participants.\113\ Sound risk management practices are important among
both domestic and foreign CCPs, given the global nature of CCP
membership.\114\ When a CCP in the United States has significant number
of foreign members, the CCP and its U.S.-domiciled members would be
exposed to the foreign members. Similarly, when U.S.-domiciled entities
are members of foreign domiciled CCPs, U.S. exposure to a foreign
institution is created that may be systemically important.
---------------------------------------------------------------------------

    \113\ See, e.g., Clearing Agency Standards Adopting Release, 77
FR 66220.
    \114\ Based on the analysis of the member positions at ICE Clear
Credit in the United States by the staff in the Division of Risk,
Strategy and Financial Innovation, approximately half of the
positions at ICE Clear Credit in the United States are held by
foreign-domiciled dealing entities. See Section XV.B.2(e), infra.
---------------------------------------------------------------------------

(d) Security-Based Swap Data Reporting
    Certain Title VII requirements are designed to increase market
transparency for regulators and among security-based swap market
participants. Requirements of regulatory reporting are designed to
provide regulators with a broad view of the market and help monitor
pockets of risk that might not otherwise be observed by market
participants with an incomplete view of the market. Separately,
requirements of post-trade reporting of prices in real-time are
intended to promote price discovery and lower the trading costs by
lessening the information advantage afforded certain OTC market
participants with the largest order flow. Allowing all market
participants access to more information about transactions' prices and
sizes should create a more level playing field and may promote the
efficiency of exchange or SEF trading of security-based swaps. In
particular, as in other security markets, quoted bids and offers should
form and adjust according to the reporting of executed trades. At the
same time, however, we recognize that increased post-trade transparency
also could impact the liquidity of, and competition in, the security-
based swap market.\115\ For example, market participants may be less
willing to provide liquidity for large, potentially market-moving
trades if the implementation of the Title VII public dissemination
requirements reveals private information about future hedging and
inventory needs.
---------------------------------------------------------------------------

    \115\ See Section XV.C, infra (discussing the effects of our
proposed cross-border approach on competition, efficiency, and
capital formation).
---------------------------------------------------------------------------

    The increased transparency caused by the Title VII reporting
requirements could be diminished if consistent reporting requirements
are not applied to transactions across various jurisdictions and
information regarding security-based swaps taking place in the global
market is not shared among jurisdictions. For instance, the aggregate
exposures created by a particular security-based swap or class of
security-based swaps may only be partially observed if security-based
swap transactions span multiple jurisdictions. As a result any single
regulator may not have a complete view of the security-based swap risks
and may underestimate such risks. Separately, if some regulatory
regimes do not require, or provide for less informative, post-trade
reporting rules, then certain transactions may gravitate to these
jurisdictions so that market participants can escape reporting their
transaction prices. In both instances the increased transparency
contemplated by the Title VII reporting requirements may be diluted.

B. Scope of Title VII's Application to Cross-Border Security-Based Swap
Activity

    Congress has given the Commission authority in Title VII to
implement a security-based swap regulatory framework. In the statutory
definitions and registration requirements for market intermediaries and
participants (i.e., security-based swap dealers and major security-
based swap participants) and security-based swap infrastructures (i.e.,
SDRs, security-based swap clearing agencies, and SB SEFs), Congress has
identified the types of security-based swap activity that triggers
Title VII registration and regulatory requirements relevant to such
persons or the application of Title VII transaction-level requirements.
    We recognize that applying Title VII to persons and transactions
that fall within the statutory definitions or requirements may subject
some persons based outside the United States, or some transactions
arising from activity that occurs in part inside and in part outside
the United States, to the various provisions of Title VII. At the same
time, however, the global nature of the security-based swap market and
the characteristics of the risk associated with security-based swap
activity suggest that applying Title VII only to the conduct of persons
located within the United States or to security-based swap activity
occurring entirely within the United States would exclude from
regulation a significant proportion of security-based swap activity
that occurs in part inside and in part outside the United States.\116\
Our proposed approach is intended to strike a reasonable balance in
light of the authority provided by Congress, the structure of the
security-based swap market, and the transfer of risk within that
market. Accordingly, among other things, our proposed approach does not
impose Title VII requirements on persons whose relevant security-based
swap activity occurs entirely outside the United States and thus likely
does not raise the types of concerns in the U.S. financial system that
would warrant application of Title VII.
---------------------------------------------------------------------------

    \116\ See Section II.A, supra. We preliminarily believe that
many of the circumstances of concern also would create the
opportunity for evasion of the Dodd-Frank Act's regulatory regime.
See, e.g., note 558, infra.
---------------------------------------------------------------------------

    Commenters have raised concerns about the application of Title VII
to security-based swap activity in the cross-border context and
specifically about the possibility that the Commission may apply our
security-based swap regulations to ``extraterritorial'' conduct. In
this subsection, we discuss commenters' views regarding the
applicability of Title VII to cross-border security-based swap
activity, explain our proposed approach to determining whether the
relevant security-based swap activity takes place, in whole or in part,
within the United States, and interpret what it means for a person to
``transact a business in security-based swaps without the jurisdiction
of the United States'' as set forth in Section 30(c) of the Exchange
Act (``Section 30(c)'').\117\ In subsequent sections of the release, we
discuss in more detail our proposed

application of Title VII to cross-border security-based swap activity.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78dd(c).
---------------------------------------------------------------------------

1. Commenters' Views
    Commenters generally expressed the view that Section 30(c)
restricts the Commission's authority to apply Title VII to
``extraterritorial'' conduct and thus, that the Commission follow a
territorial approach in applying Title VII to cross-border security-
based swap activity. One commenter interpreted Section 30(c) as
prescribing a strictly territorial approach to the application of Title
VII, arguing that this section codifies the territorial approach that
we have historically taken in our existing securities regulations.\118\
Several commenters argued that a narrow interpretation of the
``extraterritorial'' reach of Title VII was consistent with both
Commission precedent\119\ and the Supreme Court's decision in Morrison
v. National Australia Bank.\120\
---------------------------------------------------------------------------

    \118\ See Cleary Letter IV at 33-36; see also SIFMA Letter I at
5, 22; Sullivan & Cromwell Letter at 6 (suggesting that Section
30(c) permits ``extraterritorial'' application of Title VII only to
prevent ``efforts to evade'' statutory requirements).
    \119\ See, e.g., Sullivan & Cromwell Letter at 11 (stating that
the Commission has ``plainly stated that it uses a territorial
approach in applying the broker-dealer requirements to international
operations'').
    \120\ 130 S.Ct. 2869 (2010). See, e.g., Jones Day Letter at 7-8
(suggesting that the jurisdictional limits of Dodd-Frank Act
Sections 722 and 772 be interpreted narrowly in a manner consistent
with the Morrison decision); Cleary Letter IV at 33-6 (arguing
against an extraterritorial application of Title VII); SIFMA Letter
I at 5-6; ISDA Letter I at 11.
---------------------------------------------------------------------------

    Based on this interpretation of Section 30(c), commenters generally
argued that Title VII does not give the Commission authority to
regulate entities that transact a business in security-based swaps
outside the United States.\121\ Some commenters suggested that non-U.S.
entities (including affiliates of U.S. persons) that conduct business
entirely with counterparties outside the United States should not be
required to register as swap or security-based swap dealers or comply
with Title VII.\122\ Some of these commenters also urged the Commission
not to subject foreign branches and affiliates of U.S. banks to Title
VII registration requirements to the extent that they transact solely
with foreign persons.\123\ Some commenters urged that, even within a
single entity, only those branches, departments, or divisions that
engage in business within the United States should be required to
register.\124\
---------------------------------------------------------------------------

    \121\ See, e.g., Jones Day Letter at 7-8; Cleary Letter IV at
33-6; Sullivan & Cromwell Letter at 10-11; SIFMA Letter I at 5-6;
ISDA Letter I at 11.
    \122\ See SIFMA Letter I at 4; see also ISDA Letter I at 11
(recommending that designation as a dealer should not be triggered
by transactions entered into with foreign affiliates or branches of
a U.S. bank or with foreign entities whose obligations are
guaranteed by a U.S. person, or by legacy positions with U.S.
counterparties); Davis Polk Letter II at 5-6 (stating that a foreign
entity engaged in swaps exclusively with foreign counterparties is
```without the jurisdiction of the United States'''). Similarly, one
commenter recommended that transactions between two foreign entities
should be excluded from calculations of substantial position for
purposes of the major participant definition. Canadian MAVs Letter
at 7-8.
    \123\ See, e.g., Sullivan & Cromwell Letter at 7 (stating that a
territorial interpretation of Section 30(c) prevented the Commission
from imposing Title VII requirements on the U.S. banks' ``Non-U.S.
Operations,'' defined to include both foreign affiliates or
subsidiaries and foreign branches of these banks).
    \124\ See, e.g., Cleary Letter IV at 12; see also id. at 26
(arguing that a non-U.S. branch or affiliate of a U.S. entity should
not be required to register as a dealer by virtue of its
transactions with a non-U.S. person counterparty); ISDA Letter I at
11 (stating that a ``branch, division or office of an entity should
be able to be designated as a Dealer without subjecting the whole
entity to regulation'').
---------------------------------------------------------------------------

    Commenters generally took the view that Section 30(c) does not
permit the Commission to apply Title VII to transactions occurring
outside the United States. Accordingly, commenters suggested that
Section 30(c) restricts the Commission's ability to apply Title VII
requirements to the foreign business of entities that are required to
register with the Commission.\125\ For example, one commenter
interpreted Section 30(c) to prohibit application of Title VII to any
of a person's ``activity'' or ``business'' outside the United States,
even if that person otherwise transacts a business in security-based
swaps within the jurisdiction of the United States.\126\
---------------------------------------------------------------------------

    \125\ See Cleary Letter IV at 11; see also SIFMA Letter I at 14
(suggesting that Section 30(c) ``provide[s] strong support'' for not
applying Title VII to transactions between a registered foreign swap
dealer and non-U.S. persons); ISDA Letter I at 11 (recommending that
no Title VII requirements should apply to transactions between a
non-U.S. entity registered as a dealer and its non-U.S. person
counterparties).
    \126\ See Cleary Letter IV at 12.
---------------------------------------------------------------------------

    Similarly, some commenters suggested that Section 30(c) prohibits
the application of Title VII to transactions involving the foreign
affiliates of U.S. persons, on the basis that such transactions occur
``without the jurisdiction of the United States'' when no U.S. person
is a counterparty to the trade.\127\ One commenter explained that,
because such transactions involve parties outside the United States and
occur outside the United States, they are ``removed from the stream of
U.S. commerce.'' \128\
---------------------------------------------------------------------------

    \127\ See SIFMA Letter I at 5-6; see also ISDA Letter I at 11
(suggesting that dealer-related requirements of Title VII should not
apply to business with non-U.S. person counterparties, including
foreign affiliates and branches of U.S. persons).
    \128\ See Sullivan & Cromwell Letter at 9.
---------------------------------------------------------------------------

    Commenters also generally recommended a narrower interpretation of
the language in Section 30(c) permitting the application of Title VII
regulations to persons transacting a business in security-based swaps
without the jurisdiction of the United States to the extent that they
are doing so in contravention of rules the Commission has prescribed as
``necessary or appropriate to prevent the evasion of any provision of
[the Exchange Act that was added by the Dodd-Frank Act].'' Under this
view, Section 30(c) permits ``extraterritorial'' application of Title
VII only to entities that have themselves engaged in willful or
intentional evasion.\129\ These commenters argued that the longstanding
use of foreign branches and affiliates by security-based swap market
entities demonstrates that these types of business structures are not
evasive and, therefore, do not fall within the exception to the limits
on the applicability of Title VII as set forth in Section 30(c).\130\
---------------------------------------------------------------------------

    \129\ See, e.g., id. at 9-10 (suggesting that
``extraterritorial'' application of Title VII requires an ``intent
to evade'' Title VII).
    \130\ See Cleary Letter IV at 7.
