``For any security-based swap that must be publicly disseminated
pursuant to Sec. Sec.  242.902 and 242.908 and for which it is the
reporting side, the reporting side shall report the following
information in real time. If a security-based swap is required by
Sec. Sec.  242.901 and 242.908 to be reported but not publicly
disseminated, the reporting side shall report the following information
no later than the time that the reporting side is required to comply
with paragraph (d) of this section.'' In addition, re-proposed Rule
901(c) would be retitled ``Primary trade information,'' thus
eliminating the reference to real-time reporting--since the information
required to be reported under Rule 901(c) would no longer in all cases
be required to be reported in real time. Furthermore, re-proposed Rule
901(d) would be retitled ``Secondary trade information.'' \923\
---------------------------------------------------------------------------

    \923\ In the original proposal, Rule 901(d) of Regulation SBSR
was titled ``Additional information that must be reported.'' This
additional information would be for regulatory purposes only and
would not be publicly disseminated.
---------------------------------------------------------------------------

    The Commission also is re-proposing Rule 905(b)(2) to clarify that,
if a registered SDR receives corrected information relating to a
previously submitted transaction report, it would be required to
publicly disseminate a corrected transaction report only if the initial
security-based swap were subject to public dissemination.\924\
---------------------------------------------------------------------------

    \924\ Re-proposed Rule 905(b)(2) of Regulation SBSR also
substitutes the word ``counterparties''--which is a defined term in
Regulation SBSR--for the word ``parties,'' which was used in the
initial proposal but was not a defined term.
---------------------------------------------------------------------------

    Rule 901(c)(10), as initially proposed, provided that the following
data element would be required to be reported: ``If both counterparties
to a security-based swap are security-based swap dealers, an indication
to that effect.'' As the Commission stated in the Regulation SBSR
Proposing Release: ``Prices of transactions involving a dealer and a
non-dealer are typically `all-in' prices that include a mark-up or
mark-down, while interdealer transaction prices typically do not. Thus,
the Commission believes that requiring an indication of whether a
[security-based swap] was an interdealer transaction or a transaction
between a dealer and a non-dealer counterparty would enhance
transparency by allowing market participants to more accurately assess
the reported price for a [security-based swap].'' \925\ The Commission
is now re-proposing Rule 901(c)(10) as follows: ``If both sides of the
security-based swap include a security-based swap dealer, an indication
to that effect.'' The re-proposed rule would clarify that a security-
based swap dealer might be a direct or indirect counterparty to a
security-based swap. The Commission continues to believe that, in
either case, a security-based swap having a security-based swap dealer
on each side could, all other things being equal, be priced differently
than a security-based swap having a security-based swap dealer on only
one side. Therefore, the Commission continues to believe that the
existence of a security-based swap dealer on each side should be
reported to the registered SDR and made known to the public.
---------------------------------------------------------------------------

    \925\ Regulation SBSR Proposing Release, 75 FR 75214.
---------------------------------------------------------------------------

    The Commission is re-proposing Rule 901(d)(1)(ii) to require
reporting of the broker ID, desk ID, and trader ID, as applicable, only
of the direct counterparty on the reporting side. The Commission
preliminarily believes that it would be impractical and unnecessary to
report such data elements with respect to an indirect counterparty, as
such elements might not be applicable to an indirect counterparty.\926\
Similarly, Rule 901(d)(1)(iii) is being re-proposed to require
reporting of a description of the terms and contingencies of the
payment streams only of each direct counterparty to the other. The
Commission is including the word ``direct'' to avoid extending Rule
901(d)(1)(iii) to indirect counterparty relationships, where payments
generally would not flow to or from an indirect counterparty.
---------------------------------------------------------------------------

    \926\ An indirect counterparty typically would not have a desk
or trader involved in the transaction, or engage the services of a
broker, in the same manner as a direct counterparty.
---------------------------------------------------------------------------

    Proposed Rule 901(e) set forth provisions for reporting life cycle
events of a security-based swap. The basic approach set forth in
proposed Rule 901(e) was that, generally, the original reporting party
of the initial transaction would have the responsibility to report any
subsequent life cycle event; this approach remains unchanged in the re-
proposal. However, if the life cycle event were an assignment or
novation that removed the original reporting party, either the new
counterparty or the original counterparty would have to be the
reporting party. Further, Rule 901(e), as initially proposed, would
provide that the new counterparty would be the reporting party if it
were a U.S. person, whereas the other counterparty would be the new
reporting party if the new counterparty were not a U.S. person.
    However, as discussed above, the Commission is now proposing the
concept of a ``reporting side,'' which would include the direct and any
indirect counterparty. Further, as discussed above, the Commission is
proposing that non-U.S. person security-based swap dealers or major
security-based swap participants would, in certain instances, incur a
duty to report. Thus, the Commission is re-proposing Rule 901(e) to
provide that the duty to report would switch to the other side only if
the new side did not include a U.S. person (as in the originally
proposed rule) or a security-based swap dealer or major security-based
swap participant (references to which are being added to Rule 901(e)).
The Commission preliminarily believes that, if the new side includes a
security-based swap dealer or major security-based swap participant,
the new side should retain the duty to report. This approach is
designed to align reporting duties with the market participants that
the Commission preliminarily believes are better suited to carrying
them out because non-U.S. person security-based swap dealers and major
security-based swap participants likely have already taken significant
steps to establish and maintain the systems, processes and procedures,
and staff resources necessary to report security-based swaps
currently.\927\
---------------------------------------------------------------------------

    \927\ See Section VIII.D, supra (explaining rationale for
proposing to align reporting duties with greater capability to carry
out such duties).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of all the
technical and conforming changes in re-proposed Regulation SBSR,
including the following:
     Do you disagree with any of the technical and conforming
changes in the re-proposed rules? If so, why?
     Do you agree with the proposed change to Rule 902(a) which
provides that a registered SDR would not have an obligation to publicly
disseminate a transaction report for any security-based swap that is
required to be reported but not publically disseminated? Why or why
not?
     Do you agree with the proposed change to Rule 910(b)(4)
that would remove the requirement that ``[a]ll security-based swaps
reported to the registered security-based swap data

repository [] be subject to real-time public dissemination as specified
in Sec.  242.902'' and replace it with the requirement that ``[a]ll
security-based swaps received by the registered security-based swap
data repository [] be treated in a manner consistent with Sec. Sec.
242.902, 242.905, and 242.908''? Are there any alternative formulations
of the re-proposed rule text that the Commission should consider? If
so, what are they? Please be specific.
     Do you agree with the proposed changes to the data
elements initially contained in proposed Rules 901(c) and 901(d)?
Specifically, do you agree with the reformulation of the introductory
language contained in re-proposed Rule 901(c) to reflect situations in
which a security-based swap could be subject to regulatory reporting
but not public dissemination? Why or why not? Do you agree with the
retitling of re-proposed Rule 901(c) to ``Primary trade information''
to eliminate the reference to real-time reporting? Why or why not?
     Do you agree with the proposed change to re-proposed Rule
905(b)(2) to clarify that, if a registered SDR receives corrected
information relating to a previously submitted transaction report, it
would be required to publicly disseminate a corrected transaction
report only if the initial security-based swap were subject to public
dissemination? Why or why not?
     Do you agree with the proposed change to re-proposed Rule
901(c)(10) to clarify that a security-based swap dealer might be a
direct or indirect counterparty to a security-based swap? Why or why
not?
     Do you agree with the proposed change to re-proposed Rule
901(d)(1)(ii) to require the reporting of the broker ID, desk ID, and
trader ID only of the direct counterparty on the reporting side? Why or
why not? Similarly, do you agree with the requirement in re-proposed
Rule 901(d)(1)(iii) for reporting of a description of the terms and
contingencies of the payment streams only of each direct counterparty
to the other in order to avoid extending the rule to indirect
counterparty relationships? Why or why not?
     Do you agree with the proposed change to re-proposed Rule
901(e) to provide that the duty to report would switch to the other
side only if the new side did not include a U.S. person or a security-
based swap dealer or major security-based swap participant? Why or why
not?
     Are there any other technical and conforming changes that
the Commission should make to re-proposed Regulation SBSR?

F. Cross-Border Inter-Affiliate Transactions

    Commenters raised concerns about applying Title VII reporting or
dissemination requirements to cross-border inter-affiliate security-
based swaps.\928\ One commenter argued that, for a foreign entity
registered as a bank holding company and subject to the consolidated
supervision of the Federal Reserve, the reporting of inter-affiliate
transactions would be superfluous because the Federal Reserve has
``ample authority to monitor transactions among affiliates.'' \929\ The
second commenter expressed concern about duplicative or conflicting
regulation of inter-affiliate transactions. It stated that, for
example, inter-affiliate security-based swaps ``could be required to be
publicly reported in multiple jurisdictions, even though they are not
suitable for reporting in any jurisdiction.'' \930\ A third commenter
argued that inter-affiliate security-based swaps generally--not
referencing cross-border inter-affiliate transactions in particular--
should not be subject to public dissemination requirements, stating
that ``public reporting could confuse market participants with
irrelevant information and raise the costs to corporate groups of
managing risk internally.'' \931\
---------------------------------------------------------------------------

    \928\ See Japanese Banks Letter at 5; Multiple Associations
Letter IV at 11-12.
    \929\ Japanese Banks Letter at 5.
    \930\ Multiple Associations Letter IV at 16.
    \931\ Cleary Letter II at 17-18.
---------------------------------------------------------------------------

    The Commission preliminarily believes that regulatory reporting and
public dissemination serve different purposes and, while these two
requirements are related, their application to cross-border inter-
affiliate transactions should be considered separately. The Commission
notes that the statutory provisions that require regulatory reporting
and public dissemination of security-based swap transactions state that
``each'' security-based swap shall be reported; these statutory
provisions do not by their terms distinguish such reporting based on
particular characteristics (such as being negotiated at arm's length).
Section 13A(a)(1) of the Exchange Act \932\ provides that each
security-based swap that is not accepted for clearing shall be subject
to regulatory reporting. Section 13(m)(1)(G) of the Exchange Act \933\
provides that each security-based swap (whether cleared or uncleared)
shall be reported to a registered SDR, and Section 13(m)(1)(C) of the
Exchange Act \934\ generally provides that transaction, volume, and
pricing data of security-based swaps shall be publicly disseminated.
With respect to regulatory reporting of cross-border inter-affiliate
security-based swaps, the Commission preliminarily believes that
regulators should have ready access to information about the precise
legal entities that hold risk positions in all security-based swaps.
While it is true that the Federal Reserve or perhaps other regulators
might exercise consolidated supervision over a group, this might not
provide regulators with current and specific information about
security-based swap positions taken by the group's subsidiaries. As a
result, it would likely be more difficult for the Commission to conduct
general market analysis or surveillance of market behavior, and could
create particular problems during a crisis situation when having
accurate and timely information about specific risk exposures could be
crucial. Therefore, the Commission continues to believe that each
cross-border inter-affiliate security-based swap that otherwise
satisfies any of the criteria in re-proposed Rule 908(a)(1) should be
subject to regulatory reporting.
---------------------------------------------------------------------------

    \932\ 15 U.S.C. 78m-1(a)(1).
    \933\ 15 U.S.C. 78m(m)(1)(G).
    \934\ 15 U.S.C. 78m(m)(1)(C).
---------------------------------------------------------------------------

    With respect to public dissemination of cross-border inter-
affiliate transaction data, the Commission preliminarily believes that
the analysis of this issue in the cross-border context is in many ways
similar to the analysis of dissemination of inter-affiliate transaction
data in the domestic context. In particular, many of the issues raised
by commenters with respect to the public dissemination of inter-
affiliate transactions generally appear to be relevant whether a
transaction is conducted within the United States or conducted on a
cross-border basis. These general issues include a concern about
information distortion, market confusion, and interference with
internal risk management of a corporate group.
    First, commenters stated that inter-affiliate transactions--whether
cross-border or not--are typically risk transfers with no market
impact. They believe that the market-facing transactions already would
have been publicly reported, so requiring that inter-affiliate
transactions also be publically reported would duplicate information
already known to the public. The commenters express the concern that
such ``double counting'' would distort information that is critical for
price discovery and measuring liquidity, the depth of trading, and

exposure to swaps in the market.\935\ They also believe that it would
distort the establishment of regulatory thresholds and analysis, as
well as enforcement activities that require an accurate assessment of
the swaps market.\936\
---------------------------------------------------------------------------

