develop if there were more than one registered SDR in each asset class?
If so, should there be a uniform reporting format across all registered
SDRs? How would commenters recommend that the Commission achieve this
goal? Should the Commission require all registered SDRs to use the same
format and the same data elements?
b. Reference Codes
    The Commission understands that there are--or could be developed--
industry conventions for identifying SBSs or reference entities on
which SBS are based through readily available reference codes
comparable to the CUSIP identifier used for debt, equity, and certain
derivative securities.\80\ Proposed Rule 903 would permit the use of
codes in place of certain data elements for purposes of reporting and
disseminating the information required under proposed Regulation SBSR,
provided that the information needed to interpret such codes is widely
available on a non-fee basis. Specifically, proposed Rule 903 would
provide that a reporting party could provide information to a
registered SDR pursuant to proposed Rule 901, and a registered SDR
could publicly disseminate information pursuant to proposed Rule 902,
using codes in place of certain data elements, provided that the
information necessary to interpret such codes is widely available on a
non-fee basis.
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    \80\ The CUSIP number for a security uniquely identifies a
company or issuer, the type of security, and other information about
the instrument. From the CUSIP number for a debt instrument, for
example, market participants are able to determine the issuer, the
date of maturity, the interest rate, the coupon structure, and other
terms of the instrument.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate for
the information required to interpret any codes used for reporting SBSs
be widely available on a non-fee basis. If the information necessary to
interpret such codes were not widely available, or available only for a
fee, SBS transaction and pricing data might not be meaningfully
available to the public. In the absence of proposed Rule 903, a
registered SDR potentially could use proprietary code information,
thereby requiring all consumers of its SBS market data to purchase from
the code creator information necessary to interpret the codes.

Request for Comment

    The Commission requests comment on all aspects of the proposed
rules regarding the use of reference codes.
    87. Do commenters agree it would be useful to permit the use of
codes in place of specific data elements? Why or why not?
    88. Are such codes currently in use? How would proposed Rule 903
affect how market participants employ any existing codes? Should the
Commission permit registered SDRs to publicly disseminate SBS
information using existing codes? Are market participants able to
understand the codes without having to pay licensing or other usage
fees?
    89. Who might in the future develop any codes to be used in place
of specific data elements? Would it be costly to develop these codes?
    90. Is it feasible for information necessary to interpret these
codes to be widely available on a non-fee basis? If not, why not? Would
codes be developed if developers were not able to charge fees for the
information necessary to interpret the codes? How would permitting
developers of codes to charge fees for information necessary to
interpret the codes affect SBS market participants? Would SBS market
participants effectively be compelled to purchase this information?
    91. If fees are necessary to protect the investment in intellectual
property, what standards should be established to assure that such fees
are fair and reasonable and not unreasonably discriminatory?
    92. Do commenters believe a better approach would be to permit the
use of fee-based codes for reporting information to a registered SDR,
provided that SBS transaction reports are disseminated by the
registered SDR without the codes, or with codes that are widely
available on a non-fee basis? Should a registered SDR be expected to
pay any fees or be subject to any usage restrictions imposed by the
code creator? Would these fees and usage restrictions impact the
public's access to the registered SDR's market data feed?

F. Reporting of Data for Historical SBSs

    Section 3C(e)(1) of the Exchange Act requires the Commission, no
later than 180 days after the effective date of Section 3C, to adopt
rules providing for the reporting to a registered SDR or to the
Commission of SBSs entered into before the date of enactment of Section
3C. Section 3C(e)(2) of the Exchange Act requires the Commission to
adopt rules that provide for the reporting of SBSs entered into on or
after the date of enactment of Section 3C no later than the later of
(1) 90 days after the effective date of Section 3C, or (2) such other
time after entering into the SBS as the Commission may prescribe by
rule or regulation.
    The statutory provision applicable to the reporting of SBSs entered
into prior to the date of enactment does not limit the SBSs subject to
the reporting. In contrast, the statutory provision requiring the
Commission to adopt an interim final rule for the reporting of SBSs
entered into prior to the effective date of the Dodd-Frank Act does
limit the applicability of that rule to such SBSs that had ``not
expired as of the date of enactment.'' \81\ Indeed, the statutory
language applicable in this proposal would not prohibit collection of
SBS data on all SBSs entered into since the first SBS, whether or not
those SBS positions remain open or have been closed. This would
potentially capture a very large amount of data on SBSs going

back many years. The Commission preliminarily believes that an attempt
to collect many years' worth of transaction-level SBS data (including
closed or expired SBSs) would not enhance the goal of price discovery,
nor would it be particularly useful to regulators or market
participants in implementing a forward-looking SBS reporting and
dissemination regime. Furthermore, collecting, reporting, and
processing all such data would involve substantial costs to market
participants with little potential benefit. Accordingly, the Commission
has proposed to limit the reporting of SBSs entered into prior to the
date of enactment to those SBSs that had not expired as of that date
(``pre-enactment SBSs'').\82\
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    \81\ 15 U.S.C. 78m[A(a)(2)(A)].
    \82\ See proposed Rule 900 (defining ``pre-enactment security-
based swap'' to mean any SBS executed before July 21, 2010--the date
of enactment of the Dodd-Frank Act--the terms of which had not
expired as of that date).
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    The Commission acknowledges that reporting parties will not
necessarily possess all of the information required by proposed Rule
901(c) and (d) with respect to pre-enactment SBSs or SBSs executed on
or after July 21, 2010, and before the effective reporting date \83\
(``transitional SBSs'') (and together with pre-enactment SBSs,
``historical SBSs''). Thus, proposed Rule 901(i) would require a
reporting party to report all of the information required by proposed
Rules 901(c) and (d) for any historical SBSs, to the extent such
information is available.\84\ For example, a reporting party would not
have to report the time stamp of a historical SBS if a time stamp had
not already been captured. In addition, if the terms of a SBS had been
amended since the initial time of execution, only the most current
version of the SBS would be considered the historical SBS that had to
be reported pursuant to proposed Rules 901(i) and 910(a).
---------------------------------------------------------------------------

    \83\ See proposed Rule 900 (defining ``effective reporting
date,'' with respect to a SDR, as the date six months after the
registration date); proposed Rule 900 (defining ``registration
date,'' with respect to a SDR, as the date on which the Commission
registers the SDR, or, if the Commission registers the SDR before
the effective date of proposed Regulation SBSR, the effective date
of proposed Regulation SBSR).
    \84\ Information concerning historical SBSs would be reported,
but would not be publicly disseminated. See proposed Rules 901(i)
and 910. This reporting is consistent with the requirements
contained in Rule 13Aa-2T(b)(1) under the Exchange Act, as the
Commission recognizes that such information may not be available.
See Interim Rule Release, supra note 16. Furthermore, if a reporting
party has reported a SBS to a registered SDR pursuant to proposed
Rule 901(i), the reporting party would become obligated to report to
the registered SDR any life cycle events pertaining to that SBS. See
proposed Rule 901(e).
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    By requiring reporting of pre-enactment SBS transactions, proposed
Rule 901(i) would provide the Commission with insight as to outstanding
notional size, number of transactions, and number and type of
participants in the SBS market. This would provide a starting benchmark
against which to assess the development of the SBS market over time
and, thus, represent a first step toward a more transparent and well
regulated market for SBSs. The data reported pursuant to proposed Rule
901(i) also could help the Commission prepare the reports that it is
required to provide to Congress. Further, proposed Rule 901(i) would
require market participants to inventory their positions in SBS to
determine what information needs to be reported, which could benefit
market participants by encouraging management review of their internal
procedures and controls.
    The Commission notes that, especially with respect to CDSs,
reporting parties may already have reported SBS information about
historical SBSs to a data repository. Should such a data repository
become registered with the Commission, the Commission would not require
reporting parties to submit duplicate information to the registered
SDR, except to the extent the reporting party has information in its
possession that satisfies the provisions of proposed Rules 901(c) and
(d) that had not previously been reported to the registered SDR.

Request for Comment

    The Commission requests comment on all aspects of the proposed
rules relating to pre-enactment SBSs and transitional SBSs.
    93. Do commenters agree with the proposed reporting requirements
for historical SBSs? Should the Commission extend the reporting
requirement to include SBSs that were entered into prior to the date of
enactment of the Dodd-Frank Act that had expired as of that date? If
so, what information should be reported with respect to these SBSs?
Would this approach be feasible? What would be the benefits of such an
approach? Who would use this information, and for what purpose(s)? What
would be the costs of this approach?
    94. Would data concerning expired SBSs be of use to anyone? If so,
who would use this information, and for what purpose?
    95. Should the proposed rule ``grandfather'' all SBSs previously
reported to a SDR regardless of whether the reporting party has
information in its possession that satisfies the provisions of proposed
Rule 901(c) and (d) that had not previously been reported to the
registered SDR?

V. Public Dissemination of Security-Based Swap Transaction Information

    In seeking to carry out Congress's mandate to require real-time
public reporting for all SBSs, the Commission is mindful of Congress's
statement in Section 13(m)(1)(B) of the Exchange Act \85\ that ``[t]he
purpose of [Section 13(m)] is to authorize the Commission to make
security-based swap transaction and pricing data available to the
public in such form and at such times as the Commission determines
appropriate to enhance price discovery.'' Section 13(m)(1)(E)(iv) of
the Exchange Act \86\ further provides that the rule promulgated by the
Commission to carry out the real-time reporting mandate shall contain
provisions that take into account whether the public disclosure will
materially reduce market liquidity.\87\
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78m(m)(1)(B).
    \86\ 15 U.S.C. 78m(m)(1)(E)(iv).
    \87\ This provision applies only with regard to SBSs described
in clauses (i) and (ii) of Section 13(m)(1)(C) of the Exchange Act,
not SBSs described in clauses (iii) and (iv) of Section 13(m)(1)(C).
See supra Section I.B.2 (describing which SBSs fall into each of
these four categories).
---------------------------------------------------------------------------

    By reducing information asymmetries, post-trade transparency has
the potential to lower transaction costs, improve confidence in the
market, encourage participation by a larger number of market
participants, and increase liquidity in the SBS market. The current
market is opaque. Market participants, even dealers, lack an effective
mechanism to learn the prices at which other market participants
transact. In the absence of post-trade transparency, market
participants do not know whether the prices they are paying or would
pay are higher or lower than what others are paying for the same SBS
instruments. Currently, market participants resort to ``screen-
scraping'' e-mails containing indicative quotation information to
develop a sense of the market. Supplementing that effort with prompt
last-sale information would provide all market participants with more
extensive and more accurate information on which to make trading and
valuation determinations.
    SBSs are complex derivative instruments, and there exists no single
accepted way to model a SBS for pricing purposes. Post-trade pricing
and volume information could allow valuation models to be adjusted to
reflect how other market participants have valued a SBS instrument at a
specific moment in time. Public, real-time dissemination of

last-sale information also could aid dealers in deriving better
quotations, because they would know the prices at which other market
participants have traded. The same information could aid end users in
evaluating current quotations, because they would be able to inquire
from dealers why the quotations that the dealers are providing them
differ from the prices of the most recent transactions. Furthermore,
end users that could view last-sale information in real time would be
able to test whether quotations offered by dealers before the last sale
were close to the price at which the last sale was executed. In this
manner, post-trade transparency could promote price competition and
more efficient price discovery in the SBS market.
    In other markets, greater post-trade transparency has increased
competition among market participants and reduced transaction costs. A
number of studies of the corporate bond market, for example, have found
that post-trade transparency, resulting from the introduction of TRACE,
has reduced transaction costs.\88\
---------------------------------------------------------------------------