---------------------------------------------------------------------------

2. Scope of Application of Title VII in the Cross-Border Context
(a) Overview and General Approach
    Section 772(b) of the Dodd-Frank Act amends Section 30 of the
Exchange Act to provide that ``[n]o provision of [Title VII] . . .
shall apply to any person insofar as such person transacts a business
in security-based swaps without the jurisdiction of the United
States,'' unless that business is transacted in contravention of rules
prescribed to prevent evasion of Title VII.\131\ In so amending Section
30 of the Exchange Act, Congress directly appropriated nearly identical
language defining the scope of the Exchange Act's application that
appears in subsection (b) of Section 30 of the Exchange Act,\132\
indicating that Congress intended the territorial application of Title
VII to entities and transactions in the security-based swap market to
follow similar principles to those applicable to the

securities market under the Exchange Act.\133\
---------------------------------------------------------------------------

    \131\ See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c),
added by Section 772(b) of the Dodd-Frank Act.
    \132\ Section 30(b) of the Exchange Act, 15 U.S.C. 78dd(b),
provides that the Exchange Act and related rules ``shall not apply
to any person insofar as he transacts a business in securities
without the jurisdiction of the United States,'' unless that
business is transacted in contravention of rules prescribed as
necessary or appropriate to prevent evasion of the Exchange Act.
    \133\ See, e.g., Commodity Futures Trading Comm'n v. Schor, 478
U.S. 833, 846 (1986) (holding that ``when Congress revisits a
statute giving rise to a longstanding administrative interpretation
without pertinent change, the `congressional failure to revise or
repeal the agency's interpretation is persuasive evidence that the
interpretation is the one intended by Congress''').
---------------------------------------------------------------------------

    In light of this similar language, commenters have urged us to
follow a territorial approach in applying Title VII to cross-border
security-based swap activity.\134\ We preliminarily agree that a
territorial approach, if properly tailored to the characteristics of
the security-based swap market, should help ensure that our regulatory
framework focuses on security-based swap activity that is most likely
to raise the concerns that Congress intended to address in Title VII,
including the effects of security-based swap activity on the financial
stability of the United States, on the transparency of the U.S.
financial system, and on the protection of counterparties.
---------------------------------------------------------------------------

    \134\ See, e.g., Cleary Letter IV at 33-37.
---------------------------------------------------------------------------

    We differ from commenters, however, in our understanding of what a
territorial approach means in the context of a global security-based
swap market. As noted above, some commenters suggested that the
security-based swap activity of foreign branches and affiliates of U.S.
persons with non-U.S. persons occurs outside the United States and has
only an indirect connection with the United States and that, therefore,
subjecting transactions resulting from that activity to Title VII would
involve extraterritorial application of the statute.\135\ Although we
recognize that some of the security-based swap activity involving these
foreign branches and affiliates occur outside the United States, we
believe that a properly tailored territorial approach should look to
both the full range of activities described in the statutory text as
well as to the concerns that Congress intended Title VII to address in
determining whether the relevant activity, considered in its entirety,
occurs at least in part within the United States.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., Cleary Letter IV at 35; ISDA Letter I at 11;
SIFMA Letter I at 5-6; Sullivan & Cromwell Letter at 11-13.
    \136\ See Morrison, 130 S. Ct. at 2884 (looking to the ``focus''
of the relevant statutory provision in determining whether the
statute was being applied to domestic conduct).
---------------------------------------------------------------------------

    As noted above, security-based swap transactions differ from most
traditional securities transactions in that they give rise to an
ongoing obligation between the counterparties to the trade: the
counterparties bear the risks that result from those transactions for
the duration of the transactions.\137\ The Dodd-Frank Act was enacted,
in part, to address the risks to the financial stability of the United
States posed by entities bearing such risks, and a territorial approach
to the application of Title VII should be consistent with achieving
these statutory purposes. A territorial approach to the application of
Title VII that excluded from the application of Title VII any activity
conducted by the foreign operations of a U.S. person where they do
business only with non-U.S. counterparties located outside the United
States would likely fail to achieve the financial stability goals of
Title VII, as such an approach would not account for the security-based
swap risks that may be borne by entities located within the United
States whose foreign operations solicit, negotiate, or execute
transactions outside the United States. In addition, it is not clear
that a different territorial approach that focused solely on the
location of the entity bearing the risk (and disregarded whether
certain relevant activity, including execution of the transaction,
occurred within the United States) would adequately address the Dodd-
Frank Act's concern with promoting transparency in the U.S. financial
system and protecting counterparties, concerns that are likely to be
raised by the solicitation, negotiation, or execution within the United
States, even if the risk arising from those security-based swaps
transactions is borne by entities outside the United States. For
example, some transactions characterized by commenters as occurring
outside the United States, even with non-U.S. persons, are entered into
by persons located within the United States and would appear to raise
the same types of risk concerns as transactions occurring wholly within
the United States.
---------------------------------------------------------------------------

    \137\ See Section II.A, infra.
---------------------------------------------------------------------------

    Similarly, the Commission preliminarily believes that a territorial
approach should be informed by the text of the statutory provision that
imposes the registration or other regulatory requirement.\138\ Some
commenters suggested, for instance, that a territorial approach would
necessarily exclude certain foreign operations of U.S. persons from
registration as security-based swap dealers so long as they did not
enter into security-based swap transactions with counterparties located
within the United States.\139\ However, in this instance, these
commenters did not show how their suggested approach relates to the
statutory definition of security-based swap dealer or to the rules and
interpretation adopted by the Commission and the CFTC to further define
``security-based swap dealer'' in the Intermediary Definitions Adopting
Release, including our discussion of conduct that is indicative of
dealing activity.\140\ In our preliminary view, we should identify the
activity that the statutory provision regulates before reaching a
determination of whether relevant activity is occurring within the
United States.\141\ Only after we identify the activity that the
statutory provision regulates would we then be able to determine
whether the conduct at issue involves activity that the statutory
provision regulates and whether this conduct occurs within the United
States. To the extent that conduct involving activity that the
statutory provision regulates occurs within the United States,
application of Title VII to that conduct would be consistent with a
territorial approach.
---------------------------------------------------------------------------

    \138\ See Morrison, 130 S. Ct. at 2884 (performing a textual
analysis of Section 10(b) of the Exchange Act to determine what
conduct was relevant in determining whether the statute was being
applied to domestic conduct).
    \139\ See, e.g., Sullivan & Cromwell Letter at 11.
    \140\ See note 135, supra; see also Intermediary Definitions
Adopting Release, 77 FR 30616-19.
    \141\ See Morrison, 130 S. Ct. at 2884.
---------------------------------------------------------------------------

(b) Territorial Approach to Application of Title VII Security-Based
Swap Dealer Registration Requirements
    We discuss our application of this approach with respect to each of
the major Title VII registration categories and requirements in
connection with reporting, public dissemination, clearing, and trade
execution for security-based swaps in further detail in the sections
below,\142\ but for sake of illustration, we provide a brief overview
of our territorial approach as it applies to the security-based swap
dealer definition.
---------------------------------------------------------------------------

    \142\ See Sections III-VII, infra (discussing each major
registration category), and Sections VIII-IX.A, infra (discussing
certain requirements in connection with reporting and dissemination,
clearing, and trade execution for security-based swaps).
---------------------------------------------------------------------------

    Section 3(a)(71) of the Exchange Act \143\ defines security-based
swap dealer as a person that engages in any of the following types of
activity:
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 78c(a)(71).
---------------------------------------------------------------------------

    (i) Holding oneself out as a dealer in security-based swaps,
    (ii) making a market in security-based swaps,
    (iii) regularly entering into security-based swaps with
counterparties as an ordinary course of business for one's own account,
    (iv) engaging in any activity causing oneself to be commonly known
in the

trade as a dealer in security-based swaps.\144\
---------------------------------------------------------------------------

    \144\ Section 3(a)(71)(A) of the Exchange Act, 15 U.S.C.
78c(a)(71)(A).
---------------------------------------------------------------------------

    We have further interpreted this definition by jointly adopting
interpretive guidance with the CFTC that identifies the types of
activity that is relevant in determining whether a person is a
security-based swap dealer.\145\ In this interpretive guidance, we have
identified indicia of security-based swap dealing activity to include
the following activities:

    \145\ See Intermediary Definitions Adopting Release, 77 FR
30617-18.
---------------------------------------------------------------------------

     Providing liquidity to market professionals or other
persons in connection with security-based swaps,
     seeking to profit by providing liquidity in connection
with security-based swaps,
     providing advice in connection with security-based swaps
or structuring security-based swaps,
     having a regular clientele and actively soliciting
clients,
     using inter-dealer brokers, and
     acting as a market maker on an organized security-based
swap exchange or trading system.\146\
---------------------------------------------------------------------------

    \146\ Id.
---------------------------------------------------------------------------

    As the foregoing list of relevant activities illustrates, both the
statutory text and our interpretation of that text include within the
security-based swap dealer definition a range of activities. The broad
scope of activities listed above identifies various characteristics of
dealing activity. Given the risks associated with dealing activity that
the dealer definition and associated regulatory framework in Title VII
are intended to address, we preliminarily believe that a territorial
approach consistent with these statutory purposes should consider
whether the entity performs any of these indicia of dealing activity
within the United States (even if some of these indicia also arise in
activity conducted outside the United States). This type of analysis
appears to us more consistent with the statutory text and with the
Supreme Court's approach to statutory analysis in its decision in
Morrison than an approach that excludes from jurisdiction certain
foreign operations of U.S. persons transacting with foreign
counterparties. We also believe that our proposed approach would better
help ensure that our regulatory framework achieves the various purposes
of security-based swap dealer regulation under Title VII, while
avoiding application of security-based swap dealer registration to
persons whose dealing activity is unlikely to raise the types of
dealer-specific risks that Title VII dealer registration was intended
to address because it occurs entirely outside the United States.\147\
---------------------------------------------------------------------------

    \147\ Under our proposed approach to the application of the de
minimis threshold in the cross-border context, non-U.S. persons that
engage in dealing activity with U.S. persons or otherwise within the
United States at levels below the de minimis threshold generally
would also not be required to register as security-based swap
dealers. Such entities are engaged in dealing activity within the
United States, and their dealing activity within the United States
may raise certain concerns addressed by Title VII. However, we
preliminarily believe that, to the extent that this dealing activity
remains at levels below the de minimis threshold, they should be
treated similarly to a U.S. person that engages in dealing activity
at levels below the de minimis threshold. See Section III.B.4,
infra. Like U.S. entities engaged in dealing activity, they may be
required to register under the aggregation requirements the
Commission and the CFTC adopted in the Intermediary Definitions
Adopting Release. See Intermediary Definitions Adopting Release, 77
FR 30631; 17 CFR 240.3a71-2(a)(1). Under the aggregation
requirements we propose below, even entities with security-based
swap dealing activity at levels below the de minimis threshold may
be required to register if the total security-based swap dealing
activity of affiliates under common control (excluding the activity
of any registered affiliates that have independent operations)
exceeds the de minimis threshold. See Section III.B.8, infra.
---------------------------------------------------------------------------

    Under our proposed territorial approach to the security-based swap
dealer definition, as explained further below, we would require persons
resident or organized in the United States, or with their principal
place of business in the United States, to count all of their dealing
transactions toward their de minimis threshold, including transactions
that arise from dealing activity that occurs in part outside the United
States (for example, because it is negotiated and executed through that
person's foreign branch or office).\148\
---------------------------------------------------------------------------

    \148\ See Section III.B.4, infra.
---------------------------------------------------------------------------

    An interpretation of Section 30(c) that advances the view that
security-based swap activity conducted by a U.S. person through a
foreign branch constitutes activity ``without the jurisdiction of the
United States'' or that a transaction arising from such activity
constitutes ``transacting a business in security-based swaps without
the jurisdiction of the United States'' for purposes of Section 30(c)
may not fully account for the statutory definition of ``security-based
swap dealer,'' the purposes of Title VII, or the global nature of the
security-based swap market. It does not account for the entire range of
activities performed by entities active in the security-based swap
market, including security-based swap dealers, and the relevance of
such activities to the statutory definitions and requirements, given
the purposes of Title VII, and it would leave unaddressed significant
levels of activity that poses precisely the sorts of risks that Title
VII was intended to address.
