Paragraph (f) of proposed Rule 819 is modelled on Sec.  37.205,
using the same paragraph structure and rule text. Paragraph (f) would
require an SBSEF to capture and retain all audit trail data necessary
to detect, investigate, and prevent customer and market abuses and
impose other requirements on the SBSEF's audit trail pertaining to the
records that must be kept, electronic analysis capability, safe-storage
capability, and enforcement of the audit trail requirements.
    Paragraph (g) of proposed Rule 819 is based on Sec.  37.206 and
would generally track all of its rule text, but includes additional
language derived from the

appendix B guidance that is interwoven throughout. In converting the
guidance to proposed rule text, the Commission preliminarily believes
that grouping conceptually related items together would yield the most
coherent and readable ruleset, instead of incorporating the guidance
into a stand-alone section of the rules. Accordingly, paragraph
(g)(1)(i) of proposed Rule 819 is taken from Sec.  37.206(a) and would
require an SBSEF to establish and maintain sufficient enforcement staff
and resources to effectively and promptly prosecute possible rule
violations within the disciplinary jurisdiction of the SBSEF.
Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B
guidance and would provide, respectively, that:
     The enforcement staff of an SBSEF shall \130\ not include
members or other persons whose interests conflict with their
enforcement duties.
---------------------------------------------------------------------------

    \130\ In this bullet and the next bullet, the word used in the
corresponding CFTC guidance was ``should'' but the Commission is
proposing the word ``shall'' in both places to convert the guidance
into an enforceable rule.
---------------------------------------------------------------------------

     A member of the enforcement staff shall not operate under
the direction or control of any person or persons with trading
privileges at the SBSEF.
     The enforcement staff of an SBSEF may operate as part of
the SBSEF's compliance department.
    Paragraph (g)(2) of proposed Rule 819 is modelled on Sec.
37.206(b) and would require an SBSEF to establish one or more
disciplinary panels that are authorized to fulfill their obligations
under Rule 819. Section 37.206(b) provides that disciplinary panels
must meet the composition requirements of part 40. To help ensure
fairness and prevent special treatment or preference of any person or
member and to provide for consistency of the makeup of members of SBSEF
major disciplinary committees and hearing panels, the Commission is
proposing instead to require the disciplinary panels established under
proposed Rule 819(g)(2) to meet the composition requirements of
proposed Rule 834(d), which would apply to each major disciplinary
committee and hearing panel of an SBSEF.\131\
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    \131\ Proposed Rule 834(d) would require each SBSEF and SBS
exchange to ensure that its disciplinary processes preclude any
member, or group or class of its members, from dominating or
exercising disproportionate influence on the disciplinary process,
and that each major disciplinary committee or hearing panel include
sufficient different groups or classes of its members so as to
ensure fairness and to prevent special treatment or preference for
any person or member in the conduct of the responsibilities of the
committee or panel. See infra section X.
---------------------------------------------------------------------------

    Paragraphs (g)(3) through (8) of proposed Rule 819 have no parallel
in Sec.  37.206 itself, but derive from the guidance in appendix B
pertaining to Sec.  37.206, following the paragraph structure and
wording of the guidance closely. Paragraph (g)(3) would impose
procedural requirements relating to the notice of charges made to a
respondent. Paragraph (g)(4) would provide that a respondent has a
right to representation. Paragraph (g)(5) would provide that a
respondent must be given adequate time to respond to any charges.
Paragraph (g)(6) would state that the rules of an SBSEF may provide
that, if a respondent admits or fails to deny any of the charges, a
disciplinary panel may find that the violations alleged in the notice
of charges have been committed. Paragraph (g)(6) would further state
that, if the SBSEF's rules so provide, then: (i) The disciplinary panel
may impose a sanction for each violation found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and (iii) The
rules of the SBSEF may provide that, if a respondent fails to request a
hearing within the period of time stated in the notice, the respondent
will be deemed to have accepted the sanction.
    Paragraph (g)(7) of proposed Rule 819 would provide that, where a
respondent has requested a hearing on a charge that is denied, or on a
sanction set by the disciplinary panel, the respondent shall be given
an opportunity for a hearing in accordance with the rules of the
security-based swap execution facility. Paragraph (g)(8) would address
settlement offers.
    Paragraph (g)(9) of proposed Rule 819 returns to the text of Sec.
37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is
modelled on Sec.  37.206(c)(1) and would require an SBSEF to have rules
requiring a hearing to be fair, conducted before members of the
disciplinary panel, and promptly convened after reasonable notice to
the respondent. The Commission is proposing an additional provision,
which derives from the guidance, that an SBSEF need not apply the
formal rules of evidence for a hearing; nevertheless, the procedures
for the hearing may not be so informal as to deny a fair hearing.
    Paragraphs (g)(9)(ii) through (vi) of proposed Rule 819 are also
adapted from the guidance. Paragraph (g)(9)(ii) would bar a member of
the disciplinary panel for the hearing from having a financial,
personal, or other direct interest in the matter under consideration.
Paragraph (g)(9)(iii) would address the respondent's access to evidence
in the SBSEF's possession. Paragraph (g)(9)(iv) would provide that the
SBSEF's enforcement and compliance staffs shall \132\ be parties to the
hearing, and the enforcement staff shall present their case on those
charges and sanctions that are the subject of the hearing. Paragraph
(g)(9)(v) would provide that the respondent shall be entitled to appear
personally at the hearing, to cross-examine any persons appearing as
witnesses at the hearing, to call witnesses, and to present such
evidence as may be relevant to the charges. Paragraph (g)(9)(vi) would
provide that the SBSEF shall require persons within its jurisdiction
who are called as witnesses to participate in the hearing and produce
evidence.
---------------------------------------------------------------------------

    \132\ The CFTC's guidance in appendix B that is adapted into
paragraphs (g)(9)(ii) through (vi) of proposed Rule 819 uses the
word ``should'' here and in other similar instances. The Commission
is proposing to use the word ``shall'' in such instances instead.
---------------------------------------------------------------------------

    Paragraph (g)(9)(vii) of proposed Rule 819 is modelled on the text
of Sec.  37.206(c)(2) and would require that, if the respondent has
requested a hearing, a copy of the hearing shall be made and shall
become a part of the record of the proceeding. Paragraph (g)(9)(vii)
would not require the record to be transcribed unless the transcript is
requested by Commission staff or the respondent, the decision is
appealed pursuant to the rules of the SBSEF, or the decision is
reviewed by the Commission pursuant to Sec.  201.442.\133\ In all other
instances, a summary record of a hearing is permitted.
---------------------------------------------------------------------------

    \133\ See infra section XVI(E) (discussing proposed Rule 442,
which would establish the right to appeal to the Commission certain
actions taken by an SBSEF, and setting out certain procedural
matters relating to any such appeal).
---------------------------------------------------------------------------

    Paragraph (g)(10) of proposed Rule 819 is modelled on Sec.
37.206(d) and would provide that, promptly following a hearing
conducted in accordance with the rules of the SBSEF, the disciplinary
panel shall render a written decision based upon the weight of the
evidence contained in the record of the proceeding and shall provide a
copy to the respondent. The written decision would have to include six
enumerated elements, all of which are closely modelled on those in
Sec.  37.206(d).
    Paragraph (g)(11) of proposed Rule 819 would address emergency
disciplinary actions and is drawn from the appendix B guidance. It
would provide that an SBSEF may impose a sanction, including
suspension, or take other summary action against a person

or entity subject to its jurisdiction upon a reasonable belief that
such immediate action is necessary to protect the best interest of the
market place. Furthermore, any emergency disciplinary action would have
to be taken in accordance with an SBSEF's procedures that provide for
notice (if practicable), rights for representation in all proceedings,
an opportunity for a hearing as soon as reasonably practicable, and the
rendering of a written decision promptly following the hearing based
upon the weight of the evidence contained in the record. Proposed Rule
819(g)(11) seeks to balance the need to allow an SBSEF to take summary
action against the need to afford due process to respondents.\134\
---------------------------------------------------------------------------

    \134\ Compare proposed Rule 819(g)(11)(i) (allowing an SBSEF to
impose a sanction, including suspension, or take other summary
action against a person or entity subject to its jurisdiction upon a
reasonable belief that such immediate action is necessary to protect
the best interest of the market place) with proposed Rule
819(g)(11)(ii)(A) (providing that, if practicable, a respondent
should be served with a notice before the action is taken, or
otherwise at the earliest possible opportunity).
---------------------------------------------------------------------------

    Paragraph (g)(12) of proposed Rule 819 also is drawn from the
appendix B guidance and provides that, if the rules of the SBSEF permit
appeals,\135\ the SBSEF shall establish an appellate panel that is
authorized to hear appeals. The composition of the panel would have to
be consistent with proposed Rule 834(d) \136\ and could not include any
members of the SBSEF's compliance staff or any person involved in
adjudicating any other stage of the same proceeding. Promptly following
the appeal or review proceeding, the appellate panel would be required
to issue a written decision and to provide a copy to the respondent.
---------------------------------------------------------------------------

    \135\ Neither Sec.  37.206 or the associated guidance from
appendix B requires a SEF to allow appeals. The guidance states,
rather, that a SEF's rules ``may permit'' appeals and includes
certain procedural requirements only if the rules of a swap
execution facility permit appeals. The Commission is adhering to
this permissive approach in this proposal but seeks comment on
whether the final rules should require an SBSEF to create an appeals
procedure.
    \136\ See supra note 131.
---------------------------------------------------------------------------

    Paragraph (g)(13) of proposed Rule 819 is adapted partly from Sec.
37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i)
is drawn from Sec.  37.206(e) and would provide that all disciplinary
sanctions imposed by an SBSEF or its disciplinary panels shall be
commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other members.
All disciplinary sanctions, including sanctions imposed pursuant to an
accepted settlement offer, would be required to take into account the
respondent's disciplinary history. In the event of demonstrated
customer harm, any disciplinary sanction would also be required to
include full customer restitution, except where the amount of
restitution or to whom it should be provided cannot be reasonably
determined. Paragraph (g)(13)(i) is adapted from the guidance and would
allow an SBSEF to adopt a summary fine schedule for violations of rules
relating to the failure to timely submit accurate records required for
clearing or verifying each day's transactions.
    The Commission preliminarily believes that combining text from
Sec.  37.206 with the associated guidance from appendix B provides a
logical set of procedures for addressing Core Principle 2 (Compliance
with Rules), from requirements relating to enforcement staff generally
(proposed Rule 819(g)(1)); to the composition of disciplinary panels
and notices of charges (proposed Rules 819(g)(1) and (g)(2)); to rights
to representation (proposed Rule 819(g)(4)), answer to charges and
admission or failure to deny charges (proposed Rules 819(g)(5) and
(g)(6)), denial of charges and right to a hearing (proposed Rule
819(g)(7)), settlement offers (proposed Rule 819(g)(8)); and, finally,
hearings (proposed Rule 819(g)(9)), decisions (proposed Rule
819(g)(10)), emergency disciplinary actions (proposed Rule 819(g)(11)),
right to appeal (proposed Rule 819(g)(12)), and disciplinary sanctions
(proposed Rule 819(g)(13)).
    The Commission recognizes that a set of rules that govern
compliance and enforcement matters for SBSEFs could, in the abstract,
differ in a number of details from the rules adopted by the CFTC in
subpart C of part 37 and still plausibly satisfy the requirements of
Core Principle 2. However, in light of the baseline set by the CFTC's
rules, the Commission is concerned that implementing rules for SBSEFs
having major or even minor differences with the rules applicable to
SEFs could increase compliance costs and cause confusion for dually
registered SEF/SBSEFs and market participants. This would particularly
be the case if a potential violation involved a rule that was not
specific to the swap or SBS market, but rather involved member conduct
generally. No regulatory purpose would be served if the SEF/SBSEF had
to pursue one cause of action against a member pursuant to a CFTC rule
and a slightly different cause of action pursuant to an SEC rule, for
the same underlying facts.
    The Commission seeks comment on the following:
    95. Do you agree generally with the manner in which the Commission
is proposing to implement Core Principle 2? Why or why not?
    96. In particular, do you agree with the proposed access
requirements in Rule 819(c)? Why or why not? Do you see differences
between the swap and SBS markets that warrant different requirements
for access to a SEF than to an SBSEF? If so, please describe.
    97. Do you see differences between the swap and SBS markets that
warrant different audit trail requirements or trade surveillance
capability for SBSEFs than for SEFs? If so, please describe.
    98. Do you believe that SBSEFs, like SEFs, should be able to
utilize regulatory service providers? What entities currently serve as
regulatory service providers for SEFs? Do you believe that the types of
regulatory service providers that could be utilized by SBSEFs under
proposed Rule 819(e)(1) are appropriate? If not, what other regulatory
service providers should be permitted?
    99. Do you agree with how the Commission is proposing to implement
requirements for disciplinary procedures and sanctions in proposed Rule
819(g)? Why or why not?
    100. In particular, do you agree with the manner in which the
Commission is proposing to incorporate significant portions of the
appendix B guidance into proposed Rule 819(g)? Why or why not? Are
there provisions from the guidance that the Commission is proposing to
incorporate that you believe should be revised or omitted entirely? If
so, please describe. Are there provisions from the guidance that the
Commission has not proposed to incorporate but that you believe should
be incorporated? If so, please describe.
    101. Do existing SEFs treat the appendix B guidance as if it were
mandatory? By converting the non-binding guidance applicable to SEFs
into formal rules that would apply to SBSEFs, would dually registered
entities be compelled to deviate from their present practices? If so,
please describe.
    102. Do you believe that proposed Rule 819(g)(12) should be revised
to require an SBSEF to permit appeals of enforcement decisions to an
appellate panel established by the SBSEF, despite the fact that neither
subpart C of part 37 nor the CFTC's associated guidance requires
appeals? Why or why not?
2. Provisions of Rule 819 Adapted From Other SEF Requirements
    Proposed Rule 819 includes four paragraphs--(h), (i), (j), and
(k)--that are not derived from subpart C of part 37,

