enter into new documentation with clients, where there is potential
for security-based swap reporting obligations to arise.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and has
modified Rule 15Fi-5(b)(1), such that the required policies and
procedures no longer need to be reasonably designed to ensure that the
trading relationship documentation include terms governing applicable
regulatory reporting obligations. In particular, the comments we
received indicated that the inclusion of the proposed requirement would
not serve as a basis for potentially addressing the SDR verification
issue, and that such requirement would introduce additional burdens on
SBS Entities, which commenters asserted were not justified in light of
the fact that the expected benefits the Commission referred to in the
Proposing Release were already addressed by other requirements, namely
in certain aspects of Regulation SBSR.\113\
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    \113\ See id. For example, ISDA and SIFMA stated that
``Regulation SBSR establishes which parties to the trade have a
reporting obligation without the need for any further contractual
agreement among the parties.'' As such, requiring that an SBS
Entity's trading relationship documentation include terms governing
applicable regulatory reporting obligations would be both redundant
with, and an expansion of, the requirements in Regulation SBSR.
---------------------------------------------------------------------------

    In addition, pursuant to Rule 15Fi-5(b)(2), all trade
acknowledgements and verifications of security-based swap transactions
required under Rule 15Fi-2 will be deemed to be security-based swap
trading relationship documentation, as they often may contain one or
more terms contemplated by the policies and procedures required by Rule
15Fi-5. Further, the Commission understands that in some transactions,
the parties may choose to document their trading relationship by using
a stand-alone ``long-form confirmation'' that includes all of the terms
governing the relationship. Rule 15Fi-5 is not intended to interfere
with this practice. Accordingly, we believe that the use of a ``long-
form confirmation'' would comply with Rule 15Fi-5 so long as such
document is: (1) In written form and includes all of the elements of
the trading relationship required under the rule (whether by
incorporating them by reference from a standard master agreement or by
expressly restating them in the confirmation) and (2) executed prior
to, or contemporaneously with, the execution of each relevant security-
based swap.
    Pursuant to Rule 15Fi-5(b)(3), the policies and procedures required
by Rule 15Fi-5(a)(2) also need to provide that the security-based swap
trading relationship documentation include credit support arrangements.
Such credit support arrangements must

contain, in accordance with applicable requirements under regulations
adopted by the Commission or any prudential regulators,\114\ and
without limitation, the following:
---------------------------------------------------------------------------

    \114\ See supra note 73.
---------------------------------------------------------------------------

     initial and variation margin requirements, if any;
     types of assets that may be used as margin and asset
valuation haircuts, if any;
     investment and re-hypothecation terms for assets used as
margin for uncleared security-based swaps, if any; and
     custodial arrangements for margin assets, including
whether margin assets are to be segregated with an independent third
party, in accordance with the notice requirement in Section 3E(f)(1)(A)
of the Exchange Act (and either 17 CFR 240.15c3-3(p)(4)(i) (Rule 15c3-
3(p)(4)(i)) or Rule 18a-4(d)(1) thereunder, as applicable), if
any.\115\
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    \115\ See 15 U.S.C. 78c-5(f). Consistent with the Commission's
goal of ensuring that these final rules are harmonized with the
corresponding CFTC requirements wherever possible, the requirements
in Rule 15Fi-5(b)(3) are identical to CFTC Rule Sec.  23.504(b)(3),
other than a cross-reference in the latter to CFTC Rule part 701
which, among other things, requires that a Swap Entity notify its
counterparty to an uncleared swap transaction that the counterparty
has the right to require that any initial margin the counterparty
provides in connection with such transaction be segregated in
accordance with the CFTC's segregation requirements. On March 28,
2019, the CFTC amended certain parts of Rule part 701, including by
modifying the timing requirements applicable to the required
notices. See Segregation of Assets Held as Collateral in Uncleared
Swap Transactions, 84 FR 12894 (Apr. 3, 2019). In addition, the
Commission has made technical edits to Rule 15Fi-5(b)(3) to
incorporate the applicable pinpoint citation in Section 3E(f)(1)(a)
of the Exchange Act and to reference the specific rules the
Commission recently adopted pursuant to that statutory authority.
---------------------------------------------------------------------------

    As the Commission has previously explained, ensuring that uncleared
OTC derivatives transactions are appropriately collateralized was one
of the key elements of the Title VII reforms.\116\ Accordingly,
requiring that an SBS Entity's policies and procedures be reasonably
designed to ensure that the counterparties clearly document the
applicable processes and requirements for calculating and exchanging
margin in connection with a security-based swap transaction is an
important step in achieving this broader regulatory objective.\117\
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    \116\ See supra Section I.
    \117\ Also in furtherance of harmonizing these final rules with
the corresponding CFTC requirements, we note that in adopting Title
VII capital, margin, and segregation requirements in June 2019, the
Commission crafted certain margin requirements, including rules
regarding third-party custodian and netting or collateral
agreements, such that existing agreements with counterparties
entered into for purposes of the corresponding CFTC documentation
rules will be sufficient for purposes of the Commission's margin
rules, if the agreements meet the requirements of the applicable
Commission rules. See Capital, Margin, and Segregation Adopting
Release, 84 FR at 43894, 43909, and 43928, n. 570. Nevertheless, the
Commission encourages registrants or potential registrants who have
concerns regarding the need to revise their existing documentation
solely due to the operation of Rule 15Fi-5 to consult with the staff
of the Commission.
---------------------------------------------------------------------------

    At the same time, however, the Commission notes that the
requirement in Rule 15Fi-5(b)(3) is intended to be complementary to,
and not conflict with, our existing margin requirements, particularly
Rule 18a-3. That rule, which the Commission adopted in June 2019,
prescribes margin requirements for non-bank SBS Entities with respect
to uncleared security-based swaps. Although Rule 18a-3 does not contain
specific margin documentation requirements, paragraphs (c)(4) and (5)
contain requirements related to the use of collateral and netting
agreements.\118\ Rule 18a-3 also contains an exception to the
requirement to collect initial margin when the initial margin amount
plus all other credit exposures resulting from uncleared swaps and
security-based swaps of the SBS Entity and its affiliates with the
counterparty and its affiliates does not exceed $50 million.
Recognizing that counterparties may need time after breaching that $50
million threshold to execute agreements to address the posting of
initial margin, the rule also permits an SBS Entity to defer collecting
initial margin from a counterparty for two months after the month in
which the counterparty does not qualify for the $50 million threshold
exception for the first time.\119\ Accordingly, the Commission is
confirming that an SBS Entity that is not collecting initial margin
from a counterparty pursuant to the exception in Rule 18a-
3(c)(1)(iii)(H) (including the one-time two-month deferral period after
breaching the $50 million threshold) would not be required to have a
collateral agreement or a netting agreement in place, solely with
respect to the collection of initial margin, for purposes of both Rule
18a-3 and Rule 15Fi-5(b)(3).\120\
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    \118\ See 17 CFR 240.18a-3(c)(4) and (5). See also Capital,
Margin, and Segregation Adopting Release, 84 FR at 43909, n. 334.
    \119\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43926.
    \120\ By contrast, the uncleared swap margin rules adopted by
the CFTC and the prudential regulators do contain specific margin
documentation requirements. See Capital, Margin, and Segregation
Adopting Release, 84 FR at 43909, n. 335. However, CFTC staff issued
an advisory on July 9, 2019 clarifying that the CFTC's margin rules
do not require documentation governing the posting, collection and
custody of initial margin until the initial margin threshold amount
exceeds $50 million. See CFTC Letter No. 19-16 (Jul. 9, 2019),
available at: https://www.cftc.gov/PressRoom/PressReleases/7960-19.
Similarly, the prudential regulators recently proposed amendments to
their margin rules for uncleared swaps and security-based swaps
that, among other things, would clarify that covered entities
subject to those rules are not required to execute initial margin
trading documentation with a counterparty prior to the time they are
required to collect or post initial margin pursuant to the rule. See
Margin and Capital Requirements for Covered Swap Entities, 84 FR
59970, 59977 (Nov. 7, 2019). Finally, BCBS and IOSCO issued a
statement on March 5, 2019, also clarifying their recommended view
that documentation should not be required if the bilateral initial
margin amount does not exceed [euro]50 million, and further noting
that ``[i]t is expected, however, that covered entities will act
diligently when their exposures approach the threshold to ensure
that the relevant arrangements needed are in place if the threshold
is exceeded.'' See BCBS/IOSCO statement on the final implementation
phases of the Margin requirements for non-centrally cleared
derivatives (Mar. 5, 2019), available at: https://www.bis.org/press/p190305a.htm.
---------------------------------------------------------------------------

2. Rule 15Fi-5(b)(4): Documenting Valuation Methodologies
    As discussed in Section I, ensuring that security-based swaps are
accurately valued throughout the duration of a contract should play an
important role in protecting the integrity of the OTC derivatives
market, both at the level of an individual participant and systemically
across the broader financial market.\121\ Accordingly, Rule 15Fi-
5(b)(4) requires that the applicable policies and procedures provide
that the relevant swap trading relationship documentation between
certain types of counterparties include written documentation in which
the parties agree on the process, which may include any agreed upon
methods, procedures, rules, and inputs, for determining the value of
each security-based swap at any time from execution to the termination,
maturity, or expiration of such security-based swap for the purposes of
complying with the margin requirements under Section 15F(e) of the
Exchange Act (and applicable regulations),\122\ and the risk management
requirements under Section 15F(j) of the Exchange Act (and applicable
regulations).\123\ To the maximum extent practicable, such valuations
need to be based on recently executed transactions, valuations

provided by independent third parties, or other objective criteria.
---------------------------------------------------------------------------

    \121\ See id.
    \122\ See 15 U.S.C. 78o-10(e). For the avoidance of doubt, the
requirements in Rule 15Fi-5(b)(4) are intended to facilitate
agreement between an SBS Entity and its counterparty as to how they
will determine the value of a security-based swap in order to, among
other things, comply with the margin requirements promulgated by
either the Commission or, with respect to an SBS Entity that is a
bank, the applicable prudential regulator. These requirements are
not intended in any way to supersede those underlying margin
requirements.
    \123\ See 15 U.S.C. 78o-10(j).
---------------------------------------------------------------------------

    The requirements in Rule 15Fi-5(b)(4) regarding valuation
methodology apply to security-based swap trading relationship
documentation entered into between: (1) Two SBS Entities; (2) an SBS
Entity and a ``financial counterparty;'' and (3) an SBS Entity and any
other counterparty, if requested by such counterparty. Accordingly, we
are also revising proposed Rule 15Fi-1 to add, as paragraph (g), a
definition of ``financial counterparty,'' which includes any
counterparty that is not an SBS Entity and that is one of the
following:
     A swap dealer;
     a major swap participant;
     a commodity pool as defined in Section 1a(10) of the
Commodity Exchange Act (7 U.S.C. 1a(10));
     a private fund as defined in Section 202(a)(29) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a));
     an employee benefit plan as defined in paragraphs (3) and
(32) of Section 3 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1002); and
     a person predominantly engaged in activities that are in
the business of banking or, in activities that are financial in nature,
as defined in Section 4(k) of the Bank Holding Company Act of 1956 (12
U.S.C. 1843k).\124\
---------------------------------------------------------------------------

    \124\ The corresponding definition in CFTC Rule Sec.  23.500(e)
is referred to as a ``financial entity.'' We replaced the word
``entity'' with ``counterparty'' to avoid any confusion due to the
fact that there are other definitions of ``financial entity'' within
the Exchange Act and its implementing regulations. For example, term
``financial entity'' is used in Section 3C(g) of the Exchange Act
for purposes of the statutory exception to the mandatory clearing
requirement in Title VII. See 15 U.S.C. 78c-3(g)(3). Similarly,
there is a definition of ``financial entity'' in Rule 3a67-6 under
the Exchange Act, which is used for one of the tests for determining
a person's status under the definition of ``major security-based
swap participant'' in Section 3(a)(67) of the Exchange Act. See 15
U.S.C. 78. Other than the different titles, we do not believe that
there are any substantive differences between the CFTC's definition
of ``financial entity'' and the definition of ``financial
counterparty'' in Rule 15Fi-1(g).
---------------------------------------------------------------------------