    In our preliminary view, to the extent that a U.S. person engages
in dealing activity through a foreign operation that is part of the
U.S. legal person (such as a foreign branch or office), relevant
activity for purposes of the security-based swap dealer definition
occurs, at least in part, within the United States because we believe
it is the U.S. entity as a whole, and not just the foreign branch or
office, that is holding itself out as a dealer and making a market in
security-based swaps. Moreover, it is necessarily the U.S. person as a
whole that is seeking to profit by providing liquidity and engaging in
market-making in security-based swaps, and it is the financial
resources of the entire entity that enable it to provide liquidity and
engage in market-making in connection with security-based swaps. Its
dealing counterparties will look to the entire U.S. person, and not
just the foreign branch or office, for performance on the transaction.
The entire U.S. person assumes, and stands behind, the obligations
arising from the resulting agreement. For these reasons, to the extent
that a dealer resides or is organized, or has its principal place of
business, within the United States, we believe that it cannot hold
itself out as a security-based swap dealer, even through a foreign
branch, as anything other than a single person, given that it generally
could not operate as a dealer absent the financial and other resources
of the entire U.S. person. Its dealing activity with all of its
counterparties, including dealing activity conducted through its
foreign branch or office, is best characterized as occurring, at least
in part, within the United States and should therefore be counted
toward the entity's de minimis threshold.
    More generally, we preliminarily believe that transactions that
create ongoing obligations that are borne by a U.S. person are properly
described as directly occurring within the United States, particularly
given Title VII's focus on, among other things, addressing risks to the
financial stability of the United States.\149\ Indeed, the history of
AIG FP confirms that such transactions of U.S. persons can pose risks
to the U.S. financial system even if they are conducted through foreign
operations. The nature of such risks, and their role in the financial
crisis and in the enactment of Title VII, suggest that the statutory
framework established

by Congress and the objectives of Title VII may require a broader
analysis than excluding transactions involving U.S. persons from the
application of Title VII solely because they are conducted through
operations outside the United States, while others by the same U.S.
persons occur within the United States.\150\
---------------------------------------------------------------------------

    \149\ As we discuss below, such activity would include providing
guarantees for a foreign entity's security-based swap transactions.
See Section II.B.2(d), infra.
    \150\ However, for reasons explained below, the Commission is
not proposing to subject the foreign operations of U.S. persons to
certain of the requirements in Title VII. See, e.g., Sections
III.B.7, III.B.9, VIII.C, IX.C.3(a), and X.B.3(a), infra.
---------------------------------------------------------------------------

    However, we preliminarily believe that non-U.S. persons engaged in
dealing activity would be required to count toward their de minimis
thresholds only transactions arising from their dealing activity with
U.S. persons \151\ or dealing activity otherwise conducted within the
United States. In addition, to the extent that a non-U.S. person
engages in security-based swap dealing activity within the United
States, we preliminarily believe that such dealing activity should be
counted toward the non-U.S. person's de minimis threshold regardless of
whether its counterparties are U.S. persons.\152\ This view is
consistent with the fact that such security-based swap activity raises
the types of concerns that the Dodd-Frank Act was intended to address.
---------------------------------------------------------------------------

    \151\ However, for reasons explained below, the Commission is
not proposing to require non-U.S. persons to include transactions
with the foreign branches of U.S. banks in their de minimis
calculations. See Section III.B.7, infra.
    \152\ See Intermediary Definitions Adopting Release, 77 FR
30617-18.
---------------------------------------------------------------------------

    We preliminarily believe that a non-U.S. person not engaged in any
security-based swap activity within the United States (or engaged only
at levels below the de minimis threshold) is unlikely to pose the types
of concerns within the U.S. financial system that Title VII dealer
regulation was intended to address.\153\ Thus, under our proposed
approach, a non-U.S. person that engages in dealing activity entirely
outside the United States (i.e., does not enter into transactions with
a U.S. person or otherwise conduct any part of its dealing activity
within the United States) would not be required to register as a
security-based swap dealer.\154\
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    \153\ Proposed Rule 3a71-3(b) under the Exchange Act, as
discussed in Section III.B.4, infra. Of course, the transactions of
an entity engaged in security-based swap dealing activity within the
United States at levels below the de minimis threshold or in
security-based swap activity within the United States that is not
dealing activity may be subject to other Title VII requirements, as
discussed below, or other provisions of the federal securities laws.
    \154\ This proposed approach to the application of Title VII
security-based swap dealer registration requirements is not intended
to limit or address the cross-border reach or extraterritorial
application of the antifraud or other provisions of the federal
securities laws.
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(c) Application of Other Title VII Requirements to Registered Entities
    We are proposing to apply the Title VII requirements associated
with registration (including, among others, capital and margin
requirements and external business conduct requirements \155\) to the
activities of registered entities to the extent we have determined that
doing so advances the purposes of Title VII.\156\ Although some
commenters suggested that a territorial approach would prohibit the
Commission from applying Title VII to the foreign security-based swap
activities of even registered entities, such an interpretation of the
application of Title VII to registered entities is difficult to
reconcile with the statutory language describing the requirements
applicable to registered security-based swap dealers, with the text of
Section 30(c),\157\ or with the purposes of Title VII and the nature of
risks in the security-based swap market as described above. We have
long taken the view that an entity that has registered with the
Commission subjects itself to the entire regulatory system governing
such registered entities.\158\
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    \155\ See Section 15F of the Exchange Act, 15 U.S.C. 78o-10.
    \156\ See, e.g., Sections III.C.3 and 4, infra (discussing
requirements applicable to security-based swap dealers).
    \157\ Section 30(c) prohibits the application of the Exchange
Act only with respect to those persons that ``transact[] a business
in security-based swaps without the jurisdiction of the United
States.'' Because only security-based swap entities that transact a
business in security-based swaps within the United States would be
required to register under the approach proposed in this release,
registered entities are not persons that ``transact[] a business in
security-based swaps without the jurisdiction of the United
States.''
    \158\ See Registration Requirements for Foreign Broker-Dealers,
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30016-
17 (July 18, 1989) (``Rule 15a-6 Adopting Release'') (noting that a
foreign registrant is subject to the regulatory system applicable to
such entities); Revision of Form BD, Exchange Act Release No. 25285
(Jan. 22, 1988) (``It is the Commission's view that a broker-dealer
submits to the Commission's jurisdiction when it registers with the
Commission.''); In re International Paper and Power Co., 4 SEC 873,
876 (1939) (registration with the Commission makes registrant
``subject to the complete jurisdiction of the Commission''). See
also Exemption of Certain Foreign Brokers or Dealers, Exchange Act
Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8, 2008)
(``Proposed Amendments to Rule 15a-6''), at 39182 (describing
registration requirements as applying to the entire foreign entity);
In re Ira William Scott, 53 SEC 862, 866 (1998) (holding that
investment adviser that registers with the Commission has
``submitted himself to [the Commission's] jurisdiction pursuant to
the Advisers Act''). Cf. In re United Corp., 232 F.2d 601, 606
(1956) (stating that, upon registration as a holding company, an
entity comes within ``the jurisdiction of the Commission and [is]
subject to all requirements applicable to a registered holding
company'').
---------------------------------------------------------------------------

(d) Application of Title VII Regulatory Requirements to Transactions of
Foreign Entities Receiving Guarantees From U.S. Persons
    We also are proposing to apply certain Title VII transaction-level
requirements (e.g., mandatory clearing, reporting and dissemination,
and mandatory trade execution of security-based swaps) to certain
transactions involving one or more non-U.S. persons whose performance
under the security-based swaps is guaranteed by a U.S. person. We
discuss the statutory basis for applying specific Title VII
requirements to such transactions in the relevant substantive
discussions below.\159\ In this subsection, we briefly explain why we
believe that a territorial approach that is consistent with the
purposes and text of the Dodd-Frank Act supports the application of
Title VII to such transactions.
---------------------------------------------------------------------------

    \159\ See Sections VIII-XI, infra.
---------------------------------------------------------------------------

    In a security-based swap transaction between two non-U.S. persons
where the performance of at least one side of the transaction is
guaranteed by a U.S. person, the guarantee gives the guaranteed
entity's counterparty direct recourse to the U.S. person for
performance of obligations owed by the guaranteed entity under the
security-based swap,\160\ and the U.S. guarantor exposes itself to the
security-based swap risk as if it were a direct counterparty to the
security-based swap through the security-based swap activity engaged in
by the guaranteed entity. As a result, the guarantee creates risk to
the U.S. financial system and counterparties (including U.S.
guarantors) to the same degree as if the transaction were entered into
directly by a U.S. person. In addition, in many cases, the counterparty
would not enter into the transaction (or would not do so on the same
terms) with the guaranteed entity, and the guaranteed entity would not
be able to engage in any security-based swaps, absent the presence of
the guarantee. Given that the guarantee is

provided by a U.S. person and poses risks to the U.S. financial system,
and considering the reliance by both the guaranteed entity and its
counterparty on the creditworthiness of the guarantor in the course of
engaging in security-based swap transactions and for the duration of
the security-based swap, we preliminarily believe that a transaction
entered into by a non-U.S. person whose performance under the security-
based swap is guaranteed by a U.S. person is within the United States
by virtue of the involvement of the U.S. guarantor in the security-
based swap. Therefore, we preliminarily believe that subjecting such
transactions to Title VII is consistent with our territorial approach.
---------------------------------------------------------------------------

    \160\ In discussing the application of the major participant
tests to guaranteed positions in the Intermediary Definitions
Adopting Release, the Commission and the CFTC noted that an entity's
security-based swap positions are attributed to a parent, other
affiliate, or guarantor for purposes of the major participant
analysis to the extent that the counterparties to those positions
have recourse to that parent, other affiliate, or guarantor in
connection with the position. Positions are not attributed in the
absence of recourse. See Intermediary Definitions Adopting Release,
77 FR 30689. As a result, the term ``guarantee'' as used in this
release refers to a contractual agreement pursuant to which one
party to a security-based swap transaction has recourse to its
counterparty's parent, other affiliate, or guarantor with respect to
the counterparty's obligations owed under the transaction.
---------------------------------------------------------------------------

(e) Regulations Necessary or Appropriate to Prevent Evasion of Title
VII
    As noted above, several commenters expressed the view that Section
30(c) of the Exchange Act restricts the Commission's authority to apply
amendments made to the Exchange Act by Title VII to
``extraterritorial'' conduct. Section 30(c) provides the Commission
with the express authority to prescribe rules and regulations for
persons that transact a business in security-based swaps without the
jurisdiction of the United States to the extent the Commission
determines that doing so is necessary or appropriate to prevent
evasion. Some commenters have expressed the view that this authority
extends to ``extraterritorial'' activity only when such activity is
intended to evade Title VII or to conceal a domestic violation of Title
VII, suggesting that Section 30(c) prohibits application of Title VII
to transactions by foreign affiliates or operations established for a
legitimate business purpose, as the existence of such a purpose is
evidence that the conduct is not intended to be evasive.\161\
---------------------------------------------------------------------------

    \161\ See, e.g., Cleary Letter IV at 5-6, 7, 18; Sullivan &
Cromwell Letter at 6-7.
---------------------------------------------------------------------------

    While recognizing the concerns expressed by commenters, the
Commission preliminarily believes that Section 30(c) does not require
the Commission to find actual evasion in order to invoke our authority
to reach activity ``without the jurisdiction of the United States.''
