3. Response to Comments and Final Rules
    After considering the comments, the Commission has determined to
apply the rules to SBS Dealers and Major SBS Participants as proposed.
To that end, as discussed below, where a statutory provision
encompasses both SBS Dealers and Major SBS Participants,\158\

we are adopting rules that would apply equally to SBS Dealers and Major
SBS Participants.\159\ We think this is important to ensure that
counterparties of Major SBS Participants, as well as counterparties of
SBS Dealers, receive the protections the rules are intended to provide.
For example, to the extent that Major SBS Participants may be better
informed about the risks and valuations of security-based swaps due to
information asymmetries, disclosures may help inform counterparties
concerning the material risks and characteristics of security-based
swaps, and material conflicts of interest of Major SBS Participants
entering into security-based swaps.\160\
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    \158\ See Section 15F(h)(1) (requiring SBS Dealers and Major SBS
Participants to conform to business conduct standards as prescribed
by Section 15F(h)(3) (regarding duty to verify counterparty status
as ECP, required pre-trade disclosures and ongoing daily mark
disclosures)); Section 15F(h)(1)(A) (requiring SBS Dealers and Major
SBS Participants to comply with standards as may be prescribed by
the Commission regarding fraud); Section 15F(h)(1)(B) (requiring SBS
Dealers and Major SBS Participants to comply with standards as may
be prescribed by the Commission regarding diligent supervision of
the business of the SBS Dealer or Major SBS Participant); Section
15F(h)(4)(A) (antifraud provisions applicable to both SBS Dealers
and Major SBS Participants); Section 15F(h)(5) (regarding special
requirements for SBS Dealers and Major SBS Participants that enter
into a security-based swap with a special entity); and Section
15F(k) (imposing CCO obligations).
    \159\ See Rules 15Fh-3(a) (verification of counterparty status),
15Fh-3(b) (pre-trade disclosures), 15Fh-3(c) (daily mark), 15Fh-3(h)
(supervision), 15Fh-5 (special requirements for SBS Entities acting
as counterparties to special entities) and 15Fk-1 (CCO
requirements).
    \160\ See discussion infra in Section VI.B.
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    Where, however, a business conduct requirement is not expressly
addressed by the Dodd-Frank Act or we read the statute to apply a
requirement only to SBS Dealers,\161\ the adopted rules generally would
not apply to Major SBS Participants.\162\ Thus, the obligations under
Rules 15Fh-3(e) (know your counterparty), 15Fh-3(f) (recommendations of
security-based swaps or trading strategies), 15Fh-4(b) (special
obligations when acting as an advisor to a special entity) and 15Fh-6
(pay to play rules) do not apply to a Major SBS Participant. In
addition, our rules provide exceptions to Major SBS Participants, as
discussed in Section II.G.2.a, from certain disclosure requirements
when entering into security-based swaps with an SBS Dealer, another
Major SBS Participant, a swap dealer or a swap participant.
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    \161\ See Section II.H.2 (regarding application of ``act as an
advisor'' obligations under Rule 15Fh-4(b) to SBS Dealers but not
Major SBS Participants).
    \162\ As noted in the Proposing Release, there are exceptions to
this principle. Because an SBS Entity must comply with the
requirements of Rule 15Fh-5 if it is acting as a counterparty to a
special entity, the obligation to verify special entity status under
Rule 15Fh-3(a)(2) applies to all SBS Entities. See Section II.G.1.
In addition, Section 3C(g)(5) of the Exchange Act creates certain
rights with respect to clearing for counterparties entering into
security-based swaps with SBS Entities but does not require
disclosure. As discussed in Section II.G.2.f, infra, Rule 15Fh-3(d)
would require all SBS Entities to disclose to a counterparty certain
information relating to these clearing rights.
---------------------------------------------------------------------------

    In determining whether or not to apply certain requirements to
Major SBS Participants, as explained in the Proposing Release, we have
considered how the differences between the definitions of SBS Dealer
and Major SBS Participant may be relevant in formulating the business
conduct standards applicable to these entities. The Dodd-Frank Act and
our rules define ``security-based swap dealer'' in a functional manner,
by reference to the way a person holds itself out in the market and the
nature of the conduct engaged in by that person, and how the market
perceives the person's activities.\163\ Unlike the definition of
``security-based swap dealer,'' which focuses on those persons whose
function is to serve as the points of connection in those markets, the
definition of ``major security-based swap participant'' focuses on the
market impacts and risks associated with an entity's security-based
swap positions.\164\ Despite the differences in focus, however, the
Dodd-Frank Act applies substantially the same statutory standards to
SBS Dealers and Major SBS Participants.\165\ We explained in the
Proposing Release that, in this way, the statute applies comprehensive
regulation to entities (i.e., Major SBS Participants) whose security-
based swap activities do not cause them to be dealers, but nonetheless
could pose a high degree of risk to the U.S. financial system
generally.
---------------------------------------------------------------------------

    \163\ See Exchange Act Section 3(a)(71), 15 U.S.C. 78c(a)(71),
and Rule 3a-71, 17 CFR 240.3a71.
    \164\ See Exchange Act Section 3(a)(67), 15 U.S.C. 78c(a)(67),
and Rule 3a-67, 17 CFR 240.3a67.
    \165\ In particular, under Section 15F of the Exchange Act, SBS
Dealers and Major SBS Participants generally are subject to the same
types of margin, capital, business conduct and certain other
requirements, unless an exclusion applies. See 15 U.S.C. 78o-10.
---------------------------------------------------------------------------

    We are mindful, as noted by a commenter, that there are ``different
reasons why the Dodd-Frank Act requires additional oversight of each.''
\166\ We have attempted to take into account these differing
definitions and regulatory concerns in considering whether the business
conduct requirements that we proposed, and that we are adopting, for
SBS Dealers should or should not apply to Major SBS Participants as
well. Accordingly, as noted, in general, where the Dodd-Frank Act
imposes a business conduct requirement on both SBS Dealers and Major
SBS Participants, the rules will apply equally to SBS Dealers and Major
SBS Participants, and where a business conduct requirement is not
expressly addressed by the Dodd-Frank Act, the rules generally will not
apply to Major SBS Participants. We believe this approach addresses the
concern of the commenter who argued that the determining factor should
be the conduct in which a Major SBS Participant is likely to be
engaged.\167\
---------------------------------------------------------------------------

    \166\ See MFA, supra note 5.
    \167\ See CFA, supra note 5.
---------------------------------------------------------------------------

    The external business conduct requirements promulgated under
Section 15F(h) are intended to provide certain protections for
counterparties, and we believe the rules we are adopting today
appropriately apply those requirements to SBS Dealers and Major SBS
Participants so that counterparties receive the benefit of those
protections. At the same time, mindful of the different role to be
played by Major SBS Participants (which, by definition, are not SBS
Dealers), we have not sought to impose the full range of business
conduct requirements on Major SBS Participants. We note that our
approach in this regard largely mirrors that of the CFTC, under whose
rules Swap Dealers and Major Swap Participants have operated for some
time. We believe that this consistency will result in efficiencies for
entities that have already established infrastructure to comply with
the CFTC standard.
    We proposed and are adopting limited exceptions (as discussed in
connection with the applicable rules) from the disclosure requirements
in Rules 15Fh-3(b), 15Fh-3(c) and 15Fh-3(d) for transactions with an
SBS Entity or a Swap Entity.\168\ We are not, however, adopting the
suggestion that we broaden the exceptions to permit other types of
counterparties to opt out of the disclosures and other protections
provided under the rules when entering into a transaction with a Major
SBS Participant. As noted above, the external business conduct
requirements promulgated under Section 15F(h) are intended to provide
certain protections for counterparties, and we believe the rules we are
adopting today appropriately tailor those requirements so that
counterparties receive the benefit of those protections.
---------------------------------------------------------------------------

    \168\ See BlackRock, supra note 5.
---------------------------------------------------------------------------

D. Reliance on Representations

1. Proposal
    The Proposing Release solicited input on whether the rules adopted
by the Commission should include a standard addressing the
circumstances in which an SBS Entity may rely on representations to
establish compliance with the business conduct rules.\169\ We sought
comment on two alternative approaches.\170\ One approach would permit
an SBS Entity to rely on a representation from a counterparty

unless it knows that the representation is not accurate (``actual
knowledge standard'').\171\ The other would permit an SBS Entity to
rely on a representation unless the SBS Entity has information that
would cause a reasonable person to question the accuracy of the
representation (``reasonable person standard'').\172\ After the
Commission issued its proposed rules, the CFTC in its final rules
adopted a ``reasonable person standard'' that generally permits a Swap
Entity to rely on written representations to satisfy its due diligence
obligations unless it has information that would cause a reasonable
person to question the accuracy of the representation.\173\
---------------------------------------------------------------------------

    \169\ See Proposing Release, 76 FR at 42404, supra note 3.
    \170\ Id.
    \171\ Id.
    \172\ Id.
    \173\ See CFTC Adopting Release, 77 FR at 9749, supra note 21.
---------------------------------------------------------------------------

2. Comments on the Proposal
    Twelve commenters generally addressed the proposed standards for
reliance on counterparty representations.\174\ With one exception,\175\
these comments predate the 2012 adoption of the CFTC rules.
---------------------------------------------------------------------------

    \174\ See CCMR, supra note 5; FIA/ISDA/SIFMA, supra note 5;
APPA, supra note 5; BlackRock, supra note 5; SIFMA (August 2011),
supra note 5; ABC, supra note 5; ABA Committees, supra note 5; NABL,
supra note 5; Better Markets (August 2011), supra note 5; AFSCME,
supra note 5; CFA, supra note 5; SIFMA (August 2015), supra note 5.
    \175\ See SIFMA (August 2015), supra note 5 (asking the
Commission to adopt a reasonable person standard consistent with the
standard under the parallel CFTC rules).
---------------------------------------------------------------------------

    In 2011, seven commenters supported the actual knowledge
standard.\176\ One asserted its view that the actual knowledge standard
would offer greater legal certainty to SBS Entities when making
required subjective judgments under the rules (for example, judgments
regarding the qualifications of a special entity's independent
representative).\177\ Another commenter argued that the actual
knowledge standard is preferable because the reasonable person standard
would require an assessment of what a reasonable person would conclude
if such person had the same information as the SBS Entity, which could
cause uncertainty and additional cost for market participants.\178\
---------------------------------------------------------------------------

    \176\ See FIA/ISDA/SIFMA, supra note 5; APPA, supra note 5;
BlackRock, supra note 5; SIFMA (August 2011), supra note 5; ABC,
supra note 5; ABA Committees, supra note 5; NABL, supra note 5.
    \177\ See FIA/ISDA/SIFMA, supra note 5.
    \178\ See NABL, supra note 5.
---------------------------------------------------------------------------

    One commenter, writing after the CFTC rules were adopted, asked the
Commission to adopt a ``reasonable person standard'' that is
``consistent with the parallel CFTC EBC Rules,'' which generally permit
a Swap Entity to rely on written representations to satisfy its due
diligence obligations unless it has information that would cause a
reasonable person to question the accuracy of the representations.\179\
Additionally, two other commenters supported the reasonable person
standard in 2011.\180\ One commenter asserted that the reasonable
person standard would help to ensure that SBS Entities are acting on
reliable information because of the duty it would impose to verify the
accuracy of a representation if the SBS Entity had some reason to
question it.\181\ The commenter also argued that the reasonable person
standard would be easier to monitor and enforce because it would be
objective rather than subjective.\182\
---------------------------------------------------------------------------

    \179\ See SIFMA (August 2015), supra note 5.
    \180\ See Better Markets (August 2011), supra note 5; CCMR,
supra note 5. See also CFA, supra note 5 (opposing both proposed
standards but noting a preference for the reasonable person standard
over the actual knowledge standard).
    \181\ See Better Markets (August 2011), supra note 5.
    \182\ Id.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission require detailed
representations.\183\ One commenter asked the Commission to clarify
that, for purposes of ``red flags,'' the knowledge test should apply
only to individuals with knowledge of the security-based swap
transaction; information that may be available to other parts of the
SBS Entity organization should not be imputed to those
individuals.\184\ Another commenter requested that the Commission
clarify that any representations made by a special entity or its
representative to satisfy the rules do not give any party any
additional rights, such as rescission or monetary compensation (e.g.,
if the representations turn out to be incorrect).\185\ Additionally,
the commenter asserted that an SBS Dealer should be permitted to rely
on a single set of representations made by a special entity at the
beginning of a trading relationship, rather than requiring the SBS
Dealer to obtain a new representation with each transaction, if the
special entity represents that it will notify the SBS Dealer when the
representations become inaccurate.\186\
---------------------------------------------------------------------------

