Section II(A)(4)(d), supra, the Commission
notes that it identified four foreign dealing entities that likely
engaged in ANE activity in 2015 but, based on the level of relevant
activity, would be unlikely to register as security-based swap dealers.
Based on the analysis, the Commission estimates that four unregistered
foreign dealing entities will engage in ANE activity and thus be
affected by the newly adopted rules.\919\ In Section XII(A)(1)(d),
supra, the Commission estimates the compliance costs associated with
Rule 901 for these four unregistered foreign dealing entities.\920\ As
discussed earlier, these programmatic costs are part of the
programmatic costs associated with Rule 901 that were accounted for in
the Regulation SBSR Adopting Release. While data limitations do not
allow the quantification of the benefits associated with the amendments
that apply Regulation SBSR to ANE transactions and transactions
intermediated by registered broker-dealers, the Commission discusses
these benefits qualitatively in Section XIII(H), infra.
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    \919\ Because of the relatively low volume of transaction
activity of these four entities during 2015 and the existence of
affiliations with other entities expected to register as security-
based swap dealers, the Commission believes, even after accounting
for growth in the security-based swap market and acknowledging the
limitations of the transaction data available for analysis, four is
a reasonable estimate of the number of unregistered dealing entities
likely to incur assessment costs as a result of new Rule 908(b)(5).
    \920\ The initial aggregate annual costs associated with Rule
901 will be approximately $3,668,000, which corresponds to
approximately $524,000 per unregistered entity. The Commission
estimates that the ongoing aggregate annual costs on an unregistered
entity associated with Rule 901 will be approximately $2,233,000,
which corresponds to approximately $319,000 per unregistered entity.
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B. Assessment Costs of Unregistered Entities Related to ANE
Transactions

1. Assessment Costs of Foreign Dealing Entities Engaging in ANE
Transactions
    New Rule 908(b)(5) provides that an unregistered foreign dealing
entity that engages in ANE transactions may incur reporting duties
under Regulation SBSR, and the amendments to Rule 901(a)(2)(ii)(E)
adopted herein provide that such foreign dealing entities will be the
reporting side in certain cases. Thus, unregistered foreign dealing
entities will incur costs to assess whether they engage in ANE
transactions and, if so, whether they will incur reporting duties under
Rule 901(a)(2)(ii)(E). The Commission estimates that four unregistered
foreign dealing entities will incur such assessment costs. The four
unregistered foreign dealing entities are in addition to the 20
additional non-U.S. persons that the Commission estimated would incur
assessment costs as a result of the rules finalized in the U.S.
Activity Adopting Release.\921\ In what follows, the Commission
discusses costs that these four unregistered foreign dealing entities
might incur to assess whether they engage in ANE transactions.
---------------------------------------------------------------------------

    \921\ See U.S. Activity Adopting Release, 81 FR at 8627. This is
calculated as 134 non-U.S. persons likely to incur assessment costs
to determine the level of ANE activity, less the 114 persons that
are likely to incur assessment costs associated with the dealer de
minimis rules adopted in the Cross-Border Adopting Release.
---------------------------------------------------------------------------

    In the U.S. Activity Adopting Release, the Commission discussed the
approaches that market participants may use to determine which
transactions involve relevant activity involving U.S. personnel and
thus would apply toward dealer de minimis thresholds. The Commission
notes that, as an initial matter, a foreign dealing entity likely will
review its current dealing operations to ascertain whether it has U.S.
personnel that could be used to arrange, negotiate, or execute
security-based swaps. The Commission believes that such a determination
will not result in significant costs because it requires only that the
foreign dealing entity check for the existence of U.S. personnel. If
the foreign dealing entity does not have U.S. personnel that could be
used to arrange, negotiate, or execute security-based swaps, then the
foreign dealing entity's assessment of whether it has engaged in ANE
activity ends.
    If, based on the review described above, the foreign dealing entity
determines that it has U.S. personnel that could be used to arrange,
negotiate, or execute security-based swaps, then the foreign dealing
entity could choose between a number of alternative means of
compliance.\922\ One alternative would be for the entity to implement
systems to check the location of personnel used in arranging,
negotiating, or executing individual security-based swap transactions.
The Commission believes that the cost of developing and modifying
systems to track the location of persons with dealing activity will be
substantially similar to the costs of such systems discussed in the
U.S. Activity Adopting Release, or $410,000 for the average foreign
dealing entity. To the extent that non-U.S. persons already employ
systems that track the location of persons with dealing activity, the
costs of modifying such IT systems may be lower than the Commission's
estimate.\923\ In addition to the development or modification of such
systems, the Commission estimates that entities would incur the cost of
$6,500 per location per year on an ongoing basis for training,
compliance, and verification costs.\924\ Second, the foreign dealing
entity could choose to restrict personnel located in a U.S. branch or
office from engaging in ANE activity in connection with the entity's
dealing activity with non-U.S. counterparties. Such a restriction on
communication and staffing for purposes of avoiding certain Title VII
requirements would reduce the costs of assessing the location of
personnel involved in ANE activity and could remove entirely the need
to implement systems to track the activities of U.S. personnel on a
per-transaction basis. The Commission estimates that the costs of
establishing

policies and procedures to restrict communication between personnel
located in the United States employed by non-U.S. persons (or their
agents) and other personnel involved in dealing activity would be
approximately $28,300 for each entity that chooses this approach.\925\
---------------------------------------------------------------------------

    \922\ See U.S. Activity Adopting Release, 81 FR at 8627-28.
    \923\ See id. at 8627.
    \924\ This cost is calculated as (internal cost, 90 hours x $50
per hour = $4,500) + (consulting costs, 10 hours x $200 per hour =
$2,000) = a total cost of $6,500 per location per year. See also
U.S. Activity Adopting Release, 81 FR at 8627.
    \925\ See id. at 8628.
---------------------------------------------------------------------------

    Finally, a foreign dealing entity could avoid assessing
transactions on a per-transaction basis by choosing to report all
transactions to a registered SDR, regardless of the location of
personnel engaged in ANE activity. Such an alternative may be
reasonable for foreign dealing entities that expect few transactions
involving foreign counterparties to be arranged, negotiated, or
executed by personnel located outside the United States, such as
foreign dealing entities that primarily transact in security-based
swaps on U.S. reference entities or securities, and generally rely on
personnel located in the United States to perform market-facing
activities.\926\
---------------------------------------------------------------------------

    \926\ See id.
---------------------------------------------------------------------------

    The Commission believes that the same principles apply to foreign
dealing entities that rely on agents to arrange, negotiate, or execute
security-based swaps on their behalf. The Commission anticipates that
foreign dealing entities may employ any of the strategies above to
comply with the final rules through the choice of their agents. For
example, a foreign dealing entity may choose an agent that does not use
U.S.-based personnel for arranging, negotiating, or executing security-
based swap transactions with non-U.S. counterparties to avoid
assessment costs. The Commission also anticipates that a foreign
dealing entity might rely on representations from its agents about
whether transactions conducted on its behalf involved relevant dealing
activity by personnel from a location in the United States. This could
occur on a transaction-by-transaction basis, or, if the agent uses
personnel located in the United States in all or none of its
transactions, it could choose to make a representation about the
entirety of the agent's business.
    As in the U.S. Activity Adopting Release, the Commission believes
that a foreign dealing entity will inform its choice between the
alternative compliance strategies with a one-time review of its
security-based swap business lines. This review likely will encompass
both employees of the foreign dealing entity as well as employees of
agents used by the foreign dealing entity, and identify whether these
personnel are involved in arranging, negotiating, or executing
security-based swaps. The information gathered as a result of this
review will allow the foreign dealing entity to assess the revenues
that it expects to flow from transaction activity performed by U.S.
personnel. This information also will help these market participants
form preliminary estimates about the costs associated with various
alternative compliance strategies, including the trade-by-trade
analysis outlined above. This initial review may be followed with
reassessment at regular intervals or subsequent to major changes in the
market participant's security-based swap business, such as acquisition
or divestiture of business units. The Commission estimates that the
per-entity initial costs of a review of business lines will be
approximately $104,000. Further, the Commission believes that periodic
reassessment of business lines will cost, on average, $52,000 per year,
per entity.\927\
---------------------------------------------------------------------------

    \927\ See id. at n. 283.
---------------------------------------------------------------------------