Section 30(c) also does not require that every particular application
of Title VII to security-based swap activity ``without the jurisdiction
of the United States'' address only business that is transacted in a
way that evades Title VII. Section 30(c) authorizes the Commission to
apply Title VII to persons transacting a business ``without the
jurisdiction of the United States'' if they violate rules that the
Commission has prescribed as ``necessary or appropriate to prevent the
evasion of any provision'' of Title VII. The focus of this provision is
not whether such rules impose Title VII requirements only on entities
engaged in evasive activity but whether the rules are generally
``necessary or appropriate'' to prevent evasion of Title VII. In other
words, Section 30(c) permits the Commission to impose prophylactic
rules intended to prevent possible evasion, even if they affect both
evasive and non-evasive conduct. Thus, under our preliminary proposed
interpretation of Section 30(c), the statute permits us to prescribe
such rules to conduct without the jurisdiction of the United States,
even if those rules would also apply to a market participant that has
been transacting business through a pre-existing market structure such
as a foreign branch or guaranteed foreign affiliate established for
valid business purposes, provided the proposed rule or interpretation
is designed to prevent possible evasive conduct.\162\
---------------------------------------------------------------------------

    \162\ We preliminarily believe that the proposed rules or
interpretations set forth in this release are not being applied to
persons who are ``transact[ing] a business in security-based swaps
without the jurisdiction of the United States,'' within the meaning
of Section 30(c). See Section II.B.2(a), supra. However, as noted
below, the Commission also preliminarily believes that the proposed
rules or interpretations are necessary or appropriate to help
prevent the evasion of the provisions of the Exchange Act that were
added by the Dodd-Frank Act and prophylactically will help ensure
that the particular purposes of the Dodd-Frank Act addressed by the
rule or interpretation are not undermined. See, e.g., note 558,
infra.
---------------------------------------------------------------------------

C. Principles Guiding Proposed Approach to Applying Title VII in the
Cross-Border Context

    In considering how to apply Title VII in the cross-border context,
the Commission has been mindful of the global nature of the security-
based swap market and the types of risks created by security-based swap
activity to the U.S. financial system and market participants, as well
as the needs of a well-functioning security-based swap market.\163\ We
also have been guided by the purpose of the Dodd-Frank Act \164\ and
the applicable requirements of the Exchange Act, including the
following:
---------------------------------------------------------------------------

    \163\ See Sections II.A.1-II.A.3, supra.
    \164\ See note 4, supra.
---------------------------------------------------------------------------

     Risk to the U.S. Financial System--The Dodd-Frank Act was
intended to promote, among other things, the financial stability of the
United States by limiting/mitigating risks to the financial
system.\165\
---------------------------------------------------------------------------

    \165\ See id.
---------------------------------------------------------------------------

     Transparency--The Dodd-Frank Act was intended to promote
transparency in the U.S. financial system.\166\
---------------------------------------------------------------------------

    \166\ See id.
---------------------------------------------------------------------------

     Counterparty Protection--The Dodd-Frank Act adds
provisions to the Exchange Act relating to counterparty protection,
particularly with respect to ``special entities.'' \167\
---------------------------------------------------------------------------

    \167\ See Section 15F(h) of the Exchange Act, as added by
Section 764(a) of the Dodd-Frank Act, in particular.
---------------------------------------------------------------------------

     Economic Impacts--The Exchange Act requires the Commission
to consider the impact of our rulemakings on efficiency, competition,
and capital formation.\168\
---------------------------------------------------------------------------

    \168\ Specifically, Section 3(f) of the Exchange Act provides:
``Whenever pursuant to this title the Commission is engaged in
rulemaking, . . .; required to consider or determine whether an
action is necessary or appropriate in the public interest, the
Commission shall also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation.'' Section 23(a)(2) of the Exchange Act also
provides: ``The Commission . . ., in making rules and regulations
pursuant to any provisions of this title, shall consider among other
matters the impact any such rule or regulation would have on
competition. The Commission . . . shall not adopt any such rule or
regulation which would impose a burden on competition not necessary
or appropriate in furtherance of the purposes of [the Exchange
Act].''
---------------------------------------------------------------------------

     Harmonization with Other U.S. Regulators--In connection
with implementation of Title VII, the Dodd Frank Act requires the
Commission to consult and coordinate with the CFTC and prudential
regulators to ensure ``regulatory consistency and comparability, to the
extent possible.'' \169\
---------------------------------------------------------------------------

    \169\ See Section 712(a)(2) of the Dodd-Frank Act.
---------------------------------------------------------------------------

     Consistent International Standards--To promote effective
and consistent global regulation of swaps and security-based swaps, the
Dodd-Frank Act requires the Commission and the CFTC to consult and
coordinate with foreign regulatory authorities on the ``establishment
of consistent international standards'' with respect to the regulation
of swaps and security-based swaps.\170\ In this regard, the Commission
recognizes that regulators in other jurisdictions are currently engaged
in implementing their own regulatory reforms of the OTC derivatives
markets and that our proposed application of Title VII to cross-border
activities may affect the policy decisions of these other regulators as
they seek to address potential conflicts or duplication in the
regulatory requirements that apply to

market participants under their authority.\171\
---------------------------------------------------------------------------

    \170\ See Section 752(a) of the Dodd-Frank Act. In this regard,
some commenters have encouraged the Commission to consider
international comity when applying Title VII in the cross-border
context. See note 225, infra.
    \171\ For example, subjecting non-U.S. persons to Title VII may
prompt a foreign jurisdiction to respond by subjecting U.S. persons
to the foreign jurisdiction's regulatory regime. However,
substituted compliance of the type proposed in this release or other
mechanisms may address potential conflicts or duplication arising
from overlapping regulatory requirements.
---------------------------------------------------------------------------

     Anti-Evasion--The Dodd-Frank Act amends the Exchange Act
to provide the Commission with authority to prescribe rules and
regulations as necessary or appropriate to prevent the evasion of any
provision of the Exchange Act that was added by the Dodd-Frank
Act.\172\
---------------------------------------------------------------------------

    \172\ See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c),
as discussed in Section II.B, supra.
---------------------------------------------------------------------------

    At times these principles reinforce one another; at other times
they compete with each other. For instance, attempts to regulate risk
posed to the United States may, depending on what is proposed, make it
more costly for U.S.-based firms to conduct security-based swap
business, particularly in foreign markets, compared to foreign firms,
or could make foreign firms less willing to deal with U.S. persons. On
the other hand, attempts to provide U.S. persons greater access to
foreign security-based swap markets may, depending on what is proposed,
fail to appropriately address the risk posed to the United States from
transactions conducted outside the United States or create
opportunities for market participants to evade the application of Title
VII, particularly until such time as global initiatives to regulate the
derivatives markets are fully enacted and implemented.
    Balancing these sometimes competing principles is complicated by
the fact that Title VII imposes a new regulatory regime on a
marketplace that already exists as a functioning, global market. Title
VII establishes reforms that will have implications for entities that
compete internationally in the global security-based swap market. As we
have formulated our proposal, we have generally sought, in accordance
with the statutory factors described above, to avoid creating
opportunities for regulatory arbitrage or evasion or the potential for
duplicative or conflicting regulations. We also have considered the
needs for a well-functioning security-based swap market and for
avoiding disruption that may reduce liquidity, competition, efficiency,
transparency, or stability in the security-based swap market.

D. Conclusion

    Consistent with the principles and requirements outlined above, we
are proposing to structure our implementation of Title VII around an
approach that focuses on identifying market participants whose presence
or activity within the United States or activity involving market
participants within the United States may give rise to the types of
risk to the U.S. financial system and counterparties that Title VII
seeks to address, as described more fully below in the subsequent
sections of the release.
Request for Comment
    The Commission requests comment on all aspects of the discussion
and analysis above, including the following:
     Is our understanding of the global nature of the security-
based swap market accurate? If not, why not? Please elaborate.
     Is our understanding of the dealing structures used by
U.S. and non-U.S. persons accurate? If not, why not? Are there other
dealing structures used by market participants? If so, please
elaborate.
     Is our understanding of clearing, reporting, and trade
execution practices accurate? If not, why not? Please elaborate.
     As discussed above in Section II.B.1, some commenters
recommend a narrower approach to the cross-border application of Title
VII than this proposal sets forth. We request further comment on these
and any other potential alternative approaches to determining the
extent to which Title VII should be applied to cross-border
transactions, non-U.S. persons, and registered entities.

III. Security-Based Swap Dealers

A. Introduction

    Among the market participants subject to regulation under Title VII
as a result of their security-based swap activities are security-based
swap dealers.\173\ As discussed above, a ``security-based swap dealer''
generally is defined as any person that (i) Holds itself out as a
dealer in security-based swaps; (ii) makes a market in security-based
swaps; (iii) regularly enters into security-based swaps with
counterparties as an ordinary course of business for its own account;
or (iv) engages in any activity causing the person to be commonly known
in the trade as a dealer or market maker in security-based swaps.\174\
The Commission, jointly with the CFTC, issued final rules and
interpretive guidance to further define the term security-based swap
dealer,\175\ including rules implementing the de minimis
exception.\176\ As part of these final rules and interpretive guidance,
the Commission stated that the relevant statutory provisions suggest
that, rather than focusing solely on the risk these entities pose to
the financial markets, we should interpret the ``security-based swap
dealer definition in a way that identifies those persons for which
regulation is warranted either: (i) [D]ue to the nature of their
interactions with counterparties; or (ii) to promote market stability
and transparency, in light of the role those persons occupy within the
security-based swap markets.'' \177\ Security-based swap dealers are
subject to a comprehensive regulatory regime under Title VII. The
statutory provisions added to the Exchange Act by Title VII are
intended to provide for financial responsibility associated with
security-based swap dealers' activities (e.g., the ability to satisfy
obligations and the protection of counterparties' funds and assets),
and other counterparty protections, as well as market stability and
transparency.\178\
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    \173\ See Section 764(a) of the Dodd-Frank Act, codified as
Section 15F of the Exchange Act, 15 U.S.C. 78o-10. See also Section
IV, infra (discussing major security-based swap participants).
    \174\ See Section 3(a)(71) of the Exchange Act, 15 U.S.C.
78c(a)(71), as added by Section 761(a) of the Dodd-Frank Act; see
also Section II.B.2(b), supra.
    \175\ See Intermediary Definitions Adopting Release, 77 FR
30596; 17 CFR 240.3a71-1.
    \176\ Section 3(a)(71)(D) of the Exchange Act, 15 U.S.C.
78c(a)(71)(D), provides that ``[t]he Commission shall exempt from
designation as a security-based swap dealer an entity that engages
in a de minimis quantity of security-based swap dealing in
connection with transactions with or on behalf of its customers. The
Commission shall promulgate regulations to establish factors with
respect to the making of this determination to exempt.'' This
provision is implemented in Rule 3a71-2 under the Exchange Act (17
CFR 240.3a71-2), as discussed in the Intermediary Definitions
Adopting Release, 77 FR 30626-43.
    \177\ Intermediary Definitions Adopting Release, 77 FR 30617.
    \178\ See Intermediary Definitions Adopting Release, 77 FR
30608; see also Section III.C.1, infra (discussing substantive
requirements applicable to security-based swap dealers).
---------------------------------------------------------------------------

    By its terms, application of the security-based swap dealer
definition set forth in Section 3(a)(71) of the Exchange Act \179\ does
not depend on whether a security-based swap dealer or its counterparty
is a U.S. person.\180\ Rather, the security-based swap dealer
definition encompasses persons engaged in security-based swap dealing
activities without regard to the geographic location or legal residence
of either the dealing person or such person's counterparties. The
Commission did not provide guidance on the application of the security-
based swap dealer definition to non-U.S. persons or to U.S. persons
that conduct dealing activities

in the cross-border context in either our proposed or final rules.\181\
As discussed above \182\ and as further discussed below, market
participants, foreign regulators, and other interested parties have
raised concerns regarding, among other things, the application of Title
VII to non-U.S. persons that engage in security-based swap dealing
activity and U.S. persons who conduct dealing activities ``outside the
United States.'' \183\
---------------------------------------------------------------------------

    \179\ 15 U.S.C. 78c(a)(71).
    \180\ See Section 3(a)(71) of the Exchange Act, 15 U.S.C.
78c(a)(71); 17 CFR 240.3a71-1.
    \181\ See Intermediary Definitions Adopting Release, 77 FR
30596; Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' Exchange Act
Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010)
(``Intermediary Definitions Proposing Release'').
    \182\ See Section II.B, supra.
    \183\ See Section III.B.3, infra.