    \183\ See AFSCME, supra note 5 (recommending requiring written
representations that are ``sufficiently detailed and informative to
permit reliance,'' and requiring SBS Entities to have a reasonable
basis for believing the representations to be true); CFA, supra note
5 (recommending requiring that the written representations be
sufficiently detailed to allow such an assessment).
    \184\ See FIA/ISDA/SIFMA, supra note 5.
    \185\ See ABC, supra note 5.
    \186\ Id.
---------------------------------------------------------------------------

    More generally, another commenter recommended allowing
representations to be contained in counterparty relationship
documentation if agreed to by the counterparties, and requiring
counterparties to undertake to update such representations with any
material changes.\187\ The commenter also suggested that an SBS Entity
that is also registered with the CFTC as a Swap Entity should be
permitted to rely on a counterparty's written representations with
respect to the CFTC's business conduct rules to satisfy its due
diligence requirements under the Commission's business conduct rules
provided that the SBS Entity provides notice of such reliance to the
counterparty and the counterparty does not object.\188\ The commenter
argued that this would speed implementation and lower costs without
reducing counterparty protections.\189\ Finally, the commenter
recommended including both a general reliance on representations
provision and also specific reliance on representations safe harbors in
the individual rules that specify what representations the SBS Entity
should obtain to satisfy the safe harbor.\190\
---------------------------------------------------------------------------

    \187\ See SIFMA (August 2015), supra note 5.
    \188\ Id. In a subsequent letter, the commenter explained that
there is a multilateral protocol that has been adopted by most
market participants as a means of complying with the CFTC rules. See
SIFMA (November 2015), supra note 5. The commenter noted that the
representations contained in this protocol only expressly address
market participants' trading in swaps, but asserted that ``the
factual matters addressed by those representations typically do not
vary as between trading in swaps and trading in [security-based
swaps]. As a result, requiring SBS Entities to obtain separate
representations specifically addressing [security-based swaps] would
impose additional costs with few, if any, additional benefits.'' Id.
    \189\ SIFMA (November 2015), supra note 5.
    \190\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    The Commission is adopting new Rule 15Fh-1(b), which provides that
an SBS Entity may rely on written representations to satisfy its due
diligence requirements under the business conduct rules unless it has
information that would cause a reasonable person to question the
accuracy of the representation. Under this standard, if an SBS Entity
has in its possession information that would cause a reasonable person
to question the accuracy of the representation, it will need to make
further reasonable inquiry to verify the accuracy of the
representation.\191\
---------------------------------------------------------------------------

    \191\ See Proposing Release, 76 FR at 42404, supra note 3. As
described infra in Section II.G.0, Rule 15Fh-3(e) will require an
SBS Dealer to have policies and procedures reasonably designed to
obtain and retain certain essential facts regarding a known
counterparty. As a result, information in the SBS Entity's
possession will include information gathered by an SBS Dealer
through compliance with the ``know your counterparty'' provisions of
Rule 15Fh-3(e), as well as any other information the SBS Entity has
acquired through its interactions with the counterparty, including
other representations obtained from the counterparty by the SBS
Entity.

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

    We understand that this is a market in which parties rely heavily
on representations both with respect to relationship documentation and
the transactions themselves. While both standards we proposed for
comment could be workable in this context, we recognize that neither
provides the absolute certainty sought by some commenters. As we
explained in the Proposing Release, under either approach an SBS Entity
could not ignore information in its possession as a result of which the
SBS Entity would know that a representation is inaccurate.\192\ Under
an ``actual knowledge'' standard, however, an SBS Entity can rely on a
representation unless it knows that the representation is inaccurate.
This alternative could allow SBS Entities to rely on questionable
representations insofar as they do not have actual knowledge that the
representation is inaccurate, even if they have information that would
cause reasonable persons to question their accuracy. As a result, this
alternative could potentially reduce the benefits of the verification
of status, know your counterparty, suitability and special entity
requirements and result in weaker protections for counterparties to SBS
Entities. In contrast, the ``reasonable person'' standard under the
rule as adopted should help ensure that SBS Entities do not disregard
facts that call into question the validity of the representation.\193\
---------------------------------------------------------------------------

    \192\ See Proposing Release, 76 FR at 42404, supra note 3.
    \193\ Cf. Exchange Act Rule 3a71-3(4) (permitting reliance on a
counterparty representation unless the party seeking to rely on the
representation ``knows or has reason to know that the representation
is not accurate; . . . a person would have reason to know that the
representation is not accurate if a reasonable person should know,
under all of the facts of which the person is aware, that it is not
accurate''). See also Application of ``Security-Based Swap Dealer''
and ``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities; Final Rule; Republication,
Exchange Act Release No. 72472 (Jun. 25, 2014), 79 FR 47277, 47313
(Aug. 12, 2014 (republication)) (``Cross-Border Adopting Release'')
(noting that ``this `known or have reason to know' standard should
help ensure that potential [SBS Entities] do not disregard facts
that call into question the validity of the representation'').
---------------------------------------------------------------------------

    Further, this standard also is consistent with the standard adopted
by the CFTC under which a Swap Entity cannot rely on a representation
if the Swap Entity has information that would cause a reasonable person
to question the accuracy of the representation.\194\ This consistency
will result in efficiencies for entities that have already established
infrastructure to comply with the CFTC standard.
---------------------------------------------------------------------------

    \194\ See CFTC Adopting Release, 77 FR at 9749, supra note 21.
---------------------------------------------------------------------------

    The rule as adopted would permit an SBS Entity to reasonably rely
on the representations of a counterparty or its representative to
satisfy its due diligence obligations under the business conduct rules,
including Rules 15Fh-2(a) and (d), 15Fh-3(a), (e) and (f), 15Fh-4 and
15Fh-5. We are not requiring a specified level of detail for these
representations but note that they should be detailed enough to permit
the SBS Entity to form a reasonable basis for believing that the
applicable requirement is satisfied.\195\
---------------------------------------------------------------------------

    \195\ See AFSCME, supra note 5 (recommending requiring written
representations that are ``sufficiently detailed and informative to
permit reliance,'' and requiring SBS Entities to have a reasonable
basis for believing the representations to be true); CFA, supra note
5 (recommending requiring that the written representations be
sufficiently detailed to allow such an assessment).
---------------------------------------------------------------------------

    Nothing in our rules would prohibit an arrangement under which the
parties agree that representations will be provided in counterparty
relationship documentation, and that they will update such
representations with any material changes, as suggested by
commenters.\196\
---------------------------------------------------------------------------

    \196\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015),
supra note 5.
---------------------------------------------------------------------------

    We are not accepting the commenter's suggestion that we provide
that in every instance an SBS Entity that is also registered with the
CFTC as a Swap Entity will be permitted to rely on a counterparty's
pre-existing written representations with respect to the CFTC's
business conduct rules to satisfy its due diligence requirements under
the Commission's business conduct rules, provided that the SBS Entity
provides notice of such reliance to the counterparty and the
counterparty does not object.\197\ Rule 15Fh-1(b) as adopted sets out
the standard pursuant to which an SBS Entity can rely on
representations to satisfy its due diligence obligations, and does not
speak to the process the SBS Entity will need to undertake to meet the
standard. The question of whether reliance on the representations that
had been obtained with respect to the CFTC business conduct rules,
including the process by which the SBS Entity makes that determination,
would satisfy an SBS Entity's obligations under our business conduct
rules will depend on the facts and circumstances of the particular
matter.\198\
---------------------------------------------------------------------------

    \197\ Id. In a subsequent letter, the commenter explained that
there is a multilateral protocol that has been adopted by most
market participants as a means of complying with the CFTC rules. See
SIFMA (November 2015), supra note 5. The commenter noted that the
representations contained in this protocol only expressly address
market participants' trading in swaps, but asserted that ``the
factual matters addressed by those representations typically do not
vary as between trading in swaps and trading in [security-based
swaps]. As a result, requiring SBS Entities to obtain separate
representations specifically addressing [security-based swaps] would
impose additional costs with few, if any, additional benefits.'' Id.
    \198\ See SIFMA (August 2015), supra note 5; SIFMA (November
2015), supra note 5.
---------------------------------------------------------------------------

    We are not adopting the suggestion of one commenter that ``the
knowledge test should be applied only to individuals with knowledge of
the SBS transaction.'' \199\ In some instances it may be appropriate to
look only to the knowledge of persons involved in a security-based swap
transaction for purposes of determining whether an SBS Entity
reasonably relied on representations. However, the determination
whether to impute to the individuals that are involved in a securities-
based swap transaction knowledge that may be available in other parts
of the SBS Entity will depend on the facts and circumstances of the
particular matter. At a minimum, an SBS Entity seeking to rely on
representations cannot ignore information that would cause a reasonable
person to question the accuracy of those representations.
---------------------------------------------------------------------------

    \199\ See FIA/ISDA/SIFMA, supra note 5 (arguing that information
that may be available to other parts of the SBS Entity organization
should not be imputed to those individuals involved in the SBS
transaction).
---------------------------------------------------------------------------

E. Policies and Procedures Alternative

1. Proposal
    The Commission solicited comment on whether an SBS Entity should be
deemed to have complied with a requirement under the proposed rules if
it has: (1) Established and maintained written policies and procedures,
and a documented system for applying those policies and procedures,
that are reasonably designed to achieve compliance with the
requirement; and (2) reasonably discharged the duties and obligations
required by the written policies and procedures and documented system,
and did not have a reasonable basis to believe that the written
policies and procedures and documented system were not being
followed.\200\
---------------------------------------------------------------------------

    \200\ See Proposing Release, 76 FR at 42402, supra note 3.

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

2. Comments on the Proposal
    One commenter addressed the policies and procedures
alternative.\201\ The commenter opposed the alternative, arguing that
it would reward the process of achieving compliance more than actually
achieving compliance.\202\ However, the commenter asserted that SBS
Entities should be required to establish, maintain, document and
enforce appropriate policies and procedures, and that the Commission
should take them into account when determining the sanctions for
violations.\203\ The commenter argued that the requirement regarding
policies and procedures should supplement the requirements or
prohibitions in the rules, not supplant them.\204\
---------------------------------------------------------------------------

    \201\ See CFA, supra note 5.
    \202\ Id.
    \203\ Id.
    \204\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    After taking into consideration the comment, the Commission is not
adopting a general policies and procedures safe harbor. The Commission
acknowledges the importance of policies and procedures as a tool to
achieving compliance with applicable regulatory and other requirements
but agrees with the commenter that a general policies and procedures
safe harbor could have the unintended effect of rewarding the process
towards achieving compliance more than the result of actually achieving
compliance.\205\
---------------------------------------------------------------------------

    \205\ See CFA, supra note 5.
---------------------------------------------------------------------------

    As discussed more fully herein, Rule 15Fh-3(h) requires that an SBS
Entity establish, maintain and enforce written policies and procedures
that are reasonably designed to prevent violations of applicable
securities laws, and rules and regulations thereunder. Rule 15Fh-3(h)
also provides an affirmative defense to a charge of failure to
supervise diligently based, in part, on the establishment and
maintenance of these policies and procedures, where the entity has
reasonably discharged the duties and obligations required by the
written policies and procedures and documented system, and did not have
a reasonable basis to believe that the written policies and procedures
and documented system were not being followed. In addition, consistent
with the approach of the CFTC, we are providing targeted
representations-based safe harbors,\206\ which should result in
efficiencies for entities that have already established infrastructure
to comply with the CFTC rules.
---------------------------------------------------------------------------

    \206\ See, e.g., Rule 15Fh-3(f)(3), discussed in Section II.G.3,
infra, under which an SBS Dealer can generally satisfy its
obligations by obtaining representations with respect to certain
suitability requirements, and Rule 15Fh-5(b), discussed in Section
II.H.6, infra, under which an SBS Entity can generally satisfy its
obligations with respect to having a reasonable basis to believe
that a special entity counterparty has a qualified independent
representative.
---------------------------------------------------------------------------