which directly implements CEA Core Principle 2, or from the associated
guidance in appendix B to part 37. Instead, these four paragraphs are
modelled on requirements for SEFs located in other parts of the CFTC's
rules. Because these requirements fall under the general heading of
``Compliance with Rules,'' the Commission is proposing them as part of
Rule 819, which implements SEA Core Principle 2.
a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board
Members, Committee Members, and Consultants
    Paragraph (h) of proposed Rule 819 generally would prohibit persons
who are employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Proposed Rule 819(h) is modelled
on Sec.  1.59 of the CFTC's rules, which requires an SRO (which term,
under Sec.  1.3 of the CFTC regulations, includes a SEF) to place
restrictions on trading by its governing board members, committee
members, consultants, and employees and to prohibit any such person
from disclosing any material, non-public information obtained as a
result of their official duties with the SRO.
    In particular, Sec.  1.59(b)(1)(i) requires an SRO to maintain in
effect rules that, at a minimum, prohibit employees of the SRO from
trading, directly or indirectly, in:
     Any ``commodity interest'' \137\ traded on or cleared by
the employing contract market, SEF, or clearing organization;
---------------------------------------------------------------------------

    \137\ See Sec.  1.59(a)(8) (defining ``commodity interest'' to
mean ``any commodity futures, commodity option or swap contract
traded on or subject to the rules of a contract market, a swap
execution facility or linked exchange, or cleared by a derivatives
clearing organization, or cash commodities traded on or subject to
the rules of a board of trade which has been designated as a
contract market'').
---------------------------------------------------------------------------

     Any ``related commodity interest''; \138\
---------------------------------------------------------------------------

    \138\ See Sec.  1.59(a)(9) (defining ``related commodity
interest'' to mean ``any commodity interest which is traded on or
subject to the rules of a contract market, swap execution facility,
linked exchange, or other board of trade, exchange, or market, or
cleared by a derivatives clearing organization, other than the self-
regulatory organization by which a person is employed, and with
respect to which: (i) such employing self-regulatory organization
has recognized or established intermarket spread margins or other
special margin treatment between that other commodity interest and a
commodity interest which is traded on or subject to the rules of the
employing self-regulatory organization; or (ii) such other self-
regulatory organization has recognized or established intermarket
spread margins or other special margin treatment with another
commodity interest as to which the person has access to material,
nonpublic information'').
---------------------------------------------------------------------------

     A commodity interest traded on a contract market or SEF or
cleared by a DCO other than the employing SRO if the employee has
access to material, non-public information concerning such commodity
interest;
     A commodity interest traded on or cleared by a ``linked
exchange'' if the employee has access to material, non-public
information concerning such commodity interest.
    The Commission is proposing to adapt Sec.  1.59(b)(1) into
Regulation SE in a simplified way. The Commission preliminarily
believes that, in the SBS market, the policy goals of the rule can be
achieved without the complexities of the CFTC definitions of
``commodity interest'' and ``related commodity interest.'' Paragraph
(h)(2)(i) of proposed Rule 819 would require an SBSEF to maintain in
effect rules that, at a minimum, prohibit an employee of the SBSEF from
trading, directly or indirectly, any ``covered interest.'' Proposed
Rule (h)(1)(i) would define ``covered interest'' to mean, with respect
to an SBSEF: An SBS that trades on the SBSEF; a security of an issuer
that has issued a security that underlies an SBS that is listed on the
SBSEF; or a derivative based on a security that falls within the
immediately preceding prong. The Commission preliminarily believes that
the opportunity to observe order submission and trading in an SBS on an
SBSEF could yield material non-public information about the future
performance not just of that SBS, but of all securities issued by that
entity. The single-name CDS market, in particular, is a market for
assessing the creditworthiness of particular issuers. Non-public
information derived from activity on the SBSEF pertaining to the
market's assessment of an issuer's creditworthiness is likely to be
material to the markets for that issuer's cash securities as well as to
markets for derivatives based on the issuer's cash securities (e.g.,
single-stock options).
    Paragraph (h)(2)(ii), modelled on Sec.  1.59(b)(1)(ii), would
prohibit an SBSEF employee from disclosing to any other person any
material non-public information which such employee obtains as a result
of their employment at the SBSEF, and where such employee has or should
have a reasonable expectation that the information disclosed may assist
another person in trading any covered interest. In addition, paragraph
(h)(2)(ii), like Sec.  1.59(b)(1)(ii), would provide an exception for
disclosures made in the course of an employee's duties, or disclosures
made to another SBSEF, court of competent jurisdiction, or
representative of any agency or department of the Federal or State
government acting in their official capacity.
    Paragraph (h)(3) of Rule 819, modelled on Sec.  1.59(b)(2), would
allow an SBSEF to adopt rules setting forth circumstances under which
exemptions from the employee trading prohibition may be granted. In
particular, paragraph (h)(3) would include the following possible
carve-outs from the employee trading prohibition: (1) Participation by
an employee in a ``pooled investment vehicle'' where the employee has
no direct or indirect control with respect to transactions executed for
or on behalf of such vehicle; (2) trading by an employee in a
derivative based on such a pooled investment vehicle; (3) trading by an
employee in a derivative based on an index in which no covered interest
constitutes more than 10% of the index; and (4) trading by an employee
under circumstances enumerated in rules which the SBSEF determines are
not contrary to applicable law, the public interest, or just and
equitable principles of trade. The first and the fourth carve-outs
listed above are comparable to those listed in Sec.  1.59(b)(2). The
Commission is proposing to include the second and third carve-outs to
permit an SBSEF employee to trade derivatives that provide indirect
exposure to a covered interest where the exposure to the covered
interest is sufficiently diluted. In such cases, it would be unlikely
that the employee would be using material non-public information about
the covered interest to gain an unfair advantage when trading the
derivative.
    The Commission is proposing to depart from the CFTC definition of
``pooled investment vehicle'' \139\ to adapt it for the SBS and
securities markets. Proposed Rule (h)(1)(ii) would define ``pooled
investment vehicle'' to mean an investment company registered under the
Investment Company Act of 1940 in which no covered interest constitutes
more than 10% of the investment company's assets. Thus, under this
definition, if an SBSEF were to list a single-name CDS on company XYZ,
a ``pooled investment vehicle'' would include a broad-based mutual fund
or ETF that contains a security issued by company XYZ, assuming that

the XYZ security does not exceed 10% of the fund's holdings. The
proposed 10% limit on a covered interest's composition of the fund is
designed to permit SBSEF employees to trade most index-based mutual
funds and ETFs that contain covered interests, except those where a
component of the fund becomes sufficiently large that material non-
public information about an issuer derived from activity on the SBSEF
could provide an unfair advantage to an SBSEF employee when trading
that fund.
---------------------------------------------------------------------------

    \139\ See Sec.  1.59(a)(10) (defining ``pooled investment
vehicle'' to mean ``a trading vehicle organized and operated as a
commodity pool within the meaning of Sec.  4.10(d) of this chapter,
and whose units of participation have been registered under the
Securities Act of 1933, or a trading vehicle for which Sec.  4.5 of
this chapter makes available relief from regulation as a commodity
pool operator, i.e., registered investment companies, insurance
company separate accounts, bank trust funds, and certain pension
plans'').
---------------------------------------------------------------------------

    Finally, the Commission notes that, under proposed Rule 819(h)(3)--
as with Sec.  1.59(b)(2)--the exemptions from the trading restrictions
would not be automatically available to SBSEF employees. Proposed Rule
819(h)(3) still would require the SBSEF to adopt rules that set forth
circumstances under which exemptions from the trading prohibition may
be granted. Furthermore, proposed Rule 819(h)(3), which is modelled on
Sec.  1.59(b)(2), would state that any exemption must be administered
by the SBSEF ``on a case-by-case basis.''
    Paragraph (h)(4) of proposed Rule 819, like Sec.  1.59(d),\140\
would address prohibited conduct not just of employees of an SBSEF, but
also of governing board members, committee members, and consultants of
the SBSEF. Paragraph (h)(4)(i)(A) is modelled on Sec.  1.59(d)(1)(i)
and would prohibit any employee, governing board member, committee
member, or consultant of the SBSEF from trading for such person's own
account, or for or on behalf of any other account, in any covered
interest on the basis of any material, non-public information obtained
through special access related to the performance of such person's
official duties as an employee, governing board member, committee
member, or consultant. Paragraph (h)(4)(i)(B), modelled on Sec.
1.59(d)(1)(ii), would prohibit any employee, governing board member,
committee member, or consultant of the SBSEF from disclosing for any
purpose inconsistent with the performance of such person's official
duties as an employee, governing board member, committee member, or
consultant any material, non-public information obtained through
special access related to the performance of such duties. Paragraph
(h)(4)(ii), modelled on Sec.  1.59(d)(2), would provide that no person
shall trade for such person's own account, or for or on behalf of any
other account, in any covered interest on the basis of any material,
non-public information that such person knows was obtained in violation
of paragraph (h)(4) of this section from an employee, governing board
member, committee member, or consultant.
---------------------------------------------------------------------------

    \140\ Section 1.59(c) applies only to national futures
associations and is not considered here.
---------------------------------------------------------------------------

    The Commission preliminarily believes that persons who have
professional duties with an SBSEF should not trade on material non-
public information derived from the SBSEF or improperly disclose that
information to third parties, and therefore that harmonizing with the
comparable CFTC rule as closely as practicable, taking into account the
difference in products subject to the respective jurisdictions of the
SEC and CFTC, is an appropriate means of furthering that policy goal.
If the Commission adopts Rule 819(h) in substantially the same form as
proposed herein, dually registered SEF/SBSEFs would be able to utilize
the same rules and procedures for complying with Rule 819(h) as they do
for Sec.  1.59. The Commission recognizes that the scope of assets
under restriction would differ in Rule 819(h) than in Sec.  1.59, as
reflected in the SEC's use of the term ``covered interest'' rather than
``commodity interest'' in the analogous CFTC provisions, as well as the
significant differences in the potential exemptions from the trading
restriction (including in the ``pooled investment vehicle''
definition). Nevertheless, SBS are different from swaps, so the
material non-public information that can be obtained from observing
order submission and SBS trading on an SBSEF is different from the
material non-public information that can be obtained from observing
order submission and swap trading on a SEF. The Commission
preliminarily believes, therefore, that it is appropriate for Rule
819(h) to utilize a definition of ``covered interest'' to denote the
scope of the trading restrictions in the proposed rule--and a
definition of ``pooled investment vehicle'' to denote the scope of one
of the potential exemptions from those restrictions--that is customized
for the SBS and securities markets.
    The Commission seeks comment on the following:
    103. Do you believe in general that the Commission should
incorporate into Regulation SE a rule that restricts how persons with
official duties at an SBSEF may utilize information that they obtain in
the course of their official duties? Why or why not?
    104. Do you agree with the specific language proposed by the
Commission to adapt Sec.  1.59 into proposed Rule 819(h)? If not, how
would you revise the proposed rule?
    105. In particular, do you agree with the Commission's proposed
definition of ``covered interest''? Why or why not? Do you believe that
the term ``covered interest'' should be expanded to include securities
underlying an index swap and other securities issued by an issuer whose
securities underlie an index swap that trade on a dually registered
SEF/SBSEF? Why or why not?
    106. Do you agree with the proposed potential exemptions from the
trading restrictions in proposed Rule 819(h)(3)? For example, do you
believe in general that an SBSEF should be permitted to allow its
employees, governing board members, committee members, and consultants
to hold covered interests through pooled investment vehicles? Why or
why not?
    107. Do you agree with the Commission's proposed definition of
``pooled investment vehicle''? Why or why not? Do you agree with the
Commission's proposed requirement that no covered interest may
constitute more than 10% of the pooled investment vehicle? Why or why
not? If you believe another threshold would be more appropriate, please
justify that threshold.
    108. Are there additional provisions of Sec.  1.59 that the
Commission has omitted but which you believe should be incorporated
into Regulation SE? If so, which provisions and why?
b. Rule 819(i)--Service on SBSEF Governing Boards or Committees by
Persons With Disciplinary Histories
    Paragraph (i) of proposed Rule 819 would bar persons with specified
disciplinary histories from serving on the governing board or
committees of an SBSEF and impose certain other duties on the SBSEF
associated with that fundamental requirement. Proposed Rule 819(i) is
modelled on Sec.  1.63 of the CFTC's rules, which imposes similar
requirements in connection with SROs (which term, under the CEA,
includes SEFs).
    Section 1.63(b) requires each SRO to maintain in effect rules that
render a person ineligible to serve on its disciplinary committees,
arbitration panels, oversight panels, or governing board \141\ who
meets any of six enumerated criteria. These criteria generally relate
to a disciplinary offense having been committed by that person within
the past three years. While