2. Assessment Costs of Unregistered U.S. Persons Engaging in Security-
Based Swaps Against Foreign Entities
    New Rules 901(a)(2)(ii)(E)(2) and 901(3) create reporting duties
for unregistered U.S. persons that transact security-based swaps with
unregistered entities. Under Rule 901(a)(2)(ii)(E)(2), in a transaction
between an unregistered U.S. person and an unregistered foreign dealing
entity that is engaging in ANE activity, the sides would be required to
select the reporting side. Under Rule 901(a)(2)(ii)(E)(3), in a
transaction between an unregistered U.S. person and an unregistered
non-U.S. person that is not engaging in ANE activity, the unregistered
U.S. person is the reporting side. Because of these reporting duties,
an unregistered U.S. person could incur costs to assess whether its
foreign counterparty in a security-based swap transaction is an
unregistered foreign dealing entity engaging in ANE activity.
    The Commission believes that unregistered U.S. persons likely will
seek to avoid the costs of assessing whether a foreign counterparty is
engaging in ANE activity by choosing to transact only with registered
entities for which assessment is not required.\928\ The incentive of
unregistered U.S. persons to avoid transacting with unregistered
foreign counterparties is strengthened by the fact that there will be
very few unregistered foreign dealing entities that might engage in ANE
activities, and that they likely will participate in a relatively small
number of security-based swap transactions in the U.S. market. As noted
earlier,\929\ the Commission estimates that only four foreign dealing
entities will remain below the de minimis threshold and thus not have
to register as security-based swap dealers.\930\ Furthermore, to the
extent that the usage of U.S. personnel by such a foreign dealing
entity to engage in ANE activity is a question for a unregistered U.S.
person who is a potential counterparty, the foreign dealing entity has
an incentive to readily provide this information to the unregistered
U.S. person--thereby obviating the need for the U.S. person to conduct
an assessment--and to agree to be the reporting side. If the foreign
dealing entity did not agree to be the reporting side, the unregistered
U.S. person would have the option of transacting with one of several
registered security-based swap dealers, both U.S. and foreign, for
which the U.S. counterparty would not have to assess for ANE activity
or negotiate with the other side about the reporting duty, because the
duty would fall to the registered security-based swap dealer pursuant
to existing Rule 901(a)(2)(ii)(B). Therefore, the Commission believes
that any assessment costs incurred by unregistered U.S. persons will be
limited.
---------------------------------------------------------------------------

    \928\ See infra Section XIII(H)(1) (discussing the potential
competitive effects associated with assessments for ANE activity by
unregistered U.S. persons).
    \929\ See supra note 885 and accompanying text.
    \930\ For foreign dealing entities that register with the
Commission as security-based swap dealers, reporting duties stem
from their registration status, not from the presence of any ANE
activity. Therefore, for these entities, no assessment will be
needed to know whether a reporting duty arises from a particular
transaction.
---------------------------------------------------------------------------

3. Assessment Costs Associated With Rule 901(a)(2)(ii)(E)(4)
    Under new Rule 901(a)(2)(ii)(E)(4), respondent broker-dealers
(including SB SEFs) will be required to report security-based swap
transactions that they intermediate if neither side incurs the duty to
report (i.e., neither side includes a U.S. person, a registered
security-based swap dealer, a registered major security-based swap
participant, or a non-U.S. person engaging in an ANE transaction). As a
result, respondent broker-dealers will incur certain costs to assess
the circumstances in which they incur the duty to report transactions
because neither side incurs the duty. Any such assessment costs are
reflected in the cost estimates for the policies and procedures that
respondent broker-dealers are required to establish, maintain, and
enforce under Rule

906(c).\931\ The programmatic costs estimated by the Commission for the
amendment to Rule 906(c) already incorporate the cost incurred by
respondent broker-dealers when assessing whether they have a duty to
report security-based swap transactions. Therefore, respondent broker-
dealers will not incur any additional costs beyond the programmatic
cost for the amendment to Rule 906(c) adopted herein.\932\
---------------------------------------------------------------------------

    \931\ See supra Section XII(A)(3) (discussing the costs of
amended Rule 906(c)).
    \932\ See id.
---------------------------------------------------------------------------

4. Discussion of Comments Received
    The Commission received a number of comments relating to its
analysis of the assessment costs associated with the proposed
amendments to Rules 901 and 908 included in the U.S. Activity Proposal.
One commenter pointed out that the Commission's analysis of assessment
costs was incomplete because the analysis did not account for the
additional work that market participants might undertake to meet
reporting requirements during the Interim Period (i.e., the period
beginning on Compliance Date 1 but before the SBS entities registration
compliance date).\933\ According to the commenter, this additional work
and the associated cost could be avoided if the Commission scheduled
Compliance Date 1 after the SBS entities registration compliance
date.\934\ The same commenter also suggested that the Commission's cost
analysis failed to account for the possibility that some of the
documentation and processes developed by market participants for
Interim Period reporting would become obsolete after security-based
swap dealers register with the Commission.\935\
---------------------------------------------------------------------------

    \933\ See ISDA II at 11 (stating that the additional work
involves efforts to ``exchange transaction level party data, develop
a new approach to use the tie-breaker logic, enter into reporting
side agreements and delegation agreements, and build dual sets of
reporting side logic to develop an organized industry approach to
comply with SBSR''); ISDA III at 9 (stating that the Commission did
not consider the cost and effort that market participants would
spend to develop and implement interim reporting side agreements,
and the ``cost that market infrastructure providers would incur to
duplicate efforts in order to support both pre- and post-
registration reporting side approaches'').
    \934\ See ISDA II at 12; ISDA III at 9, 12.
    \935\ See ISDA I at 13.
---------------------------------------------------------------------------

    As discussed in Section X(C), supra, the Commission acknowledges
the commenters' concerns that requiring compliance with Regulation SBSR
before the SBS entities registration compliance date would have raised
numerous challenges, and that addressing these challenges would have
necessitated time and investment to create interim solutions that might
not have been useful after the SBS entities registration compliance
date. Therefore, the Commission has determined that market participants
will not be required to comply with Regulation SBSR until after the SBS
entities registration compliance date.

XIII. Economic Effects and Effects on Efficiency, Competition, and
Capital Formation

    Section 3(f) of the Exchange Act \936\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the Exchange Act \937\
requires the Commission, when making rules under the Exchange Act, to
consider the impact of such rules on competition. Section 23(a)(2) also
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \936\ 15 U.S.C. 78c(f).
    \937\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission believes that the amendments to Regulation SBSR
adopted herein will result in further progress towards providing a
means for the Commission and other relevant authorities to gain a
better understanding of the aggregate risk exposures and trading
behaviors of participants in the security-based swap market; facilitate
public dissemination of security-based swap transaction information,
thus promoting price discovery and competition by improving the level
of information to all market participants; and improve risk management
by security-based swap counterparties.\938\
---------------------------------------------------------------------------

    \938\ See 80 FR at 14779.
---------------------------------------------------------------------------

    The economic effects of these amendments on firms that provide
infrastructure services to security-based swap counterparties and the
security-based swap market generally are discussed in detail below. The
Commission also considered the effects that these amendments might have
on efficiency, competition, and capital formation. The Commission
believes that its action today is likely to affect competition among
firms that provide security-based swap infrastructure services to
market participants and affect efficiency as a result of the way that
these amendments allocate regulatory burdens. The effects of these
amendments on capital formation are likely to be indirect and will
result from the way in which these amendments affect the behavior of
registered clearing agencies, counterparties to security-based swaps,
and registered SDRs. To the extent that these amendments promote more
efficient provision of security-based swap market infrastructure
services, there would be lower transactions costs,\939\ which would
free resources for investment and capital formation.
---------------------------------------------------------------------------

    \939\ These transactions costs would include both implicit and
explicit costs. Implicit transactions costs are the spread between
transaction prices and the fundamental value of the assets being
traded. Explicit transactions costs, by contrast, are commissions
and other fees paid by counterparties for effecting transactions in
the market.
---------------------------------------------------------------------------