F. Definitions

1. Proposed Rule
    Proposed Rules 15Fh-2(a), (c), (e) and (f), which would define
``act as an advisor to a special entity,'' ``independent representative
of a special entity,'' ``special entity,'' and ``subject to a statutory
disqualification,'' respectively are discussed in Section II.H below in
the context of the special entity requirements.
    Proposed Rule 15Fh-2(b) would define ``eligible contract
participant'' to mean any person defined in Section 3(a)(66) of the
Exchange Act.
    Proposed Rule 15Fh-2(d) would provide that ``security-based swap
dealer or major security-based swap participant'' would include, where
relevant, an associated person of the SBS Dealer or Major SBS
Participant.
2. Comments on the Proposed Rule
a. Definitions Relating to the Rules Applicable to Dealings With
Special Entities
    Comments on paragraphs (a), (c), (e) and (f) of proposed Rule 15Fh-
2 defining ``act as an advisor,'' ``independent representative of a
special entity,'' ``special entity'' and ``subject to a statutory
disqualification,'' respectively are addressed below in Section II.H.
b. Eligible Contract Participant
    One commenter addressed proposed Rule 15Fh-2(b) defining ``eligible
contract participant.'' \207\ The commenter pointed out an error in the
cross-reference in the rule to the Exchange Act definition and
recommended adding a reference to applicable rules and interpretations
of the Commission and the CFTC.\208\
---------------------------------------------------------------------------

    \207\ See SIFMA (August 2015), supra note 5.
    \208\ Id.
---------------------------------------------------------------------------

c. SBS Dealer or Major SBS Participant
    Three commenters addressed proposed Rule 15Fh-2(d) defining SBS
Dealer or Major SBS Participant.\209\ Two commenters suggested that the
Commission adopt a broader definition that would apply the business
conduct rules to any person acting on behalf of the SBS Entity,
including an associated person, consistent with the CFTC business
conduct rules.\210\ One commenter asserted that this would prevent SBS
Entities from ``evad[ing] the business conduct rules by doing through
third parties what they would not be permitted to do directly.'' \211\
The commenter also discouraged the Commission from seeking to identify
all of the requirements that would apply to an associated person of an
SBS Entity, suggesting that the rules should apply in any circumstance
where an SBS Entity acts through or by means of an associated person or
other party.\212\
---------------------------------------------------------------------------

    \209\ See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA
(August 2015), supra note 5.
    \210\ See CFA, supra note 5; SIFMA (August 2015), supra note 5.
    \211\ See CFA, supra note 5.
    \212\ Id.
---------------------------------------------------------------------------

    A third commenter recommended that the Commission clarify that
associated persons of an SBS Entity should only be directly responsible
for complying with the disclosure rules and rules involving
interactions with counterparties, and should not be responsible for
complying with internal business conduct standards, such as the rules
relating to supervision and requiring designation of a CCO.\213\ The
commenter also suggested that the Commission define ``associated
person'' as ``an associated person of an [SBS Dealer] or [Major SBS
Participant] through whom the [SBS Dealer] or [Major SBS Participant]
acts.'' \214\
---------------------------------------------------------------------------

    \213\ See FIA/ISDA/SIFMA, supra note 5.
    \214\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    The Commission is moving the definition of ``independent
representative of a special entity'' from Rule 15Fh-2 to Rule 15Fh-5
and accordingly, re-designating paragraphs (d) through (f) of Rule
15Fh-2 as paragraphs (c) through (e). The definition of ``independent
representative of a special entity'' and paragraphs (a), (d) and (e) of
Rule 15Fh-2 (defining ``act as an advisor,'' ``special entity'' and
``subject to a statutory disqualification,'' respectively) are
addressed below in Section II.H.
    The Commission is adopting Rule 15Fh-2(b) with two modifications.
In response to a suggestion from a commenter,\215\ the Commission is
correcting a typographical error in the cross-reference to the Exchange
Act definition of ``eligible contract participant'' in the proposed
rule. The proposed rule referenced ``Section 3(a)(66)'' of the Exchange
Act, but should have referenced Section 3(a)(65) of the Exchange Act,
which defines an

eligible contract participant. Section 3(a)(65) of the Exchange Act, in
turn, provides that the term eligible contract participant ``has the
same meaning as in section 1a of the Commodity Exchange Act.'' We have
also revised the definition in response to the same commenter's request
that we add a reference to applicable rules and interpretations of the
Commission and the CFTC to incorporate the joint SEC-CFTC rulemaking
adopted in May 2012.\216\ In this regard, we note that the Commission
and the CFTC jointly further defined the term eligible contract
participant by adopting rules and regulations under the Commodity
Exchange Act.\217\ Thus, as adopted, the definition of ``eligible
contract participant'' in Rule 15Fh-2(b) refers to: ``any person as
defined in Section 3(a)(65) of the Act and the rules and regulations
thereunder and in Section 1a of the Commodity Exchange Act and the
rules and regulations thereunder.''
---------------------------------------------------------------------------

    \215\ See SIFMA (August 2015), supra note 5.
    \216\ Section 712(d)(1)(A) of the Dodd-Frank Act provides, among
other things, that the CFTC and the Commission, in consultation with
the Board of Governors, shall further define the term ``eligible
contract participant.'' Public Law 111-203, 124 Stat. 1376 (2010).
Moreover, Section 712(d)(4) provides that any interpretation of, or
guidance by either Commission regarding, a provision of Title VII of
the Dodd Frank Act shall be effective only if issued jointly by the
CFTC and the Commission, after consultation with the Board of
Governors, if this title requires the Commissions to issue joint
regulations to implement the provision. Id.
    \217\ See Definitions Adopting Release, supra note 115.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting Rule
15Fh-2(d) as proposed, re-designated as Rule 15Fh-2(c). The statute
defines the term ``associated person of a security-based swap dealer or
major security-based swap participant'' to include ``any person
directly or indirectly controlling, controlled by, or under common
control with'' an SBS Dealer or Major SBS Participant.\218\ While the
SBS Entity remains ultimately responsible for compliance with the
business conduct standards, to the extent that an SBS Entity acts
through, or by means of, an associated person of that SBS Entity, the
associated person must comply as well with the applicable business
conduct standards.
---------------------------------------------------------------------------

    \218\ Section 3(a)(70)(A)(ii) of the Exchange Act, 15 U.S.C.
78c(a)(70)(A)(ii).
---------------------------------------------------------------------------

    The Commission declines to modify the definition, as requested by
some commenters, to apply to persons acting on behalf of the SBS
Entity.\219\ We believe it unnecessary to expand the definition
because, as noted above, the SBS Entity remains ultimately responsible
for compliance with the business conduct standards, whether the SBS
Entity is acting through, or by means of, an associated person or other
person.
---------------------------------------------------------------------------

    \219\ See CFA, supra note 5; SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    In response to the commenter that raised concerns that associated
persons should not be responsible for complying with ``internal''
business conduct standards,\220\ the Commission notes that Rule 15Fh-
2(c) provides that the definition of an SBS Entity includes associated
persons of the SBS Entity ``where relevant.'' Certain rules, including
the so-called ``internal'' business conduct rules (e.g., Rule 15Fh-3(h)
(supervision) and Rule 15Fk-1 (designation of CCO)) may apply to some
but not all associated persons of an SBS Entity, and the registrant
remains ultimately responsible for compliance with all of the business
conduct rules that are the subject of this rulemaking.
---------------------------------------------------------------------------

    \220\ See FIA/ISDA/SIFMA, supra note 5.
---------------------------------------------------------------------------

G. Business Conduct Requirements

1. Counterparty Status
a. Proposed Rule
    Section 15F(h)(3)(A) of the Exchange Act directs that business
conduct requirements adopted by the Commission shall establish a duty
for an SBS Entity to verify that any counterparty meets the eligibility
standards for an ECP.\221\
---------------------------------------------------------------------------

    \221\ 15 U.S.C. 78o-10(h)(3)(A).
---------------------------------------------------------------------------

    Proposed Rule 15Fh-3(a)(1) would require an SBS Entity to verify
that a counterparty whose identity is known to an SBS Entity prior to
the execution of the transaction meets the eligibility standards for an
ECP, before entering into a security-based swap with that counterparty
other than on a registered national securities exchange or SEF.\222\
Proposed Rule 15Fh-3(a)(2) would require an SBS Entity to verify
whether a counterparty whose identity is known to the SBS Entity prior
to the execution of the transaction is a special entity before entering
into a security-based swap with that counterparty, no matter where the
transaction is executed.\223\
---------------------------------------------------------------------------

    \222\ Proposed Rule 15Fh-3(a)(1). See Section 6(l) of the
Exchange Act (making it unlawful to effect a security-based swap
transaction with or for a person that is not an ECP unless such
transaction is effected on a registered national securities
exchange). See also Section 5(e) of the Securities Act of 1933, 15
U.S.C. 77e(e)) (``unless a registration statement meeting the
requirements of section 10(a) [of the Securities Act] is in effect
as to a security-based swap, it shall be unlawful for any person . .
. to offer to sell, offer to buy or purchase or sell a security-
based swap to any person who is not an eligible contract
participant''). See also Registration and Regulation of Security-
Based Swap Execution Facilities, Exchange Act Release No. 63825
(Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (``SEF Registration
Proposing Release'') (proposed Rule 809 would limit SEF
participation to registered SBS Dealers, Major SBS Participants,
brokers and ECPs).
    \223\ Proposed Rule 15Fh-3(a)(2). See generally Section
15F(h)(1)(D) of the Exchange Act, 15 U.S.C. 78o-10(h)(1)(D)
(authorizing the Commission to prescribe business conduct standards
that relate to ``such other matters as the Commission determines to
be appropriate'').
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Three commenters addressed proposed Rule 15Fh-3(a).\224\ One
opposed limiting the application of the rule to known counterparties,
noting that this would invite SBS Entities to promote anonymous off-
exchange transactions that would allow them to avoid obligations
otherwise owed to special entities.\225\ The commenter asserted that
the only exemption from the verification requirement should be for
transactions on a registered exchange or SEF, and that for such
transactions, if the SBS Entity knows the identity of the counterparty
prior to the transaction and has reason to believe it may not be an
ECP, the SBS Entity should be required to undertake an additional
inquiry to verify the counterparty's status.\226\ The commenter also
recommended that verification take place before the SBS Entity offers
to enter into a transaction, rather than before execution.\227\
---------------------------------------------------------------------------

    \224\ See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA
(August 2015), supra note 5.
    \225\ See CFA, supra note 5.
    \226\ Id. The commenter also recommended that the Commission
conform to the CFTC's then-pending proposal, which would have
required counterparty status verification in any transaction other
than anonymous transactions on a swap execution facility. We note,
however, that the CFTC subsequently adopted a rule that clarified
that the exemption from verification applies to all transactions on
a designated contract market (``DCM'') and to anonymous transactions
on a swap execution facility. See CFTC Adopting Release, 77 FR at
9757, supra note 21.
    \227\ See CFA, supra note 5.
---------------------------------------------------------------------------

    Two commenters recommended that the exception for transactions on a
registered exchange or SEF be broadened to apply to the verification of
special entity status in addition to the verification of ECP
status.\228\ One commenter also recommended expanding the exception to
include exempt SEFs, such as a foreign SEF that the Commission
determines to be subject to a comparable home country regime.\229\
Additionally, as part of a series of recommendations to harmonize with
the CFTC's treatment of employee benefit plans defined in Section 3 of
ERISA, the commenter suggested requiring an SBS Entity to verify
whether a counterparty is eligible to

elect to be a special entity, and if so, to notify such
counterparty.\230\
---------------------------------------------------------------------------

    \228\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015),
supra note 5.
    \229\ SIFMA (August 2015), supra note 5.
    \230\ Id. See also discussion in Section III.H.1, infra.
---------------------------------------------------------------------------

    The other commenter also recommended further narrowing the
application of the rule by excluding transactions in which the identity
of the counterparty is known just prior to execution, arguing that an
SBS Entity would have insufficient time to exchange representations
with the counterparty or otherwise verify the counterparty's status in
those situations.\231\ Alternatively, the commenter requested that the
Commission require SEFs to adopt rules that would permit verification
of the counterparty's status.\232\ The commenter also opposed
establishing specific documentation requirements regarding counterparty
status, asserting that it would not allow for flexible risk management
and investment decisions through private contractual negotiation.\233\
---------------------------------------------------------------------------