Sec.  1.63(b) requires the SRO to implement rules imposing a bar, Sec.
1.63(c) in addition imposes a bar on such persons directly, stating
that no person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of an SRO if such person is
subject to any of the conditions listed in Sec.  1.63(b). Section
1.63(d) requires an SRO to maintain, keep current, and provide to the
CFTC and the public a list of the rule violations which constitute
disciplinary offenses that would trigger the bar in Sec.  1.63. Section
1.63(e) requires an SRO to submit to the CFTC, within 30 days of the
end of each calendar year, a certified list of any persons who have
been removed from its disciplinary committees, arbitration panels,
oversight panels, or governing board pursuant to Sec.  1.63 during the
prior year.
---------------------------------------------------------------------------

    \141\ Section 1.63 uses the term ``governing board'' throughout.
Certain other CFTC rules that the Commission is proposing to adapt
into Regulation SE use ``board of directors'' to denote the same
concept. As noted above, the Commission is proposing to utilize the
term ``governing board'' throughout Regulation SE, even when the
parallel CFTC rule on which an SEC rule is based uses ``board of
directors.'' See supra note 29.
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    Paragraph (i) of proposed Rule 819 is closely modelled on Sec.
1.63. Paragraph (i)(1), like Sec.  1.63(b), would require an SBSEF to
maintain rules \142\ that render a person ineligible to serve on its
disciplinary committees,\143\ arbitration panels, oversight
panels,\144\ or governing boards who falls into any of six enumerated
criteria, all of which are modelled closely on the criteria in Sec.
1.63(b).\145\ Paragraph (i)(2), modelled on Sec.  1.63(c), would impose
a direct bar on any person from serving on a disciplinary committee,
arbitration panel, oversight panel, or governing board of an SBSEF who
meets any of the six criteria enumerated in proposed Rule 819(i)(1).
Paragraph (i)(3), modelled on Sec.  1.63(d), would require an SBSEF to
submit to the Commission a schedule listing the rule violations which
constitute disciplinary offenses that would trigger the bar and, to the
extent necessary to reflect revisions, would have to submit an amended
schedule within 30 days of the end of each calendar year. The SBSEF
would be required to maintain and keep current this schedule and post
it on its website so that it is in a public place designed to provide
notice to members and otherwise ensure its availability to the general
public. Paragraph (i)(4), like Sec.  1.63(e), would require an SBSEF to
submit to the Commission within 30 days of the end of each calendar
year a certified list of any persons who have been removed from its
disciplinary committees, arbitration panels, oversight panels, or
governing board pursuant to Rule 819(i) during the prior year.
Paragraph (i)(5), modelled on Sec.  1.63(f), would provide that,
whenever an SBSEF finds by final decision that a person has committed a
disciplinary offense and such finding makes such person ineligible to
serve on that SBSEF's disciplinary committees, arbitration panels,
oversight panels, or governing board, the SBSEF shall inform the
Commission of that finding and the length of the ineligibility, in a
form and manner specified by the Commission.
---------------------------------------------------------------------------

    \142\ Section 1.63(b), in relevant part, requires a SEF to
maintain rules that have been submitted to the Commission pursuant
to section 5c(c) of the CEA and part 40 of the CFTC's rules. As
noted above, the Commission is proposing to adapt Sec. Sec.  40.5
(Voluntary submission of rules for Commission review and approval)
and 40.6 (Self-certification of rules) into proposed Rules 806 and
807, respectively. Therefore, proposed Rule 819(i)(1) would require
an SBSEF to maintain in effect rules which have been submitted to
the Commission pursuant to Rules 806 or 807.
    \143\ Proposed Rule 802 would define ``disciplinary committee''
as any person or committee of persons, or any subcommittee thereof,
that is authorized by an SBSEF or SBS exchange to issue disciplinary
charges, to conduct disciplinary proceedings, to settle disciplinary
charges, to impose disciplinary sanctions, or to hear appeals
thereof in cases involving any violation of the rules of the SBSEF
or SBS exchange, except those cases where the person or committee is
authorized summarily to impose minor penalties for violating rules
regarding decorum, attire, the timely submission of accurate records
for clearing or verifying each day's transactions, or other similar
activities. The CFTC rules contain two slightly different
definitions of ``disciplinary committee'' that appear in Sec.
1.63(a)(2) and Sec.  1.69(a)(1), respectively. Because the
definition in Sec.  1.69(a)(1) is more comprehensive, the Commission
is modelling its proposed definition of ``disciplinary committee''
on Sec.  1.69(a)(1) rather than on Sec.  1.63(a)(2). The Commission
is locating the definition in proposed Rule 802, since the term is
used by multiple rules in Regulation SE.
    \144\ Proposed Rule 802 would define ``oversight panel'' as any
panel, or any subcommittee thereof, authorized by an SBSEF or SBS
exchange to recommend or establish policies or procedures with
respect to the surveillance, compliance, rule enforcement, or
disciplinary responsibilities of the SBSEF or SBS exchange. The
CFTC's definitions of ``oversight panel'' are contained in Sec.
1.63(a)(4) and Sec.  1.69(a)(4), respectively. Because the
definition in Sec.  1.69(a)(4) is more comprehensive, the Commission
is modelling its proposed definition of ``oversight panel'' on Sec.
1.69(a)(4) rather than on Sec.  1.63(a)(4). As with the definition
of ``disciplinary committee,'' the Commission is locating the
definition of ``oversight panel'' in proposed Rule 802, since the
term is used by multiple rules in Regulation SE.
    \145\ Section 1.63(b)(5) provides that one criterion for the bar
would be that the person in question is subject to or has had
imposed on him within the prior three years a CFTC registration
revocation or suspension in any capacity for any reason, or has been
convicted within the prior three years of any of the felonies listed
in section 8a(2)(D)(ii) through (iv) of the CEA. Since the SEC is
not subject to the CEA and cannot cross-reference those provisions,
the Commission is proposing for the equivalent criterion in Rule
819(i)(1)(v) that a person would be barred for having been convicted
within the prior three years of any felony, without limitation on
the type of felony.
---------------------------------------------------------------------------

    Paragraph (i)(6) of proposed Rule 819(i) would define the terms
``arbitration panel,'' ``disciplinary offense,'' and ``final decision''
which are used in proposed Rule 819(i).\146\ These definitions are
closely modelled on those provided in Sec.  1.63(a).\147\
---------------------------------------------------------------------------

    \146\ Proposed Rule 819(i)(6)(i) would define ``arbitration
panel'' as any person or panel empowered by an SBSEF to arbitrate
disputes involving the SBSEF's members or their customers. Proposed
Rule 819(i)(6)(ii) would define ``disciplinary offense'' as: Any
violation of the rules of an SBSEF, except a violation resulting in
fines aggregating to less than $5,000 within a calendar year
involving decorum or attire, financial requirements, or reporting or
recordkeeping; any rule violation which involves fraud, deceit, or
conversion or results in a suspension or expulsion; any violation of
the SEA or the Commission's rules thereunder; or any failure to
exercise supervisory responsibility when such failure is itself a
violation of either the rules of the SBSEF, the SEA, or the
Commission's rules thereunder. Proposed Rule 819(i)(6)(iii) would
define ``final decision'' as a decision of an SBSEF which cannot be
further appealed within the SBSEF, is not subject to the stay of the
Commission or a court of competent jurisdiction, and has not been
reversed by the Commission or any court of competent jurisdiction;
or any decision by an administrative law judge, a court of competent
jurisdiction, or the Commission which has not been stayed or
reversed.
    \147\ Since these terms are used only in proposed Rule 819(i)
and not elsewhere in Regulation SE, the Commission is defining them
in proposed Rule 819(i) and not the omnibus definitions rule in
Regulation SE (Rule 802).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to bar
persons with inappropriate disciplinary histories from serving on the
disciplinary committees, arbitration panels, oversight panels, or
governing board of an SBSEF, and that closely modelling a rule in
Regulation SE on Sec.  1.63 would be an appropriate means of furthering
that policy goal. The requirements of Sec.  1.63 should be well
understood by SEFs, who have been complying with them for several
years, and incorporating similar requirements into Regulation SE should
impose few if any additional costs on dually registered SEF/SBSEFs. The
Commission preliminarily believes, in particular, that establishing
criteria for the bar that are as similar as possible to the CFTC's
criteria would avoid a situation where a person is ineligible under one
agency's rules to serve on a disciplinary committee, arbitration panel,
oversight panel, or the governing board, but would be eligible under
the other agency's rules.
    The Commission seeks comment on the following:
    109. Do you believe in general that Regulation SE should include a
rule that prohibits persons having an inappropriate disciplinary
history from serving on the disciplinary committees, arbitration
panels, oversight panels, or governing board of an SBSEF? Why or why
not?
    110. In particular, do you agree with the specific language
proposed by the Commission to adapt Sec.  1.63 into proposed Rule
819(i)? If not, how would you revise the rule?

    111. Are there additional provisions of Sec.  1.63 that the
Commission has not adapted into proposed Rule 819(i) but which you
believe should be incorporated? If so, which provisions and why?
    112. Proposed Rule 819(i)(1)(iv) would require an SBSEF to have
rules that render a person ineligible to serve on its disciplinary
committees, arbitration panels, oversight panels, or governing board if
that person is subject to an agreement with the Commission, an SBSEF,
or an SRO not to apply for registration with the Commission or
membership in any SRO. Should similar agreements with any other types
of entities be included in the ineligibility provision of proposed Rule
819(i)(1)(iv)? For example, should registered futures associations such
as the NFA be included in this list? Why or why not?
c. Rule 819(j)--Notification of Final Disciplinary Action Involving
Financial Harm to a Customer
    Paragraph (j) of proposed Rule 819 is a modified version of Sec.
1.67 of the CFTC's rules. Section 1.67(b) provides, in relevant part,
that upon any final disciplinary action \148\ in which a contract
market or SEF finds that a member has committed a rule violation that
involved a transaction for a customer,\149\ whether executed or not,
and that resulted in harm to the customer, the contract market or SEF
must promptly provide notice of the disciplinary action to the futures
commission merchant or other registrant. The futures commission
merchant or other registrant that receives the notice must promptly
provide written notice of the disciplinary action to the customer as
disclosed on its books and records. Such written notice must include
the principal facts of the disciplinary action and a statement that the
contract market or SEF has found that the member has committed a rule
violation that involved a transaction for the customer, whether
executed or not, and that resulted in financial harm to the customer.
---------------------------------------------------------------------------

    \148\ See Sec.  1.67(a) (defining ``final disciplinary action''
as any decision by or settlement with a contract market or swap
execution facility in a disciplinary matter which cannot be further
appealed at the contract market or swap execution facility, is not
subject to the stay of the Commission or a court of competent
jurisdiction, and has not been reversed by the Commission or any
court of competent jurisdiction).
    \149\ See Sec.  1.3 (defining ``customer'' as any person who
uses a futures commission merchant, introducing broker, commodity
trading advisor, or commodity pool operator as an agent in
connection with trading in any commodity interest; Provided,
however, an owner or holder of a proprietary account as defined in
this section shall not be deemed to be a customer within the meaning
of section 4d of the CEA, the regulations that implement sections 4d
and 4f of the CEA and Sec.  1.35, and such an owner or holder of
such a proprietary account shall otherwise be deemed to be a
customer within the meaning of the CEA and Sec. Sec.  1.37 and 1.46
and all other sections of these rules, regulations, and orders which
do not implement sections 4d and 4f of the CEA).
---------------------------------------------------------------------------