    \935\ See Multiple Associations Letter IV at 11-12.
    \936\ See id.
---------------------------------------------------------------------------

    Second, commenters stated that affiliates often enter into an
inter-affiliate transaction on terms linked to an external trade being
hedged, which they are concerned could create confusion in the market
if publicly reported. If markets move because of the external trade
before the inter-affiliate transaction is entered into on a SEF or
reported as an off-exchange trade, market participants could
misconstrue the market's true direction and depth simply because of the
disconnect in timing between the two offsetting trades.\937\
---------------------------------------------------------------------------

    \937\ See id. at 12.
---------------------------------------------------------------------------

    Third, commenters stated that public dissemination of inter-
affiliate transactions could interfere with the internal risk
management practices of a corporate group. For example, one entity in a
group may be better positioned to take on a certain type of risk, even
though another entity must, for unrelated reasons, actually enter into
the transaction with an external counterparty. Public disclosure of a
transaction between affiliates could prompt other market participants
to act in a way that would prevent the corporate group from following
through with its risk management strategy by, for instance, causing
adverse price movements in the market that the risk-carrying affiliate
would use to hedge.\938\
---------------------------------------------------------------------------

    \938\ Cleary Letter II at 17.
---------------------------------------------------------------------------

    Beyond these concerns regarding the public dissemination of inter-
affiliate transactions, commenters addressing the public reporting of
cross-border inter-affiliate transactions focused more generally on
duplicative and conflicting regulations. Using public dissemination as
an example, one commenter stated that inter-affiliate security-based
swaps ``could be required to be publicly reported in multiple
jurisdictions, even though they are not suitable for reporting in any
jurisdiction.'' \939\ However, the Commission is not aware of any
commenter proposing a treatment of cross-border inter-affiliate
transactions under public dissemination requirements that differs
substantively from proposals for the treatment of other inter-affiliate
transactions.
---------------------------------------------------------------------------

    \939\ See note 930, supra.
---------------------------------------------------------------------------

    The Commission has considered the issues raised by these commenters
both with respect to inter-affiliate transactions generally and in the
cross-border context. The common thread of the issues identified by
commenters to date is that public dissemination should not be required
for a security-based swap that is undertaken to transfer the risk of an
initial security-based swap (between X and Y) to an affiliate (i.e.,
from X to XA) because it would have no price discovery value or could
even give market observers a false understanding of the nature of the
transaction.\940\ The Commission acknowledges that the initial
security-based swap between X and Y likely would have more price
discovery value than the subsequent inter-affiliate transaction between
X to XA, all else being equal. In this hypothetical, the initial
transaction presumably represents the mutual agreement of parties
operating on an arm's-length basis to execute a trade at a particular
price, while the latter transaction generally would not involve
negotiation of the terms, particularly as regards to price. It may not
follow, however, that the subsequent inter-affiliate transaction would
have no price discovery value whatsoever, particularly in a cross-
border context where multiple public dissemination requirements may be
involved. Arguing that an inter-affiliate security-based swap has no
price discovery value appears to presuppose that the initial, arm's-
length security-based swap had been publicly disseminated. This could
be the case if the initial security-based swap were subject to the
rules of a jurisdiction having public dissemination requirements.\941\
However, if the initial security-based swap had not been publicly
disseminated, public dissemination of the cross-border inter-affiliate
transaction, assuming it were subject to Rule 908(a)(2) of re-proposed
Regulation SBSR,\942\ might be the only way for the market to obtain
any pricing information about the series of transactions. These
circumstances could be present if the initial security-based swap were
not subject to the rules of a jurisdiction having public dissemination
requirements. In this case, public dissemination of the cross-border
inter-affiliate transaction, assuming it were subject to Rule 908(a)(2)
of re-proposed Regulation SBSR,\943\ might be the only way for the
market to obtain any pricing information about the series of
transactions.
---------------------------------------------------------------------------

    \940\ See Cleary Letter II at 17-18; Multiple Associations
Letter IV at 16.
    \941\ See Multiple Associations Letter IV at 12 (``The market-
facing swaps already will have been reported and therefore, to
require that inter-affiliate swaps also be reported will duplicate
information'').
    \942\ Re-proposed Rule 908(a)(2) of Regulation SBSR would
describe when a cross-border security-based swap would be subject to
public dissemination.
    \943\ See id.
---------------------------------------------------------------------------

    As described above, commenters also raised a general concern about
the potential for duplicative and conflicting regulation of cross-
border inter-affiliate transactions. The Commission is sensitive to
these concerns both generally and in the context of public
dissemination.\944\ The treatment of these issues in connection with
public dissemination is not dissimilar to their treatment in other
contexts under Title VII, including the context of regulatory
reporting. Accordingly, the Commission preliminarily believes that the
concern expressed by the commenters should be addressed by the proposed
substituted compliance policy and framework discussed in detail below,
as well as when the Commission considers the adopting release for
public dissemination, which the Commission anticipates will address the
issue of dissemination of inter-affiliate transactions.\945\
---------------------------------------------------------------------------

    \944\ Duplicative and conflicting regulation is one of the
considerations the Commission takes into account in proposing the
approach to application of Title VII requirements to security-based
swap transactions in the cross-border context. See Section II.C,
supra.
    \945\ See Section XI, infra.
---------------------------------------------------------------------------

    In light of these considerations, the Commission preliminarily
believes that cross-border inter-affiliate security-based swaps should
not be excluded from the public dissemination requirements to the
extent that inter-affiliate security-based swaps are not excluded as a
general matter. The Commission preliminarily believes that the
considerations regarding whether or not to exclude inter-affiliate
cross-border security-based swaps from public dissemination on the
grounds that they could be misleading or have no price discovery value
are similar to the considerations regarding whether or not to exclude
inter-affiliate security-based swaps generally. Similarly, the
Commission preliminarily believes that any steps short of exclusion
that could be taken to maximize the price discovery value that inter-
affiliate cross-border security-based swaps may have (while minimizing
any concern that they might mislead the market) are similar to the
steps that could be taken with respect to inter-affiliate security-
based swaps generally. Although the Commission is not in this release
re-proposing any provisions of Regulation SBSR regarding the public
dissemination of inter-affiliate security-

based swaps generally (whether or not cross-border),\946\ as previously
stated, the Commission invites public comment on whether there are
specific concerns or reasons to support different treatment or analysis
of public dissemination of cross-border inter-affiliate transactions
from the treatment or analysis of the same issue in the domestic
context, and, in particular, why cross-border inter-affiliate
transactions may not be suitable for public dissemination.
---------------------------------------------------------------------------

    \946\ See Regulation SBSR Proposing Release, 75 FR 75215
(proposing that inter-affiliate security-based swaps should not be
suppressed from the public data feed, but rather should be
disseminated and appropriately tagged).
---------------------------------------------------------------------------

    For example, the concerns about the potentially limited price
discovery value of inter-affiliate security-based swaps may be able to
be addressed through the public dissemination of relevant data that may
be indicative of such limitations, rather than suppressing these
transactions entirely. In the Regulation SBSR Proposing Release, the
Commission proposed to require a registered SDR to ``publicly
disseminate a transaction report of a security-based swap immediately
upon receipt of information about the security-based swap from a
reporting party.'' \947\ As the Commission noted in the Regulation SBSR
Proposing Release, ``[t]he transaction report that is disseminated
would be required to consist of all the information reported by the
reporting party pursuant to proposed Rule 901(c).'' \948\ One of the
data elements enumerated in proposed Rule 901(c) would be ``[i]f
applicable, an indication that the transaction does not accurately
reflect the market.'' \949\ Such data element should send a message to
the market that the transaction was not conducted at arm's length on
the open market.\950\ Market participants could take such information
into account when interpreting or analyzing the publicly-disseminated
inter-affiliate transaction pricing information.
---------------------------------------------------------------------------

    \947\ See Rule 902(a) of Regulation SBSR, as originally
proposed. If the SDR were closed when the reporting party submitted
its transaction report, the SDR would be required to publicly
disseminate the transaction report immediately upon re-opening. See
id.
    \948\ Regulation SBSR Proposing Release, 75 FR 75228.
    \949\ Rule 901(c)(11) of Regulation SBSR, as originally
proposed.
    \950\ The Commission preliminarily disagrees with the commenter
that argued that ``inclusion of these swaps in swaps market data
will distort the establishment of position limits, analysis of open
interest, determinations of block trade thresholds and performance
of other important regulatory analysis, functions and enforcement
activities that require an accurate assessment of the swaps
market.'' Multiple Associations Letter IV at 11-12. Security-based
swaps that have been appropriately marked as inter-affiliate
transactions also could be excluded from certain aggregated market
data, depending on the purpose for which those data are being used.
---------------------------------------------------------------------------

    As noted above, one commenter expressed concern that public
dissemination of an inter-affiliate transaction could interfere with
the internal risk management of a corporate group by causing adverse
price movements in the market that the risk-carrying affiliate might
use to hedge. The commenter did not explain why the corporate group
might be unable or might choose not to hedge the risk when the initial
transaction is executed, or why the impact of the public dissemination
of the subsequent inter-affiliate transaction might be different from
the impact of the public dissemination of the initial transaction. The
Commission preliminarily believes that, assuming that the corporate
group does not hedge at the time the initial transaction was executed,
a concern about the potential impact of public dissemination of the
inter-affiliate transaction on the ability to hedge the position would
be similar to the concern that commenters have expressed generally
about public dissemination of block trades.\951\ This concern about a
potential impact of the public dissemination--either of the original
transaction or the subsequent inter-affiliate transaction--may be
addressed by delayed dissemination instead of suppressing dissemination
of these transactions entirely. The broader issue of how to treat block
trades, including how to define what is a block trade, is one that the
Commission continues to evaluate. In addition, public dissemination of
relevant data indicating the inter-affiliate nature of the transaction
separately may help address concerns about potential impact on markets
on which a hedge might if occur if such markets are made aware that
there may be special considerations that should be taken into account
when assessing the extent to which the transaction may reflect the
current market.
---------------------------------------------------------------------------

    \951\ Specifically, if the corporate group hedges the initial
transaction at the time of execution, there would appear to be no
need to hedge at the time of the inter-affiliate transaction, and
thus no concern about the impact of the dissemination of the inter-
affiliate transaction on the market in which the hedge is put on.
Furthermore, if the corporate group chooses not hedge the position
until the time of the inter-affiliate transaction, the Commission
questions why the concern about the impact of the disclosure of that
transaction would be different than a concern about the
dissemination of the original transaction.
---------------------------------------------------------------------------

    Regulation SBSR would require registered SDRs, in their policies
and procedures, to enumerate the specific data elements of a security-
based swap or life cycle event that would be required to be reported,
and to specify one or more acceptable data formats, connectivity
requirements, and other protocols for submitting information.\952\ The
Commission itself did not propose to specify each data element that
would have to be reported, but instead identified broad categories of
information that must be reported.\953\ Furthermore, the Commission
initially proposed to require, in Rule 907(a)(4), that a registered SDR
have policies and procedures ``[d]escribing how reporting parties shall
report and, consistent with the enhancement of price discovery, how the
registered security-based swap data repository shall publicly
disseminate . . . security-based swap transactions that do not involve
an opportunity to negotiate any material terms, other than the
counterparty; and any other security-based swap transactions that, in
the estimation of the registered security-based swap data repository,
do not accurately reflect the market.'' \954\ However, the Commission
invites public comment on whether concerns about the inter-affiliate
security-based swaps not accurately reflecting the market can be
addressed in the policies and procedures of registered SDRs that would
be required under re-proposed Rule 907(a)(4).
---------------------------------------------------------------------------

    \952\ See Rules 907(a)(1) and 907(a)(2) of Regulation SBSR, as
originally proposed.
    \953\ For example, the Commission proposed to require the
reporting of ``[i]nformation that identifies the security-based swap
instrument''--see Rule 901(c)(2) of Regulation SBSR, as originally
proposed--but did not specify the exact manner in which such
information must be reported, instead proposing to allow SDRs
discretion to set such specifications in their policies and
procedures. However, the Commission did propose to require reporting
of certain discrete data elements. See, e.g., Rule 901(d)(vi) of
Regulation SBSR (requiring reporting of the name of the clearing
agency, if the security-based swap will be cleared).
    \954\ Rule 907(a)(4) of Regulation SBSR, as originally proposed.
---------------------------------------------------------------------------