    Further, Rule 15Fi-5(b)(4)(ii) is intended to help ensure that the
required valuation documentation between SBS Entities and their
counterparties contains sufficient guidance and information in the
event of a problem with determining the value of a security-based swap.
Specifically, the documentation required by the applicable policies and
procedures must include either: (1) Alternative methods for determining
the value of the security-based swap for the purposes of complying with
Rule 15Fi-5(b)(4) in the event of the unavailability or other failure
of any input required to value the security-based swap for such
purposes; or (2) a valuation dispute resolution process by which the
value of the security-based swap shall be determined for the purposes
of complying with the rule.
    To the extent that the prescribed valuation documentation needs to
be updated, revised, or otherwise modified, Rule 15Fi-5(b)(4)(iv)
provides that the parties may agree on changes or procedures for
modifying or amending such documentation at any time.\125\ Finally,
because valuation data and methodologies often include, or may be based
on, private information, Rule 15Fi-5(b)(4)(iii) makes clear that an SBS
Entity is not required to disclose to the counterparty confidential,
proprietary information about any model it may use to value a security-
based swap.
---------------------------------------------------------------------------

    \125\ The text of CFTC Rule Sec.  23.504(b)(4)(iv), which is the
corresponding subsection under CFTC rules, provides that ``[t]he
parties may agree on changes or procedures for modifying or amending
the documentation required by this paragraph at any time.'' Rule
15Fi-5(b)(4)(iv) does not contain the phrase ``required by this
paragraph.'' We view this to be solely a technical change and do not
intend for it to represent a substantive deviation from the
corresponding CFTC rule. Rather, the difference is intended to avoid
any suggestion that the parties could amend the underlying
requirements contained in Rule 15Fi-5(b)(4).
---------------------------------------------------------------------------

3. Rule 15Fi-5(b)(5) and (6): Other Disclosure Requirements
    Rule 15Fi-5 also requires that the policies and procedures
governing the applicable trading relationship documentation require an
SBS Entity and its counterparty to disclose to each other certain
information regarding their legal and bankruptcy status, and to include
a statement regarding the status of a security-based swap if accepted
for clearing by a central counterparty (``CCP''). The first requirement
relates to whether the SBS Entity or its counterparty is subject to a
particular legal regime in the event of its failure, such as FDIC
receivership for banks or orderly liquidation for certain financial
companies that meet the requirements set forth in Title II of the Dodd-
Frank Act.\126\ As background, Title II of the Dodd-Frank Act provides
for an alternative insolvency regime for the ``orderly liquidation'' of
large financial companies,\127\ including broker-dealers, that meet
specified criteria (each a ``covered financial company'') as set forth
in Title II of the Dodd-Frank Act.\128\ If the covered financial
company is (1) a broker or dealer and (2) a member of the Securities
Investor Protection Corporation (``SIPC''), such ``covered broker or
dealer'' would be placed into an orderly liquidation proceeding with
the FDIC appointed as receiver.\129\ Because this orderly liquidation
process, which was modeled on the receivership process used for failed
banks, is different from the liquidation regimes established under the
Securities Investor Protection Act of 1970 \130\ or by the U.S.
Bankruptcy Code,\131\ the Commission believes it to be appropriate to
require counterparties to a security-based swap transaction to disclose
to each other whether this alternative regime may potentially apply in
the event of an insolvency.
---------------------------------------------------------------------------

    \126\ See 12 U.S.C. 5382; 12 U.S.C. 5383.
    \127\ The term ``financial company'' is defined in 12 U.S.C.
5381(a)(11) to include any company (as defined in 12 U.S.C.
5381(a)(5)) that--
    (A) is incorporated or organized under any provision of Federal
law or the laws of any State;
    (B) is--
    (i) a bank holding company (as defined in 12 U.S.C. 1841(a));
    (ii) a nonbank financial company supervised by the Federal
Reserve Board;
    (iii) any company that is predominantly engaged in activities
that the Federal Reserve Board has determined are financial in
nature or incidental thereto for purposes of 12 U.S.C. 1843(k)
(other than a company described in clause (i) or (ii)); or
    (iv) any subsidiary of any company described in any of clauses
(i) through (iii) that is predominantly engaged in activities that
the Federal Reserve Board has determined are financial in nature or
incidental thereto for purposes of 12 U.S.C. 1843(k) (other than a
subsidiary that is an insured depository institution or an insurance
company); and
    (C) is not a Farm Credit System institution chartered under and
subject to the provisions of the Farm Credit Act of 1971, as amended
(12 U.S.C. 2001 et seq.), a governmental entity, or a regulated
entity, as defined under 12 U.S.C. 4502(20).
    \128\ Section 203 of the Dodd-Frank Act sets forth the process
for designating a financial company as a ``covered financial
company.'' In the case of a broker-dealer, or when a financial
company's largest U.S. subsidiary is a broker-dealer, Section
203(a)(1)(B) provides that the Federal Reserve Board and the
Commission (in each case subject to the approval of a two-thirds
majority of each agency's members), in consultation with the FDIC,
may, either on their own initiative or at the request of the
Secretary of the U.S. Treasury (``Secretary''), issue a written
orderly liquidation recommendation to the Secretary. See 12 U.S.C.
5383(a). Section 203(b) requires the Secretary (after consultation
with the President) to take action on the recommendation upon an
affirmative determination that, among other things, the failure of a
financial company would have serious adverse effects on financial
stability in the United States and that taking action under the
orderly liquidation authority with respect to that company would
avoid or mitigate such adverse effects. See 12 U.S.C. 5383(b).
    \129\ See 12 U.S.C. 5384. Section 205(a) of the Dodd-Frank Act
requires the FDIC, as the appointed receiver for any covered broker
or dealer, to appoint SIPC as trustee for the liquidation. See 12
U.S.C. 5385(a).
    \130\ 15 U.S.C. 78aaa et seq.
    \131\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Accordingly, Rule 15Fi-5(b)(5) sets out that each SBS Entity's
policies and procedures must require that security-based swap trading
relationship documentation contain a statement as to whether it or its
counterparty is an

insured depository institution or financial company. Further, the
documentation also must contain a statement that the orderly
liquidation provisions of the Dodd-Frank Act and the Federal Deposit
Insurance Act \132\ may limit the rights of the parties under their
trading relationship documentation should either party be deemed a
``covered financial company'' or is otherwise subject to having the
FDIC appointed as a receiver. The documentation further needs to state
that such limitations relate to the right of the non-covered party to
terminate, liquidate, or net any security-based swap by reason of the
appointment of the FDIC as receiver, notwithstanding the agreement of
the parties in the security-based swap trading relationship
documentation, and that the FDIC may have certain rights to transfer
security-based swaps of the covered party. Finally, the policies and
procedures must require that the trading relationship documentation
contain an agreement between the SBS Entity and its counterparty to
provide notice if either it or its counterparty becomes or ceases to be
an insured depository institution or a financial company.\133\
---------------------------------------------------------------------------

    \132\ 12 U.S.C. 1811 et seq.
    \133\ Specifically, Rule 15Fi-5(b)(5) requires that an SBS
Entity's policies and procedures require that the applicable
security-based swap trading relationship documentation contain:
     A statement of whether the SBS Entity is an insured
depository institution (as defined in 12 U.S.C. 1813) or a financial
company (as defined in Section 201(a)(11) of the Dodd-Frank Act, 12
U.S.C. 5381(a)(11));
     A statement of whether the counterparty is an insured
depository institution or financial company;
     A statement that in the event either the SBS Entity or
its counterparty becomes a covered financial company (as defined in
12 U.S.C. 5381(a)(8)) or is an insured depository institution for
which the FDIC has been appointed as a receiver (the ``covered
party''), certain limitations under Title II of the Dodd-Frank Act
or the Federal Deposit Insurance Act may apply to the right of the
non-covered party to terminate, liquidate, or net any security-based
swap by reason of the appointment of the FDIC as receiver,
notwithstanding the agreement of the parties in the security-based
swap trading relationship documentation, and that the FDIC may have
certain rights to transfer security-based swaps of the covered party
under Section 210(c)(9)(A) of the Dodd-Frank Act, 12 U.S.C.
5390(c)(9)(A), or 12 U.S.C. 1821(e)(9)(A); and
     An agreement between the SBS Entity and its
counterparty to provide notice if either it or its counterparty
becomes or ceases to be an insured depository institution or a
financial company.
---------------------------------------------------------------------------

    Second, pursuant to Rule 15Fi-5(b)(6), the security-based swap
trading relationship documentation subject to the policies and
procedures requirement in Rule 15Fi-5(a)(2) must include certain
information regarding the status of a security-based swap accepted for
clearing by a clearing agency. Specifically, such documentation must
contain a notice that, upon acceptance of a security-based swap by a
clearing agency:
     The original security-based swap is extinguished;
     The original security-based swap is replaced by equal and
opposite security-based swaps with the clearing agency; and
     All terms of the security-based swap shall conform to the
product specifications of the cleared security-based swap established
under the clearing agency's rules.
    The Commission believes that such disclosure provides important
information to counterparties regarding the effects of clearing a trade
at a clearing agency and clarifies the status of the contract following
its acceptance and novation at the clearing agency.
4. Rule 15Fi-5(c): Audit of Security-Based Swap Trading Relationship
Documentation
    Rule 15Fi-5(c) requires each SBS Entity to have an independent
auditor conduct periodic audits sufficient to identify any material
weakness in its documentation policies and procedures required by the
rule. In addition, a record of the results of each audit must be
retained for a period of three years after the conclusion of the
audit.\134\ The Commission believes that requiring periodic audits of a
firm's security-based swap trading relationship documentation is
consistent with sound risk mitigation practices and is designed to
reduce the prevalence of discrepancies during the course of these
transactions. This requirement differs slightly from CFTC Rule Sec.
23.504(c), which references an independent ``internal or external''
auditor.\135\
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    \134\ The three year holding period for these records is
contained in the applicable recordkeeping, reporting, and
notification requirements for SBS Entities, as opposed to in Rule
15Fi-5(c) itself.
    \135\ See 17 CFR 23.504(c).
---------------------------------------------------------------------------

    In their comment letter, ISDA and SIFMA asked the Commission to
clarify that the required auditor can be ``internal or external'' as is
the case in the CFTC rule.\136\ As we stated in the Proposing Release,
the Commission has experience overseeing accounting and auditing
standards in other contexts, particularly as related to certain
disclosure requirements under the federal securities laws.\137\ We also
explained in the Proposing Release that, in those contexts, an internal
auditor typically reports to the management of the applicable entity,
which would be inconsistent with the Commission's auditor independence
rules.\138\ Accordingly, we have determined not to modify Rule 15Fi-
5(c) in the manner requested by the commenters because it appears that
an internal auditor would not typically be independent as contemplated
in the Commission's auditor independence rules. However, and as noted
in the Proposing Release, we also are not necessarily foreclosing the
possibility that there could be alternative structures to the typical
``internal'' auditor employment relationship that, if structured
properly, could be consistent with the Commission's auditor
independence rules.\139\
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    \136\ See ISDA/SIFMA Letter.
    \137\ See Proposing Release, 84 at 4630 (referencing See 17 CFR
210.2-01(c)(2) (Rule 2-01(c)(2) of Regulation S-X) (Employment
Relationships)).
    \138\ See id.
    \139\ See Proposing Release, 84 at 4630 n. 105. In the request
for comment on this issue, we also asked commenters to identify and
describe such potential structures. We did not receive any
information responsive to that request.
---------------------------------------------------------------------------

5. Exceptions to the Trading Relationship Documentation Requirements
    Rule 15Fi-5(a)(1) contains three different exceptions from the
basic requirement that each SBS Entity establish, maintain, and follow
written policies and procedures reasonably designed to ensure that it
executes written security-based swap trading relationship documentation
with each of its counterparties prior to, or contemporaneously with,
executing a security-based swap with any counterparty. First, Rule
15Fi-5(a)(1)(i) provides an exception for security-based swaps executed
prior to the date on which an SBS Entity is required to be in
compliance with the documentation rule. Although the Commission
recognizes the significant risk mitigation benefits associated with
ensuring that all transactions are supported by comprehensive and
accurate documentation, we also understand that it may be impractical
to require SBS Entities to have policies and procedures to bring
existing transactions into compliance with these rules, particularly
when weighing any potential benefits of doing so against the potential
costs.\140\ Accordingly, we believe that those transactions should be

excepted from the documentation requirements.\141\
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    \140\ When the CFTC adopted a similar exception in 2012, it
acknowledged the views of commenters that applying CFTC Rule Sec.
23.504 retroactively to existing swaps would be time consuming and
costly for Swap Entities due to them needing to make amendments to
existing documentation. See CFTC Risk Mitigation Adopting Release,
77 FR at 55950.
    \141\ As discussed in detail in Section II.F.1 of this release,
the Commission also is amending Rules 17a-4 and 18a-6 under the
Exchange Act to, among other things, require SBS Entities to retain
all security-based swap trading relationship documentation with
counterparties required to be created under Rule 15Fi-5. Because
security-based swaps executed prior to the compliance date for Rule
15Fi-5 would be exempt from the underlying documentation
requirement, any trading relationship documentation voluntarily
entered into in respect of those transactions would not be deemed to
have been created pursuant to Rule 15Fi-5.
---------------------------------------------------------------------------