    Paragraph (j)(1) of proposed Rule 819 is designed to replicate for
SBSEFs the fundamental duty of Sec.  1.67 and would provide that, upon
any final disciplinary action in which an SBSEF finds that a member has
committed a rule violation that involved a transaction for a customer,
whether executed or not, and that resulted in financial harm to the
customer, the SBSEF must promptly provide written notice of the
disciplinary action to the member. In addition, the SBSEF would be
required to have established a rule pursuant to Rule 806 or 807 that
requires a member that receives such a notice to promptly provide that
notice to the customer, as disclosed on the member's books and
records.\150\ Paragraph (j)(2) would provide that the written notice
must include the principal facts of the disciplinary action and a
statement that the SBSEF has found that the member has committed a rule
violation that involved a transaction for the customer, whether
executed or not, and that resulted in financial harm to the customer.
---------------------------------------------------------------------------

    \150\ The provision on which proposed Rule 819(j)(1)(i)(B) is
based, Sec.  1.67(b)(1)(ii), requires a futures commission merchant
or other registrant that receives such a notice to forward it to the
injured customer. Because of differences in the respective agencies'
statutory authority, the Commission is proposing to require the
SBSEF to establish a rule that requires the relevant member to
forward the notice, not to propose a Commission rule that would
impose such a duty on the member directly.
---------------------------------------------------------------------------

    Paragraph (j)(3) of proposed Rule 819 would provide definitions for
two terms used in Rule 819(j). The proposed definition for ``final
disciplinary action'' is closely modelled on the CFTC's definition in
Sec.  1.67(a).\151\ The proposed definition of ``customer'' is only
loosely modelled on the definition of ``customer'' provided in Sec.
1.3, which includes complexities deriving from the CEA that the
Commission does not believe are necessary or appropriate to adapt into
a rule that applies to SBSEFs.\152\ The Commission is proposing to
define ``customer'' in proposed Rule 819(j)(3)(i) as a person that
utilizes an agent in connection with trading on an SBSEF.
---------------------------------------------------------------------------

    \151\ See proposed Rule 819(j)(3)(ii) (defining ``final
disciplinary action'' as any decision by or settlement with an SBSEF
in a disciplinary matter which cannot be further appealed at the
SBSEF, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission
or any court of competent jurisdiction).
    \152\ The Commission notes, finally, that the definitions of
``customer'' and ``final disciplinary action'' would apply only
within proposed Rule 819(j), so they are not included in the omnibus
definitions rule for proposed Regulation SE (Rule 802).
---------------------------------------------------------------------------

    The Commission preliminarily believes that, if an SBSEF member
commits a rule violation that involved a transaction for the customer
and financial harm to the customer results, the customer should be
apprised of that fact. The Commission preliminarily believes,
therefore, that closely modelling a rule in Regulation SE on Sec.  1.67
would be an appropriate means of furthering that policy goal. The
requirements of Sec.  1.67 should be well understood by SEFs, who have
been complying with them for several years, and incorporating similar
requirements into Regulation SE should impose lower compliance costs on
dually registered SEF/SBSEFs.
    The Commission seeks comment on the following:
    113. Do you believe in general that Regulation SE should include a
rule designed to provide a customer of an SBSEF member notice if the
member commits a violation of an SBSEF rule that results in harm to the
customer? Why or why not?
    114. In particular, do you agree with the specific language
proposed by the Commission to adapt Sec.  1.67 into proposed Rule
819(j)? If not, how would you revise that language?
    115. Do you agree with the proposed definition of ``customer'' in
proposed Rule 819(j)? If not, how would you revise it?
d. Rule 819(k)--Designation of Agent for Non-U.S. Member
    Paragraph (k) of proposed Rule 819 would require non-U.S. persons
who trade on an SBSEF to have an agent for service process, which could
be an agent of its own choosing or, by default, the SBSEF. Proposed
Rule 819(k) is modelled on Sec.  15.05(i) of the CFTC's rules, which
concerns the designation of agents for foreign persons participating on
``reporting markets,'' a category in the CFTC's rules that includes
SEFs.\153\ With respect to SEFs, Sec.  15.05(i) provides that a SEF
that permits a foreign trader to effect contracts, agreements, or
transactions on the SEF shall be deemed to be the agent of the foreign
trader with respect to any such contracts, agreements, or transactions
executed by the foreign trader. Sec.  15.05(i) further provides that
service or delivery of any communication issued by or on behalf

of the CFTC to the SEF shall constitute valid and effective service
upon the foreign trader, and that a SEF that has been served with, or
to which there has been delivered, a communication issued by or on
behalf of the CFTC to a foreign trader shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the CFTC in the communication, to the
foreign trader.
---------------------------------------------------------------------------

    \153\ A ``reporting market'' is defined in Sec.  15.00(q) to
mean a DCM or registered entity under section 1a(40) of the CEA. The
term ``registered entity'' as defined in section 1a(40) of the CEA
includes SEFs, among other entities.
---------------------------------------------------------------------------

    Paragraph (i)(1) of Sec.  15.05 provides, with respect to SEFs,
that it shall be unlawful for a SEF to permit a foreign trader to
effect contracts on the SEF unless the SEF has informed the foreign
trader of the requirements of Sec.  15.05. Paragraph (i)(2) of Sec.
15.05 permits a foreign trader to appoint its own agent for service of
process if it provides a copy of the agency agreement to the SEF, and
the SEF files the agreement with the CFTC. Paragraph (i)(3) of Sec.
15.05 provides that the foreign trader would have to notify the CFTC
immediately if that agreement is no longer in effect.
    Paragraph (k)(1) of proposed Rule 819 is modelled on Sec.  15.05(i)
and would provide that an SBSEF that admits a non-U.S. person as a
member shall be deemed to be the agent of the ``non-U.S. member'' \154\
with respect to any SBS executed by the non-U.S. member. Under proposed
Rule 819(k)(1), service or delivery of any communication issued by or
on behalf of the Commission to the SBSEF shall constitute valid and
effective service upon the non-U.S. member. If an SBSEF is served with
a communication issued by or on behalf of the Commission to a non-U.S.
member, the SBSEF would be required to transmit the communication to
the non-U.S. member. Paragraph (k)(2) of proposed Rule 819 is modelled
on Sec.  15.05(i)(1) and would provide that it shall be unlawful for an
SBSEF to permit a non-U.S. member to execute SBS transactions on the
facility unless the SBSEF informs the non-U.S. member in writing of the
requirements of proposed Rule 819(k).
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    \154\ ``Non-U.S. member'' would be a defined term in proposed
Rule 819(k) that does not appear in Sec.  15.05 of the CFTC's rules
but which, the Commission preliminarily believes, appropriately
conveys the meaning of the CFTC rule for purposes of SBSEFs in
proposed Rule 819(k). A foreign trader that executes contracts on a
trading platform such as an SBSEF must be a member of that platform.
Therefore, to promote uniformity throughout Regulation SE, the
Commission is using the term ``member'' for this concept.
Furthermore, the Commission has defined the term ``U.S. person'' for
purposes of the cross-border application of its Title VII rules--see
Rule 3a71-3(a)(4), Sec.  240.3a71-3(a)(4) --and thus is proposing to
define ``non-U.S. member'' in Rule 802 as ``a member of a security-
based swap execution facility that is not a U.S. person.''
---------------------------------------------------------------------------

    Paragraph (k)(3) of proposed Rule 819 is modelled on Sec.
15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize
an agent for service of process other than the SBSEF. The non-U.S.
member would have to provide a copy of its agreement with the alternate
agent to the SBSEF, and the SBSEF would then have to file the agreement
with the Commission, before executing any transaction on the SBSEF.
Paragraph (k)(4) of proposed Rule 819, modelled on Sec.  15.05(i)(3),
would require the non-U.S. member to notify the Commission if the
agency agreement is no longer in effect.
    The Commission preliminarily believes that, for an SBSEF to have an
effective regulatory program and thereby comply with Core Principle 2
(Compliance with Rules), the SBSEF must have jurisdiction over all of
its members, including members who are not U.S. persons. Proposed Rule
819(k) would further an SBSEF's ability to ensure compliance by its
non-U.S. members with its rules by requiring each non-U.S. member of
the SBSEF to have an agent for service of process, whether an agent of
its own choosing that has been disclosed to the SBSEF and the
Commission or, as a default, the SBSEF itself. This would eliminate any
question of how to provide valid notice to a non-U.S. member of any
proceedings involving potential rule violations.
    The Commission preliminarily believes that the CFTC has adequately
addressed these concerns with Sec.  15.05(i), and therefore that
proposed Rule 819 should include provisions adapted from Sec.  15.05(i)
for application to SBSEFs. If the Commission ultimately adopts Rule
819(k) in the same or similar form as it is proposed, non-U.S. members
of dually registered SEF/SBSEFs that trade both swaps and SBS should
already be in compliance with these requirements.
    The Commission seeks comment on the following:
    116. Do you believe in general that Regulation SE should include a
provision making an SBSEF the default agent for service of process for
its non-U.S. members? Why or why not?
    117. Do you agree with the specific language proposed by the
Commission to adapt Sec.  15.05(i) into proposed Rule 819(k)? If not,
how would you revise the rule?
    118. Are there additional provisions of Sec.  15.05 that the
Commission has omitted but which you believe should be incorporated
into proposed Rule 819(k)? If so, which provisions and why?
    119. Do you anticipate that SBSEFs will have any non-U.S. members?
Do you believe that proposed Rule 819(k) will even be necessary?
    120. Do you agree with the proposed definition of ``non-U.S.
member'' in Rule 802? If not, how would you revise it?

C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation

    Core Principle 3 \155\ provides that an SBSEF may permit trading
only in SBS that are not readily susceptible to manipulation. CEA Core
Principle 3 for SEFs is substantively identical.\156\
---------------------------------------------------------------------------

    \155\ Section 3D(d)(3) of the SEA, 15 U.S.C. 78c-4(d)(3).
    \156\ See section 5h(f)(3) of the CEA, 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 3 in subpart D of part 37.
Section 37.300 of subpart D repeats the statutory text of CEA Core
Principle 3. Sec.  37.301 provides that, for a SEF to demonstrate its
compliance with the core principle, it must, at the time it submits a
new swap contract pursuant to part 40, provide the applicable
information as set forth in appendix C to part 38 (Demonstration of
Compliance That a Contract is not Readily Susceptible to
Manipulation).\157\ Section 37.301 also states that a SEF may refer to
the guidance provided in appendix B of part 37, which provides in
relevant part that, when identifying a reference price, a SEF should
either calculate its own reference price using suitable and well-
established acceptable methods or carefully select a reliable third-
party index.
---------------------------------------------------------------------------

    \157\ Appendix C to part 38 provides, inter alia, that careful
consideration should be given to the potential for manipulation or
distortion of the cash settlement price of a swap, as well as the
reliability of that price as an indicator of cash market values.
Appropriate consideration also should be given to the commercial
acceptability, public availability, and timeliness of the price
series that is used to calculate the cash settlement price.
Documentation demonstrating that the settlement price index is a
reliable indicator of market values and conditions and is highly
regarded by industry/market agents should be provided. Such
documentation may take on various forms, including carefully
documented interviews with principal market trading agents, pricing
experts, marketing agents, etc. Appropriate consideration also
should be given to the commercial acceptability, public
availability, and timeliness of the price series that is used to
calculate the cash flows of the swap.
---------------------------------------------------------------------------

    Proposed Rule 820 would implement Core Principle 3. Although, like
Sec.  37.300, proposed Rule 820 repeats the statutory text of the Core
Principle, the Commission preliminarily believes that it is not
necessary or appropriate to harmonize with the CFTC guidance

referenced in Sec.  37.301, as this guidance was developed for products
other than SBS.
    The Commission seeks comment on the following:
    121. Do you agree with how the Commission is proposing to implement
Core Principle 3? Why or why not? If not, what other rules would you
suggest?