    For example, such policies and procedures could be designed to
maximize the price discovery value of cross-border (or other) inter-
affiliate security-based swaps and to minimize their ability to
mislead. These policies and procedures could require not only that
reporting sides mark whether a security-based swap is an inter-
affiliate transaction, but also whether the initial security-based swap
was executed in a jurisdiction with public dissemination
requirements.\955\ Further, these policies and procedures also could
require the reporting side to indicate the approximate time when the
initial

security-based swap was executed.\956\ This would permit market
observers to gauge how much price discovery value to assign to the
price provided in the inter-affiliate security-based swap transaction
report that would be publicly disseminated under Rule 902 of re-
proposed Regulation SBSR. Information about an initial trade done less
than 24 hours before (obtained indirectly from the later-appearing
trade report of the inter-affiliate cross-border security-based swap)
could have significant price discovery value, while information from an
initial trade executed over a week before could, all things being
equal, have less.\957\ The Commission invites public comment on these
approaches to the treatment of inter-affiliate security-based swaps
generally, as well as their relative advantages and disadvantages. In
particular, the Commission invites public comment on how these
approaches would affect the internal risk management practices of a
corporate group. In addition, as previously stated, the Commission
invites public comment on whether there are specific concerns or
reasons to support different treatment or analysis of public
dissemination of cross-border inter-affiliate transactions from the
treatment or analysis of the same issue in the domestic context.
---------------------------------------------------------------------------

    \955\ This could be either the United States or another
jurisdiction that imposes post-trade transparency requirements
similar to those in re-proposed Regulation SBSR.
    \956\ For example, there could be indicators for the initial
security-based swap having been executed within the past 24 hours,
between one and seven days before, or longer than seven days before.
    \957\ However, even information about a trade done over a week
ago (or more) could have price discovery value for security-based
swap instruments that trade infrequently.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of issues
regarding cross-border inter-affiliate security-based swaps, including
the following:
     Do you believe that cross-border inter-affiliate security-
based swaps should be excluded from the regulatory reporting
requirements of Regulation SBSR? If so, under what circumstances should
such security-based swaps be excluded, and why? What would be the harm
of having such inter-affiliate security-based swaps reported to a
registered SDR? What are the risks of not requiring regulatory
reporting of inter-affiliate security-based swaps?
     Do you believe that cross-border inter-affiliate security-
based swaps should be analyzed differently from domestic inter-
affiliate security-based swaps? Why or why not?
     Do you believe that cross-border inter-affiliate security-
based swaps should be excluded from the public dissemination
requirements of Regulation SBSR? Why or why not? What are the risks or
benefits of not requiring public dissemination of inter-affiliate
security-based swaps? How should the Commission balance these risks and
benefits?
     Does your view about public dissemination for cross-border
inter-affiliate security-based swaps change depending on whether an
initial, arm's-length security-based swap was executed and publicly
disseminated in a jurisdiction having public dissemination
requirements? Why or why not? On what basis could or should the
Commission exclude the cross-border inter-affiliate security-based swap
from the public dissemination requirements if the initial, arm's-length
security-based swap was executed and publicly disseminated in a
jurisdiction having no public dissemination requirements, or public
dissemination requirements that are not comparable to those in the
United States?
     Does your view on the application of regulatory reporting
and public dissemination requirements to inter-affiliate security-based
swaps change if the affiliates are subject to consolidated supervision?
If so, please explain.
     Can you suggest any additions to the policies and
procedures of registered SDRs that could maximize the price discovery
value, and minimize any potentially misleading aspects, of public trade
reports of cross-border inter-affiliate security-based swaps? If so,
what are they? Should the Commission more clearly specify in Rule
907(a)(4) how inter-affiliate security-based swaps should be publicly
disseminated so as to maximize their price discovery value and minimize
their potential for misleading market observers? If so, how?
     Do you have any other concerns about public dissemination
of cross-border inter-affiliate security-based swaps so long as they
are appropriately marked?

G. Foreign Privacy Laws Versus Duty To Report Counterparty ID

    Rule 901(d), as initially proposed, set forth the data elements
that would constitute the required regulatory report of a security-
based swap (i.e., information for use only by regulators that would not
be included in the publicly disseminated report). One such element is
the ``participant ID'' of the counterparty.\958\ The Title VII
provisions relating to security-based swap trade reporting and proposed
Regulation SBSR that would implement those provisions contemplate only
one counterparty to a security-based swap having a duty to report.
However, the Commission preliminarily believes that being able to
assess the positions and behavior of both counterparties to the
security-based swap would facilitate our ability to carry out our
regulatory duties for market oversight.\959\ Because only one party
would be required to report, the only way to obtain the identity of the
non-reporting party counterparty would be to require the reporting
party to disclose its counterparty's identity.\960\
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    \958\ See Rule 901(d)(1)(i) of Regulation SBSR, as initially
proposed. See also Regulation SBSR Proposing Release, 75 FR 75217.
    \959\ U.S. regulators have a strong interest in being able to
monitor the risk exposures of U.S. persons, particularly those
involved in the security-based swap market, as the failure or
financial distress of a U.S. person could impact other U.S. persons
and the U.S. economy as a whole. U.S. regulators also have an
interest in obtaining information about non-U.S. counterparties that
enter into security-based swaps with U.S. persons, as the ability of
such non-U.S. counterparties to perform their obligations under
those security-based swaps could impact the financial soundness of
U.S. persons. See, e.g., S. Comm. on Banking, Hous., & Urban
Affairs, The Restoring American Financial Stability Act of 2010, S.
Rep. No. 111-176, at 32 (``As a key element of reducing systemic
risk and protecting taxpayers in the future, protections must
include comprehensive regulation and rules for how the OTC
derivatives market operates. Increasing the use of central
clearinghouses, exchanges, appropriate margining, capital
requirements, and reporting will provide safeguards for American
taxpayers and the financial system as a whole.'') (emphasis added).
    \960\ Once the identity of the opposite counterparty to a
security-based swap is known by a registered SDR, the SDR would be
required to obtain certain additional information from that
counterparty. See proposed Rule 906(a), which is not being revised
by this re-proposal.
---------------------------------------------------------------------------

    Three comments on proposed Regulation SBSR cautioned that U.S.
persons may be restricted from complying with such a requirement in
cases where a security-based swap is executed outside the United
States.\961\ One commenter stated that the London branch of a U.S.
person would need its counterparty's consent to identify that

party under U.K. law.\962\ The commenter added that, under French law,
consent is required each time a report is made identifying the
counterparty, and this restriction cannot be resolved by changes to the
firm's terms of business.\963\ Another commenter urged the Commission
to ``consider carefully and provide for consistency with, foreign
privacy laws, some of which carry criminal penalties for wrongful
disclosure of information,''\964\ but did not provide further detail. A
third commenter argued that allowing substituted compliance when both
parties are not domiciled in the United States could avoid problems
with foreign privacy laws conflicting with U.S. reporting
requirements.\965\
---------------------------------------------------------------------------

    \961\ In addition, two comments on the Commission's interim
final temporary rule on the reporting of security-based swaps
entered into before July 21, 2010, Securities Exchange Act Release
No. 63094 (Oct. 13, 2010), 75 FR 64643 (Oct. 20, 2010), made similar
points. See Deutsche Bank Letter at 5 (``In some cases,
dissemination or disclosure of [counterparty] information could lead
to severe civil or criminal penalties for those required to submit
information to an SDR pursuant to the Interim Final Rules. These
concerns are particularly pronounced because of the expectation that
Reportable Swap data will be reported, on a counterparty identifying
basis, to SDRs, which will be non-governmental entities, and not
directly to the Commissions.''); ISDA Letter II at 6 (``In many
cases, counterparties to cross-border security-based swap
transactions will face significant legal and reputational obstacles
to the reporting of such information. Indeed, disclosure of such
information may lead to civil penalties in some jurisdictions and
even criminal sanctions in other jurisdictions.'').
    \962\ See DTCC Letter II at 21.
    \963\ See id.
    \964\ ISDA/SIFMA Letter I at 20.
    \965\ See Cleary Letter II at 17-18.
---------------------------------------------------------------------------

    The Commission seeks to understand more precisely if--and, if so,
how--requiring a counterparty to report the transaction pursuant to
Regulation SBSR (including disclosure of the counterparty's identity to
a registered SDR) might cause it to violate local law in a foreign
jurisdiction where it operates. Before determining whether any
exception to reporting the counterparty's identity might be necessary
or appropriate, the Commission seeks to obtain additional information
about any such foreign privacy laws.
Request for Comment
    The Commission generally requests comment on all aspects of issues
relating to foreign privacy laws with respect to proposed Regulation
SBSR, including the following:
     What jurisdictions have laws that might affect a reporting
side's ability to report the participant ID of its counterparty? Please
cite and describe specifically for each such law: To whom such
restrictions would apply and under what circumstances; how the law
might restrict reporting (e.g., what data elements that otherwise would
be required to be reported under Regulation SBSR would be restricted);
whether any exceptions under the law, particularly but not limited to
consent provisions and provisions relating to compliance with
applicable law, might be available to a reporting side that otherwise
would be required to comply with re-proposed Rule 901(d)(1)(i), or
explain why none of the exceptions would be available.
     If no such exceptions are available under the local law
and you believe that an exception by rule from re-proposed Rule
901(d)(1)(i) would be appropriate, how should that exception be
crafted? Please suggest appropriate rule text.
     How, if at all, would a substituted compliance regime for
regulatory reporting avoid problems with foreign privacy laws? Would
the Commission and other U.S. financial regulators be able to obtain
information about security-based swap counterparties from foreign trade
repositories or foreign regulatory authorities to which such
transactions had been reported?

H. Foreign Public Sector Financial Institutions

    Six commenters expressed concern about applying the requirements of
Title VII to the activities of FPSFIs, such as foreign central banks
and multilateral development banks.\966\ One commenter, the European
Central Bank (``ECB''), noted that security-based swaps entered into by
the Federal Reserve Banks are excluded from the CEA's definition of
``swap'' \967\ and that the functions of foreign central banks and the
Federal Reserve are broadly comparable. The ECB argued, therefore, that
security-based swaps entered into by foreign central banks should
likewise be excluded from the definition of ``swap.'' \968\ A second
commenter, the World Bank (representing the International Bank for
Reconstruction and Development, the International Finance Corporation,
and other multilateral development institutions of which the United
States is a member) also argued generally that the term ``swap'' should
be defined to exclude any transaction involving a multilateral
development bank.\969\ The World Bank further noted that the EMIR--
which is intended to serve as the E.U. counterpart to Title VII of the
Dodd-Frank Act--would expressly exclude multilateral development banks
from its coverage.\970\
---------------------------------------------------------------------------

    \966\ See BIS Letter passim; CEB at 2, 4; ECB Letter passim; ECB
Letter II passim; EIB Letter passim; Nordic Investment Bank Letter
at 1; World Bank Letter II passim.
    \967\ Section 1a(47)(B)(ix) of the CEA excludes from the
definition of swap any agreement, contract, or transaction a
counterparty of which is a Federal Reserve Bank, the Federal
Government, or a Federal agency that is expressly backed by the full
faith and credit of the United States. A security-based swap
includes any swap, as defined in the CEA, that is based on, among
other things, a narrow-based index or a single security or loan. See
Section 3(a)(68) of the Exchange Act, 15 U.S.C. 78c3(a)(68). See
also Product Definitions Adopting Release, 77 FR 48208.
    \968\ See ECB Letter I at 2; ECB Letter II at 2. See also EIB
Letter at 1; Nordic Development Bank at 1.
    \969\ See World Bank Letter II at 6-7.
    \970\ See id. at 4. See also EIB Letter at 7 (``As a matter of
comity, actions by U.S. financial regulators should be consistent
with the laws of other jurisdictions that provide exemption from
national regulation for government-owned multinational developments
such as the [EIB]'').
---------------------------------------------------------------------------

    The ECB and BIS stated that foreign central banks enter into
security-based swaps solely in connection with their public mandates,
which require them to act confidentially in certain circumstances.\971\
The ECB argued in particular that public disclosure of its market
activities could compromise its ability to take necessary actions and
``could cause signaling effects to other market players and finally
hinder the policy objectives of such actions.'' \972\ Another
commenter, the Council of Europe Development Banks (``CEB''), while
opposing application of Title VII requirements to multilateral
development banks generally, did not object to the CFTC and SEC
preserving their authority over certain aspects of swaps activity,
including reporting requirements.\973\ Similarly, the World Bank
believed that the definition of ``swap'' could be qualified by a
requirement that counterparties would treat such transactions as swaps
solely for reporting purposes.\974\
---------------------------------------------------------------------------