    This analysis has been informed by the relationships among
regulation, competition, and market power discussed in Section II(B),
supra. An environment in which there is limited competition in SDR
services could impose costs on the security-based swap market,
including higher prices or lower quality services from SDRs. For
example, a registered SDR that faces few or no competitors could seek
to impose higher prices, because persons with a duty to report
security-based swaps under Regulation SBSR might not be able to
identify a competing SDR that offers prices close enough to marginal
cost to make changing service providers efficient. Further, if
consumers of SDR services have few alternative suppliers from which to
choose, SDRs would have fewer incentives to produce more efficient SDR
processes and services. This combination of higher prices for SDR
services and/or less efficient SDR services could reduce security-based
swap transaction activity undertaken by market participants to hedge
assets that have cash flows that are related to the cash flows of
security-based swaps. A reduction in hedging activity through security-
based swaps could reduce the values of assets held by market
participants and in turn result in welfare losses for these market
participants.
    However, there could be some offsetting benefit to limited
competition in the market for SDR services for both regulatory
authorities and the public. A small set of registered SDRs could make
it simpler for the Commission and other relevant authorities to build a
complete picture of transaction activity and outstanding risk exposures
in the security-based swap market, and could limit the need for market
observers to aggregate the security-based swap transaction data
disseminated by

multiple SDRs before using it as an input to economic decisions.
    The Commission also considered the effects on efficiency,
competition, and capital formation stemming from the amendments to
Rules 901 and 908 that will subject additional cross-border security-
based swaps to regulatory reporting and public dissemination, and
assign the duty to report those cross-border transactions. The adopted
amendments might affect the security-based swap market in a number of
ways, many of which are difficult to quantify. In particular, a number
of the potential effects that the Commission discusses below are
related to price efficiency, liquidity, and risk sharing. These effects
are difficult to quantity for a number of reasons. First, in many cases
the effects are contingent upon strategic responses of market
participants. For instance, the Commission notes in Section XIII(H)(2),
infra, that under the adopted approach non-U.S. persons may choose to
relocate personnel, making it difficult for U.S. counterparties to
access liquidity in security-based swaps. The magnitude of these
effects on liquidity and on risk sharing depend upon a number of
factors that the Commission cannot estimate, including the likelihood
of relocation, the availability of substitute liquidity suppliers, and
the availability of substitute hedging assets. Therefore, much of the
discussion below is qualitative in nature, although the Commission
tries to describe, where possible, the direction of these effects.
    Not only can some of these effects be difficult to quantify, but
there are many cases where a rule could have two opposing effects,
making it difficult to estimate a net impact on efficiency,
competition, or capital formation. For example, in the discussion of
the net effect of certain amendments to Regulation SBSR on efficiency,
the Commission expects that post-trade transparency may have a positive
effect on price efficiency, while it could negatively affect liquidity
by providing incentives for non-U.S. persons to avoid contact with U.S.
persons. The magnitude of these two opposing effects will depend on
factors such as the sensitivity of traders to information about order
flow, the impact of public dissemination of transaction information on
the execution costs of large orders, and the ease with which non-U.S.
persons can find substitutes that avoid contact with U.S. personnel.
Each of these factors is difficult to quantify individually, which
makes the net impact on efficiency equally difficult to quantify.

A. Reporting of Clearing Transactions

    New Rule 901(a)(2)(i) assigns the duty to report a security-based
swap that has a registered clearing agency as a direct counterparty to
that registered clearing agency. Existing Rule 901(a) does not assign
reporting obligations for any clearing transactions; thus, in the
absence of Rule 901(a)(2)(i), clearing transactions would not be
subject to any regulatory reporting requirement. Without a requirement
for clearing transactions to be reported to a registered SDR, the
Commission and other relevant authorities would have only limited
ability to carry out market oversight functions. For example, while the
Commission could access transaction reports of alphas and uncleared
transactions, the Commission would not be able to obtain from
registered SDRs information about the open security-based swap
positions of the relevant counterparties after alpha transactions are
cleared. Requiring that clearing transactions be reported to registered
SDRs and delineating reporting responsibilities for these transactions
are particularly important given the level of voluntary clearing
activity in the market as well as the mandatory clearing determinations
that will be required under Title VII.\940\
---------------------------------------------------------------------------

    \940\ See General Policy on Sequencing, 77 FR at 35636.
---------------------------------------------------------------------------

    The Commission believes that, because a registered clearing agency
creates the clearing transactions to which it is a counterparty, the
registered clearing agency is in the best position to provide complete
and accurate information for the clearing transactions resulting from
the security-based swaps that it clears.\941\ If the Commission
assigned the reporting obligation for clearing transactions to a person
who lacked direct access to the information required to be reported,
that person would be obligated to obtain the required information from
the clearing agency or another party who had access to the information
to discharge its reporting obligation. Thus, assigning reporting
obligations to the non-clearing-agency side could increase the number
of reporting steps, thereby increasing the possibility of discrepancy,
error, or delay in the reporting process. Placing the reporting duty on
the non-clearing-agency side could also reduce data reliability if the
data has to be reconfigured to be acceptable by the SDR.\942\
Inaccurate or delayed reporting of clearing transactions would
negatively impact the ability of the Commission and other relevant
authorities to understand, aggregate, and act on the transaction
information.
---------------------------------------------------------------------------

    \941\ Although registered clearing agencies might pass on the
costs associated with reporting clearing transactions, at least in
part, to their non-reporting counterparties, the costs that are
passed on to non-reporting parties are likely to be lower than the
costs that the non-reporting parties would face if they had direct
responsibility to report these transactions.
    \942\ See supra Section III(B).
---------------------------------------------------------------------------

    New Rule 901(a)(2)(i) also allows the registered clearing agency
that is required to report all clearing transactions to which it is a
counterparty to select the registered SDR to which to report. As noted
in Section II(B), supra, because many of the infrastructure
requirements for entrant SDRs are shared by registered clearing
agencies, registered clearing agencies might pursue vertical
integration into the market for SDR services at a lower cost relative
to potential entrants from unrelated markets. If the costs of reporting
to affiliated SDRs are lower than the costs of reporting to
unaffiliated SDRs, registered clearing agencies will likely choose to
report clearing transactions to an affiliated SDR. Because a registered
clearing agency is likely to be involved in developing an affiliated
SDR's systems, the clearing agency will likely avoid costs related to
translating or reformatting data due to incompatibilities between data
reporting by the registered clearing agency and data intake by the SDR.
To the extent that a clearing agency incurs a lower cost when
connecting to an affiliated SDR, the cost of reporting clearing
transactions to an affiliated SDR is likely to be lower than the cost
of reporting to an independent SDR. While both a clearing-agency-
affiliated SDR and an independent SDR could lower their average costs
by adding clearing transactions to their existing volume of reported
transactions, only the clearing agency can reduce the cost of
connecting to its affiliated SDR.
    Vertical integration of security-based swap clearing and SDR
services could be beneficial to other market participants if they
ultimately share in these efficiency gains. For example, efficiency
gains due to straight-through processing from execution to reporting
could lower transactions costs for market participants and reduce the
likelihood of data discrepancies and delays. Even if registered
clearing agencies do not enter the market for SDR services, the
potential for them to pursue a vertical integration strategy could
motivate independent SDRs to offer more competitive service models.
    The Commission is aware of the potential costs of allowing
registered

clearing agencies to select the SDR to which they report. If Rule
901(a)(2)(i) encourages the formation of clearing-agency-affiliated
SDRs that would not otherwise emerge, the aggregate number of
registered SDRs might reflect an inefficient level of service
provision. Once an entity has established the functionality to offer
clearing and central counterparty services for security-based swaps,
only marginal additional investments would likely be needed to offer
SDR services. The ease with which registered clearing agencies set up
affiliated SDRs could affect how well all SDRs exploit economies of
scale. As noted in Section II(B)(2), supra, in the market for SDR
services, economies of scale arise from the ability to amortize the
fixed costs associated with infrastructure over a large volume of
transactions. With a fixed volume of reportable transactions,
exploitation of economies of scale by each SDR becomes more limited as
the number of SDRs increases. Thus, the entry of clearing-agency-
affiliated SDRs could indicate that each SDR benefits from an
affiliation with a clearing agency and might not, in aggregate, result
in the provision of transaction reporting services at a lower per-
transaction cost than if there were fewer SDRs. Inefficiencies could
result if the Commission and the public had to receive and process
security-based swap transaction data from a larger number of registered
SDRs. Connecting to a larger number of SDRs and merging transaction
data with potentially different data formats could be costly and
difficult.
    The potential for efficiency gains through vertical integration of
clearing agencies and SDRs could foreclose entry into the market for
SDR services except by firms that are already present in the market for
clearing agency services. Registered clearing agencies are more likely
to benefit from efficiencies in shared infrastructure than independent
SDRs, given that it is more difficult for an SDR to enter the market
for clearing services than for a clearing agency to enter the market
for SDR services.\943\ Moreover, to the extent that an affiliated SDR
is not as cost-effective as a competing independent SDR, a registered
clearing agency could subsidize the operation of its affiliate SDR to
provide a competitive advantage in its cost structure over independent
SDRs. Hence, providing a registered clearing agency with the discretion
to select the registered SDR could provide a competitive advantage for
clearing-agency-affiliated SDRs relative to independent SDRs. If a
registered clearing agency subsidizes its affiliated SDR using revenue
generated from its clearing business, the clearing agency's members
would indirectly bear some of the costs of operating the affiliated
SDR. Such an allocation of SDR cost to clearing members could be
inefficient because the benefits of reporting transactions to an SDR
(i.e., the benefits of regulatory reporting and public dissemination)
accrue to market participants generally, and not just to clearing
members.
---------------------------------------------------------------------------

