calculates margin based on the market value of specific transactions or
on a portfolio basis).\394\
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    \387\ See, e.g., Section 15F(h)(3)(A) of the Exchange Act, 15
U.S.C. 78o-10(h)(3)(A). See generally Section 15F(h) (discussing
external business conduct standards). However, requirements under
Section 15F(h)(1), which address fraud, supervision and adherence to
position limits, apply at the entity level.
    \388\ See Section 3E of the Exchange Act, 15 U.S.C. 78c-5.
    \389\ See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e).
    \390\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
    \391\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \392\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C.
78o-10(h)(1)(B).
    \393\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \394\ See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e). To take another example, the requirement that security-based
swap dealers implement conflict-of-interest systems and procedures
relating to security-based swaps in Section 15F(j)(5) of the
Exchange Act, 15 U.S.C. 78o-10(j)(5), is transactional in the sense
that potential conflicts of interest relate to particular security-
based swap transactions. At the same time, however, it also is an
entity-level requirement because implementing such systems and
procedures would require, among other things, a security-based swap
dealer to establish structural and institutional safeguards to wall
off the activities of persons within the firm relating to research
or analysis of the price or market for any security-based swap. See
External Business Conduct Standards Proposing Release, 76 FR 42420.
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    Below, we describe in more detail various transaction-level and
entity-level requirements in Title VII applicable to security-based
swap dealers.\395\
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    \395\ For purposes of this discussion, we are addressing only
requirements applicable to security-based swap dealers in Sections
3E and 15F of the Exchange Act, 15 U.S.C. 78c-5 and 78o-10, and the
rules and regulations thereunder. Title VII requirements relating to
regulatory reporting and public dissemination, clearing, and trade
execution are discussed in Sections VIII-X below.
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(a) Transaction-Level Requirements
    In general, transaction-level requirements primarily focus on
protecting counterparties by requiring security-based swap dealers to,
among other things, provide certain disclosures to counterparties,
adhere to certain standards of business conduct, and segregate customer
funds, securities, and other assets. The following briefly describes
the most significant transaction-level requirements applicable to
security-based swap dealers in Title VII.
i. External Business Conduct Standards
    Section 15F(h) of the Exchange Act requires the Commission to adopt
rules specifying external business conduct standards for security-based
swap dealers in their dealings with counterparties,\396\ including
counterparties that are ``special entities.'' \397\ Congress granted
the Commission broad authority to promulgate business conduct
requirements, as the Commission determines to be appropriate in the
public interest, for the protection of investors or otherwise in
furtherance of the purposes of the Exchange Act.\398\
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    \396\ Section 15F(h)(6) of the Exchange Act, 15 U.S.C. 78o-
10(h)(6), directs the Commission to prescribe rules governing
external business conduct standards for security-based swap dealers.
Section 15F(h) of the Exchange Act, 15 U.S.C. 78o-10(h), also
generally authorizes and requires the Commission to adopt rules for
major security-based swap participants. See Section IV, infra.
    \397\ Section 15F(h)(2)(C) of the Exchange Act, 15 U.S.C. 78o-
10(h)(2)(C). See note 286, supra.
    \398\ See Section 15F(h)(3)(D) of the Exchange Act, 15 U.S.C.
78o-10(h)(3)(D) (``[b]usiness conduct requirements adopted by the
Commission shall establish such other standards and requirements as
the Commission may determine are appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of this Act''). See also Section 15F(h)(1)(D) of the
Exchange Act (requiring that security-based swap dealers to comply
as well with ``such business conduct standards . . . as may be
prescribed by the Commission by rule or regulation that relate to .
. . such other matters as the Commission determines to be
appropriate'').
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    These standards, as described in Section 15F(h)(3) of the Exchange
Act, must require security-based swap dealers to: (i) Verify that a
counterparty meets the eligibility standards for an ECP; (ii) disclose
to the counterparty material information about the security-based swap,
including material risks and characteristics of the security-based
swap, and material incentives and conflicts of interest of the
security-based swap dealer in connection with the security-based swap;
and (iii) provide the counterparty with information concerning the
daily mark for the security-based swap. Section 15F(h)(3) also directs
the Commission to establish a duty for security-based swap dealers to
communicate information in a fair and balanced manner based on
principles of fair dealing and good faith.
    In addition, Section 15F(h)(4) of the Exchange Act requires that a
security-based swap dealer that ``acts as an advisor to a special
entity'' must act in the ``best interests'' of the special entity and
undertake ``reasonable efforts to obtain such information as is
necessary to make a reasonable determination'' that a recommended
security-based swap is in the best interests of the special
entity.\399\ Section 15F(h)(5) requires that security-based swap
dealers that enter into, or offer to enter into, security-based swaps
with a special entity comply with any duty established by the
Commission that requires a security-based swap dealer to have a
``reasonable basis'' for believing that a special entity has an
``independent representative'' that meets certain criteria and
undertakes a duty to act in the ``best interests'' of the special
entity.
---------------------------------------------------------------------------

    \399\ See External Business Conduct Standards Proposing Release,
76 FR 42423-25.
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    The Commission has proposed Rules 15Fh-1 through 15Fh-6 under the
Exchange Act to implement the business conduct requirements described
above.\400\ In addition to external business conduct standards
expressly addressed by Title VII, the Commission has proposed certain
other business conduct requirements for security-based swap dealers
that the Commission preliminarily believed would further the principles
that underlie the Dodd-Frank Act. These rules would, among other
things, impose certain ``know your counterparty'' and suitability
obligations on security-based swap dealers, as well as restrict
security-based swap dealers from engaging in certain ``pay to play''
activities.\401\
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    \400\ See External Business Conduct Standards Proposing Release,
76 FR 42396.
    \401\ See External Business Conduct Standards Proposing Release,
76 FR 42399-400; proposed Rules 15Fh-3(e) (``know your
counterparty''), 15Fh-3(f) (``suitability''), and 15Fh-6 (``pay to
play'') under the Exchange Act.
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ii. Segregation of Assets
    Segregation requirements are designed to identify and protect
customer property held by a security-based swap dealer as collateral in
order to facilitate the prompt return of the property to customers or
counterparties in a liquidation proceeding of such security-based swap
dealer.\402\ Segregation not only protects counterparties who are
customers of a security-based swap dealer but also facilitates orderly
liquidation of a security-based swap dealer and minimizes the
disruption to and impact on the U.S. security-based swap market and the
U.S. financial system overall caused by insolvency and liquidation of a
security-based swap dealer.
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    \402\ Proposed Rule 18a-4 under the Exchange Act, as discussed
in Section II.C. of the Capital, Margin, and Segregation Proposing
Release, 77 FR 70274.
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    Section 3E of the Exchange Act provides the Commission with
rulemaking authority to prescribe segregation requirements for
securities-based swap dealers that receive assets from, for, or on
behalf of a counterparty to margin, guarantee, or secure a security-
based swap transaction.\403\ Section 3E(c) provides the Commission with
rulemaking authority to prescribe how any margin received by a
security-based swap dealer with respect to cleared security-based swap
transactions may be maintained, accounted for, treated and dealt with
by the security-based swap dealer.\404\ In addition, Section 3E(g)
extended the customer protections of the U.S. Bankruptcy Code to
counterparties of a security-based swap dealer with respect to cleared
security-based swaps, and with respect to non-cleared security-based
swaps, if there is a customer protection requirement under Section
15(c)(3) or a segregation requirement

prescribed by the Commission.\405\ The Commission has proposed Rule
18a-4 under the Exchange Act to establish segregation requirements for
security-based swap dealers with respect to both cleared and non-
cleared security-based swap transactions.\406\ The provisions of
proposed Rule 18a-4 were modeled on the broker-dealer customer
protection rule and take into account the characteristics of security-
based swaps.\407\
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    \403\ See Section 3E of the Exchange Act, 15 U.S.C. 78c-5.
    \404\ See Section 3E(c)(2) of the Exchange Act, 15 U.S.C. 78c-
5(c)(2).
    \405\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g);
Capital, Margin, and Segregation Proposing Release, 77 FR 70275.
    \406\ Proposed Rule 18a-4 under the Exchange Act, as discussed
in the Capital, Margin, and Segregation Proposing Release, 77 FR
70274-88.
    \407\ 17 CFR 240.15c3-3. See Capital, Margin, and Segregation
Proposing Release, 77 FR 70276.
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(b) Entity-Level Requirements
    Entity-level requirements in Title VII primarily address concerns
relating to the security-based swap dealer as a whole, with a
particular focus on safety and soundness of the entity to reduce
systemic risk in the U.S. financial system.\408\ The most significant
entity-level requirements, as discussed below, are capital and margin
requirements. Certain other entity-level requirements relate to the
capital and margin requirements because, at their core, they relate to
how the firm identifies and manages its risk exposure arising from its
activities (e.g., risk management requirements). Given their functions,
these entity-level requirements would be applied under our proposal on
a firm-wide basis to address risks to the security-based swap dealer as
a whole.
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    \408\ For example, Section 15F(e)(3) of the Exchange Act
provides that the requirements relating to capital and margin
imposed by the Commission pursuant to Section 15F(e)(2) shall help
ensure the safety and soundness of the security-based swap dealer
and be appropriate for the risk associated with the non-cleared
security-based swaps held as a security-based swap dealer in order
``[t]o offset the greater risk to the security-based swap dealer . .
. and the financial system arising from the use of security-based
swaps that are not cleared.''
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i. Capital
    The Commission is required to establish minimum requirements
relating to capital for security-based swap dealers for which there is
not a prudential regulator (``nonbank security-based swap
dealers'').\409\ The prudential regulators are required to establish
requirements relating to capital for bank security-based swap
dealers.\410\ Some security-based swap dealers may also be registered
as swap dealers with the CFTC. The CFTC is required to establish
capital requirements for nonbank swap dealers.\411\ The prudential
regulators are required to establish capital requirements for bank swap
dealers.\412\
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    \409\ See Section 15F(e)(1)(B) of the Exchange Act, 15 U.S.C.
78o-10(e)(1)(B); note 34, supra (discussing the term ``prudential
regulator'').
    \410\ See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C.
78o-10(e)(1)(A); see also Prudential Regulators Proposed Rule,
Margin and Capital Requirements for Covered Swap Entities, 76 FR
27564 (May 11, 2011) (``Prudential Regulator Margin and Capital
Proposal'').
    \411\ See Section 4s(e)(1)(B) of the CEA, 7 U.S.C. 6s(e)(1)(B),
as added by Section 731 of the Dodd-Frank Act; see also CFTC
Proposed Rule, Capital Requirements of Swap Dealers and Major Swap
Participants, 76 FR 27802 (May 12, 2011) (``CFTC Capital
Proposal'').
    \412\ See Section 4s(e)(1)(A) of the CEA, 7 U.S.C. 6s(e)(1)(A);
see also Prudential Regulator Margin and Capital Proposal, 76 FR
27564.
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    The objective of the Commission's proposed capital rule for
security-based swap dealers is the same as the Commission's capital
rule for broker-dealers; specifically, to ensure that the entity
maintains at all times sufficient liquid assets to (i) promptly satisfy
its liabilities--the claims of customers, creditors, and other
security-based swap dealers, and (ii) provide a cushion of liquid
assets in excess of liabilities to cover potential market, credit, and
other risks.\413\
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    \413\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70218 (``[T]he capital and other financial responsibility
requirements for broker-dealers generally provide a reasonable
template for crafting the corresponding requirements for nonbank
[security-based swap dealers]. For example, among other
considerations, the objectives of capital standards for both types
of entities are similar.'').
---------------------------------------------------------------------------