    \88\ See Amy K. Edwards, Lawrence Harris, & Michael S. Piwowar,
Corporate Bond Market Transparency and Transaction Costs, J. of
Fin., Vol. 62, at 1421-1451 (2007); Hendrik Bessembinder, William F.
Maxwell, & Kumar Venkataraman, Market Transparency, Liquidity,
Externalities and Institutional Trading Costs in Corporate Bonds, J.
of Fin. Econ., Vol. 82, at 251-288 (2006). It should be noted that
Amy Edwards, one of the co-authors of the first article cited,
currently serves as an economist in the Commission's Division of
Risk, Strategy, and Financial Innovation.
---------------------------------------------------------------------------

    However, the structure of the SBS market and the way in which
participants manage risk in this market might be sufficiently different
from other financial markets to warrant different approaches to post-
trade transparency. The SBS market is almost wholly institutional,
unlike other securities markets where there is substantial retail
participation. Moreover, the SBS market has many fewer market
participants, fewer transactions, and larger trade sizes relative to
other securities markets. It could be argued that post-trade
transparency in the SBS market might not have the same effects as in
other securities markets. Indeed, one study of TRACE stated that
``[o]ur evidence suggests that the availability of last sale price
information may have little impact on spreads for less active bonds''
and that ``[w]e do not find any effect (positive or negative) of
transparency for very thinly traded bonds.'' \89\
---------------------------------------------------------------------------

    \89\ Michael A. Goldstein, Edith S. Hotchkiss, & Erik R. Sirri,
Transparency and Liquidity: A Controlled Experiment on Corporate
Bonds, Rev. of Fin. Stud., Vol. 20, Issue 4, at 235-273 (2007), at
269, 270.
---------------------------------------------------------------------------

    It could be argued that post-trade transparency in the SBS market,
particularly for large-sized trades, might even adversely impact
liquidity by increasing the costs of dealers to hedge. In a typical
SBS, one party (the ``natural long'') either has a risk position that
it wishes to offset (because, for example, it is long the bonds of a
reference company) or it wishes to establish a risk position. The
natural long typically would approach one or more dealers to take the
other side of the trade. If a dealer were to enter into a SBS with the
natural long, the dealer typically would seek to lay off that risk as
much as possible, perhaps with another dealer. Eventually, however, the
risk would typically be assumed by a market participant (the ``natural
short'') who is willing to assume the risk being laid off by the
natural long. In the SBS market, dealers generally are not natural
longs or natural shorts, because they do not seek to profit by taking
long or short risk positions. Dealers profit, rather, by collecting
spreads between the price at which they buy risk and the price at which
they sell risk, and by charging commissions.
    The larger the natural long's initial risk position, the more
difficult it would likely be for a dealer that enters into an SBS with
the natural long to lay off the risk. All other things being equal, it
would likely be easier for the dealer to find another dealer or a
natural short willing to take on a small risk than a larger one. This
is the case even in an opaque market, such as the SBS market as it
exists today. The difficulties in transferring the risk could be even
greater if the transaction details of the initial SBS between the
natural long and the dealer were publicly disseminated in real time. A
dealer trying to engage in hedging transactions following an initial,
large SBS trade could be put in a weaker bargaining position relative
to subsequent counterparties, who could anticipate the structure of the
hedge.
    In an opaque market, market participants have to rely primarily on
their understanding of the market's fundamentals to arrive at a price
at which they would be willing to assume risk. With immediate real-time
public dissemination of a block trade, however, market participants who
might be willing to offset that risk--i.e., other dealers and natural
shorts--could extract rents from a dealer that takes the risk from the
natural long. Because the initial dealer would not internalize those
higher costs, it would most likely seek to pass those costs on to the
natural long in the form of a higher price for the initial SBS up
front. Alternatively, the initial dealer could choose not to enter into
the initial SBS if the dealer's cost to hedge increased. In other
words, increasing the dealer's initial cost to hedge could increase
costs to those seeking to take a natural long position both in the form
of less favorable SBS prices for the natural long and potentially fewer
counterparties for a natural long to transact with, if certain dealers
were to scale back their activity in the SBS market. This could lead to
less liquidity in the SBS market, and thus lower trading volume and
less ability for market participants to manage risk.\90\ It also might
be argued that increased post-trade transparency could drive large
trades to other markets that offer the opacity desired by traders,
creating fragmentation and harming price efficiency and liquidity. This
possibility is consistent with the argument that large, informed
traders may prefer a less transparent trading environment that allows
them to minimize the price impact of their trades.\91\
---------------------------------------------------------------------------

    \90\ See N.Y. Naik, A. Neuberger, & S. Viswanathan, Trade
Disclosure Regulation in Markets with Negotiated Trades, Rev. of
Fin. Stud., Vol. 2, Issue 4, at 873-900 (1999).
    \91\ See Ananth Madhavan, Consolidation, Fragmentation, and the
Disclosure of Trading Information, Rev. of Fin. Stud., Vol. 8, Issue
3, at 579-603 (1995).
---------------------------------------------------------------------------

    Under this view of the SBS market, real-time public dissemination
of SBS block trades could result in market inefficiencies, as evidenced
by fewer transactions or less liquidity. If the natural long were
unable or unwilling to assume higher costs for the initial SBS
transaction, it might be left with an undesired level of risk, because
the market has been unable to relocate the risk to others who are more
willing or able to assume it. Furthermore, higher overall transaction
costs could hurt dealers, even though they can pass on to the natural
long the higher costs to hedge. This is because post-trade transparency
could cause overall transaction volumes to decline, thereby reducing
profits accruing to dealers, whether in the form of spreads or
commissions. Furthermore, to the extent natural shorts are able under a
post-trade transparency regime without a block trade exception to
extract rents from natural longs (albeit indirectly), there could be a
wealth transfer from natural longs to natural shorts. This could be
viewed as inefficient, because the prices charged (and presumably
obtained) by the natural shorts are not based solely on economic
fundamentals, but also are impacted by the predicament of the natural
longs (or dealers that have traded with the natural longs), where all
market participants

know that the natural longs (or the dealers) have a large risk position
that they presumably will wish to offset in the near future.
    On the other hand, fully and immediately disseminating SBS
transactions to the public--even those of large notional size--could
incentivize additional market participants to compete to purchase the
risk that the natural long is trying to acquire or offset. In other
words, the desire by natural shorts to extract rents from natural longs
might be offset by more natural shorts competing to acquire the risk.
In this view, greater post-trade transparency would result in lower
rather than higher costs for natural longs to offset or acquire their
risk positions. In the existing, opaque market for SBSs, any individual
market participant possesses only incomplete knowledge of when
transactions occur, and thus when opportunities arise to enter the
market by offering to offset risk. Moreover, any individual market
participant possesses only incomplete information about where others
view the price of risk. Real-time public dissemination of both the
price and full size of all SBS transactions, including block trades,
could cause more market participants to bid to take on risk after
seeing a report of the block trade. Moreover, full post-trade
transparency of block trades would allow natural shorts to know the
prices at which natural longs transacted, which would enable natural
shorts to bid more efficiently to accept the risk, particularly if
natural shorts used the post-trade information as an input to, rather
than as a substitute for, their own independent valuation and pricing
decisions. Currently, a natural short--without knowledge of the price
at which the natural long transacted--could underprice its willingness
to acquire the risk, resulting in a windfall profit for the dealer, who
can capture a greater spread.
    Discussed in greater detail below are the provisions in proposed
Regulation SBSR relating to post-trade transparency. In particular, the
Commission is proposing Rules 907(b) and 902(b) relating to block
trades, and is thereby taking into account the possibility that public
disclosure required under the Dodd-Frank Act could materially reduce
market liquidity for SBSs of large notional size.\92\ These proposed
rules are designed to balance the benefits of post-trade transparency
against the potential harm that could be done to dealers and natural
longs that could face higher costs of transferring or hedging a large
risk position after other market participants learn of the execution of
a block trade.
---------------------------------------------------------------------------

    \92\ See 15 U.S.C. 78m(m)(1)(E)(iv).
---------------------------------------------------------------------------

    The Commission acknowledges that it would be difficult at this
stage to accurately predict how post-trade transparency in general, or
the particular methods of post-trade transparency discussed in this
release, would affect the SBS market. The Commission is mindful that
there are similarities and differences between the SBS market and the
other securities markets that the Commission regulates, and that these
similarities and differences may impact how post-trade transparency
could affect the SBS market, in contrast to how post-trade transparency
affects other securities markets. Moreover, the effects of immediate
real-time dissemination could differ between the near term and the long
term, particularly as the SBS market evolves in response to other
regulatory actions. The Commission expects that, as post-trade
transparency is implemented in the SBS market, new data will come to
light that will inform the discussion and could cause subsequent
revision of Regulation SBSR. Whatever approach is ultimately adopted,
the Commission will study the development of the market closely,
particularly with regard to block trades, and make subsequent revisions
to the rules relating to post-trade transparency in the SBS market as
necessary or appropriate.

Request for Comment

    The Commission requests comment generally on how the Commission
should address Congress's instruction in Section 13(m)(1)(E)(iv) of the
Exchange Act that, with respect to certain SBSs, the rule promulgated
by the Commission to carry out the real-time reporting mandate shall
contain provisions that take into account whether the public disclosure
will materially reduce market liquidity. In particular:
    96. Would post-trade transparency have an effect on the SBS market
similar to its effect in other securities markets? Why or why not?
    97. Academic studies of other securities markets generally have
found that post-trade transparency reduces transaction costs and has
not reduced market liquidity. How do those markets differ or compare to
the SBS market? How would those similarities or differences affect
post-trade transparency in the SBS market?
    98. The SBS market currently is almost wholly institutional. Would
this characteristic impact the effect of post-trade transparency on the
SBS market? If so, how and how much? Are the needs of market
participants in the SBS market for access to transaction information
different than the needs of market participants in other securities
markets for access to transaction information?
    99. A significant amount of trading in the SBS market is currently
carried out by only a limited number of market participants. Would this
characteristic impact the effect of post-trade transparency on the SBS
market? If so, how and how much? For example, is there a concern that
it would be easier to determine the identity of the counterparties to a
SBS transaction in certain instances based on the real-time transaction
report? If so, what would be the harm, if any, of such knowledge? Would
the answer differ depending upon the liquidity of the SBS instrument,
or whether it was a customized SBS or not?
    100. Overall, the SBS market is significantly more illiquid than
other securities markets that have post-trade transparency regimes. How
would this characteristic impact, if at all, the effect of post-trade
transparency on the SBS market? Do commenters believe that post-trade
transparency could materially reduce market liquidity in the SBS
market, or particular subsets thereof? Why and how? Please be specific
in your response and provide data to the extent possible.
    101. In an illiquid market (such as the CDS market for smaller
reference entities), there will likely be fewer last-sale prints than
in a more liquid market (such as the CDS market for large corporate
debt issuers). Would these few last-sale prints in the illiquid market
have more, less, or the same value as prints in the more liquid market?
Why or why not?
    102. How would a post-trade transparency regime in SBSs affect the
liquidity of the underlying securities? For example, how, if at all,
would the post-trade transparency regime affect liquidity in the
corporate bond market?
    103. Should there be exceptions other than a block trading
exception to post-trade transparency to avoid unnecessarily reducing
market liquidity, e.g., for SBSs based on illiquid securities? Please
be specific in your response and provide data to the extent possible.
    104. As noted above, Section 13(m)(1)(E)(iv) of the Exchange Act
provides that, with respect to real-time public dissemination of
information about SBSs that are subject to mandatory clearing or that
are not subject to mandatory clearing but are cleared regardless, the
rule promulgated by the Commission regarding such

dissemination shall contain provisions ``that take into account whether
the public disclosure will materially reduce market liquidity.'' Do
commenters believe that there are circumstances under which real-time
public dissemination of information about SBS transactions, as
contemplated by proposed Regulation SBSR, whether or not the
transactions are block trades, would materially reduce market
liquidity? If so, how, why, and under what circumstances would real-
time public dissemination affect market liquidity? If market liquidity
would be materially reduced, how do commenters believe that the
Commission should address that issue, given the general requirement in
Section 13(m)(1)(C) of the Exchange Act that the Commission generally
shall require real-time public reporting for all SBSs?