---------------------------------------------------------------------------

    The rules and interpretations described below represent the
Commission's proposed approach to applying the security-based swap
dealer definition to non-U.S. persons and to U.S. persons who conduct
dealing activities in the cross-border context in light of the
principles discussed above.\184\ Our proposal reflects a particular
balancing of these principles, informed by, among other things, the
particular nature of the security-based swap market,\185\ the structure
of security-based swap dealing activity,\186\ and our experience in
applying the federal securities laws in the cross-border context in the
past.\187\ We recognize that other approaches are possible to achieve
the goals of the Dodd-Frank Act, in whole or in part. Accordingly, we
invite comment regarding all aspects of the proposal described below,
and each proposed rule and interpretation contained therein, including
potential alternative approaches. Data and comment from market
participants and other interested parties regarding the likely effect
of each proposed rule and interpretation and potential alternative
approaches will be particularly useful to the Commission in evaluating
possible modifications to the proposal.
---------------------------------------------------------------------------

    \184\ See Section II.C, supra.
    \185\ See Section II.A, supra.
    \186\ See Section II.A.2, supra.
    \187\ See Section III.B.2, infra.
---------------------------------------------------------------------------

B. Registration Requirement

1. Introduction
    In the Intermediary Definitions Adopting Release, which was adopted
jointly with the CFTC, the Commission set forth a de minimis threshold
of security-based swap dealing that takes into account the notional
amount of security-based swap positions connected with a person's
security-based swap dealing activity over the prior 12 months.\188\
When a person engages in security-based swap dealing in connection with
transactions above that threshold, such person meets the definition of
a security-based swap dealer under Section 3(a)(71) of the Exchange
Act,\189\ and the rules and regulations thereunder,\190\ and is
required to register as a security-based swap dealer with the
Commission pursuant to Section 15F(a)(1) of the Exchange Act.\191\
---------------------------------------------------------------------------

    \188\ See Intermediary Definitions Adopting Release, 77 FR
30626-43. The de minimis threshold was adopted by the Commission in
the Intermediary Definitions Adopting Release to implement a
statutory exclusion from the security-based swap dealer definition
found in Section 3(a)(71)(D) of the Exchange Act. See note 176,
supra. The de minimis threshold is defined in terms of a notional
amount of security-based swap positions connected with dealing
activity in which a person engages over the course of the
immediately preceding 12 months. An entity engaged in security-based
swap dealing activity in connection with security-based swap
transactions with or on behalf of its customers below the de minimis
threshold amount is exempt from designation as a security-based swap
dealer. See Intermediary Definitions Adopting Release, 77 FR 30626.
    \189\ 15 U.S.C. 78c(3)(a)(71).
    \190\ 17 CFR 240.3a71-1 and 240.3a71-2.
    \191\ Section 15F(a)(1) of the Exchange Act provides that ``[i]t
shall be unlawful for any person to act as a security-based swap
dealer unless the person is registered as a security-based swap
dealer with the Commission.'' 15 U.S.C. 78o-10(a)(1). A person that
engages in security-based swap dealing activity in connection with
transactions with or on behalf of customers in excess of the de
minimis threshold falls within the security-based swap dealer
definition, and such person must register as a security-based swap
dealer pursuant to Section 15F(a)(1). By contrast, persons that fall
within the statutory definitions of a broker and dealer in Sections
3(a)(4) and (5) of the Exchange Act, 15 U.S.C. 78c(a)(4) and (a)(5),
are required to register with the Commission only if they make use
of the ``mails or any means or instrumentality of interstate
commerce to effect any transactions in, or to induce or attempt to
induce the purchase or sale of, any security. . . . '' Section
15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
---------------------------------------------------------------------------

    The de minimis exception in Section 3(a)(71) of the Exchange Act is
silent on its application to the cross-border security-based swap
dealing activity of U.S. persons and non-U.S. persons, and the
Commission did not address this issue in the Intermediary Definitions
Adopting Release.\192\ Without additional Commission guidance, it would
be unclear how persons would be required to calculate the notional
amount of their security-based swaps for purposes of the de minimis
exception based on their global book of security-based swap dealing
activity. In addition, as discussed below, commenters have raised
questions regarding how the de minimis threshold should be applied in
the cross-border context, expressing concern that, among other things,
if a non-U.S. person were required to register as a security-based swap
dealer with the Commission because its security-based swap dealing
activity exceeded the de minimis threshold, it might be subject to
duplicative and potentially conflicting requirements by the Commission
and a foreign jurisdiction.\193\
---------------------------------------------------------------------------

    \192\ See Intermediary Definitions Adopting Release, 77 FR 30628
n.407 (indicating that the Commission and the CFTC intended to
address the application of the Title VII dealer regime to non-U.S.
persons in separate releases).
    \193\ See Section III.B.2, infra.
---------------------------------------------------------------------------

    Under the Commission's proposal, as described more fully in the
following subsections of this release, a non-U.S. person \194\ would be
required to register as a security-based swap dealer with the
Commission pursuant to Section 15F(a)(1) of the Exchange Act \195\ if
the notional amount of security-based swap positions connected with its
security-based swap dealing activity \196\ with U.S. persons (other
than with foreign branches of U.S. banks) \197\ or otherwise conducted
within the United States \198\ exceeds the de minimis threshold in the
security-based swap dealer definition.\199\ Thus, a non-U.S. person
with a global security-based swap dealing business, but whose positions
connected with its security-based swap dealing activity with U.S
persons (other than with foreign branches of U.S. banks) or otherwise
conducted within the United States fall below the de minimis threshold,
would not be required to register with the Commission as a security-
based swap dealer.\200\ A U.S. person, by contrast, would be required
to count all of its security-based swap transactions (including
transactions conducted

through a foreign branch),\201\ conducted in a dealing capacity, toward
the de minimis threshold to determine whether it would be required to
register as a security-based swap dealer with the Commission pursuant
to Section 15F(a)(1) of the Exchange Act.\202\
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    \194\ Proposed Rule 3a71-3(a)(7) under the Exchange Act
(defining ``U.S. person''), as discussed in Section III.B.5, infra.
    \195\ 15 U.S.C. 78o-10(a)(1).
    \196\ See note 188, supra.
    \197\ Proposed Rule 3a71-3(a)(1) under the Exchange Act
(defining ``foreign branch''), as discussed in Section III.B.7,
infra.
    \198\ Proposed Rule 3a71-3(a)(5) under the Exchange Act
(defining ``transaction conducted within the United States''), as
discussed in Section III.B.6, infra. This provision would capture
dealing activity undertaken by non-U.S. persons that are physically
located within the United States, such as through a U.S. branch of a
foreign bank, or through an agent, such as non-U.S. person's U.S.
subsidiary or an unaffiliated third party acting on the non-U.S.
person's behalf. As discussed elsewhere in the release, foreign
security-based swap dealers utilize these organizational models as
part of their global security-based swap dealing businesses. See
Section II.A.2, supra (discussing dealing structures), and Section
III.D, infra (discussing intermediation).
    \199\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \200\ But see Section III.B.9, infra (discussing the aggregation
of affiliate positions).
    \201\ Proposed Rule 3a71-3(a)(4) under the Exchange Act
(defining ``transaction conducted through a foreign branch''), as
discussed in Section III.C.4, infra.
    \202\ Proposed Rule 3a71-3(b)(1)(i) under the Exchange Act.
---------------------------------------------------------------------------

    As further discussed below, however, we are not proposing to
require a non-U.S. person engaged in security-based swap dealing
activity to count a transaction with a non-U.S. person conducted
outside the United States toward its de minimis threshold, even if its
performance (or the performance of its counterparty) on the security-
based swap is guaranteed by a U.S. person.\203\ In addition, in
conformity with the position that the Commissions took in the
Intermediary Definitions Adopting Release,\204\ we are not proposing to
require cross-border security-based swap transactions between majority-
owned affiliates to be considered when determining whether a person is
a security-based swap dealer.\205\
---------------------------------------------------------------------------

    \203\ See Section III.B.8, infra. However, such U.S. guarantor
may become a major security-based swap participant by virtue of the
guarantee it extends on the performance of the obligations under the
transaction. See Section IV.C.2, infra. In addition, a security-
based swap entered into by a non-U.S. person whose performance under
such security-based swap is guaranteed by a U.S. person would be
required to be reported and, in certain cases, publicly
disseminated, under re-proposed Regulation SBSR. See Section VIII.C,
infra. Such security-based swap also may be subject to the clearing
and trade execution requirements in Title VII. See Sections IX and
X, infra.
    \204\ See Intermediary Definitions Adopting Release, 77 FR
30624-25.
    \205\ See Section III.B.8, infra.
---------------------------------------------------------------------------

    In the following subsections, we first briefly discuss the
Commission's approach to the registration of foreign brokers and
dealers, as background, and the views of commenters on the application
of Title VII to cross-border activities, particularly as such views
relate to security-based swap dealing activity. Then we propose a rule
regarding the application of the de minimis exception to cross-border
security-based swap dealing activity.\206\ In order to give further
definition to this proposed rule, we are proposing rules defining a
number of relevant terms, including ``U.S. person'' \207\ and
``transaction conducted within the United States.''\208\ We also are
proposing a rule excluding from a non-U.S. person's de minimis
calculation security-based swap transactions entered into, in a dealing
capacity, with a foreign branch of a U.S. bank.\209\ In addition, we
are proposing a rule providing an exception from the aggregation
requirement, in the context of the security-based swap dealer
definition, for affiliated groups with a registered security-based swap
dealer.\210\ Finally, we are proposing interpretive guidance regarding
and requesting comment on the treatment of inter-affiliate and
guaranteed transactions in the cross-border context for purposes of the
de minimis threshold.\211\
---------------------------------------------------------------------------

    \206\ Proposed Rule 3a71-3(b) under the Exchange Act, as
discussed in Section III.B.4, infra.
    \207\ Proposed Rule 3a71-3(a)(7) under the Exchange Act, as
discussed in Section III.B.5, infra. The proposed definition of U.S.
person is used not only in the proposed rule regarding the
application of the de minimis threshold in the cross-border context,
but also in proposed rules discussed in subsequent sections of the
release.
    \208\ Proposed Rule 3a71-3(a)(5) under the Exchange Act, as
discussed in Section III.B.6, infra. Like the proposed definition of
U.S. person, the definition of ``transaction conducted within the
United States'' is used not only in the proposed rule regarding the
application of the de minimis threshold in the cross-border context,
but also in proposed rules discussed in subsequent sections of the
release. In general, under the Commission's proposal, transactions
conducted within the United States, as defined in the proposed rule,
would trigger certain transaction-level requirements in Title VII.
See Sections VIII-X, infra.
    \209\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act; see
also proposed Rule 3a71-3(a)(1) under the Exchange Act (defining
``foreign branch''), as discussed in Section III.B.7, infra.
    \210\ Proposed Rule 3a71-4 under the Exchange Act, as discussed
in Section III.B.8, infra.
    \211\ See Section III.B.8, infra.
---------------------------------------------------------------------------

2. Background Discussion Regarding the Registration of Foreign Brokers
and Dealers
    Under the Commission's traditional approach to the registration of
brokers and dealers under the Exchange Act, registration and other
requirements generally are triggered by a broker or dealer physically
operating in the United States, even if such activities are directed
only to non-U.S. persons outside the United States.\212\ The
Commission's territorial approach also generally requires broker-dealer
registration by foreign brokers or dealers that, from outside the
United States, induce or attempt to induce securities transactions by
persons within the United States.\213\ By contrast, the Commission has
not required foreign entities to register as broker-dealers if they
conduct their ``sales activities'' entirely outside the United
States.\214\
---------------------------------------------------------------------------

    \212\ See Rule 15a-6 Adopting Release, 54 FR 30016-17 (``As a
policy matter, the Commission now uses a territorial approach in
applying the broker-dealer registration requirements to the
international operations of broker-dealers. Under this approach, all
broker-dealers physically operating within the United States that
effect, induce, or attempt to induce any securities transactions
would be required to register as broker-dealers with the Commission,
even if these activities were directed only to foreign investors
outside the United States.''); see also Proposed Amendments to Rule
15a-6, 73 FR 39182 (``Under this [territorial] approach, broker-
dealers located outside the United States that induce or attempt to
induce securities transactions with persons in the United States are
required to register with the Commission, unless an exemption
applies'').