    As noted above, the Commission's proposed capital rules focus on
the liquid assets of a nonbank security-based swap dealer available to
satisfy its liabilities or cover its risks in a liquidation scenario.
This focus on liquid assets would distinguish the Commission's capital
rules applicable to security-based swap dealers from those applicable
to banks, which generally include a more permissive list of assets that
may be taken into account for purposes of capital calculations.\414\
The difference in approach between the capital rules applicable to
nonbank dealers and bank dealers is supported by certain operational,
policy, and legal differences between nonbank security-based swap
dealers and bank security-based swap dealers.\415\ Notably, existing
capital standards for banks and broker-dealers reflect, in part,
differences in their funding models and access to certain types of
financial support, and we expect that those same differences also will
exist between bank security-based swap dealers and nonbank security-
based swap dealers. For example, banks obtain funding through customer
deposits and can generally obtain liquidity through the Federal
Reserve's discount window to meet their obligations,\416\ whereas
broker-dealers and nonbank security-based swap dealers cannot.\417\
Thus all of a nonbank entity's counterparty obligations must be met
through the nonbank entity's own liquid assets. For these reasons, the
Commission's proposed capital standard for nonbank security-based swap
dealers is a net liquid assets test modeled on the broker-dealer
capital standard in Rule 15c3-1 under the Exchange Act.\418\
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    \414\ See, e.g., Basel Committee on Banking Supervision
(``BCBS''), Basel III: International framework for liquidity risk
measurement, standards and monitoring for banks (Dec. 2010) (``Basel
III''), available at: http://www.bis.org/publ/bcbs188.pdf.
    \415\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70218. In this release, the Commission discussed the operational,
policy, and legal differences between banks and nonbank entities for
distinguishing the Commission's capital rules from those applicable
to bank security-based swap dealers.
    \416\ Depository institutions that maintain transaction accounts
or non-personal time deposits subject to reserve requirements are
eligible to borrow funds from the Federal Reserve's discount window,
such as commercial banks, thrift institutions, and U.S. branches and
agencies of foreign banks. See Regulation D, 12 CFR part 204.
    \417\ Under the segregation requirements in Rule 15c3-3 under
the Exchange Act and proposed Rule 18a-4 under the Exchange Act,
broker-dealers and security-based swap dealers are not permitted to
rehypothecate customer assets to finance their business activity.
Thus, they cannot use customer assets as a source of funding,
whereas banks are in the business of investing customer deposits
(subject to banking regulations).
    \418\ Id.
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ii. Margin
    Margin may be viewed as an entity-level requirement given its
effect on the financial soundness of an entity, as well as a
transaction-level requirement due to the fact that margin is calculated
based on particular transactions and positions. Although margin is
calculated based on individual transactions, the cumulative effect of
collecting margin from counterparties is to protect an entity from the
default of its counterparties. Given the emphasis placed on the
financial soundness of security-based swap dealers in Title VII,\419\
we believe that margin should be treated as an entity-level requirement
for purposes of implementing Title VII in the cross-border context.
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    \419\ See, e.g., Section 15F(e)(3)(A)(i) of the Exchange Act, 15
U.S.C. 78o-10(e)(3)(A)(i) (stating that Title VII's capital and
margin requirements are intended to ``help ensure the safety and
soundness of the security-based swap dealer or major security-based
swap participant''). In setting capital and margin requirements for
security-based swap dealers and major security-based swap
participants, the Commission's goal is to help ensure the safety and
soundness of these entities because of their connection to the U.S.
financial system.
---------------------------------------------------------------------------

    We recognize that this approach differs from the approach to margin

proposed by the CFTC in its cross-border guidance, which focused on the
transaction-by-transaction nature of margin and thus treated it as a
transaction-level requirement.\420\ However, we preliminarily believe
that treating margin as an entity-level requirement is consistent with
the role margin plays as part of an integrated program of financial
responsibility requirements, along with the capital standards and
segregation requirements, that are intended to enhance the financial
integrity of security-based swap dealers.\421\ The margin requirements
proposed by the Commission are intended to work in tandem with the
capital requirements to strengthen the financial system by reducing the
potential for default to an acceptable level and limiting the amount of
leverage that can be employed by security-based swap dealers and other
market participants.\422\ For example, the capital requirements
proposed by the Commission take into account whether a security-based
swap is cleared or non-cleared, the amount of margin collateral imposed
by registered clearing agencies with respect to cleared security-based
swaps, and the circumstances where non-cleared security-based swaps are
excepted from the margin collection requirements imposed by the
Commission, and would impose a capital charge in certain cases for
uncollateralized or insufficiently collateralized exposures arising
from cleared or non-cleared security-based swaps in order to account
for the counterparty default risk that is not adequately addressed by
margin collateral.\423\ We preliminarily do not believe that margin
would effectively fulfill its purpose as part of a comprehensive
financial responsibility program for non-bank security-based swap
dealers if the Commission were to treat margin solely as a transaction-
level requirement.
---------------------------------------------------------------------------

    \420\ See CFTC Cross-Border Proposal, 77 FR 41226.
    \421\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70303 and 70259.
    \422\ See id. at 70304.
    \423\ See id. at 70245-46.
---------------------------------------------------------------------------

    The division of regulatory responsibilities related to margin
requirements in Title VII mirrors that of the capital requirements
discussed above. As with capital, the Commission is required to
establish minimum requirements relating to initial and variation margin
on all security-based swaps that are not cleared by a registered
clearing agency for nonbank security-based swap dealers.\424\ The
prudential regulators are required to establish requirements relating
to margin for bank security-based swap dealers.\425\ Security-based
swap dealers that are also registered as swap dealers with the CFTC
also would be subject to CFTC requirements for nonbank swap dealers
with respect to initial and variation margin requirements on all swaps
that are not cleared by a registered derivatives clearing
organization.\426\
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    \424\ See Sections 15F(e)(1)(B) and (2)(B) of the Exchange Act,
15 U.S.C. 78o-10(e)(1)(B) and (2)(B).
    \425\ See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C.
78o-10(e)(1)(A); see also Prudential Regulator Margin and Capital
Proposal, 76 FR 27564.
    \426\ See Section 4s(e)(1)(B) of the CEA, 7 U.S.C. 6s(e)(1)(B),
as added by Section 731 of the Dodd-Frank Act; see also CFTC
Proposed Rule, Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 76 FR 23732 (Apr. 28, 2011)
(``CFTC Margin Proposal''). The CFTC also has adopted segregation
requirements for cleared swaps and proposed segregation requirements
for non-cleared swaps. See Protection of Cleared Swaps Customer
Contracts and Collateral; Conforming Amendments to the Commodity
Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012) (``CFTC
Segregation for Cleared Swaps Final Release''); Protection of
Collateral of Counterparties to Uncleared Swaps; Treatment of
Securities in a Portfolio Margining Account in a Commodity Broker
Bankruptcy, 75 FR 75432 (Dec. 3, 2010) (``CFTC Segregation for
Uncleared Swaps Proposing Release'').
---------------------------------------------------------------------------

    The objective of the margin requirements for security-based swap
dealers is to offset the greater risk to the security-based swap dealer
and the financial system arising from the use of security-based swaps
that are not cleared.\427\ Margin serves as a buffer in the event a
counterparty fails to meet an obligation to the security-based swap
dealer and the security-based swap dealer must liquidate the assets
posted by the counterparty to satisfy the obligation.\428\ More
generally, under Title VII, the Commission is specifically required to
set both capital and margin requirements for nonbank security-based
swap dealers that (i) help ensure the safety and soundness of the
nonbank security-based swap dealer and (ii) are appropriate for the
risk associated with the non-cleared swaps held as a security-based
swap dealer.\429\
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    \427\ See Section 15F(e)(3)(A) of the Exchange Act, 15 U.S.C.
78o-10(e)(3)(A).
    \428\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70259.
    \429\ See Sections 15F(e)(3)(A)(i) and (ii) of the Exchange Act,
15 U.S.C. 78o-10(e)(3)(A)(i) and (ii).
---------------------------------------------------------------------------

    Pursuant to Section 15F(e) of the Exchange Act, the Commission has
proposed Rule 18a-3 to establish margin requirements for nonbank
security-based swap dealers with respect to non-cleared security-based
swaps.\430\ Proposed Rule 18a-3 is based on the margin rules applicable
to broker-dealers.\431\ The goal of modeling proposed Rule 18a-3 on the
broker-dealer margin rules is to promote consistency with existing
rules and to facilitate the portfolio margining of security-based swaps
with other types of securities.\432\ Proposed Rule 18a-3 is intended to
form part of an integrated program of financial responsibility
requirements, along with the proposed capital and segregation
standards.\433\
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    \430\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70257-74.
    \431\ See id. at 70259. Broker-dealers are subject to margin
requirements in Regulation T promulgated by the Federal Reserve (12
CFR 220.1-220.132), in rules promulgated by the self-regulatory
organizations (``SROs'') (see, e.g., Rules 4210-4240 of the
Financial Industry Regulatory Authority (``FINRA'')), and with
respect to security futures, in rules jointly promulgated by the
Commission and the CFTC (17 CFR 242.400-242.406).
    \432\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70259.
    \433\ Id.
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    The Commission preliminarily believes that it is necessary to treat
margin as an entity-level requirement applicable to all of a dealer's
security-based swap transactions in order to effectively address the
Dodd-Frank Act requirements for setting margin. We preliminarily
believe that treating margin solely as a transaction-level requirement,
and applying margin requirements differently to a security-based swap
dealer's U.S. Business and Foreign Business,\434\ would not adequately
further the goals of using margin to ensure the safety and soundness of
security-based swap dealers because it could result in security-based
swap dealers with global businesses collecting significantly less
collateral than would otherwise be required to the extent that they are
not required by local law to collect margin from their counterparties.
Further, separately applying margin in this way would force those
counterparties entering into transactions that constitute the U.S.
Business of a dealer to bear a greater burden in ensuring the safety
and soundness of such dealer than counterparties that are part of the
dealer's Foreign Business.\435\ We thus preliminarily believe that it
is

appropriate to treat margin as an entity-level requirement applicable
to the security-based swap transactions of registered security-based
swap dealers regardless of the location of their counterparties. As
noted below, the Commission is soliciting comment on this approach.
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    \434\ See proposed Rule 3a71-3(a)(2) under the Exchange Act
(defining ``Foreign Business'').
    \435\ Although we do not believe that it is appropriate to
distinguish between the geographic locations of counterparties when
applying the margin requirement, we recognize that it may be
appropriate, in certain circumstances, to distinguish between types
of counterparties in applying margin based on such factors as the
risk they pose to dealers and the policy goal of promoting liquidity
in dealers. See Capital, Margin, and Segregation Proposing Release,
77 FR 70265-68 (proposing to exclude both transactions with
commercial end users and those with other dealers from certain
margin requirements applicable to security-based swap dealers).
---------------------------------------------------------------------------

iii. Risk Management
    Registered security-based swap dealers are required to establish
robust and professional risk management systems adequate for managing
their day-to-day business.\436\ The Commission has proposed that
nonbank security-based swap dealers would be required to comply with
existing Rule 15c3-4 under the Exchange Act.\437\ This rule, originally
adopted for OTC derivative dealers, requires firms subject to its
provisions to establish, document, and maintain a comprehensive system
of internal risk management controls to assist in managing the risks
associated with its business activities, including market, credit,
leverage, liquidity, legal, and operational risks.\438\ These various
risks arise from both the U.S. Business and Foreign Business of a
global security-based swap dealer. A risk management system limited in
scope to cover only one type of business, or limited to certain
security-based swap transactions, would not effectively control the
risks undertaken by a security-based swap dealer because the risks
stemming from business outside the scope of such risk management system
could still negatively impact the dealer. As a result, we preliminarily
believe that it is necessary to treat risk management requirements as
entity-level requirements in order to place risk controls over the
entire security-based swap business, thus effectively addressing the
Dodd-Frank Act requirements for managing risk within security-based
swap dealers.
---------------------------------------------------------------------------