    To the extent that an SBS Entity maintains an existing security-
based swap portfolio with a counterparty that pre-dates the compliance
date, Rule 15Fi-5(a)(1)(i) provides an exception from the documentation
requirements only with respect to those existing transactions. This
means that the SBS Entity would not be in violation of Rule 15Fi-5
solely as a result of having policies and procedures that do not
require such SBS Entity to have executed written security-based swap
trading relationship documentation with any counterparty with respect
to those existing transactions, or if the existing documentation that
it maintains with the counterparty does not otherwise comply with the
requirements of the rule. However, if the SBS Entity enters into new
security-based swap transactions with that same counterparty, the
exception would not apply to those new transactions, even if
noncompliant trading relationship documentation already existed. Under
those circumstances, the SBS Entity's policies and procedures will need
to be reasonably designed to ensure that the existing documentation
complies with the rule before using it as the basis to enter into any
new security-based swaps with that counterparty.
    Second, Rule 15Fi-5(a)(1)(ii) provides an exception for any
security-based swap that is, directly or indirectly, submitted to and
cleared by a clearing agency registered pursuant to Section 17A of the
Exchange Act or by a clearing agency that the Commission has exempted
from registration by rule or order pursuant to Section 17A of the
Exchange Act.\142\ We included this exception in recognition of the
fact that, once a security-based swap is cleared, the transaction is
governed primarily by the terms of the agreements in effect between the
clearing member and the clearing agency (as well as between the
clearing member and its customer, if applicable). This exception has
been modified from the proposal, as described in detail in Section
II.A.6.
---------------------------------------------------------------------------

    \142\ See supra note 85 and accompanying text.
---------------------------------------------------------------------------

    Finally, Rule 15Fi-5(a)(1)(iii) provides an exception for security-
based swaps executed anonymously on a national securities exchange or a
security-based swap execution facility (``SB SEF''), provided that:
     Such security-based swaps are intended to be cleared and
are actually submitted for clearing to a clearing agency;
     All terms of such security-based swaps conform to the
rules of the clearing agency; and
     Upon acceptance of such security-based swap by the
clearing agency: (1) The original security-based swap is extinguished;
(2) the original security-based swap is replaced by equal and opposite
security-based swaps with the clearing agency; and (3) all terms of the
security-based swap shall conform to the product specifications of the
cleared security-based swap established under the clearing agency's
rules.
    The exception in Rule 15Fi-5(a)(1)(iii) is intended to recognize
the fact that the documentation requirements may be largely impossible
to comply with in the context of cleared anonymous transactions
because, by definition, the parties to these transactions would not
know the identity their counterparties. Therefore, trading relationship
documentation with any such counterparty would be unnecessary and
impractical.
    The exception provided for in Rule 15Fi-5(a)(1)(iii) is limited--
and therefore distinguishable from the exception for cleared security-
based swap transactions--in one important respect to account for
instances where a transaction is not accepted for clearing following
its submission. For example, an SBS Entity may enter into a security-
based swap transaction on an anonymous basis on a national securities
exchange or an SB SEF, fully intending for the transaction to be
submitted to, and cleared by, a clearing agency. In some cases, the
transaction may be rejected by the clearing agency for reasons which
the SBS Entity did not know prior to its submission, such as possible
operational or clerical errors or if one of the clearing members
unintentionally exceeded its clearing limits. If a bilateral
transaction continues to exist between the two counterparties (who
would no longer be unknown to each other), written trading relationship
documentation governing that transaction might not exist between them.
    The Commission believes that under those circumstances the
objectives of Rule 15Fi-5 would not be satisfied if the SBS Entity and
its counterparty did not ultimately have written agreement on the terms
of the remaining security-based swap transaction. At the same time,
however, because the transaction was initially entered into on an
anonymous basis, the two sides might need additional time to agree to
the terms of the trading relationship documentation, particularly if
they previously had not engaged in any other transactions. Accordingly,
if an SBS Entity that is relying on the exception in Rule 15Fi-
5(a)(1)(iii) subsequently receives notice that the relevant security-
based swap transaction has not been accepted for clearing by a clearing
agency, the rule requires that the SBS Entity be in compliance with the
requirements of Rule 15Fi-5 in all respects promptly after receipt of
such notice (if a security-based swap continues to exist between the
two counterparties after it has been rejected by the clearing
agency).\143\
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    \143\ The provisions in Rule 15Fi-5(a)(iii) to account for
cleared anonymous transactions that are submitted for clearing, but
ultimately not accepted, are not included in CFTC Rule Sec.  23.504.
We have included this provision to account for situations when an
SBS Entity could be otherwise deemed to be not in compliance with
Rule 15Fi-5 due to a transaction being rejected for clearing for
reasons which the SBS Entity did not know prior to when the
transaction was submitted to the clearing agency.
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    Whether a contract that has not been accepted for clearing by a
clearing agency continues to exist may depend on the rules of the
particular SB SEF, national securities exchange, or clearing agency, or
the agreement of the counterparties. If the end result is that a
security-based swap continues to exist despite being rejected by the
clearing agency, then the policies and procedures would need to require
that the SBS Entity be in compliance with the requirements of Rule
15Fi-5 with respect to that transaction. If the rejection from clearing
results in a termination or voiding of the original security-based
swap, then there is no security-based swap for which it is necessary to
comply with Rule 15Fi-5.
    Similarly, ISDA and SIFMA requested that the exception in Rule
15Fi-5(a)(1)(iii) be expanded to include all ``intended to be cleared''
(``ITBC'') security-based swaps, consistent with CFTC Staff Letter 13-
70, issued in 2013.\144\ That no-action letter addresses the treatment
of trading relationship documentation requirements in CFTC Rule Sec.
23.504 and a number of specified provisions of the CFTC's business
conduct standards in the context of ITBC swaps, which CFTC staff
defined as swaps that (i) are of a type accepted for clearing by a
derivatives clearing organizations (``DCO''), and (ii) are

intended to be submitted for clearing contemporaneously with
execution.\145\
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    \144\ See ISDA/SIFMA Letter.
    \145\ See Swaps Intended to be Cleared CFTC Letter No. 13-70,
No-Action Relief: Swaps Intended to be Cleared (Nov. 15, 2013),
available at<EMAIL_ADDRESS>The position in
CFTC Staff Letter 13-70 applies to four specific fact patterns set
forth in the letter. Those fact patterns differ based on certain
variables, including, among other things, (1) whether the Swap
Entity knows the identity of its counterparty prior to execution of
the swap, (2) whether the ITBC swap is executed on or subject to the
rules of a swap execution facility or a designated contract market,
(3) whether the ITBC swap is of a type that was not being accepted
for clearing by a DCO as of the date of the letter, (4) whether the
ITBC swap is subject to a mandatory trading determination, and (5)
whether the Swap Entity ensures that both parties submit the ITBC
swap for clearing as quickly after execution as would be
technologically practicable if fully automated systems were used.
CFTC Staff Letter 13-70 also requires as conditions to all four
scenarios that (i) the Swap Entity is either a clearing member of
the DCO to which the ITBC swap will be submitted, or has entered
into an agreement with a clearing member of such DCO for clearing of
swaps of the same type as the ITBC swap; and (ii) the Swap Entity
does not require the counterparty or its clearing FCM to enter into
a breakage agreement or similar agreement as a condition to
executing the ITBC swap.
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    After careful review and consideration of these comments, the
Commission has determined not to modify Rule 15Fi-5(a)(1)(iii) to take
into account CFTC Staff Letter 13-70. Because a number of variables
included in CFTC Staff Letter 13-70 relate to aspects of Title VII that
the Commission has not yet addressed, we believe that it would be
premature to incorporate the exceptions contained in that letter into
Rule 15Fi-5 at this time. For example, and as described above, certain
of the fact patterns identified in the CFTC letter depend on whether
the relevant swap is subject to a CFTC mandatory clearing
determination. As the Commission has not yet made any such mandatory
clearing determinations, we do not yet have a factual basis for
assessing whether and to what extent a comparable condition should be
reflected in Rule 15Fi-5.
    Finally, the Commission recognizes that because the definition of
``security-based swap execution facility'' in Rule 15Fi-1(n) only
includes an SB SEF that is registered with the Commission pursuant to
section 3D of the Exchange Act, the exemption provided in Rule 15Fi-
5(a)(1)(iii) will not be available to SBS Entities until such time as
the Commission has finalized its SB SEF registration rules.\146\ The
Commission also has granted temporary exemptions from the registration
requirements for SB SEFs and from certain disclosure requirements in
Section 3D(c) of the Exchange Act (``SB SEF Exemptions'').\147\ The SB
SEF Exemptions will expire on the earliest compliance date set forth in
any of the final rules regarding registration of SB SEFs.\148\
Accordingly, the Commission is taking the position that until such time
as an SB SEF is required to register with the Commission, an SBS Entity
may comply with the exemption from the trading relationship
documentation requirements, as provided for in Rule 15Fi-5(a)(1)(iii),
by executing a security-based swap on a trading platform that would be
required to be registered with the Commission as an SB SEF, but for the
relief provided by the SBS Exemptions.\149\
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    \146\ In February 2011, the Commission proposed rules providing
for the registration and other requirements applicable to SB SEFs.
See Registration and Regulation of Security-Based Swap Execution
Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR
10948 (Feb. 28, 2011). The Commission has not yet adopted these
rules.
    \147\ See Temporary Exemptions and Other Temporary Relief,
Together with Information on Compliance Dates for New Provisions of
the Securities Exchange Act of 1934 Applicable to Security-Based
Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287,
36292-93, 36306 (June 22, 2011).
    \148\ See id.
    \149\ Of course, to rely on this Commission position, the SBS
Entity also would need to ensure that it remains in compliance with
the other requirements of Rule 15Fi-5(a)(1)(iii), such as the
requirement that the transaction be executed anonymously and that it
be intended to be cleared and actually submitted for clearing.
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D. Amendments to Recordkeeping Rules

    The Commission also is amending the recordkeeping, reporting, and
notification requirements applicable to SBS Entities. With these
amendments, SBS Entities will be required to make and keep current
information relevant to each portfolio reconciliation and portfolio
compression exercise in which it participates, and to retain a record
of each valuation dispute notification required pursuant to Rule 15Fi-
3(c), all security-based swap trading relationship documentation
required to be created under Rule 15Fi-5, a record of the results of
each audit of the SBS Entity's security-based swap trading relationship
documentation policies and procedures, as required pursuant to Rule
15Fi-5(c), and each policy and procedure created pursuant to Rules
15Fi-3 through 15Fi-5.
    Specifically, the Commission is amending: (1) Existing Rule 17a-3
under the Exchange Act, which applies to SBS Entities that are also
registered with the Commission as broker-dealers under Section 15(b) of
the Exchange Act (``broker-dealer SBS Entities''), and (2) Rule 18a-5
under the Exchange Act, which applies to SBS Entities that are not also
registered with the Commission as broker-dealers under Section 15(b) of
the Exchange Act (``stand-alone and bank SBS Entities''). As amended,
these rules require each SBS Entity to make and keep current records of
each security-based swap portfolio reconciliation, whether conducted
pursuant to Rule 15Fi-3 or otherwise,\150\ a copy of each valuation
dispute notification required to be provided to the Commission pursuant
to Rule 15Fi-3(c),\151\ and a record of each bilateral offset and each
bilateral portfolio compression exercise or multilateral portfolio
compression exercise in which it participates, whether conducted
pursuant to Rule 15Fi-4 or otherwise.\152\
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    \150\ See Rules 17a-3(a)(31)(i), 18a-5(a)(18)(i), and 18a-
5(b)(14)(i).
    \151\ See Rules 17a-3(a)(31)(ii), 18a-5(a)(18)(ii), and 18a-
5(b)(14)(ii).
    \152\ See Rules 17a-3(a)(31)(iii), 18a-5(a)(18)(iii), and 18a-
5(b)(14)(iii).
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    With respect to the reconciliation requirement, the amendments
require that these records include the dates of the security-based swap
portfolio reconciliation, the number of portfolio reconciliation
discrepancies, the number of security-based swap valuation disputes
(including the time-to-resolution of each valuation dispute and the age
of outstanding valuation disputes, categorized by transaction and
counterparty), and the name of the third-party entity performing the
security-based swap portfolio reconciliation, if any.\153\ With respect
to the valuation notification requirement, the amended rules require
the retention of each notification required to be provided to the
Commission pursuant to Rule 15Fi-3(c).\154\ With respect to
compression, the rules will now require that these records include the
dates of the offset or compression, the security-based swaps included
in the offset or compression, the identity of the counterparties
participating in the offset or compression, the results of the
compression, and the name of the third-party entity performing the
offset or compression, if any.\155\ The Commission believes that
requiring SBS Entities to make and retain such records will, among
other things, promote compliance with Rules 15Fi-3 and 15Fi-4, assist
SBS Entities in the event that they need to resolve problems that
relate to a previous reconciliation or compression, and assist
Commission examiners in reviewing compliance with those rules.
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    \153\ See Rules 17a-3(a)(31)(i) and 18a-5(a)(18)(i) and
(b)(14)(i).
    \154\ See Rules 17a-3(a)(31)(ii) and 18a-5(a)(18)(ii) and
(b)(14)(ii).
    \155\ See Rules 17a-3(a)(31)(iii) and 18a-5(a)(18)(iii) and
(b)(14)(iii).