A. Registered SDRs as Entities With Duty To Disseminate

    The Dodd-Frank Act identifies four types of SBSs and states, with
respect to each, that the Commission shall require real-time public
reporting for such transactions.\93\ In implementing the requirements
of the Dodd-Frank Act, the Commission preliminarily believes that the
best approach would be to require registered SDRs to disseminate SBS
transaction information, and to require other market participants to
report such information to a registered SDR in real time, so that the
registered SDR can in turn provide transaction reports to the public in
real time.\94\ Under this approach, market participants would not have
to obtain SBS market data from other potential sources of SBS
transaction information--such as SB SEFs, clearing agencies, brokers,
or the counterparties themselves--to obtain a comprehensive view of the
SBS market. Requiring registered SDRs to be the registered entities
with the duty to disseminate information would produce some degree of
mandated consolidation of SBS transaction data and help to provide
consistency in the form of the reported information. This approach is
designed to limit the costs and difficulty to market participants of
obtaining and assembling data feeds from multiple venues that might
disseminate information using different formats.
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    \93\ See 15 U.S.C. 78m(m)(1)(C).
    \94\ One commenter has expressed support for this approach. See
Benchmark Letter at 2 (arguing that trade reporting and
dissemination, including the reference data and identifier system,
``should be provided via a non-profit industry utility such as a
SDR''). See also letter from Larry E. Thompson, General Counsel,
DTCC, to Mary Schapiro, Chairman, Commission, and Gary Gensler,
Chairman, CFTC, at 1 (November 15, 2010) (stating that a registered
SDR ``should be able to provide * * * a framework for real-time
reporting from swap execution facilities and derivatives
clearinghouses'').
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    Multiple uniquely formatted data feeds could impair the ability of
market participants to receive, understand, or compare SBS transaction
data and thus undermine its value. The Commission is cognizant of this
potential and seeks public comment on means to address this issue. One
way to address that issue would be to dictate the exact format and mode
of providing required SBS transaction data to the public. Although this
approach could promote consistency, the Commission preliminarily
believes that such an approach could inhibit innovation and the
development of best practices, and could inadvertently omit key
elements to a successful SBS transaction reporting system. The
Commission also preliminarily believes that such an approach may be
difficult to administer over time.
    The Commission understands that existing SDRs that accept SBS data
do not currently have the functionality to publicly disseminate data in
real time. The Commission notes that nothing in the proposal would
prohibit a registered SDR from contracting with a vendor to carry out
the dissemination function. Over time, as registered SDRs and SBS
transaction reporting become more established, it is possible that
alternative approaches for reporting and disseminating SBS transaction
information could develop. Thus, the proposal would not prohibit
registered SDRs that cover the same asset classes from acting together
to create a central consolidator that would disseminate information for
all SBSs in that asset class. Allowing registered SDRs to satisfy their
dissemination obligation by providing information to a third party that
would consolidate and disseminate information for all SBSs in an asset
class might provide an economic incentive for registered SDRs to
create, fund, and operate a single central consolidator.
    The Commission is sensitive to the possibility that there could
emerge multiple registered SDRs in an asset class. Should this occur,
the Commission and the markets would be confronted with the possibility
that different registered SDRs could adopt different dissemination
protocols, potentially creating fragmentation in SBS market data. Based
on conversations with market participants, however, the Commission
preliminarily believes that the most likely outcome is for the market
to have only a few registered SDRs (although nothing in the Dodd-Frank
Act prevents more from being established). Furthermore, even if
multiple registered SDRs were to be established in an asset class, it
is unclear whether market participants would have an incentive to
spread their business across those multiple registered SDRs. The
Commission seeks comment on the likelihood of multiple registered SDRs
per asset class emerging; how that would likely affect market
participant behavior; and what steps, if any, that the Commission
should take to address any attendant regulatory issues that could
arise.
    One step that the Commission could take would be to require one
consolidated reporting entity to disseminate all SBS transaction data
for that asset class, by requiring each registered SDR in an asset
class to provide all of its SBS data to a ``central processor'' that
would also be a registered SDR. There is substantial precedent for this
approach in the equity markets, where market participants may access a
consolidated quote for national markets system securities and a
consolidated tape reporting executed transactions. A central processor
could receive a data feed from each registered SDR, consolidate the
information, and then publicly disseminate the consolidated data.
However, this approach likely would take more time to implement and may
not be warranted given the present SBS market structure. Furthermore,
as noted above, the proposal would not prohibit registered SDRs that
cover the same asset classes from determining on their own to act
together to create a central processor.
    Another approach would be to require public dissemination pursuant
to a ``first touch'' or ``modified first touch'' approach. For a first
touch approach, a SBS dealer or major SBS participant that is a party
to the SBS would be responsible for dissemination, and for SBSs in
which no SBS dealer or major SBS participant is a party, the SDR would
be responsible for dissemination. Under a modified first touch
approach, a SB SEF or national securities exchange would be required to
disseminate the information for those SBSs executed on the SB SEF or
national securities exchange. In connection with either of these
approaches, the Commission could allow a party required to disseminate
to satisfy its obligation if it provided the information to a third-
party consolidator that would disseminate the information for all SBSs
in that asset class. However, if that did not occur in a timely
manner--if, for example, the reporting parties could not agree on the
practicalities of such an undertaking, or if not all reporting parties
wanted to join--it would result

in less consolidation than the proposed approach to require registered
SDRs to disseminate the SBS data.

Request for Comment

    The Commission requests comment on all aspects of the proposed
rules requiring registered SDRs to disseminate SBS information.
    105. Would requiring registered SDRs to disseminate SBS information
be an effective means of dissemination? Why or why not? Would another
approach be more effective? What would be the advantages, or
disadvantages, of requiring different registered entities, in addition
to or instead of registered SDRs, to disseminate SBS information?
    106. Would the presence of multiple disseminators increase the need
for a consolidated data feed? Why or why not?
    107. Should the Commission require consolidation of data feeds now?
Or over time if multiple registered SDRs begin to operate in an asset
class?
    108. What are the costs and benefits of requiring registered SDRs
to disseminate SBS data? Would this approach have an impact on an
entity's desire to become a registered SDR? Are other entities, such as
SB SEFs, better suited to disseminate SBS data? How should the
Commission balance the costs to particular entities with the benefits
of greater consolidation of publicly disseminated SBS data?

B. Dissemination in Real Time

    Proposed Rule 902(a) would require a registered SDR to publicly
disseminate a transaction report of a SBS, other than a block
trade,\95\ immediately upon (1) receipt of information about the SBS
from a reporting party, or (2) re-opening following a period when the
registered SDR was closed.\96\ The Commission preliminarily believes
that ``immediately'' as used in this context would require a wholly
automated process to accept the incoming information, process the
information to assure that only information required to be disseminated
is disseminated, and disseminate a trade report through electronic
means. The 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),\97\ along with any indicator or indicators
contemplated by the registered SDR's policies and procedures.\98\ In
addition, the registered SDR would be required to have policies and
procedures that specify the specific data elements that must be
reported to it and the format for reporting this information,\99\ which
could help to provide greater uniformity in the disseminated
transaction data.
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    \95\ See infra Section V.C (discussing block trades).
    \96\ The Commission notes that FINRA disseminates information on
all transactions in TRACE-eligible securities immediately upon
receipt of a transaction report. See FINRA Rule 6750(a). The
Commission also notes that the Municipal Securities Rulemaking Board
disseminates information on most transactions in municipal
securities almost immediately. See http://emma.msrb.org/
EducationCenter/FAQs.aspx?topic+AboutTrade.
    \97\ See supra Section III.B (discussing the data elements
required to be reported in real time by proposed Rule 901(c)).
    \98\ See proposed Rule 907(a)(4).
    \99\ See proposed Rules 907(a)(1) and (2).
---------------------------------------------------------------------------

    The Commission recognizes that there may be circumstances when a
registered SDR's systems might be unavailable for publicly
disseminating transaction data. In such cases, as provided in proposed
Rule 902, the registered SDR would be required to disseminate the
transaction data immediately upon its re-opening.\100\
---------------------------------------------------------------------------

    \100\ See infra Section V.D (discussing proposed Rule 904, which
deals with hours of operation of registered SDRs and related
operational procedures).
---------------------------------------------------------------------------

C. Block Trades

    The Commission proposes to establish criteria for what constitutes
a block trade and for specifying a time delay for disseminating certain
information about a block trade to the public, for all SBSs except
those that are determined to be required to be cleared under Section
3C(b) of the Exchange Act but are not cleared.\101\ Proposed Rule
907(b) would establish criteria for what constitutes a block trade, and
proposed Rule 902(b) would specify the time delay for disseminating
certain information about a block trade to the public.
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    \101\ See 15 U.S.C. 13m(m)(1)(C)(iv) (providing that, with
respect to SBSs that are determined to be required to be cleared
under Section 3C(b) but are not cleared, the Commission shall
require real-time public reporting of such transactions).
---------------------------------------------------------------------------

1. Role of Registered SDRs Generally
    Proposed Rule 900 would define ``block trade'' to mean a large
notional SBS transaction that meets the criteria set forth in proposed
Rule 907(b). Proposed Rule 907(b)(1) would require a registered SDR to
establish and maintain written policies and procedures for calculating
and publicizing block trade thresholds for all SBS instruments reported
to the registered SDR in accordance with the criteria and formula for
determining block size as specified by the Commission. In determining
block trade thresholds, a registered SDR would be performing
mechanical, non-subjective calculations.
    The Commission preliminarily believes that requiring a registered
SDR to calculate and publicize block trade thresholds pursuant to its
written policies and procedures would allow for a more streamlined and
accurate process, as registered SDRs would have more ready access to
the data necessary to make block trade calculations. Further, placing
the responsibility on registered SDRs rather than reporting parties
would eliminate the burden on reporting parties for making block trade
calculations, and should provide greater uniformity in what constitutes
a block trade.
2. Block Trade Threshold
    As noted above, Section 13m(1)(E)(ii) of the Exchange Act \102\
requires the Commission rule for real-time public dissemination of SBS
transactions ``to specify the criteria for determining what constitutes
a large notional security-based swap transaction (block trade).'' In
this release, the Commission is proposing general criteria that it
would consider when setting specific block trade thresholds, but is not
proposing specific thresholds at this time. The Commission believes
that it would be appropriate to seek additional comment from the
public, as well as to collect and analyze additional data on the SBS
market, in the coming months. The Commission intends to propose
specific block trade thresholds simultaneous with the adoption of
Regulation SBSR (in whatever form it may ultimately take).
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    \102\ 15 U.S.C. 13m(m)(1)(E)(ii). This provision applies with
respect to SBSs that are subject to mandatory clearing and SBSs that
are not subject to mandatory clearing but are cleared at a
registered clearing agency.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the general criteria for
what constitutes a large notional SBS transaction must be specified in
a way that takes into account whether public disclosure of such
transactions would materially reduce market liquidity, but presumably
should be balanced by the general mandate of Section 13(m)(1) of the
Exchange Act, which provides that data on SBS transactions must be
publicly disseminated in real time, and in a form that enhances price
discovery. In considering criteria for what constitutes a large
notional SBS, the Commission notes that there are mechanisms by which
reporting data on any SBS might impact liquidity. If the intent to
trade were publicly reported prior to a transaction taking place (i.e.,
if there were pre-trade transparency), it would be reasonable to
suppose that the marketplace would have an opportunity to react to this
information in a way that