    \436\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
    \437\ See proposed new paragraph (a)(10)(ii) of Rule 15c3-1
under the Exchange Act (17 CFR 240.15c3-1); paragraph (g) of
proposed new Rule 18a-1 under the Exchange Act. See also 17 CFR
240.15c3-4; Capital, Margin, and Segregation Proposing Release, 77
FR 70250-51. The Commission has not proposed rules relating to risk
management for bank security-based swap dealers.
    \438\ See OTC Derivatives Dealers, Exchange Act Release No.
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998).
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    Rule 15c3-4 identifies a number of qualitative factors that would
need to be a part of the risk management controls of a nonbank
security-based swap dealer. For example, a nonbank security-based swap
dealer would need to have a risk control unit that reports directly to
senior management and is independent from business trading units, and
it would be required to separate duties between personnel responsible
for entering into a transaction and those responsible for recording the
transaction in the books and records of the firm.\439\ In addition, the
Commission is authorized to adopt rules governing documentation
standards of security-based swap dealers for timely and accurate
confirmation, processing, netting, documentation, and valuation of
security-based swaps.\440\ Pursuant to this authority, the Commission
has proposed rules regarding trade acknowledgement and verification
related to security-based swap transactions.\441\
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    \439\ See 17 CFR 240.15c3-4(c), as discussed in the Capital,
Margin, and Segregation Proposing Release, 77 FR 70250.
    \440\ See Section 15F(i) of the Exchange Act, 15 U.S.C. 78o-
10(i).
    \441\ See Trade Acknowledgement Proposing Release, 76 FR 3859.
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iv. Recordkeeping and Reporting
    Registered nonbank security-based swap dealers are required to keep
books and records in such form and manner and for such period as may be
prescribed by the Commission by rule or regulation; registered bank
security-based swap dealers are required to keep books and records of
all activities related to their ``business as a security-based swap
dealer'' in such form and manner and for such period as may be
prescribed by the Commission.\442\ Registered security-based swap
dealers also are required to make such reports as are required by the
Commission regarding the transactions and positions, and financial
condition of the registrant.\443\
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    \442\ See Sections 15F(f)(1)(B)(i) and (ii) of the Exchange Act,
15 U.S.C. 78o-10(f)(1)(B)(i) and (ii).
    \443\ See Section 15F(f)(1)(A) of the Exchange Act, 15 U.S.C.
78o-10(f)(1)(A).
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    In addition, security-based swap dealers are required to maintain
daily trading records of the security-based swaps they enter into.\444\
Security-based swap dealers also are required to disclose to the
Commission and the prudential regulators information concerning: (i)
Terms and conditions of their security-based swaps; (ii) security-based
swap trading operations, mechanisms, and practices; (iii) financial
integrity protections relating to security-based swaps; and (iv) other
information relevant to their trading in security-based swaps.\445\
---------------------------------------------------------------------------

    \444\ See Section 15F(g) of the Exchange Act, 15 U.S.C. 78o-
10(g).
    \445\ See Section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o-
10(j)(3).
---------------------------------------------------------------------------

    Each of these types of records is an important part of the
Commission's oversight of our registrants because it provides the
Commission with vital information regarding such entities. If the
Commission's information were limited in scope to cover only one type
of business, or limited to only certain security-based swap activities,
the Commission would not be able to effectively regulate our registered
security-based swap dealers because it would not have a full picture of
the business of such registrants. As a result, we preliminarily believe
that it is necessary to treat recordkeeping and reporting as entity-
level requirements in order to provide the Commission with the
information necessary to regulate registered security-based swap
dealers and thus effectively address the Dodd-Frank Act requirements
for maintaining books and records.
    The Commission has not yet proposed rules regarding the
recordkeeping and reporting requirements under Section 15F of the
Exchange Act and solicits comment regarding the application of
recordkeeping and reporting requirements in the cross-border context.
v. Internal System and Controls
    Security-based swap dealers are required to establish and enforce
systems and procedures to obtain any information that is necessary to
perform any of the functions that are required under Section 15F(j) of
the Exchange Act \446\ and to provide this information to the
Commission, or the responsible prudential regulator, upon request.\447\
The Commission has proposed a rule that would require a registered
security-based swap dealer to establish policies and procedures that
are reasonably designed to comply with its responsibilities under
Section 15F(j) of the Exchange Act.\448\
---------------------------------------------------------------------------

    \446\ 15 U.S.C. 78o-10(j). These functions include monitoring of
applicable position limits under Section 15F(j)(1) of the Exchange
Act, 15 U.S.C. 78o-10(j)(1); establishment of risk management
procedures under Section 15F(j)(2) of the Exchange Act, 15 U.S.C.
78o-10(j)(2); disclosure of general information to the Commission
and prudential regulators under Section 15F(j)(3) of the Exchange
Act, 15 U.S.C. 78o-10(j)(3); establishment of policies and
procedures to avoid conflicts of interest under Section 15F(j)(5) of
the Exchange Act, 15 U.S.C. 78o-10(j)(5); and avoidance of any
actions that result in an unreasonable restraint of trade or place
any material anticompetitive burden on trading or clearing under
Section 15F(j)(6) of the Exchange Act, 15 U.S.C. 78o-10(j)(6).
    \447\ See Section 15F(j)(4) of the Exchange Act, 15 U.S.C. 78o-
10(j)(4).
    \448\ See proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act,
as discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42420.
---------------------------------------------------------------------------

    Many of the functions required under Section 15F(j) of the Exchange
Act are

entity-level in nature (e.g., risk management procedures \449\ and
conflicts of interest \450\). As a result, we preliminarily believe
that the requirement to establish and enforce systems and procedures to
obtain any information that is necessary to perform these functions
cannot be effectively implemented unless it also is treated as an
entity-level requirement, or else it would not cover the full scope of
the requirements under Section 15F(j) of the Exchange Act to which it
applies.
---------------------------------------------------------------------------

    \449\ See Section III.C.3(b)iii, supra.
    \450\ See Section III.C.3(b)vii, infra.
---------------------------------------------------------------------------

vi. Diligent Supervision
    The Commission is authorized under the Dodd-Frank Act to adopt
rules requiring diligent supervision of the business of security-based
swap dealers.\451\ The Commission has proposed a rule that would
establish supervisory obligations and that would incorporate principles
from Section 15(b) of the Exchange Act and existing SRO rules.\452\
Among other things, under proposed Rule 15Fh-3(h), a security-based
swap dealer would be required to establish, maintain, and enforce a
system to supervise, and would be required to supervise diligently, its
business and its associated persons, with a view to preventing
violations of applicable federal securities laws, and the rules and
regulations thereunder, relating to its business as a security-based
swap dealer.\453\ The rule proposed by the Commission also would
establish certain minimum requirements relating to the supervisory
systems that are prescriptive in nature, that is, they would impose
specific obligations on security-based swap dealers.\454\
---------------------------------------------------------------------------

    \451\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C.
78o-10(h)(1)(B).
    \452\ Proposed Rule 15Fh-3(h) under the Exchange Act, as
discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42419-21.
    \453\ Proposed Rule 15Fh-3(h)(1) under the Exchange Act, as
discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42419-21.
    \454\ Proposed Rule 15Fh-3(h)(2) under the Exchange Act, as
discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42419-21.
---------------------------------------------------------------------------

    As previously noted, the purpose of diligent supervision
requirements is to prevent violations of applicable federal securities
laws, and the rules and regulations thereunder, relating to an entity's
business as a security-based swap dealer. An entity's business as a
security-based swap dealer is not limited to either its Foreign
Business or its U.S. Business, but rather is comprised of its entire
global security-based swap dealing activity. As a result, we
preliminarily believe that it is necessary to treat diligent
supervision as an entity-level requirement applicable to all of a
dealer's security-based swap transactions in order to effectively
address the Dodd-Frank Act requirements for diligent supervision. We
believe that treating diligent supervision solely as a transaction-
level requirement, and applying supervisory requirements differently to
a security-based swap dealer's U.S. Business and Foreign Business,
would not further the Dodd-Frank Act goal of establishing effective
supervisory systems for security-based swap dealers.
vii. Conflicts of Interest
    Section 15F(j)(5) of the Exchange Act requires security-based swap
dealers to implement conflict-of-interest systems and procedures. Such
policies and procedures must establish structural and institutional
safeguards to ensure that the activities of any person within the firm
relating to research or analysis of the price or market for any
security-based swap, or acting in the role of providing clearing
activities, or making determinations as to accepting clearing customers
are separated by appropriate informational partitions within the firm
from the review, pressure, or oversight of persons whose involvement in
pricing, trading, or clearing activities might potentially bias their
judgment or supervision, and contravene the core principles of open
access and the business conduct standards addressed in Title VII.\455\
The Commission has proposed a rule that would require a security-based
swap dealer to establish policies and procedures that are reasonably
designed to comply with its responsibilities under Section
15F(j)(5).\456\
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    \455\ See Section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o-
10(j)(5), as discussed in the External Business Conduct Standards
Proposing Release, 76 FR 42420.
    \456\ Proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act, as
discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42420.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is necessary to treat
conflicts of interest as an entity-level requirement applicable to all
of a dealer's security-based swap transactions in order to effectively
address the Dodd-Frank Act requirements for setting systems and
procedures to prevent conflicts of interest from biasing the judgment
or supervision of security-based swap dealers. We believe that treating
conflicts of interest solely as a transaction-level requirement, and
applying the required structural and institutional safeguards
differently to a security-based swap dealer's U.S. Business and Foreign
Business, would not further the goals of preventing conflicts of
interest from influencing the security-based swap dealing activities of
registered security-based swap dealers because such safeguards would
only be in place for a portion of a security-based swap dealer's
activities.
viii. Chief Compliance Officer
    Registered security-based swap dealers are required to designate a
chief compliance officer who reports directly to the board of directors
or to the senior officer of the security-based swap dealer.\457\ The
chief compliance officer's responsibilities include reviewing and
ensuring compliance of the security-based swap dealer with applicable
requirements in the Exchange Act and the rules and regulations
thereunder, resolution of conflicts of interest, administration of
business conduct policies and procedures, and establishment of
procedures for the remediation of noncompliance issues.\458\ The chief
compliance officer also is required to prepare and sign a report that
contains a description of the security-based swap dealer's compliance
with applicable requirements in the Exchange Act, and the rules and
regulations thereunder, and each of the security-based swap dealer's
policies and procedures.\459\ The Commission has proposed a rule to
implement these statutory requirements relating to the designation and
functions of a chief compliance officer.\460\
---------------------------------------------------------------------------

    \457\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \458\ See Section 15F(k)(2) of the Exchange Act, 15 U.S.C. 78o-
10(k)(2).
    \459\ See Section 15F(k)(3) of the Exchange Act, 15 U.S.C. 78o-
10(k)(3).
    \460\ Proposed Rule 15Fk-1 under the Exchange Act, as discussed
in the External Business Conduct Standards Proposing Release, 76 FR
42435-38.
---------------------------------------------------------------------------

    As noted above, part of the chief compliance officer's
responsibilities, under the proposed rule, include establishing,
maintaining, and reviewing policies and procedures reasonably designed
to ensure compliance with applicable requirements in the Exchange Act
and the rules and regulations thereunder.\461\ Many of Title VII
requirements, such as those applicable to security-based swap dealers
that are described in this section, apply at the entity level. As a
result, we preliminarily believe that it is necessary to treat the
chief compliance officer as an entity-level requirement applicable to
all of a dealer's security-

based swap business in order to effectively address the Dodd-Frank Act
requirements for the chief compliance officer. We believe that treating
the chief compliance officer solely as a transaction-level requirement,
and applying the chief compliance officer requirements differently to a
security-based swap dealer's U.S. Business and Foreign Business, would
be unworkable given the chief compliance officer's oversight
responsibilities over entity-level requirements and thus would not
further the goals of establishing the chief compliance officer role for
security-based swap dealers.
---------------------------------------------------------------------------

    \461\ See Proposed Rule 15Fk-1(b)(2) under the Exchange Act, as
discussed in the External Business Conduct Standards Proposing
Release, 76 FR 42435-36.
---------------------------------------------------------------------------

ix. Inspection and Examination
    Registered bank and nonbank security-based swap dealers are
obligated to keep their books and records required pursuant to
Commission rules and regulations open to inspection and examination by
any representative of the Commission.\462\ The Commission has proposed
a rule that would require, among other things, ``nonresident security-
based swap dealers'' that are required to register with the Commission
to appoint and identify to the Commission an agent in the United States
(other than the Commission or a Commission member, official, or
employee) for service of process.\463\ In addition, the proposed rule
would require that a nonresident security-based swap dealer certify
that the firm can, as a matter of law, provide the Commission with
prompt access to its books and records and can, as a matter of law,
submit to onsite inspection and examination by the Commission.\464\ The
proposed rule also would require that the nonresident security-based
swap dealer provide the Commission with an opinion of counsel
concurring that the firm can, as a matter of law, provide the
Commission with prompt access to its books and records and can, as a
matter of law, submit to onsite inspection and examination by the
Commission.\465\
---------------------------------------------------------------------------