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

    In addition, the Commission is amending (1) Rule 17a-4 under the
Exchange Act, which requires each applicable broker-dealer, including
broker-dealer SBS Entities, to preserve certain records if the broker-
dealer makes or receives the type of record and (2) Rule 18a-6 under
the Exchange Act, which imposes parallel preservation requirements on
stand-alone and bank SBS Entities. In particular, the amendments to
Rules 17a-4 and 18a-6 require SBS Entities to retain certain of the
records required to be made and kept under Rules 17a-3 and 18a-5, as
amended, for at least three years, the first two years in an easily
accessible place.\156\ Those amended rules also require each SBS Entity
to retain the following:
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    \156\ See Rules 17a-4(b)(1) and 18a-6(b)(1)(i) and (b)(2)(i).
---------------------------------------------------------------------------

     The written policies and procedures required pursuant to
Rules 15Fi-3, 15Fi-4, and 15Fi-5 until three years after termination of
the use of the policies and procedures; \157\
---------------------------------------------------------------------------

    \157\ See Rules 17a-4(e)(11) and 18a-6(d)(4).
---------------------------------------------------------------------------

     each written agreement with counterparties on the terms of
portfolio reconciliation with those counterparties, as required to be
created under Rules 15Fi-3(a)(1) and (b)(1) until three years after the
termination of the agreement and all transactions governed thereby;
\158\
---------------------------------------------------------------------------

    \158\ See Rules 17a-4(e)(12)(i) and 18a-6(d)(5)(i).
---------------------------------------------------------------------------

     security-based swap trading relationship documentation
with counterparties required to be created under Rule 15Fi-5, until
three years after the termination of such documentation and all
transactions governed thereby; \159\ and
---------------------------------------------------------------------------

    \159\ See Rules 17a-4(e)(12)(ii) and 18a-6(d)(5)(ii).
---------------------------------------------------------------------------

     a record of the results of each audit required to be
performed pursuant to Rule 15Fi-5(c) until three years after the
completion of the audit.\160\
---------------------------------------------------------------------------

    \160\ See Rules 17a-4(e)(12)(iii) and 18a-6(d)(5)(iii).
---------------------------------------------------------------------------

    The Commission believes that requiring the retention of the above
records in accordance with the applicable rules will help ensure that
those records are retained in a manner that would allow them to be
readily accessible for Commission examiners.
    Finally, in June 2019, the Commission adopted 17 CFR 240.18a-10
(Rule 18a-10), which established an alternative compliance mechanism
for certain SBS dealers.\161\ As originally adopted, Rule 18a-10
permits SBS dealers to elect to comply with the CFTC's capital, margin,
and segregation requirements in lieu of complying with the Commission's
capital, margin, and segregation requirements of 17 CFR 240.18a-1 (Rule
18a-1) and Rules 18a-3 and 18a-4, subject to certain conditions. The
Commission recently amended Rule 18a-10 to permit firms that will
operate under Rule 18a-10 to elect to also comply with the CFTC's
recordkeeping and reporting requirements in lieu of complying with
Rules 18a-5 and 18a-6 and 17 CFR 240.18a-7, 240.18a-8, and 240.18a-9
(Rules 18a-7, 18a-8, and 18a-9).\162\ Accordingly, SBS dealers that
satisfy the conditions of Rule 18a-10 and that elect to comply with the
CFTC's recordkeeping and reporting requirements will be able to comply
with Rules 18a-5 and 18a-6, as amended by the final rules to
incorporate records related to Rules 15Fi-3, 15Fi-4, and 15Fi-5.
---------------------------------------------------------------------------

    \161\ See 17 CFR 240.18a-10. Among other things, the SBS dealer
must (1) be registered with the Commission as a stand-alone SBS
dealer (i.e., not also registered with the Commission as a broker-
dealer or an OTC derivatives dealer), (2) be registered with the
CFTC as a swap dealer, and (3) not exceed certain thresholds with
respect to its outstanding security-based swap positions. Those
thresholds are designed to limit the availability of the alternative
compliance mechanism to firms whose security-based swaps business is
not a significant part of the security-based swap market and that
are predominately engaged in a swaps business as compared to a
security-based swaps business. See Capital, Margin, and Segregation
Adopting Release, 84 FR at 43943-46.
    \162\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers, Exchange Act Release No. 87005 (Sept. 19, 2019), 84
FR 68550 (Dec. 16, 2019) (``Recordkeeping and Reporting Adopting
Release'').
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III. Cross-Border Application of Rules 15Fi-3, 15Fi-4, and 15Fi-5

A. Background on the Cross-Border Application of Title VII Requirements

    In 2013, the Commission proposed rules and interpretive guidance to
address the cross-border application of Title VII, including
requirements applicable to SBS Entities.\163\ In that proposal, the
Commission preliminarily interpreted the Title VII requirements
associated with registration to apply generally to the activities of
registered entities.\164\ In reaching that preliminary conclusion, the
Commission did not concur with the views of certain commenters that the
Title VII requirements should not apply to the foreign security-based
swap activities of registered entities, stating that such a view could
be difficult to reconcile with, among other things, the statutory
language describing the requirements applicable to SBSDs.\165\
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    \163\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968 (May 23, 2013) (``Cross-Border Proposing
Release'') (discussing joint rulemaking to further define various
Title VII terms).
    \164\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39825, n.191 (citing Cross-Border Proposing
Release, 78 FR at 30986).
    \165\ See Cross-Border Proposing Release, 78 FR at 30986. The
Proposing Release also contains a more detailed background
discussion of the Commission's taxonomy for classifying requirements
under Section 15F of the Exchange Act as applying at either the
transaction-level or at the entity-level. See Proposing Release, 84
FR at 4636-4637 (citing Cross-Border Proposing Release, 78 FR at
31009-10).
---------------------------------------------------------------------------

    Although the Cross-Border Proposing Release preliminarily
identified the trade acknowledgment and verification rules as entity-
level requirements, it did not propose a cross-border interpretation
with respect to the portfolio reconciliation, portfolio compression,
and trading relationship documentation requirements.\166\ Consequently,
and consistent with the approach in both the Cross-Border Proposing
Release and the Trade Acknowledgement and Verification Adopting
Release, the Commission proposed that the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements in Rules 15Fi-3 through 15Fi-5 should be treated as
entity-level requirements.\167\
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    \166\ See Cross-Border Proposing Release, 78 FR at 31013. The
Commission subsequently adopted its proposed cross-border
interpretation of the trade acknowledgment and verification rules as
entity-level requirements in connection with adopting those
underlying rules in 2016. See Trade Acknowledgment and Verification
Adopting Release, 81 FR at 39826.
    \167\ See Proposing Release, 84 FR at 4637.
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B. Final Cross-Border Interpretation

    The Commission received no comments on its proposed cross-border
interpretation in the Proposing Release. Accordingly, the Commission
concludes that it is treating the portfolio reconciliation, portfolio
compression, and trading relationship documentation requirements in
Rules 15Fi-3 through 15Fi-5 as entity-level requirements that apply to
an SBS Entity's entire security-based swap business without exception,
including in connection with any security-based swap business it
conducts with foreign counterparties.
    As we explained in the Proposing Release, the requirements
referenced above play an important role in addressing risks to the SBS
Entity as a whole, including risks related to the entity's safety and
soundness. As we have noted throughout this release in connection with
describing each of the new rules, requiring SBS Entities and their
counterparties to identify and resolve discrepancies involving key
terms of their security-based swap transactions is a key consideration

underpinning both the portfolio reconciliation and trading relationship
documentation requirements, and serves as an important mechanism for
encouraging SBS Entities and their counterparties to better manage
their internal risks.\168\ Similarly, portfolio compression is intended
to help SBS Entities and their counterparties and their counterparties
manage their post-trade risks associated with security-based swap
transactions in a number of important ways, including by eliminating
redundant uncleared transactions (as measured both by the number of
contracts and total notional value) and potentially reducing a market
participant's credit risk to its direct counterparties, including by
eliminating all outstanding transactions with some counterparties,
without affecting the market participant's overall economic
position.\169\
---------------------------------------------------------------------------

    \168\ See supra note 11 and accompanying text.
    \169\ See supra notes 16-18 and accompanying text.
---------------------------------------------------------------------------

    In the alternative, not requiring an SBS Entity to take steps to
manage its internal risk using portfolio reconciliation, compression,
or standards governing trading relationship documentation could be
expected to contribute to operational risk and legal uncertainty
throughout the firm's entire security-based swap business, affecting
the entity's business as a whole, and not merely specific security-
based swap transactions. For example, as we have previously noted,
inaccurate or incomplete trading relationship documentation could lead
to, among other things, a collateral dispute between the counterparties
to a security-based swap transaction. The larger the dispute, even if
confined to a single counterparty, the greater the risk that an SBS
Entity could experience liquidity problems on a firmwide basis.
    Moreover, to the extent that these risks affect the safety and
soundness of the SBS Entity, they also may affect the firm's
counterparties and the functioning of the broader security-based swap
market. Continuing with the previous example, if a collateral dispute
with a foreign counterparty creates liquidity issues throughout an SBS
Entity, the firm could experience difficulty making payments or posting
collateral to its other counterparties, which may include U.S. persons.
Accordingly, the Commission concludes that it is appropriate to apply
the requirements in Rules 15Fi-3, 15Fi-4, and 15Fi-5 to the entirety of
an SBS Entity's security-based swap business.\170\
---------------------------------------------------------------------------

    \170\ We recognize that the CFTC has taken a different position
with regard to corresponding requirements pursuant to the CEA,
classifying them as what the CFTC has termed ``Category A''
transaction-level requirements. See CFTC Interpretive Guidance and
Policy Statement Regarding Compliance With Certain Swap Regulations,
78 FR 45292, 45334 (Jul. 26, 2013).
---------------------------------------------------------------------------

IV. Availability of Substituted Compliance for Rules 15Fi-3 Through
15Fi-5

A. Existing Substituted Compliance Rule

    In 2013, the Commission proposed to make substituted compliance
potentially available in connection with the requirements applicable to
foreign SBS dealers pursuant to Section 15F of the Exchange Act, other
than the registration requirements applicable to dealers.\171\ Because
the portfolio reconciliation, portfolio compression, and trading
relationship documentation requirements being adopted are grounded in
Section 15F, substituted compliance generally would have been available
for those requirements pursuant to the 2013 proposal.
---------------------------------------------------------------------------

    \171\ See Cross-Border Proposing Release, 78 FR at 30968, 31085.
---------------------------------------------------------------------------