    \231\ FIA/ISDA/SIFMA, supra note 5.
    \232\ Id.
    \233\ Id.
---------------------------------------------------------------------------

c. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting Rule
15Fh-3(a) with certain modifications.
    Rule 15Fh-3(a)(1), as adopted, requires an SBS Entity to verify the
ECP status of a counterparty before entering into a security-based swap
with that counterparty other than a transaction executed on a
registered national securities exchange. We are not adopting the
further provision of the proposed rule that would have limited the
application of the verification requirement to a counterparty ``whose
identity is known to the SBS Entity prior to the execution of the
transaction.'' We also are not adopting the provision of the proposed
rule that would have provided that the verification requirement does
not apply to transactions executed on a SEF. These changes reflect the
Commission's further consideration of the regulatory framework provided
by the Dodd-Frank Act.
    In particular, Section 6(l) of the Exchange Act makes it unlawful
to effect a transaction in a security-based swap with or for a person
that is not an ECP, unless the transaction is effected on a registered
national securities exchange.\234\ Section 6(l) of the Exchange Act
does not provide an exception for transactions effected on SEFs, or for
transactions where the identity of a counterparty is not known to the
SBS Entity prior to the execution of the transaction. Thus, upon
further consideration of the proposed rule in the context of the
statute, we are not providing an exception for transactions executed
other than on a registered national securities exchange, and we are not
limiting the requirement to known counterparties because Section 6(l)
of the Exchange Act does not contain a similar exception or limitation,
and we do not wish to suggest to SBS Entities that Section 6(l) is
similarly limited. In this regard, we note that, even with these
modifications, the scope of Section 6(l) of the Exchange Act
(``unlawful to effect a transaction in a security-based swap'') is
broader than the activity covered by Rule 15Fh-3(a)(1) (``before
entering into a security-based swap''), and that SBS Entities, and
other market participants, have an independent obligation under Section
6(l) for any action covered by that section.\235\
---------------------------------------------------------------------------

    \234\ See Proposing Release, 76 FR at 42403, supra note 5. 15
U.S.C. 78f(l) (``[i]t shall be unlawful for any person to effect a
transaction in a security-based swap with or for a person that is
not an eligible contract participant, unless such transaction is
effected on a [registered] national securities exchange'').
    \235\ See also Section 5(e) of the Securities Act, 15 U.S.C.
77e(e) (``unless a registration statement meeting the requirements
of [section 10(a) of the Securities Act] is in effect as to a
security-based swap, it shall be unlawful for any person . . . to
offer to sell, offer to buy or purchase or sell a security-based
swap to any person who is not an eligible contract participant'').
This rulemaking does not address and has no applicability with
respect to the requirements under the Securities Act applicable to
security-based swap transactions.
---------------------------------------------------------------------------

    As noted in the Proposing Release, an SBS Entity that has complied
with the requirements of Rule 15Fh-3(a)(1) concerning a counterparty's
eligibility to enter into a particular security-based swap fulfills its
obligations under the rule for that security-based swap, even if the
counterparty subsequently ceases to meet the eligibility standards for
an ECP during the term of that security-based swap.\236\ However, an
SBS Entity will need to verify the counterparty's status for any
subsequent action covered by Rule 15Fh-3(a)(1), (which it could do by
relying on written representations from the counterparty, as described
above). An SBS Entity could satisfy this obligation by relying on a
representation in a master or other agreement that is renewed or
``brought down'' as of the date of the subsequent action covered by
15Fh-3(a)(1). In this manner, counterparties will be able to make
representations about their status at the outset of a relationship, and
can undertake to ``bring down'' that representation for each relevant
action involving a security-based swap. In addition, as noted above,
market participants have an independent obligation under Section 6(l)
of the Exchange Act for any action covered by that section.
---------------------------------------------------------------------------

    \236\ See Proposing Release, 76 FR at 42404, supra note 5.
---------------------------------------------------------------------------

    Rule 15Fh-3(a)(2), as adopted, requires an SBS Entity to verify
whether a counterparty is a special entity before entering into a
security-based swap transaction with that counterparty, unless the
transaction is executed on a registered or exempt SEF or registered
national securities exchange and the SBS Entity does not know the
identity of the counterparty at a reasonably sufficient time prior to
execution of the transaction to permit the SBS Entity to comply with
the obligations of the rule. The rule as proposed would have limited
the verification of special entity status to counterparties whose
identity is known to the SBS Entity prior to the execution of the
security-based swap transaction. Because the question of special entity
status figures most significantly in connection with the application of
the special entity rules (Rules 15Fh-4, 15Fh-5 and 15Fh-6), we have
modified the special entity verification rule to track the exceptions
to those rules.\237\ Accordingly, the verification of special entity
status requirements will not apply where the transaction is executed on
a registered or exempt SEF or registered national securities exchange,
and the SBS Entity does not know the identity of the counterparty at a
reasonably sufficient time prior to execution of the transaction to
permit the SBS Entity to comply with the obligations of the rule.
---------------------------------------------------------------------------

    \237\ See Section II.B.
---------------------------------------------------------------------------

    An SBS Entity that has complied with the requirements of Rule 15Fh-
3(a)(2) concerning verification whether a counterparty is a special
entity before entering into a particular security-based swap with that
counterparty fulfills its obligations under the rule for that security-
based swap.\238\ However, an SBS Entity will need to verify the
counterparty's status for any subsequent action covered by Rule 15Fh-
3(a)(2) (which it could do by relying on written representations from
the counterparty, as described above). An SBS Entity could satisfy this
obligation by relying on a representation in a master or other
agreement that is renewed or ``brought down'' as of the date of the
subsequent action covered by 15Fh-3(a)(2). In this manner,
counterparties will be able to make representations about their status
at the outset of a relationship, and can undertake to ``bring down''
that

representation for each relevant action involving a security-based
swap.
---------------------------------------------------------------------------

    \238\ See Proposing Release, 76 FR at 42404, supra note 5.
---------------------------------------------------------------------------

    Additionally, the Commission is adding a new paragraph (a)(3),
special entity election, which requires an SBS Entity, in verifying the
special entity status of a counterparty pursuant to Rule 15Fh-3(a)(2),
to verify whether a counterparty is eligible to elect not to be a
special entity as provided for in the adopted special entity definition
in Rule 15Fh-2(d)(4), and if so, notify such counterparty. This change
is intended to provide the greatest protections to the broadest
categories of special entities, while still allowing them the
flexibility to elect not to avail themselves of special entity
protections.\239\
---------------------------------------------------------------------------

    \239\ As explained in Section II.H.1, we are interpreting the
definition of ``special entity'' to distinguish entities that are
``defined in'' section 3 of ERISA but not ``subject to'' regulation
under Title I of ERISA. Our rules as adopted would include within
the ``special entity'' definition entities such as church plans and
plans maintained solely for the purpose of complying with applicable
workmen's compensation laws, unemployment compensation, or
disability insurance laws but allow them to elect not to be treated
as ``special entities.''
---------------------------------------------------------------------------

    Although the Dodd-Frank Act does not specifically require an SBS
Entity to verify whether a counterparty is a special entity or is
eligible to elect not to be a special entity, the Commission believes
that such verification will help to ensure the proper application of
the business conduct rules that apply to SBS Entities dealing with
special entities.\240\
---------------------------------------------------------------------------

    \240\ See Section II.H, infra.
---------------------------------------------------------------------------

    The Commission is not revising the rule, as suggested by a
commenter,\241\ to require that verification of special entity
counterparty status take place before an SBS Entity ``offers'' to enter
into a transaction. We agree with the commenter that it is important
for an SBS Entity to verify special entity status ``as soon as possible
. . . to ensure timely compliance with the other obligations that
accompany transactions with these entities.'' As explained in Section
II.A, when the rules refer to a ``counterparty'' of the SBS Entity, the
term ``counterparty'' includes a potential counterparty where
compliance with the obligation is required before the SBS Entity and
the ``counterparty'' have actually entered into the security-based
swap.
---------------------------------------------------------------------------

    \241\ See CFA, supra note 5.
---------------------------------------------------------------------------

    The Commission is not specifying the manner of documentation or
procedures required for compliance with Rule 15Fh-3(a).\242\ Among
other things, an SBS Entity could rely on representations in accordance
with Rule 15Fh-1(b). For example, an SBS Entity could verify that a
counterparty is an ECP by obtaining a written representation from the
counterparty as to specific facts about the counterparty (e.g., that it
has $100 million in assets) to conclude that the counterparty is an
ECP, unless the SBS Entity has information that would cause a
reasonable person to question the accuracy of the representation.
Similarly, an SBS Entity could seek to verify that a counterparty is
not a special entity by obtaining a written representation from the
counterparty that it does not fall within any of the enumerated
categories of persons that are ``special entities'' for purposes of
Section 15F of the Exchange Act. The SBS Entity also could seek to
obtain a representation in writing from the counterparty if it elects
not to be a special entity, as provided for in the special entity
definition in Rule 15Fh-2(d)(4). Consistent with Rule 15Fh-1(b),
however, an SBS Entity cannot disregard information that would cause a
reasonable person to question the accuracy of the representation.
---------------------------------------------------------------------------

    \242\ See Proposing Release, 76 FR at 42403, supra note 3. The
Commission separately has proposed rules regarding recordkeeping and
reporting requirements for SBS Entities that would require an SBS
Entity to keep records of its verification. See Recordkeeping and
Reporting Requirements for Security-Based Swap Dealers, Major
Security-Based Swap Participants, and Broker-Dealers; Capital Rule
for Certain Security-Based Swap Dealers, Exchange Act Release No.
71958 (Apr. 17, 2014), 79 FR 25193, 25208 and 25217-25218 (May 2,
2014) (``Recordkeeping Release'') (proposed Rules 18a-5(a)(17) and
18a-5(b)(13)).
---------------------------------------------------------------------------

2. Disclosure
    Section 15F(h)(3)(B) of the Exchange Act broadly requires that
business conduct requirements adopted by the Commission require
disclosures by SBS Entities to counterparties of information related to
``material risks and characteristics'' of the security-based swap,
``material incentives or conflicts of interest'' that an SBS Entity may
have in connection with the security-based swap, and the ``daily mark''
of a security-based swap.\243\
---------------------------------------------------------------------------

    \243\ 15 U.S.C. 78o-10(h)(3)(B).
---------------------------------------------------------------------------

a. Disclosure Not Required When the Counterparty is an SBS Entity or a
Swap Entity
i. Proposed Rules
    Section 15F(h)(3)(B) provides that disclosures under that section
are not required when the counterparty is ``a security-based swap
dealer, major security-based swap participant, security-based swap
dealer, or major security-based swap participant.'' \244\ As explained
in the Proposing Release, the Commission believes that the repetition
of the terms ``security-based swap dealer and major security-based swap
participant'' in this Exchange Act provision is a drafting error, and
that Congress instead intended an exclusion identical to that found in
the Commodity Exchange Act, which provides that these general
disclosures are not required when the counterparty is ``a swap dealer,
major swap participant, security-based swap dealer, or major security-
based swap participant.'' \245\ Accordingly, proposed Rule 15Fh-3(b)
(information about material risks and characteristics, and material
incentives or conflicts of interests), proposed Rule 15Fh-3(c) (the
daily mark), and proposed Rule 15Fh-3(d) (clearing rights) would not
apply whenever the counterparty is an SBS Entity or Swap Entity.
---------------------------------------------------------------------------

    \244\ 15 U.S.C. 78o-10(h)(3)(B).
    \245\ 7 U.S.C. 6s(h)(3)(B). See Proposing Release, 76 FR at
42405, supra note 3.
---------------------------------------------------------------------------

ii. Comments on the Proposal
    Two commenters submitted comments on the application of the
disclosure requirements when the counterparty is an SBS Entity or Swap
Entity.\246\ One commenter asserted that the disclosure requirements
should apply even when the counterparty is also an SBS Entity.\247\
Another commenter agreed with the Commission's interpretation that
Congress intended the exclusion to apply to transactions with other SBS
Entities and Swap Entities.\248\ However, in response to a specific
request for comment, the commenter asserted that the Commission should
not exempt transactions with other entities (such as banks or broker-
dealers) from the disclosure requirements, or otherwise subject them to
different disclosure standards, because while more sophisticated banks
or brokers may benefit, less sophisticated parties would be left
without adequate protections.\249\
---------------------------------------------------------------------------

    \246\ See Better Markets (August 2011), supra note 5; CFA, supra
note 5.
    \247\ See Better Markets (August 2011), supra note 5.
    \248\ See CFA, supra note 5.
    \249\ Id.
---------------------------------------------------------------------------