D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing

    Core Principle 4 \158\ requires an SBSEF to establish and enforce
rules or terms and conditions defining or specifications detailing: (1)
Trading procedures to be used in entering and executing orders traded
on or through the facilities of the SBSEF; and (2) procedures for trade
processing of SBS on or through the facilities of the SBSEF. Core
Principle 4 also requires an SBSEF to monitor trading in SBS to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance, and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions. CEA Core Principle 4 for SEFs \159\ is substantively
identical.
---------------------------------------------------------------------------

    \158\ Section 3D(d)(4) of the SEA, 15 U.S.C. 78c-4(d)(4).
    \159\ Section 5h(f)(4) of the CEA, 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 4 in subpart E of part 37.
Section 37.401 of subpart E provides that a SEF must collect and
evaluate data on its market participants' market activity; demonstrate
an effective program for conducting real-time monitoring to detect and
resolve abnormalities; demonstrate the ability to comprehensively and
accurately reconstruct daily trading; and demonstrate that it has
access to sufficient information to assess whether trading in the swaps
on its market, in the index or instruments used as a reference price,
or other underlying instruments is being used to affect prices on its
market. Sections 37.402 and 37.403 impose additional requirements for
physical-delivery swaps and cash-settled swaps, respectively. Section
37.404(a) requires a SEF to demonstrate that it has access to
sufficient information to assess whether trading in swaps listed on its
market, in the index or instrument used as a reference price, or in the
underlying commodity for its listed swaps is being used to affect
prices on its market. Section 37.404(b) requires a SEF to have rules
that require its market participants to keep records of their trading,
including records of their activity in the index or instrument used as
a reference price, the underlying commodity, and related derivatives
markets, and make such records available, upon request, to the SEF or,
if applicable, to its regulatory service provider, and the CFTC.
Section 37.405 requires a SEF to establish and maintain risk control
mechanisms to prevent and reduce the potential risk of market
disruptions, including, but not limited to, market restrictions that
pause or halt trading under market conditions prescribed by the SEF.
Section 37.406 requires a SEF to have the ability to reconstruct all
trading on its facility, and requires that all audit-trail data and
reconstructions shall be made available to the CFTC in a form, manner,
and time that is acceptable to the CFTC. Section 37.407 requires a SEF
to comply with subpart E of part 37 through a dedicated regulatory
department or by contracting with a regulatory services provider.
Section 37.408 provides that SEFs may refer to the guidance in appendix
B to part 37 to demonstrate compliance with subpart E of part 37.\160\
---------------------------------------------------------------------------

    \160\ The guidance pertaining to Core Principle 4 has
subsections entitled ``general requirements,'' ``physical-delivery
swaps,'' ``cash-settled swaps,'' ``ability to obtain information,''
and ``risk controls for trading.''
---------------------------------------------------------------------------

    Proposed Rule 821 would implement Core Principle 4 and is closely
modelled on the rules in subpart E of part 37. The Commission
preliminarily believes that the CFTC has implemented Core Principle 4
for SEFs in an appropriate way, and that closely harmonizing with the
CFTC rule would yield comparable regulatory benefits while imposing
only marginal additional costs. The Commission does not observe any
differences between the swap and SBS markets sufficient to warrant a
different approach to how a SEF/SBSEF should monitor trading and trade
processing.
    As noted above, the Commission preliminarily believes, in
attempting to harmonize with the CFTC's regulatory regime for SEFs,
that it would be preferable to adapt the CFTC's guidance and acceptable
practices from appendix B to part 37 into formal rules, where
appropriate. Although the Commission considered proposing a stand-alone
rule that adapts the guidance pertaining to Core Principle 4, the
Commission is proposing instead to weave concepts--and, in some cases,
specific language--from the guidance together with the CFTC's original
rule text, as the guidance itself follows the structure of the rule.
The Commission illustrates its approach in the following proposed
rules, where the analogous CFTC rule language is in plain text and
language adapted from the guidance is italicized:
     Proposed Rule 821(b)(3): An SBSEF shall: ``Demonstrate an
effective program for conducting real-time monitoring of trading for
the purpose of detecting and resolving abnormalities. A security-based
swap execution facility shall employ automated alerts to detect
abnormal price movements and unusual trading volumes in real time and
instances or threats of manipulation, price distortion, and disruptions
on at least a T+1 basis. The T+1 detection and analysis should
incorporate any additional data that becomes available on a T+1 basis,
including the trade reconstruction data.''
     Proposed Rule 821(d)(2): ``For cash-settled security-based
swaps listed on the security-based swap execution facility where the
reference price is formulated and computed by the security-based swap
execution facility, the security-based swap execution facility shall
demonstrate that it monitors the continued appropriateness of its
methodology for deriving that price and shall promptly amend any
methodologies that result, or are likely to result, in manipulation,
price distortions, or market disruptions, or impose new methodologies
to resolve the threat of disruptions or distortions.''
     Proposed Rule 821(d)(3): ``For cash-settled security-based
swaps listed on the security-based swap execution facility where the
reference price relies on a third-party index or instrument, including
an index or instrument traded on another venue, the security-based swap
execution facility shall demonstrate that it monitors for pricing
abnormalities in the index or instrument used to calculate the
reference price and shall conduct due diligence to ensure that the
reference price is not susceptible to manipulation.''
     Proposed Rule 821(e)(1): ``A security-based swap execution
facility shall demonstrate that it has access to sufficient information
to assess whether trading in security-based swaps listed on its market,
in the index or instrument used as a reference price, or in the
underlying asset for its listed security-based swaps is being used to
affect prices on its market. The security-based swap execution facility
shall demonstrate that it can obtain position and trading information
directly from members that conduct substantial trading on its facility
or through an information-sharing agreement with other venues or a
third-party regulatory service provider. If the position and trading
information is not available

directly from its members but is available through information-sharing
agreements with other trading venues or a third-party regulatory
service provider, the security-based swap execution facility should
cooperate in such information-sharing agreements.''
     Proposed Rule 821(e)(2): ``A security-based swap execution
facility shall have rules that require its members to keep records of
their trading, including records of their activity in the underlying
asset, and related derivatives markets, and make such records
available, upon request, to the security-based swap execution facility
or, if applicable, to its regulatory service provider and the
Commission. The security-based swap execution facility may limit the
application of this requirement to only those members that conduct
substantial trading on its facility.''
     Proposed Rule 821(f): ``A security-based swap execution
facility shall establish and maintain risk control mechanisms to
prevent and reduce the potential risk of market disruptions, including,
but not limited to, market restrictions that pause or halt trading
under market conditions prescribed by the security-based swap execution
facility. Such risk control mechanisms shall be designed to avoid
market disruptions without unduly interfering with that market's price
discovery function. The security-based swap execution facility may
choose from among controls that include: pre-trade limits on order
size, price collars or bands around the current price, message
throttles, daily price limits, and intraday position limits related to
financial risk to the clearing member, or design other types of
controls, as well as clear error-trade and order-cancellation policies.
Within the specific array of controls that are selected, the security-
based swap execution facility shall set the parameters for those
controls, so that the specific parameters are reasonably likely to
serve the purpose of preventing market disruptions and price
distortions.''
    The Commission also is proposing a stand-alone provision derived
from the appendix B guidance as Rule 821(b)(5), which would provide
than an SBSEF must have rules in place that allow it to intervene to
prevent or reduce market disruptions. Once a threatened or actual
disruption is detected, the security-based swap execution facility
shall take steps to prevent the market disruption or reduce its
severity.
    Finally, in several instances in subpart E of part 37, the CFTC
uses the term ``commodity'' with respect to the swap underlier. In
proposed Rule 821, the Commission is proposing instead to use the more
generic term ``asset'' to refer to the underlier.
    The Commission seeks comment on the following:
    122. Do you agree in general with the Commission's approach to
implementing Core Principle 4? Why or why not? In particular, do agree
with how the Commission is proposing to adapt the CFTC guidance on Core
Principle 4 by converting appropriate parts of it into a formal rule?
Why or why not?
    123. In particular, is there any language that the Commission is
proposing to adapt from subpart E of part 37 into proposed Rule 821
that you believe is not appropriate? If so, how would you revise it?
    124. Are there any aspects of proposed Rule 821 that derive from
the guidance that you believe are inappropriate for the Commission to
incorporate into its own rules, or that you believe the Commission is
proposing to incorporate inappropriately? If so, please discuss.
    125. Are there any aspects of the CFTC's guidance that you believe
should also be incorporated into the SEC rule but are not present in
proposed Rule 821? If so, please describe.

E. Rule 822--Core Principle 5--Ability To Obtain Information

    Core Principle 5 \161\ requires an SBSEF to establish and enforce
rules that will allow the SBSEF to obtain any necessary information to
perform any of the functions described in the Core Principles, provide
the information to the Commission on request, and have the capacity to
carry out such international information-sharing agreements as the
Commission may require. CEA Core Principle 5 for SEFs \162\ is
substantively identical.
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    \161\ Section 3D(d)(5) of the SEA, 15 U.S.C. 78c-4(d)(5).
    \162\ Section 5h(f)(5) of the CEA, 7 U.S.C. 7b-3(f)(5).
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    The CFTC implemented Core Principle 5 in subpart F of part 37.
Section 37.500 of subpart F repeats the statutory text of Core
Principle 5. Section 37.501 requires a SEF to establish and enforce
rules that will allow the SEF to have the ability and authority to
obtain sufficient information to allow it to fully perform its
operational, risk management, governance, and regulatory functions and
any requirements under the rule, including the capacity to carry out
international information-sharing agreements as the Commission may
require. Section 37.502 requires a SEF to have rules that allow it to
collect information on a routine basis, allow for the collection of
non-routine data from its market participants, and allow for its
examination of books and records kept by the market participants on its
facility. Section 37.503 requires a SEF to provide information in its
possession to the CFTC upon request, in a form and manner that the CFTC
approves. Section 37.504 requires a SEF to share information with other
regulatory organizations, data repositories, and third-party data
reporting services as required by the CFTC or as otherwise necessary
and appropriate to fulfill its self-regulatory and reporting
responsibilities. Section 37.504 further provides that appropriate
information-sharing agreements can be established with such entities or
the CFTC can act in conjunction with the SEF to carry out such
information sharing.
    Proposed Rule 822 would implement Core Principle 5 and is
substantively identical to subpart F of part 37. Paragraph (a) of
proposed Rule 822 repeats the statutory text of Core Principle 5.
Paragraph (b), modelled on Sec.  37.501, would require that an SBSEF
establish and enforce rules that will allow the SBSEF to have the
ability and authority to obtain sufficient information to allow it to
fully perform its operational, risk management, governance, and
regulatory functions and any requirements under Regulation SE.
Paragraph (c), like Sec.  37.502, would require an SBSEF to have rules
that allow it to collect information on a routine basis, allow for the
collection of non-routine data from its members, and allow for its
examination of books and records kept by members on its facility.\163\
Paragraph (d), like Sec.  37.503, would require that an SBSEF provide
information in its possession to the Commission upon request, in a form
and manner specified by the Commission. Finally, paragraph (e), like
Sec.  37.504, would require an SBSEF to share information with other
regulatory organizations, data repositories, and third-party data
reporting services as required by the Commission or as otherwise
necessary and appropriate to fulfill its regulatory and reporting
responsibilities, and that appropriate information-sharing agreements
can be established with such entities, or the Commission can act in
conjunction with the SBSEF to carry out such information sharing.
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    \163\ While Sec.  37.502 of subpart F uses the term ``market
participant,'' proposed Rule 822 substitutes the term ``member'' in
these places, since the rule pertains to market participants who are
acting as members of the SEF/SBSEF. See supra note 53.

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    The Commission preliminarily believes that closely harmonizing with
the CFTC's rules associated with CEA Core Principle 5 would
appropriately implement SEA Core Principle 5. By harmonizing with the
CFTC's approach, a SEF/SBSEF could have the same information-collection
rules and information-sharing agreements. The Commission could thus
obtain comparable regulatory benefits while imposing few if any
additional costs on SEF/SBSEFs.
    The Commission seeks comment on the following:
    126. Do you agree generally with how the Commission is proposing to
implement Core Principle 5? Why or why not?
    127. In particular, do you believe that closely harmonizing with
subpart F of the CFTC's rules is appropriate? Why or why not? If not,
please identify any provision(s) in the CFTC rules that you believe
should not be adapted for SBSEFs and explain your reasoning.