impacted the ability of such a transaction to be completed at the
desired price, which might in turn impact the liquidity of such a
market by causing participants to withdraw from trading or reduce the
size of their trades.
    However, this effect could not manifest itself directly via post-
trade transparency, since the transaction has already taken place. For
post-trade transparency to have a negative impact on liquidity, market
participants would need to be affected in a way that either: (1)
Impacted their desire to engage in subsequent transactions unrelated to
the first, or (2) impacted their ability to follow through with further
actions after the reported transaction has been completed that they
feel are a necessary consequence of the reported transaction. In
instance (1), post-trade dissemination of transaction prices, without
necessarily any reference to notional size, could impact the desire for
certain market participants to trade if spreads narrowed, because price
transparency led to an increased negotiating ability for market
participants who otherwise would not have been privy to such
information. But this same transparency also could lead to an increase
in liquidity if other market participants increase their trading as a
result of having access to new information or of narrower spreads. It
may not be possible to estimate with any certainty which of these
factors will outweigh the other as the SBS market continues to evolve.
Analogs to other markets (such as fixed income or equities) may provide
guidance; however, those markets each have structures and instruments
that differ significantly from the SBS market.
    In determining whether there should be a delay in the disclosure of
prices of SBS block trades, without necessarily any reference to
notional size, the Commission is guided by the general mandate of
Section 13(m)(1) of the Exchange Act, which provides that transaction
information should be disseminated in a form that enhances price
discovery. Nonetheless, the Commission recognizes that mandating
disclosure of trades below a certain size would essentially signal to
the market that a trade was at or above that size--that is to say,
would signal that the trade was ``of size''--even when there is no
disclosure of the precise size of the trade if it is above some
threshold size. The Commission preliminarily believes that even in very
illiquid markets transaction prices form the foundation of price
discovery. Past transactions may not be indicative of those in the
future, and may not themselves accurately reflect fundamental value,
but they provide an objective starting point for participants to
consider. Moreover, in an illiquid market, the low frequency of
transactions and potentially wide variation of past prices inform
participants as to uncertainty in pricing that they may expect in the
future, which may not only influence trading decisions, but could also
play a role in mark-to-market valuations and risk management. There
does not seem to be a reason that post-trade price disclosure for large
notional SBS transactions would be less relevant for price discovery
than similar disclosure for other SBSs. Therefore, as described further
below, the Commission is proposing that prices for block trades be
disseminated in the same fashion as prices for non-block-trade
transactions.
    In contrast, instance (2) above considers that disclosure that a
block trade has taken place, with or without the exact size of the
trade, may lead to a reduction in liquidity if one or both of the
parties engaged in such a transaction need to take further actions in
the marketplace after the reported transaction was completed and
disseminated, and dissemination would inhibit their ability to take
such action. In this situation, one or both of the parties might choose
not to have participated in the original transaction.
    One reason an SBS counterparty might desire to take further action
after an initial transaction is completed would be for hedging
purposes. This hedge may take the form of re-entering the SBS market on
the contra side, or hedging the exposure underlying the initial SBS by
taking a contra position in the cash security market. Whether or not
one or more parties to a transaction will be subsequently hedging its
exposure after the transaction is complete cannot be discerned from
data about the transaction. However, if a transaction is to be hedged,
the size of the transaction would be a factor in how readily the hedge
can be executed.
    For transactions that are sufficiently small, disseminating the
exact size of the transaction would likely not provide other market
participants with information that could be used to the detriment of
the hedging party, since the hedging transaction would be
indistinguishable from other market activity. However, for transactions
that are sufficiently large, it may be the case that disseminating the
size of such a transaction would provide a signal to other market
participants that there is the potential, though not certainty, that a
large transaction could take place in an SBS or a related security.
Market participants might be able to use this information to their
advantage in a way that disadvantages the hedging party and disincents
that party from engaging in such types of SBS transactions. In this
fashion, post-trade transparency for one transaction is transformed
into pre-trade signaling for another.
    To address this issue, the Commission preliminarily believes that
the size of an SBS transaction that is sufficiently large to signal
other market participants that there is the potential for a subsequent
outsized transaction, should itself be suppressed to provide time for
those subsequent transactions, if any, to be absorbed by the market.
Moreover, the Commission recognizes that mandating disclosure of trades
below a certain size would essentially signal to the market that a
trade was at or above that size--that is to say, would signal that a
trade was ``of size''--even when there is no disclosure of the precise
size of the trade, if it is above some threshold size.
    There are a variety of metrics that can be used to determine the
criteria for whether or not a SBS transaction should be considered a
block trade. These include the absolute size of the transaction, the
size of the transaction relative to other similar transactions, the
size of the transaction relative to some measure of overall volume for
that SBS instrument, and the size of the transaction relative to some
measure of overall volume for the security or securities underlying the
SBS. The most relevant metric would depend on the specific nature and
timing of the hedging, which cannot be discerned from data about the
transaction. However, if the goal of not publicly disseminating the
size of a large notional SBS transaction is to prevent inadvertent
signaling to the market of potential large subsequent transactions,
then criteria should be chosen in a way that minimizes such signaling.
    This suggests the use of one or more metrics that can help
distinguish ordinary transaction sizes from extraordinary transaction
sizes. An ordinary transaction size would be one in which the size of
subsequent hedging transactions (if any) would be indistinguishable
from the rest of the market. Extraordinary transaction sizes would be
those in which subsequent transactions could be distinguished from the
rest of the market.
    One possibility could be to order the sizes of all transactions for
a given SBS instrument and identify the top N-percent as large.
However, it is not a priori obvious what percent should be used. Also,
using a simple percentile threshold would not account for the
distribution of trade sizes that could be widely dispersed or narrowly
clustered. In addition, the distribution of the trade sizes could
change over time.

    A second possibility would be to examine trade size data to
determine if the distribution of trade sizes suggests thresholds that
could be used to discern ordinary versus extraordinary trade size. The
figure below plots the distribution of trade sizes, bucketed in bins of
$5 million, for over 370,000 single name corporate CDS
transactions.\103\ Almost half of all trades have sizes of less than $5
million, and over 90% have sizes less than $15 million. There is a
small cluster of trades between $15 million and $30 million, followed
by a long tail beginning at $30 million and extending to over $100
million.
---------------------------------------------------------------------------

    \103\ See supra note 11.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP02DE10.025

    These data would suggest two possible thresholds--$15 million or
$30 million. A cutoff of $15 million would have resulted in about 8% of
trades executed over this time period being considered large notional,
and a cutoff of $30 million would have resulted in about 1% of trades
being considered large notional.
    The second figure below presents similar data for over 20,000
sovereign CDS transactions from the same source over the same time
period. The plot suggests similar cutoff points, although there are
notably many more transactions in the tail for sovereign CDS than there
were for single-name corporate CDS. A cutoff of $15 million would
result in about 26% of all trades being considered large notional, and
a cutoff of $30 million would result in about 7.5% of all trades being
considered large notional.

[GRAPHIC] [TIFF OMITTED] TP02DE10.027

BILLING CODE 8011-01-C
    Splitting the universe of transactions into single-name corporate
CDS and sovereign CDS would not provide for potential differences
between individual corporates or sovereigns that may have unique
distributions or liquidity profiles. As a further consideration, the
Commission notes that some SBSs may trade very infrequently, such as
only a few times per month. Under these conditions, it would not be
obvious how to distinguish an ordinary sized transaction from an
extraordinary size. However, if a market were that illiquid it would
most likely not be the case that subsequent hedging would be done in
that same market. In such case, it is somewhat harder to see how the
post-trade reporting of size would further impact the ability for one
or more market participants to affect subsequent hedging transactions,
since in such an illiquid market it may not be possible to hedge at
all.
    The Commission also notes that this criterion considers only
typical trade sizes within the CDS market without regard to overall
daily, weekly, or monthly volume. This criterion also does not consider
liquidity or volume in the underlying cash markets. Inclusion of volume
metrics may be helpful in defining the criteria for what constitutes a
block trade. For example, a single trade that is equivalent in size to
a full- or half-day's average volume may be considered out-sized. On
the other hand, if a particular SBS trades only once or twice per day
then every trade would be equivalent to a full or half-day's average
size. The Commission invites comment on if and how volume
considerations should be included in the criteria for setting block
trade thresholds.
    For the reasons discussed above, a simple metric based on recent
trade sizes of SBSs designed to help distinguish ordinary from
extraordinary trade sizes could address the issue of inadvertently
signaling market participants that a potential large transaction in a
specific SBS or underlying security may be forthcoming as the result of
one or more participants hedging a just-completed large notional
transaction. On the other hand, the Commission recognizes that
requiring disclosure of the fact that a block trade took place may
raise some of the same concerns as requiring disclosure of the exact
size of the large trade, and that to mandate disclosure of trades below
a certain size is tantamount to mandating disclosure that a large trade
occurred, even if the precise size of the trade is not disclosed. The
Commission is interested in and invites comment on whether there are
other means by which the dissemination protocol for block trades could
effectively not reveal the size of a block trade or mitigate the
potential effects of revealing that a block trade took place, while
still offering the price component in real time. For example, could the
block trade be disseminated with a ``proxy'' size, such as the size of
the block trade threshold or a randomized size, with no identifier
showing that the trade is a block trade?
    Finally, the Commission preliminarily believes that it would not be
appropriate to establish different block trade thresholds for similar
instruments with different maturities. This is reflected in the
proposed definition of ``security-based swap instrument,'' which would
mean ``each security-based swap in the same asset class, with the same
underlying reference asset, reference issuer, or reference index.''
\104\ The proposed definition would not include any distinction based
on tenor or date until expiration. The Commission is proposing this
approach for three reasons. First, the larger the number of
distinctions between SBS instruments that are created by the proposed
rule, the larger the number of potentially

illogical categorizations at the margins. For example, there would be
little economic rationale to draw a distinction between SBSs alike in
all respects except that they had maturities one day apart. Second, the
Commission understands that SBSs in the same asset class, with the same
underlying reference asset, reference issuer, or reference index have
pricing impacts on each other, regardless of their maturities. This is
because market participants typically price SBSs based on the same
reference issuer or index along a curve, whereby prices at points along
the curve where no hard data exist may be interpolated or extrapolated
from different points along the curve where harder data (such as
publicly disseminated last-sale prints) may exist. Thus, even if a SBS
of an unusual maturity were traded only infrequently, the market in
that SBS would likely be affected more by the characteristics of other
SBSs based in the same asset class, with the same underlying reference
asset, reference issuer, or reference index, rather than the fact that
there is low liquidity in SBSs having that specific maturity. Third, a
regime that differentiated SBSs based on maturities could invite market
participants to fragment the market by creating SBSs with non-standard
maturities in an effort to gain more favorable block trade treatment.
---------------------------------------------------------------------------

    \104\ See proposed Rule 900.
---------------------------------------------------------------------------

3. Exclusions From Block Trade Definition
    Proposed Rule 907(b)(2)(i) would provide that a registered SDR
shall not designate as a block trade any SBS that is an equity total
return swap or is otherwise designed to offer risks and returns
proportional to a position in the equity security or securities on
which the security-based swap is based.\105\ A SBS can be designed as a
synthetic substitute for a position in the underlying equity security
or securities. There is no delay in the reporting of block trade
transactions for equity securities in the United States. Proposed Rule
907(b)(2)(i) is designed to discourage SBS market participants from
evading post-trade transparency in the equity securities markets by
using synthetic substitutes in the SBS market.\106\
---------------------------------------------------------------------------

    \105\ Proposed Rule 901(c)(1) would require the reporting party
to report, in real time, the asset class of the SBS and, if the SBS
is an equity derivative, whether it is a total return swap or is
otherwise designed to offer risks and returns proportional to a
position in the equity security or securities on which the SBS is
based.
    \106\ As an example: Bank DEF wants to purchase ten million
shares of Company XYZ and would like to avoid real-time public
reporting of the purchase. If Bank DEF purchased those shares on a
national securities exchange, the purchase would be reported in real
time. However, Bank DEF could instead enter into a total return swap
with ten million shares of XYZ as a reference asset and create an
economically similar position. If the total return swap, but not the
equity security transaction, were afforded a block trade exception
under proposed Regulation SBSR, this disparate regulatory treatment
might influence market participants' investment choices.
---------------------------------------------------------------------------