    Additionally, as discussed in Section II.B, a commenter advocated
for adding exceptions to the disclosure requirements in Rules 15Fh-3(b)
and (d) to cover security-based swaps that are intended to be cleared
and that are either (1) executed on a registered national securities
exchange or registered or exempt SEF and required to be cleared
pursuant to Section 3C of the Exchange Act, or (2) anonymous.\250\ The
commenter argued that this would harmonize the scope of the
Commission's disclosure requirements with no-action relief provided by
the

CFTC with respect to its parallel requirements.\251\
---------------------------------------------------------------------------

    \250\ See SIFMA (August 2015), supra note 5.
    \251\ Id.
---------------------------------------------------------------------------

iii. Response to Comments and Final Rules
    After considering the comments, the Commission is adopting, as
proposed, the exceptions from the disclosure requirements under Rule
15Fh-3(b) (information about material risks and characteristics, and
material incentives or conflicts of interests), Rule 15Fh-3(c) (the
daily mark), and Rule 15Fh-3(d) (clearing rights) for transactions in
which the counterparty is an SBS Entity or Swap Entity. We are not
adopting the suggestion that disclosure requirements apply even when
the counterparty is an SBS Entity or Swap Entity. We believe that an
SBS Entity would be well-positioned to negotiate with another SBS
Entity, and nothing in our rules precludes an SBS Entity from
requesting such disclosures.
    In addition, the exceptions under the rules as adopted parallel the
exceptions in the analogous CFTC rules. This consistency will result in
efficiencies for entities that have already established infrastructure
to comply with the CFTC standard.
    For the reasons discussed in Section II.B, we are not providing
additional exceptions for transactions that are intended to be
cleared.\252\
---------------------------------------------------------------------------

    \252\ Id. See Swaps Intended to Be Cleared, CFTC Letter No. 13-
70 (Nov. 15, 2013), available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

b. Timing and Manner of Certain Disclosures and Scope of Disclosure
Rules
i. Proposed Rules
    Proposed Rule 15Fh-3(b) would require that disclosures regarding
material risks and characteristics and material incentives or conflicts
of interest be made to potential counterparties before entering into a
security-based swap, but would not mandate the specific manner in which
those disclosures are made as long as they are made ``in a manner
reasonably designed to allow the counterparty to assess'' the
information being provided.\253\ Proposed Rule 15Fh-3(d) similarly
would require that disclosures regarding certain clearing rights be
made before entering into a security-based swap, but would not mandate
the manner of disclosure. To the extent such disclosures were not
otherwise provided to the counterparty in writing prior to entering
into a security-based swap, proposed Rules 15Fh-3(b)(3) and 15Fh-
3(d)(3) would require an SBS Entity to make a written record of the
non-written disclosures made pursuant to proposed Rules 15Fh-3(b) and
15Fh-3(d), respectively, and provide a written version of these
disclosures to the counterparty in a timely manner, but in any case no
later than the delivery of the trade acknowledgement of the particular
transaction.
---------------------------------------------------------------------------

    \253\ Section 15F(h)(3)(B) of the Exchange Act is silent
regarding both form and timing of disclosure. See 15 U.S.C. 78o-
10(h)(3)(B).
---------------------------------------------------------------------------

ii. Comments on Proposed Rules
Timing and Manner of Certain Disclosures
    Five commenters addressed the timing and manner of required
disclosures.\254\ One commenter recommended allowing disclosure
requirements to be satisfied by the execution of a master agreement and
provision of a trade acknowledgment.\255\ Similarly, another commenter
urged the Commission to permit all required disclosures to be made
upfront at the beginning of a trading relationship, rather than on a
transaction-by-transaction basis.\256\
---------------------------------------------------------------------------

    \254\ See ABC, supra note 5; CFA, supra note 5; FIA/ISDA/SIFMA,
supra note 5; Better Markets (August 2011), supra note 5; SIFMA
(August 2015), supra note 5.
    \255\ See FIA/ISDA/SIFMA, supra note 5.
    \256\ See ABC, supra note 5.
---------------------------------------------------------------------------

    Alternatively, if the Commission requires disclosure beyond the
master agreement and trade acknowledgment, the first commenter
encouraged the Commission to permit the use of standardized
disclosures.\257\ The commenter also recommended that the Commission
not dictate the timing of required disclosures and permit SBS Entities
to make required disclosures in advance, as opposed to immediately
prior to the execution of a trade, so as not to interfere with the
parties' desired timing.\258\ However, the commenter noted that advance
disclosure requirements would be infeasible for transactions executed
on a SEF or exchange, or where the counterparty is known only
immediately prior to or after execution.\259\
---------------------------------------------------------------------------

    \257\ See FIA/ISDA/SIFMA, supra note 5.
    \258\ Id.
    \259\ Id.
---------------------------------------------------------------------------

    In contrast, two commenters advocated for more specific
requirements with respect to the timing and manner of disclosure.\260\
Both recommended that disclosure be required in writing and at a
``reasonably sufficient time'' prior to the execution of the
transaction to allow counterparties to evaluate the information before
deciding whether to enter the transaction.\261\ One commenter also
asserted that disclosure should be in a clear and intelligible format
that permits comparison between derivatives offered by different market
participants.\262\ The other commenter opposed allowing SBS Entities to
satisfy disclosure requirements through entry into a master agreement
and provision of a trade acknowledgement, arguing that key information
could be lost in the fine print of legal documents.\263\ At a minimum,
if a master agreement is used, the commenter recommended that the
required disclosures regarding material risks and characteristics and
material incentives or conflicts of interest be provided in a clearly
labeled, separate narrative incorporated into the overall document, and
that all key issues be disclosed before the trade is executed and not
in a post-trade acknowledgement.\264\
---------------------------------------------------------------------------

    \260\ See Better Markets (August 2011), supra note 5; CFA, supra
note 5.
    \261\ See Better Markets (August 2011), supra note 5; CFA, supra
note 5.
    \262\ See Better Markets (August 2011), supra note 5.
    \263\ See CFA, supra note 5.
    \264\ Id.
---------------------------------------------------------------------------

    Another commenter also recommended that disclosure regarding
material risks and characteristics and material incentives or conflicts
of interest be required at a ``reasonably sufficient time'' prior to
the execution of the transaction to harmonize with the CFTC's
disclosure requirements.\265\ Additionally, as discussed in Section
II.B, the commenter advocated for adding exceptions to the disclosure
requirements in Rules 15Fh-3(b) and (d) to cover security-based swaps
that are intended to be cleared and that are either: (1) Executed on a
registered national securities exchange or registered or exempt SEF and
required to be cleared pursuant to Section 3C of the Exchange Act, or
(2) anonymous.\266\
---------------------------------------------------------------------------

    \265\ See SIFMA (August 2015), supra note 5.
    \266\ Id.
---------------------------------------------------------------------------

Written Records of Non-Written Disclosure
    One commenter addressed the written record requirements in proposed
Rules 15Fh-3(b)(3) and 15Fh-3(d)(3).\267\ The commenter opposed
permitting SBS Entities to make required disclosures orally, asserting
that oral disclosure fails to promote pre-trade transparency and makes
enforcement more difficult, and that SBS Entities may minimize
disclosure of conflicts of interest when making them orally.\268\ The
commenter also argued that the Commission's approach to permitting oral
disclosure ``doesn't even have the benefit of saving

labor, since the Commission proposes to require after-the-fact written
disclosures of any information not made in writing prior to the
transaction.'' \269\
---------------------------------------------------------------------------

    \267\ See CFA, supra note 5.
    \268\ See CFA, supra note 5.
    \269\ Id.
---------------------------------------------------------------------------

Scope of Disclosure Rules
    If the Commission requires disclosure beyond the master agreement
and trade acknowledgment, one commenter encouraged the Commission to
exclude from such requirements counterparties that are regulated
entities such as banks, broker-dealers, and investment advisers.\270\
Two other commenters argued that Major SBS Participants should not be
subject to the disclosure requirements because they will be transacting
with counterparties at arm's length.\271\ Alternatively, one commenter
suggested exempting transactions between Major SBS Participants and SBS
Dealers from the disclosure requirements, and allowing all other
counterparties to opt out of certain disclosure requirements, in
particular receiving written records of non-written disclosure.\272\
Similarly, another commenter suggested that ECPs should have the option
of opting-out of disclosures.\273\
---------------------------------------------------------------------------

    \270\ See FIA/ISDA/SIFMA, supra note 5.
    \271\ See BlackRock, supra note 5; MFA, supra note 5.
    \272\ See BlackRock, supra note 5.
    \273\ See MFA, supra note 5.
---------------------------------------------------------------------------

iii. Response to Comments and Final Rules
    After considering the comments, the Commission is adopting the
rules substantially as proposed, with certain modifications. In
response to commenters' concerns, the Commission is requiring that an
SBS Entity make the disclosures required by Rule 15Fh-3(b) regarding
material risks and characteristics and material incentives or conflicts
of interest at a reasonably sufficient time prior to entering into a
security-based swap to allow the counterparty to assess the
disclosures. This will also be consistent with the CFTC's timing
requirement for its parallel disclosures rules, resulting in
efficiencies for entities that have already established infrastructure
to comply with the CFTC standard.
    With respect to the manner of disclosure, we are not adopting the
commenters' suggestion that we impose more specific requirements with
respect to the timing and manner of disclosure.\274\ Instead, the
Commission continues to believe it is appropriate to require only that
disclosures regarding material risks and characteristics and material
incentives or conflicts of interest be made ``in a manner reasonably
designed to allow the counterparty to assess'' the information being
provided pursuant to Rule 15Fh-3(b). As noted in the Proposing Release,
this provision is intended to require that disclosures be reasonably
clear and informative as to the relevant material risks or conflicts
that are the subject of the disclosure, and is not intended to impose a
requirement that disclosures be tailored to a particular counterparty
or to the financial, commercial or other status of that
counterparty.\275\
---------------------------------------------------------------------------

    \274\ See Better Markets (August 2011), supra note 5; CFA, supra
note 5.
    \275\ See Proposing Release, 76 FR at 42406, supra note 3.
---------------------------------------------------------------------------

    After considering the comments, the Commission is also adopting as
proposed the requirements in Rules 15Fh-3(b)(3) and 15Fh-3(d)(3) that
an SBS Entity make a written record of any non-written disclosures made
pursuant to Rules15Fh-3(b) and 15Fh-3(d), respectively, and provide a
written version of these disclosures to the counterparty in a timely
manner, but in any case no later than the delivery of the trade
acknowledgement \276\ of the particular transaction. As noted in the
Proposing Release and suggested by commenters, the Commission
understands that security-based swaps generally are executed under
master agreements, with much of the transaction-specific disclosure
provided over the telephone, in instant messages or in
confirmations.\277\ The Commission believes that parties should have
the flexibility to make disclosures by various means, including master
agreements and related documentation, telephone calls, emails, instant
messages, and electronic platforms.\278\ Similarly, while we
acknowledge the commenter's concern that SBS Entities may minimize
disclosure of conflicts of interest when making them orally, we are not
persuaded that requiring all disclosures be provided in writing prior
to the parties' entering into a security-based swap would be necessary
to provide protections under the rule as adopted. We further note that
Rule 15Fh-3(b)(3), discussed in Section II.G.2.c, separately requires
that an SBS Entity provide a written record of non-written disclosures
no later than the delivery of the trade acknowledgement of the
particular transaction. Accordingly, the Commission anticipates that
SBS Entities may elect to make certain required disclosures of material
information to their counterparties in a master agreement or other
written document accompanying such agreement. While certain forms of
disclosure may be highly standardized, certain provisions may need to
be tailored to the particular transaction, most notably pricing and
other transaction-specific commercial terms. As noted in the Proposing
Release, the Commission believes this approach is generally consistent
with the use of standardized disclosures suggested by industry groups
and commenters.\279\
---------------------------------------------------------------------------

    \276\ See Trade Acknowledgement and Verification of Security-
Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14,
2011), 76 FR 3859 (Jan. 21, 2011) (proposing Rule 15Fi-1(c)(1),
which would require a trade acknowledgement to be provided within 15
minutes of execution for a transaction that has been executed and
processed electronically; within 30 minutes of execution for a
transaction that is not electronically executed, but that will be
processed electronically; and within 24 hours of execution for a
transaction that the SBS Entity cannot process electronically).
    \277\ See Proposing Release, 76 FR at 42406, supra note 3; FIA/
ISDA/SIFMA, supra note 5.
    \278\ When SBS Entities rely on electronic media, their
counterparties generally should have the capability to effectively
access all of the information required by Rule 15Fh-3(b)(3) in a
format that is understandable but not unduly burdensome for the
counterparty. See generally Use of Electronic Media by Broker-
Dealers, Transfer Agents and Investment Advisers for Delivery of
Electronic Information, Securities Act Release No. 7288 (May 9,
1996), 61 FR 24644 (May 15, 1996). See also Use of Electronic Media,
Exchange Act Release No. 42728 (Apr. 28, 2000), 65 FR 25843 (May 4,
2000).
    \279\ See Proposing Release, 76 FR at 42406, supra note 3.
---------------------------------------------------------------------------