    \971\ See BIS Letter at 4-5; ECB Letter I at 3.
    \972\ ECB Letter I at 3. See also ECB Letter II at 2.
    \973\ See CEB Letter at 4. However, the CEB did not state a view
as to whether FPSFI trades should be subject to post-trade
transparency.
    \974\ See World Bank Letter II at 7.
---------------------------------------------------------------------------

    The Commission preliminarily believes that security-based swaps to
which an FPSFI is a counterparty (``FPSFI trades'') should not, for
that fact alone, be exempt from regulatory reporting.\975\ Under
Regulation SBSR, as initially proposed, an FPSFI trade would be
required to be reported to a registered SDR if the counterparty were a
U.S. person. The Commission continues to believe that, if an FPSFI
executes a security-based swap with a counterparty that is a U.S.
person, the security-based swap should be subject

to regulatory reporting. Under re-proposed Regulation SBSR, an FPSFI
trade also would be required to be reported if the counterparty were a
non-U.S. person security-based swap dealer or major security-based swap
participant. In either case, without a regulatory report of such
security-based swaps, the Commission would have an incomplete view of
the risk positions held by security-based swap market participants that
are U.S. persons or registered with the Commission. Regulatory
reporting of such security-based swaps, despite the fact that an FPSFI
is a counterparty, would facilitate the Commission's ability to carry
out our regulatory oversight responsibilities with respect to
registered entities and the security-based swap market. The Commission
notes that this approach was endorsed by two commenters.\976\
---------------------------------------------------------------------------

    \975\ The Commission notes that all FPSFIs, even FPSFIs that are
based in the United States, would be deemed non-U.S. persons under
the Commission's Title VII rules. See proposed Rule 3a71-3(a)(7)(ii)
(``The term `U.S. person' does not include the International
Monetary Fund, the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations,
and their agencies, affiliates, and pension plans, and any other
similar international organizations, their agencies, affiliates, and
pension plans''). See also Section III.B.5, supra (discussing
proposed definition of ``U.S. person''). As with any other security-
based swap transaction having a direct counterparty that is a non-
U.S. person, a transaction involving an FPSFI as a direct
counterparty would be subject to Regulation SBSR's regulatory
reporting requirements only if it met one of the conditions in re-
proposed Rule 908(a)(1), and would be subject to Regulation SBSR's
public dissemination requirements only if it met one of the
conditions in re-proposed Rule 908(a)(2).
    \976\ See CEB Letter at 4; World Bank Letter II at 7 (stating
that, although swaps involving FPSFIs as counterparties generally
should be exempt from the definition of ``swap,'' they should be
treated as swaps solely for reporting purposes).
---------------------------------------------------------------------------

    Furthermore, the Commission believes that, at this time, a
sufficient basis does not exist to support an exemption from public
dissemination for FPSFI trades. The Commission preliminarily
understands that FPSFI participation in the security-based swap
market--rather than the swap market generally--may be limited. Comments
submitted by FPSFIs generally were addressed to both the Commission and
the CFTC and addressed participation in the swap market generally; it
is unclear the extent to which these comments should be read to apply
to the security-based swap market.\977\ Furthermore, to the extent that
FPSFI trades are subject to public dissemination under Regulation SBSR
(e.g., because the direct counterparty is a U.S. person other than a
foreign branch of a U.S. bank), such trades could provide useful price
discovery information to other market participants.
---------------------------------------------------------------------------

    \977\ But see BIS Letter at 3 (stating that the BIS generally
does not transact security-based swaps such as credit default swaps
or equity derivatives).
---------------------------------------------------------------------------

    The Commission is seeking more information with respect to the
basis for the claim that public dissemination of FPSFI trades, as
contemplated by re-proposed Regulation SBSR, would ``hinder the policy
objectives'' \978\ of FPSFIs. The Commission notes that proposed
Regulation SBSR contains provisions relating to public dissemination
that are designed to protect the identity of security-based swap
counterparties \979\ and prohibit a registered SDR (with respect to
uncleared security-based swaps) from disclosing the business
transactions and market positions of any person.\980\ Furthermore, to
the extent that an FPSFI trade is small enough not to constitute a
block trade, the Commission questions the extent to which market
observers would be able to distinguish the trade as having been
conducted by an FPSFI. Given these provisions of Regulation SBSR, which
are designed to prevent adverse market impacts due to disclosure of a
counterparty's identity or the public dissemination of a block trade,
the Commission preliminarily does not see a basis to exempt FPSFI
trades from public dissemination. However, the Commission is open to
receiving further information that might support an exemption.
---------------------------------------------------------------------------

    \978\ ECB Letter I at 3.
    \979\ See Rule 902(c)(1), as initially proposed.
    \980\ See Rule 902(c)(2), as initially proposed.
---------------------------------------------------------------------------

Request for Comment
    As noted above, certain FPSFI commenters stated that carrying out
their policy mandates would require confidentiality in certain
circumstances.\981\ The Commission seeks additional information to
assist our analysis of this issue, and requests answers to the
following questions. In responding, please focus on the security-based
swap market, not the market for other swaps. In addition, commenters
are requested to answer only with respect to security-based swap
activity that would be subject to Regulation SBSR, and not with respect
to activity that, because of the place where the transaction is
conducted or the nationality of the counterparties, would not be
subject to Regulation SBSR in any case:
---------------------------------------------------------------------------

    \981\ See BIS Letter at 5; ECB Letter at 3.
---------------------------------------------------------------------------

     How many FPSFIs engage in security-based swap activity
with U.S. persons? How active are they in the security-based swap
market generally?
     What policy goals might an FPSFI be attempting to carry
out by participating in the security-based swap market?
     What trading strategies might an FPSFI conduct in the
security-based swap market?
     Are there any characteristics of FPSFI activity in the
security-based swap market that could make it easier for market
observers to detect an FPSFI as a counterparty, or that could make it
easier to detect an FPSFI's business transactions or market positions?
If so, are there steps the Commission could take to minimize such
information leakage short of suppressing all FPSFI trades from public
dissemination? If so, what are they?
     Do FPSFIs typically trade standardized or more bespoke
security-based swap instruments? If the former, would market observers
be less likely to detect the participation of an FPSFI in the security-
based swap market?
     What sizes do FPSFIs typically transact in? Does the size
impact any concerns with publicly disseminating FPSFI trades? If so,
how? Could the concerns of FPSFIs be addressed by crafting appropriate
block thresholds and dissemination delays rather than by suppressing
all FPSFI trades from public dissemination? Why or why not?
     Do you believe that FPSFI trades should be included in
public dissemination? Why or why not? To what extent, and how, would
price transparency and market efficiency be affected if FPSFI trades
were suppressed from public dissemination?

I. Summary and Additional Request for Comment

    The provisions of re-proposed Regulation SBSR discussed above
represent the Commission's preliminary views regarding the application
of Title VII's provisions relating to regulatory reporting and public
dissemination of security-based swap transactions in the cross-border
context. This re-proposal reflects a particular balancing of the
principles and applicable requirements described above,\982\ informed
by, among other things, the particular nature of the security-based
swap market, the structure of security-based swap dealing activity, and
the Commission's experience in applying the federal securities laws in
the cross-border context. The Commission recognizes that other
approaches are possible and might more effectively achieve the goals of
the Dodd-Frank Act, in whole or in part. Accordingly, the Commission
invites comment regarding all aspects of re-proposed Regulation SBSR,
and each re-proposed rule contained therein, including potential
alternative approaches. Data and comment from market participants and
other interested parties regarding the likely effect of each re-
proposed rule and potential alternative approaches will be particularly
useful to the Commission in evaluating possible modifications to the
proposals.
---------------------------------------------------------------------------

    \982\ See Section II, supra.
---------------------------------------------------------------------------

    The Commission requests comment on any other cross-border issues
relating to regulatory reporting and public dissemination of security-
based swaps that may not have been addressed above. In particular, the
Commission requests comment on how the Commission's re-proposal
addressing

cross-border issues related to regulatory reporting and public
dissemination might differ from the CFTC's cross-border guidance on
these matters.\983\ For example, the CFTC Cross-Border Proposal
provides that a swap between two unregistered non-U.S. persons, each of
which is guaranteed by a U.S. person, would not be subject to
regulatory reporting or public dissemination requirements.\984\ The
Commission, on the other hand, is proposing that a security-based swap
between two such direct counterparties would be subject to both
regulatory reporting and public dissemination requirements.\985\
Furthermore, the CFTC Cross-Border Proposal provides that a swap
between, on one side, an unregistered non-U.S. person that is
guaranteed by a U.S. person and, on the other side, an unregistered
non-U.S. person that is not guaranteed by a U.S. person also would not
be subject to regulatory reporting or public dissemination
requirements.\986\ The Commission is proposing that a security-based
swap between two such direct counterparties would be subject to
regulatory reporting \987\ (but, in accord with the CFTC's proposal,
not subject to public dissemination). Please describe any other
differences that you believe might exist and what would be the impact
of any such differences.
---------------------------------------------------------------------------

    \983\ See note 21, supra.
    \984\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \985\ See re-proposed Rules 908(a)(1)(ii) and 908(a)(2)(ii) of
Regulation SBSR.
    \986\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \987\ See re-proposed Rule 908(a)(1)(ii) of Regulation SBSR.
---------------------------------------------------------------------------

    In addition, the Commission requests comment on the market impact
of the approach to re-proposed Regulation SBSR. For example, how would
the application of re-proposed Regulation SBSR affect the
competitiveness of U.S. entities in the global marketplace (both in the
United States as well as in foreign jurisdictions)? Would re-proposed
Regulation SBSR place any market participants at a competitive
disadvantage or advantage? If so, please explain. Would re-proposed
Regulation SBSR be a more general burden on competition? If so, please
explain. What other measures should the Commission consider to
implement re-proposed Regulation SBSR?

IX. Mandatory Security-Based Swap Clearing Requirement

A. Introduction

    Section 3C(a)(1) of the Exchange Act provides that it ``shall be
unlawful for any person to engage in a security-based swap unless that
person submits such security-based swap for clearing to a clearing
agency that is registered under [the Exchange] Act or a clearing agency
that is exempt from registration under [the Exchange] Act if the
security-based swap is required to be cleared.'' \988\ In this section,
we are proposing a rule to specify when persons engaging in cross-
border security-based swap transactions would be required to comply
with a mandatory clearing determination.\989\ Consistent with the
approach we have taken elsewhere in this release,\990\ the proposed
rule is designed in general to help ensure that the mandatory clearing
requirement applies to persons that engage in security-based swap
transactions within the United States and who may pose financial or
operational risk to the U.S. financial system that may be mitigated by
requiring transactions to be centrally cleared.\991\ The proposed rule
also is designed to help avoid limiting the access of U.S. persons that
conduct security-based swap activity through foreign branches or
guaranteed non-U.S. persons to foreign security-based swap markets. To
address concerns regarding the clearance and settlement of security-
based swaps subject to the mandatory clearing requirement, as well as
the potential for conflicting mandatory clearing requirements in
different jurisdictions, we discuss under what circumstances the
Commission would permit substituted compliance with the mandatory
clearing requirement in Section XI.E below.\992\
---------------------------------------------------------------------------