    \462\ See Section 15F(f)(1)(C) of the Exchange Act, 15 U.S.C.
78o-10(f)(1)(C). Registered bank security-based swap dealers are
only required to keep the books and records associated with the
activities related to their security-based swap dealing business, as
prescribed by the Commission, and to make these books and records
available for inspection by any representative of the Commission.
See id.
    \463\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed
in the Registration Proposing Release, 76 FR 65799. For a
description of the term ``nonresident security-based swap dealer''
as defined in proposed Rule 15Fb2-4(a) under the Exchange Act,
including how that definition differs from the definition of the
term ``foreign security-based swap dealer'' as proposed in this
release, see note 579 above.
    \464\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed
in the Registration Proposing Release, 76 FR 65800.
    \465\ Proposed Rule 15Fb2-4 under the Exchange Act, as discussed
in the Registration Proposing Release, 76 FR 65799-801.
---------------------------------------------------------------------------

    In proposing this rule, the Commission stated that it preliminarily
believed that the nonresident security-based swap certification and
supporting opinion of counsel were important to confirm that each
registered nonresident security-based swap dealer has taken the
necessary steps to be in the position to provide the Commission with
prompt access to its books and records and to be subject to inspection
and examination by the Commission.\466\ To effectively fulfill our
regulatory oversight responsibilities with respect to nonresident
security-based swap dealers registered with it, the Commission stated
that it must have access to those entities' records and the ability to
examine them. The Commission recognized, however, that certain foreign
jurisdictions may have laws that complicate the ability of financial
institutions, such as nonresident security-based swap dealers located
in their jurisdictions, to share and/or transfer certain information
including personal financial data of individuals that the financial
institutions come to possess from third persons (e.g., personal data
relating to the identity of market participants or their
customers).\467\ The Commission further stated that the required
certification and opinion of counsel regarding the nonresident
security-based swap dealer's ability to provide prompt access to books
and records and to be subject to inspection and examination would allow
the Commission to better evaluate a nonresident security-based swap
dealer's ability to meet the requirements of registration and ongoing
supervision.\468\
---------------------------------------------------------------------------

    \466\ See Registration Proposing Release, 76 FR 65800.
    \467\ Id.
    \468\ Id.
---------------------------------------------------------------------------

    The Commission's inspection and examination authority is vital to
our oversight of registered security-based swap dealers. If the
Commission's inspection and examination were limited in scope to cover
only one type of business, or limited to only certain security-based
swap activities, the Commission would not be able to effectively
regulate our registered security-based swap dealers because it would
not have a full picture of the business of such registrants. As a
result, we preliminarily believe that it is necessary to treat
inspection and examination requirements as entity-level in order to
provide the Commission with the information and access necessary to
regulate registered security-based swap dealers.
x. Licensing Requirements and Statutory Disqualification
    The Commission has not proposed any licensing requirements for
associated persons of registered security-based swap dealers, that are
specifically related to their security-based swap dealing activities.
However, the Commission has proposed a rule that would require
security-based swap dealers (and major security-based swap
participants) to certify that no person associated with such entities
who effects or is involved in effecting security-based swaps on their
behalf is subject to statutory disqualification, as defined in Section
3(a)(39) of the Exchange Act.\469\ This proposed rule relates to
paragraph (b)(6) of Section 15F of the Exchange Act,\470\ which
generally prohibits security-based swap dealers (and major security-
based swap participants) from permitting any of their associated
persons \471\\\ who are subject to a ``statutory disqualification'' to
effect or be involved in effecting \472\\\ security-based swaps on
behalf of such entities if the security-based swap dealer (or major
security-based swap participant) knew, or in the exercise of

reasonable care should have known, of the statutory
disqualification.\473\
---------------------------------------------------------------------------

    \469\ 15 U.S.C. 78c(a)(39). See proposed Rule 15Fb6-1 under the
Exchange Act, as discussed in the Registration Proposing Release, 76
FR 65795.
    \470\ 15 U.S.C. 78o-10(b)(6).
    \471\ Section 3(a)(70) of the Exchange Act, 15 U.S.C.
78c(a)(70), generally defines the term ``person associated with'' a
security-based swap dealer or major security-based swap participant
(``SBS Entity'') to include: (i) any partner, officer, director, or
branch manager of an SBS Entity (or any person occupying a similar
status or performing similar functions); (ii) any person directly or
indirectly controlling, controlled by, or under common control with
an SBS Entity; or (iii) any employee of an SBS Entity. However, it
generally excludes persons whose functions are solely clerical or
ministerial.
    \472\ As stated in the Registration Proposing Release, ``[t]he
Commission believes that associated persons `involved in effecting'
security-based swaps would include, but not be limited to, persons
involved in drafting and negotiating master agreements and
confirmations, persons recommending security-based swap transactions
to counterparties, persons on a trading desk actively involved in
effecting security-based swap transactions, persons pricing
security-based swap positions and managing collateral for the
[security-based swap dealer or major security-based swap
participant], and persons assuring that the [security-based swap
dealer's or major security-based swap participant's] security-based
swap business operates in compliance with applicable regulations. In
short, the term would encompass persons engaged in functions
necessary to facilitate the [security-based swap dealer's or major
security-based swap participant's] security-based swap business.''
Registration Proposing Release, 76 FR 65795 n. 56.
    \473\ See Registration Proposing Release, 76 FR 65795.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is necessary to treat
requirements related to licensing and statutory disqualification as
entity-level requirements applicable to all of a dealer's security-
based swap business in order to effectively address the Exchange Act's
statutory disqualification provision. We believe that treating
licensing requirements and statutory disqualification solely as
transaction-level requirements, and applying the statutory
disqualification differently to a security-based swap dealer's U.S.
Business and Foreign Business, would not further the goals of
preventing statutorily disqualified persons from effecting security-
based swaps on behalf of registered security-based swap dealers because
such disqualifications would only be in place for a portion of a
security-based swap dealer's activities.
4. Application of Certain Transaction-Level Requirements \474\
---------------------------------------------------------------------------

    \474\ For purposes of this discussion, we are addressing only
requirements applicable to security-based swap dealers in Sections
3E and 15F of the Exchange Act, 15 U.S.C. 78c-5 and 78o-10, and the
rules and regulations thereunder. Title VII requirements relating to
reporting and dissemination, clearing, and trade execution are
discussed in Sections VIII-X, infra.
---------------------------------------------------------------------------

(a) Proposed Rule
    The Commission is proposing a rule that would provide that a
registered foreign security-based swap dealer and a foreign branch of a
registered U.S. security-based swap dealer, with respect to their
Foreign Business, shall not be subject to the requirements relating to
external business conduct standards described in Section 15F(h) of the
Exchange Act,\475\ and the rules and regulations thereunder, other than
the rules and regulations prescribed by the Commission pursuant to
Section 15F(h)(1)(B).\476\
---------------------------------------------------------------------------

    \475\ 15 U.S.C. 78o-10(h).
    \476\ Proposed Rule 3a71-3(c) under the Exchange Act. The
approach under the proposed rule does not affect applicability of
the general antifraud provisions of the federal securities laws to
the activity of a foreign security-based swap dealer. See Section
XII, infra.
---------------------------------------------------------------------------

    The proposed rule would define ``Foreign Business'' as security-
based swap transactions entered into, or offered to be entered into, by
or on behalf of a foreign security-based swap dealer or a U.S.
security-based swap dealer that do not include its U.S. Business.\477\
The proposed rule would define ``U.S. Business'' as:
---------------------------------------------------------------------------

    \477\ Proposed Rule 3a71-3(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

     With respect to a foreign security-based swap dealer, (i)
any transaction entered into, or offered to be entered into, by or on
behalf of such foreign security-based swap dealer, with a U.S. person
(other than with a foreign branch), or (ii) any transaction conducted
within the United States; \478\ and
---------------------------------------------------------------------------

    \478\ Proposed Rule 3a71-3(a)(6) under the Exchange Act. A
person that meets the security-based swap dealer definition is a
dealer with regard to all of its security-based swap activities, not
just its dealing activities. See Intermediary Definitions Adopting
Release, 77 FR 30645. Accordingly, a foreign security-based swap
dealer's U.S. Business would not be limited only to transactions
arising from its dealing activity, but rather would include all
types of security-based swap activity.
---------------------------------------------------------------------------

     With respect to a U.S. security-based swap dealer, any
transaction by or on behalf of such U.S. security-based swap dealer,
wherever entered into or offered to be entered into, other than a
transaction conducted through a foreign branch with a non-U.S. person
or another foreign branch.\479\
---------------------------------------------------------------------------

    \479\ Proposed Rule 3a71-3(a)(6) under the Exchange Act.
---------------------------------------------------------------------------

    Whether the activity occurred within the United States or with a
U.S. person for purposes of identifying whether security-based swap
transactions are part of a U.S. Business or Foreign Business would turn
on the same factors used to determine whether a foreign security-based
swap dealer is engaging in dealing activity within the United States or
with U.S. persons, as discussed above.\480\ The proposed rule provides
that a U.S. security-based swap dealer would be considered to have
conducted a security-based swap transaction through a foreign branch
if:
---------------------------------------------------------------------------

    \480\ See Section III.B.6, supra (discussing the proposed
definition of ``transaction conducted within the United States'').
---------------------------------------------------------------------------

     The foreign branch is the counterparty to such security-
based swap transaction; and
     No person within the United States is directly involved in
soliciting, negotiating, or executing the security-based swap
transaction on behalf of the foreign branch or its counterparty.\481\
---------------------------------------------------------------------------

    \481\ Proposed Rule 3a71-3(a)(4) under the Exchange Act. See
also proposed Rule 3a71-3(a)(5)(ii) under the Exchange Act
(providing that the definition of ``transaction conducted within the
United States'' shall not include a transaction conducted through a
foreign branch).
---------------------------------------------------------------------------

As discussed above,\482\ the proposed rule would define ``foreign
branch'' as any branch of a U.S. bank if:
---------------------------------------------------------------------------

    \482\ See Section III.B.7, supra.
---------------------------------------------------------------------------

     The branch is located outside the United States;
     The branch operates for valid business reasons; and
     The branch is engaged in the business of banking and is
subject to substantive banking regulation in the jurisdiction where
located.\483\
---------------------------------------------------------------------------

    \483\ Proposed Rule 3a71-3(a)(1) under the Exchange Act.
---------------------------------------------------------------------------

    All other requirements in Section 15F of the Exchange Act, and the
rules and regulations thereunder, would apply to both U.S. and foreign
security-based swap dealers registered with the Commission, although
the Commission is proposing to establish a policy and procedural
framework under which it would consider permitting substituted
compliance for foreign security-based swap dealers (but not for U.S.
security-based swap dealers that conduct dealing activity through
foreign branches) under certain circumstances, as discussed below.\484\
---------------------------------------------------------------------------

    \484\ See Section XI.C, infra.
---------------------------------------------------------------------------

    The Commission also is proposing a rule that would provide that a
foreign security-based swap dealer would not be required to comply with
the segregation requirements set forth in Section 3E of the Exchange
Act, and the rules and regulations thereunder, with respect to
security-based transactions with non-U.S. person counterparties in
certain circumstances.\485\ Specifically, the Commission is proposing a
rule that would provide the following:
---------------------------------------------------------------------------

    \485\ Proposed Rule 18a-4(e) under the Exchange Act.
---------------------------------------------------------------------------

     With respect to non-cleared security-based swap
transactions:
    [cir] A registered foreign security-based swap dealer that is a
registered broker-dealer would be subject to the requirements relating
to segregation of assets held as collateral set forth in Section 3E of
the Exchange Act, and rules and regulations thereunder, with respect to
assets collected from, for, or on behalf of any counterparty to margin
a non-cleared security-based swap transaction.
    [cir] a registered foreign security-based swap dealer that is not a
registered broker-dealer would be subject to the requirements relating
to segregation of assets held as collateral set forth in Section 3E of
the Exchange Act, and Rules 18a-4(a)-(d), solely with respect to assets
collected from, for, or on behalf of a counterparty that is a U.S.
person to margin a non-cleared security-based swap transaction. The
special account maintained by a registered foreign security-based swap
dealer that is not a registered broker-dealer in accordance with
proposed Rule 18a-4(c) would be required to be designated for the
exclusive benefit of U.S. person security-based swap customers.\486\
---------------------------------------------------------------------------