    We do believe, however, that is it is important that the required
disclosures be made at a reasonably sufficient time before the
execution of the transaction to allow the counterparty to assess the
disclosures. While this time may vary depending on the product and the
counterparty, we do not believe, as suggested by some commenters, that
SBS Entities should be able to rely on trade acknowledgements alone to
satisfy certain disclosure requirements.\280\ As noted in the Proposing
Release, however, SBS Entities could rely on trade acknowledgements to
memorialize non-written disclosures they made prior to entering into
the proposed transaction.\281\
---------------------------------------------------------------------------

    \280\ See FIA/ISDA/SIFMA, supra note 5.
    \281\ See Proposing Release, 76 FR at 42406, supra note 3.
---------------------------------------------------------------------------

    As discussed in Section II.B above, the Commission is limiting the
disclosure requirements in Rules 15Fh-3(b) and (d) to circumstances
where the identity of the counterparty is known to the SBS Entity at a
reasonably sufficient time prior to execution of the transaction to
permit the SBS Entity to comply with the obligations of the rule. The
disclosure requirements in Rules 15Fh-3(b) and (d) will not apply where
the identity of the counterparty is not discovered until after the
execution of the transaction, or where the SBS Entity learns the
identity of the counterparty

with insufficient time to be able to provide the necessary disclosures
to satisfy its obligations under the rule without disrupting or
delaying the execution of the transaction. Similarly, for the reasons
discussed in Section II.A.3.d, we are not providing additional
exceptions or ``opt-out'' rights.
    Finally, we are not adopting the suggestion of one commenter that
the Commission exclude from the disclosure requirements transactions
with counterparties that are regulated entities such as banks, broker-
dealers, and investment advisers.\282\ Because information asymmetries
exist in a market for opaque and complex products, even for regulated
entities, such disclosures may help inform counterparties concerning
the valuations and material risks and characteristics of security-based
swaps in the sometimes rapidly changing market environment.\283\ In
this regard, the external business conduct requirements promulgated
under Section 15F(h) are intended to provide certain protections for
counterparties, including information regarding the material risks and
characteristics of the security-based swap, any material incentives or
conflicts of interest that the SBS Entity may have, and the daily mark
of the security-based swap. We believe the rules we are adopting today
appropriately apply those requirements so that counterparties receive
the benefit of those protections, and so are not providing counterparty
exclusions beyond the exception for transactions with SBS Entities and
Swap Entities discussed in Section II.G.2.a, infra.
---------------------------------------------------------------------------

    \282\ See FIA/ISDA/SIFMA, supra note 5.
    \283\ See Section VI.C, infra.
---------------------------------------------------------------------------

c. Material Risks and Characteristics of the Security-Based Swap
i. Proposed Rule
    Proposed Rule 15Fh-3(b)(1) would require an SBS Entity to disclose
the material risks and characteristics of the particular security-based
swap, including, but not limited to, the material factors that
influence the day-to-day changes in valuation, the factors or events
that might lead to significant losses, the sensitivities of the
security-based swap to those factors and conditions, and the
approximate magnitude of the gains or losses the security-based swap
would experience under specified circumstances. In the Proposing
Release, the Commission also solicited comment regarding whether SBS
Entities should be specifically required to provide scenario analysis
disclosure.\284\
---------------------------------------------------------------------------

    \284\ See Proposing Release, 76 FR at 42409, supra note 3.
---------------------------------------------------------------------------

ii. Comments on the Proposed Rule
General
    Seven commenters addressed the disclosure of material risks and
characteristics of security-based swaps.\285\ One commenter expressed
support for the proposed disclosure requirements, agreeing that the
disclosure should include any information for which there is a
substantial likelihood that a reasonable investor would consider the
information to be important in making an investment decision.\286\
---------------------------------------------------------------------------

    \285\ See Barnard, supra note 5; Better Markets (August 2011),
supra note 5; CFA, supra note 5; Levin, supra note 5; FIA/ISDA/
SIFMA, supra note 5; SIFMA (August 2011), supra note 5; SIFMA
(August 2015), supra note 5.
    \286\ See Barnard, supra note 5.
---------------------------------------------------------------------------

    Two commenters argued that the Commission should adopt different or
modified disclosure requirements.\287\ One commenter requested that the
Commission clarify in the rule that: (1) The rule only requires
disclosure about the material risks and characteristics of the
security-based swap itself and not with respect to the underlying
reference security or index, and (2) the rule does not require
disclosure in relation to any particular counterparty.\288\ The
commenter also asked the Commission to eliminate the proposed
requirement that risk disclosures set forth the approximate magnitude
of the gains or losses the security-based swap will experience under
specified circumstances because this is the functional equivalent of a
requirement to provide a scenario analysis, which the commenter does
not support (discussed below).\289\ Additionally, the commenter noted
its view that the Commission should not require an SBS Entity to
disclose the absence of certain material provisions typically contained
in master agreements for security-based swap transactions because
master agreements differ and what is ``typical'' is not clear.\290\ A
second commenter requested a clarification that only material
information is required to be disclosed.\291\
---------------------------------------------------------------------------

    \287\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015),
supra note 5.
    \288\ See FIA/ISDA/SIFMA, supra note 5.
    \289\ Id.
    \290\ Id.
    \291\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    Three commenters argued for additional or modified
requirements.\292\ One asserted that the proposed disclosure
obligations are too limited in terms of scope, form, and content.\293\
The commenter suggested that the disclosure provisions should require
``more complete, timely, and intelligible disclosure of all the risks,
costs, and other material information relating to [security-based swap]
transactions,'' including disaggregated prices and risks, listed hedge
equivalents, scenario analysis (discussed below), and embedded
financing costs.\294\ Similarly, another commenter requested
clarification regarding what material risks and characteristics must be
disclosed, arguing that the disclosure should include liquidity risks,
the details of (and separate prices for) the standardized component
parts of any customized security-based swap, any features of the
security-based swap that could disadvantage the counterparty (such as
differences in interest rates paid versus those received), and where
credit arrangements are built into security-based swaps through
forbearance of collateral posting, the embedded credit and its
price.\295\ A third commenter also suggested that the Commission
clarify what material risks and characteristics must be disclosed,
proposing that SBS Entities be required to disclose any material risk
related to the source of a security-based swap's assets and any
negative view by the SBS Entity itself of the assets' riskiness.\296\
The commenter also recommended that SBS Entities be required to
disclose the material risks and characteristics not just of the
security-based swap itself, but also of any reference securities,
indices, or other assets, noting that this disclosure would be
particularly important when the security-based swap references unique
pools of assets arranged by the SBS Entity.\297\
---------------------------------------------------------------------------

    \292\ See Better Markets (August 2011), supra note 5; CFA, supra
note 5; Levin, supra note 5.
    \293\ See Better Markets (August 2011), supra note 5.
    \294\ Id.
    \295\ See CFA, supra note 5.
    \296\ See Levin, supra note 5.
    \297\ Id.
---------------------------------------------------------------------------

    Another commenter, writing after the CFTC adopted its final rules,
recommended that the Commission harmonize with the CFTC's requirement
to disclose material risks and characteristics.\298\ Specifically, the
commenter requested that, like the CFTC, the Commission describe the
material risks and characteristics to be disclosed as including
``market, credit, liquidity, foreign currency, legal, operational, and
any other applicable risks,'' and ``the material economic terms of the
security-based swap, the terms relating to the operation of the

security-based swap, and the rights and obligations of the parties
during the term of the security-based swap.'' \299\ The commenter
argued that harmonization with the CFTC would help support the
continued development of standard disclosures, reducing compliance
costs and preventing undue delays in execution, and would reduce the
likelihood of inconsistent disclosures for similar products and
resulting counterparty confusion.\300\
---------------------------------------------------------------------------

    \298\ See SIFMA (August 2015), supra note 5.
    \299\ Id.
    \300\ Id.
---------------------------------------------------------------------------

Scenario Analysis
    We sought comment on whether we should require scenario analysis
and, if so, what standards should apply. Eight commenters addressed the
disclosure of scenario analysis.\301\ Four commenters supported
requiring scenario analysis disclosure to some degree.\302\ Of these
commenters, one suggested that the analysis include specific
information about the security-based swap's liquidity and
volatility.\303\ Another recommended only requiring scenario analysis
disclosure for ``high-risk complex security-based swaps,'' and
suggested that the Commission provide additional clarification or a
definition for determining what security-based swaps are high-risk and
complex.\304\ A third commenter advocated requiring SBS Entities to
notify counterparties of their right to receive a scenario analysis and
to provide a scenario analysis at the request of a non-SBS Entity
counterparty.\305\ To reduce the costs associated with providing
scenario analyses and to mitigate the disclosure of SBS Entities'
proprietary information, the commenter suggested that the Commission
permit SBS Entities to delegate the provision of scenario analyses to
qualified third-parties.\306\ The commenter explained that requiring
scenario analysis disclosure on a transaction-by-transaction basis
would not be necessary because SBS Entity counterparties are generally
sophisticated enough to create their own, more meaningful, portfolio-
based analyses, but that scenario analyses could help a less
sophisticated counterparty understand the dynamics and potential
exposure of security-based swaps on a portfolio-level.\307\ The
commenter also noted that the Commission should encourage all market
participants to create or obtain a portfolio-level scenario analysis,
in keeping with industry best practices.\308\
---------------------------------------------------------------------------

    \301\ See Barnard, supra note 5; Better Markets (August 2011),
supra note 5; CFA, supra note 5; Markit, supra note 5; FIA/ISDA/
SIFMA, supra note 5; SIFMA (August 2011), supra note 5; MFA, supra
note 5; SIFMA (August 2015), supra note 5.
    \302\ See Barnard, supra note 5; Better Markets (August 2011),
supra note 5; CFA, supra note 5; Markit, supra note 5.
    \303\ See Better Markets (August 2011), supra note 5.
    \304\ See Barnard, supra note 5.
    \305\ See Markit, supra note 5.
    \306\ Id.
    \307\ Id.
    \308\ Id.
---------------------------------------------------------------------------

    Four commenters opposed requiring disclosure of scenario
analysis.\309\ One noted that requiring scenario analysis disclosure
would have potentially significant adverse consequences for special
entities and other counterparties, and urged the Commission to refrain
from requiring it.\310\ Specifically, the commenter explained that
requiring scenario analysis would likely delay execution of
transactions and expose counterparties to market risk for potentially
extended periods of time (including at critical times when the
counterparty is seeking to hedge its positions in volatile markets)
because the development of scenario analyses depends upon the specific
terms agreed by the parties and therefore, cannot be performed until
full agreement on the material terms is reached.\311\ Additionally, the
commenter noted that the development of such analyses would cause SBS
Entities to incur substantial costs, which ultimately would be passed
on to counterparties.\312\ Another commenter opposed a requirement to
provide scenario analysis and asserted that, if a scenario analysis is
required, it should only be at the request of the counterparty and only
with respect to scenarios based on parameters selected by the
counterparty.\313\ The commenter also expressed concern that providing
a scenario analysis could be viewed as a ``recommendation'' that
triggers other requirements under the proposed rules (e.g., suitability
requirements).\314\
---------------------------------------------------------------------------

    \309\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011),
supra note 5; MFA, supra note 5; SIFMA (August 2015), supra note 5.
    \310\ See SIFMA (August 2011), supra note 5.
    \311\ Id.
    \312\ Id.
    \313\ See FIA/ISDA/SIFMA, supra note 5.
    \314\ Id.
---------------------------------------------------------------------------

    A third commenter, writing after the CFTC adopted final rules,\315\
stated that, in its experience, the CFTC's scenario analysis
requirement has complicated the ability of SBS Dealers to provide
different pricing scenarios, either voluntarily or at the request of a
counterparty, because it creates ``uncertainty as to when those
scenarios must satisfy the requirements for scenario analysis set forth
in the CFTC EBC rules.'' \316\
---------------------------------------------------------------------------