    \988\ 15 U.S.C. 78c-3(a)(1). Section 3C of the Exchange Act
further requires the Commission to review each security-based swap
(or any group, category, type, or class of security-based swaps) to
make a determination that such security-based swap (or group,
category, type, or class of security-based swap) should be required
to be cleared. 15 U.S.C. 78c-3(b). The Commission has adopted final
rules regarding process for submissions for review of security-based
swaps for mandatory clearing and notice filing requirements for
clearing agencies. See Clearing Procedures Adopting Release, 77 FR
41602. The proposed application of the mandatory clearing
requirement in the cross-border context does not address, in any
respect, our obligation to review security-based swaps and make
mandatory clearing determinations under Section 3C(b) of the
Exchange Act.
    \989\ The mandatory clearing requirement in Section 3C(a)(1) of
the Exchange Act will not apply unless and until the Commission
makes a determination that a security-based swap is required to be
cleared, and the Commission has not yet made any such
determinations. In addition, the registration requirement for
security-based swap clearing agencies in Section 17A(g) of the
Exchange Act is not yet effective because further rulemaking is
required regarding registration of and standards for security-based
swap clearing agencies. See 15 U.S.C. 78q-1(i) and (j). The
Commission recently adopted rules to establish minimum requirements
for registered clearing agency risk management practices and
operations. The rules identify certain minimum standards for all
clearing agencies, including clearing agencies that clear security-
based swaps. See Clearing Agency Standards Adopting Release, 77 FR
66220. The Commission continues to consider additional standards for
adoption, including standards for confidentiality of trading
information, conflicts of interest, and members of clearing agency
boards of directors or committees, as outlined in the proposing
release for clearing agency standards. See Exchange Act Release No.
64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011). Any new rules
governing security-based swap clearing agencies could also affect
counterparties that are required to clear security-based swaps.
    \990\ See, e.g., Section V, supra (discussing the registration
requirement in Section 17A(g) of the Exchange Act for security-based
swap clearing agencies); see also the general discussion of the
Commission's approach to applying Title VII to cross-border
activities in Section II.B, supra.
    \991\ See Testimony Regarding Reducing Risks and Improving
Oversight in the OTC Credit Derivatives Market Before the Subcomm.
on Secs., Ins., & Inv., of the S. Comm. on Banking, Hous., & Urban
Affairs, 110th Cong. (2008) (statement of James A. Overdahl, Chief
Economist, Commission), available at: http://www.sec.gov/news/testimony/2008/ts070908jao.htm (``The 1975 Amendments [to the
Exchange Act] were in direct response to the Paperwork Crisis of the
late 1960's that nearly brought the securities industry to a
standstill and directly or indirectly resulted in the failure of
large numbers of broker-dealers. The causes of the Paperwork Crisis
are similar to the issues that we have been trying to resolve in the
OTC derivatives market. The crisis resulted from a combination of
sharply increased volume and inattention to securities processing.
As a result, the industry's clearance and settlement procedures were
inefficient and lacked automation, thus implicating the finances of
the securities firms. Today, almost forty years later, increasing
automation in the processing of OTC derivatives transactions is one
of the key goals of the OTC confirmations initiative, in which the
Commission is a very active participant . . .''); see also CPSS, New
Developments in Clearing and Settlement Arrangements for OTC
Derivatives, at 9, 39 (Mar. 2007), available at: http://www.bis.org/publ/cpss77.pdf (noting ``increasing concern about the size and
rapid growth of confirmation backlogs for credit derivatives'' and
the growing importance of ``operational reliability'' to ``safe and
efficient clearing and settlement'' as the ``market infrastructure
moves further in the direction of centralised processing of trades
and post-trade events'').
    \992\ Under the Commission's proposal, substituted compliance
may be permitted for cross-border security-based swap transactions
subject to the mandatory clearing requirement in Section 3C(a)(1) of
the Exchange Act to enable counterparties to clear and settle such
transactions at a clearing agency that is neither registered with
the Commission nor exempt from registration, under certain
conditions. See Section XI.E, infra.
---------------------------------------------------------------------------

    Our proposed approach reflects a particular balancing of the
principles discussed above.\993\ We recognize that other approaches may
achieve the goals of the Dodd-Frank Act and Section 17A of the Exchange
Act, in whole or in part. Accordingly, we invite comment regarding all
aspects of the proposed rule described here, including potential
alternative approaches. Data and comment from market participants and
other interested parties regarding the likely effect of the proposed
rule and of potential alternative approaches will be particularly
useful to the Commission in

evaluating potential modifications to the proposal.
---------------------------------------------------------------------------

    \993\ See Section II.C, supra.
---------------------------------------------------------------------------

B. Summary of Comments

    The Commission has published several rulemaking proposals under
Title VII of the Dodd-Frank Act that relate to clearing security-based
swaps.\994\ The Commission solicited public comment on each of these
proposals. The Commission also solicited public comment on regulatory
initiatives under the Dodd-Frank Act related to clearing security-based
swaps.\995\ Generally, these commenters requested that the Commission
take actions to limit duplicative or conflicting regulations with
respect to clearing security-based swaps.\996\
---------------------------------------------------------------------------

    \994\ See Exchange Act Release Nos. 63556 (Dec. 15, 2010), 75 FR
79992 (Dec. 21, 2010) (proposing a rule governing the end-user
exception to the mandatory clearing requirement); 63107 (Oct. 14,
2010), 75 FR 65881 (Oct. 26, 2010) (proposing Regulation MC which
would in part set ownership limitations and governance requirements
for clearing agencies); see also notes 988 and 989, supra
(discussing final rules adopted in the Clearing Procedures Adopting
Release and rules proposed and adopted relating to clearing agency
standards).
    \995\ See Exchange Act Release Nos. 63435 (Dec. 6, 2010), 75 FR
76705 (Dec. 9, 2010) (joint roundtable with CFTC regarding capital
and margin requirements); 63112 (Oct. 15, 2010), 75 FR 64710 (Oct.
20, 2010) (joint roundtable with CFTC regarding issues related to
clearing); 62864 (Sept. 8, 2010), 75 FR 55574 (Sept. 13, 2010)
(joint roundtable with CFTC regarding swap execution facilities);
62725 (Aug. 16, 2010), 75 FR 51305 (Aug. 19, 2010) (joint roundtable
with CFTC regarding governance and conflicts of interest).
    \996\ See, e.g., Davis Polk Letter I at 8 (``First, requiring
foreign swap transactions to be cleared through a U.S.-regulated
clearinghouse may conflict with any applicable foreign law that
requires such transactions to be cleared at a home country (non-
U.S.) clearinghouse. Second, such an approach would also legally
compel a disproportionate amount of global swaps clearing to be
conducted through U.S.-regulated clearinghouses. Third, such a
requirement would also concentrate risk that is non-U.S. (because
the transactions are with non-U.S. persons) in the U.S.-regulated
clearinghouses, which would cause them and the U.S. financial system
to bear additional non-U.S. risks.''); Davis Polk Letter II at 21-22
(proposing rule modifications that ``would avoid imposing
unnecessarily duplicative and inconsistent clearing and trade
reporting obligations on swap dealers and their counterparties'');
Cleary Letter IV at 27 (noting swaps between non-U.S. persons ``are,
in many cases, likely to be subject to local clearing requirements
(which may (practically or legally) require use of a local clearing
organization and so, in some cases, could conflict with Dodd-Frank's
clearing requirement)''); Japanese Banks Letter at 4 (``We believe
that future Japanese regulation of swap activities of Japanese banks
will render regulation of such banks subject to Title VII
superfluous at best and potentially subject such banks to
inconsistent regulations under U.S. and Japanese law.''); Multiple
Associations Letter I at 9-10 (``We believe that [the Commission]
and other U.S. regulatory agencies should anticipate where the
rulemaking may overlap, and possibly conflict, and make every effort
to actively coordinate with each other and with foreign regulators
both as to harmonizing the substance of related regulations and the
timing of their implementation. Otherwise, the development of the
Swap markets will be vulnerable to false starts, significant
revisions and inefficiencies, and possible regulatory arbitrage
across, or the flight to, other jurisdictions.''); Multiple
Associations Letter II at 2 (stating that it is ``essential that
rules be appropriately tailored, work in tandem, and avoid unduly
impairing market liquidity or adversely impacting investors'' and
that [i]t is not enough to phase-in implementation if the final
rules themselves are unworkable or in conflict'').
---------------------------------------------------------------------------

    Two commenters highlighted the global nature of the security-based
swap market and raised concerns about the possible effect of foreign
regulations on U.S. participants in the security-based swap
market.\997\ These commenters requested that U.S. and foreign
regulators identify possible areas where rulemaking may overlap or
conflict and actively coordinate to harmonize both the substance of
related regulations and the timing of their implementation.\998\ The
commenters argued that, without such coordination, ``the development of
the swap markets will be vulnerable to false starts, significant
revisions and inefficiencies, and possible regulatory arbitrage across,
or the flight to, other jurisdictions.'' \999\
---------------------------------------------------------------------------

    \997\ See Multiple Associations Letter I at 9 (``[I]t is unclear
to what extent foreign regulation, in addition to regulation by the
Commissions, may affect U.S. Swap market participants.''); Multiple
Associations Letter II at 1 (noting that ``an iterative approach to
rulemaking has been taken when rules have an unusually large impact
on market structure and participants'').
    \998\ Multiple Associations Letter I at 9.
    \999\ Id. at 9-10.
---------------------------------------------------------------------------

    Commenters representing several foreign banks requested that the
Commission adopt implementing regulations under the Dodd-Frank Act
``that enable and encourage foreign banks engaged in swap dealing
activities to book their swaps businesses in a single well-capitalized,
highly rated foreign-based banking institution.'' \1000\ These
commenters did not comment specifically on the proposed rules, but
rather argued in favor of a regulatory framework that relies on home
country supervision where regulations operate at the entity level, and
that relies on Title VII of the Dodd-Frank Act with respect to ``U.S.
swap transactions,'' where regulations operate at the transaction
level.\1001\ In particular, these entities believe that the mandatory
clearing requirement should not apply to ``foreign swap transactions''
(i.e., transactions they defined as not involving a U.S. counterparty)
or, more broadly, to transactions that a counterparty thereto is
required to submit for clearing pursuant to foreign law.\1002\
---------------------------------------------------------------------------

    \1000\ See Davis Polk Letter I at 2.
    \1001\ Id.
    \1002\ Id.; Cleary Letter IV at 27.
---------------------------------------------------------------------------

    Commenters representing foreign financial institutions submitted a
second, supplemental comment letter to elaborate on the above
comments.\1003\ In this letter, these commenters requested that the
Commission modify the proposed definition of ``security-based swap
dealer'' to make clear that ``a security-based swap which is required
to be cleared under foreign law (including by virtue of the fact that
any counterparty thereto is required under foreign law to submit the
same for clearing) is not required to be cleared under the [Dodd-Frank]
Act.'' \1004\
---------------------------------------------------------------------------

    \1003\ See Davis Polk Letter II.
    \1004\ Id. at 4-5.
---------------------------------------------------------------------------

    Moreover, commenters representing Japan's three largest bank groups
requested that the Commission ``adopt implementing regulations under
the Dodd-Frank Act with the effect that Japanese banks, including their
U.S. branches, are not made subject to the application of Title VII
requirements.'' \1005\ Should the Commission not take such action,
these commenters requested that the regulations issued pursuant to
Title VII: (i) Not apply to transactions between affiliates of a bank
group regulated as a bank holding company \1006\ and (ii) not apply to
``a foreign dealer''--particularly one that is ``subject to
comprehensive home country regulation''--with respect to transactions
entered into by the foreign dealer with a U.S.-based dealer regulated
as a swap dealer or security-based swap dealer pursuant to Title
VII.\1007\
---------------------------------------------------------------------------

    \1005\ See Japanese Banks Letter at 4.
    \1006\ Id.
    \1007\ Id. at 5.
---------------------------------------------------------------------------

    In addition, multiple commenters endorsed the use of mandatory
clearing generally to further the goals of the Dodd-Frank Act. One
commenter described mandatory clearing as ``the centerpiece of reform
embodied in Title VII of the Dodd-Frank Act'' that, accordingly, should
be subject to ``only a very few, narrow, and limited exceptions.''
\1008\ Another commenter similarly urged the Commission to ``prioritize
the finalization and implementation of clearing-related rules.'' \1009\
Another stated that the Commission's ``top priority should be to

implement requirements that reduce systemic risk, such as the use of
centralized Swap clearinghouses.'' \1010\
---------------------------------------------------------------------------

    \1008\ Better Markets Letter at 10.
    \1009\ Citadel Letter at 2 (further noting that ``anything less
needlessly inhibits transparency and competition in the SB swaps
markets and will leave US financial markets vulnerable, damage
American competitiveness, and weaken our long-term prospects for
sound economic growth''); see also MFA Letter IV at 4 (urging the
Commission to prioritize clearing rules to ``lay the regulatory
groundwork for more informed implementation'' of other final rules
planned under the Dodd-Frank Act).
    \1010\ Multiple Associations Letter I at 2.
---------------------------------------------------------------------------