    The Commission subsequently adopted Rule 3a71-6, which provides
that substituted compliance is available with respect to the
Commission's business conduct requirements, and (rather than addressing
all requirements under Section 15F of the Exchange Act) reserved the
issue as to whether substituted compliance also would be available in
connection with other requirements under that section.\172\ Rule 3a71-6
was subsequently amended to provide SBS Entities with the potential to
avail themselves of substituted compliance with respect to the
following Title VII requirements: (1) Trade acknowledgment and
verification,\173\ (2) capital and margin,\174\ and (3) recordkeeping
and reporting.\175\
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    \172\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Release No.
77617 (Apr. 14, 2016), 81 FR 29960 (``Business Conduct Standards
Adopting Release''). See also Cross-Border Proposing Release, 78 FR
at 31088, 31207-08 (Rule 3a71-6 was proposed as Rule 3a71-5).
    \173\ See Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39827-28.
    \174\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43948-57.
    \175\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68597-99.
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B. Amendments to Rule 3a71-6

    In the Proposing Release, the Commission proposed to further amend
Rule 3a71-6 to provide SBS Entities that are not U.S. persons (as
defined in 17 CFR 240.3a71-3(a)(4) (Rule 3a71-3(a)(4) of the Exchange
Act)) with the potential to avail themselves of substituted compliance
to satisfy the Title VII portfolio reconciliation, portfolio
compression, and trading relationship documentation requirements.\176\
In their comment letter, ISDA and SIFMA agreed with the proposed
outcomes-based approach to substituted compliance, as opposed to
issuing comparability determinations based on a line-by-line review of
the foreign requirements.\177\ ISDA and SIFMA also suggested that the
Commission should, in essence, not diverge from any comparability
determination previously made by the CFTC with respect to the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements.\178\ As noted previously, the Commission
has endeavored to harmonize these rules with the corresponding CFTC
rules wherever possible, which should make divergence with respect to
an outcomes-based comparability analysis of the rules highly unlikely.
Substituted compliance, however, involves additional considerations and
arrangements, particularly with respect to supervisory and enforcement
cooperation.\179\ We are therefore adopting the amendments to Rule
3a71-6, as proposed. Accordingly, Rule 3a71-6(d)(7) provides foreign
SBS Entities \180\

with the potential to utilize substituted compliance with comparable
foreign requirements to satisfy Section 15F(i) of the Exchange Act and
Rules 15Fi-3, 15Fi-4, and 15Fi-5 thereunder.\181\
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    \176\ See Proposing Release, 84 FR at 4638. We did not propose
rules making substituted compliance available specifically with
respect to the amendments to Rules 18a-5 and 18a-6, which specify
the recordkeeping and reporting requirements applicable to SBS
Entities. This is because the Commission has also adopted amendments
to Rule 3a71-6 with respect to Title VII recordkeeping and reporting
requirements in connection with adopting those underlying
provisions. See Recordkeeping and Reporting Adopting Release, 84 FR
68597-99. Accordingly, to the extent that substituted compliance is
made available with respect to those rules, we would anticipate that
any determination made with respect to the comparability of the
foreign financial regulatory system would address all aspects of the
Commission recordkeeping and reporting requirements for SBS Entities
including the amendments we are adopting with respect to the
portfolio reconciliation, portfolio compression, and trading
relationship document requirements.
    \177\ See ISDA/SIFMA Letter.
    \178\ See id.
    \179\ See 17 CFR 240.3a71-6(a)(2)(i) and (ii).
    \180\ In the Business Conduct Standards Adopting Release, the
Commission stated that Rule 3a71-6 provides that substituted
compliance is potentially available in connection with the business
conduct requirements for registered major SBS participants as well
as for registered SBS dealers. The Commission further explained that
such decision reflects the fact that the business conduct standards
apply to registered major SBS participants as well as to registered
SBS dealers, and recognizes that the market efficiency goals that
underpin substituted compliance also can apply when substituted
compliance is granted to registered major SBS participants. See
Business Conduct Standards Adopting Release, 81 FR at 30076. This
same reasoning applies with respect to the Commission's portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements and Rule 3a71-6, as amended, provides
that substituted compliance is also potentially available to foreign
major SBS participants (in addition to foreign SBS dealers) with
respect to Section 15F(i) of the Exchange Act and Rules 15Fi-3,
15Fi-4, and 15Fi-5, as applicable.
    \181\ In the Proposing Release, these requirements would have
been designated as paragraph (d)(3) of Rule 3a71-6. Because of
subsequent amendments to that rule, however, the provision
applicable to the portfolio reconciliation, portfolio compression,
and trading relationship documentation requirements is now being
adopted as paragraph (d)(7).
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    In amending Rule 3a71-6, the Commission concludes that the
principles associated with substituted compliance for the business
conduct, trade acknowledgment and verification, capital and margin, and
recordkeeping and reporting requirements in large part similarly apply
to the portfolio reconciliation, portfolio compression, and trading
relationship documentation requirements.\182\ Accordingly, except as
discussed below, the revised substituted compliance rule applies to
Section 15F(i) of the Exchange Act and Rules 15Fi-3, 15Fi-4, and 15Fi-5
thereunder in the same manner as it applies to the business conduct,
trade acknowledgment and verification, capital and margin, and
recordkeeping and reporting requirements.
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    \182\ The discussions in the Business Conduct Standards Adopting
Release, including those regarding consideration of supervisory and
enforcement practices (see Business Conduct Standards Adopting
Release, 81 FR at 30079), regarding certain multi-jurisdictional
issues (see id. at 30079-80), and regarding application procedures
(see id. at 30080-81) are applicable to the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements.
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1. Basis for Substituted Compliance in Connection With the Portfolio
Reconciliation, Portfolio Compression, and Trading Relationship
Documentation Requirements
    In light of the global nature of the security-based swap market and
the prevalence of cross-border transactions within that market, there
is the potential that the application of the Title VII portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements may lead to requirements that are
duplicative of, or in conflict with, applicable foreign requirements,
even when the two sets of requirements implement similar goals and lead
to similar results. Those results have the potential to disrupt
existing business relationships and, more generally, to reduce
competition and market efficiency.\183\
---------------------------------------------------------------------------

    \183\ See generally Business Conduct Standards Adopting Release,
81 FR at 30073-74 (addressing the basis for making substituted
compliance available in the context of the business conduct
requirements).
---------------------------------------------------------------------------

    To address those effects, the Commission concludes that under
certain circumstances it is appropriate to allow the possibility of
substituted compliance, whereby foreign SBS Entities may satisfy
Section 15F of the Exchange Act and the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements in Rules 15Fi-3, 15Fi-4, and 15Fi-5, respectively, by
complying with the comparable foreign requirements. Allowing for the
possibility of substituted compliance in this manner may be expected to
help achieve the benefits of those particular risk mitigation
requirements--helping to curb legal uncertainty and reduce credit and
operational risk for participants in security-based swap transactions
and in the broader market--in a way that helps avoid regulatory
conflict and minimizes duplication, thereby promoting market
efficiency, enhancing competition, and contributing to the overall
functioning of the global security-based swap market. Accordingly, Rule
3a71-6 is amended to identify the portfolio reconciliation, portfolio
compression, and trading relationship documentation requirements of
Section 15F(i) of the Exchange Act and Rules 15Fi-3, 15Fi-4, and 15Fi-5
thereunder as being eligible for substituted compliance.\184\
---------------------------------------------------------------------------

    \184\ See paragraph (d) of Rule 3a71-6, as adopted. Paragraph
(a)(1) of the rule provides that the Commission may, conditionally
or unconditionally, by order, make a determination with respect to a
foreign financial regulatory system that compliance with specified
requirements under the foreign financial system by an SBS dealer
and/or by a registered major SBS swap participant, or class thereof,
may satisfy the corresponding requirements identified in paragraph
(d) of the rule that would otherwise apply.
---------------------------------------------------------------------------

2. Comparability Criteria, and Consideration of Related Requirements
    The Commission will endeavor to take a holistic approach in
determining the comparability of foreign requirements for substituted
compliance purposes, focusing on regulatory outcomes as a whole, rather
than on requirement-by-requirement similarity.\185\ The Commission's
comparability assessments associated with Section 15F(i) and Rules
15Fi-3, 15Fi-4, and 15Fi-5 thereunder accordingly will consider
whether, in the Commission's view, the foreign regulatory system
achieves regulatory outcomes that are comparable to the regulatory
outcomes associated with those Exchange Act requirements. However,
paragraph (a)(2)(i) of Rule 3a71-6 provides that the Commission's
substituted compliance determination will take into account factors
that the Commission determines appropriate, such as, for example, the
scope and objectives of the relevant foreign regulatory requirements
(taking into account the applicable criteria set forth in paragraph (d)
of the rule, which sets forth the list of requirements eligible for
substituted compliance), as well as the effectiveness of the
supervisory compliance program administered, and the enforcement
authority exercised, by a foreign financial regulatory authority or
authorities in such system to support its oversight of such foreign
security-based swap entity (or class thereof) or of the activities of
such security-based swap entity (or class thereof).
---------------------------------------------------------------------------

    \185\ See Business Conduct Standards Adopting Release, 81 FR at
30078-79. See also Trade Acknowledgment and Verification Adopting
Release, 81 FR at 39828.
---------------------------------------------------------------------------

    In light of these considerations, paragraph (d)(7) of Rule 3a71-6
states that prior to making a substituted compliance determination in
connection with the portfolio reconciliation, portfolio compression,
and trading relationship documentation requirements, the Commission
intends to consider whether the requirements of the foreign financial
regulatory system, the duties imposed by the foreign financial
regulatory system, and the information that is required to be provided
to counterparties pursuant to the requirements of the foreign financial
regulatory system, are comparable to those required pursuant to the
applicable provisions under the Exchange Act.
    In reviewing applications, the Commission may determine to conduct
its comparability analyses regarding the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements in conjunction with comparability analyses regarding other
Exchange Act requirements that, like the requirements in these final
rules, promote risk mitigation in connection with SBS Entities.
Accordingly, depending on the applicable facts and circumstances, the
comparability assessment associated with the portfolio reconciliation,
portfolio compression, and trading relationship documentation
requirements may constitute part of a broader assessment of Exchange
Act risk mitigation requirements, and the applicable comparability
decisions may be made at the level of those risk mitigation
requirements as a whole.

V. Explanation of Dates

A. Effective Date

    These final rules will be effective 60 days after the date of this
release's publication in the Federal Register.

B. Compliance Date

    The compliance date for the final rules, other than the amendments
to Rule 3a71-6 (as discussed below), will be the same as the compliance
date for the registration of SBS Entities (the ``Registration
Compliance Date'').\186\ Specifically, the Registration Compliance Date
will be 18 months after the effective date of the final rules set forth
in the Cross-Border Amendments Adopting Release.\187\ The Commission
believes that this compliance date should allow sufficient time for SBS
Entities to prepare for and come into compliance with the new portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements.
---------------------------------------------------------------------------

    \186\ See Cross-Border Amendments Adopting Release, supra note
51 Moreover, the Registration Compliance Date also will be the
compliance date for: (1) Nonbank SBS Entity capital and margin
requirements; (2) SBS Entity participant segregation requirements;
(3) SBS Entity participant business conduct and chief compliance
officer requirements; (4) SBS Entity trade acknowledgement and
verification requirements; and SBS Entity recordkeeping and
reporting requirements. See Capital, Margin, and Segregation
Adopting Release, 84 FR at 43954; Business Conduct Standards
Adopting Release, 81 FR at 30081-82; Trade Acknowledgment and
Verification Adopting Release, 81 FR at 39828-29; and Recordkeeping
and Reporting Adopting Release, 84 FR at 68600-01.
    \187\ As explained in the Cross-Border Amendments Adopting
Release, the effective date of those final rules will be the later
of March 1, 2020, or 60 days following publication of the Cross-
Border Amendments Adopting Release in the Federal Register. See
Cross-Border Amendments Adopting Release, supra note 51.
---------------------------------------------------------------------------

    In addition, these final rules are in many respects intended to
complement and work in coordination with other Title VII requirements
for which compliance will also be required as of the Registration
Compliance Date. For example, Rules 15Fi-3 (portfolio reconciliation)
and 15Fi-5 (written trading relationship documentation) both contain
requirements that are intended to help ensure that the counterparties
to a security-based swap agree on the methodology for determining the
valuation of the security-based swap and for detecting and resolving
any discrepancies with respect to that valuation, if necessary. As we
noted in Section I, the valuation of an uncleared security-based swap
is critical for determining, among other things, the amount of margin
that would be required to be collected from the security-based swap
counterparty and for calculating potential capital charges applicable
to the SBS Entity. We also discussed in Section I the relationship
between the Title VII trade acknowledgment and verification process and
the portfolio reconciliation process. Further, these final rules
supplement the recordkeeping and reporting requirements for security-
based swaps that the Commission adopted in September 2019, which also
use the Registration Compliance Date. Accordingly, the Commission
believes it to be both practical and efficient to require SBS Entities
to begin complying with the rules we are adopting in this release on
the same date on which compliance with those other rules will be
required.