    \315\ The CFTC had proposed to require scenario analysis for
``high-risk complex bilateral swaps'' but in its final rules
determined instead to require scenario analysis only when requested
by the counterparty for any swap not ``made available for trading''
on a designated contract market or swap execution facility. To
comply with the CFTC rule, swap dealers must disclose to
counterparties their right to receive scenario analysis and consult
with counterparties regarding design. See CFTC Adopting Release, 77
FR at 9762-9763, supra note 21. See also 17 CFR 23.431(b).
    \316\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    A fourth commenter recommended that, to the extent a Major SBS
Participant is transacting with an ECP at arm's-length, the Commission
should explicitly exclude scenario analysis from the information that
the Major SBS Participant is required to disclose pursuant to Rule
15Fh-3(b).\317\ The commenter asserted that scenario analysis
disclosure would be costly and redundant since the rule would already
require Major SBS Participants to undertake a transaction-specific
analysis, and prepare tailored disclosures of a transaction's loss
sensitivities to market factors and conditions, and the magnitude of
gains and losses the transaction may experience under specified
circumstances.\318\
---------------------------------------------------------------------------

    \317\ See MFA, supra note 5.
    \318\ Id.
---------------------------------------------------------------------------

iii. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting Rule
15Fh-3(b)(1) with some modifications requested by commenters to more
closely align the requirements of our rules with those of the CFTC.
    We have revised the descriptions in Rule 15Fh-3(b)(1) of the
required disclosures of material risks and characteristics of a
security-based swap to harmonize with the descriptions in the parallel
CFTC disclosure requirement. As adopted, Rule 15Fh-3(b)(1) requires an
SBS Entity to disclose material information in a manner reasonably
designed to allow the counterparty to assess the material risks and
characteristics of the particular security-based swap, which may
include (1) market risk,\319\ credit risk,\320\ liquidity risk,\321\
foreign

currency risk, legal risk,\322\ operational risk\323\ and any other
applicable risks, and (2) the material economic terms of the security-
based swap, and the rights and obligations of the parties during the
term of the security-based swap. These changes are intended to provide
an illustrative list of material risks and characteristics. In
addition, these changes will harmonize our rule with the requirements
of the CFTC rule, which should result in efficiencies for SBS Entities
that have already established infrastructure to comply with the CFTC
rules, while still achieving the objectives of the rule to provide
information to a counterparty to help them assess whether, and under
what terms, they want to enter into the transaction.
---------------------------------------------------------------------------

    \319\ By ``market risk,'' we mean the risk to the value of a
security-based swap ``resulting from adverse movements in the level
or volatility of market prices.'' See Proposing Release, 76 FR at
42408 n.82, supra note 3.
    \320\ By ``credit risk,'' we mean the risk that a counterparty
to a security-based swap ``will fail to perform on an obligation''
under the security-based swap. See Proposing Release, 76 FR at 42408
n.80, supra note 3.
    \321\ By ``liquidity risk,'' we mean the risk that a
counterparty to a security-based swap ``may not be able to, or
cannot easily, unwind or offset a particular position at or near the
previous market price because of inadequate market depth or because
of disruptions in the marketplace.'' See Proposing Release, 76 FR at
42408 n.83, supra note 3.
    \322\ By ``legal risk,'' we mean the risk that agreements are
unenforceable or incorrectly or inadequately documented. See
Proposing Release, 76 FR at 42408 n.85, supra note 3.
    \323\ By ``operational risk,'' we mean the risk that
``deficiencies in information systems or internal controls,
[including human error,] will result in unexpected loss.'' See
Proposing Release, 76 FR at 42408 n.84, supra note 3.
---------------------------------------------------------------------------

    The rule as adopted requires disclosure of ``material'' information
regarding material risks and characteristics and material incentives or
conflicts of interests. We believe that this modification will provide
for an appropriate level of disclosure by requiring disclosure of
``material'' information, that is, the information most relevant to a
counterparty's assessment of whether and under what terms to enter into
a security-based swap. In addition, it will harmonize with the CFTC
approach, promoting regulatory consistency across the swap and
security-based swap markets, particularly among entities that transact
in both markets and have already established infrastructure to comply
with existing CFTC regulations. In response to comment, the Commission
believes that for purposes of evaluating the material risks and
characteristics of the particular security-based swap, including its
economic terms, material information about the referenced security,
index, asset or issuer should be disclosed.\324\ As one commenter
suggested, this disclosure would be particularly important when, for
example, the security-based swap references unique pools of assets
arranged by the SBS Entity.\325\
---------------------------------------------------------------------------

    \324\ The manner in which and extent of information about the
referenced security, index, asset or issuer is disclosed would
depend on the particular facts and circumstances, including the
public availability of the information.
    \325\ See Levin, supra note 5.
---------------------------------------------------------------------------

    The Commission anticipates that SBS Entities may provide these
disclosures through various means, including by providing a scenario
analysis, as noted in the Proposing Release.\326\ We are not, however,
adopting any requirements that would require an SBS Entity to provide
scenario analysis. Although scenario analysis may prove a valuable
analytic tool, it is one means by which information may be conveyed,
and we acknowledge the concerns of commenters that a scenario analysis
may not be necessary or appropriate in every situation to ensure that
appropriate disclosures are made. We note, however, that nothing in our
rules would preclude parties from requesting such analysis, even if a
security-based swap is ``made available for trading.'' In this regard,
our approach differs from that of the CFTC which requires a Swap Dealer
to provide scenario analysis when requested by a counterparty for any
swap that is not ``made available for trading'' on a designated
contract market or swap execution facility. We believe, however, that
the approaches are consistent because, as noted above, the Commission
is not prohibiting counterparties from requesting scenario analysis
disclosure.
---------------------------------------------------------------------------

    \326\ See Proposing Release, 76 FR at 42408 n.88, supra note 3.
---------------------------------------------------------------------------

    As noted in the Proposing Release, these disclosures are intended
to pertain to the material risks and characteristics of the security-
based swap, and not the material risks and characteristics of the
security-based swap with respect to a particular counterparty.\327\
---------------------------------------------------------------------------

    \327\ See Proposing Release, 76 FR at 42408 n.87, supra note 3.
However, if an SBS Dealer recommends a security-based swap or
trading strategy involving a security-based swap, or acts as an
advisor to a special entity, for example, Rules 15Fh-3(f) and 15Fh-
4, respectively, impose certain counterparty-specific requirements.
See Rules 15Fh-3(f) and 15Fh-4, discussed infra in Sections II.G.0
and II.H.3.
---------------------------------------------------------------------------

d. Material Incentives or Conflicts of Interest
 i. Proposed Rule
    Proposed Rule 15Fh-3(b)(2) would require the SBS Entity to disclose
any material incentives or conflicts of interest that it may have in
connection with the security-based swap, including any compensation or
other incentives from any source other than the counterparty in
connection with the security-based swap to be entered into with the
counterparty.\328\ We explained in the Proposing Release that we
preliminarily believed that the term ``incentives''--which is used in
Section 15F(h)(3)(b)(ii) of the Dodd-Frank Act--refers not to any
profit or return that the SBS Entity would expect to earn from the
security-based swap itself, or from any related hedging or trading
activities of the SBS Entity, but rather to any other financial
arrangements pursuant to which an SBS Entity may have an incentive to
encourage the counterparty to enter into the transaction. This
disclosure would include, among other things, information concerning
any compensation (e.g., under revenue-sharing arrangements) or other
incentives the SBS Entity receives from any source other than the
counterparty in connection with the security-based swap to be entered
into with the counterparty, but would not include, for example,
expected cash flows received from a transaction to hedge the security-
based swap or that the security-based swap is intended to hedge.\329\
---------------------------------------------------------------------------

    \328\ See Section 15F(h)(3)(B)(ii) of the Exchange Act, 15
U.S.C. 78o-10(h)(3)(B)(ii) (providing that business conduct
requirements adopted by the Commission shall require disclosure by
an SBS Entity of ``any material incentives or conflicts of
interest'' that the SBS Entity may have in connection with the
security-based swap).
    \329\ See Proposing Release, 76 FR at 42409, supra note 3.
---------------------------------------------------------------------------

ii. Comments on the Proposed Rule
    Seven commenters addressed the disclosure of material incentives or
conflicts of interest.\330\ One commenter expressed strong support for
the proposed rule.\331\ A second commenter also supported the proposed
rule, noting that it is consistent with the CFTC's parallel
requirement, except for the CFTC's requirement to disclose a pre-trade
mid-market mark, which the commenter argued is of limited benefit and
delays execution of transactions.\332\ Three other commenters expressed
support for the proposed rule but also suggested certain revisions to
the rule.\333\ One recommended modifying the rule to include specific
disclosures by SBS Entities of any affiliations or material business
relationships they may have with any provider of security-based swap
valuation services.\334\ Another noted that an SBS Entity's biggest
conflict of interest would likely be the difference in compensation
between selling a security-based swap (and in particular, a customized
security-based swap) versus another

product with similar economic terms.\335\ Accordingly, the commenter
recommended that SBS Entities be required to include any differential
compensation in their disclosure.\336\ Additionally, the commenter
asserted that if an SBS Entity is entering a trade as part of a trading
strategy to move a position off its books, the SBS Entity should be
required to disclose that particular conflict of interest and that the
security-based swap is recommended to effect that strategy.\337\ A
third commenter suggested coordinating the proposed rule with the
conflict of interest prohibitions in Sections 619 and 621 of the Dodd-
Frank Act to clarify that those prohibitions cannot be circumvented
through application of the business conduct disclosure
requirements.\338\ The commenter also recommended including in these
required disclosures any otherwise hidden profits or returns that the
SBS Entity expects to make from a security-based swap, related
agreement or arrangement, or related hedging or trading activity.\339\
---------------------------------------------------------------------------