    \943\ A registered clearing agency, particularly one that acts
as a central counterparty for security-based swaps, needs
significant financial resources to ensure that it can absorb losses
from clearing member defaults, while SDRs do not. Similarly, a
registered clearing agency requires significant risk management
expertise that an SDR does not. Thus, the barriers to entry into the
clearing agency market are higher than the barriers to entry into
the SDR market.
---------------------------------------------------------------------------

    As a result of new Rule 901(a)(2)(i), clearing members might find
that the records of their security-based swap transactions are
fragmented across multiple registered SDRs (i.e., alpha SDRs and, in
addition, clearing-agency-affiliated SDRs to which registered clearing
agencies report clearing transactions). The Commission does not
believe, however, that fragmentation in the storage of transaction
reports would create significant difficulties or inefficiencies for a
clearing member that wishes to consolidate all its security-based swap
transaction reports at a chosen SDR to facilitate activities such as
risk management. Such a clearing member might contract with a
registered clearing agency, for a fee, to transmit data for its
clearing transactions to an SDR of the clearing member's choice as a
duplicate report. This would allow the registered clearing agency to
satisfy its obligations while permitting the clearing member to
establish and maintain access to a consolidated record of all of its
security-based swap transactions in a single SDR. However, in this
case, the registered clearing agency could choose a fee schedule that
encourages the clearing member to report its uncleared bilateral
transactions to the affiliated SDR. Such a fee schedule might involve
the clearing agency offering to terminate alpha transactions reported
to its affiliate SDR for a lower price than alpha transactions to an
independent SDR.
    As discussed in Section XII(B)(1)(a), supra, the Commission has
estimated the annual and on-going costs associated with requiring
registered clearing agencies to establish connections to registered
SDRs. The Commission believes that, for a given registered clearing
agency, these costs are likely to be lower for a connection to an
affiliated SDR than to an independent SDR. Because the registered
clearing agency is likely to have been involved in developing its
affiliated SDR's systems, the clearing agency can likely avoid costs
related to translating or reformatting data due to incompatibilities
between the clearing agency's data format and the data format required
by the SDR. The reporting of clearing transactions by registered
clearing agencies to their affiliated SDRs could promote efficiency in
two ways. First, a registered clearing agency would incur lower
connection costs when reporting to an affiliated SDR. Second, the
quality of transaction data available to the Commission could be
improved to the extent that the Commission gains access to marginally
more reliable transaction data because reporting by a registered
clearing agency to an affiliated SDR avoids introducing errors or other
data discrepancies that otherwise could occur when translating or
reformatting transaction data for submission to an independent SDR.

B. Alternative Approaches to Reporting Clearing Transactions

    As part of the economic analysis of the amendments adopted herein,
the Commission has considered the market power that providers of
security-based swap market infrastructure might be able to exercise in
pricing the services that they offer and the possibility that these
infrastructures could shift the costs created by regulatory burdens
onto their customers. The Commission included these economic
considerations in its evaluation of alternative approaches to assigning
reporting obligations for clearing transactions. As outlined above, the
Commission considered four alternatives for assigning these reporting
obligations as well as comments received related to these alternatives.
The following section discusses the likely economic effects of these
alternatives, including their likely impacts on efficiency,
competition, and, indirectly, capital formation.
1. Alternative 1
    The first alternative would be to apply the reporting hierarchy in
existing Rule 901(a)(2)(ii) to clearing transactions. Under Alternative
1, a counterparty to a clearing transaction other than the clearing
agency, such as a registered security-based swap dealer, would have the
duty to report the clearing transaction. As discussed above, assigning
reporting obligations to the non-clearing-agency side could increase
the number of reporting steps, thereby increasing the possibility of

discrepancy, error, or delay in the reporting process. Placing the
reporting duty on the non-clearing-agency side also could reduce data
reliability if the data has to be reconfigured to be acceptable by the
SDR.\944\
---------------------------------------------------------------------------

    \944\ See supra Section III(B).
---------------------------------------------------------------------------

    The Commission continues to believe that it is unlikely that non-
clearing-agency counterparties would be subject to significant
additional costs associated with building infrastructure to support
regulatory reporting for clearing transactions under this alternative,
for two reasons.\945\ First, to the extent that market participants
that submit security-based swaps to clearing also engage in uncleared
transactions and sit atop the reporting hierarchy, they likely already
have the required infrastructure in place to support regulatory
reporting of alphas and uncleared transactions. The Commission
anticipates that, as a result, there might be only marginal additional
costs for reporting sides to report clearing transactions, if the
Commission selected Alternative 1. Moreover, the Commission anticipates
that, once infrastructure is built, the per-transaction cost of data
transmission would not vary substantially between registered clearing
agencies, who are required to report under new Rule 901(a)(2)(i), and
reporting sides, who would be required to report under Alternative 1.
---------------------------------------------------------------------------

    \945\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14781.
---------------------------------------------------------------------------

    Second, non-clearing agency counterparties, particularly those who
engage solely in cleared trades or who are not high in the reporting
hierarchy, could enter into an agreement under which the registered
clearing agency would submit the information to a registered SDR on
their behalf. This service could be bundled as part of the other
clearing services purchased, and would result in an outcome
substantially similar to giving the registered clearing agency the duty
to report. One difference, however, is that the customer of the
registered clearing agency could, under this alternative, request that
the information be submitted to a registered SDR unaffiliated with the
registered clearing agency, a choice that, under the adopted approach,
is at the discretion of the registered clearing agency. Nevertheless,
the Commission believes that, to the extent that it is economically
efficient for the registered clearing agency to report the details of
cleared transactions on behalf of its counterparties, Alternative 1
would likely result in ongoing costs of data transmission for market
participants and infrastructure providers that are, in the aggregate,
similar to the Commission's approach in Rule 901(a)(2)(i).
    If registered clearing agencies reporting to registered SDRs on
behalf of counterparties is not available under Alternative 1, then
some counterparties would be required to build infrastructure to
support regulatory reporting for clearing transactions. Analysis of
single-name CDS transactions in 2015 in which a clearing agency was a
direct counterparty shows approximately 54 market participants that are
not likely to register as security-based swap dealers or major
security-based swap participants, and therefore might be required to
build infrastructure to support regulatory reporting for clearing
transactions in order to maintain current trading practices in the
security-based swap market.\946\ One commenter asserted that the
Commission did not adequately address the role of third parties that
could perform reporting duties on behalf of reporting parties.\947\ As
noted in Section III(B), supra, Regulation SBSR permits the use of
agents to carry out reporting duties and the Commission expects that a
market participant that would be assigned the reporting obligation for
clearing transactions under Alternative 1 would contract with an agent
if it expects use of an agent to be less costly than carrying out the
reporting obligation itself. As a result, the ability to use agents
could further reduce costs to market participants under Alternative 1.
---------------------------------------------------------------------------

    \946\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14781-82. To arrive at this estimate, the Commission staff used
single-name CDS transaction data for 2015 to produce a list of all
direct counterparties to a clearing agency and removed those persons
likely to register as security-based swap dealers or major security-
based swap participants. The list of likely registrants was
constructed using the methodology described in the Cross-Border
Adopting Release. See 79 FR at 47296, n. 150 (describing the
methodology employed by the Commission to estimate the number of
potential security-based swap dealers); id. at 47297, n. 153
(describing the methodology employed by the Commission to estimate
the number of potential major security-based swap participants).
    \947\ See Markit Letter at 8.
---------------------------------------------------------------------------