C. Application to Substituted Compliance

    For the amendments to Rule 3a71-6, the Commission is adopting an
effective date of 60 days following publication in the Federal
Register.\188\ There will be no separate compliance date in connection
with that rule amendment, as the rule does not impose obligations upon
Swap Entities. Rather, those amendments provide foreign SBS Entities
with the potential to utilize substituted compliance with comparable
foreign requirements to satisfy Section 15F(i) of the Exchange Act and
new Rules 15Fi-3, 15Fi-4, and 15Fi-5 thereunder.
---------------------------------------------------------------------------

    \188\ The Commission has taken a similar approach in connection
with other recent amendments to Rule 3a71-6. See, e.g.,
Recordkeeping and Reporting Adopting Release, 84 FR at 68602.
---------------------------------------------------------------------------

    SBS Entities will not be required to comply with the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements until they are registered, and the
registration requirement for those entities will not be triggered until
a number of regulatory benchmarks have been met. In practice, the
Commission recognizes that if the requirements of a foreign regime are
comparable to the corresponding Title VII requirements, and the other
prerequisites to substituted compliance also have been satisfied, then
it may be appropriate to permit an SBS Entity to rely on substituted
compliance commencing at the time that entity is registered with the
Commission. Accordingly, and to alleviate any concerns that the
compliance date could be before substituted compliance determinations
are made, the Commission would consider substituted compliance requests
that are submitted prior to the compliance date for the portfolio
reconciliation, portfolio compression, and trading relationship
documentation requirements.

VI. Paperwork Reduction Act

    Certain provisions of the final rules and rule amendments being
adopted in this release contain new or modified ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\189\ The Commission submitted these
collections of information to OMB for review in accordance with the
PRA.\190\ The Commission did not receive any comments on the PRA
estimates included in the Proposing Release. However, the Commission's
earlier PRA assessments have been revised solely with respect to the
number of respondents that we expect to be registered with both the
Commission and the CFTC, as discussed below. An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
---------------------------------------------------------------------------

    \189\ 44 U.S.C. 3501 et seq.
    \190\ See 44 U.S.C. 3507(d); see also 5 CFR 1320.11.
---------------------------------------------------------------------------

    Specifically, Rules 15Fi-3, 15Fi-4, and 15Fi-5 impose new
collection of information requirements. The title of these new
collections of information is, collectively, ``Rules 15Fi-3--15Fi-5--
Risk Mitigation Techniques for Uncleared Security-Based Swaps.'' OMB
has not yet assigned a control number to these new collections of
information. In addition, the amendments to Rules 3a71-6, 17a-3, 17a-4,
18a-5, and 18a-6 modify already-existing collection of information
requirements. The titles and control numbers for these collections of
information are as follows:
    (1) Rule 17a-3--Records to be made by certain brokers and dealers
(OMB control number 3235-0033);
    (2) Rule 17a-4--Records to be preserved by certain brokers and
dealers (OMB control number 3235-0279);
    (3) Rule 18a-5--Records to be made by certain security-based swap
dealers and major security-based swap participants (OMB control number
3235-0745);
    (4) Rule 18a-6--Records to be preserved by certain security-based
swap dealers and major security-based swap participants (OMB control
number 3235-0751); and
    (5) Rule 3a71-6--Substituted Compliance for Foreign Security-Based
Swap Dealers (OMB control number 3235-0715).

A. Summary of Collections of Information

1. Rule 15Fi-3: Portfolio Reconciliation
    Rule 15Fi-3 generally requires SBS Entities to (1) engage in
periodic portfolio reconciliation activities with counterparties who
are also SBS Entities, and (2) establish, maintain, and follow written
policies and procedures reasonably designed to ensure that they engage
in periodic portfolio reconciliation with counterparties who are not
SBS Entities.\191\ Among other things, Rule 15Fi-3 specifies the
requirements applicable to an SBS Entity for purposes of engaging in
portfolio reconciliation with either type of counterparty (as well as
the applicable definitions), with regard to (1) the information that
the two sides are required to exchange as part of the reconciliation
process,\192\ (2) the frequency by which an SBS Entity is required to
reconcile its security-based swap portfolios with its
counterparties,\193\ (3) the required policies and procedures
specifying the means and timeframes by which an SBS Entity is required
to resolve discrepancies with respect to either the valuation or a
material term of a security-based swap,\194\ and (4) the requirement
that an SBS Entity agree in writing with each of its counterparties on
the terms of the portfolio reconciliation, including agreement of the
selection of any third-party service provider.\195\ Finally, Rule 15Fi-
3(c) requires an SBS Entity to promptly notify the Commission of any
security-based swap valuation dispute in excess of $20,000,000 (or its
equivalent in any other currency) if not resolved within: (1) Three
business days, if the dispute is with a counterparty that is an SBS
Entity; or (2) five business days, if the dispute is with a
counterparty that is not an SBS Entity.\196\
---------------------------------------------------------------------------

    \191\ Rule 15Fi-3 does not apply to any security-based swap that
has a clearing agency as a direct counterparty.
    \192\ See supra Section II.B.1.
    \193\ See supra Sections II.B.2 and II.B.4.
    \194\ See supra Sections II.B.3 and II.B.4.
    \195\ See supra Sections II.B.2 and II.B.4.
    \196\ See supra Section II.B.5. Rule 15Fi-3(c) also requires SBS
Entities to notify the Commission, in a form and manner acceptable
to the Commission, and any applicable prudential regulator, if the
amount of any security-based swap valuation dispute that was the
subject of a previous notice increases or decreases by more than
$20,000,000 (or its equivalent in any other currency), at either the
transaction or portfolio level. Each amended notice is required to
be provided to the Commission and any applicable prudential
regulator no later than the last business day of the calendar month
in which the applicable security-based swap valuation dispute
increases or decreases by the applicable dispute amount.
---------------------------------------------------------------------------

2. Rule 15Fi-4: Portfolio Compression
    Rule 15Fi-4 requires SBS Entities to establish, maintain, and
follow written policies and procedures related to bilateral offsetting
of security-based swaps, and periodic bilateral and multilateral
compression exercises. Specifically, Rules 15Fi-4(a)(2) and (3)
requires each SBS Entity to establish, maintain, and follow written
policies and procedures for periodically engaging in both bilateral
portfolio compression exercises and multilateral portfolio compression
exercises, in each case when appropriate, with each counterparty that
is an SBS Entity.\197\ Similarly, Rule 15Fi-4(a)(1) requires each SBS
Entity to establish, maintain, and follow written policies and
procedures for terminating each ``fully offsetting security-based
swap'' that it maintains with another SBS Entity in a timely fashion,
when appropriate.\198\ To the extent that an SBS Entity transacts with
a counterparty that is not an SBS Entity, Rule 15Fi-4(b) provides that
such policies and procedures will only need to address terminating each
``fully offsetting security-based swap'' or engaging in a bilateral or
multilateral portfolio compression exercise, when appropriate and to
the extent requested by any such counterparty.\199\
---------------------------------------------------------------------------

    \197\ See supra Section II.C.1.
    \198\ See supra Section II.C.2.
    \199\ See supra Section II.C.1 and II.C.2.
---------------------------------------------------------------------------

3. Rule 15Fi-5: Written Trading Relationship Documentation
    Rule 15Fi-5 requires that each SBS Entity to establish, maintain,
and follow written policies and procedures reasonably designed to
ensure that it executes written trading relationship documentation with
each of its counterparties, subject to certain exceptions, prior to, or
contemporaneously with, executing a security-based swap transaction, in
each case in the manner as provided for in the rule.\200\ The rule also
requires that the trading relationship documentation include (1) credit
support arrangements addressing certain specified items related to,
among other things, margin haircuts, and custody of margin assets \201\
and (2) agreements regarding the means by which the counterparties
would determine the value of each security-based swap.\202\ Rule 15Fi-5
also contains requirements for SBS Entities and their counterparties to
disclose to each other certain information regarding their legal and
bankruptcy status, and to include a statement regarding the status of a
security-based swap if accepted for clearing by a CCP.\203\ Finally,
the rule requires each SBS Entity to have an independent auditor
conduct periodic audits sufficient to identify any material weakness in
its documentation policies and procedures required by the rule.\204\
---------------------------------------------------------------------------

    \200\ See supra Section II.C.1. Rule 15Fi-5 also requires that
the security-based swap trading relationship documentation address,
among other things, terms addressing payment obligations, netting of
payments, events of default or other termination events, calculation
and netting of obligations upon termination, transfer of rights and
obligations, governing law, valuation and dispute resolution.
    \201\ See id.
    \202\ See supra Section II.C.2.
    \203\ See supra Section II.C.3.
    \204\ See supra Section I.D.5.
---------------------------------------------------------------------------

4. Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books and
Records Requirements
    Rule 17a-3 requires a broker-dealer to make and keep current
certain records and Rule 17a-4 requires a broker-dealer to preserve
certain records if it makes or receives them.\205\ The Commission is
amending these existing rules to account for the security-based swap
risk mitigation activities of broker-dealers, including broker-dealer
SBS Entities, by requiring the making and preserving of any required
records regarding portfolio reconciliation, bilateral offsets,
bilateral or multilateral portfolio compression, valuation disputes,
and written trading relationship documentation. With respect to stand-
alone SBS Entities, the Commission is amending Rules 18a-5 and 18a-6--
which the Commission adopted in September of this year and are
themselves modeled on Rules 17a-3 and 17a-4--to account for these same
risk mitigation requirements.\206\
---------------------------------------------------------------------------

    \205\ 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \206\ See supra Section I.F.1.
---------------------------------------------------------------------------

5. Amendment to Rule 3a71-6: Substituted Compliance
    The amendment to Rule 3a71-6 permits non-U.S. SBS Entities to
comply with the portfolio reconciliation, portfolio compression, and
written trading relationship documentation requirements by following
the comparable regulatory requirements of a foreign financial
regulatory system. Specifically, the amendment adds Rules 15Fi-3, 15Fi-
4, and 15Fi-5 to the list of Commission requirements eligible for a
substituted compliance determination and sets forth the standard by
which the Commission would make such a determination.\207\
---------------------------------------------------------------------------

    \207\ See supra Sections IV.B.1 and IV.B.2.

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

B. Use of Information

1. Rule 15Fi-3: Portfolio Reconciliation
    As previously noted, the Commission believes that the information
shared by counterparties to a security-based swap transaction
periodically during the portfolio reconciliation process, as
contemplated by Rule 15Fi-3, will play an important role in assisting
those counterparties in identifying and resolving discrepancies
involving key terms of their transactions on an ongoing basis. This
information also should allow those counterparties to improve their
management of internal risks related to the enforcement of their rights
and the performance of their obligations under a security-based swap.
For example, the information obtained and provided in the course of
portfolio reconciliation should help ensure that the counterparties to
a security-based swap are and remain in agreement with respect to all
material terms throughout the life of the transaction, thereby
mitigating the possibility that a discrepancy could unexpectedly affect
either side's ability to perform any or all of its obligations under
the contract, including those obligations related to the posting of
collateral. Moreover, requiring SBS Entities to agree in writing with
each of their counterparties on the terms of the portfolio
reconciliation (including, if applicable, agreement on the selection of
any third party service provider who may be performing the
reconciliation) should help to minimize any discrepancies regarding the
portfolio reconciliation process itself, thereby ensuring that it
operates in as efficient and cost-effective means possible. Finally,
the requirement to report certain unresolved valuation disputes to the
Commission should assist the Commission in identifying potential issues
with respect to an SBS Entity's internal valuation methodology and also
could serve as an indication of a widespread market disruption in cases
where the Commission receives a large number of such notices from
multiple firms.
2. Rule 15Fi-4: Portfolio Compression
    As previously discussed, the Commission believes that Rule 15Fi-4
will help market participants by eliminating redundant uncleared
derivatives contracts, thereby potentially reducing a market
participant's credit risk to its direct counterparties, including by
eliminating all outstanding contracts with some counterparties, without
affecting the market participant's overall economic position. In
addition, we believe that the collection of information should lead to
processing improvements for market participants, as envisioned by
Section 15F(i) of the Exchange Act, by virtue of the fact that both SBS
Entities and their counterparties should ultimately have fewer trades
to manage, maintain, and settle, resulting in fewer opportunities for
processing errors, failures, or other problems that could develop
throughout the lifecycle of a transaction.
3. Rule 15Fi-5: Written Trading Relationship Documentation
    The Commission believes that the information required to be
contained in the written trading relationship documentation pursuant to
Rule 15Fi-5 should help ensure that each SBS Entity mitigates risk with
respect to its security-based swap portfolio by, among other things,
enhancing clarity and legal certainty from the outset of a transaction
regarding each party's rights and obligations. This outcome should help
to reduce exposure to, among other things, counterparty credit risk and
promote agreement regarding the proper valuation and other material
terms of a security-based swap.
4. Amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6: Books and
Records Requirements
    The Commission expects that the information contained in the
records required to be made and kept pursuant to the amendments to
Rules 17a-3, 17a-4, 18a-5, and 18a-6 would be used to assist the
Commission in its oversight of SBS Entities. In addition, records
regarding portfolio reconciliation, bilateral offsets, bilateral or
multilateral portfolio compression, valuation disputes, and written
trading relationship documentation should help to provide SBS Entities
and their counterparties to security-based swaps with an ability to
identify and resolve discrepancies involving key terms of their
transactions on an ongoing basis, allowing for better management of
internal risks related to performance of obligations, valuation, margin
obligations, internal valuation systems and models, or internal
controls.
5. Amendment to Rule 3a71-6: Substituted Compliance
    Under the amendment to Rule 3a71-6 under the Exchange Act, the
Commission would use the information collected to evaluate requests for
substituted compliance with respect to the portfolio reconciliation,
portfolio compression, and written trading relationship documentation
requirements applicable to SBS Entities.