    \486\ Proposed Rule 18a-4(e)(1) under the Exchange Act.
---------------------------------------------------------------------------

     With respect to cleared security-based swap transactions:

    [cir] A registered foreign security-based swap dealer that is not a
foreign bank with a branch or agency in the United States and is a
registered broker-dealer shall be subject to the requirements relating
to segregation of assets held as collateral set forth in Section 3E of
the Exchange Act, and rules and regulations thereunder, with respect to
assets collected from, for, or on behalf of any counterparty to margin
a cleared security-based swap transaction.
    [cir] a registered foreign security-based swap dealer that is not a
foreign bank with a branch or agency in the United States and that is
not a registered broker-dealer shall be subject to the requirements
relating to segregation of assets held as collateral set forth in
Section 3E of the Exchange Act, and Rules 18a-4(a)-(d), only if such
registered foreign security-based swap dealer accepts any assets from,
for, or on behalf of a counterparty that is a U.S. person to margin,
guarantee, or secure a cleared security-based swap transaction.\487\
---------------------------------------------------------------------------

    \487\ Proposed Rule 18a-4(e)(2)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    [cir] a registered foreign security-based swap dealer that is a
foreign bank with a branch or agency in the United States would be
subject to the requirements relating to segregation of assets held as
collateral set forth in Section 3E of the Exchange Act, and Rules 18a-
4(a)-(d),\488\ solely with respect to assets collected from a
counterparty that is a U.S. person to margin a cleared security-based
swap transaction. The special account maintained by a registered
foreign security-based swap dealer that is a foreign bank with a branch
or agency in the United States in accordance with proposed Rule 18a-
4(c) would be required to be designated for the exclusive benefit of
U.S. person security-based swap customers.\489\
---------------------------------------------------------------------------

    \488\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70274-88 (proposing Rules 18a-4(a)-(d) under the Exchange Act).
    \489\ Proposed Rule 18a-4(e)(2)(i) under the Exchange Act.
---------------------------------------------------------------------------

    In addition, a registered foreign security-based swap dealer would
be required to disclose to its counterparty the potential treatment of
the assets segregated by such registered foreign security-based swap
dealer pursuant to Section 3E of the Exchange Act, and rules and
regulations thereunder, in insolvency proceedings under the U.S.
bankruptcy law and applicable foreign insolvency laws.\490\
---------------------------------------------------------------------------

    \490\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
---------------------------------------------------------------------------

(b) Discussion
i. External Business Conduct Standards
a. Foreign Security-Based Swap Dealers
    The Commission preliminarily believes it is appropriate not to
impose on foreign security-based swap dealers the external business
conduct standards in Section 15F(h) (other than rules and requirements
prescribed by the Commission pursuant to Section 15F(h)(1)(B)) of the
Exchange Act, and the rules and regulations thereunder, described in
the proposed rule,\491\ with respect to their Foreign Business, because
these requirements relate primarily to customer protection. The Dodd-
Frank Act's counterparty protection mandate focuses on the United
States and the U.S. markets.\492\ In addition, we preliminarily believe
that foreign counterparties typically would not expect to receive the
customer protections of Title VII when dealing with a foreign security-
based swap dealer outside the United States. At the same time, our
proposed approach would preserve customer protections for U.S.
counterparties that would expect to benefit from the protection
afforded to them by Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \491\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \492\ See note 4, supra.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily believes that requiring
foreign security-based swap dealers to comply with the external
business conduct standards requirement with respect to their security-
based swap transactions conducted outside the United States with non-
U.S. persons (or with foreign branches of U.S. banks) would not advance
this statutory purpose. Although this approach represents a departure
from the entity approach the Commission has traditionally taken in the
regulation of foreign broker-dealers, as discussed above, whereby the
Commission applies our regulations to the entire global business of a
registered broker-dealer, we preliminarily believe this departure is
appropriate in the context of a global security-based swap market in
order to create a regulatory framework that provides effective
protections for counterparties that are U.S. persons while recognizing
the role of foreign regulators in non-U.S. markets.
    The Commission also preliminarily believes that this approach
addresses many of the concerns raised by commenters, including foreign
regulators, concerning the potential application of Title VII to
transactions between registered foreign security-based swap dealers and
non-U.S. counterparties. In addition, this approach is consistent with
the reasonable expectations of U.S. person counterparties, who would
expect to receive the protection of external business conduct standards
and conflicts of interest requirements when dealing with a foreign
security-based swap dealer within the United States.\493\
---------------------------------------------------------------------------

    \493\ See note 321, supra.
---------------------------------------------------------------------------

    The Commission's proposed approach to external business conduct
standards would not except foreign security-based swap dealers from the
rules and requirements prescribed by the Commission pursuant to Section
15F(h)(1)(B) of the Exchange Act with respect to their Foreign
Business.\494\ Section 15F(h)(1)(B) requires security-based swap
dealers to conform with such business conduct standards relating to
diligent supervision as the Commission shall prescribe.\495\ The
Commission preliminarily believes that it is not appropriate to except
foreign security-based swap dealers from compliance with such
requirements. Because registered foreign security-based swap dealers
would be subject to a number of obligations under the federal
securities laws with respect to their security-based swap business, the
Commission preliminarily believes that having systems in place
reasonably designed to ensure diligent supervision would be an
important aspect of their compliance with the federal securities laws.
However, as discussed below, the Commission is proposing to permit
substituted compliance with the diligent supervision requirement in
Section 15F(h)(1)(B), and the rules and regulations thereunder, by
foreign security-based swap dealers.\496\ The Commission preliminarily
believes that foreign security-based swap dealers subject to regulation
in a foreign jurisdiction are very likely to be subject to diligent
supervision requirements and to the extent that such requirements are
comparable to Commission requirements, we would consider permitting
substituted compliance, as discussed below.\497\
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    \494\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \495\ 15 U.S.C. 78o-10(h)(1)(B). See Section III.C.3(b)vi, supra
(discussing the diligent supervision requirements).
    \496\ See Section XI.C, infra.
    \497\ See id.
---------------------------------------------------------------------------

    The Commission is proposing to except foreign security-based swap
dealers from complying with the rules and regulations that the
Commission may prescribe pursuant to Section 15F(h)(1)(A) or (C) of the
Exchange

Act.\498\ Section 15F(h)(1)(A) requires security-based swap dealers to
conform with such business conduct standards relating to fraud,
manipulation, and other abusive practices involving security-based
swaps (including security-based swaps that are offered but not entered
into) as prescribed by the Commission. Section 15F(h)(1)(C) requires
security-based swap dealers to adhere to rules and regulations
prescribed by the Commission with respect to applicable position
limits. The Commission has not engaged in rulemaking pursuant to these
provisions.\499\ If the Commission does propose rules pursuant to these
provisions in the future, the Commission would consider, at that time,
whether it would be appropriate to subject foreign security-based swap
dealers to such requirements with respect to their Foreign Business.
---------------------------------------------------------------------------

    \498\ 15 U.S.C. 78o-10(h)(1)(A) and (C).
    \499\ Although the Commission has not proposed rules under
Section 15F(h)(1)(A) of the Exchange Act, the Commission has
proposed new Rule 9j-1 under the Exchange Act, which is intended to
prevent fraud, manipulation, and deception in connection with the
offer, purchase, or sale of any security-based swap, the exercise of
any right or performance of any obligation under a security-based
swap, or the avoidance of such exercise or performance. See
Prohibition Against Fraud, Manipulation, and Deception in Connection
with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3,
2010), 75 FR 68560 (Nov. 8, 2010). The Commission's view of its
antifraud enforcement authority in the cross-border context is
described in further detail in Section XI below.
---------------------------------------------------------------------------

b. U.S. Security-Based Swap Dealers
    The Commission preliminarily believes it is appropriate not to
subject U.S. security-based swap dealers to the external business
conduct standards in Section 15F(h) (other than Section 15F(h)(1)(B))
of the Exchange Act, and the rules and regulations thereunder, as
specified in the proposed rule, with respect to security-based swap
transactions conducted through their foreign branches outside the
United States with non-U.S. counterparties, because such requirements
relate primarily to customer protection requirements. The Dodd-Frank
Act generally is concerned with the protection of U.S. markets and
participants in those markets.\500\ Therefore, we preliminarily believe
that subjecting U.S. security-based swap dealers to the Title VII
customer protection requirements with respect to their security-based
swap transactions conducted through their foreign branches outside the
United States (even though the transactions may pose risk to the U.S.
financial system) with non-U.S. persons would produce little or no
benefit to U.S. market participants. Although this approach would
represent a departure from the entity approach the Commission has
traditionally taken in the regulation of broker-dealers, whereby the
Commission applies our regulations to the entire global business of a
registered broker-dealer, we preliminarily believe it is appropriate in
the context of a global security-based swap market in order to develop
a national regulatory framework that provides effective protections for
counterparties who are U.S. persons while recognizing the role of
foreign regulators in non-U.S. markets.
---------------------------------------------------------------------------

    \500\ See note 4, supra.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that this approach would
help address the potential application of duplicative and conflicting
regulatory requirements to security-based swap transactions between the
foreign branches of registered U.S. bank security-based swap dealers
and non-U.S. counterparties. In addition, the Commission preliminarily
believes this approach is consistent with the reasonable expectations
of foreign counterparties, who would not necessarily expect to receive
the protections of Title VII when dealing with a foreign branch of a
U.S. bank outside the United States, even if it is registered as a
security-based swap dealer with the Commission.\501\
---------------------------------------------------------------------------

    \501\ See note 321, supra. The proposed definition of foreign
branch is the same as discussed above. See proposed Rule 3a71-
3(a)(1) under the Exchange Act, as discussed in Section III.B.7,
supra.
---------------------------------------------------------------------------

    The purpose of the proposed provision defining when a security-
based swap transaction would be considered to have been conducted
through a foreign branch is intended to prevent U.S. security-based
swap dealers from using the proposed rule to evade the application of
Title VII.\502\ Requiring that the foreign branch be the named
counterparty to the security-based swap transaction and that no person
within the United States be directly involved in soliciting,
negotiating, or executing the security-based swap transaction on behalf
of the foreign branch or its counterparty is intended to help ensure
that the security-based swap transaction occurs outside the United
States, even though the Commission recognizes that the risk of the
transaction would ultimately be borne by the U.S. security-based swap
dealer, of which the foreign branch is merely a part.\503\ The U.S.
security-based swap dealer would still be subject to the entity-level
requirements described above intended to address the risk the
transactions pose to the U.S. financial system.
---------------------------------------------------------------------------

    \502\ Proposed Rule 3a71-3(a)(4) under the Exchange Act.
    \503\ Proposed Rule 3a71-3(a)(4)(i) under the Exchange Act.
---------------------------------------------------------------------------

ii. Segregation Requirements
    The segregation requirements set forth in Section 3E of the
Exchange Act, and rules and regulations thereunder, are closely tied to
U.S. bankruptcy laws.\504\ Subchapter III of Chapter 7, Title 11 of the
United States Code (the ``stockbroker liquidation provisions'') \505\
provides special protections for ``customers'' of stockbrokers. Among
other protections, ``customers'' share ratably with other customers
ahead of virtually all other creditors in the ``customer property''
held by the failed stockbroker.\506\ The Dodd-Frank Act contains
provisions designed to ensure that cash and securities held by a
security-based swap dealer relating to security-based swaps will be
deemed customer property under the stockbroker liquidation
provisions.\507\ In particular, Section 3E(g) of the Exchange Act \508\
provides, among other things, that a security-based swap shall be
considered to be a ``security'' as such term is used in section
101(53A)(B) \509\ and the stockbroker liquidation provisions. Section
3E(g) also provides that an account that holds a security-based swap
shall be considered to be a ``securities account'' as that term is
defined in the stockbroker liquidation provisions.\510\ In addition,
Section 3E(g) provides that the terms ``purchase'' and ``sale'' as
defined in Sections 3(a)(13) and (14) of the Exchange Act,
respectively, shall be applied to the terms ``purchase'' and ``sale''
as used in the stockbroker liquidation

provisions.\511\ Finally, Section 3E(g) provides that the term
``customer'' as defined in the stockbroker liquidation provisions
excludes any person to the extent the person has a claim based on a
non-cleared security-based swap transaction except to the extent of any
margin delivered to or by the customer with respect to which there is a
customer protection requirement under Section 15(c)(3) of the Exchange
Act or a segregation requirement.\512\
---------------------------------------------------------------------------