    Proposed Rule 907(b)(2)(ii) would provide that a registered SDR
shall not designate as a block trade any SBS contemplated by Section
13(m)(1)(C)(iv) of the Exchange Act, i.e., any SBS that is determined
to be required to be cleared under Section 3C(b) of the Exchange Act,
but that is not cleared. The Dodd-Frank Act expressly requires the
Commission to mandate real-time public dissemination for SBSs that are
determined to be required to be cleared but are not cleared.
4. Public Dissemination of Block Trades
    Proposed Rule 902(b) would provide that a registered SDR shall
publicly disseminate a transaction report of an SBS that constitutes a
block trade immediately upon receipt of information about the block
trade from the reporting party. The transaction report would be
required to consist of all the information reported by the reporting
party pursuant to proposed Rule 901(c), except for the notional size,
plus the transaction ID and an indicator that the report represents a
block trade. The Commission proposes that the registered SDR would be
required to publicly disseminate a complete transaction report for such
block trade (including the transaction ID and the full notional size)
as follows:
     Proposed Rule 902(b)(1) would provide that, if the SBS was
executed on or after 05:00 UTC and before 23:00 UTC of the same day
(which corresponds to 12 midnight and 6 p.m. EST), the transaction
report (including the transaction ID and the full notional size) shall
be disseminated at 07:00 UTC of the following day (which corresponds to
2 a.m. EST of the following day).
     Proposed Rule 902(b)(2) would provide that, if the SBS was
executed on or after 23:00 UTC and up to 05:00 UTC of the following day
(which corresponds to 6 p.m. until midnight EST), the transaction
report (including the transaction ID and the full notional size) shall
be disseminated at 13:00 UTC of that following day (which corresponds
to 8 a.m. EST of the following day).
    Under proposed Rule 902(b), market participants would learn the
price of an SBS block trade in real time, although not the notional
size. The Commission preliminarily believes that this approach promotes
the public's interest in price discovery without subjecting the block
trade counterparties to undue risk of a significant change in the price
necessary to hedge the market risk created by entering into the block
trade. Other market participants would know the SBS transaction was
above a certain size, and it may be possible to infer the size or
direction of a large trade before the size is publicly disseminated,
based on the liquidity premium inferred from the reported trade price.
The Commission recognizes that the disclosure that a block trade took
place, even without disclosure of the exact size, can still implicate
some of the concerns regarding subsequent hedging that were previously
discussed. On the other hand, there would still be substantial risk for
any other market participant that seeks to take long or short market
positions solely to profit from the information that a block trade
occurred, due to the uncertainty regarding the true size of the trade.
Moreover, disseminating the price in real time could allow all market
participants to obtain useful information about the block trade for
valuation purposes, even though they would not learn about the full
size of the block trade until later.\107\ The Commission notes that the
approach that it is proposing here is similar to TRACE's handling of
block trades.\108\
---------------------------------------------------------------------------

    \107\ SBS market participants typically value their holdings at
the end of the business day. If no information about a block trade
were made public until after the end of the business day (for
example, if the block trade occurred at 15:00 UTC/noon EST but no
public trade report were required until eight hours later, i.e., at
23:00 UTC/8:00 p.m. EST), all market participants would lose a
potentially significant input into their valuation methodologies.
This could be the case in particular for infrequently traded SBS
instruments, where there are few last-sale prints. This would also
likely be the case for market participants that hold SBS instruments
in notional sizes similar to the undisseminated SBS block trade. A
large position might be valued less on a per-unit basis than a
smaller position, due to an illiquidity premium. Seeing the price of
the block trade in real time could be useful for market participants
that must value a larger SBS position, because the price of the
reported block trade (even if the exact size is unknown) would also
likely reflect an illiquidity premium to some extent.
    \108\ FINRA rules require member broker-dealers to report
transactions in corporate and agency debt securities to TRACE within
15 minutes. FINRA publicly disseminates a transaction report
immediately upon receipt of the information. If the par value of the
trade exceeds $5 million (in the case of investment grade bonds) or
$1 million (in the case of non-investment-grade bonds) the quantity
disseminated by TRACE will be either ``5 million+'' or ``1
million+''. At no time will TRACE subsequently disseminate the full
size of the trade. See TRACE User Guide, version 2.4 (last update
March 31, 2010), at 50.
---------------------------------------------------------------------------

    Unlike TRACE, however, the Commission is proposing a second wave of
transaction reporting, which would include the full notional size of
the

block trade, after an appropriate delay. Under proposed Rules 907(b)(1)
and (2), all block trades would have at least an eight-hour delay
before the full notional size would be disseminated. Proposed Rule
907(b) would establish a cut-off time of 23:00 UTC, which correspond to
6 p.m. EST. Block trades executed on or after 05:00 UTC (which
corresponds to midnight EST) and up to 23:00 UTC (6 p.m. EST) would
have to have their full notional size disseminated by 07:00 UTC, which
corresponds to 2 a.m. EST. Thus, most block trades executed on a given
U.S. day would have their full notional sizes disseminated overnight.
However, block trades executed on or after 23:00 UTC (6 p.m. EST) and
before 05:00 UTC (midnight EST) would instead have their full notional
sizes disseminated at 13:00 UTC, which corresponds to 8 a.m. EST of the
following U.S. day. If there were only one point in the day when a
registered SDR were required to disseminate the full notional sizes,
block trades executed a short time before the second wave of
dissemination would not benefit from the proposed delay in the
dissemination of the notional size. Under the proposed approach, block
trades executed during a period that runs roughly from the close of the
U.S. business day to midnight EST would have their full sizes
disseminated by a registered SDR at a time that corresponds to the
opening of business on the next U.S. day.
    The Commission preliminarily believes that disseminating the full
size of a block trade, albeit with a delay, would further promote price
transparency while having only minimal costs. The ability to view the
full notional size, although with a delay of between eight and 26
hours,\109\ would allow market participants to understand the full
scope of activity in the market. At the same time, market participants
that execute block trades would have at minimum eight hours to hedge or
take other action to minimize their risks before the full size of their
trades was disseminated. Based on preliminary discussions with market
participants, the Commission believes that the proposed delay of
between eight and 26 hours, which in most cases would represent the
better part of a business day, would allow sufficient time for the
counterparties to the transaction to take follow-up action as needed.
The Commission preliminarily believes, therefore, that these time
periods strike a reasonable balance between the goals of post-trade
transparency and of providing market participants that trade in large
size a reasonable opportunity to mitigate their risks.
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    \109\ Market participants would be able to view the full
notional size of a SBS transaction no sooner than eight hours and no
more than 26 hours after the time of execution. A SBS block trade
executed at 05:00 UTC would have its full size disseminated by a
registered SDR at 07:00 UTC of the next day, which is 26 hours
later. Any other SBS block trade would be disseminated after a
shorter delay. For example, a SBS block trade executed at 17:00 UTC
also would be disseminated with its full size at 07:00 UTC of the
next day, which is 14 hours later. A SBS block trade executed at
04:59:59 would have its full size disseminated by a registered SDR
at 13:00 UTC of that same day, just over eight hours later.
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    Finally, proposed Rule 907(b)(3) would provide that, if a
registered SDR is in normal closing hours or special closing hours
\110\ at a time when it would be required to disseminate information
about a block trade pursuant to this section, the registered SDR shall
instead disseminate information about the block trade immediately upon
re-opening. Under proposed Rules 907(b)(1) and (2), a registered SDR
could otherwise be required to disseminate the full report of a block
trade, including the notional size, at a time when it is closed.
---------------------------------------------------------------------------

    \110\ See infra Section V.E (discussing hours of operation of
registered SDRs).
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5. No Delay in Reporting Block Trades to Registered SDR
    Because the registered SDR, rather than the reporting party, would
have the responsibility to determine whether a transaction qualifies as
a block trade, the reporting party would be required to report a SBS to
a registered SDR or the Commission pursuant to the time frames set
forth in Rules 901(c) and (d), regardless of whether the reporting
party believes the transaction qualifies for block trade treatment.
6. Block Trade Policies and Procedures
    Proposed Rule 907(b)(1) would provide that a registered SDR shall
establish and maintain written policies and procedures for calculating
and publicizing block trade thresholds for all SBS instruments reported
to the registered SDR. At a minimum, a registered SDR would be required
to establish written policies and procedures reasonably designed to:
(1) Immediately determine whether a SBS reported to the registered SDR
constitutes a block trade and, if so, (2) disseminate information about
the block trade in a manner consistent with proposed Rule 902(b).
    As noted above, the specific threshold that a registered SDR would
have to apply to make the block trade calculations will be established
in a future Commission rulemaking.

Request for Comment

    The Commission requests comment generally on all aspects of the
proposed rules regarding block trades, including the proposed criteria
and the proposed exclusions. In particular, the Commission specifically
requests comment on the following issues:
    109. Do commenters agree with the approach of having a registered
SDR calculate and publicize block size thresholds, in accordance with
the criteria established by the Commission? Why or why not? If not,
what would be an alternative approach?
    110. If there is more than one registered SDR for an asset class,
how would the Commission ensure that all registered SDRs calculated the
same block trade thresholds for the same SBS instrument? How should the
Commission address this issue? Is it feasible to expect multiple
registered SDRs in the same asset class to obtain each others' market
data feeds to obtain the data with which to calculate block trade
thresholds?
    111. If commenters believe that there would be adverse price impact
for traders if all information on block trades was made available in
real time, do commenters have any studies or empirical evidence to
support that assertion? What would be the long-term effects on the
market if all market participants knew the full transaction details of
all SBSs in real time? Would this impact liquidity? If so, how?
    112. Some participants in the Market Data Roundtable referred to
the likelihood of ``front running'' if all information on block trades
were made available in real time. How would front running occur in the
SBS market if all the details of block trades were disseminated in real
time?
    113. How do counterparties hedge large SBS trades? At what notional
trade size does it become difficult to hedge a SBS such that a
dissemination delay is necessary? How does this vary by asset class?
How long does it take to complete a hedge? What characteristics of a
SBS instrument or asset class affect the length of time needed to
deploy the hedge?
    114. Does a counterparty's ability to hedge a trade increase or
decrease depending on market characteristics such as trading volume and
trading frequency? Does this depend on asset class, and within an asset
class does it depend on maturity or other contract characteristics?
    115. Do commenters agree that the criteria for determining whether
or not a SBS transaction is considered a block trade should be based on
a distribution