C. Respondents

    The Commission estimated the number of respondents in the Proposing
Release. The Commission received no comment on these estimates.
However, the Commission is updating the number of SBS Entities that we
estimate to be dually-registered with the CFTC as Swap Entities in
order to be consistent with the most recent estimates used in other
Commission rulemakings.\208\ Rules 15Fi-3, 15Fi-4, and 15Fi-5, and the
amendments to Rules 17a-3, 17a-4, 18a-5, and 18a-6 apply only to SBS
Entities, each of which will be registered with the Commission.
Consistent with prior releases, the Commission estimates that 50 or
fewer entities ultimately may be required to register with the
Commission as SBS dealers.\209\ We also previously estimated that the
number of major SBS participants likely will be five or fewer and, in
actuality, may be zero.\210\ The Commission continues to believe that
these estimates are appropriate. Thus, the Commission believes that
approximately 55 entities will be required to register with the
Commission under either category, and will therefore be subject to
Rules 15Fi-3 through 15Fi-5.
---------------------------------------------------------------------------

    \208\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68607-09.
    \209\ See id. See also Capital, Margin, and Segregation Adopting
Release, 84 FR at 43960; Trade Acknowledgement and Verification
Adopting Release, 81 FR at 39830; and SBS Entity Registration
Adopting Release, 80 FR at 48990.
    \210\ See id.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that of the 55
entities that may register with the Commission as SBS Entities,
approximately 35 will be dually-registered with the CFTC as Swap
Entities.\211\ In a more recent release, however, the Commission
updated that estimate, such that we now believe that approximately 20
SBS Entities will also be registered with the CFTC as Swap
Entities.\212\ Accordingly, we are using the updated number for
calculating the burdens pursuant to Rule 15Fi-3, 15Fi-4, and 15Fi-5.
---------------------------------------------------------------------------

    \211\ See Proposing Release, 84 FR at 4643.
    \212\ See Recordkeeping and Reporting Adopting Release, 84 FR at
68607-09. This figure includes 19 SBS dealers and one major SBS
participant.
---------------------------------------------------------------------------

    With regard to the requirements under Rule 3a71-6, as amended,
requests for a substituted compliance determination with respect to the
portfolio reconciliation, portfolio compression, and written trading
relationship documentation requirements may be filed by foreign
financial regulatory authorities, or by non-U.S. SBS Entities.
Consistent with prior estimates, the

Commission expects that there are approximately 22 non-U.S. entities
that may register with the Commission as SBS dealers, out of
approximately 50 total entities that may register as SBS dealers.\213\
---------------------------------------------------------------------------

    \213\ See Cross-Border Application Proposing Release, 84 FR at
24253. See also Recordkeeping and Reporting Adopting Release, 84 FR
at 68607-09; and Capital, Margin, and Segregation Adopting Release,
84 FR at 43960-61.
---------------------------------------------------------------------------

    Potentially, all such non-U.S. SBS dealers, or some subset thereof,
may seek to rely on a substituted compliance determination in
connection with these portfolio reconciliation, portfolio compression,
and written trading relationship documentation requirements.\214\ In
practice, however, the Commission expects that the greater portion of
any such requests will be submitted by foreign financial regulatory
authorities, given their expertise in connection with the relevant
substantive requirements, especially in connection with their
supervisory and enforcement oversight with regard to SBS dealers and
their activities.
---------------------------------------------------------------------------

    \214\ As previously noted, the Commission further believes that
there may up to five major SBS participants. See supra note 210 and
accompanying text. It is possible that some subset of those entities
will be non-U.S. major SBS participants that will seek to rely on
substituted compliance in connection with the applicable portfolio
reconciliation, portfolio compression, and written trading
relationship documentation requirements.
---------------------------------------------------------------------------

D. Total Annual Recordkeeping Burden

1. Portfolio Reconciliation Activities Generally
    Pursuant to Rule 15Fi-3(a), the approximately 55 respondent SBS
Entities will be required to reconcile security-based swap portfolios
with other SBS Entities on a daily, weekly, or quarterly basis,
depending upon the size of the portfolio. For purposes of this
requirement, the Commission estimates that each SBS Entity will engage
in security-based swap transactions with approximately one-third of the
other 54 SBS Entities, meaning that an SBS Entity will maintain
security-based swap portfolios with approximately 18 SBS Entities. Of
this total, we believe that, on average, two SBS Entity counterparty
portfolios will require daily reconciliation (i.e., a portfolio
consisting of 500 or more uncleared security-based swaps), four SBS
Entity counterparty portfolios will require weekly reconciliation
(i.e., a portfolio of more than 50 but fewer than 500 uncleared
security-based swaps), and the remaining 12 SBS Entity counterparty
portfolios will require quarterly reconciliation (i.e., a portfolio of
no more than 50 uncleared security-based swaps).\215\ The Commission
therefore estimates that each SBS Entity will engage in an average of
760 portfolio reconciliations with other SBS Entities per year.\216\
---------------------------------------------------------------------------

    \215\ These estimates are consistent with those used by the CFTC
in connection with its portfolio reconciliation rule. See
Confirmation, Portfolio Reconciliation, and Portfolio Compression
Requirements for Swap Dealers and Major Swap Participants, 75 FR
81519, 81528 (Dec. 28, 2010).
    \216\ This estimate uses 252 business days for purposes of the
daily portfolio reconciliation requirement, which is consistent with
the definition of ``business day'' in Rule 15Fi-1(b).
---------------------------------------------------------------------------

    The Commission believes that each portfolio reconciliation is
likely to be conducted through an automated process.\217\ As a result,
we believe that each reconciliation will require an average of 30
minutes to complete in total (which is the combined estimate for both
counterparties), regardless of the size of the security-based swap
portfolio with the applicable counterparty.\218\ Using these figures,
the Commission estimates that compliance with Rule 15Fi-3(a), as it
relates to engaging in portfolio reconciliation with other SBS
Entities, will impose an average annual burden of approximately 190
hours per year on each of the respondent 55 SBS Entities, for an
estimated average annual burden of 10,450 hours in the aggregate. These
calculations are summarized in PRA Table 1, below.
---------------------------------------------------------------------------

    \217\ The Commission recognizes that some respondents may choose
to engage a third-party vendor to conduct portfolio reconciliations.
For simplicity, however, the Commission's burden estimate is based
upon SBS Entities conducting these activities internally, without
the use of third-party vendors. The Commission requested, but did
not receive, comment on this approach, including regarding the
likelihood and cost of using third-party providers. Accordingly, we
are using the same estimates as included in the proposal. See
Proposing Release, 84 FR at 4642, n. 176.
    \218\ Because the 30 minute estimate is for the entire
reconciliation process, without respect to how that time is
allocated between the two parties, to avoid double-counting we have
divided it by one-half in the context of security-based swap
portfolios between two SBS Entities, resulting in an estimate of 15
minutes per reconciliation per counterparty for those portfolios.

                  PRA Table 1--Rule 15i-3(a): Portfolio Reconciliations With Other SBS Entities
----------------------------------------------------------------------------------------------------------------
                                                                                Hourly burden
   Number of counterparties per  respondent     Number of annual reconciliations        per        Total annual
                                                                                reconciliation  burden (hours)
----------------------------------------------------------------------------------------------------------------
2 (>=500 transactions)........................  252 (daily).....................             .25             126
4 (>50<500 transactions)......................  52 (weekly).....................             .25              52
12 (<=50 transactions)........................  4 (quarterly)...................             .25              12
                                                                                ---------------
    Total per respondent......................  ................................  ..............             190
                                                                                ---------------
        Total Aggregate Annual Burden for all   ................................  ..............          10,450
         55 respondents.
----------------------------------------------------------------------------------------------------------------

    In addition, Rule 15Fi-3(b) requires each SBS Entity to establish,
maintain, and follow written policies and procedures reasonably
designed to ensure that it engages in portfolio reconciliation for all
security-based swaps (other than security-based swaps that will be
cleared by a clearing agency) in which its counterparty is not an SBS
Entity.\219\ In calculating the burden of performing the portfolio
reconciliations required by these policies and procedures, the
Commission estimates that (1) there are currently 13,082 market
participants in security-based swaps who will not be required to
register as SBS Entities,\220\ and (2) each SBS Entity will have an
average of approximately 350 of these non-SBS Entity market
participants as

counterparties.\221\ Further, the Commission believes that
reconciliations with these parties will be conducted on a quarterly
basis for 10% of these portfolios (i.e., portfolios with more than 100
uncleared security-based swaps), and on an annual basis for the
remaining 90% of these portfolios (i.e., portfolios that do not involve
100 or more uncleared security-based swaps).\222\
---------------------------------------------------------------------------

    \219\ The Commission's estimate for the hourly burden for
preparing these policies and procedures is discussed below.
    \220\ In the Economic Analysis, the Commission estimates that
there are approximately 13,137 market participants in the security-
based swap market. See infra Section VI.B.1.c (Table 2). Subtracting
the estimated 55 SBS Entities from this figure results in an
estimated 13,082 non-SBS Entities.
    \221\ This estimate is based upon the assumption that each non-
SBS Entity market participant will do business with, on average,
between one or two SBS Entities and is calculated as follows:
((13,082 non-SBS Entity market participants/55 SBS Entities) x 1.5
SBS Entities per non-SBS market participants) = approximately 350
non-SBS Entity counterparties per SBS Entity.
    \222\ Accordingly, of the estimated 350 security-based swap
portfolios that an SBS Entity maintains with non-SBS Entities, 90%
(or 315) will require only one portfolio reconciliation each year,
and 10% (or 35) will require quarterly portfolio reconciliations,
resulting in a total of 455 portfolio reconciliations per SBS Entity
per year.
---------------------------------------------------------------------------

    The Commission further estimates that each portfolio reconciliation
between an SBS Entity and a non-SBS Entity will require an average of
30 minutes to complete (which is the combined estimate for both
counterparties).\223\ Using these figures, the Commission estimates
that compliance with Rule 15Fi-3(b), as it relates to conducting
portfolio reconciliations with non-SBS Entities, will impose an annual
hourly burden of approximately 227.5 hours per SBS Entity, for an
estimated average annual burden of approximately 12,512.5 hours in the
aggregate for all 55 SBS Entity respondents. These calculations are
summarized in PRA Table 2, below.
---------------------------------------------------------------------------

    \223\ This figure is identical to the estimate used for
reconciliations between two SBS Entities (before dividing by one-
half to avoid double-counting) and is consistent with the estimate
used by the CFTC, which used an estimate of six minutes (or .10
hours) in connection with its portfolio reconciliation requirements.
See supra notes 215 and 218 and accompanying text.