    \213\ See Rule 15a-6 Adopting Release, 54 FR 30016 (``[E]ven if
section 30(b) [of the Exchange Act] were read to incorporate a
territorial approach, the Commission does not believe that section
30(b) would exempt from broker-dealer registration the activities
suggested by the commenters. In particular, directed selling efforts
to U.S. investors in the United States hardly could be considered
activities not traversing the U.S. territorial limits. A broker-
dealer operating outside the physical boundaries of the United
States, but using the U.S. mails, wires, or telephone lines to trade
securities with U.S. persons located in this country, would not be,
in the words of section 30(b), `transact[ing] a business in
securities without the jurisdiction of the United States.' '').
    \214\ See Rule 15a-6 Adopting Release, 54 FR 30016 (citing
Exchange Act Release No. 25801, 53 FR 23646 n.9, and accompanying
text).
---------------------------------------------------------------------------

    In addition to our territorial approach to registration of broker-
dealers under the Exchange Act, the Commission traditionally has taken
an ``entity'' approach to the application of regulation to registered
broker-dealers.\215\ Pursuant to this approach, we have not limited the
application of the Exchange Act, and rules and regulations thereunder,
solely to the transactions of such entities that result in the
registration requirement. Instead, we have taken the position that a
registered broker-dealer is generally subject to registration and
consequent substantive requirements with respect to all of its
securities activity, including the activity of its branches and
offices, regardless of whether the activity occurs in the United States
or with U.S. persons.\216\ For instance, under this approach, if a
foreign broker-dealer is required to register with the Commission as a
result of conducting securities activity through a branch in the United
States, the registration requirements and the regulatory system
governing U.S. broker-dealers, including capital, margin, and
recordkeeping requirements, would apply to the entire foreign broker-
dealer entity, including its head office, not just the U.S.
branch.\217\ By contrast, the Commission

traditionally has not extended our regulatory oversight of broker-
dealers to the activities of their corporate parents, subsidiaries, or
other affiliates.\218\
---------------------------------------------------------------------------

    \215\ See Rule 15a-6 Adopting Release, 54 FR 30017 (``Also, the
Commission uses an entity approach with respect to registered
broker-dealers''); see also Proposed Amendments to Rule 15a-6, 73 FR
39182 (``Because this territorial approach applies on an entity
level, not a branch level, if a foreign broker-dealer establishes a
branch in the United States, broker-dealer registration requirements
would extend to the entire foreign broker-dealer entity.'').
    \216\ As noted above, this is consistent with the approach we
have taken in other contexts under the federal securities laws. See
note 158, supra.
    \217\ See Rule 15a-6 Adopting Release, 54 FR 30017.
    \218\ See id. (``If the foreign broker-dealer establishes an
affiliate in the United States, however, only the affiliate must be
registered as a broker-dealer; the foreign broker-dealer parent
would not be required to register.''); see also Proposed Amendments
to Rule 15a-6, 73 FR 39182. As discussed in Section III.B.89, infra,
this is consistent with the approach that the Commission is
proposing to take in the context of security-based swap dealer
registration.
---------------------------------------------------------------------------

    The Commission's approach to registration and regulation of foreign
broker-dealers thus extends Commission oversight to the global
activities of non-U.S.-based securities market intermediaries that are
registered broker-dealers because of their securities activities with
U.S. persons or that physically operate within the United States.\219\
In recognition of the internationalization of securities markets,
however, the Commission has used available exemptive authority to
tailor rules and regulations to the specific circumstances of foreign
markets and market participants. For example, we used our exemptive
authority under Section 15(a)(2) of the Exchange Act to adopt Rule 15a-
6 under the Exchange Act (``Rule 15a-6''),\220\ which provides limited
exemptions from registration to foreign brokers or dealers engaging in
securities transactions, or offering to engage in securities
transactions, within the United States or with U.S. persons, subject to
certain conditions.\221\
---------------------------------------------------------------------------

    \219\ See Rule 15a-6 Adopting Release, 54 FR 30017.
    \220\ 17 CFR 240.15a-6.
    \221\ See Rule 15a-6 Adopting Release, 54 FR 30013. As discussed
below, some commenters have suggested that the Commission use an
approach that would be modeled after the approach the Commission has
applied to foreign broker-dealers in Rule 15a-6 to address issues
related to cross-border security-based swap transactions and foreign
security-based swap dealers.
---------------------------------------------------------------------------

3. Comment Summary
(a) Market Participants
    As noted above, various commenters expressed concerns about the
``extraterritorial'' application of Title VII, and many of these
commenters expressed particular concerns about the possible
extraterritorial application of security-based swap dealer regulation
and registration requirements.\222\ In addition to concerns described
above regarding the application of Title VII to cross-border security-
based swap activity,\223\ commenters noted that the derivatives
industry functions in a global market and that new regulations pose the
potential to disrupt this market if they do not take into account the
nature of the industry and the appropriate extraterritorial reach of
the regulations.\224\ A consistent theme in many of these comment
letters was the importance of taking into account the principles of
international comity in limiting the extraterritorial reach of the
proposed rules, including entering into coordination agreements with
our foreign regulatory counterparts on the jurisdictional reach of U.S.
and foreign derivatives rules.\225\
---------------------------------------------------------------------------

    \222\ See e.g., ACP/AMF Letter, BaFin Letter, Cleary Letter IV,
Davis Polk Letter I, Davis Polk Letter II, IIB Letter, ISDA Letter
I, Japanese Banks Letter, JFSA Letter I, Newedge Letter, Rabobank
Letter, Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter I, SIFMA
Letter, Soci[eacute]t[eacute] G[eacute]n[eacute]rale Letter II,
Sullivan & Cromwell Letter, and TCX Letter.
    \223\ See Section II.B, supra.
    \224\ See Section II.B, supra; see also ISDA Letter I at 17
(urging that the new regulations be implemented so as to not distort
the current global derivatives market that functions ``within a
relatively level international playing field,'' and noting that to
address concerns related to competition and conflicts between
various regulators and regulations ``[i]t is imperative that U.S.
and non-U.S. regulators must coordinate requirements to avoid
unintended impediments to, and fragmentation of, the derivatives
markets'').
    \225\ See, e.g., Davis Polk Letter II at 12 (recommending that
in implementing Title VII regulations, ``the Commissions and the
Federal Reserve should also give effect to the general
jurisdictional limits specified in Sections 722 and 772 of the Dodd-
Frank Act in a manner that is consistent with the principle of
international comity evident in the statute and general legal
principles governing statutory construction pertaining to
extraterritorial and international matters''); Soci[eacute]t[eacute]
G[eacute]n[eacute]rale Letter I at 8, 11 (recommending U.S. and
foreign counterparts to work toward a memorandum of understanding on
the jurisdictional reach of U.S. and EU derivatives rules and
warning that without cooperation between the U.S. and foreign
regulators the result could be ``regulatory retaliation'' whereby
``the [s]waps market could devolve into regulatory chaos, thereby
increasing systemic risk''); Newedge Letter at 10-12 (expressing
concern that requiring foreign firms to register as swaps dealers or
major swap participants in the U.S. ``could result in foreign
regulators taking retaliatory action against U.S. firms engaging in
swap activities with non-U.S. persons domiciled within their
physical borders'' and that any regulation of foreign firms not
physically present in the United States that are already subject to
foreign regulations is unnecessary and would violate principles of
international comity).
---------------------------------------------------------------------------

    For example, a number of commenters recommended that the Commission
take a territorial approach in determining when a person engaging in
security-based swap dealing activity would be required to register with
the Commission as a security-based swap dealer, generally recommending
registration of an entity for its security-based swaps dealing activity
from within the United States or with regard to its dealings with U.S.
counterparties.\226\ Several commenters further suggested that a non-
U.S. person's de minimis amount of swap activities with U.S. persons
should not trigger security-based swap dealer registration.\227\ Some
commenters expressed the view that the Commission's cross-border
framework should seek to avoid imposing duplicative regulation and
unnecessary cost on entities that are already regulated in a foreign
jurisdiction.\228\ Some commenters have suggested that the Commission
use an approach that would be modeled after the approach the Commission
has applied to foreign broker-dealers in Rule 15a-6 to address issues
related to cross-border security-

based swap transactions and foreign security-based swap dealers.\229\
---------------------------------------------------------------------------

    \226\ See, e.g., Sullivan & Cromwell Letter at 11 (``The SEC
has, in the past, plainly stated that it uses a territorial approach
in applying broker-dealer registration requirements to international
operations. Only those broker-dealers who induce, or attempt to
induce, securities transactions with persons in the United States
would be required to register.''); MFA Letter II at 15-16
(commenting that the proposed security-based swap dealer and major
security-based swap participant rules do not appear to encompass
trading outside of the U.S. between non-U.S. entities or non-U.S.
affiliates of U.S. entities, and adding that the rules also should
not capture the non-U.S. affiliates of U.S. investment managers that
advise offshore funds, or non-U.S.-domiciled funds that have U.S.
investment managers but trade in swaps referencing non-U.S.
securities or on a non-U.S. market, considering that foreign
regulators will have jurisdiction over the non-U.S. activities of
U.S. entities); IIB Letter at 9 (urging the Commission to adopt an
interpretation that a ``reference to a U.S. underlier or reference
entity in a swap conducted outside the U.S. [is not] a sufficient
connection to the U.S. to subject either counterparty to U.S. Swap
Dealer registration requirements''); Newedge Letter at 2 (suggesting
that foreign entities engaging in swaps transactions ``with US
persons should not be required to register as swaps dealers or major
swaps participants in the US to the extent they are not physically
located in the US and are subject to a comparable regulatory
regime'').
    \227\ See, e.g., Sullivan & Cromwell Letter at 2, 8
(acknowledging that a foreign entity's swaps transactions with U.S.
persons in excess of the de minimis amount, ``if otherwise covered
by the definitions, [should] be required to register'' as a swaps
entity, but suggesting that swaps activities with U.S. persons
within ``any de minimis amount authorized by the final rules and in
transactions with their U.S. affiliates for purposes of risk
management'' should not trigger swaps entity registration); TCX
Letter at 6 (``We are concerned that, should TCX become subject to
swap dealer registration notwithstanding the arguments presented
above, the de minimis exception as proposed in the [Intermediary
Definitions Proposing Release] has been drafted too narrowly to be
of any practical use to TCXIM or to any other similarly-situated
offshore entity with limited US swaps business. In particular, we
urge the Commission to clarify that an offshore entity's swaps with
US counterparties, excluding non-US subsidiaries of US entities,
must be counted when determining if the de minimis exemption is
available.'').
    \228\ See, e.g., IIB Letter at 7 (suggesting that the
``Commissions should establish a framework for cross-border swap
activities that preserves and leverages the strengths of existing
market practices and home country supervision and regulation'' and
``avoid a framework that is duplicative, inefficient (for
supervisors and market participants) and would result in unrealistic
extraterritorial supervisory responsibilities for the Commissions
and potential fragmentation of the derivatives markets'').
    \229\ See, e.g., Davis Polk Letter I at 11 n.17 (``This model is
similar to the mode of operation permitted by Rule 15a-6 under the
Securities Exchange Act of 1934, pursuant to which foreign broker-
dealers interface with U.S. customers under arrangements with
affiliated or non-affiliated broker-dealers without themselves
registering as broker-dealers in the U.S.''); Cleary Letter IV at 22
(``Accordingly, as one alternative, we suggest that the Commissions
adopt an approach that is modeled on the Commissions' existing
regimes, permitting non-U.S. swap dealers to transact with U.S.
persons without registering in the U.S. if those transactions are
intermediated by a U.S.-registered swap dealer. This would be
consistent with the approach adopted by the SEC under Rule 15a-6 and
prior interpretative precedents with respect to non-U.S. securities
dealers.'').