    Under Alternative 1, non-clearing-agency counterparties would have
the ability to choose which registered SDR receives their reports.
Because non-clearing-agency counterparties would have this choice,
registered SDRs under the alternative approach might have additional
incentive to provide high levels of service to attract this reporting
business by, for example, providing such counterparties with convenient
access to reports submitted to the registered SDR or by supporting the
counterparties' efforts at data validation and error correction.
Additionally, ensuring that these counterparties have discretion over
which registered SDR receives the transaction data could allow these
counterparties to consolidate their security-based swap transactions
into a single SDR for record-keeping purposes or for operational
reasons, though only to the extent that they can identify a registered
SDR that accepts reports for all relevant asset classes.
    In assessing Alternative 1, the Commission recognizes that
registered clearing agencies have a comparative advantage in processing
and preparing data for reporting cleared transactions to a registered
SDR. Registered clearing agencies terminate alpha transactions, as well
as create beta and gamma transactions and all subsequent netting
transactions, and so already possess all of the relevant information to
report these transaction events to a registered SDR. Moreover, the
volume of transactions at registered clearing agencies means that they
can amortize the fixed costs of establishing and maintaining
connections to a registered SDR over a large quantity of reportable
activity, potentially allowing them to report transactions at a lower
average cost per transaction than many other market participants,
particularly non-registered persons.
    The Commission believes that, given this comparative advantage,
applying to clearing transactions the same reporting hierarchy that it
has adopted for uncleared transactions would result in a registered
clearing agency reporting the transaction data to a registered SDR of a
non-clearing-agency counterparty's choice as a service to the non-
clearing-agency counterparties to its clearing transactions. In this
respect, the entity that performs the actual reporting of clearing
transactions would likely be the same as with adopted Rule
901(a)(2)(i), which would assign this duty to the registered clearing
agency. The key difference under Alternative 1 is that the non-
clearing-agency counterparty would generate this responsibility through
private contract and could terminate the agreement and assume the
reporting responsibility, should it perceive the fee or service terms
as unreasonable. Such an agreement also could specify the registered
SDR to which the clearing agency should send transaction data on behalf
of the non-clearing-agency counterparty. The ability to terminate such
an agreement could diminish the potential bargaining power that the
registered clearing agency would otherwise have if the registered
clearing agency were assigned the duty to report. Further, by allowing

the non-clearing-agency counterparty to choose between registered SDRs,
such an agreement could promote competition between SDRs.
    However, because the non-clearing-agency counterparty might still
have to rely on assistance from the clearing agency to satisfy the
reporting obligations--particularly for any subsequent clearing
transactions resulting from netting and compression of multiple betas
and gammas--the reduction in clearing agency bargaining power might not
be substantial. A registered clearing agency that supplies this
information and converts it into the format prescribed by a non-
clearing-agency counterparty's chosen SDR so that the counterparty can
fulfill its reporting duty by submitting transaction data to a
registered SDR of its choice could still have significant bargaining
power with respect to providing that information.
    The Commission believes that the adopted rules are generally
consistent with the outcome under Alternative 1 in a number of key
respects. First, under both approaches to reporting--one in which the
Commission assigns the reporting responsibility for clearing
transactions to registered clearing agencies, and the other in which
the market allocates the reporting responsibility in the same way--it
is likely that registered clearing agencies will report clearing
transactions to their affiliated SDRs.\948\ Under an approach in which
the Commission does not assign any reporting duties to registered
clearing agencies, counterparties would likely be assessed an explicit
fee by registered clearing agencies for submitting reports on the
counterparties' behalf. Under Rule 901(a)(2)(i), the fees associated
with these services will likely be part of the total fees associated
with clearing security-based swaps.
---------------------------------------------------------------------------

    \948\ Unless it preferred a particular registered SDR for
operational reasons discussed above, a non-clearing-agency
counterparty to a clearing transaction would likely contract with
the clearing agency to report clearing transactions to the
registered SDR that offers the lowest price, most likely the
clearing agency affiliate. As discussed in Section II(B)(1), supra,
a registered clearing agency and its affiliated SDR have greater
control over the reporting process relative to sending transaction
data to an independent SDR. This greater control lowers the cost of
transmitting transaction data from the clearing agency to its
affiliated SDR relative to transmitting the same data to an
independent SDR. The lower cost potentially allows the affiliated
SDR to charge the lowest price among competing SDRs.
---------------------------------------------------------------------------

    In light of comments received on its proposal, the Commission
acknowledges caveats to this analysis.\949\ Under Alternative 1, a non-
clearing agency counterparty may alter the disposition of its clearing
transaction data as a result of having the right to select the
registered SDR to which this information is submitted. In particular, a
non-clearing agency counterparty with the duty to report clearing
transactions would compare the costs and benefits of contracting with
the clearing agency to fulfil reporting obligations on its behalf by
reporting to an affiliated SDR,\950\ with the costs and benefits of
alternative arrangements that would place the same data at an
independent SDR of its choice.
---------------------------------------------------------------------------

    \949\ See Markit Letter at 12. Although the commenter asserts
the benefits of allowing non-clearing agency counterparties
discretion over which registered SDR receives their data in its
assessment of Alternative 3, the Commission believes that this
analysis applies equally to the assessment of Alternative 1.
    \950\ See supra note 948.
---------------------------------------------------------------------------

    Second, under Alternative 1 and under the adopted approach,
efficiency gains stemming from consolidation of the reporting function
within registered clearing agencies would be split between such
clearing agencies and security-based swap counterparties. The
difference between these two regulatory approaches turn on how these
gains are split.
    The Commission believes that Alternative 1 would not necessarily
restrict the ability of registered clearing agencies to exercise market
power in ways that may allow them to capture the bulk of any efficiency
gains.\951\ First, while a counterparty to a registered clearing agency
could contract with the clearing agency to receive the information
about netting and compression transactions that would enable re-
transmission of the cleared transaction data to a registered SDR,
depending on the policies and procedures of the registered clearing
agency, these data might not be in the format that is required for
submission to the counterparty's SDR of choice. As a result,
counterparties to registered clearing agencies would bear the costs
associated with restructuring the data that they receive from
registered clearing agencies before submitting transaction reports to a
registered SDR. Such costs could limit the feasibility of assuming the
reporting responsibility rather than contracting to have the registered
clearing agency perform the duty. However, the Commission acknowledges,
in line with comments received on its proposal,\952\ that the use of
agents to carry out reporting duties could mitigate these costs, if
agents are able to restructure data more efficiently than
counterparties.
---------------------------------------------------------------------------

    \951\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14782.
    \952\ See Markit Letter at 8.
---------------------------------------------------------------------------

    Second, in an environment where reporting obligations for clearing
transactions rest with counterparties and there is limited competition
among registered clearing agencies, registered clearing agencies might
be able to charge high fees to counterparties who must rely on them to
provide information necessary to make required reports to registered
SDRs. A registered clearing agency could otherwise impair the ability
of its counterparties to perform their own reporting if the clearing
agency does not provide sufficient support or access to clearing
transaction data. In particular, the clearing agency might have
incentives to underinvest in the infrastructure necessary to provide
clearing transaction data to its counterparties unless the Commission,
by rule, were to establish minimum standards for communication of
clearing transaction data from registered clearing agencies to their
counterparties. As a result, counterparties could face greater
difficulties in reporting data and an increased likelihood of
incomplete, inaccurate, or untimely data being submitted to registered
SDRs.
    Third, under this alternative the registered clearing agency that
is party to the transaction potentially has weaker incentives to
provide high-quality regulatory data to the counterparty with a duty to
report, which could reduce the quality of regulatory data collected by
registered SDRs. The person with the duty to report a transaction has
strong incentives to ensure that the transaction details are
transmitted in a well-structured format with data fields clearly
defined, and that contain data elements that are validated and free of
errors because, pursuant to Regulation SBSR, this person is responsible
for making accurate reports and, if necessary, making corrections to
previously submitted data. Not only would the registered clearing
agency have no duty under Regulation SBSR to provide information to its
counterparty, but additionally, market forces might not provide
sufficient motivation to the registered clearing agency to provide data
to the counterparty in a manner that would minimize the counterparty's
reporting burden. If registered clearing agencies exercise their market
power against counterparties, the counterparties might have limited
ability to demand high-quality data reporting services from registered
clearing agencies and may require the services of agents that clean and
validate transaction data that they receive.