                     Table 2 -Rule 15i-3(b): Portfolio Reconciliations With Non-SBS Entities
----------------------------------------------------------------------------------------------------------------
                                                                                Hourly burden
    Number of counterparties per respondent     Number of annual reconciliations        per        Total annual
                                                                                reconciliation  burden (hours)
----------------------------------------------------------------------------------------------------------------
35 (>100 transactions)........................  4 (quarterly)...................              .5              70
315 (<=100 transactions)......................  1 (annual)......................              .5           157.5
                                                                                ---------------
    Total per respondent......................  ................................  ..............           227.5
                                                                                ---------------
        Total Aggregate Annual Burden for all   ................................  ..............        12,512.5
         55 respondents.
----------------------------------------------------------------------------------------------------------------

2. Establishing, Maintaining, and Enforcing Written Policies and
Procedures
    Rule 15Fi-3 also contains policies and procedures requirements
applicable to SBS Entities in connection with engaging in portfolio
reconciliation with both SBS Entities and other counterparties. As
previously noted, the Commission estimates that of the estimated 55
persons that may register with the Commission as SBS Entities,
approximately 20 will be dually-registered with the CFTC as Swap
Entities.\224\ In addition, the CFTC's adopted final rules on portfolio
reconciliation written policies and procedures are substantively
identical to those in Rule 15Fi-3. Accordingly, these 20 dually-
registered entities are already required to establish, maintain, and
follow written policies and procedures as they relate to the
reconciliation of their swap portfolios, and these policies and
procedures would be expected to be largely consistent with those that
would be required with respect to their security-based swap portfolios.
Assuming that these existing policies and procedures would simply need
to be amended to apply to security-based swap transactions pursuant to
Rule 15Fi-3, we estimate that the initial burden of revising these
policies and procedures would be one hour per respondent, for an
estimated one-time initial burden of 20 hours in the aggregate. With
respect to the remaining 35 SBS Entities that will not be dually-
registered with the CFTC, the Commission estimates, based on prior
estimates in earlier Dodd-Frank rulemakings, that these policies and
procedures would require an average of 80 hours per non-dually-
registered respondent to initially prepare and implement, for an
estimated one-time initial burden of 2,800 hours in the aggregate.\225\
Once these policies and procedures are established, the Commission
estimates that it will take an average of 40 hours annually to revise
and maintain these policies and procedures per respondent (including
both dually-registered and non-dually-registered SBS Entities),\226\
for an estimated average annual burden of 2,200 hours in the aggregate
for all 55 respondents.\227\
---------------------------------------------------------------------------

    \224\ See supra note 212 and accompanying text.
    \225\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 40 hours) + (Director of Compliance at 20 hours) +
(Deputy General Counsel at 20 hours))] = 80 hours per SBS Entity.
See Trade Acknowledgment and Verification Adopting Release, 81 FR at
39831, n. 242.
    \226\ Although dually-registered SBS Entities would technically
need to revise and maintain their policies and procedures to ensure
compliance with both the Commission's and CFTC's rules, we have
decided to conservatively assume that all of the estimated hours
would be incurred in connection with compliance with the collection
of information associated with Rule 15Fi-3.
    \227\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 20 hours) + (Director of Compliance at 10 hours) +
(General Counsel at 10 hours))] = 40 hours per SBS Entity. See Trade
Acknowledgment and Verification Adopting Release, 81 FR at 39831, n.
243.
---------------------------------------------------------------------------

3. Reporting of Certain Valuation Disputes
    Rule 15Fi-3(c) requires each SBS Entity to promptly notify the
Commission (and any applicable prudential regulator for an SBS Entity
that is also a bank), in a form and manner acceptable to the
Commission, of any security-based swap valuation dispute in excess of
$20,000,000 (or its equivalent in any other currency) if not resolved
within a prescribed time period. As previously noted, we crafted the
rule in this way to provide SBS Entities with flexibility to determine
the most efficient and cost-effective form and manner of making such
submissions, so long as it is deemed to be acceptable by the
Commission.\228\ Accordingly, we would expect there to be only a
minimal, if any, initial burden of designing a system for submitting
these notices. We also believe that the associated ongoing hourly
burden of preparing and submitting such notices would be minimal. In
addition, until

SBS Entities are registered with the Commission, it is difficult for us
to determine the typical number of valuation disputes meeting the
applicable thresholds that SBS Entities would be required to submit on
an annual basis.
---------------------------------------------------------------------------

    \228\ See supra note 72.
---------------------------------------------------------------------------

    Rule 15Fi-3(c) also requires SBS Entities to notify the Commission,
in a form and manner acceptable to the Commission, and any applicable
prudential regulator, if the amount of any security-based swap
valuation dispute that was the subject of a previous notice increases
or decreases by more than $20,000,000 (or its equivalent in any other
currency), at either the transaction or portfolio level. Such amended
notice shall be provided to the Commission, and any applicable
prudential regulator, no later than the last business day of the
calendar month in which the applicable security-based swap valuation
dispute increases or decreases by the applicable dispute amount.
Although the Commission believes that the time required to submit
amendments to existing notices will be minimal, and likely included in
the 24 hour estimate that we used in the Proposing Release (which was
used by the CFTC when it first proposed a similar requirement),\229\ we
are conservatively increasing that estimate by 25% to account for the
submission of amended notices. As such, we estimate that each SBS
Entities will spend on average of 30 hours each year complying with
this requirement, for an estimated average annual burden of 1,650 hours
in the aggregate for all 55 respondents.
---------------------------------------------------------------------------

    \229\ See Swap Trading Relationship Documentation Requirements
for Swap Dealers and Major Swap Participants, 76 FR 6715, 6723 (Feb.
8, 2011).
---------------------------------------------------------------------------

    Combining all of the estimated burdens described above, the
Commission estimates that Rule 15Fi-3 will impose an estimated one-time
initial burden of 2,899 hours in the aggregate for all SBS Entities to
prepare new written policies and procedures or to bring existing ones
into compliance. The Commission also estimates that Rule 15Fi-3 will
impose an estimated ongoing burden of 26,812.5 hours each year in the
aggregate for all SBS Entities, which is composed of (1) an estimated
annual burden of 10,450 hours in the aggregate for all SBS Entities to
engage in portfolio reconciliation with SBS Entities; (2) an estimated
annual burden of 12,512.5 hours in the aggregate for all SBS Entities
to engage in portfolio reconciliation with non-SBS Entities; (3) an
estimated annual burden of 2,200 hours in the aggregate for all SBS
Entities to revise and maintain the written policies and procedures
required pursuant to the rule; and (4) an estimated annual burden of
1,650 hours for all SBS Entities to report certain large valuation
disputes to the Commission and any applicable prudential
regulator.\230\ These calculations are summarized in PRA Tables 3 and
4, below.
---------------------------------------------------------------------------

    \230\ Rule 15Fi-3(a)(1) and (b)(1) also require an SBS Entity to
agree in writing with each of its counterparties on the terms of the
portfolio reconciliation including, if applicable, agreement on the
selection of any third party service provider who may be performing
the reconciliation. The Commission expects SBS Entities to undertake
this agreement as part of the written trading relationship
documentation each is required to enter into with its counterparties
as a result of Rule 15Fi-5. Thus, the estimate here does not account
for this burden, which is instead assumed to form part of the burden
of complying with Rule 15Fi-5.

        PRA Table 3--Rule 15Fi-3: Total Estimated Initial Burdens
------------------------------------------------------------------------
                                                          Total one-time
               Requirement                 Hourly burden  burden (hours)
------------------------------------------------------------------------
Preparation of New Written Policies and                1              20
 Procedures (20 dual SEC-CFTC
 registrants)...........................
Preparation of New Written Policies and               80           2,800
 Procedures (35 SEC-only registrants)...
                                         -------------------------------
    Total Aggregate One-Time Burden for   ..............     2,820 hours
     all 55 respondents.................
------------------------------------------------------------------------

           PRA Table 4--Rule 15Fi-3: Summary of Annual Burdens
------------------------------------------------------------------------
                                                             Aggregate
                                                           hourly burden
                       Requirement                            (all 55
                                                           respondents)
------------------------------------------------------------------------
Portfolio Reconciliations with Other SBS Entities.......          10,450
Portfolio Reconciliations with Non-SBS Entities.........        12,512.5
Revise and Maintain Written Policies and Procedures.....           2,200
Prepare and Submit Notices of Valuation Disputes >$20              1,650
 million................................................
                                                         ---------------
    Total Aggregate Annual Burden for all 55 respondents        26,812.5
------------------------------------------------------------------------

4. Rule 15Fi-4: Portfolio Compression
    As noted above, the Commission continues to believe that of the
estimated 55 persons that may register with the Commission as SBS
Entities, approximately 20 will be dually-registered with the CFTC as
Swap Entities. In addition, and as we previously noted, the
requirements in CFTC Rule Sec.  23.503 are, other than as expressly
described above in Section II.B, substantively identical to Rule 15Fi-
4. Accordingly, these 20 entities are already required to establish,
maintain, and follow relevant written policies and procedures related
to bilateral offsets and portfolio compression exercises involving
their swap portfolios, and these policies and procedures would be
expected to be largely consistent with those that would be required
with respect to their security-based swap portfolios. Assuming that
these existing policies and procedures would need to be amended to
apply to security-based swap transactions, we estimate that the initial
burden of revising these policies and procedures would be one hour per
respondent, for an estimated one-time initial burden of 20 hours in the
aggregate.
    With respect to the remaining 35 SBS Entities that are not dually-
registered with the CFTC, the Commission estimates, based on prior
estimates in earlier Dodd-Frank rulemakings, that these policies and
procedures would require an average of 80 hours per non-dually-
registered respondent to initially prepare and implement, for an
estimated average annual burden of 2,800 hours in the aggregate.\231\
Once these policies and procedures are established, the Commission
estimates that it will take an average of 40 hours annually to revise
and maintain these policies and procedures per respondent (including
both dually-registered and non-dually-registered SBS Entities), for an
estimated average annual burden of 2,200 hours in the aggregate for all
55 respondents.
---------------------------------------------------------------------------

    \231\ See supra note 225.
---------------------------------------------------------------------------

    In addition, the respondents will incur additional hourly burdens
as they undertake bilateral offsets and portfolio compression exercises
consistent with these written policies and procedures.

As noted above the Commission estimates that each of the 55 estimated
SBS Entities will be counterparty to an average of 18 other SBS
Entities and 350 non-SBS Entities, for a total of 368 counterparties.
For purposes of conducting bilateral offsets and portfolio compression
exercises, the Commission estimates that (1) each SBS Entity will have
an average of one set of security-based swaps that are eligible for
annual bilateral offset with each of these 368 counterparties, (2) each
SBS Entity will conduct an annual bilateral compression exercise with
one-third, or six of its 18 SBS Entity counterparties, (3) each SBS
Entity will conduct an annual bilateral compression exercise with each
of its 350 non-SBS Entity counterparties, and (4) each SBS Entity will
engage in multilateral compression exercises at an average rate of 12
exercises per year.
    The Commission believes that each bilateral offset and portfolio
compression exercise is likely to be conducted through an automated
process. As a result, we believe that (1) each bilateral offset will
require on average five minutes of respondent time to complete with
each of the 350 non-SBS Entity counterparties, (2) each bilateral
offset will require on average 2.5 minutes of respondent time to
complete with each of the 18 SBS Entity counterparties,\232\ (3) each
bilateral compression will require an average of 15 minutes of
respondent time to complete with each of the 350 non-SBS Entity
counterparties, (4) each bilateral compression will require an average
of 7.5 minutes with each of the six SBS Entity counterparties,\233\ and
(5) each multilateral compression exercise will require an average of
30 minutes of respondent time to complete 12 times annually. In each of
those hourly burdens, the figure used is the combined estimate for both
counterparties. Based on these estimates, the Commission estimates the
average annual hourly burden for these activities at 124.16 hours per
respondent, an estimated average annual burden of 6,828.8 hours in the
aggregate. These calculations are summarized in PRA Table 5, below.
---------------------------------------------------------------------------

    \232\ Similar to our estimates in the context of the portfolio
reconciliation requirements, because the five minute estimate is for
the entire bilateral offset process, without respect to how that
time is allocated between the two parties, to avoid double-counting
we have divided it by one-half in the context of security-based swap
portfolios between two SBS Entities, resulting in an estimate of 2.5
minutes per bilateral offset for those portfolios.
    \233\ Again, we have divided the 15 minute estimate to complete
the bilateral compression exercise by one-half in the context of
security-based swap portfolios between two SBS Entities, resulting
in an estimate of 7.5 minutes per bilateral compression for those
portfolios.

                              PRA Table 5--Portfolio Compression With All Entities