---------------------------------------------------------------------------

    For purposes of analyzing the appropriate definition of U.S. person
in the security-based swap dealer context, several commenters suggested
that the Commission look to rules adopted under the Securities Act and
adopt a definition of U.S. person based on Regulation S under the
Securities Act (``Regulation S'').\230\ Some commenters stated the view
that under Regulation S, only affiliates or branches located within the
United States would be considered U.S. persons.\231\ Some commenters
argued that a foreign affiliate of a U.S. person and non-U.S. branches
of a U.S. bank should be treated as non-U.S. persons and, depending on
their dealing activity, not be required to register as security-based
swap dealers because such entities may not have direct and significant
connection with, or effect on, U.S. commerce.\232\ One commenter
further argued that a non-U.S. affiliate of a U.S. person, in its
insolvency, is subject to separate resolution from its parent, and thus
should be treated as a non-U.S. entity.\233\
---------------------------------------------------------------------------

    \230\ See 17 CFR 230.901(k). See, e.g., Cleary Letter IV at 2,
6-9; Davis Polk Letter I at note 6.
    \231\ See, e.g., Cleary Letter IV at 7 (stating that
``Regulation S does not include as a `U.S. person' the non-U.S.
branch or affiliate of a U.S. or non-U.S. person; only affiliates or
branches located in the U.S. are covered''); SIFMA Letter at 5
(stating that (``It is noteworthy that the Regulation S definition
of U.S. person does not include non-U.S. affiliates of U.S. persons
or non-U.S. branches of a U.S. bank. . . .'').
    \232\ See, e.g., Sullivan & Cromwell Letter at 2-3, 6-9 (arguing
against the extraterritorial application to foreign affiliates of a
U.S. person, stating that when a foreign entity's ``counterparty to
a transaction is a non-U.S. affiliate of a U.S. person,'' the
transactions are ``removed from the U.S. stream of commerce. As a
result, there is no `direct' effect on U.S. commerce and it is
highly unlikely that the transactions would have any significant
effect on U.S. commerce''); ISDA Letter I at 11 (stating that ``Non-
U.S. entities (including non-U.S. affiliates and branches of U.S.
banks) should not be required to register as Dealers where they are
conducting business with non-U.S. counterparties.'').
    \233\ See Cleary Letter IV at 7 (``The non-U.S. affiliate of a
U.S. person is, in its own insolvency or that of its parent,
typically subject to separate resolution from its parent and other
affiliates'').
---------------------------------------------------------------------------

    Several commenters stated that a foreign branch or office of a U.S.
person also should be treated as a non-U.S. person, despite the fact
that, as a few commenters acknowledged, foreign branches of U.S. banks
are not separate legal entities from their U.S. head office and
typically are not separately capitalized, although in some cases they
may be subject to certain local capital or reserve maintenance
requirements.\234\ Several commenters suggested that broker-dealer
registration, not security-based swap dealer registration, may be more
appropriate for a U.S. branch, agency, or affiliate that acts as an
agent of a non-U.S. person for security-based swaps transactions.\235\
---------------------------------------------------------------------------

    \234\ See, e.g., Cleary Letter IV at 7 (arguing that
``[a]lthough bank branches are not usually separately capitalized,''
they should not be considered U.S. persons because their operations
are subject to separate local licensing, examination, and books and
records requirements); SIFMA Letter I at 15 n.37 (``We acknowledge
that Title VII capital requirements cannot be applied at the branch-
level and, therefore, must be applied at the bank level.'');
Sullivan & Cromwell Letter at 16 (remarking that ``foreign branches
have long been allowed to engage in a wider range of activities than
are their U.S. head offices and have benefitted from the presumption
against applying U.S. law extraterritorially'' despite the fact that
``foreign branches of U.S. banks are not corporate entities separate
and apart from their bank parents'').
    \235\ See, e.g., IIB Letter at 10 (suggesting that a U.S.-based
person who acts as an agent for a non-U.S. person in soliciting or
negotiating security-based swap transactions with counterparties
located outside of the U.S. should register as a broker-dealer);
Rabobank Letter at 3 (recommending that U.S. affiliates who help to
arrange swaps transactions with U.S. persons should ``register as
futures commissions merchants or introducing brokers, broker-
dealers, or swap dealers depending upon their respective roles in
soliciting transactions, receiving customer margin, performing
delegated compliance functions, effecting transactions as an agent
on exchanges and swap execution facilities and in OTC markets, or
clearing customer transactions''); cf. Newedge Letter at 1-2
(asserting that broker-dealers and foreign entities subject to
comparable regulations who ``engage principally in customer
[security-based] swap facilitation activities'' should not be
subject to security-based swap dealer and major security-based swaps
participant registration requirements because they already are
``subject to stringent rules relating to capital, risk, margin and
other requirements by virtue of their registration status''; and
alternatively, suggesting that registrants who ``execute swaps
solely in response to customer orders and that hedge each such
transactions individually . . . should be exempt since, among other
things, their trading poses little or no risk to themselves, their
customers or the markets generally.'').
---------------------------------------------------------------------------

    Several commenters acknowledged concerns that persons may seek to
book transactions through non-U.S. branches or subsidiaries in an
effort to evade the requirements of Title VII.\236\ These commenters,
however, urged that the Commissions not seek to address the potential
for evasion through an overbroad definition of a security-based swap
dealer, noting that there are legitimate business reasons for
conducting security-based swap transactions with non-U.S. persons
through non-U.S. operations.\237\
---------------------------------------------------------------------------

    \236\ See, e.g., Sullivan & Cromwell Letter at 10 (``We
understand the concerns that the Commission may have that persons
would seek to book transactions through non-U.S. branches or
subsidiaries in order to evade the requirements of the CEA or
Exchange Act.'').
    \237\ See, e.g., Sullivan & Cromwell Letter at 9-10 (expressing
understanding for the Commissions' evasion concerns, but noting that
U.S. companies have legitimate business reasons for establishing
their non-U.S. operations, including requirements in some foreign
jurisdictions that only local banks and local branches of foreign
banks may engage in swap activities); Cleary Letter IV at 5-7
(noting legitimate business reasons for establishing non-U.S.
operations abroad, and stating that the Commissions ``should not
adopt an extraterritorial regulatory framework premised on the
assumption that activities conducted outside the U.S. will be
undertaken for the purpose of evasion'').
---------------------------------------------------------------------------

(b) Foreign Regulators
    Foreign regulators have reached out to the Commission through
correspondence and bilateral and multilateral discussions to better
understand the approach being considered by the Commission, to express
concern about the potential impact of potential approaches on their
markets, and to seek regulatory coordination.\238\ One of the principal
concerns of foreign regulators is that the Commission would require
foreign entities to register with the Commission and subject them to
regulatory requirements that are duplicative of, or potentially
conflict with, the requirements imposed by their home country or host
country.\239\ In their view, the Commission's application of Title VII
requirements to foreign entities in jurisdictions that commit to
developing or have developed similar OTC derivatives regulations would
fail to acknowledge, under general principles of international comity,
the effectiveness, suitability, and scope of foreign regulatory regimes
and place undue regulatory burdens on foreign

entities that conduct security-based swap business with U.S.
persons.\240\
---------------------------------------------------------------------------

    \238\ See, e.g., BaFIN Letter at 1-2 (``Close cooperation of our
respective authorities, accompanied by a Memorandum of
Understanding, might help to establish an adequate regulatory
environment for the swap activities of US and German entities and to
provide the confidence that the respective national legislation is
adequately recognized and complied with.'').
    \239\ See, e.g., JFSA Letter I at 1-2 (requesting that Japanese
financial institutions be exempted from ``Swap Dealer'' and ``Major
Swap Participant'' registration under the Dodd-Frank Act); BaFIN
Letter at 1 (``The obligations for foreign banks should be
proportionate and take into account equivalent requirements in their
home jurisdiction.''). See also ECB Letter at 2 (expressing concern
about the ``possible inconsistency between US and EU legislation
with respect to differing rules on exempting public international
institutions . . . from the clearing and reporting obligation.'').
    \240\ See Asian-Pacific Regulators Letter at 4.
---------------------------------------------------------------------------

    Such concerns from foreign regulators include comments that U.S.
regulators should not ask financial institutions domiciled in their
jurisdictions to register as security-based swap dealers because this
would create undesirable redundancies for those financial institutions
that are already regulated in the foreign jurisdiction.\241\ Certain
foreign regulators also argued that the Commission should not regulate
foreign subsidiaries of U.S. security-based swap dealers because these
entities would already be regulated by a foreign regulator.\242\ Some
foreign regulators expressed the expectation that the Commission would
limit the registration of foreign banks as security-based swap dealers
to operations conducting activities with U.S. counterparties or clients
and would not apply the registration and regulation requirements to
foreign banks as a whole.\243\
---------------------------------------------------------------------------

    \241\ See, e.g., JFSA Letter I at 1 (``If these institutions
were also to be regulated under US DFA framework, this will create
an undesirable and redundant effect on these Japanese
institutions.'').
    \242\ See, e.g., ACP/AMF Letter at 1-32 (``[W]e strongly support
. . . a mutual recognition regime built around an adequate and
balanced symmetrical system taking into account the home and the
host country regulatory regimes. Thus . . . we expect that [the
registration of non-resident entities] will be limited to activities
in relation with US counterparties and/or clients and will not
involve similar obligations to the financial organizations as a
whole. The obligations for non-resident entities should indeed be
proportionate and take into [account] equivalent requirements in
their home jurisdiction.'').
    \243\ See, e.g., BaFIN Letter at 1 (``Without questioning the
registration of foreign banks, I suppose that such registration will
be limited to activities in relation with US counterparties and/or
clients and will not involve similar obligations to foreign banks as
a whole'').
---------------------------------------------------------------------------

4. Application of the De Minimis Exception to Cross-Border Security-
Based Swap Dealing Activity
    The Commission recognizes the concerns raised by commenters
regarding the potential for imposing inconsistent or conflicting
requirements on security-based swap dealers with global operations, as
well as their desire that the Commission take into account the
principles of international comity when applying Title VII to cross-
border dealing activity. After considering the goals of the Dodd-Frank
Act and the scope of the provisions of Title VII covering security-
based swap dealers, in light of the global nature of the security-based
swap market, the various structures of dealing operations, and the
views of commenters, the Commission is proposing an approach to the
application of the Title VII registration requirement to cross-border
security-based swap dealing activity that focuses on whether dealing
conduct occurs with U.S. persons or otherwise occurs within the United
States.
    Specifically, as explained below, the Commission is proposing to
require a non-U.S. person engaged in security-based swap dealing
activity to register with the Commission as a security-based swap
dealer pursuant to Section 15F(a)(1) of the Exchange Act \244\ if the
notional amount of security-based swap transactions connected with its
dealing activity with U.S. persons (other than with foreign branches of
U.S. banks) \245\ or otherwise conducted within the United States \246\
exceeds the de minimis threshold in the security-based swap dealer
definition.\247\ A U.S. person engaged in security-based swap dealing
activity would be required to count all security-based swap
transactions connected with its dealing activity toward the de minimis
threshold, including transactions conducted through a foreign
branch.\248\
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    \244\ 15 U.S.C. 78o-10(a)(1).
    \245\ Proposed Rule 3a71-3(a)(7) under the Exchange Act
(defining ``U.S. person''), as discussed in Section III.B.5, infra;
proposed Rule 3a71-3(a)(1) under the Exchange Act (defining
``foreign branch''), as discussed in Section III.B.7, infra.
    \246\ Proposed Rule 3a71-3(a)(5) under the Exchange Act
(defining ``transaction conducted within the United States''), as
discussed in Section III.B.6, infra.
    \247\ Proposed Rule 3a71-3(b) under the Exchange Act; see also
17 CFR 240.3a71-2.
    \248\ See id.