    The Commission believes, however, that despite a similarity in
ultimate outcomes, and any benefits that might flow from enabling
registered SDRs to compete for clearing transaction business, this
alternative does not compare favorably to the adopted approach. As
discussed above, assigning reporting obligations to the non-clearing-
agency side could increase the number of reporting steps, thereby
increasing the possibility of discrepancy, error, or delay in the
reporting process. Placing the reporting duty on the non-clearing-
agency side also could reduce data reliability if the data has to be
reconfigured to be acceptable by the SDR. The Commission believes that
discrepancies, errors, and delays are less likely to occur if the duty
to report clearing transactions is assigned to registered clearing
agencies directly, because there would be no additional or intermediate
steps where data would have to be transferred or reconfigured.\953\
---------------------------------------------------------------------------

    \953\ See supra Section III(B).
---------------------------------------------------------------------------

2. Alternative 2
    A second, closely related alternative would involve placing
registered clearing agencies within the Regulation SBSR reporting
hierarchy, below registered security-based swap dealers and registered
major security-based swap participants but above counterparties that
are not registered with the Commission. Alternative 2 would assign the
reporting obligation to a registered security-based swap dealer or
registered major security-based swap participant when it is a
counterparty to a registered clearing agency, while avoiding the need
for non-registered persons to negotiate reporting obligations with
registered clearing agencies.
    As with Alternative 1, Alternative 2 potentially results in
additional reporting steps and could marginally reduce the quality of
regulatory data relative to the adopted approach. A key difference,
however, is that Alternative 2 would reduce the likelihood of reporting
obligations falling on unregistered persons, who would likely have less
market power in negotiations with registered clearing agencies over the
terms of reporting to a registered SDR. Larger counterparties, i.e.,
those with greater transaction flow, would likely be better able to
negotiate better terms by which clearing agencies report transactions
on their behalf or provide the counterparties with access to the
clearing data so that they can perform their own reporting.
    In its discussion of Alternative 1, the Commission noted three
particular ways in which limited competition among registered clearing
agencies could result in poorer outcomes for non-clearing-agency
counterparties. First, when these counterparties obtain clearing data
from a registered clearing agency, they would likely incur any costs
related to reformatting the data for submission to a registered SDR,
including the costs of outsourcing these activities to an agent.
Second, registered clearing agencies might charge these counterparties
high fees for access to regulatory data that counterparties are
required to submit to registered SDRs. Third, registered clearing
agencies might have weak incentives to ensure that the data that they
supply to non-clearing-agency counterparties are of high quality, since
the non-clearing-agency counterparties would bear the costs of error
correction.
    Limiting the extent to which registered clearing agencies can
exercise the market power resulting from limited competition over their
counterparties could reduce some of the drawbacks to the Alternative 1.
In particular, registered clearing agencies may be less likely to
exercise market power in negotiations with larger market participants,
particularly when these market participants are also clearing members.
Clearing members play key roles in the governance and operation of
registered clearing agencies, often contributing members of the board
of directors. Moreover, clearing members contribute to risk management
at registered clearing agencies by, for example, contributing to
clearing funds that mutualize counterparty risk.\954\ Nevertheless, the
Commission believes that Alternative 2 does not fully address frictions
that arise from limited competition among registered clearing agencies,
such as high clearing fees or low quality services. The Commission
believes that Alternative 2 would be less efficient than requiring the
registered clearing agency to report the transaction information
directly to a registered SDR, because the registered clearing agency is
the only person who has complete information about a clearing
transaction immediately upon its creation.
---------------------------------------------------------------------------

    \954\ See Securities Exchange Act Release No. 68080 (October 22,
2013), 77 FR 66220, 66267 (November 2, 2012) (``Clearing Agency
Standards Adopting Release'') (discussing financial resources of
clearing agencies).
---------------------------------------------------------------------------

3. Alternative 3
    The Commission considered a third alternative that would make the
reporting side for the alpha responsible for reporting both the beta
and gamma.\955\ Alternative 3 would require the reporting side for the
alpha also to report information about a security-based swap to which
it is not a counterparty, i.e., the clearing transaction between the
registered clearing agency and the non-reporting side of the alpha. As
discussed in Section III(B), supra, Alternative 3 would be
operationally difficult to implement, could create confidentiality
concerns, and could increase the likelihood of data discrepancy, error,
and delay because Alternative 3 requires additional reporting steps.
Alternative 3 also would require reporting sides to negotiate with
registered clearing agencies to obtain transaction data and to bear the
costs of correcting errors in these data, exposing them to the market
power exercised by registered clearing agencies. Also, because the
reporting side of the alpha would report the beta and gamma,
Alternative 3 is premised on the view that the beta and gamma are life
cycle events of the alpha. The Commission, however, considered and
rejected this approach in the Regulation SBSR Adopting Release.
---------------------------------------------------------------------------

    \955\ The Commission considered and rejected this approach in
the Regulation SBSR Adopting Release. See 80 FR at 14639 (``the new
term `clearing transaction' makes clear that security-based swaps
that result from clearing (e.g., betas and gammas in the agency
model) are independent security-based swaps, not life cycle events
of the security-based swap that is submitted to clearing (e.g.,
alpha security-based swaps)''). However, the Commission is
discussing this alternative in response to a commenter that, in
response to the Regulation SBSR Proposed Amendments Release,
recommended that the Commission adopt this approach. See Markit
Letter at 11-13.
---------------------------------------------------------------------------

    In addition, Alternative 3 could result in incomplete regulatory
data because it could raise questions about who would report clearing
transactions associated with the compression and netting of beta or
gamma transactions. For example, suppose a non-dealer clears two
standard contracts on the same reference entity using a single
registered clearing agency, each contract having a different registered
security-based swap dealer as counterparty. Under this alternative to
the adopted approach, each dealer would be responsible for reporting a
gamma security-based swap between the non-dealer and the registered
clearing agency. However, this alternative does not specify which of
four potential persons (the non-dealer, one or the two registered
security-based swap dealers, or the clearing agency) would be required
to report the contract that results from the netting of the two gamma
security-based swaps between the non-dealer and the registered clearing
agency.

4. Commenter Views
    One commenter proposed a fourth alternative to assigning reporting
duties for cleared transactions.\956\ Under this alternative, ``the
platform would remain the reporting side for all platform-executed
trades while for bilateral or off platform cleared transactions, the
reporting side would be the clearing agency. However, the clearing
agency would be required to submit beta and gamma trade records to the
alpha SDR (which would be determined by the alpha trade reporting side
and not the clearing agency).'' \957\ For the reasons discussed above,
the Commission considers this alternative less appropriate than the
adopted approach.\958\ While the Commission concurs with the approach
of requiring the registered clearing agency to report the resulting
beta and gamma transactions, the Commission believes that the
registered clearing agency, when it has the duty to report security-
based swaps, should be able to choose the registered SDR to which it
reports.\959\
---------------------------------------------------------------------------

    \956\ See Markit Letter at 13.
    \957\ Id.
    \958\ See supra Section III(B).
    \959\ See supra Section III(C).
---------------------------------------------------------------------------

    The same commenter stated that requiring registered clearing
agencies to report their clearing transactions ``is not supported by an
adequate consideration of factors contained in Section 3(f) of [the
Exchange Act]'' and provided comments that focused on the proposed
rule's ``considerations of efficiency and competition.'' \960\
Specifically, this commenter believed that the proposed rule ``ignores
the efficiency benefits and reduced costs introduced by middleware
reporting agencies,'' and it ``needlessly and unjustifiably proposes an
approach to cleared [security-based swap] reporting that imposes a
burden on competition.'' \961\ Further, the commenter expressed the
view that Rule 901(a)(2)(i) would deter competition based on service
quality and cost in the market for SDR services, whereas the three
alternatives would encourage such competition in the same market.\962\
The Commission believes that it has adequately considered the factors
contained in Section 3(f) of the Exchange Act in this release and in
the Regulation SBSR Proposing Release.\963\ Further, the Commission has
evaluated four alternative allocations of reporting obligations,
including their likely effects on efficiency and competition. The
Commission appreciates the commenter's concern that competition in the
market for SDR services could be hindered by Rule 901(a)(2)(i) with the
possible result that clearing-agency-affiliated SDRs might charge
higher fees and/or offer lower quality services to their users.
However, the Commission notes that such effects on competition, should
they occur, would be limited because Rule 13n-4(c)(1)(i) under the
Exchange Act \964\ requires an SDR, including a clearing-agency-
affiliated SDR, to ensure that any dues, fees, or other charges imposed
by, and any discounts or rebates offered by, the SDR are fair and
reasonable and not unreasonably discriminatory. As noted in Section
XIII, supra, an affiliated SDR might offer higher quality services and/
or lower fees to its participants to the extent that the affiliated SDR
realizes efficiency gains from vertical integration and shares some of
these gains with its participants. Further, other commenters expressed
the view that requiring registered clearing agencies to report clearing
transactions could enhance market efficiency and improve the accuracy
of reported data. Two commenters observed that clearing agencies will
be able to leverage existing reporting processes and the existing
infrastructure that they have in place with market participants and
vendors to report clearing transactions.\965\ Another commenter
observed that requiring clearing agencies to report clearing
transactions in security-based swaps would be ``efficient, cost
effective and promote[ ] global data consistency,'' because ``clearing
agencies have demonstrated their ability and preference to report data
for cleared transactions'' under swap data reporting rules established
by the CFTC and in non-U.S. jurisdictions, including the European Union
and Canada.\966\ One commenter agreed with the Commission's preliminary
view that proposed Rule 901(a)(2)(i) was superior to alternative
reporting workflows that ``could require a person who does not have
information about [a] clearing transaction at the time of its creation
to report that transaction.'' \967\ As discussed above, the Commission
acknowledges that Rule 901(a)(2)(i) could place a burden on competition
in the market for clearing services and the market for security-based
swap data reporting. However, the Commission rejects the commenter's
view that the adopted approach needlessly and unjustifiably imposes a
burden on competition. As discussed above, the Commission believes that
the adopted approach is appropriate because it would eliminate
additional steps in the reporting process that would be needed if
another market participant were assigned the duty to report a clearing
transaction or if the duty were to remain unassigned. By adopting a
reporting methodology with as few steps as possible, the Commission
intends to minimize potential delays, discrepancies, and errors in data
transmission by assigning reporting duties to the person that holds the
most complete and accurate information about clearing transactions at
the moment of their creation.\968\
---------------------------------------------------------------------------