F. Rule 823--Core Principle 6--Financial Integrity of Transactions

    SEA Core Principle 6 \164\ requires an SBSEF to establish and
enforce rules and procedures for ensuring the financial integrity of
SBS entered on or through the facilities of the SBSEF, including the
clearance and settlement of SBS pursuant to section 3C(a)(1) of the
SEA.\165\ CEA Core Principle 7 for SEFs \166\ is substantively
identical to SEA Core Principle 6.
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    \164\ Section 3D(d)(6) of the SEA, 15 U.S.C. 78c-4(d)(6).
    \165\ 15 U.S.C. 78c-3(a)(1). See supra note 94 and accompanying
text (discussing mandatory clearing provisions).
    \166\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
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    The CFTC implemented CEA Core Principle 7 in subpart H of part 37.
Section 37.700 of subpart H repeats the statutory text of Core
Principle 7. Section 37.701 provides that transactions executed on or
through the SEF that are required to be cleared or are voluntarily
cleared by the counterparties shall be cleared through a registered or
exempt DCO. Section 37.702 requires a SEF to provide for the financial
integrity of its transactions by establishing minimum financial
standards for its members, which shall at a minimum require members to
be ECPs. Section 37.702 further requires a SEF to provide for the
financial integrity of its transactions by ensuring that the SEF, for
transactions cleared by a DCO, has the capacity to route transactions
to the DCO in a manner acceptable to the DCO; and by coordinating with
each DCO to which it submits transactions for clearing in the
development of rules and procedures to facilitate prompt and efficient
transaction processing. Section 37.703 requires a SEF to monitor its
members to ensure that they continue to qualify as ECPs.
    Proposed Rule 823 would implement SEA Core Principle 6 and is
substantively identical to subpart H of part 37. Paragraph (a) of
proposed Rule 823 repeats the statutory text of the Core Principle.
Paragraph (b), like Sec.  37.701, would require that transactions
executed on or through the SBSEF that are required to be cleared under
section 3C(a)(1) of the SEA or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency
\167\ or a clearing agency that has obtained an exemption from clearing
agency registration to provide central counterparty services for SBS.
Paragraph (c), like Sec.  37.702, would require an SBSEF to provide for
the financial integrity of its transactions by establishing minimum
financial standards for its members, which shall, at a minimum, require
that each member qualify as an ECP. In addition, for transactions
cleared by a registered clearing agency, an SBSEF must provide for the
financial integrity of its transactions by ensuring that it has the
capacity to route transactions to the registered clearing agency in a
manner acceptable to the clearing agency for purposes of clearing, and
by coordinating with each registered clearing agency to which it
submits transactions for clearing, in the development of rules and
procedures to facilitate prompt and efficient transaction processing.
Finally, paragraph (d), like Sec.  37.703, would require that an SBSEF
monitor its members to ensure that they continue to qualify as ECPs.
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    \167\ While subpart H of part 37 uses the term ``derivatives
clearing organization,'' proposed Rule 823 substitutes the term
``registered clearing agency'' in these places, the analogous term
under the SEA.
---------------------------------------------------------------------------

    The Commission preliminarily believes that closely harmonizing with
the CFTC's rules associated with CEA Core Principle 7 would
appropriately implement SEA Core Principle 6. By harmonizing with the
CFTC's approach, a SEF/SBSEF could have the same financial standards
and requirements for its members, and develop the same processes for
submitting swaps and SBS for clearing, thus promoting efficiency among
its respective SEF and SBSEF operations. The Commission could thus
obtain comparable regulatory benefits while imposing few if any
additional costs on SEF/SBSEFs.
    The Commission seeks comment on the following:
    128. Do you agree generally with how the Commission is proposing to
implement Core Principle 6? Why or why not?
    129. In particular, do you believe that closely harmonizing with
subpart H of the CFTC's rules is appropriate? Why or why not? If not,
please identify any provision(s) in the CFTC rules that you believe
should not be adapted for SBSEFs and explain your reasoning.
    130. Are there any differences in the SBS market relative to the
swap market that warrant imposing different or additive requirements
with respect to the rules for implementing SEA Core Principle 6? If so,
please explain.

G. Rule 824--Core Principle 7--Emergency Authority

    SEA Core Principle 7 \168\ requires an SBSEF to adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation with the Commission, as is necessary and appropriate,
including the authority to liquidate or transfer open positions in any
SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8
for SEFs \169\ is substantively identical.
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    \168\ Section 3D(d)(7) of the SEA, 15 U.S.C. 78c-4(d)(7).
    \169\ Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8).
---------------------------------------------------------------------------

    The CFTC implemented Core Principle 8 for SEFs in subpart I of part
37. Section 37.800 of subpart I repeats the statutory text of the Core
Principle. Section 37.801 provides that a SEF ``may refer'' to the
guidance in appendix B to part 37 ``to demonstrate to the Commission
compliance with [Core Principle 8].'' Paragraph (a)(1) of that guidance
states that a SEF should have rules that authorize it to take certain
actions in the event of an emergency. Furthermore, a SEF should have
the authority to intervene as necessary to maintain markets with fair
and orderly trading and to prevent or address manipulation or
disruptive trading practices, whether the need for intervention arises
exclusively from the SEF's market or as part of a coordinated, cross-
market intervention. A SEF should have the flexibility and independence
to address market emergencies in an effective and timely manner
consistent with the nature of the emergency, as long as all such
actions taken by the SEF are made in good faith to protect the
integrity of the markets. However, the SEF should also have rules that
allow it to take market actions as may be directed by the CFTC.
Additionally, in situations where a swap is traded on

more than one platform, emergency action to liquidate or transfer open
interest shall be as directed, or agreed to, by the CFTC or its staff.
The SEF's rules should include procedures and guidelines for decision-
making and implementation of emergency intervention that avoid
conflicts of interest, and include alternate lines of communication and
approval procedures to address emergencies associated with real time
events. To address perceived market threats, the SEF should have rules
that allow it to take emergency actions, including imposing or
modifying position limits, imposing or modifying price limits, imposing
or modifying intraday market restrictions, imposing special margin
requirements, ordering the liquidation or transfer of open positions in
any contract, ordering the fixing of a settlement price, extending or
shortening the expiration date or the trading hours, suspending or
curtailing trading in any contract, transferring customer contracts and
the margin, or altering any contract's settlement terms or conditions,
or, if applicable, providing for the carrying out of such actions
through its agreements with its third-party provider of clearing or
regulatory services.
    Paragraph (a)(2) of the guidance provides that a SEF should
promptly notify the CFTC of its exercise of emergency action,
explaining its decision-making process, the reasons for using its
emergency authority, and how conflicts of interest were minimized,
including the extent to which the SEF considered the effect of its
emergency action on the underlying markets and on markets that are
linked or referenced to the contracts traded on its facility, including
similar markets on other trading venues. Furthermore, information on
all regulatory actions carried out pursuant to a SEF's emergency
authority should be included in a timely submission of a certified rule
pursuant to part 40.
    Proposed Rule 824 would implement SEA Core Principle 7 and is
closely modelled on subpart I of part 37 and the guidance for CEA Core
Principle 8 in appendix B to part 37. Paragraph (a) of proposed Rule
824 would repeat the statutory text of the Core Principle. Paragraph
(b) of proposed Rule 824 would incorporate much of the language in
paragraph (a)(1) of the CFTC's guidance on CEA Core Principle 8. Under
paragraph (b), an SBSEF would be required to adopt rules that are
reasonably designed to:
    (1) Allow the SBSEF to intervene as necessary to maintain markets
with fair and orderly trading and to prevent or address manipulation or
disruptive trading practices, whether the need for intervention arises
exclusively from the SBSEF's market or as part of a coordinated, cross-
market intervention;
    (2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the
nature of the emergency, as long as all such actions taken by the SBSEF
are made in good faith to protect the integrity of the markets;
    (3) Take market actions as may be directed by the Commission,
including, in situations where an SBS is traded on more than one
platform, emergency action to liquidate or transfer open interest as
directed, or agreed to, by the Commission or the Commission's staff;
    (4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
    (5) Include alternate lines of communication and approval
procedures to address emergencies associated with real-time events;
    (6) Allow the SBSEF, to address perceived market threats, to impose
or modify position limits, impose or modify price limits, impose or
modify intraday market restrictions, impose special margin
requirements, order the liquidation or transfer of open positions in
any contract, order the fixing of a settlement price, extend or shorten
the expiration date or the trading hours, suspend or curtail trading in
any contract, transfer customer contracts and the margin, or alter any
contract's settlement terms or conditions, or, if applicable, provide
for the carrying out of such actions through its agreements with its
third-party provider of clearing or regulatory services.
    Paragraph (c) of proposed Rule 824 is based on paragraph (a)(2) of
the CFTC's guidance on CEA Core Principle 8 and would require an SBSEF
to promptly notify the Commission of its exercise of emergency action,
explaining its decision-making process, the reasons for using its
emergency authority, and how conflicts of interest were minimized,
including the extent to which the SBSEF considered the effect of its
emergency action on the underlying markets and on markets that are
linked or referenced to the contracts traded on its facility, including
similar markets on other trading venues. In addition, proposed Rule
824(c) would require information on all regulatory actions carried out
pursuant to an SBSEF's emergency authority to be included in a timely
submission of a certified rule pursuant to Rule 807.
    The Commission preliminarily believes that adapting the CFTC's
guidance associated with CEA Core Principle 8 into proposed Rule 824
would appropriately implement SEA Core Principle 7. In particular, the
Commission preliminarily agrees with the CFTC's principles-based
approach to emergency situations, requiring SEF/SBSEFs to establish
rules ex ante that generally would facilitate emergency actions but
providing flexibility and independence with regard to specific actions
that might be necessary. The Commission also preliminarily believes, as
reflected in proposed Rule 824(c), that an SBSEF that exercises its
emergency authority should be required to promptly notify the
Commission of such exercise and to explain the basis for its actions.
By harmonizing with the CFTC's approach, the Commission's intent is
that, in many or even all instances, the SEF/SBSEF could file the same
information regarding the situation to both agencies, rather than
having to prepare one submission for the SEC and a different submission
for the CFTC.
    The Commission seeks comment on the following:
    131. Do you agree generally with the Commission's approach to
implementing SEA Core Principle 7? Why or why not?
    132. In particular, do you agree with how the Commission is
proposing to adapt the guidance from appendix B to part 37 regarding
CEA Core Principle 8? Is there language adapted from the guidance into
proposed Rule 824 that you believe should be omitted or revised? If so,
please describe.

H. Rule 825--Core Principle 8--Timely Publication of Trading
Information

    SEA Core Principle 8 \170\ requires an SBSEF to make public timely
information on price, trading volume, and other trading data on SBS to
the extent prescribed by the Commission, and to have the capacity to
electronically capture and transmit and disseminate trade information
with respect to transactions executed on or through the facility. CEA
Core Principle 9 \171\ is substantively identical to SEA Core Principle
8.
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    \170\ Section 3D(d)(8) of the SEA, 15 U.S.C. 78c-4(d)(8).
    \171\ Section 5h(f)(9) of the CEA, 7 U.S.C. 7b-3(f)(9).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 9 in subpart J of part 37.
Section 37.900 of subpart J repeats the statutory language of the Core
Principle. Sec.  37.901 provides that, with respect to swaps traded on
or through a SEF, the

SEF shall report specified swap data as provided in parts 43 and 45 of
the CFTC's rules. Section 37.901 also requires the SEF to comply with
part 16 of the CFTC's rules, which requires a ``reporting market''
(which term includes a SEF) to provide certain reports to the CFTC
regarding trading activity on the SEF and to make certain of that
information publicly available without charge.
    Proposed Rule 825 would implement SEA Core Principle 8 and is
closely modelled on subpart J of part 37. Paragraph (a) of proposed
Rule 825, like Sec.  37.900, repeats the statutory language of the Core
Principle. While Sec.  37.901 provides that a SEF shall report swap
transaction data pursuant to Parts 43 and 45 of the CFTC's rules,
paragraph (b) of proposed Rule 825 would direct SBSEFs to report SBS
transaction data in a manner specified in the SEC's Regulation
SBSR.\172\
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    \172\ Section 13(m)(1) of the SEA, 15 U.S.C. 78m(m)(1),
authorizes the Commission to make SBS transaction, volume, and
pricing data available to the public in such form and at such times
as the Commission determines appropriate to enhance price discovery.
The Commission has adopted rules relating to the reporting and
public dissemination of SBS transaction and pricing data as
Regulation SBSR. Rule 901(a)(1) of Regulation SBSR, 17 CFR
242.901(a)(1), imposes certain reporting duties on SBSEFs.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that it would be
appropriate to incorporate requirements for SBSEFs that are modelled on
the requirements for SEFs in the CFTC's part 16. Unlike part 16,
however, the Commission is not proposing to require SBSEFs to submit
any information directly to the Commission.\173\ Rather, the Commission
is proposing in paragraph (c) of Rule 825 to require only the
publication, on an SBSEF's website, of a ``Daily Market Data Report.''
The data fields that the Commission is proposing to require for the
Daily Market Data Report approximate, although they are not the same
as, those required by part 16. The Commission preliminarily believes
that the differences in the product markets (i.e., SBS vs. swaps and
futures products) necessitate certain adaptations in the data fields so
as to render the reports published by SBSEFs meaningful to SBS market
participants and market observers.
---------------------------------------------------------------------------