C. Application of Title VII Mandatory Clearing Requirements to Cross-
Border Transactions

1. Statutory Framework
    By its terms, the mandatory clearing requirement in Section
3C(a)(1) of the Exchange Act applies to any person that ``engage[s] in
a security-based swap . . . if the security-based swap is required to
be cleared.'' \1011\ We are proposing to apply the statutory language
``engage in a security-based swap'' to mean any transaction in which a
U.S. person is a counterparty \1012\ to a security-based swap or
guarantees the performance of a non-U.S. person under a security-based
swap because of the involvement of a U.S. person in the
transaction.\1013\ We also are proposing to apply the statutory
language ``engage in a security-based swap'' to include any transaction
in which a person performs any of the activities that are key stages in
a security-based swap transaction (i.e., solicitation, negotiation,
execution, or booking of the transaction) \1014\ within the United
States. As we noted above, a ``transaction conducted within the United
States,'' as defined in proposed Rule 3a71-3(a)(5), includes
soliciting, negotiating, executing, or booking a security-based swap
transaction.\1015\ Accordingly, subject to certain statutory exceptions
\1016\ and certain other exceptions described below,\1017\ we are
proposing to apply the mandatory clearing requirement to any person
that engages in a security-based swap transaction in which at least one
of the counterparties to the transaction is a U.S. person or a non-U.S.
person whose performance under the security-based swap is guaranteed by
a U.S. person, or if the transaction is a ``transaction conducted
within the United States,'' as defined in proposed Rule 3a71-3(a)(5)
under the Exchange Act.\1018\
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    \1011\ Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1).
    \1012\ The use of the term ``counterparty'' in the proposed rule
is intended to refer to the direct counterparty to the security-
based swap transaction, not a party that provides a guarantee on the
performance of the direct counterparty under the security-based
swap. As discussed in Section VIII.C, supra, re-proposed Rules
900(j) and (o) under the Exchange Act would define the term ``direct
counterparty'' as ``a person that enters directly with another
person into a contract that constitutes a security-based swap,'' and
an ``indirect counterparty'' as ``a person that guarantees the
performance of a direct counterparty to a security-based swap or
that otherwise provides recourse to the other side for the failure
of the direct counterparty to perform any obligation under the
security-based swap.''
    \1013\ See Section II.B.2(d), supra (discussing the Commission's
treatment of guarantees).
    \1014\ As noted above, solicitation, negotiation, execution, and
booking are activities that represent key stages in a potential or
completed security-based swap transaction. See note 310 and
accompanying text, supra. Persons that conduct any of these
activities would be considered to be ``engaged in a security-based
swap'' under the Commission's proposed interpretation.
    \1015\ See Section III.B.6, supra.
    \1016\ The Exchange Act provides an exception from the mandatory
clearing requirement in connection with security-based swaps that
involve persons that are not financial entities and that use the
security-based swaps to hedge or mitigate commercial risk. See
Section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g). The Exchange
Act also provides exemptions from the clearing requirement for
security-based swaps entered into prior to the enactment of the
Dodd-Frank Act, and for security-based swaps entered into prior to
the application of the clearing requirement, so long as those
instruments are reported to a registered SDR. See Sections 3C(e)(1)
and (f)(1) of the Exchange Act, 15 U.S.C. 78c-3(e)(1) and (f)(1)
(pre-enactment security-based swaps); Sections 3C(e)(2) and (f)(2)
of the Exchange Act, 15 U.S.C. 78c-3(e)(2) and (f)(2) (post-
enactment security-based swaps entered into prior to the application
of the clearing requirement).
    \1017\ See Sections IX.C.3(a)ii and IX.C.3(b)ii, infra.
    \1018\ Proposed Rule 3Ca-3(a) under the Exchange Act.
---------------------------------------------------------------------------

    We preliminarily believe our proposed approach to the mandatory
clearing requirement, including the interpretation of the statutory
language discussed above and further discussed below, is consistent
with the purposes of the mandatory clearing requirement in Section
3C(a)(1) of the Exchange Act. The Dodd-Frank Act is intended to promote
the financial stability of the United States by, among other things,
reducing risks to the U.S. financial system by ensuring that, whenever
possible and appropriate, derivatives contracts are centrally cleared
rather than traded exclusively in the OTC market.\1019\ In making our
mandatory clearing determination, the Commission is required to take
into account certain factors, including, among other things, ``the
availability of rule framework, capacity, operational expertise and
resources, and credit support infrastructure'' in clearing agencies to
support clearing of the product in question, and ``the effect on the
mitigation of systemic risk.'' \1020\ The Commission preliminarily
believes that the proposed approach generally would help to ensure that
the goals of the Dodd-Frank Act to increase the use of available
centralized market infrastructures to reduce operational risks and
mitigate systemic risk are achieved,\1021\ while not unnecessarily
limiting the access of U.S. persons that conduct security-based swap
activity through foreign branches or guaranteed non-U.S. persons to
foreign security-based swap markets.
---------------------------------------------------------------------------

    \1019\ See, e.g., S. Comm. on Banking, Hous., & Urban Affairs,
The Restoring American Financial Stability Act of 2010, S. Rep. No.
111-176, at 32 (``As a key element of reducing systemic risk and
protecting taxpayers in the future, protections must include
comprehensive regulation and rules for how the OTC derivatives
market operates. Increasing the use of central clearinghouses,
exchanges, appropriate margining, capital requirements, and
reporting will provide safeguards for American taxpayers and the
financial system as a whole.''); id. at 34 (``Some parts of the OTC
market may not be suitable for clearing and exchange trading due to
individual business needs of certain users. Those users should
retain the ability to engage in customized, uncleared contracts
while bringing in as much of the OTC market under the centrally
cleared and exchange-traded framework as possible.'').
    \1020\ Section 3C(b)(4)(B) of the Exchange Act, 15 U.S.C. 78c-
3(b)(4)(B).
    \1021\ The purpose of central clearing is to mitigate
counterparty credit risk by shifting that risk from individual
counterparties to CCPs, thereby helping protect counterparties from
each other's potential failures. Central clearing also requires that
mark-to-market pricing and margin requirements be applied in a
consistent manner. CCPs generally use liquid margin collateral to
manage the risk of a CCP member's failure, and rely on their margin
calculations and their access to that liquid collateral to protect
against sudden movements in market prices, including movements in
market value after a counterparty's default. A CCP that stands
between counterparties for OTC derivatives is generally perceived to
decrease systemic risk. Further, the use of CCPs may lead to
standardization of contracts and processes, which improve market
efficiency and reduce the operational risks attributable to human
and processing errors. See, e.g., Wellink, supra note 110, at 132-
33; Culp, supra note 111, at 15-16; Manmohan Singh, ``Collateral,
Netting and Systemic Risk in the OTC Derivatives Market,'' IMF
Working Paper (2010), at 9-13, available at: http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf.
---------------------------------------------------------------------------

2. Proposed Rule
    In light of the interpretation of the statutory language ``engage
in a security-based swap'' and the policy concerns discussed above, we
are proposing a rule that would apply the mandatory clearing
requirement to a person that engages in a security-based swap
transaction if a counterparty to the transaction is (i) a U.S. person
or (ii) a non-U.S. person whose performance under the security-based
swap is guaranteed by a U.S. person.\1022\ We also are proposing a rule
that would apply the mandatory clearing requirement to a person that
engages in a security-based swap transaction if such transaction is a
``transaction conducted within the United States,'' as defined in
proposed Rule 3a71-3(a)(5) under the Exchange Act.\1023\ To limit

the scope of the proposal, we are proposing exceptions to the mandatory
clearing requirement in the following two scenarios:
---------------------------------------------------------------------------

    \1022\ Proposed Rule 3Ca-3(a)(1) under the Exchange Act. Under
proposed Rule 3Ca-3(c) under the Exchange Act, the term ``U.S.
person'' would have the same meaning as set forth in proposed Rule
3a71-3(a)(7) under the Exchange Act, as discussed in Section
III.B.5, supra.
    \1023\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act. Under
proposed Rule 3Ca-3(c) under the Exchange Act, the term
``transaction conducted within the United States'' would have the
same meaning as set forth in proposed Rule 3a71-3(a)(5) under the
Exchange Act, as discussed in Section III.B.5, supra.
---------------------------------------------------------------------------

     If the security-based swap transaction is not a
``transaction conducted within the United States,'' the proposed rule
would not apply the mandatory clearing requirement if one counterparty
to the transaction is (i) a foreign branch of a U.S. bank \1024\ or
(ii) a non-U.S. person whose performance under the security-based swap
is guaranteed by a U.S. person,\1025\ and if the other counterparty to
the transaction is a non-U.S. person (i) whose performance under the
security-based swap is not guaranteed by a U.S. person and (ii) who is
not a foreign security-based swap dealer.\1026\
---------------------------------------------------------------------------

    \1024\ Under proposed Rule 3Ca-3(c) under the Exchange Act, the
term ``foreign branch'' would have the same meaning as set forth in
proposed Rule 3a71-3(a)(1) under the Exchange Act. See discussion in
Section III.B.7, supra. A security-based swap transaction conducted
through a foreign branch, as defined in proposed Rule 3a71-3(a)(4)
under the Exchange Act, would be specifically excluded from the
proposed definition of ``transaction conducted within the United
States.'' See proposed Rule 3a71-3(a)(5)(ii) under the Exchange Act.
    \1025\ A security-based swap transaction involving a non-U.S.
person whose performance under the security-based swap is guaranteed
by a U.S. person would not be a ``transaction conducted within the
United States'' by virtue of the guarantee alone under proposed Rule
3a71-3(a)(5) under the Exchange Act, unless the transaction is
solicited, negotiated, executed, or booked within the United States.
We would consider such transaction to be engaged in within the
United States, however, by virtue of the guarantee from the U.S.
person, who acts as an ``indirect counterparty'' to the transaction.
See note 1012, supra.
    \1026\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act.
Proposed Rule 3Ca-3(c) defines the term ``foreign security-based
swap dealer'' by cross-reference to the definition of that term in
proposed Rule 3a71-3(a)(3) of the Exchange Act (defining ``foreign
security-based swap dealer'' to mean ``a security-based swap dealer,
as defined in section 3(a)(71) of the [Exchange] Act (15 U.S.C.
78c(a)(71)), and the rules and regulations thereunder, that is not a
U.S. person'').
---------------------------------------------------------------------------

     If the security-based swap transaction is a ``transaction
conducted within the United States,'' the proposed rule would not apply
the mandatory clearing requirement if (i) neither counterparty to the
transaction is a U.S. person; (ii) neither counterparty's performance
under the security-based swap is guaranteed by a U.S. person; and (iii)
neither counterparty to the transaction is a foreign security-based
swap dealer.\1027\
---------------------------------------------------------------------------

    \1027\ Proposed Rule 3Ca-3(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

We discuss below the proposed rule regarding the application of the
mandatory clearing requirement in more detail.
3. Discussion
(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S. Persons
i. Proposed Rule
    The proposed rule would apply the mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act, and the rules and regulations
thereunder, to a person that engages in a security-based swap
transaction if a counterparty to the transaction is (i) a U.S. person
or (ii) a non-U.S. person whose performance under the security-based
swap is guaranteed by a U.S. person,\1028\ subject to certain
exceptions.\1029\
---------------------------------------------------------------------------

    \1028\ Proposed Rules 3Ca-3(a)(1)(i) and (ii) under the Exchange
Act.
    \1029\ Proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    As discussed above,\1030\ a U.S. person that is a counterparty to a
security-based swap transaction bears the ongoing risk of the
transaction. It is the financial resources of that U.S. person that
will be called upon in performing any obligations pursuant to that
transaction, and this activity is capable of posing risks to the
stability of the U.S. financial system. Because these obligations and
risks reside in the United States, the Commission preliminarily
believes that when a U.S. person is a counterparty to a security-based
swap transaction, such person necessarily engages in a security-based
swap within the United States and, therefore, would be subject to the
mandatory clearing requirement in Section 3C(a)(1) of the Exchange Act
and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \1030\ See Section II.A.6, supra.
---------------------------------------------------------------------------