of past trade sizes? Should overall volume also be considered? Should
volume or trade sizes in the cash market be considered?
    116. Should block trade thresholds be determined with more
granularity, such as on a SBS instrument by instrument basis?
    117. How often should thresholds be updated? What should be the
appropriate look back period for data used to determine thresholds?
    118. Is there a preferred formulaic way of computing the thresholds
from trade size or other distributions? Should a simple percentile cut-
off be chosen? If so, how? Would a standard deviation metric be
appropriate?
    119. How might trading change as a result of the chosen threshold?
Could these provisions be gamed? Would market participants change their
trading patterns to purposely skew the distribution to alter the
threshold when they are next updated?
    120. For any criterion that takes into account trading activity in
the SBS instrument, should inter-affiliate transactions or trades
resulting from portfolio compressions be excluded? If so, why? Are
there other types of SBSs that should be excluded? If so, why? How
could those exclusions be defined so as to prevent market participants
from inappropriately deeming a SBS as qualifying for an exclusion?
    121. Should there be a fixed minimum notional size threshold below
which no SBS could be considered a block trade? If so, what should that
threshold be and why? Should there be a different fixed minimum
threshold for different asset classes or SBS instruments? If so, why?
What would those different thresholds be?
    122. Do commenters agree with the proposed exclusions from the
block trade determination? If so, why or why not? Should other kinds of
transactions be prevented from having a block trade exception?
    123. Do commenters believe that block trades (however defined)
should be treated differently from other trades for purposes of public
dissemination? If so, why? If not, why not?
    124. What would be the effect of having no or only a short
dissemination delay for a block trade report that includes the full
notional size? Would it enhance or slow the speed of price discovery
and the level of price efficiency in the market? Would it increase or
decrease competition among market participants in general, or SBS
dealers in particular? Would any short-term increases in the cost of
hedging be offset by reductions in the cost of hedging in the longer
term?
    125. Do commenters agree with the proposed two-step process for
public dissemination of a block trade?
    126. How likely is it that market participants would be able to
infer the size or direction of a large trade before the size is
publicly disseminated, based on the liquidity premium inferred from the
reported traded price? Is it feasible to remove the liquidity premium
component from the price of a large trade, leaving only a normalized
price for a standard (non-block) size trade to be reported in real
time, with the actual price including the liquidity premium component
being reported only at the time that actual trade size is revealed?
    127. Would it be preferable to have a single transaction report for
a block trade that contains all transaction details, including the
notional size, but with a delay in dissemination of the complete trade
report? If so, why? What should that delay be? Five minutes? Ten
minutes? An hour? Three hours? At the end of the day? Why would this
length of time be appropriate?
    128. Are there other means by which the dissemination protocol for
block trades could effectively not reveal the size of the block trade
while still offering the price component in real time? For example,
could the block trade be disseminated with a ``proxy'' size, such as
the size of the block trade threshold or a randomized size, with no
identifier showing that the trade is a block trade? Even if that
approach were to effectively not reveal the true size of the block,
would it do so at the cost of creating misinformation in the market?
    129. Do commenters believe it is important for market participants
to have pricing information from block trades to set end-of-day marks?
When are these marks typically set? How valuable would it be in setting
end-of-day marks to know the price of a SBS block trade, even without
the full size?
    130. If the Commission were to adopt a requirement that the price
and size of a block trade must be publicly disseminated before the time
that market participants typically set marks, would that cause SBS
counterparties to avoid executing block trades near that time? For
example, assume the Commission were to require that the full
transaction details of block trades had to be publicly disseminated by
a registered SDR at 21:00 UTC/4:00 p.m. EST, and that even a block
trade executed at 3:55 p.m. EST had to be disseminated at 4 p.m. EST.
Would this cause market participants to shift block trading earlier or
later in the day? If so, would there be any harm in such movement?
    131. Do commenters agree with the Commission's proposed times for
disseminating the full notional size of block trades? If not, what
other times would be appropriate, and why? Would counterparties be able
to effectively hedge large SBSs executed toward the end of the day
during the time allowed by the proposed rules (i.e., between 6 p.m. and
midnight EST)?
    132. Do commenters believe it would be more appropriate for a
registered SDR to disseminate the notional size of each block trade
after a fixed period after the trade report for that SBS transaction is
disseminated without the notional size, rather than requiring the
registered SDR to disseminate the full trade reports in two ``batches''
during the day? If so, what would be an appropriate delay for
disseminate the full notional size, and why?
    133. Under the Commission's proposal, there would be at least an
eight-hour delay between the time of execution of a block trade and
when the full notional size is required to be disseminated by a
registered SDR. Is an eight-hour minimum appropriate? Should that
period be longer or shorter? Why?
    134. Would the Commission's proposed times for disseminating block
trade information with the full notional size included cause any
disruptive change in trading patterns or activity for large SBS trades,
for example by providing market participants the incentive to move
block trading toward the very beginning of the day, or by prompting
market participants to avoid trading around the release of block trade
information at 07:00 UTC/2 a.m. EST and 13:00 UTC/8 a.m. EST?
    135. Would the public dissemination of block trades as proposed
allow some market participants to infer the identity of the parties to
the transaction or materially reduce market liquidity? If so, how? Can
or should there be another means of suppressing the exact size of a
block trade?

D. SBS Information That Will Not Be Disseminated

    The Commission is proposing Rule 902(c)(1), which would prohibit a
registered SDR from disseminating the identity of either counterparty
to a SBS, and Rule 902(c)(2), which would prohibit a registered SDR
from disseminating, with respect to a SBS that is not cleared at a
registered clearing agency and that is reported to a registered SDR,
any information disclosing the business transactions and market
positions of any person.\111\
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    \111\ See 15 U.S.C. 13m(m)(1)(C)(iii) (``With respect to
security-based swaps that are not cleared * * * and which are
reported to a security-based swap data repository or the Commission
under section 3C(a)(6), the Commission shall require real-time
public reporting * * * in a manner that does not disclose the
business transactions and market positions of any person.''); 15
U.S.C. 13m(m)(1)(E)(i) (requiring that the Commission's rules
governing the dissemination of SBS transaction and pricing
information ``does not identify the participants''). The Commission
does not believe that the information that would be disseminated
pursuant to proposed Regulation SBSR would disclose the business
transactions, identities, or market positions of any person.

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

    In addition, proposed Rule 902(c)(3) would prohibit a registered
SDR from publicly disseminating any information regarding a SBS
reported pursuant to proposed Rule 901(i), which would require
participants to report pre-enactment and transitional SBSs.\112\ The
Commission preliminarily believes that price discovery would not be
enhanced by publicly disseminating information about historical
SBSs.\113\
---------------------------------------------------------------------------

    \112\ See proposed Rule 900 (defining ``pre-enactment security
based swap'' and ``transactional security-based swap'').
    \113\ See supra Section IV.F.
---------------------------------------------------------------------------

Request for Comment

    136. Do commenters believe that information that would be
disseminated pursuant to proposed Regulation SBSR would disclose the
business transactions, identities, or market positions of any person?
    137. If so, what revisions to proposed Regulation SBSR do
commenters believe would be necessary to avoid disclosing the business
transactions, identities, or market positions of any person?

E. Operating Hours of Registered SDRs

1. Continuous Operation
    The Dodd-Frank Act does not explicitly address or prescribe the
hours of operation of the real-time reporting and dissemination regime.
However, to serve the goals of transparency and price discovery, the
Commission believes that it is appropriate to implement a system of
real-time reporting and dissemination that, in general, operates
continuously.\114\ Accordingly, proposed Rule 904 would require a
registered SDR to design its systems to allow for continuous receipt
and dissemination of SBS data, except that a registered SDR would be
permitted to establish ``normal closing hours.'' Such normal closing
hours may occur only when, in the estimation of the registered SDR, the
U.S. markets and other major markets are inactive. In addition, a
registered SDR would be permitted to declare, on an ad hoc basis,
special closing hours to perform routine system maintenance, subject to
certain requirements.
---------------------------------------------------------------------------

    \114\ The Commission is aware that one current data repository,
Warehouse Trust Company LLC, a subsidiary of DTCC, operates 24 hours
a day for six days a week.
---------------------------------------------------------------------------

    The Commission believes there are compelling reasons to adopt this
approach. First, the market for SBSs is global, and the Commission
believes the public interest is served by requiring continuous real-
time dissemination of any SBS transactions that would be required to be
reported to a registered SDR, no matter when they are executed. Second,
a continuous dissemination regime would reduce the incentive for market
participants to defer execution of SBS transactions until after regular
business hours to avoid real-time post-trade transparency. Third, the
Commission believes that this continuous dissemination regime would be
``technologically practicable,'' and thus consistent with the Dodd-
Frank definition of what constitutes real-time dissemination.\115\
---------------------------------------------------------------------------

    \115\ See 15 U.S.C. 78m(m)(1)(A).
---------------------------------------------------------------------------

2. Normal Closing Hours and Special Closing Hours
    Although the Commission believes that continuous operation of a
real-time reporting and dissemination regime should be the goal, the
Commission recognizes the potential need for a registered SDR to
establish normal closing hours to perform necessary system maintenance.
Such normal closing hours should occur only when, in the estimation of
the registered SDR, the U.S. markets and major foreign markets are
inactive. Consequently, proposed Rule 904(a) would allow a registered
SDR to establish normal closing hours during periods when, in its
estimation, the U.S. market and major foreign markets are inactive. A
registered SDR would be required to provide reasonable advance notice
to participants and to the public of its normal closing hours.\116\
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    \116\ For example, a registered SDR could provide notices to its
participants or publicize its normal closing hours in a conspicuous
place on its Web site.
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    Further, the Commission recognizes that unexpected circumstances
could arise that would require a registered SDR to temporarily make
unavailable its systems for processing transaction reports and publicly
disseminating transaction data. Consequently, proposed Rule 904(b)
would permit a registered SDR to declare, on an ad hoc basis, special
closing hours to perform system maintenance that cannot wait until
normal closing hours. A registered SDR would be required, to the extent
reasonably possible under the circumstances, to avoid scheduling
special closing hours during when, in its estimation, the U.S. market
and major foreign markets are most active, and to provide reasonable
advance notice of its special closing hours to participants and to the
public.
    Paragraphs (c) to (e) of proposed Rule 904 would specify
requirements for handling and disseminating reported data during a
registered SDR's normal and special closing hours. During normal
closing hours and, to the extent reasonably practicable, during special
closing hours, a registered SDR would be required to have the
capability to receive and hold in queue transaction data it receives.
Immediately upon system re-opening following normal closing hours (or
opening following special closing hours, if it were able to hold
incoming data in queue), the registered SDR would be required to
publicly disseminate any transaction data required to be reported under
proposed Rule 901(c) that it received and held in queue. If the
registered SDR could not, while it was closed, receive and hold in
queue information required to be reported, it would be required,
immediately upon resuming normal operations, to send a notice to all
participants that it had resumed normal operations but could not, while
closed, receive and hold in queue such transaction information.
Thereafter, any participant that had an obligation to report
information, but was unable to do so because of the registered SDR's
inability to receive and hold data in queue, would be required to
immediately report the information to the registered SDR.
    Regardless of the current operating status of a registered SDR,
reporting parties would be required to submit information to the
registered SDR under the same standards and permissible timing detailed
in proposed Rule 901. If a party that has an obligation to report the
transaction data is unable to do so because the registered SDR's system
is unable to receive and hold in queue such data, the reporting party
would be required to report any information that it was obligated to
report immediately after it received a notice that it was possible to
do so.

Request for Comment

    The Commission requests comment on all aspects of the proposed
operating hours for registered SDRs.
    138. Do commenters agree with the provisions that would allow
registered SDRs to have normal and special closing hours and the
proposed process for receipt and dissemination of data during and after
such hours?
    139. Is it reasonable for the Commission to provide registered SDRs
with flexibility to set specific closing

times, or should the Commission adopt a rule that specifies hours of
operation?
    140. Are there alternatives to allowing registered SDRs to close
during normal and special closing hours? Would it be feasible for
registered SDRs to operate without normal and special closing hours?