    \504\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70274-78 (discussing the customer protection treatment provided
by proposed Rules 18a-4(a)-(d) in the stockbroker liquidation
provisions in the U.S. Bankruptcy Code).
    \505\ See 11 U.S.C. 741-53.
    \506\ See 11 U.S.C. 752.
    \507\ See Public Law 111-203 section 763(d), adding Section
3E(g) to the Exchange Act, 15 U.S.C. 78c-5(g).
    \508\ See 15 U.S.C. 78c-5(g).
    \509\ See 11 U.S.C. 101(53A)(B). Section 101(53A) of the U.S.
Bankruptcy Code defines a ``stockbroker'' to mean a person--(A) with
respect to which there is a customer, as defined in section 741,
subchapter III of chapter 7, title 11, United States Code (the
definition section of the stockbroker liquidation provisions); and
(B) that is engaged in the business of effecting transactions in
securities--(i) for the account of others; or (ii) with members of
the general public, from or for such person's own account. See 11
U.S.C. 101(53A).
    \510\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741. There is not a
definition of ``securities account'' in 11 U.S.C. 741. The term
``securities account'' is used in 11 U.S.C. 741(2) and (4) in
defining the terms ``customer'' and ``customer property.''
    \511\ See also 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-753. Section
3(a)(13) of the Exchange Act, as amended by Section 761(a) of the
Dodd-Frank Act, defines the term ``purchase'' to mean, in the case
of security-based swaps, the execution, termination (prior to its
scheduled maturity date), assignment, exchange, or similar transfer
or conveyance of, or extinguishing of rights or obligations under, a
security-based swap, as the context may require. See 15 U.S.C.
3(a)(13). Section 3(a)(14) of the Exchange Act, as amended by
Section 761(a) of the Dodd-Frank Act, defines the term ``sale'' to
mean, in the case of security-based swaps, the execution,
termination (prior to its scheduled maturity date), assignment,
exchange, or similar transfer or conveyance of, or extinguishing of
rights or obligations under, a security-based swap, as the context
may require. See 15 U.S.C. 3(a)(14).
    \512\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741(2).
---------------------------------------------------------------------------

    The provisions of Section 3E(g) of the Exchange Act apply the
customer protection elements of the stockbroker liquidation provisions
to cleared security-based swaps, including related collateral, and, if
subject to customer protection requirements under Section 15(c)(3) of
the Exchange Act or a segregation requirement prescribed by the
Commission, to collateral delivered as margin for non-cleared security-
based swaps.\513\ The Commission has proposed Rule 18a-4(a)-(d) to
establish segregation requirements for security-based swap dealers with
respect to cleared and non-cleared security-based swaps pursuant to
Section 3E of the Exchange Act and pursuant to Section 15(c)(3) of the
Exchange Act \514\ with respect to security-based swap dealers that are
broker-dealers.\515\
---------------------------------------------------------------------------

    \513\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-53.
    \514\ 15 U.S.C. 78o(c)(3).
    \515\ See proposed Rules 18a-4(a)-(d) under the Exchange Act and
Section 3E of the Exchange Act, 15 U.S.C. 78c-5. See also the
Capital, Margin, and Segregation Proposing Release, 77 FR 70278-88,
for detailed descriptions and discussions of the proposed
segregation requirements for security-based swaps in proposed Rules
18a-4(a), (b), and (c) under the Exchange Act and special provisions
for non-cleared security-based swaps in proposed Rule 18a-4(d) under
the Exchange Act.
---------------------------------------------------------------------------

    Specifically, proposed Rule 18a-4(b) requires a security-based swap
dealer to promptly obtain and thereafter maintain physical possession
or control of all excess securities collateral carried for the accounts
of security-based swap customers. Such possession or control
requirement is designed to ensure the securities held for the accounts
of security-based swap customers are under the control of the security-
based swap dealer and, therefore, readily available to be returned to
security-based swap customers. Proposed Rule 18a-4(c) requires a
security-based swap dealer to maintain a special account for the
exclusive benefit of security-based swap customers and have on deposit
in that account at all times an amount of cash or qualified securities
determined by computing the net amount of credits owed to
customers.\516\ The objective of the possession or control and special
account requirements in proposed Rule 18a-4 is to facilitate the prompt
return of ``customer property'' to security-based swap customers either
before or during a liquidation proceeding if the firm fails. In the
event of a failure of the security-based swap dealer, customers would
share the ``customer property'' ratably with other customers and ahead
of virtually all other creditors.\517\ In addition, with respect to
non-cleared security-based swaps, proposed Rule 18a-4(d) requires a
security-based swap dealer to provide the notice required under Section
3E(f)(1)(A) of the Exchange Act \518\ to a counterparty in writing
prior to the execution of the first non-cleared security-based swap
transaction with such counterparty. If a counterparty to a non-cleared
security-based swap elects to segregate funds or other property with a
third-party custodian pursuant to Section 3E(f) of the Exchange Act or
elects not to require the omnibus segregation of funds or other
property pursuant to proposed Rule 18a-4(c), the security-based swap
dealer must obtain an agreement from such counterparty to subordinate
all claims against the security-based swap dealer to the claims of
security-based swap customers of such security-based swap dealer.\519\
---------------------------------------------------------------------------

    \516\ See proposed Rule 18a-4(c) and the related discussion in
the Capital, Margin, and Segregation Proposing Release, 77 FR 70277.
    \517\ See the stockbroker liquidation provisions in the U.S.
Bankruptcy Code, 11 U.S.C. 741-53.
    \518\ 15 U.S.C. 78c-5(f)(1)(A).
    \519\ See proposed Rules 18a-4(d)(1) and (d)(2)(i) and (ii)
under the Exchange Act, as discussed in the Capital, Margin, and
Segregation Proposing Release, 77 FR 70287-88. If a non-cleared
security-based swap counterparty elects to segregate funds or other
property with a third-party custodian, the subordination agreement
would be conditioned on the counterparty's funds and other property
segregated at a third-party custodian not being included in the
bankruptcy estate of the security-based swap dealer. If the election
is not effective in keeping the counterparty's assets bankruptcy
remote, then the counterparty should be treated as a security-based
swap customer with a pro rata priority claim to customer property.
See proposed Rule 18a-4(d)(2)(i) under the Exchange Act. If a non-
cleared security-based swap counterparty elects not to segregate any
assets at all, the security-based swap dealer would need to obtain
an unconditional subordination agreement from the counterparty that
waives segregation altogether. See proposed Rule 18a-4(d)(2)(ii)
under the Exchange Act.
---------------------------------------------------------------------------

    As proposed in the Capital, Margin and Segregation Proposing
Release, the segregation requirements in proposed Rule 18a-4(a)-(d) do
not distinguish between U.S. security-based swap dealers and foreign
security-based swap dealers or between U.S. person and non-U.S. person
security-based swap counterparties, and do not address application of
the segregation requirements in the cross-border context. The
Commission preliminarily believes that the Dodd-Frank Act's mandate to
promote financial stability, improve accountability, and protect
counterparties focuses territorially on the United States and the U.S.
security-based swap market \520\ and, therefore, is not proposing any
changes with respect to U.S. security-based swap dealers to the
segregation requirements already proposed.\521\ The Commission's
proposed approach to application of segregation requirements to foreign
security-based swap dealers intends to protect U.S. person
counterparties and minimize the impact of a failed security-based swap
dealer on the U.S. financial system generally and the U.S. security-
based swap market in particular.
---------------------------------------------------------------------------

    \520\ See note 4, supra.
    \521\ See proposed Rules 18a-4(a)-(d) under the Exchange Act and
Section 3E of the Exchange Act, 15 U.S.C. 78c-5. See also the
Capital, Margin, and Segregation Proposing Release, 77 FR 70278-88.
---------------------------------------------------------------------------

a. Foreign Security-Based Swap Dealers
    As stated above, Section 3E(g) extends the customer protection
provided by the stockbroker liquidation provisions of the U.S.
Bankruptcy Code to cleared security-based swaps and non-cleared
security-based swaps in different ways. In addition, a foreign
security-based swap dealer may not be subject to the stockbroker
liquidation provisions if it is a foreign bank with a branch or agency
in the United States.\522\ Such foreign security-based swap dealer's
insolvency and liquidation would be subject to banking
regulations.\523\ On the

other hand, if a foreign security-based swap dealer is not a foreign
bank with a branch or agency in the United States, it may be subject to
the stockbroker liquidation provisions \524\ in a stockbroker
liquidation proceeding in a U.S. bankruptcy court. Moreover, if a
foreign security-based swap dealer is a registered broker-dealer, it is
a member of the Securities Investor Protection Corporation (``SIPC'')
\525\ and is subject to segregation requirements under Section 15(c)(3)
of the Exchange Act,\526\ and rules and regulations thereunder.\527\
Such a foreign security-based swap dealer would be subject to the
liquidation proceeding under the Securities Investor Protection Act of
1970 (the ``SIPA'').\528\ Therefore, we propose an approach that would
apply the segregation requirements to a foreign security-based swap
dealer depending on whether it holds assets to secure cleared security-
based swap transactions or non-cleared security-based swap transactions
and whether such foreign security-based swap dealer is a registered
broker-dealer, a foreign bank with a branch or agency in the United
States, or neither of the above.\529\
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    \522\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C.
109(b) (providing that a person may be a debtor under chapter 7 of
the U.S. Bankruptcy Code only if such person is not, among other
things, a bank or similar institution which is an insured bank as
defined in Section 3(h) of the Federal Deposit Insurance Act, or a
foreign bank that has a branch or agency (as defined in Section 1(b)
of the International Banking Act of 1978) in the United States).
    \523\ See 12 U.S.C. 1821-25. Whereas insured deposit
institutions would be resolved under the Federal Deposit Insurance
Act, uninsured U.S. branches of foreign banks would be resolved
under either relevant state statutes, in the case of uninsured state
branches, or the International Banking Act, in the case of uninsured
federal branches.
    \524\ See note 522, supra.
    \525\ We recognize that a very limited number of registered
foreign broker-dealers who do not conduct securities business in the
United States and do not hold U.S. person customers' funds are not
members of SIPC.
    \526\ 15 U.S.C. 78o(c)(3).
    \527\ See Rule 15c3-3 under the Exchange Act, 17 CFR 240.15c3-3.
    \528\ See 15 U.S.C. 78aaa et seq.
    \529\ We preliminarily believe that the proposed approach with
respect to the segregation requirements set forth in Section 3E of
the Exchange Act, and rules and regulations thereunder, is not being
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within
the meaning of Section 30(c). See Section II.B.2(a), supra. However,
the Commission also preliminary believes that the proposed approach
with respect to the segregation requirements is necessary or
appropriate to help prevent the evasion of the particular provisions
of the Exchange Act that were added by the Dodd-Frank Act that are
being implemented by the proposed approach and prophylactically will
help ensure that the purposes of those provisions of the Dodd-Frank
Act are not undermined. See Section II.B.2(e), supra; see also
Section II.B.2(c), supra.
    For example, if the segregation requirements do not apply to the
entire business of a registered foreign security-based swap dealer
that is a registered broker-dealer, or do not apply to assets
received from non-U.S. person customers to secure cleared security-
based swaps by a registered foreign security-based swap dealer that
is not a registered broker-dealer (and is not a foreign bank with a
branch or agency in the United States) if such foreign security-
based swap dealer also receives assets from a U.S. person customer
to secure clear security-based swaps, then U.S. security-based swap
dealers would have an incentive to evade the full application of the
segregation requirements by moving their operations outside the
United States. In this event, these security-based swap dealers
could use the assets collected from the non-U.S. person
counterparties for their own business purposes, and the assets
segregated (i.e., assets posted by U.S. person customers) could be
insufficient to satisfy the combined priority claims of both U.S.
person and non-U.S. person customers, potentially resulting in
losses to U.S. person customers in contravention of the purposes of
the customer protection framework established by the Dodd-Frank Act.
See discussions of application of the segregation requirements to a
foreign security-based swap dealer that is a registered broker-
dealer with respect to non-cleared security-based swaps in Section
III.C.4(b)ii.b.i, application of the segregation requirements to a
foreign security-based swap dealer that is a registered broker-
dealer with respect to cleared security-based swaps in Section
III.C.4(b)ii.c.i, and application of the segregation requirements to
a foreign security-based swap dealer that is not a registered
broker-dealer and is not a foreign bank with a branch or agency in
the United States in Section III.C.4(b)ii.c.ii above.
---------------------------------------------------------------------------