    \960\ See Markit Letter at 3.
    \961\ See id. at 3-4.
    \962\ See id. at 12 (stating that ``Proposed Rule 901(a)(2)(i)
would deter competition for SDR and post-trade processing services
and lower the utility of SDR services, since SDRs that are
affiliated to clearing agencies and receive their reports for
cleared SBS would no longer need to compete based on quality of
service and cost, with no commensurate marginal benefit for market
participants.'') and 13 (stating that ``these other alternatives,
relative to the Proposal, encourage competition based on quality of
service and cost and the rule of reporting agents and are more
likely to result in outcomes whereby the same SDR will receive
alpha, beta, and gamma trades'').
    \963\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14779-84.
    \964\ 17 CFR 240.13n-4(c)(1)(i).
    \965\ See ICE Letter at 5 (observing that, although the same
systems could be used, they would need to be modified in certain
respects); LCH.Clearnet Letter at 8.
    \966\ ISDA/SIFMA Letter at 24.
    \967\ Better Markets Letter at 4.
    \968\ See supra Section XII(A).
---------------------------------------------------------------------------

C. Reporting by Platforms

    Pursuant to new Rule 901(a)(1), a platform is required to report a
security-based swap transaction executed on that platform that will be
submitted to clearing.\969\ With the ability to clear security-based
swap transactions, it is possible for two counterparties to trade
anonymously on a platform. In an anonymous trade, because neither
counterparty would be aware of the name or registration status of the
other, it might not be possible for either counterparty to use the
reporting hierarchy in existing Rule 901(a)(2)(i) to determine who
would be required to report this alpha transaction.\970\ The Commission
is requiring a platform to report all alpha transactions executed on
the platform that will be submitted to clearing, even those that might
not be anonymous; this approach avoids the need for the platform and
the counterparties to ascertain whether the counterparties are in fact
unknown to each other.
---------------------------------------------------------------------------

    \969\ See supra Section V.
    \970\ See Regulation SBSR Proposed Amendments Release, 80 FR at
14748-49.
---------------------------------------------------------------------------

    Furthermore, the platform is the only entity at the time of
execution--i.e., before the transaction is submitted for clearing--that
knows the identity of both sides. Requiring the platform to

report information associated with transactions that will be submitted
to clearing also reduces the number of data transmission steps between
execution and reporting to a registered SDR. A platform that matches
orders and executes transactions will possess or can readily obtain all
of the primary trade information necessary to be reported to a
registered SDR, and new Rule 901(a)(1) makes it unnecessary for
counterparties to report these transactions. This approach is designed
to result in a more efficient reporting process for platform-executed
alphas. By reducing the number of steps between the creation of
transaction data and reporting to a registered SDR, Rule 901(a)(1)
reduces the possibility of data discrepancies and delays.
    While the level of security-based swap activity that currently
takes place on platforms and is subsequently submitted for clearing is
low, future rulemaking under Title VII could cause security-based swap
trading volume on platforms to increase.\971\ Efficiencies resulting
from requiring platforms to report platform-executed alphas will
increase to the extent that security-based swap trading volumes on
platforms increases.
---------------------------------------------------------------------------

    \971\ The Commission has proposed, but not adopted, rules
governing the registration and operation of SB SEFs. See SB SEF
Proposing Release, 76 FR at 10948.
---------------------------------------------------------------------------

    As discussed above in the context of reporting obligations for
registered clearing agencies, the Commission believes that the
reporting infrastructure costs associated with required reporting
pursuant to the adopted amendments could represent a barrier to entry
for new, smaller platforms that do not yet have the ability to report
transactions to a registered SDR. To the extent that the adopted rules
and amendments might deter new trading platforms from entering the
security-based swap market, this could negatively impact competition.
1. Alternative Approaches to Reporting Platform-Executed Transactions
    For platform-executed transactions that are submitted to clearing
but are not anonymous, an alternative would be to use the reporting
hierarchy in existing Rule 901(a)(2)(ii) to assign the reporting duty.
Under such an alternative, a platform would have to determine which of
the trades that it executes are anonymous and which are not, which
would impose additional costs on platforms.\972\ It is likely that
platforms would seek to pass on these costs to its participants. The
Commission believes that the due diligence that platforms would have to
perform under this alternative would impose unnecessary costs without
enhancing the benefits of regulatory reporting. Such costs can be
avoided by requiring a platform to report all platform-executed alphas,
which is what adopted Rule 901(a)(2)(i) requires.
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    \972\ There could be situations where a market participant
splits an order into two or more child orders and some child orders
are anonymously executed while other child orders are not
anonymously executed. This could further complicate separation of
anonymous and non-anonymous executions.
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    A second alternative would be to assign the reporting duty for all
platform-executed alphas to the registered clearing agency to which the
alphas are submitted. While the registered clearing agency would likely
have the information necessary for reporting--because the clearing
agency will need much of the same information about the alpha to clear
it--the Commission believes that it would be more appropriate to assign
the reporting duty to the platform. This approach creates a more direct
flow of information from the point of execution on the platform to the
registered SDR, thus minimizing opportunities for data discrepancies or
delays. This approach also avoids the need for the registered clearing
agency to invest resources in systems to receive data elements from
platforms beyond what is already required for clearing, and to report
transactions to which it is not a counterparty.

D. Reporting of Clearing Transactions Involving Allocation

    In the Regulation SBSR Adopting Release, the Commission explained
the application of Regulation SBSR to bunched order executions that are
not submitted to clearing.\973\ In the Regulation SBSR Proposed
Amendments Release, the Commission discussed the application of
Regulation SBSR to bunched order executions that are submitted to
clearing, and the security-based swaps that result from the allocation
of the bunched order if the resulting security-based swaps are cleared.
In this release, the Commission discusses how the amendments to
Regulation SBSR that the Commission is adopting today apply to bunched
order executions that are cleared. The discussion is designed to
accommodate the various workflows that market participants employ to
execute and allocate bunched order alphas. This guidance does not
create any new duties under Regulation SBSR but does explain the
application of Regulation SBSR to events that occur as part of the
allocation process.\974\ Additionally, because the guidance explains
how Regulation SBSR applies to a platform-executed bunched order that
will be submitted to clearing--and the security-based swaps that result
from the allocation of any bunched order execution, if the resulting
security-based swaps are cleared--the interpretation is not likely to
have consequences for efficiency, competition, or capital formation
beyond those stemming from imposing reporting obligations on registered
clearing agencies and platforms, as discussed above in Sections II and
III, respectively.
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    \973\ See 80 FR at 14625-27.
    \974\ The Commission's estimates of events reportable under
these amendments includes observable allocation by clearing agencies
in the TIW data. Therefore, the costs associated with clearing
transactions involving allocation are included in the Commission's
estimate of the programmatic costs of Rules 901(a)(1) and (a)(2)(i).
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E. Application of Regulation SBSR to Prime Brokerage Transactions

    In Section VII, supra, the Commission discussed how Regulation SBSR
applies to security-based swaps arising out of prime brokerage
arrangements. This guidance does not create any new duties; it merely
explains how a series of security-based swaps arising from a prime
brokerage arrangement should be reported and publicly disseminated
under Regulation SBSR. Therefore, there are no additional costs or
benefits beyond those already considered in the Regulation SBSR
Adopting Release.\975\
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    \975\ See 80 FR 14700-704. The Commission's estimates in that
release of the total number of reportable events included all
security-based swap legs arising out of prime brokerage
arrangements.
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    A prime brokerage arrangement involves a reallocation of
counterparty risk, as the prime broker interposes itself between its
client and a third-party executing dealer. Regulatory reporting of each
security-based swap leg will allow the Commission and other relevant
authorities to more accurately conduct market surveillance and monitor
counterparty risk. As a result of public dissemination of all security-
based swaps arising from a prime brokerage arrangement, market
observers will have access to information regarding each leg. This
could help market observers infer from these disseminated reports the
fees that the prime broker charges for its credit intermediation
service and separate these fees from the transaction price of the
security-based swap.