    In the case of a non-U.S. person guaranteed by a U.S. person
(``U.S. guarantor''), the guarantee provides the counterparty of the
guaranteed entity direct recourse to the U.S. guarantor with respect to
any obligations owed by the guaranteed entity under the security-based
swap, and the U.S. guarantor exposes itself to the security-based swap
risk as if it were a direct counterparty \1031\ to the security-based
swap through the security-based swap activity engaged in by the
guaranteed entity. In many cases, the counterparty would not enter into
the transaction (or would not do so on the same terms) with the
guaranteed entity, and the guaranteed entity would not be able to
engage in any security-based swaps, without the guarantee. Given the
reliance by both the guaranteed entity and its counterparty on the
creditworthiness of the guarantor in the course of engaging in
security-based swap transactions and for the duration of the
transaction, we preliminarily believe that a security-based swap
transaction in which one of the counterparties is a non-U.S. person
whose performance under a security-based swap is guaranteed by a U.S.
person is a transaction that is engaged in within the United States by
virtue of the involvement of the U.S. guarantor in the security-based
swap.\1032\ Our proposed rule, therefore, would subject transactions
involving at least one counterparty whose performance under the
security-based swap is guaranteed by a U.S. person to the mandatory
clearing requirement,\1033\ subject to certain exceptions discussed
below.\1034\
---------------------------------------------------------------------------

    \1031\ See note 1012, supra.
    \1032\ See note 1025, supra.
    \1033\ Proposed Rule 3Ca-3(a)(1)(ii) under the Exchange Act.
    \1034\ Proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

    We recognize that this proposed approach would subject certain
security-based swap transactions with non-U.S. persons to the mandatory
clearing requirement if a U.S. person is a counterparty to the
transaction (e.g., U.S. dealer to foreign dealer transactions). We
preliminarily believe that such an approach is appropriate, as a
significant proportion of the risk borne by U.S. persons, and,
therefore, the risk to the U.S. financial system as a result of the
U.S. persons' security-based swap activity, arises from transactions
entered into with non-U.S. persons.\1035\ Even where a U.S person's
security-based swap activity occurs in part outside the United States
(e.g., the transaction is negotiated or executed outside the United
States), this activity may pose risk to the U.S. financial system
because security-based swap transactions give rise to ongoing
obligations on the part of the U.S. person and credit risk exposures to
its non-U.S. counterparties. Therefore, subjecting a transaction in
which a U.S. person is a counterparty to the transaction to the
mandatory clearing requirement would further the purposes of Title VII
by ensuring that security-based swaps involving persons whose security-
based swap activities create risk that Title VII is intended to address
would be centrally cleared through a CCP.\1036\
---------------------------------------------------------------------------

    \1035\ See Section II.A.6, supra.
    \1036\ We preliminarily believe that the proposed approach to
the mandatory clearing requirement is not being applied to persons
who are ``transact[ing] a business in security-based swaps without
the jurisdiction of the United States,'' within the meaning of
Section 30(c). See Section II.B.2(b), supra. However, the Commission
also preliminarily believes that the proposed approach to the
mandatory clearing requirement is necessary or appropriate to help
prevent the evasion of the particular provisions of the Exchange Act
that were added by the Dodd-Frank Act that are being implemented by
the approach and prophylactically will help ensure that the purposes
of those provisions of the Dodd-Frank Act are not undermined. See
Section II.B.2(e), supra; see also Section II.B.2(d), supra.
    For example, if the mandatory clearing requirement does not
apply to transactions among non-U.S. persons that receive guarantees
from U.S. persons and foreign branches of U.S. banks, then U.S.
persons would have an incentive to conduct transactions with other
U.S. persons through guaranteed foreign affiliates or foreign
branches to avoid the mandatory clearing requirement, even though
altering the form of the transactions would not alter the substance
of the risk to U.S. markets that the Dodd-Frank Act was enacted to
address and thus could undermine the purposes of the Dodd-Frank Act.
See Section II.A.6, supra.

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

ii. Proposed Exception for Certain Transactions Involving Foreign
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    The Commission is proposing an exception from the mandatory
clearing requirement described above for certain transactions that
involve foreign branches of a U.S. bank or guaranteed non-U.S. persons,
provided the transactions are not conducted within the United States.
Specifically, under the proposed rule, the mandatory clearing
requirement would not apply to a security-based swap transaction if one
counterparty to the transaction is a foreign branch of a U.S. bank
\1037\ or a non-U.S. person whose performance under the security-based
swap is guaranteed by a U.S. person and if the other counterparty to
the transaction is a non-U.S. person (i) whose performance under the
security-based swap is not guaranteed by a U.S. person and (ii) who is
not a foreign security-based swap dealer.\1038\ Such exception would
not apply if the security-based swap transaction were a transaction
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1039\
---------------------------------------------------------------------------

    \1037\ See note 1024, supra.
    \1038\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act. See
note 1026, supra.
    \1039\ Proposed Rule 3Ca-3(b)(1) under the Exchange Act.
---------------------------------------------------------------------------

    Without such an exception, U.S. persons conducting security-based
swap activity out of foreign branches or guaranteed non-U.S. persons
may have less access to foreign security-based swap markets because
non-U.S. person counterparties may be less willing to enter into
security-based swap transactions with them if such transactions are
subject to a mandatory clearing requirement. We recognize that imposing
the mandatory clearing requirement on a foreign branch of a U.S. bank
or on a non-U.S. person whose performance under a security-based swap
is guaranteed by a U.S. person would be consistent with the view that a
foreign branch of a U.S. bank is part of a U.S. person \1040\ and that
a U.S. guarantor is an indirect counterparty \1041\ to the transaction
entered into by the guaranteed non-U.S. person. We also recognize that
such transactions pose risk to the U.S. financial system. At the same
time, however, imposing the mandatory clearing requirement on U.S.
persons that conduct their foreign security-based swap dealing activity
through foreign branches or guaranteed non-U.S. persons, without any
exceptions, could put such U.S. persons at a significant competitive
disadvantage to non-U.S. persons who conduct security-based swap
business in the same foreign local market and thereby limit the access
of such U.S. persons to foreign security-based swap markets.\1042\
After balancing the various policy considerations, including the Dodd-
Frank Act's goal of mitigating risk to the U.S. financial system, we
have preliminarily concluded that the proposed exception from the
mandatory clearing requirement for transactions by U.S. persons
conducting security-based swap activity out of foreign branches or
guaranteed non-U.S. persons with non-U.S. persons whose performance
under the security-based swap is not guaranteed by a U.S. person is
appropriate, provided that it is not a transaction conducted within the
United States.\1043\
---------------------------------------------------------------------------

    \1040\ See Section III.B.5, supra.
    \1041\ See note 1012, supra.
    \1042\ See, e.g., Sullivan & Cromwell Letter at 14 (``The
jurisdictional scope of the swaps entity definitions is critical to
the ability of U.S. banking organizations to maintain their
competitive position in foreign marketplaces. Imposing the
regulatory regime of Title VII on their Non-U.S. Operations would
place them at a disadvantage to their foreign bank competitors
because the Non-U.S. Operations would be subject to an additional
regulatory regime which their foreign competitors would not.'');
Cleary Letter IV at 7 (``Subjecting such non-U.S. branches and
affiliates to U.S. requirements could effectively preclude them
from, or significantly increase the cost of, managing their risk in
the local financial markets, since local financial institutions may
be required to comply with Dodd-Frank to provide those services.'').
    \1043\ In this regard, we note that such transaction may be
subject to a mandatory clearing requirement in a foreign
jurisdiction. See Section XI.E, infra (discussing substituted
compliance).
---------------------------------------------------------------------------

    This exception from the mandatory clearing requirement would not
apply under the proposed rule, however, when the non-U.S. person
counterparty of the foreign branch of the U.S. bank or the guaranteed
non-U.S. person is a foreign security-based swap dealer.\1044\ As
discussed above, a non-U.S. person would be required to register as a
foreign security-based swap dealer if its transactions with U.S.
persons or otherwise conducted within the United States, connected with
its dealing capacity, exceed the de minimis threshold in the security-
based swap dealer definition.\1045\ Thus, a foreign security-based swap
dealer would necessarily have a significant connection with the U.S.
security-based swap market. As a result, the Commission preliminarily
believes that it is not appropriate to provide an exception for U.S.
persons conducting security-based swap activity out of foreign branches
or guaranteed non-U.S. persons when they enter into security-based
swaps with foreign security-based swap dealers.
---------------------------------------------------------------------------

    \1044\ Proposed Rule 3Ca-3(b)(1)(ii)(B) under the Exchange Act.
Like U.S. persons conducting security-based swap activity out of
foreign branches or guaranteed non-U.S. persons, a foreign security-
based swap dealer would not be subject to the mandatory clearing
requirement when it engages in a security-based swap transaction
with a non-U.S. person, provided neither party's performance under
the security-based swap is guaranteed by a U.S. person and the
transaction is not conducted within the United States. Such a
transaction would not be captured by proposed Rule 3Ca-3(a) under
the Exchange Act (and, therefore, it is not necessary for such
transaction to be included as an exception in paragraph (b) of Rule
3Ca-3).
    \1045\ See Section III.B.4, supra.
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    We are not proposing to provide an exception from mandatory
clearing for U.S. persons generally, however, although we recognize
that such exception could increase access to foreign security-based
swap markets for all U.S. persons. The Commission preliminarily
believes that such a broad exception to the mandatory clearing
requirement, in a market as global as the security-based swap
market,\1046\ would undermine the goal of the mandatory clearing
requirement to reduce financial risk to the U.S. financial system. In
light of the statutory goal, we preliminarily do not believe that the
benefit of providing U.S. persons greater access to foreign security-
based swap markets warrants expanding the exception beyond the scope we
are proposing here. In this regard, we also note that a uniform
mandatory clearing requirement for all U.S. persons other than foreign
branches and guaranteed non-U.S. persons should facilitate the
development of central clearing infrastructures and encourage the
standardization of contract terms.\1047\
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    \1046\ See Section II.A.1, supra (discussing the global nature
of the security-based swap market).
    \1047\ See, e.g., note 991, supra. A robust infrastructure for
clearing of security-based swaps should reduce operational risks
resulting from backlogs and processing errors. See FMI Principles at
20, 94 (describing operational risk as the ``risk that deficiencies
in information systems or internal processes, human errors,
management failures, or disruptions from external events will result
in the reduction, deterioration, or breakdown of services'' and
noting that operational risks ``can be a source of systemic
risk.'').