    We recognize that a foreign security-based swap dealer may not be
subject to the stockbroker liquidation provisions and its insolvency or
liquidation proceeding in the United States may be administered under
SIPA or banking regulations concurrently with other potential
insolvency proceedings outside the United States under applicable
foreign insolvency laws. Therefore, the effectiveness of the
segregation requirements with respect to a foreign security-based swap
dealer in practice may depend on many factors, including the type and
objectives of the insolvency or liquidation proceeding and how the U.S.
Bankruptcy Code, SIPA, banking regulations and applicable foreign
insolvency laws are interpreted by the U.S. bankruptcy court, SIPC,
Federal Deposit Insurance Corporation and relevant foreign authorities.
b. Non-Cleared Security-Based Swaps
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    With respect to non-cleared security-based swaps, the Commission
proposes to apply segregation requirements differently to foreign
security-based swap dealers depending on whether they also are
registered broker-dealers. Specifically, the Commission proposes to
require a foreign security-based swap dealer that is a registered
broker-dealer to segregate margin received from all counterparties to
secure non-cleared security-based swap transactions, in accordance with
Section 3E of the Exchange Act, and rules and regulations
thereunder.\530\
---------------------------------------------------------------------------

    \530\ See proposed Rule 18a-4(e)(1)(i) under the Exchange Act.
---------------------------------------------------------------------------

    If a foreign security-based swap dealer is a registered broker-
dealer, it already would: (i) be subject to the customer protection
requirements under Section 15(c)(3) of the Exchange Act,\531\ and rules
and regulations thereunder, including Rule 15c3-3 if it carries
customer securities and cash; (ii) be required to maintain possession
or control of customer securities and maintain cash or qualified
securities in a special reserve account if it carries customer
securities and cash; and (iii) if it is a member of SIPC, be liquidated
in a formal proceeding under the SIPA.\532\ Rule 15c3-3 under Section
15(c)(3) of the Exchange Act provides customer protection and defines
``customer'' broadly to include any person from whom or on whose behalf
a broker or dealer has received or acquired or holds funds or
securities for the account of that person.\533\ Therefore, if a foreign
security-based swap dealer that is a registered broker-dealer receives
collateral from a non-cleared security-based swap counterparty, such
counterparty would be a ``customer'' and is afforded customer
protection with respect to such collateral under Rule 15c3-3. As stated
above, Section 3E(g) extends ``customer'' status to non-cleared
security-based swap counterparties to the extent of any margin
delivered to or by the counterparties with respect to which there is a
customer protection requirement under Section 15(c)(3).\534\ Therefore,
non-cleared security-based swap counterparties of a foreign security-
based swap dealer that is a registered broker-dealer are ``customers''
within the meaning of the stockbroker liquidation provisions.\535\
---------------------------------------------------------------------------

    \531\ 15 U.S.C. 78o(c)(3).
    \532\ See Capital, Margin, and Segregation Proposing Release, 77
FR 70276-77 (discussing the broker-dealer segregation rule--Rule
15c3-3 under the Exchange Act, 17 CFR 240.15c3-3).
    \533\ See Rule 15c3-3(a)(1) under the Exchange Act, 17 CFR
240.15c3-3(a)(1).
    \534\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g)
(``The term `customer', as defined in section 741 of title 11,
United States Code, excludes any person, to the extent that such
person has a claim based on any . . . non-cleared security-based
swap except to the extent of any margin delivered to or by the
customer with respect to which there is a customer protection
requirement under section 15(c)(3) or a segregation requirement.'').
    \535\ A non-cleared security-based swap counterparty may waive
its pro rata priority claim on customer property with other
customers by executing a conditional subordination agreement
pursuant to proposed Rule 18a-4(d)(i) under the Exchange Act to
affirmatively elect individual segregation, or by executing an
unconditional subordination agreement pursuant to proposed Rule 18a-
4(d)(ii) under the Exchange Act to affirmatively waive segregation
altogether.
---------------------------------------------------------------------------

    As such, if the Commission does not require a foreign security-
based swap dealer that is a registered broker-dealer to segregate all
counterparties' assets posted to secure non-cleared security-based
swaps, in a SIPA liquidation

proceeding of such foreign security-based swap dealer and broker-
dealer,\536\ the pool of assets segregated pursuant to Rule 15c3-3 and
proposed Rule 18a-4 may be insufficient to satisfy the combined claims
of all customers, resulting in losses to all customers. Therefore, the
Commission proposes to subject a foreign security-based swap dealer
that is a registered broker-dealer to the segregation requirements set
forth in Section 3E of the Exchange Act, and rules and regulations
thereunder, relating to assets received from all counterparties held as
collateral to secure non-cleared security-based swap transactions.
---------------------------------------------------------------------------

    \536\ In very limited circumstances where a foreign security-
based swap dealer that is a registered broker-dealer is not a SIPC
member, it would potentially be liquidated pursuant to the
stockbroker liquidation provisions in a U.S. bankruptcy court.
---------------------------------------------------------------------------

ii. Non-Cleared Security-Based Swaps--Foreign Security-Based Swap
Dealer That is Not a Registered Broker-Dealer
    If a foreign security-based swap dealer is not a registered broker-
dealer, its non-cleared security-based swap counterparties would be
``customers'' under the stockbroker liquidation provisions only to the
extent that there is a segregation requirement prescribed by the
Commission.\537\ The Commission proposes to subject such foreign
security-based swap dealer to the segregation requirements set forth in
Section 3E of the Exchange Act, and rules and regulations thereunder,
solely with respect to non-cleared security-based swaps with U.S.
person counterparties.\538\ This approach would provide U.S. person
counterparties ``customer'' status under the stockbroker liquidation
provisions and their assets would be segregated for their exclusive
benefit. Non-U.S. person counterparties would not be ``customers'' and
would not have ``customer'' status with respect to the segregated
assets. As stated above, the Commission preliminarily believes that the
objective of the Dodd-Frank Act is to protect U.S. counterparties and
to minimize disruption to the U.S. financial system caused by a
security-based swap dealer's failure. Therefore, the Commission
preliminarily believes that the proposed approach would achieve the
benefit intended by the segregation requirements set forth in Section
3E of the Exchange Act, and rules and regulations thereunder.
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    \537\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g).
    \538\ See proposed Rule 18a-4(e)(1)(ii) under the Exchange Act.
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    The Commission recognizes that a foreign security-based swap dealer
that is not a broker-dealer but is a foreign bank with a branch or
agency (as defined in Section 1(b) of the International Banking Act of
1978) \539\ in the United States may not be eligible to be liquidated
pursuant to the stockbroker liquidation provisions.\540\ Such foreign
security-based swap dealer's insolvency proceeding in the United States
would be administered under banking regulations.\541\ Nevertheless, the
Commission preliminarily believes that imposing segregation
requirements on such foreign security-based swap dealer when it
receives collateral from U.S. person counterparties would reduce the
likelihood of U.S. person counterparties incurring losses by helping
identify U.S. customers' assets in an insolvency proceeding of such
foreign security-based swap dealer in the United States and would
potentially minimize disruption to the U.S. security-based swap market,
thereby producing potential benefits to the U.S. financial system and
U.S. counterparties that are consistent with the objectives of the
Dodd-Frank Act.
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    \539\ See Sections 1(b)(1), (3), and (7) of the International
Banking Act of 1978, 12 U.S.C. 3101(b)(1), (3) and (7), for
definitions of ``agency,'' ``branch,'' and ``foreign bank.''
    \540\ See Section 109(b)(3)(B) of the U.S. Bankruptcy Code, 11
U.S.C. 109(b)(3)(B).
    \541\ See 12 U.S.C. 1821-25. Whereas insured deposit
institutions would be resolved under the Federal Deposit Insurance
Act, uninsured U.S. branches of foreign banks would be resolved
under either relevant state statutes, in the case of uninsured state
branches, or the International Banking Act, in the case of uninsured
federal branches.
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c. Cleared Security-Based Swaps
    In applying the segregation requirements to a foreign security-
based swap dealer with respect to cleared security-based swap
transactions, the Commission also proposes to distinguish among: (1) a
foreign security-based swap dealer that is a registered broker-dealer;
(2) a foreign security-based swap dealer that is not a registered
broker-dealer and is not a foreign bank with a branch or agency in the
United States; and (3) a foreign security-based swap dealer that is a
foreign bank with a branch or agency in the United States. In the
following paragraphs, we will discuss how we propose to apply the
segregation requirements to foreign security-based swap dealers in each
of these categories with respect to assets held by them as collateral
to secure cleared security-based swaps.
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    The proposed rule would apply segregation requirements to a foreign
security-based swap dealer that is a registered broker-dealer with
respect to assets received from all counterparties to secure cleared
security-based swaps.\542\ As stated above, Section 3E(g) of the
Exchange Act extends customer protection under the stockbroker
liquidation provisions to all cleared security-based swap
counterparties and to all non-cleared security-based swap
counterparties, with respect to which there is a customer protection
requirement under Section 15(c)(3) of the Exchange Act.\543\ Therefore,
all security-based swap counterparties of a foreign security-based swap
dealer that is a registered broker-dealer are customers under the
stockbroker liquidation provisions.\544\ In the absence of a Commission
requirement that a foreign security-based swap dealer that is a
registered broker-dealer segregate all cleared security-based swap
counterparties' collateral, if such an entity were liquidated pursuant
to SIPA, the amount of assets segregated could be less than the
combined priority claims of all security-based swap customers,
potentially resulting in losses to customers. Therefore, the Commission
proposes to subject a foreign security-based swap dealer who is a
registered broker-dealer to segregation requirements set forth in
Section 3E of the Exchange Act, and rules and regulations thereunder,
with respect to assets received from all counterparties to secure
cleared security-based swaps.
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    \542\ Proposed Rule 18a-4(e)(2)(i) under the Exchange Act.
    \543\ See Section III.C.4(b)ii.b, supra.
    \544\ A non-cleared security-based swap counterparty would be a
customer of a foreign security-based swap dealer that is a
registered broker-dealer and have a pro rata priority claim to
customer property under the stockbroker liquidation provisions
unless it affirmatively waives segregation altogether by executing
an unconditional subordination agreement pursuant to proposed Rule
18a-4(d)(ii) under the Exchange Act, or elects individual
segregation pursuant to Section 3E(f) of the Exchange Act by
executing a conditional subordination agreement pursuant to proposed
Rule 18a-4(d)(i) under the Exchange Act.
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ii. Foreign Security-Based Swap Dealer That Is Not a Registered Broker-
Dealer and Is Not a Foreign Bank With Branch or Agency in the United
States
    If a foreign security-based swap dealer is not a registered broker-
dealer and is not a foreign bank that has a branch or agency (as
defined in Section 1(b) of the International Banking Act of 1978) in
the United States, such foreign security-based swap dealer may be
eligible to be