    \173\ Contra Sec.  16.00(a) (requiring a reporting market to
submit clearing member reports to the CFTC for each business day).
---------------------------------------------------------------------------

    Under proposed Rule 825(c)(1), the Daily Market Data Report for a
business day would be required to contain the following information for
each tenor of each SBS traded on that SBSEF during that business day:
    (i) The trade count (including block trades but excluding error
trades, correcting trades, and offsetting trades);
    (ii) The total notional amount traded (including block trades but
excluding error trades, correcting trades, and offsetting trades
\174\);
---------------------------------------------------------------------------

    \174\ Each of these terms is defined in proposed Rule 802 and
also used in proposed Rule 815.
---------------------------------------------------------------------------

    (iii) The number of block trades;
    (iv) The total notional amount of block trades;
    (v) The opening and closing price;
    (vi) The price that is used for settlement purposes, if different
from the closing price; and
    (vii) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the SBSEF
reasonably determines accurately reflects market conditions. Bids and
offers vacated or withdrawn shall not be used in making this
determination. A bid is vacated if followed by a higher bid or price
and an offer is vacated if followed by a lower offer or price.
    Paragraph (c)(2) of proposed Rule 825 would require an SBSEF to
provide certain explanatory information regarding data presented on the
Daily Market Data Report:
    (i) The method used by the SBSEF in determining nominal prices and
settlement prices; and
    (ii) If discretion is used by the SBSEF in determining the opening
and/or closing ranges or the settlement prices, an explanation that
certain discretion may be employed by the SBSEF and a description of
the manner in which that discretion may be employed. Discretionary
authority would have to be noted explicitly in each case in which it is
applied (for example, by use of an asterisk or footnote).
    Paragraph (c)(3) of proposed Rule 825 would set out various
requirements regarding the form and manner by which an SBSEF makes
available its Daily Market Data Report. Paragraph (c)(3)(i) would
require the SBSEF to post on its website its Daily Market Data Report
in a downloadable and machine-readable format using the most recent
versions of the associated XML schema and PDF renderer as published on
the Commission's website. This proposed requirement is similar to
existing Commission requirements for broker-dealer reports on order
routing and execution \175\ and is designed to allow the Daily Market
Data Report to be automatically recognized and processed by a variety
of software applications, thus making it immediately available for
users to search, aggregate, compare, and analyze.\176\ This should
enable SBS market participants and other market observers to obtain
timely and consistent information on price, trading volume, and other
SBSEF trading data in a manner that would facilitate search
capabilities, and statistical and comparative analyses across SBSEFs
and date ranges. In addition, requiring SBSEFs to use a PDF renderer as
specified by the Commission would provide a corresponding human-
readable version of the machine-readable data, allowing end users
without access to analytical software to read the disclosed
information.
---------------------------------------------------------------------------

    \175\ See 17 CFR 242.606.
    \176\ XML (eXtensible Markup Language) is an open standard that
defines, or ``tags,'' data using standard definitions. The tags
establish a consistent structure of identity and context, which
allows for automatic recognition and processing by software
applications.
---------------------------------------------------------------------------

    Paragraph (c)(3)(ii) of proposed Rule 825 would require the SBSEF
to make available its Daily Market Data Report without fees or other
charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing
any encumbrances on access or usage restrictions with respect to the
Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF
from requiring a user to agree to any terms before being allowed to
view or download the Daily Market Data Report, such as by waiving any
requirements of proposed Rule 825(c)(3). Paragraph (c)(3)(iv) would
further provide that any such waiver agreed to by a user would be null
and void.\177\ The Commission preliminarily believes that proposed Rule
825(c)(3) could be subverted if an SBSEF could, for example, require
that users--as a condition to viewing or downloading the Daily Market
Data Report--waive any of the protections afforded under proposed Rule
825(c)(3).
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    \177\ The presence of any such waiver requirements on a click-
through screen could chill use of the Daily Market Data Report,
because the user would be compelled to agree to the waiver even to
view the report. The Commission recognizes that individual users may
not have the time or the incentive to contest the appropriateness of
any such waiver provisions in order to secure access. Proposed Rule
825(c)(3)(iv) is designed to assure such users that, even if an
SBSEF were to insist on the waiver click-through as a condition of
access, users would not in fact be sacrificing their ability to use
the data free of charges and usage restrictions because the waiver
would be null and void.
---------------------------------------------------------------------------

    Proposed Rule 825(c)(3) is designed to promote wide use of the SBS
trading information contained in the Daily Market Data Report by
prohibiting an SBSEF from imposing any financial, legal, or operational
burdens on that use. The approach taken in proposed Rule 825(c)(3) is
similar to the approach taken by the Commission in Regulation SBSR,
which uses the term ``widely

accessible'' \178\ to prohibit registered SDRs from charging fees for
or imposing usage restrictions on the SBS transaction data that they
are required to publicly disseminate under Regulation SBSR.\179\ When
adopting the definition of ``widely accessible,'' the Commission noted
that a registered SDR has a monopoly position over the SBS transaction
information that it publicly disseminates and stated that ``there would
be no other source from which the user could freely obtain this
transaction information.'' \180\ The Commission preliminarily believes
that a registered SBSEF is similarly situated, because it is the sole
source of information about SBS trading activity on its market. The
Commission also stated that the prohibition on usage restrictions
encompasses an SDR-imposed restriction on bulk redistribution by third
parties of the regulatorily mandated transaction data that the
registered SDR publicly disseminates.\181\ For the same reasons, the
proposed prohibition against an SBSEF imposing any usage restrictions
on its Daily Market Data Report necessarily would encompass a
prohibition on bulk redistribution of the Daily Market Data Report or
any information contained therein. The Commission seeks to encourage
market observers to access the Daily Market Data Report and scrub,
reconfigure, aggregate, analyze, repurpose, or otherwise add value to
the information contained in the report as they see fit.
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    \178\ See Rule 900(tt) of Regulation SBSR, 17 CFR 242.900(tt)
(defining ``widely accessible'').
    \179\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 78321 (July 14,
2016), 81 FR 53546, 53586-89 (August 12, 2016) (``Regulation SBSR
Adopting Release II'').
    \180\ Id. at 53587.
    \181\ Id. (stating that: ``The Commission continues to believe
that allowing unencumbered redistribution best serves the policy
goals of wide availability of the data and minimization of
information asymmetries in the [SBS] market. Because the Commission
is prohibiting registered SDRs from imposing a restriction on bulk
redistribution, third parties . . . will be able to take in the full
data set and scrub, reconfigure, aggregate, analyze, repurpose, or
otherwise add value to those data, and potentially sell that value-
added product to others'').
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    Paragraph (c)(4) of proposed Rule 825 would require the SBSEF to
publish the Daily Market Data Report on its website no later than the
SBSEF's commencement of trading on the next business day after the day
to which the information pertains. Proposed Rule 825(c)(4) is designed
to require an SBSEF to provide its market data in a timely fashion so
that it can be assessed and utilized by the next business day. Finally,
paragraph (c)(5) would require the SBSEF to keep each Daily Market Data
Report available on its website in the same location as all other Daily
Market Data Reports for no less than one year after the date of first
publication. Proposed Rule 825(c)(5) is designed to allow market
observers to consult a reasonable number of previous reports on the
SBSEF's website; the reports would be of less utility if an SBSEF could
take down reports shortly after they are posted.
    The Commission seeks comment on the following:
    133. Do you agree in general with the Commission's approach for
implementing SEA Core Principle 8? Why or why not?
    134. Do you agree with the adaptions that the Commission is
proposing to the CFTC's part 16 for inclusion in proposed Rule 825(c)?
In particular, do you concur with the Commission's proposal to require
only the Daily Market Data Report (to be published on the SBSEF's
website) and not to require any daily reports to the Commission? Why or
why not? If not, what market data do you believe should be reported
directly to the Commission, and why?
    135. Do you agree with the fields proposed by the Commission for
the Daily Market Data Report in paragraphs (c)(1) and (2) of proposed
Rule 825? If not, which fields do you believe are not appropriate, and
why?
    136. Do you believe that any of the fields should be defined
differently or more precisely? If so, please explain.
    137. Do you believe that the Commission should require additional
fields? If so, what fields and why?
    138. Do you agree with the proposed requirement in Rule 825(c)(3)
that the Daily Market Data Report should be available free of charge
and without usage restrictions or encumbrances? Why or why not? Are
there any clarifications that you would recommend to help promote free
and unencumbered access to and use of the Daily Market Data Report and
any information contained therein? If so, please discuss.
    139. Do you agree with the proposed requirement that the Daily
Market Data Report should be made available in a downloadable and
machine-readable format using the most recent version of the associated
XML schema and PDF renderer as published on the Commission's website?
Why or why not? Is there some other format that the Commission should
require? If so, what format and why?
    140. Do you agree with the proposed requirement in Rule 825(c)(4)
that an SBSEF must publish the Daily Market Data Report on its website
no later than the SBSEF's commencement of trading on the next business
day after the day to which the information pertains? Why or why not?
What is the current practice for the approximate time of day at which
CFTC reporting markets make available their daily market data?
    141. Do you agree with the proposed requirement in Rule 825(c)(5)
that an SBSEF keep each Daily Market Data Report available on its
website in the same location as all other Daily Market Data Reports for
no less than one year after the date of first publication? Why or why
not? Do you believe that a longer or shorter period would be
appropriate? If so, please explain.

I. Rule 826--Core Principle 9--Recordkeeping and Reporting

    SEA Core Principle 9 \182\ sets forth recordkeeping and reporting
obligations for SBSEFs. Core Principle 9 requires an SBSEF to maintain
records of all activities relating to the business of the facility,
including a complete audit trail, in a form and manner acceptable to
the Commission for a period of five years. The Core Principle further
requires an SBSEF to report to the Commission, in a form and manner
acceptable to the Commission, such information as the Commission
determines to be necessary or appropriate for the Commission to perform
its duties. Finally, under Core Principle 9, the Commission must adopt
data collection and reporting requirements for SBSEFs that are
comparable to requirements for clearing agencies and SBS data
repositories.\183\ CEA Core Principle 10 for SEFs, although it includes
an additional clause not present in the equivalent SEA Core Principle
9,\184\ is substantively identical.
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    \182\ Section 3D(d)(9) of the SEA, 15 U.S.C. 78c-4(d)(9).
    \183\ As discussed below in this section, the Commission is
proposing Rule 826 to require an SBSEF to maintain records of all
activities relating to the business of the SBSEF for a period of not
less than five years. Similarly, Rule 17a-1 under the SEA, 17 CFR
240.17a-1, requires a clearing agency to keep and preserve one copy
of all documents made or received in the course of its business and
conduct of its self-regulatory activities for a period of not less
than five years. In addition, Rule 13n-7(b) under the SEA, 17 CFT
240.13n-7(b), requires an SBS data repository to keep and preserve a
copy of all documents made or received by it in the course of its
business for at least five years.
    \184\ CEA Core Principle 10 includes a clause stating that a SEF
shall keep any records relating to certain swaps open to inspection
and examination by the SEC. See 7 U.S.C. 7b-3(f)(10)(A)(iii).
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    The CFTC implemented Core Principle 10 for SEFs in subpart K of
part 37. Section 37.1000 of subpart K repeats the statutory language of
the Core Principle. Section 37.1001 requires a SEF to maintain records
of all