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(b) Transactions Conducted Within the United States
i. Proposed Rule
    Under the proposed rule, a security-based swap transaction that is
a ``transaction conducted within the United States,'' as defined in
proposed Rule 3a71-3(a)(5) under the Exchange Act, would be subject to
the mandatory clearing requirement.\1048\ The Commission preliminarily
believes that engaging in a security-based swap includes the
performance by a person of any of the activities that represent key
stages in a security-based swap transaction, including solicitation,
negotiation, execution, or booking of a security-based swap
transaction. As we have noted above, a ``transaction conducted within
the United States,'' as defined in proposed Rule 3a71-3(a)(5), includes
soliciting, negotiating, executing, or booking a security-based swap
transaction.\1049\ Accordingly, we preliminarily would interpret
engaging in a security-based swap within the United States to encompass
the same types of activities that characterize a transaction conducted
within the United States, as that term is defined in proposed Rule
3a71-3(a)(5).\1050\
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    \1048\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
    \1049\ See Section III.B.6, supra.
    \1050\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
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ii. Proposed Exception for Transactions Conducted Within the United
States by Certain Non-U.S. Persons
    The Commission recognizes that transactions between two non-U.S.
persons whose performances under a security-based swap are not
guaranteed by a U.S. person do not pose the same risk to the U.S.
financial system that is posed by transactions with U.S. person
counterparties or transactions in which a U.S. person provides a
guarantee. In particular, while the operational risks associated with
the transaction may reside in the United States and would potentially
be reduced by required use of the central market infrastructure
available to clear the products in question, we preliminarily believe
that because the financial risks of the transaction would reside with
non-U.S. persons outside the United States, it is not necessary to
apply the mandatory clearing requirement to a transaction between two
non-U.S. persons solely because the transaction is a ``transaction
conducted within the United States'' as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act. Accordingly, the Commission is
proposing an exception from the mandatory clearing requirement for
security-based swap transactions that are ``transactions conducted
within the United States'' when no counterparty to the transaction is
(i) a U.S. person; (ii) a non-U.S. person whose performance under the
security-based swap is guaranteed by a U.S. person; or (iii) a foreign
security-based swap dealer.\1051\
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    \1051\ Id.
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    The Commission preliminarily believes it is appropriate to limit
the exception from the mandatory clearing requirement when one or both
of the non-U.S. person counterparties is a foreign security-based swap
dealer. Non-U.S. persons whose transactions arising from dealing
activity with U.S. persons or otherwise conducted within the United
States exceed the de minimis threshold in the security-based swap
dealer definition have a sufficient connection to the U.S. security-
based swap market to lead the Commission to preliminarily conclude that
it would not be appropriate to except transactions involving them from
the mandatory clearing requirement when they conduct security-based
swap transactions within the United States. Permitting non-U.S. persons
to engage in security-based swap transactions within the United States
with foreign security-based swap dealers without being subject to the
mandatory clearing requirement would potentially limit the access of
U.S. persons to foreign security-based swap markets because non-U.S.
persons seeking to engage in security-based swaps within the United
States may prefer to engage in security-based swaps with foreign
security-based swap dealers rather than U.S. persons to avoid the
mandatory clearing requirement.
Request for Comment
    The Commission seeks comment on the proposed rule in all aspects.
In addition, the Commission seeks comment on the following specific
questions:
     Should the mandatory clearing requirement apply to all
transactions conducted by a U.S. person, including transactions
conducted out of a foreign branch, or by a guaranteed non-U.S. person?
Why or why not? Should the mandatory clearing requirement apply to such
transactions unless, for example, they are conducted in a foreign
regime that has a mandatory clearing regime that is comparable to the
mandatory clearing regime under the Dodd-Frank Act? In assessing
comparability under this approach, to what extent should results of
mandatory clearing determinations under the foreign regime be taken
into account? Should the determinations with respect to ``local''
products be viewed differently than products that are subject to
mandatory clearing determinations in one or more other jurisdictions,
i.e., ``global'' products? Would some other standard for assessing a
foreign regime in these circumstances be appropriate?
     Is the proposed approach over-broad or over-narrow? If so,
why? Should a security-based swap that is required to be cleared under
foreign law not be required to be cleared pursuant to Section 3C, as
some commenters stated? If so, why?
     When the conduct occurring in the United States is limited
only to negotiating or soliciting a transaction, does the transaction
carry risk into the U.S. financial system? If not, is application of
the mandatory clearing requirement to such transactions appropriate?
     How should the Commission weigh the operational risks that
arise from requiring mandatory clearing? To what extent do the
exceptions to the mandatory clearing requirement undermine the
development of a central clearing infrastructure that will facilitate
the prompt and accurate clearance and settlement of security-based
swaps? Are persons excepted from the mandatory clearing requirement
likely to develop the same operational capacity and safeguards to
facilitate clearing as persons not excepted? If not, to what extent
does this increase operational risk to the national system for
clearance and settlement? To what extent, if any, should the exceptions
to the mandatory clearing requirement be limited to minimize
operational risks and market risks that may be experienced in the
United States?
     Are there other rationales besides risk mitigation that
justify imposing the mandatory clearing requirement? If so, what are
they and why? Do these alternative rationales support a different
application of the requirement to U.S. persons and non-U.S. persons? As
regards foreign branches of U.S. banks? As regards non-U.S. persons who
receive guarantees from U.S. persons and non-U.S. persons who do not
receive guarantees from U.S. persons? As regards security-based swap
dealers?
     How should the mandatory clearing requirement treat
members of clearing agencies registered with the Commission? For
instance, to what extent should the mandatory clearing requirement
apply to members of clearing agencies registered with the

Commission if the member is not a U.S. person, does not have its
performance guaranteed by a U.S. person, is not a security-based swap
dealer, or is not conducting the transaction within the United States?
Please be specific.
     How should the mandatory clearing requirement treat
counterparties who are swap dealers? For instance, should non-U.S.
persons who are swap dealers and whose performance under the swap is
not guaranteed by a U.S. person be excepted from the mandatory clearing
requirement in any circumstances? If so, under what circumstances? How
should other financial entities be treated? How should major swap
participants and major security-based swap participants be treated
under the proposed rule? Should they be excepted from the mandatory
clearing requirement, in certain circumstances, as we have proposed?
     Are the proposed exceptions from the mandatory clearing
requirement appropriate? Should other transactions also be excepted? If
so, which? Should other categories of persons also be excepted? If so,
whom?
     Should any transactions conducted within the United States
be subject to any exception from the mandatory clearing requirement? If
so, why? For instance, should a transaction between two non-U.S.
persons neither of whom is guaranteed by a U.S. person and neither of
whom are security-based swap dealers, as excepted from the mandatory
clearing requirement under proposed Rule 3Ca-3(b)(2), be subject to
mandatory clearing? If so, why?
     Should any transactions where one counterparty is a U.S.
person be subject to an exception from the mandatory clearing
requirement? If so, which transactions and why? For instance, should
transactions not conducted in the United States in which one
counterparty is a foreign branch of a U.S. bank be subject to any
exceptions, such as the exception in proposed Rule 3Ca-3(b)(1)?
     To what extent might the exceptions described in proposed
Rule 3Ca-3(b) create competitive disparity between similarly situated
persons competing in the same market? For instance, for transactions
conducted within the United States, to what extent, if any, might
proposed Rule 3Ca-3(b)(2) create competitive disparity between U.S.
persons and non-U.S. persons? For transactions not conducted within the
United States, to what extent, if any, might proposed Rule 3Ca-3(b)(1)
create competitive disparity between counterparties who are security-
based swap dealers and foreign branches of U.S. banks?
     Should the Commission impose any conditions to the
exceptions from the mandatory clearing requirement? What conditions
would be appropriate?
     If the proposed rule overlaps with a foreign mandatory
clearing requirement, in what ways are the requirements likely to
conflict? What would be the effects on efficiency, competition and
capital formation in the event that there are overlapping or
duplicative mandatory clearing requirements or varying exceptions to
such requirements across multiple jurisdictions?
     What provisions of Section 3C, or the Exchange Act and
rules thereunder generally, would a counterparty be unable to comply
with if the security-based swap transaction was subject to more than
one mandatory clearing requirement? What categories of transactions are
likely to be subject to such multiple mandatory clearing requirements?
To what extent, if any, would a counterparty's membership in a clearing
agency that clears security-based swaps affect the likelihood that
multiple mandatory clearing requirements would apply to a security-
based swap transaction? To what extent, if any, would a guaranteed non-
U.S. person be subject to multiple mandatory clearing requirements? To
what extent, if any, does the home country of the reference entity
under a security-based swap affect the likelihood that multiple
mandatory clearing requirements would apply to the transaction? Does
proposed Rule 3Ca-3 provide sufficient regulatory guidance regarding
such transactions? Why or why not?
     What would be the market impact of proposed Rule 3Ca-3?
How would the proposed application of the mandatory clearing
requirement affect the competitiveness of U.S. entities in the global
marketplace (both in the United States as well as in foreign
jurisdictions)? Would the proposed rule place any market participants
at a competitive disadvantage or advantage? If so, please explain.
Would the proposed rule be a more general burden on competition? If so,
please explain. What other measures should the Commission consider to
implement the mandatory clearing requirement? What would be the market
impacts and competitiveness effects of alternatives to the proposed
approach discussed in this release?

X. Mandatory Security-Based Swap Trade Execution Requirement

A. Introduction

    Section 3C(h)(1) of the Exchange Act requires, with respect to
transactions involving security-based swaps subject to the clearing
requirement in Section 3C(a)(1) of the Exchange Act, that
counterparties execute such transactions on an exchange or a security-
based swap execution facility that is registered under Section 3D of
the Exchange Act or exempt from registration under Section 3D(e) of the
Exchange Act (the ``mandatory trade execution requirement'').\1052\
Section 3C(h) thus provides that security-based swap transactions
subject to the mandatory trade execution requirement cannot be executed
on an OTC basis, but must instead be executed on an exchange or
security-based swap execution facility that is registered or exempt
from registration under the Exchange Act, unless an exception
applies.\1053\ As such, the mandatory trade execution requirement is
important in helping to bring the trading of security-based swaps onto
transparent, regulated markets, from more opaque OTC markets.\1054\
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    \1052\ 15 U.S.C. 78c-3(h)(1).
    \1053\ 15 U.S.C. 78c-3(h). Section 3C(h)(2) of the Exchange Act
provides two exceptions to compliance with the mandatory trade
execution requirement: (i) If no exchange or security-based swap
execution facility makes the security-based swap available to trade;
or (ii) if the security-based swap transaction is subject to the
clearing exception under Section 3C(g) of the Exchange Act. 15
U.S.C. 78c-3(h)(2). In this release, we are not addressing either of
these exceptions, as they pertain to whether a particular security-
based swap is subject to the mandatory trade execution requirement.
Our focus here is on the obligations of the counterparties to a
transaction involving a security-based swap that is subject to the
mandatory execution requirement where neither of these exceptions
applies.
    \1054\ See SB SEF Proposing Release, 76 FR 10949 (``The current
market for [security-based] swaps is opaque, with little, if any,
pre-trade transparency (the ability of market participants to see
trading interest prior to a trade being executed) or post-trade
transparency (the ability of market participants to see transaction
information after a trade is executed). A key goal of the Dodd-Frank
Act is to bring trading of [security-based] swaps onto regulated
markets . . . .'').
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    Because transactions in security-based swaps are often conducted
globally with counterparties and intermediaries from multiple
jurisdictions,\1055\ we recognize uncertainty may exist regarding how
to apply the mandatory trade execution requirement to cross-border
security-based swap transactions.\1056\ The

Commission is proposing Rule 3Ch-1 under the Exchange Act to specify
the applicability of the mandatory trade execution requirement with
respect to cross-border security-based swap transactions. Our proposed
approach follows the territorial approach described above \1057\ and
imposes the mandatory trade execution requirement on transactions that
would be subject to the mandatory clearing requirement \1058\ unless
they qualify for an exception.\1059\ We discuss substituted compliance
with the mandatory trade execution requirement in Section XI.F
below.\1060\
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    \1055\ See Section II.A.1, supra.
    \1056\ One commenter, writing on behalf of a group of various
market participants, asked for clear guidance regarding the
application of the mandatory trade execution requirement for cross-
border transactions in security-based swaps. See Cleary Letter III
and Cleary Letter IV. The commenter recommended that the mandatory
trade execution requirement should only apply to transactions where
at least one counterparty is a U.S. person. See Cleary Letter IV at
27. This commenter also argued that the mandatory trade execution
requirement should not apply to transactions involving two non-U.S.
persons that utilize U.S. persons to carry out the transaction. We
discuss this comment below.
    \1057\ See, e.g., Section VII, supra (discussing the
registration of foreign security-based swap markets); see also the
general discussion of the Commission's territorial approach in
Section II.B, supra.
    \1058\ See Section IX, supra (discussing the scope of the
mandatory clearing requirement).
    \1059\ See note 1053, supra.
    \1060\ Under the Commission's proposal, substituted compliance
would be permitted for certain cross-border security-based swap
transactions that would be subject to the mandatory trade execution
requirement in Section 3C(h) of the Exchange Act and the rules and
regulations thereunder. See discussion in Section XI.F, infra.
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    We recognize that other approaches are possible to achieve the
goals of the Dodd-Frank Act, in whole or in part. Accordingly, we
invite comment regarding all aspects of the proposal described below,
including potential alternative approaches. Data and comment from
market participants and other interested parties regarding the likely
effect of the proposed rule and potential alternative approaches will
be particularly useful to the Commission in evaluating possible
modifications to the proposal.

B. Application of the Mandatory Trade Execution Requirement to Cross-
Border Transactions

1. Statutory Framework
    Section 3C(h) of the Exchange Act provides that if a transaction is
subject to the mandatory clearing requirement, counterparties shall
execute the transaction on an exchange or on a registered or exempt SB
SEF, unless an exception applies.\1061\ Section 3C(a)(1) of the
Exchange Act provides that it shall be unlawful for any person ``to
engage in a security-based swap unless that person submits such
security-based swap for clearing . . . if the security-based swap is
required to be cleared.'' \1062\ As discussed above, we are proposing
to apply the statutory mandatory clearing requirement to any person who
engages in a security-based swap transaction within the United
States.\1063\ We preliminarily believe that, to the extent that a
cross-border transaction is subject to the mandatory clearing
requirement under the proposed approach described above, it also would
be subject to the mandatory trade execution requirement unless it
qualifies for an exception.\1064\ This approach is consistent with the
statutory framework of Title VII of the Dodd-Frank Act, because a
security-based swap transaction first must be subject to the mandatory
clearing requirement before the counterparties to the transaction must
comply with the mandatory trade execution requirement, unless an
exception to the mandatory trade execution requirement applies. Thus,
to the extent that we are proposing not to apply the mandatory clearing