a debtor under Chapter 7 of the U.S. Bankruptcy Code and may therefore
be subject to the stockbroker liquidation provisions in the U.S.
Bankruptcy Code.\545\ As stated above, Section 3E(g) of the Exchange
Act provides ``customer'' status to all counterparties to cleared
security-based swaps, making no distinction between U.S. customers or
counterparties and non-U.S. person customers or counterparties.\546\
Therefore, in the case where such foreign security-based swap dealer
receives any assets from, for, or on behalf of a U.S. person customer
to margin, guarantee, or secure security-based swaps, if the Commission
were to apply the segregation requirements only to assets posted by
U.S. person customers but not to assets posted by non-U.S. person
customers, in a stockbroker liquidation proceeding of such foreign
security-based swap dealer, the assets segregated (i.e., assets posted
by U.S. person customers) could be insufficient to satisfy the combined
priority claims of both U.S person and non-U.S. person customers,
potentially resulting in losses to U.S. person customers. As stated
above, the Commission preliminarily believes that Section 3E intends to
provide customer protection to U.S. person counterparties and apply
segregation requirements in a way that would protect the U.S. financial
system and counterparties in the United States. Therefore, the
Commission proposes to apply segregation requirements described in
Section 3E of the Exchange Act, and the rules and regulations
thereunder, to a foreign security-based swap dealer that is not a
registered broker-dealer and is not a foreign bank with a branch or
agency in the United States with respect to assets received from both
U.S. person counterparties and non-U.S. person counterparties if such
foreign security-based swap dealer receives collateral from U.S. person
counterparties to secure security-based swaps.\547\
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    \545\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C.
109(b).
    \546\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741(2).
    \547\ Proposed Rule 18a-4(e)(2)(ii) under the Exchange Act.
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iii. Foreign Security-Based Swap Dealer That is Not a Registered
Broker-Dealer and is a Foreign Bank With Branch or Agency in the United
States
    Finally, if a foreign security-based swap dealer is not a
registered broker-dealer and is a foreign bank that has a branch or
agency in the United States, it is not eligible to be a debtor under
Chapter 7 and will therefore not be subject to the stockbroker
liquidation provisions of the U.S. Bankruptcy Code \548\ and its
insolvency proceeding in the United States would be administered under
banking regulations.\549\ Consistent with the objective of protecting
U.S. person counterparties, the Commission is proposing that such
foreign security-based swap dealer shall be subject to the segregation
requirements set forth in Section 3E of the Exchange Act, and the rules
and regulations thereunder, with respect to any assets received from,
for or on behalf of a counterparty who is a U.S. person to margin,
guarantee, or secure a cleared security-based swap, but shall not be
required to segregate assets received from, for or on behalf of all
other counterparties to margin, guarantee, or secure a cleared
security-based swap.\550\ The special account maintained by the foreign
security-based swap dealer shall be designated for the exclusive
benefit of U.S. person security-based swap customers. The Commission
preliminarily believes that imposing segregation requirements on such
foreign security-based swap dealer when it receives collateral from
U.S. person counterparties would reduce the likelihood of U.S. person
counterparties incurring losses by helping identify U.S. customers'
assets in an insolvency proceeding of such foreign security-based swap
dealer in the United States and would potentially minimize disruption
to the U.S. security-based swap market, thereby producing potential
benefits to the U.S. financial system and U.S. counterparties that are
consistent with the objectives of the Dodd-Frank Act. For the same
reason, the Commission preliminarily does not believe that extending
segregation requirements and customer protection to such foreign
security-based swap dealer's transactions with non-U.S. persons would
advance the purposes of the Dodd-Frank Act.
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    \548\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C.
109(b).
    \549\ See 12 U.S.C. 1821-25. Whereas insured deposit
institutions would be resolved under the Federal Deposit Insurance
Act, uninsured U.S. branches of foreign banks would be resolved
under either relevant state statutes, in the case of uninsured state
branches, or the International Banking Act, in the case of uninsured
federal branches.
    \550\ Proposed Rule 18a-4(e)(2)(iii) under the Exchange Act.
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d. Disclosure
    In addition to the proposed rules described above relating to
application of the segregation requirements to foreign security-based
swap dealers, the Commission also is proposing to require foreign
security-based swap dealers to make certain disclosures.\551\ Since the
treatment of the special account under Sections 3E(b) and (g) or
individually segregated assets pursuant to Section 3E(f) of the
Exchange Act in insolvency proceedings of a foreign security-based swap
dealer may vary depending on the status of the foreign security-based
swap dealer and the insolvency proceedings such foreign security-based
swap dealer is subject to, the Commission proposes to require a foreign
security-based swap dealer to disclose to each counterparty that is a
U.S. person, prior to accepting any assets from, for, or on behalf of
such counterparty to margin, guarantee, or secure a security-based
swap, the potential treatment of the assets segregated by such foreign
security-based swap dealer pursuant to Section 3E of the Exchange Act,
and the rules and regulations thereunder, in insolvency proceedings
relating to such foreign security-based swap dealer under U.S.
bankruptcy law and applicable foreign insolvency laws. Pursuant to this
proposed rule, the Commission intends to require that a foreign
security-based swap dealer disclose whether it is subject to the
segregation requirement set forth in Section 3E of the Exchange Act,
and the rules and regulations thereunder, with respect to the assets
collected from the U.S. person counterparty who will receive the
disclosure, whether the foreign security-based swap dealer could be
subject to the stockbroker liquidation provisions in the U.S.
Bankruptcy Code, whether the segregated assets could be afforded
customer property treatment under the U.S. bankruptcy law, and any
other relevant considerations that may affect the treatment of the
assets segregated under Section 3E of the Exchange Act in insolvency
proceedings of a foreign security-based swap dealer.\552\ Since the
proposed rule regarding application of the segregation requirements in
the cross-border context is designed to advance the goals of protecting
U.S. person counterparties, the Commission believes that such
disclosure would enhance U.S. person counterparty protection and the
objectives that segregation requirements intend to achieve in the
context of cross-border security-based swap dealing.
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    \551\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
    \552\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule
regarding the application of transaction-

level requirements relating to customer protection and segregation,
including the following:
     What, if any, are the likely competitive effects, within
the U.S. security-based swap market and among U.S. security-based swap
dealers, of the proposed approach for foreign security-based swap
dealers? Please describe the specific nature of any such effects.
     Should a foreign security-based swap dealer automatically
be eligible for the proposed approach by virtue of being a nonresident
entity? Alternatively, should the Commission consider other factors,
such as the share of the foreign security-based swap dealer's business
that constitutes U.S. Business, in determining how to apply
transaction-level requirements?
     From an operational perspective, what types of internal
controls would be necessary to identify Foreign Business and U.S.
Business and ensure that the foreign security-based swap dealer
complies with the external business conduct standards with respect to
its U.S. Business? Should U.S. Business be generally defined with
reference to the type of activity that, if performed in a dealing
capacity, triggers the registration requirement?
     Does the proposed approach appropriately classify entity-
level and transaction-level requirements? Does it appropriately
identify those transaction-level requirements that relate to the
operation of the security-based swap dealer on an entity level? If not,
please identify those requirements that should be classified
differently and how doing so is consistent with the goals of Title VII.
     To what extent would foreign security-based swap dealers
in various jurisdictions be prohibited from complying, under local law,
with the Commission's requirements to provide the Commission with
prompt access to their books and records and to submit to onsite
inspection and examination by the Commission? If there are limitations,
what are they, and under what circumstances would they arise? Are there
other entity-level requirements that foreign security-based swap
dealers would not be permitted to comply with under local law? If so,
what are they?
     Should the external business conduct rules apply in
transactions between a registered non-U.S. security-based swap dealer
and foreign branches of a U.S. bank?
     Should the external business conduct rules apply in
transactions between a registered non-U.S. security-based swap dealer
and non-U.S. persons with U.S. guarantees in transactions outside the
United States?
     Does the proposed application of the business conduct
standards in the cross-border context appropriately implement the
business conduct standards as described in Section 15F(h) of the
Exchange Act?
     As described above, the Commission does not, at this time,
propose to apply the business conduct standards in Section 15F(h) of
the Exchange Act, and the rules and regulations thereunder (other than
the rules and regulations relating to diligent supervision prescribed
by the Commission pursuant to Section 15F(h)(1)(B)), to the Foreign
Business of registered security-based swap dealers. Should such
standards apply to the Foreign Business of registered security-based
swap dealers? Would such application of business conduct standards
further the goals of Title VII of the Dodd-Frank Act?
     Should the Commission apply rules and regulations pursuant
to Section 15F(h)(1)(A) of the Exchange Act relating to fraud,
manipulation, and other abusive practices involving security-based
swaps (including security-based swaps that are offered but not entered
into) to the Foreign Business of registered foreign security-based swap
dealers?
     Should the Commission apply rules and regulations pursuant
to Section 15F(h)(1)(C) of the Exchange Act relating to position limits
to the Foreign Business of foreign security-based swap dealers?
     Should the proposed rule relating to conflicts of interest
set forth in Section 15F(j)(5) of the Exchange Act apply to both the
U.S. Business and Foreign Business of security-based swap dealers?
     Does the proposed approach appropriately treat the rules
and regulations prescribed by the Commission relating to diligent
supervision pursuant to Section 15F(h)(1)(B) as entity-level
requirements applicable to both the U.S. Business and the Foreign
Business of foreign security-based swap dealers? Why or why not?
     Is it appropriate that the proposed rule does not apply
future rules and regulations that the Commission may prescribe pursuant
to Section 15F(h)(1)(A) of the Exchange Act relating to fraud,
manipulation, and other abusive practices involving security-based
swaps (including security-based swaps that are offered but not entered
into) to the Foreign Business of foreign security-based swap dealers?
Why or why not?
     Is it appropriate that the proposed rule does not apply
future rules and regulations that the Commission may prescribe pursuant
to Section 15F(h)(1)(C) of the Exchange Act relating to position limits
to the Foreign Business of foreign security-based swap dealers? Why or
why not?
     Does the proposed approach appropriately treat the
requirements relating to conflicts of interest set forth in Section
15F(j)(5) of the Exchange Act as entity-level requirements applicable
to both the U.S. Business and Foreign Business of foreign security-
based swap dealers? If not, please identify any requirements that
should not be applied to a foreign security-based swap dealer and
explain how such an approach would be consistent with the goals of
Title VII. Please identify what the costs or operational challenges
would be, if any, for a registered security-based swap dealer to
establish conflict-of-interest systems and procedures that would apply
to its U.S. Business but not its Foreign Business.
     Does the proposed approach appropriately implement the
requirements relating to segregation of assets held as collateral in
Section 3E of the Exchange Act, and rules and regulations thereunder,
in light of various statuses of foreign security-based swap dealers?
     Should the Commission apply segregation requirements to a
foreign security-based swap dealer that is not subject to the
stockbroker liquidation provisions in the U.S. Bankruptcy Code? If not,
what are the reasons for not applying segregation requirements? If the
segregation requirements do not apply, how would the objective of
customer protection be achieved?
     Should the Commission adopt the disclosure requirement
with respect to foreign security-based swap dealers? Why or why not? Is
the proposed disclosure requirement feasible? What would the
difficulties be in complying with the proposed disclosure requirement?
     The CFTC has proposed an interpretation that would
effectively treat a non-U.S. person whose obligations are guaranteed by
a U.S. person as a U.S. person for purposes of determining whether a
swap between it and a non-U.S. swap dealer or major swap participant
would be subject to transaction-level requirements as interpreted by
the CFTC to include, without limitation, margin and segregation
requirements, reporting, clearing, and trade execution.\553\ Should the
Commission adopt a similar approach? What would be the effects on
efficiency, competition and capital

formation in the event that there are overlapping or duplicative
requirements across multiple jurisdictions?
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    \553\ See CFTC Cross-Border Proposal, 77 FR 41228-29.
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     In addition, the CFTC has proposed an interpretation that
includes a description of a ``conduit affiliate'' that includes: (1) a
non-U.S. person that is majority-owned, directly or indirectly, by a
U.S. person where (2) the non-U.S. person regularly enters into swaps
with one or more U.S. affiliates or subsidiaries of the U.S. person,
and (3) the financial statements of the non-U.S. person are included in
the consolidated financial statements of the U.S. person.\554\ Conduit
affiliates would be subject to transaction-level requirements as if
they were U.S. persons. Should the Commission consider a similar
approach?
---------------------------------------------------------------------------

    \554\ See id. at 41229.
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     The CFTC's proposed interpretation would subject foreign
branches of U.S.-based bank swap dealers and major swap participants to
the CFTC's entity-level requirements and transaction-level requirements
(other than external business conduct standards for swaps with non-U.S.
persons), provided that foreign branches would be eligible for a
limited exception in emerging markets where foreign regulations are not
comparable.\555\ Should the Commission consider a similar approach? If
so, please explain how such an approach would be consistent with the
goals of Title VII.
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    \555\ See id. at 41230-31.
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     What would be the market impact of the proposed approach
to application of the transaction-level requirements relating to
customer protection and segregation? How would the proposed application
of transaction-level requirements affect the competitiveness of U.S.
entities in the global marketplace (both in the United States as well
as in foreign jurisdictions)? Would the proposed approach place any