F. Procedures for Correcting Errors

    Proposed Rule 905 would establish procedures to correct errors in
reported and disseminated SBS information. The Commission recognizes
that any system for transaction reporting must accommodate the
possibility that certain data elements may be incorrectly reported.
Proposed Rule 905 would establish error reporting procedures for
counterparties and for registered SDRs.
1. Counterparty Reporting Error
    Proposed Rule 905(a) would apply where a counterparty discovers an
error after a SBS transaction has been reported. A counterparty that
was not the reporting party would be required to promptly notify the
reporting party of the error. A reporting party that discovers an error
or receives notification of an error from its counterparty would be
required to promptly submit to the entity to which it provided the
original transaction report an amended report pertaining to the
original transaction report. If the reporting party reported the
initial transaction to a registered SDR, the reporting party must
submit an amended report to the registered SDR in a manner consistent
with the policies and procedures contemplated by proposed Rule
907(a)(3).\117\ The Commission preliminarily believes that it is
reasonable to place the duty to submit a correction report on the
reporting party, because the reporting party was responsible for
submitting the initial transaction report. This approach should
establish a clear duty and help to avoid the submission of duplicative
error reports.
---------------------------------------------------------------------------

    \117\ See proposed Rule 905(a)(2).
---------------------------------------------------------------------------

2. Responsibility of Registered SDR To Correct
    Proposed Rule 905(b) outlines the duties of registered SDRs in
correcting information and re-disseminating corrected information.\118\
If the registered SDR either discovers an error in the SBS information
contained in its system or receives notice of an error from a
counterparty, the registered SDR would be required to verify the
accuracy of the terms of the SBS and, following such verification,
promptly correct the information in its system.\119\ Proposed Rule 905
would further require that, if the erroneous information contains any
information that falls into the categories enumerated in proposed Rule
901(c) as information required to be reported and disseminated in real
time, the registered SDR would be required to publicly disseminate a
corrected transaction report of the SBS promptly following verification
of the trade by the parties to the SBS, with an indication that the
report relates to a previously disseminated transaction.\120\
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    \118\ See also SDR Registration Proposing Release, supra note 6
(proposing Rule 13n-5 under the Exchange Act).
    \119\ See proposed Rule 905(b)(1). The Commission is also
proposing to require the registered SDR to establish and maintain
written policies and procedures that, among other things, specify
how reporting parties are to report corrections to previously
submitted information and how information in the records of the SDR,
upon being discovered to be erroneous, is to be corrected. See
proposed Rule 907(a)(3); infra Section VI.A (discussing the policies
and procedures of registered SDRs).
    \120\ See proposed Rule 905(b)(2).
---------------------------------------------------------------------------

    Proposed Rule 907(a)(3) would require a registered SDR to, among
other things, establish and maintain written policies and procedures
for determining how participants would be required to report
corrections of prior reports. The registered SDR would have flexibility
to specify the modifiers or indicators to allow reporting parties to
submit reports distinguishing corrected trades from new trades and
indicating the actual execution date and time.
    For example: Counterparty B (the reporting party) notices that
there is an error in the reported notional amount of a SBS transaction.
Counterparty B then would be required under proposed Rule 905(a) to
promptly notify the registered SDR to which it originally reported the
trade of the error in the notional amount. Because the notional amount
is one of the data elements that must be reported in real time under
proposed Rule 901(c), the registered SDR would be required to
immediately disseminate a corrected transaction report to the public,
with a notation indicating that it is a corrected trade report.

Request for Comment

    The Commission requests comment on all aspects of the proposed
rules relating to procedures for correcting errors in reported and
disseminated SBS information.
    141. Are the proposed obligations for submitting error reports
sufficiently clear?
    142. Are additional requirements necessary? Are the proposed
requirements adequate to assure that errors are corrected promptly and
corrections are promptly disseminated as appropriate? If not, what
additional procedures should be required?
    143. Do commenters agree with the proposed approach? Why or why
not?
    144. Do commenters agree that error reports should be publicly
disseminated? Why or why not?

VI. Policies and Procedures of Registered SDRs

    In designing a comprehensive system of transaction reporting and
post-trade transparency for all SBS--involving a constantly evolving
market, thousands of participants, and potentially millions of
transactions--the Commission preliminarily believes that it is not
necessary or appropriate for it to specify by rule every detail of how
this system should operate. On some matters, there may not be a single
correct approach for maximizing transparency and price discovery;
rather, it might be more important that there be a coordinated approach
that all market participants understand and adhere to.
    The Commission believes that registered SDRs could play an
important role in developing, operating, and improving the system for
transaction reporting and post-trade transparency in SBS, as laid out
by Congress in the Dodd-Frank Act. Registered SDRs are placed at the
center of the market infrastructure, as the Dodd-Frank Act requires all
SBSs, whether cleared or uncleared, to be reported to them.\121\ The
Commission preliminarily believes that some reasonable flexibility
should be given to registered SDRs to carry out their functions--by,
for example, being able to specify data formats, connectivity
requirements, and other protocols for submitting information to them.
The Commission's intent is to set out broad principles that registered
SDRs and their participants would be required to follow, while
providing registered SDRs with flexibility in determining the precise
means of doing so.
---------------------------------------------------------------------------

    \121\ See 15 U.S.C. 13m(m)(1)(G).
---------------------------------------------------------------------------

    As discussed more fully below, a registered SDR would be required
to establish and maintain certain policies and procedures, including
policies and procedures to: (1) Enumerate the specific data elements of
SBS or life cycle event that a reporting party must report; (2) specify
one or more acceptable data formats, connectivity requirements, and
other protocols for submitting information; (3) promptly correct
information in its records that is discovered to be erroneous; (4)
determine whether and how life cycle events and other SBSs that may not
accurately reflect the market should be

disseminated; (5) assign or obtain certain unique identifiers; (6)
receive information concerning a participant's ultimate parent and
affiliated entities; and (7) handle block trades.
    A registered SDR also would be required to make its policies and
procedures required by proposed Regulation SBSR publicly available on
its Web site.\122\ This would allow all interested parties to
understand how the registered SDR is utilizing the flexibility it has
in operating the transaction reporting and dissemination system.\123\
The Commission anticipates that participants might make suggestions to
the registered SDR for altering and improving that system, or
developing new policies and procedures to address new products or
circumstances, consistent with the principles set out in proposed
Regulation SBSR. In conclusion, the Commission preliminarily believes
that requiring registered SDRs to adopt and maintain policies and
procedures, as required under proposed Rule 907, would improve
compliance with proposed Regulation SBSR.
---------------------------------------------------------------------------

    \122\ See proposed Rule 907(c).
    \123\ See SDR Registration Proposing Release, supra note 6,
proposed Rule 13n-10. Furthermore, proposed Form SDR would require
all of the policies and procedures required by proposed Regulation
SBSR be submitted by a data repository registering with the
Commission. See SDR Registration Proposing Release, supra note 6,
Exhibit GG to proposed Form SDR.
---------------------------------------------------------------------------

A. Elements of Policies and Procedures

    Proposed Rule 907(a)(1) of Regulation SBSR would require a
registered SDR to establish and maintain written policies and
procedures that enumerate the specific data elements of a SBS or a life
cycle event that a reporting party must report. These data elements
would be required to include, at a minimum, those specified in proposed
Rules 901(c) and (d). The Commission expects that the policies and
procedures adopted under proposed Rule 907(a)(1) would explain to
reporting parties how to report if all the SBS transaction data
required by Rules 901(c) and (d) is being reported simultaneously, and
how to report if responsive data are being provided at separate
times.\124\
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    \124\ In the latter case, the Commission expects that the
registered SDR would provide the reporting party the transaction ID
after the reporting party reports the information required by
proposed Rule 901(c). The reporting party would then include the
transaction ID with its submission of data required by proposed Rule
901(d), thereby allowing the registered SDR to match the real-time
report and the subsequent regulatory report.
---------------------------------------------------------------------------

    Proposed Rule 907(a)(2) would require a registered SDR to establish
and maintain written policies and procedures that specify one or more
acceptable data formats (each of which must be an open-source
structured data format that is widely used by participants),
connectivity requirements, and other protocols for submitting
information. The Commission preliminarily believes that a registered
SDR should have reasonable flexibility to design its systems and
develop ways for participants to input information into those systems.
    Proposed Rule 907(a)(3) would require a registered SDR to establish
and maintain written policies and procedures for specifying how
reporting parties are to report corrections to previously submitted
information, making corrections to information in its records that is
subsequently discovered to be erroneous, and applying an appropriate
indicator to any report required to be disseminated by proposed Rule
905(b)(2), which would denote that the report relates to a previously
disseminated transaction. There could be a number of acceptable ways to
carry out the general directive to correct erroneous information, and
reasonable flexibility should be afforded a registered SDR in this
regard. Use of transaction IDs assigned by the registered SDR would
facilitate this process, as this would offer a clear way for
participants and the registered SDR to refer to an earlier
transaction.\125\ The Commission preliminarily believes that a
registered SDR should be required to have an appropriate means to
confirm that the information provided by the reporting party is indeed
correct.
---------------------------------------------------------------------------

    \125\ See supra Section IV.E.2.
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    Finally, the policies and procedures required by proposed Rule
907(a)(3) would have to address applying an appropriate indicator to
any new transaction report required by proposed Rule 905(b)(2) that the
report relates to a previously disseminated transaction. It is
essential that market observers understand that the transaction report
triggered by proposed Rule 905 does not represent a new transaction,
but merely a correction to a previous transaction. Without some kind of
indication to that effect, market observers could misunderstand the
true state of the market. Therefore, the Commission preliminarily
believes that the registered SDR must apply an appropriate indication
to the publicly disseminated transaction report.
    Proposed Rule 907(a)(4) would require a registered SDR to establish
and maintain written policies and procedures describing how reporting
parties shall report--and, consistent with the enhancement of price
discovery, how the registered SDR shall publicly disseminate--reports
of, and adjustments due to, life cycle events; SBS transactions that do
not involve an opportunity to negotiate any material terms, other than
the counterparty; and any other SBS transactions that, in the
estimation of the registered SDR, do not accurately reflect the market.
As noted above, all SBS transactions must be reported to a registered
SDR, pursuant to proposed Rules 901(c) and (d). However, some SBSs
might not involve arm's-length negotiations that reflect competitive
price discovery.\126\ Similarly, there might be no price discovery in
the case of an assignment where the new counterparty to which a SBS is
assigned has no opportunity to negotiate a different price. Proposed
Rule 907(a)(4) would provide some flexibility to a registered SDR
regarding how to publicly disseminate transaction reports for such
SBSs. The registered SDR could determine in some cases that an
indication should be provided that explains the circumstances. Publicly
disclosed policies and procedures would permit market observers to
understand which indicators applied to which circumstances. The
Commission expects that the policies and procedures would direct
reporting parties to provide additional information to the registered
SDR about the existence of such circumstances. Furthermore, the
Commission preliminarily believes that all transactions reported late
(i.e., over 15 minutes after time of execution) should bear an
indicator so that market participants know that the transaction was
reported late. While there is likely to be value in disseminating the
transaction report, all market participants should understand that the
report is no longer timely and thus would not reflect the current
market at the time of dissemination.
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    \126\ This could be the case, for example, with an inter-
affiliate transfer.
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    Finally, the policies and procedures required by proposed Rule
907(a)(4) would be required to address applying an appropriate
indicator to reports of, and adjustments due to, life cycle events. As
with corrected transaction reports, it is essential that market
observers understand that the transaction report triggered by a life
cycle event does not represent a new transaction, but merely a change
to the terms of a previously executed SBS. Without an indicator to that
effect, market observers could misunderstand the true state of the
market. Therefore, the Commission preliminarily believes that the
registered SDR must apply an appropriate indicator to the publicly
disseminated transaction report.