    \330\ See Barnard, supra note 5; IDC, supra note 5; CFA, supra
note 5; Levin, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA
(August 2015), supra note 5.
    \331\ See Barnard, supra note 5.
    \332\ See SIFMA (August 2015), supra note 5.
    \333\ See IDC, supra note 5; CFA, supra note 5; Levin, supra
note 5.
    \334\ See IDC, supra note 5.
    \335\ See CFA, supra note 5.
    \336\ Id.
    \337\ Id.
    \338\ See Levin, supra note 5.
    \339\ Id.
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    One commenter objected to any requirement that an SBS Entity
disclose its anticipated profit for the security-based swap.\340\ The
commenter asserted that the best protection for a counterparty is
reviewing and selecting the best available pricing.\341\
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    \340\ See FIA/ISDA/SIFMA, supra note 5.
    \341\ Id.
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iii. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting Rule
15Fh-3(b)(2) as proposed.
    As noted in the Proposing Release, the Commission believes that the
term ``incentives''--which is used in Section 15F(h)(3)(b)(ii) of the
Dodd-Frank Act--refers not to any profit or return that the SBS Entity
would expect to earn from the security-based swap itself, or from any
related hedging or trading activities of the SBS Entity, but rather to
any other financial arrangements pursuant to which an SBS Entity may
have an incentive to encourage the counterparty to enter into the
transaction.\342\ Accordingly, the disclosure required pursuant to Rule
15Fh-3(b)(2) generally should include information concerning any
compensation (for example, under revenue-sharing arrangements) or other
incentives the SBS Entity receives from any source other than the
counterparty in connection with the security-based swap to be entered
into with the counterparty but will not include, for example, expected
cash flows received from a transaction to hedge the security-based swap
or that the security-based swap is intended to hedge.
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    \342\ See Proposing Release, 76 FR at 42409, supra note 3.
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    As discussed above, whether a conflict or incentive is material
depends on the facts and circumstances of the particular matter.
Although we are not expressly requiring disclosure of differential
compensation as requested by the commenter, the difference in
compensation an SBS Entity may receive for selling a security-based
swap versus another product with similar economic terms may create a
material incentive or conflict of interest that would need to be
disclosed under the framework discussed above. Similarly, an SBS Entity
would need to disclose material information concerning affiliations or
material business relationships it may have with any provider of
security-based swap valuation providers if those relationships create a
material incentive or conflict of interest. Regarding the commenter's
concern that the conflict of interest prohibitions in Sections 619 and
621 of the Dodd-Frank Act might be circumvented through application of
the business conduct disclosure requirements,\343\ nothing in our rules
limits or restricts the applicability of other relevant laws.\344\
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    \343\ See Levin, supra note 5.
    \344\ For instance, depending on the facts and circumstances,
failure to disclose material conflicts of interest when there is a
recommendation by a broker-dealer can be a violation of the
antifraud rules. See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d
1167, 1172 (2d Cir. 1970) (explaining that failure to inform a
customer fully of a possible conflict of interest in the securities
which the broker recommended for purchase was an omission of
material fact in violation of Rule 10b-5). See also In the Matter of
Richmark Capital Corp., Exchange Act Release No. 48758 (Nov. 7,
2003) (Commission opinion) (``When a securities dealer recommends
stock to a customer, it is not only obligated to avoid affirmative
misstatements, but also must disclose material adverse facts of
which it is aware. That includes disclosure of `adverse interests'
such as `economic self-interest' that could have influenced its
recommendation.'') (citations omitted).
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e. Daily Mark
    Exchange Act Section 15F(h)(3)(B)(iii) directs that business
conduct requirements adopted by the Commission require an SBS Entity to
disclose to a counterparty (other than to another SBS Entity or Swap
Entity): (i) For cleared security-based swaps, upon request of the
counterparty, the daily mark from the appropriate derivatives clearing
organization;\345\ and (ii) for uncleared security-based swaps, the
daily mark of the transaction.
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    \345\ As noted in the Proposing Release, although Section
15F(h)(3)(B)(iii) of the Exchange Act refers to a ``derivatives
clearing organization,'' the Commission believes that this was a
drafting error and that Congress intended to refer to a ``clearing
agency'' because the Dodd-Frank Act elsewhere requires security-
based swaps to be cleared at registered clearing agencies, not
derivatives clearing organizations. See Proposing Release, 76 FR at
42410 n.98, supra note 3; Section 17A(g) of the Exchange Act, 15
U.S.C. 78q-1(g).
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i. Proposed Rule
    Proposed Rule 15Fh-3(c) would require an SBS Entity to disclose to
its counterparty (other than to another SBS Entity or Swap Entity): (1)
For a cleared security-based swap, upon the request of the
counterparty, the daily end-of-day settlement price that the SBS Entity
receives from the appropriate clearing agency, and (2) for an uncleared
security-based swap, the midpoint between the bid and offer, or the
calculated equivalent thereof, as of the close of business, unless the
parties agree in writing to a different time, on each business day
during the term of the security-based swap. Proposed Rule 15Fh-3(c)(2)
would specify that the daily mark for an uncleared security-based swap
may be based on market quotations for comparable security-based swaps,
mathematical models or a combination thereof. Proposed Rule 15Fh-
3(c)(2) also would require disclosure of the data sources and a
description of the methodology and assumptions used to prepare the
daily mark for an uncleared security-based swap, as well as any
material changes to such data sources, methodology or assumptions
during the term of the security-based swap.
ii. Comments on Proposed Rule
    Ten comment letters addressed the requirement for SBS Entities to
provide a daily mark.\346\
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    \346\ See Barnard, supra note 5; Levin, supra note 5; IDC, supra
note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra
note 5; FIA/ISDA/SIFMA, supra note 5; MFA, supra note 5; BlackRock,
supra note 5; SIFMA (August 2011); SIFMA (August 2015), supra note
5.
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    One commenter suggested modifications to the daily mark requirement
to harmonize with the CFTC's parallel requirement.\347\ Specifically,
for cleared security-based swaps, the commenter recommended that an SBS
Entity simply be required to notify a counterparty of its right to
receive the daily mark from the appropriate clearing agency upon
request.\348\ The commenter also argued that the CFTC's description of
the clearinghouse's mark is less

prescriptive.\349\ Additionally, the commenter recommended that the
Commission provide guidance clarifying that an SBS Entity will be
deemed to satisfy the daily mark requirement for cleared security-based
swaps if the counterparty has agreed to receive its daily mark from its
clearing member.\350\
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    \347\ See SIFMA (August 2015), supra note 5.
    \348\ Id.
    \349\ Id.
    \350\ Id.
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    One commenter asserted that requiring SBS Entities to provide daily
marks would not further the goal of providing helpful transparency
because in most transactions marks are typically either based on
internal models or derived from indices with which the transactions are
not perfectly matched.\351\ Another commenter asked the Commission to
carefully review and consider the costs of such a requirement before
imposing any obligation to provide daily marks, other than those agreed
upon for collateral purposes or for which midmarket quotations are
observable.\352\ The commenter also requested that ``sophisticated
counterparties'' be permitted to opt out of this requirement, and
recommended that the Commission clarify that where parties have agreed
upon a basis for margining uncleared security-based swaps, providing
the daily mark used to make the related margin calculation should
satisfy the SBS Entity's daily mark disclosure obligations.\353\
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    \351\ See AFGI (September 2012), supra note 5; AFGI (July 2013),
supra note 5.
    \352\ See FIA/ISDA/SIFMA, supra note 5.
    \353\ Id.
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    One commenter suggested that the data sources, methodology and
assumptions used to prepare the daily mark should be required to
constitute a complete and independently verifiable methodology for
valuing each security-based swap entered into between the parties,
noting that this would promote objectivity and transparency, and aid in
the resolution of disputes.\354\ In this regard, a second commenter
also expressed support for requiring the provision of a daily mark and
specifically for requiring disclosure of any material changes to the
data sources, methodology and assumptions used to prepare the daily
mark, noting that this should include disclosing if the data sources
become unreliable or unavailable and any resulting changes to the
valuations.\355\
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    \354\ See Barnard, supra note 5.
    \355\ See Levin, supra note 5.
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    A third commenter recommended requiring disclosure as to how the
daily mark is calculated, including such information as whether the
daily mark was calculated based on inputs related to actual trade
activity, using mathematical models, quotes and prices of other
comparable securities, and whether those inputs came from third-party
valuation service providers.\356\ The commenter added, however, that
the proposed disclosure of the data sources and the description of the
methodology and assumptions used were not likely to require the
disclosure of proprietary information and that a general description of
key valuation inputs should be sufficient.\357\ Likewise, another
commenter also recommended that the Commission clarify in rule text
that an SBS Entity is not required to disclose confidential,
proprietary information about any model it may use to prepare the daily
mark.\358\
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    \356\ See IDC, supra note 5.
    \357\ Id.
    \358\ See SIFMA (August 2015), supra note 5.
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    This commenter also recommended that an SBS Entity should disclose
additional information concerning its daily mark to ensure a fair and
balanced communication, including that: (1) The daily mark may not
necessarily be a price at which the SBS Entity or counterparty would
agree to replace or terminate the security-based swap; (2) calls for
margin may be based on considerations other than the daily mark; and
(3) the daily mark may not necessarily be the value of the security-
based swap that is marked on the books of the SBS Entity.\359\
Additionally, this commenter advocated for eliminating the proposed
requirement for the SBS Entity to disclose its data sources used to
prepare the daily mark to harmonize more closely with the CFTC rule,
which requires disclosure of assumptions and methodologies but not data
sources.\360\
---------------------------------------------------------------------------

    \359\ Id.
    \360\ Id.
---------------------------------------------------------------------------

    One commenter noted that Major SBS Participants, unlike SBS
Dealers, will not always have access to sufficient market information
to provide a daily mark, particularly if the security-based swap is not
actively traded or if there are no current bid and offer quotes.\361\
The commenter expressed concern that this could cause Major SBS
Participants to have to reveal proprietary information about their
trading book positions, particularly when providing the methodology and
inputs that they used to prepare the daily mark.\362\ The commenter
suggested permitting sophisticated counterparties to opt out of
receiving daily marks.\363\ Another commenter suggested either not
requiring Major SBS Participants to provide the daily mark to its
counterparties or in the alternative, to exempt transactions between
Major SBS Participants and SBS Dealers and allow all other
counterparties to opt out of receiving such disclosures.\364\
---------------------------------------------------------------------------

    \361\ See MFA, supra note 5.
    \362\ Id.
    \363\ Id.
    \364\ See BlackRock, supra note 5.
---------------------------------------------------------------------------

    Several commenters raised potential conflicts of interest concerns
in connection with providing the daily mark for uncleared security-
based swaps. Two commenters recommended requiring SBS Entities to use
third-party quotations whenever possible to calculate the daily mark
for uncleared security-based swaps.\365\ One commenter suggested
allowing use of the midpoint between an SBS Entity's bid and offer
prices only when the SBS Entity's internal book value falls within the
same price range.\366\ Additionally, this commenter suggested that the
Commission consider requiring the SBS Entity to provide clients with
actionable quotes or prices at which the SBS Entity would terminate the
swap or allow the client to buy more, and with actionable quotes at a
significant size as a means to ensure accuracy.\367\ Another commenter
noted its view that defining the daily mark for uncleared security-
based swaps as the midpoint between the bid and offer prices, or the
calculated equivalent thereof, could be problematic because it may
present a conflict of interest for SBS Entities, particularly when the
security-based swaps are not actively traded or do not have consistent
or up-to-date bid and offer quotes.\368\ This commenter also suggested
requiring SBS Entities and their counterparties to have a clearly
defined process for resolving any potential valuation disputes. \369\
---------------------------------------------------------------------------

    \365\ See Levin, supra note 5; and IDC, supra note 5.
    \366\ See Levin, supra note 5.
    \367\ Id.
    \368\ See IDC, supra note 5.
    \369\ See IDC, supra note 5.
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    Two commenters addressed the communication of daily marks,
supporting the use of web-based methods of communication.\370\ One
commenter advocated for web-based systems to be the preferred method of
communication, but noted that since some market participants prefer
more traditional methods of communication, web-based systems should not
be required.\371\ The commenter recommended requiring SBS Entities to
have policies and procedures in place that reasonably ensure that any
non-electronic means of communication is safe and secure and is
otherwise

comparable to web-based systems.\372\ Additionally, the commenter
generally requested that the Commission provide greater clarity on
permissible methods for delivering daily mark disclosures, establish
minimum requirements for the communication of daily marks (for
instance, that the interfaces used provide counterparties with
appropriate tools to initiate, track and close valuation disputes), and
require SBS Entities to ensure that the method of communication is
designed to protect the confidentiality of the data and prevent any
unintentional or fraudulent addition, modification or deletion of a
valuation record.\373\ The second commenter suggested that the use of a
secure Web site or electronic platform should be required to enhance
data security.\374\ The commenter noted that such a platform could also
be used to provide transparency into the inputs used to determine the
daily mark and to initiate inquiries or challenges to the daily
mark.\375\ The commenter also recommended that the Commission require
daily mark information to be provided without charge.\376\
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    \370\ See Markit, supra note 5; IDC, supra note 5.
    \371\ See Markit, supra note 5.
    \372\ Id.
    \373\ Id.
    \374\ See IDC, supra note 5.
    \375\ Id.
    \376\ Id.
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iii. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting Rule
15Fh-3(c) as proposed, with modifications.
Cleared Security-Based Swaps
    In response to concerns raised by a commenter,\377\ the Commission
is modifying the requirement in Rule 15Fh-3(c)(1) concerning delivery
of the daily mark for cleared security-based swaps. For cleared
security-based swaps, the proposed rule would have required the SBS
Entity upon the request of the counterparty to provide the counterparty
with the end-of-day settlement price the SBS Entity received from the
clearing agency. As adopted, for cleared security-based swaps, Rule
15Fh-3(c)(1) requires an SBS Entity upon the request of the
counterparty to provide to the counterparty the daily mark that the SBS
Entity receives from the appropriate clearing agency.
---------------------------------------------------------------------------

    \377\ SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    In response to comments, the Commission is clarifying that to
fulfill its obligation to provide the daily mark upon request, the SBS
Entity may agree with the clearing agency, a clearing member or another
agent, for such clearing agency, clearing member or other agent to
provide the daily mark directly to the counterparty.\378\ The SBS
Entity, however, would retain the regulatory responsibility to provide
the daily mark upon request. We understand that current market practice
is for a clearing agency to provide access to end-of-day settlement
prices to the counterparty. We believe that this flexibility is
appropriate, as we believe errors in transmission are less likely to
occur if the counterparty receives the information directly from the
appropriate clearing agency, which is the source of the daily mark for
cleared security-based swaps. In addition, these changes will align our
rule more closely with the comparable CFTC rule, which allows for the
counterparty to receive the daily mark for a cleared swap from access
to the derivatives clearing organization or futures commodities
merchant or from the Swap Entity, which should result in efficiencies
for SBS Entities that have already established infrastructure to comply
with the CFTC rule.\379\ We note that an SBS Entity's obligation to