F. Prohibition of Fees and Usage Restrictions for Public Dissemination

    New Rule 900(tt), as adopted herein, defines the term ``widely
accessible''--

which appears in the definition of ``publicly disseminate'' in existing
Rule 900(cc)--to mean ``widely available to users of the information on
a non-fee basis.'' This new definition has the effect of prohibiting a
registered SDR from charging fees for or imposing usage restrictions on
the security-based swap transaction data that it is required to
publicly disseminate under Regulation SBSR.
    Allowing free and unrestricted access to the security-based swap
data that registered SDRs are required to publicly disseminate is
designed to reinforce the economic effects of public dissemination
generally, because market observers will be able to enjoy the benefits
of public dissemination without cost and without any restriction on how
they use the disseminated data. Furthermore, new Rule 900(tt)
reinforces the benefits of existing Rule 903(b), which provides that a
registered SDR may utilize codes in the reported or disseminated data
only if the information necessary to understand the codes is free and
not subject to any usage restrictions. As the Commission pointed out in
the Regulation SBSR Adopting Release, Rule 903(b) could improve the
efficiency of data intake by registered SDRs and data analysis by
relevant authorities and other users of security-based swap data;
improve efficiency by minimizing operational risks arising from
inconsistent identification of persons, units of persons, products, or
transactions by counterparties; and promote competition by prohibiting
fee-based licensing of reference information that could create barriers
to entry into the security-based swap market.\976\ If the Commission
did not prohibit fees and usage restrictions relating to the publicly
disseminated data, a registered SDR that wished to charge (or allow
others to charge) users for the information necessary to understand
these UICs--but could not, because of Rule 903(b)--might seek to do so
indirectly by recharacterizing the charge as being for public
dissemination. Such potential action by a registered SDR could reduce
the economic benefits of Rule 903(b) and public dissemination
generally. New Rule 900(tt) is designed in part to reinforce the
economic effects, and help prevent avoidance, of Rule 903(b).
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    \976\ See 80 FR at 14723.
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    The adopted prohibition on a registered SDR charging fees for
public dissemination of the regulatorily mandated security-based swap
transaction data also is consistent with the CFTC's current prohibition
on CFTC-registered swap data repositories charging for public
dissemination of regulatorily mandated swap transaction data. Such
consistency lessens the incentives for swap data repositories
registered with the CFTC to enter the security-based swap market and
also register with the Commission as SDRs and charge for public
dissemination of security-based swap market data.\977\ If the
Commission did not take this approach, a CFTC-registered swap data
repository could enter the security-based swap market and charge for
public dissemination of security-based swap market data, and use
revenues from this business to subsidize its operations in the swap
market, where it is not permitted to charge for public dissemination of
swap market data. If an SEC-registered SDR charges fees for security-
based swap data to subsidize its reporting activity in the CFTC regime,
then security-based swap market participants reporting to this SDR
could face higher costs than those it would face if the SDR
participated only in the security-based swap market.
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    \977\ Dual registration is likely to occur independent of the
ability to charge for public dissemination of data in the security-
based swap market. However, the ability to charge for public
dissemination would add an additional incentive to do so.
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    The Commission recognizes that, because registered SDRs are
prohibited from charging for the security-based swap data that
Regulation SBSR requires them to publicly disseminate, they must obtain
funds for their operating expenses through other means.\978\ A
registered SDR could pass the costs of publicly disseminating security-
based swap data through to the persons who report transactions to the
registered SDR. Direct fees imposed on market participants would likely
be in proportion to the number of transactions they execute, with more
active market participants, who contribute more to the production of
transaction information, paying a larger share of the cost of
disseminating that information. By contrast, it would be more difficult
to equitably calibrate a fee based on the consumption of the publicly
disseminated data, because it would be difficult to measure the
intensity of a market observer's usage of the disseminated data. As the
Commission discussed in the Regulation SBSR Adopting Release, the
positive effects of public dissemination on efficiency, competition,
and capital formation derive from the broad based use of disseminated
data by a multitude of users.\979\ There are likely to be a large
number of marginal users of the disseminated data who would not obtain
the data if they were required to pay for it. Thus, many potential
users of the data might never have the opportunity to develop new uses
for the data. While a funding model relying on fees for transaction
reporting could result in security-based swap market participants
subsidizing other users of security-based swap market data, charging
fees for the consumption of publicly disseminated data could
drastically reduce the number of data users and the associated positive
effects on efficiency, competition, and capital formation.
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    \978\ It is unlikely, however, in the absence of Rule 900(tt)
that registered SDRs would have relied on charges for public
dissemination as the sole means of funding their operations.
    \979\ See 80 FR 14720-22 (explaining how efficiency,
competition, and capital formation could be enhanced when market
participants, market observers, debt issuers, lenders, and business
owners and managers, among others, make use of publicly disseminated
security-based swap data).
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    The Commission notes that new Rule 900(tt) does not prohibit a
registered SDR from offering value-added security-based swap market
products for sale, provided that the SDR does not make transaction
information available through the value-added product sooner than it
publicly disseminates each individual transaction. This requirement is
designed to prevent a registered SDR from obtaining an unfair
competitive advantage over other firms that might wish to sell value-
added market data products. Any such products could allow market
observers to enjoy the positive impacts of Regulation SBSR on
efficiency, competition, and capital formation more directly, by making
it easier for market observers to understand the publicly disseminated
data. Even if the SDR does not make transaction information available
through the value-added product sooner than it publicly disseminates
each individual transaction, the SDR retains a time advantage over a
competing provider of value-added data products. This time advantage is
the time taken for the SDR to electronically disseminate transaction
information to the public. While the SDR has such a time advantage, the
competitive effect of this advantage depends in part on the nature of
the value-added data product. For value-added data products whose
usefulness is not highly sensitive to data transmission time, such as a
summary of monthly security-based swap trading activity, the SDR's time
advantage would not exert a significant negative effect on other
competitors. On the other hand, for value-added products whose
usefulness decreases with data

transmission time, such as a product that predicts security-based swap
prices or volumes over the next minute, the SDR's time advantage could
have a negative effect on other competitors. Even for such products,
the SDR's time advantage would be limited if there are multiple
competing SDRs accepting data in the same asset class and the SDR is
offering a value-added product that requires not only the data that it
accepts but also the data publicly disseminated by other competing
SDRs. Any time advantage that the SDR might enjoy with respect to the
data that it accepts could be offset by the absence of time advantage
when receiving data publicly disseminated by other competing SDRs.

G. Compliance Schedule for Regulation SBSR

    The compliance schedule adopted in this release is designed to
provide affected persons, especially registered SDRs and persons with a
duty to report security-based swap transactions, with time to develop,
test, and implement systems for carrying out their respective duties
under Regulation SBSR. The new compliance schedule takes into
consideration the fact that the CFTC's regulatory reporting and public
dissemination rules are already in effect. As a result, several SDRs
have provisionally registered and are operating in the swap market
under CFTC rules, and swap market participants have developed
substantial infrastructure to support swap transaction reporting. It is
likely that participants in both the swap and security-based swap
markets will seek to repurpose much of the infrastructure implemented
in the swap market to support activities in the security-based swap
market, which would enable more efficient implementation of the
Commission's regime for security-based swap reporting.
    Also, as discussed in Section X(C), supra, the new compliance
schedule aligns Regulation SBSR compliance with security-based swap
dealer registration. Thus, with respect to newly executed security-
based swaps in a particular asset class, Compliance Date 1 for Rule 901
of Regulation SBSR is the first Monday that is the later of: (1) Six
months after the date on which the first SDR that can accept
transaction reports in that asset class registers with the Commission;
or (2) one month after the SBS entities registration compliance date.
Every security-based swap in that asset class that is executed on or
after Compliance Date 1 must be reported in accordance with Rule 901.
Compliance Date 2, when public dissemination shall commence, is the
first Monday that is three months after Compliance Date 1. Compliance
Date 3, by which all historical security-based swaps in that asset
class must be reported to a registered SDR (to the extent that
information about such transactions is available), is two months after
Compliance Date 2.\980\
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    \980\ Every security-based swap in that asset class that is
executed on or after July 21, 2010, and up and including to the day
immediately before Compliance Date 1 is a transitional security-
based swap. As discussed in Section X(E), infra, the Commission's
final compliance schedule establishes a separate Compliance Date 3
for the reporting of pre-enactment and transitional security-based
swaps.
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