    Proposed Rule 907(a)(5) would require a registered SDR to establish
and maintain written policies and procedures for assigning: (1) A
transaction ID to each SBS that is reported to it; and (2) UICs
established by or on behalf of an IRSB (or, if such UICs are not yet
able to be so assigned, for assigning UICs in a consistent manner using
its own methodology). Proposed Rule 907(a)(6) would require a
registered SDR to establish and maintain written policies and
procedures for periodically obtaining from each participant information
that identifies the participant's ultimate parent(s) and any other
participant(s) with which the counterparty is affiliated, using
ultimate parent IDs and participant IDs. The Commission expects that
the registered SDR's policies and procedures would address the
relationship between itself and an IRSB, and how UICs could be obtained
from the IRSB or an agent or other person acting on its behalf.
Furthermore, the Commission expects that, if an IRSB exists and the
registered SDR is using UICs assigned by that IRSB or on its behalf,
the registered SDR's policies and procedures should explain how a
participant could obtain applicable UICs from the IRSB. To the extent
that the IRSB cannot provide certain UICs required of a participant by
proposed Regulation SBSR, the registered SDR's policies and procedures
would be required to explain the process by which a participant could
obtain such UICs from the registered SDR.
    Proposed Rule 907(d) would require a registered SDR to review and,
as necessary, update its policies and procedures required by proposed
Regulation SBSR at least annually, and to indicate the date on which
they were last reviewed. Periodic review should help ensure that a
registered SDR's policies and procedures remain well-functioning over
time. Indicating the date on which the policies and procedures were
last reviewed would allow regulators and market participants to
understand which version of the policies and procedures are current.
The Commission is proposing recordkeeping and retention rules for
registered SDRs in a separate rulemaking.\127\ Prior versions of a
registered SDR's policies and procedures would be records under that
proposed rule, and thus would be required to be retained in accordance
with those rules. Access to these records would permit the Commission,
when conducting a review of past actions, to understand what policies
and procedures were in force at the time.
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    \127\ See SDR Registration Proposing Release, supra note 6,
proposed Rule 13n-7 under the Exchange Act.
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    Proposed Rule 907(e) would require a registered SDR to have the
capacity to provide to the Commission, upon request, information or
reports related to the timeliness, accuracy, and completeness of data
reported to it pursuant to proposed Regulation SBSR and the registered
SDR's policies and procedures thereunder.\128\ Under Title VII of the
Dodd-Frank Act, the Commission is responsible for regulating and
overseeing the SBS market. The Commission preliminarily believes that,
to carry out this responsibility, it could be valuable to obtain
information from each registered SDR related to the timeliness,
accuracy, and completeness of data reported to it. Required data
submissions that are untimely, inaccurate, or incomplete could
compromise the regulatory data that the Commission would utilize to
carry out its oversight responsibilities. Furthermore, required data
submissions that are untimely, inaccurate, or incomplete could diminish
the value of publicly disseminated reports that promote transparency
and price discovery. Information or reports provided to the Commission
by a registered SDR related to the timeliness, accuracy, and
completeness of data could assist the Commission in examining for
compliance with proposed Regulation SBS and in bringing enforcement or
other administrative actions as necessary and appropriate.
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    \128\ See id., proposed Rule 13n-8 under the Exchange Act
(requiring every registered SDR to promptly report to the
Commission, in a form and manner acceptable to the Commission, such
information as the Commission determines to be necessary or
appropriate for the Commission its duties under the Exchange Act and
the rules and regulations thereunder).
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Request for Comment

    The Commission requests comment on all aspects of the proposed
policies and procedures for registered SDRs.
    145. Do commenters agree, overall, with the proposed policies and
procedures for registered SDRs? Why or why not?
    146. Should proposed Rule 907 specify more detailed elements to be
included in the required policies and procedures? If so, what should
those elements be? Or, are the proposed policies and procedures too
prescriptive? If so, in what way(s)?
    147. Should a registered SDR have flexibility to specify acceptable
data formats, connectivity requirements, and other protocols for
submitting information? Why or why not? Are there disadvantages to this
approach? If so, how should they be addressed?
    148. Should all acceptable data formats be open-source structured
data formats? What data formats are currently in use by SDRs? Would
they qualify as open-source structured data formats?
    149. Assuming special indicators on certain publicly disseminated
trade reports may be necessary, do commenters agree that a registered
SDR should have the flexibility to determine and apply those
indicators? If not, can commenters suggest another system for assigning
relevant indicators?
    150. What kinds of special circumstances would warrant indicators
for public dissemination? What should those indicators be? How should
they be reflected on the publicly disseminated trade report?
    151. Should inter-affiliate transactions be publicly disseminated
with an indicator? Should they be disseminated at all? Why or why not?
    152. Should portfolio compressions and terminations be publicly
disseminated with an indicator? Should they be disseminated at all? Why
or why not?
    153. Should a registered SDR have the flexibility to determine
whether a SBS transaction does not accurately reflect the market or
would not enhance price discovery if disseminated? If so, how should
the registered SDR exercise such flexibility? What criteria should it
use? What are examples of transactions that commenters believe should
be reported to a registered SDR but should not be publicly
disseminated? Why should they not be publicly disseminated?
    154. Multi-lateral netting and portfolio compression are post-trade
processes designed to reduce gross exposure and leave only net
exposure. These processes typically entail the termination of open
contracts and the establishment of new contracts representing only the
net position. How, if at all, should SBSs related to multi-lateral
netting and portfolio compression be reported to and disseminated by a
registered SDR? What if the netting involves a payment that is
determined by market value?
    155. How should a registered SDR's policies and procedures address
the use of UICs assigned under the auspices of a voluntary consensus
standards body?
    156. What are the costs for registered SDRs to adopt and implement
the proposed policies and procedures? What are the benefits of
requiring registered SDRs to adopt and implement these policies and
procedures?
    157. Should a data repository seeking to register with the
Commission be

required to provide the policies and procedures required by proposed
Rule 907 as part of its Form SDR submission?

VII. Policies and Procedures of SBS Dealers and Major SBS Participants

    For the proposed SBS reporting requirements established by the
Dodd-Frank Act to achieve the objective of enhancing price transparency
and providing regulators with access to data to help carry out their
oversight responsibilities, the information that participants provide
to registered SDRs must be reliable. Accordingly, proposed Rule 906(c)
would require a participant that is a SBS dealer or major SBS
participant to establish, maintain, and enforce written policies and
procedures that are reasonably designed to ensure compliance with the
SBS transaction reporting obligations set forth in proposed Regulation
SBSR and the policies and procedures of any registered SDR in which it
is a participant. Such policies and procedures are intended to provide
a system of controls that facilitate complete and accurate reporting of
SBS information by these participants, consistent with their
obligations under the Dodd-Frank Act and proposed Regulation SBSR.
    The Commission believes that proposed Rule 906(c) should result in
greater accuracy and completeness of reported SBS transaction data.
Without written policies and procedures, compliance with reporting
obligations may depend too heavily on key individuals or unreliable
processes. The Commission believes that requiring participants that are
SBS dealers or major SBS participants to establish written policies and
procedures should promote clear, reliable reporting that can continue
independent of any specific individuals. The Commission further
believes that requiring such participants to adopt and maintain
policies and procedures relevant to their reporting responsibilities,
as required under proposed Rule 906(c), would help to improve the
degree and quality of overall compliance with the reporting
requirements set out in proposed Regulation SBSR.
    The policies and procedures required by proposed Rule 906(c) should
be designed to foster compliance with the real-time reporting
requirements specified in proposed Rule 901(c), as well as the
additional reporting requirements specified in proposed Rules 901(d)
and (e). These policies and procedures, among other things, should
address: (1) The reporting process and designation of responsibility
for reporting SBS transactions; (2) the process for systematizing
orally negotiated SBS transactions; (3) OMS outages or malfunctions,
and when and how backup systems are to be used in connection with
required reporting; (4) verification and validation of all information
relating to SBS transactions reported to a registered SDR; (5) a
training program for employees responsible for SBS transaction
reporting; (6) control procedures relating to SBS transaction reporting
and designation of personnel responsible for testing and verifying such
policies and procedures; and (7) reviewing and assessing the
performance and operational capability of any third party that carries
out any duty required by proposed Regulation SBSR on behalf of the
entity.\129\
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    \129\ See supra Section II.B (noting that proposed Rule 901
would not prohibit a reporting party from having a third-party agent
carry out reporting duties on its behalf).
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    Each participant that is a SBS dealer or major SBS participant also
would be required to review and, as needed, update its policies and
procedures at least annually.\130\ Periodic review should help ensure
that a participant's policies and procedures remain well functioning
over time.
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    \130\ See proposed Rule 906(c).
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    The value of requiring policies and procedures in promoting
regulatory compliance is well-established. For example, internal
control systems have long been used to strengthen the integrity of
financial reporting. Congress recognized the importance of internal
control systems in the Foreign Corrupt Practices Act, which requires
public companies to maintain a system of internal accounting
controls.\131\ Broker-dealers also must maintain policies and
procedures for various purposes.\132\ The Commission preliminarily
believes that requiring participants that are SBS dealers or major SBS
participants to adopt and maintain policies and procedures designed to
promote compliance with proposed Regulation SBSR and the policies and
procedures of any registered SDR of which it is a participant would be
consistent with Congress's goals in adopting the Dodd-Frank Act.
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    \131\ See 15 U.S.C. 78m(b)(2)(B).
    \132\ See, e.g., FINRA Conduct Rule 3010(b) (requiring FINRA
member broker-dealers to establish and maintain written procedures
''that are reasonably designed to achieve compliance with applicable
securities laws and regulations, and the applicable Rules of [the
NASD]''; FINRA Conduct Rule 3012 (requiring FINRA member broker-
dealers to establish and maintain written supervisory procedures to
ensure that internal policies and procedures are followed and
achieve their intended objectives).
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Request for Comment

    The Commission requests comment on all aspects of the proposed
requirement that participants that are SBS dealers or major SBS
participants establish policies and procedures.
    158. Do commenters think proposed Rule 906(c) is necessary? Would
SBS dealers and major SBS participants otherwise implement written
policies and procedures to ensure compliance with the reporting
obligations in proposed Regulation SBSR?
    159. Should proposed Rule 906(c) specify elements to be included in
the required policies and procedures, such as those discussed above? If
so, what elements should be included in the proposed rule, and why?

VIII. Jurisdictional Matters

    Proposed Rule 908 is designed to clarify the application of
proposed Regulation SBSR to cross-border SBS transactions and to non-
U.S. persons.\133\
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    \133\ See proposed Rule 900 (defining ``U.S. person'' to mean a
natural person that is a U.S. citizen or U.S. resident or a legal
person that is organized under the corporate laws of any part of the
United States or has its principal place of business in the United
States).
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A. When is a SBS subject to Regulation SBSR?

    Proposed Rule 908(a) would require a SBS to be reported if the SBS:
(1) Has at least one counterparty that is a U.S. person; (2) was
executed in the United States or through any means of interstate
commerce; or (3) was cleared through a registered clearing agency
having its principal place of business in the United States. In
addition, any SBS that is required to be reported to a registered SDR
pursuant to proposed Rule 908(a) also would be required to be publicly
disseminated by the registered SDR. The Commission preliminarily
believes that, if there are sufficient jurisdictional ties to the
United States to warrant reporting of the SBS, other market
participants should have knowledge of the SBS transaction.
    The Commission preliminarily believes that, if a U.S. person
executes a SBS anywhere in the world, that SBS should be reported to a
registered SDR, pursuant to proposed Regulation SBSR. Because the U.S.
person is assuming risk, U.S. regulators have an interest in ensuring
that they have appropriate knowledge of the transaction. The Commission
notes that it is proposing to define ``U.S. person'' in proposed Rule
900 to mean ``a natural person that is a U.S. citizen or U.S. resident
or a legal person that is organized under the corporate laws of any
part of the United States or has its principal place of

business in the United States.'' The Commission intends for this
proposed definition to include branches and offices of U.S. persons.
Because a branch or office has no separate legal existence under
corporate law, the branch or office would be an integral part of the
U.S. person itself.
    A SBS also would have to be reported if the SBS were executed in
the United States or through any means of interstate commerce. For
example, even if both counterparties are not U.S. persons, U.S.
regulators have a strong interest in having knowledge of and being able
to regulate any activity conducted within the United States or through
any means of interstate commerce.
    Under proposed Rule 908(a)(3), a SBS would have to be reported
pursuant to proposed Regulation SBSR--even if both counterparties are
not U.S. persons--if the SBS were cleared through a clearing agency
having its principal place of business in the United States. It is
possible that two counterparties, neither of whom is a U.S. person,
could execute a SBS outside the United States, but clear the SBS
through a clearing agency having its principal place of business in the
United States. The Commission preliminarily believes that such SBS
should be reported to a registered SDR. If a SBS is cleared by a
clearing agency having its principal place of business in the United
States, U.S. regulators should have access to information regarding the
SBS through a registered SDR.\134\ Moreover, if non-U.S. persons