activities relating to the business of the facility, in a form and
manner acceptable to the CFTC, for a period of at least five years, and
that a SEF shall maintain such records, including a complete audit
trail for all swaps executed on or subject to the rules of the SEF,
investigatory files, and disciplinary files. Section 37.1001 does not
itself set forth detailed record retention requirements. Instead, Sec.
37.1001 directs SEFs to maintain the required records in accordance
with Sec.  1.31 and part 45 of the CFTC's rules.
    Section 1.31 imposes on ``records entities'' (which term includes
SEFs) various requirements relating to record retention and production.
Section 1.31(a) sets out definitions of terms used throughout Sec.
1.31. Section 1.31(b) sets out the duration of retention for different
types of records. In particular, a records entity must keep regulatory
records of any swap from the date that the regulatory record was
created until at least five years after the termination, maturity,
expiration, transfer, assignment, or novation of such swap. Section
1.31(c) sets out the required form and manner of retention. Section
1.31(d) provides that a records entity must, at its own expense,
produce or make regulatory records accessible for inspection to CFTC
staff or to the U.S. Department of Justice, and includes other details
regarding production requests.
    Section 45.2 imposes various recordkeeping, retention, and
retrieval requirements applicable to SEFs (among others) to support
trade reporting. Section 45.2(a), among other things, requires a SEF to
keep all records required by part 37. Section 45.2(c) sets out a record
retention requirement.\185\ Section 45.2(d) imposes requirements on the
form of retention. Sec.  45.2(e) imposes requirements on record
retrievability. Section 45.2(h) \186\ imposes requirements for record
inspection; in particular, all records required to be kept by Sec.
45.2 shall be open to inspection upon request by any representative of
the CFTC, the U.S. Department of Justice, the SEC, or by any
representative of a prudential regulatory as authorized by the CFTC.
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    \185\ See 7 CFR 45.2(c) (``All records required to be kept
pursuant to this section shall be retained with respect to each swap
throughout the life of the swap and for a period of at least five
years following the final termination of the swap''). Section
45.2(b) imposes duties on certain swap counterparties and is not
germane to SEFs; therefore, the Commission is not considering
adapting it into proposed Rule 826.
    \186\ Section 45.2(f) and (g) are marked as ``reserved.''
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    To implement SEA Core Principle 9, the Commission is proposing Rule
826, which would roughly approximate Sec. Sec.  1.31 and 45.2 while
also drawing on concepts from the books and records requirements
applicable to brokers, SEC-registered SROs, and other SEC-registered
entities.\187\
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    \187\ See infra section XIII (discussing in the context of
proposed new Rule 15a-12 that an SBSEF registered with the
Commission is also a registered broker and, as such, is subject to
the SEA's recordkeeping and reporting requirements applicable to
brokers).
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    Paragraph (a) of proposed Rule 826 repeats the statutory text of
the Core Principle. Paragraph (b) would require an SBSEF to keep full,
complete, and systematic records,\188\ together with all pertinent data
and memoranda, of all activities relating to its business with respect
to SBS. Under paragraph (b), such records would be required to include,
without limitation, the audit trail information required under proposed
Rule 819(f) and all other records that an SBSEF is required to create
or obtain under Regulation SE.
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    \188\ While Sec.  1.31(a) defines the terms ``regulatory
records'' and ``electronic regulatory records'' and utilizes them
throughout Sec.  1.31, the Commission is utilizing instead the term
``records,'' which is defined in section 3(a)(37) of the SEA, 15
U.S.C. 78c(a)(37). In doing so, the Commission seeks to avoid any
ambiguities or inconsistencies that could arise by using variants of
a term that is defined in the Commission's governing statute. The
Commission is including a definition of ``records'' in proposed Rule
802 that cross-references section 3(a)(37) of the SEA.
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    Paragraph (c) of proposed Rule 826 would require an SBSEF to keep
records of any SBS from the date of execution until the termination,
maturity, expiration, transfer, assignment, or novation date of the
transaction, and for a period of not less than five years, the first
two years in an easily accessible place, after such date. Paragraph (c)
also would require an SBSEF to keep each record (other than a record of
an SBS noted in the previous sentence) for a period of not less than
five years, the first two years in an easily accessible place, from the
date on which the record was created. The proposed five-year retention
requirements are consistent with section 3D(d) of the SEA \189\ and are
modelled on the requirements for SEFs in Sec. Sec.  1.31 and 45.2. The
proposed requirement that the records be kept ``in an easily accessible
place'' for the first two years derives from an analogous requirement
in the Commission's principal books and records rule for exchange
members, brokers, and dealers.\190\
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    \189\ See 15 U.S.C. 78c-4(d)(9)(A)(i) (requiring an SBSEF to
``maintain records of all activities relating to the business of the
facility, including a complete audit trail, in a form and manner
acceptable to the Commission, for a period of five years'')
(emphasis added).
    \190\ See Rule 17a-4(b) under the SEA, 17 CFR 240.17a-4(b).
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    Paragraph (d)(1) of proposed Rule 826 would require an SBSEF to
retain all records in a form and manner that ensures the authenticity
and reliability of such records in accordance with the Act and the
Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF,
upon request of any representative of the Commission, to promptly \191\
furnish to the representative legible, true, complete, and current
copies of any records required to be kept and preserved under Rule 826.
Paragraph (d)(3) would provide that an electronic record shall be
retained in a form and manner that allows for prompt production at the
request of any representative of the Commission. Paragraph (d)(3) also
would include provisions modelled on Sec.  1.31(c)(2) requiring an
SBSEF that maintains electronic records to establish appropriate
systems and controls that ensure the authenticity and reliability of
electronic records, including, without limitation:
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    \191\ In this context, ``prompt'' or ``promptly'' means making
reasonable efforts to produce records that are requested by the
staff during an examination without delay. The Commission believes
that, in many cases, an SBSEF could, and therefore would be required
to, furnish records immediately or within a few hours of a request.
An SBSEF should produce records within 24 hours unless there are
unusual circumstances.
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    (A) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of the information contained in
electronic records and to monitor compliance with the SEA and the
Commission's rules thereunder;
    (B) Systems that ensure that the SBSEF is able to produce
electronic records in accordance with Rule 826, and ensure the
availability of such electronic records in the event of an emergency or
other disruption of the SBSEF's electronic record retention systems;
and
    (C) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic records.
    Sections 1.31 and 43.2 include provisions that govern inspection
and production of records. While the Commission believes that its rules
for SBSEFs also should address those topics, the Commission does not
believe that adapting a CFTC rule would be the most appropriate way to
do so. Paragraph (e) of proposed Rule 826 would provide instead that,
because a registered SBSEF is also a registered broker, all records
required to be kept by an SBSEF pursuant to Rule 826 would

be subject to examination by any representative of the Commission
pursuant to section 17(b) of the SEA. As noted above, section 17(b) is
the source of the Commission's examination authority for registered
brokers (among other types of registered entities). Proposed Rule
826(e) is designed only to remind SBSEFs of this statutory authority
and does not seek to limit or expand that authority using the
Commission's powers over SBSEFs in section 3D of the SEA.
    Proposed Rule 826 includes a paragraph (f) that is not modelled on
any provision of Sec.  1.31 or 43.2, but rather on Sec.  1.37(c) of the
CFTC's rules, which provides: ``Each designated contract market and
swap execution facility shall keep a record in permanent form, which
shall show the true name, address, and principal occupation or business
of any foreign trader executing transactions on the facility or
exchange. In addition, upon request, a designated contract market or
swap execution facility shall provide to the Commission information
regarding the name of any person guaranteeing such transactions or
exercising any control over the trading of such foreign trader.''
Proposed Rule 826(f) is modelled closely on Sec.  1.37(c), except that
it uses the term ``non-U.S. member'' rather than ``foreign trader.''
\192\
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    \192\ Since a ``foreign trader'' in Sec.  1.37(c) is executing
transactions on the SEF, it must be a member of the SEF. Because the
term ``member'' is used elsewhere in the CFTC rules pertaining to
SEFs, the Commission is proposing to use the term ``member''
throughout Regulation SE and would define ``member'' in Rule 802.
The term ``non-U.S. member,'' also found in proposed Rule 802, would
be defined as ``a member of a security-based swap execution facility
that is not a U.S. person.''
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    The recordkeeping and reporting requirements proposed in Rule 826
are designed to be generally consistent with the requirements
applicable to SEFs and with the Commission's requirements under section
17(a) of the SEA. The Commission preliminarily believes that proposed
Rule 826 would therefore achieve similar regulatory benefits as the
CFTC rules applicable to SEFs while imposing only marginal costs, since
dually registered SEF/SBSEFs are familiar with the CFTC requirements
and have invested in systems, policies, and procedures to comply with
them. The Commission intends that the same systems, policies, and
procedures could be used to comply with parallel SEC requirements.
    The Commission seeks comment on the following:
    142. Do you agree in general with the Commission's approach to
implementing SEA Core Principle 9? Why or why not?
    143. Do you believe that the Commission should subject registered
SBSEFs to section 17(a) of the SEA and the Commission's rules
thereunder? Why or why not? If not, are there nevertheless specific
provisions of the Commission's rules under section 17(a) that you
believe should nevertheless be incorporated into Rule 826 using the
Commission's statutory authority over SBSEFs in section 3D of the SEA?
If so, which provision(s) and why?
    144. Are there any provisions of proposed Rule 826 that are
significantly different from, or even in conflict with, any
recordkeeping requirements imposed on SEFs by any CFTC rule? If so,
please discuss and suggest how you would resolve any such conflict.
    145. Are there any provisions of Sec.  1.31 or Sec.  45.2 that the
Commission has not proposed to incorporate into proposed Rule 826 that
you believe should be applied to SBSEFs? If so, which provision(s) and
why?
    146. Are there any recordkeeping provisions elsewhere in the CFTC
rules that the Commission has not proposed to incorporate into proposed
Rule 826 that you believe should be applied to SBSEFs? If so, which
provision(s) and why?
    147. Do you believe that the Commission should adapt Sec.  1.37
into proposed Rule 826(f)? Why or why not? Do you believe that the
Commission's proposed term ``non-U.S. member'' used in Rule 826(f) is
an appropriate substitute for ``foreign trader'' used in Sec.  1.37?
Why or why not?

J. Rule 827--Core Principle 10--Antitrust Considerations

    SEA Core Principle 10 \193\ provides that, unless necessary or
appropriate to achieve the purposes of the SEA, an SBSEF shall not: (1)
Adopt any rules or take any actions that result in any unreasonable
restraint of trade, or (2) impose any material anticompetitive burden
on trading or clearing. CEA Core Principle 11 \194\ is substantively
identical.
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    \193\ Section 3D(d)(10) of the SEA, 15 U.S.C. 78c-4(d)(10).
    \194\ Section 5h(f)(11) of the CEA, 7 U.S.C. 7b-3(f)(11).
---------------------------------------------------------------------------

    The CFTC implemented CEA Core Principle 11 in subpart L of part 37.
Section 37.1100 of subpart L repeats the statutory text of Core
Principle 11. Section 37.1101 provides that a SEF ``may refer'' to the
guidance in appendix B to part 37 to demonstrate compliance with Core
Principle 11. The guidance states that an entity seeking registration
as a SEF may request that the CFTC consider, under the provisions of
section 15(b) of the CEA,\195\ any of the entity's rules--including
trading protocols or policies, and including both operational rules and
the terms or conditions of products listed for trading--at the time of
registration or thereafter. The guidance further states that the CFTC
intends to apply CEA section 15(b) to its consideration of issues under
CEA Core Principle 11 in a manner consistent with that previously
applied to contract markets.
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    \195\ 7 U.S.C. 19(b) (providing that the CFTC shall take into
consideration the public interest to be protected by the antitrust
laws and endeavor to take the least anticompetitive means of
achieving the objectives of this chapter of the CEA, as well as the
policies and purposes of this chapter of the CEA, in issuing any
order or adopting any CFTC rule or regulation (including any
exemption), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association).
---------------------------------------------------------------------------

    Proposed Rule 827 would implement SEA Core Principle 10 and, like
Sec.  37.1100, reiterates the statutory text of the Core Principle. The
Commission is not adapting the guidance from appendix B pertaining to
CEA Core Principle 11 into a proposed rule.\196\
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    \196\ The guidance in appendix B of part 37 pertaining to CEA
Core Principle 10 for SEFs states: ``An entity seeking registration
as a [SEF] may request that the [CFTC] consider under the provisions
of section 15(b) of the [CEA], any of the entity's rules, including
trading protocols or policies, and including both operational rules
and the terms or conditions of products listed for trading, at the
time of registration or thereafter. The [CFTC] intends to apply
section 15(b) of the [CEA] to its consideration of issues under this
core principle in a manner consistent with that previously applied
to contract markets.'' Section 15(b) of the CEA, 7 U.S.C. 19(b)
states: ``The [CFTC] shall take into consideration the public
interest to be protected by the antitrust laws and endeavor to take
the least anticompetitive means of achieving the objectives of this
chapter, as well as the policies and purposes of this chapter, in
issuing any order or adopting any [CFTC] rule or regulation
(including any exemption under section 6(c) or 6c(b) of this title),
or in requiring or approving any bylaw, rule, or regulation of a
contract market or registered futures association established
pursuant to section 21 of this title.'' The Commission does not
believe that it is appropriate to adapt this guidance into a rule
that applies to SBSEFs because the SEA (which applies to SBSEFs)
does not have a provision that is closely comparable to section
15(b) of the CEA (which applies to SEFs). Furthermore, the guidance
pertaining to CEA Core Principle 10 for SEFs sets out only a general
approach to how the CFTC addresses antitrust issues applying to SEFs