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(a) Meaning of the Term ``Person'' in the Security-Based Swap Dealer
Definition
    As a preliminary matter, we note that, as the Commission discussed
in the Intermediary Definitions Adopting Release, the term ``person''
as used in the security-based swap dealer definition should be
interpreted to refer to a particular legal person.\249\ Accordingly, a
trading desk, department, office, branch, or other discrete business
unit that is not a separately organized legal person would not be
viewed as a security-based swap dealer (regardless of where located);
rather, the legal person of which it is a part would be the security-
based swap dealer.\250\ Similarly, the term ``person'' in the
Commission's rules implementing the de minimis exception should be
interpreted to refer to a particular legal person.\251\
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    \249\ See Intermediary Definitions Adopting Release, 77 FR
30624. Section 3(a)(9) of the Exchange Act defines ``person'' as ``a
natural person, company, government, or political subdivision,
agency, or instrumentality of a government.'' 15 U.S.C. 78c(a)(9);
see also proposed Rule 3a71-3(a)(7) under the Exchange Act (defining
``U.S. person''), as discussed in Section III.B.5, infra.
    \250\ This approach is consistent with the Commission's
discussion in the Intermediary Definitions Adopting Release
regarding the entity-level designation of security-based swap
dealers. 77 FR 30624. It also generally is consistent with the
Commission's traditional entity approach to the registration of
broker-dealers, as discussed in Section III.B.2, supra.
    \251\ See 17 CFR 240.3a71-2; proposed Rule 3a71-3(b) under the
Exchange Act.
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    Thus, the security-based swap dealer definition would apply to the
particular legal person performing the dealing activity, even if that
person's dealing activity is limited to a trading desk or discrete
business unit.\252\ The presumption is that a person who falls within
the security-based swap dealer definition is a dealer with regard to
all of its security-based swap activities.\253\ As a result, a legal
person with a branch, agency, or office that is engaged in dealing
activity in connection with transactions above the de minimis threshold
would be required to register as a security-based swap dealer, even if
the legal person's dealing activity were limited to such branch,
agency, or office. By contrast, each affiliate of a security-based swap
dealer would need to separately consider whether it falls within the de
minimis exception if that affiliate engages in security-based swap
dealing activity.\254\
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    \252\ Within an affiliated group of companies, only those legal
persons that engage in dealing activities will be designated as
dealers; that designation will not be imputed to other non-dealer
affiliates or to the group as a whole. A single affiliate group may
have multiple swap or security-based swap dealers. See Intermediary
Definitions Adopting Release, 77 FR 30624-25. But see Section
III.B.8, infra (discussing aggregation).
    \253\ The definition of security-based swap dealer provides that
a person may be designated as a security-based swap dealer for a
single type or class or category of security-based swaps or
activity, and not others. See Section 3(a)(71)(B) of the Exchange
Act, 15 U.S.C. 78c(71)(B); 17 CFR 240.3a71-1(c) (``A person that is
a security-based swap dealer in general shall be deemed to be a
security-based swap dealer with respect to each security-based swap
it enters into, regardless of the type, class, or category of the
security-based swap or the person's activities in connection with
the security-based swap, unless the Commission limits the person's
designation as a security-based swap dealer to specified types,
classes, or categories of security-based swaps or specified
activities of the person in connection with security-based
swaps.''). See note 588, infra.
    Although the Commission is not proposing to designate non-U.S.
persons as security-based swap dealers in a limited capacity, the
Commission's proposed approach would limit the application of
certain transaction-level requirements to the ``U.S. Business'' of
foreign security-based swap dealers. See Section III.C.4, infra.
    \254\ See Section III.B.8, infra (discussing inter-affiliate
transactions), and Section III.B.8, infra (discussing aggregation).
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(b) Proposed Rule
    We are proposing a rule identifying the types of security-based
swap transactions that should be included in

a person's calculation of the notional amount of security-based swap
transactions connected with dealing activity for purposes of
determining whether the de minimis exception excludes that dealer from
the security-based swap dealer definition.\255\ The proposed rule
confirms that all of a U.S. person's security-based swap transactions
conducted in a dealing capacity would count toward its de minimis
threshold, wherever those transactions are solicited, negotiated,
executed, or booked.\256\ Although we recognize that some commenters
have suggested that the Commission should not require U.S. persons to
include positions connected with dealing activity conducted through
foreign branches in calculating the amount of their dealing
activity,\257\ we are not proposing to adopt this approach. The
security-based swap dealing activity of a foreign branch is activity of
the U.S. legal person regardless of the role played by the foreign
branch or the location of the security-based swap dealing activity. We
believe that any dealing activity undertaken by a U.S. person occurs at
least in part within the United States and therefore warrants
application of Title VII, regardless of where particular dealing
activity in connection with the transactions is conducted.\258\ The
security-based swap dealing activity of a U.S. person creates risk to
the U.S. person and to the U.S. financial system, because the risk of
such transactions ultimately is borne by the U.S. person, even if the
transactions in connection with that dealing activity are conducted in
part outside the United States, and because the U.S. person is part of
the U.S. financial system.\259\ To achieve the purposes of Title VII,
including the reduction of systemic risk, we preliminarily believe that
U.S. persons that engage in security-based swap dealing activity
through foreign branches should be subject to the regulatory framework
for dealers established by Congress in Title VII, even if they deal
exclusively with non-U.S. persons.
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    \255\ Proposed Rule 3a71-3(b) under the Exchange Act. Appendix B
to this release contains a table that identifies whether a potential
security-based swap dealer would be required to count a transaction
with a specific type of counterparty toward its de minimis
threshold. The table in Appendix B is only a summary of the rules
and interpretations proposed in this release that is provided for
ease of reference; it does not supersede, and should be read in
conjunction with, the proposed rules and interpretations.
    \256\ Proposed Rule 3a71-3(b)(1)(i) under the Exchange Act. As
noted above, as used in this release, ``security-based swap
dealing,'' ``security-based swap dealing activity,'' ``dealing
activity,'' and related concepts have the meanings described in the
Intermediary Definitions Adopting Release, 77 FR 30596, unless
otherwise indicated in this release. Such dealing activity is
normally carried out through interactions with counterparties or
potential counterparties, which includes solicitation, negotiation,
or execution of a security-based swap.
    \257\ See, e.g., Sullivan and Cromwell Letter, at 9-11.
    \258\ See notes 231 and 234, supra. As noted in Section II.A.3
above, the security-based swap transactions of U.S. persons,
wherever entered into, give rise to ongoing obligations that may
affect the financial stability of the United States and thus present
the type of risk that Title VII was intended to address.
    \259\ These risk concerns may be greater for uncleared security-
based swap than for cleared security-based swaps where the U.S.
person would not retain the credit risk of its counterparty;
however, cleared security-based swaps still represent an importation
of risk into the U.S. financial system when entered into by U.S.
persons because in the context of cleared security-based swaps, the
U.S. persons would be exposed to the credit, financial, and
operational risks of the clearing agency.
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    By contrast, a non-U.S. person would be required to consider only
the security-based swap transactions connected with its dealing
activity with U.S. persons (other than foreign branches of U.S. banks)
\260\ or otherwise conducted within the United States \261\ for
purposes of the de minimis exception.\262\ Under this proposed
approach, a non-U.S. person would be required to calculate its
security-based swap position for purposes of the de minimis threshold
by adding together the notional amount of transactions connected with
dealing activity with U.S. persons (other than foreign branches of U.S.
banks) \263\ or otherwise conducted within the United States.\264\ As a
result, a foreign entity with a global security-based swap dealing
business, but whose transactions connected with its dealing activity
with U.S. persons (other than foreign branches of U.S. banks) or
otherwise conducted within the United States fall under the de minimis
threshold, would not fall within the security-based swap dealer
definition and, therefore, would not be required to register as a
security-based swap dealer.\265\
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    \260\ Proposed Rule 3a71-3(a)(7) under the Exchange Act
(defining ``U.S. person''), as discussed in Section III.B.5;
proposed Rule 3a71-3(a)(1) under the Exchange Act (defining
``foreign branch''), as discussed in Section III.B.7, infra.
    \261\ Proposed Rule 3a71-3(a)(5) under the Exchange Act
(defining ``transaction conducted within the United States''), as
discussed in Section III.B.6, infra. Proposed Rule 3a71-3(a)(9)
under the Exchange Act defines ``United States'' as ``the United
States of America, its territories and possessions, any States of
the United States, and the District of Columbia.'' The proposed
definition of ``United States'' is consistent with the definition of
that term in other contexts in the federal securities laws. See,
e.g., 17 CFR 230.902(l); 17 CFR 240.15a-6(b)(6).
    \262\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \263\ See Section III.B.7, infra (discussing the exception from
the de minimis threshold for transactions by foreign dealers with
foreign branches of U.S. banks).
    \264\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act. For
purposes of the de minimis threshold, the U.S. person-status of a
non-U.S. person's counterparty would be relevant only at the time of
a transaction that arises out of the non-U.S. person's dealing
activity. Any change in a counterparty's U.S. person status after
the transaction is executed would not affect that transaction's
treatment for purposes of the de minimis exception, though it would
affect the treatment of any subsequent dealing transactions with
that counterparty. See also Product Definitions Adopting Release, 77
FR 48286 (``If the material terms of a Title VII instrument are
amended or modified during its life based on an exercise of
discretion and not through predetermined criteria or a predetermined
self-executing formula, the Commissions view the amended or modified
Title VII instrument as a new Title VII instrument'').
    \265\ See 17 CFR 240.3a71-2(a). The Commission notes that, to
the extent that a non-U.S. person does not conduct dealing activity
within the United States or with U.S. persons (or to the extent that
the volume of positions connected with such dealing activity does
not exceed the de minimis threshold discussed below), it would not
be required to register with the Commission as a security-based swap
dealer under Section 15F(a)(1) of the Exchange Act regardless of the
volume of non-dealing security-based swap transactions it has within
the United States or with U.S. persons. See Intermediary Definitions
Adopting Release, 77 FR 30631. Such an entity still would be subject
to the major security-based swap participant thresholds with respect
to its non-dealing security-based swap transactions. However, once a
non-U.S. person's transactions with U.S. persons (other than foreign
branches of U.S. banks) or otherwise conducted within the United
States involve dealing activity that exceeds the de minimis
threshold, that person would be required to register as a security-
based swap dealer and would be subject to the statutory requirements
applicable to security-based swap dealers for all of its security-
based swap transactions. See Intermediary Definitions Adopting
Release, 77 FR 30645.
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    This approach to the de minimis exception for non-U.S. persons
engaged in cross-border dealing activity preliminarily appears to us to
focus appropriately on a non-U.S. person's security-based swap dealing
activity in the United States. In addition, this proposed approach,
when combined with our broader approach to the registration and
regulation of foreign security-based swap dealers, appears to us to
appropriately focus our oversight on those non-U.S. persons engaged in
security-based swap dealing activities that most directly impact the
U.S. security-based swap market and U.S. financial system and that,
therefore, warrant the application of the provisions of Title VII
covering security-based swap dealers.\266\
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    \266\ The Commission understands that entities such as foreign
central banks, international financial institutions, multilateral
development banks, and sovereign wealth funds (``SWFs'') (together,
``foreign public sector financial institutions'' or ``FPSFIs'')
rarely enter into security-based swap transactions in a dealing
capacity. As such, we believe that the proposed approach outlined in
this release would sufficiently address the dealer registration
concerns of these entities. The Commission is soliciting comment on
whether our proposal sufficiently addresses the concerns of FPSFIs
and whether our understanding of the security-based swap activity of
such entities is accurate. See also Section III.B.5(b)iv, infra
(discussing international organizations).

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    The Commission is not proposing, as some commenters have suggested,
an approach modeled on Rule 15a-6(a)(3), which would permit non-U.S.
persons to conduct security-based swap dealing activity with U.S.
persons without registering with the Commission if such dealing
activity were intermediated by a registered security-based swap
dealer.\267\ The Commission preliminarily believes that such an
approach would not address the risk to the U.S. financial system by
dealing activity of non-U.S. persons within the United States or with
U.S. persons. As a dealer, the non-U.S. person would be the party to
the security-based swap transaction and, therefore, the party that
bears the financial risk of such transaction and whose financial
integrity is of primary concern to the Commission. This concern is
heightened by the fact, noted above, that, unlike most other securities
transactions, security-based swap transactions give rise to ongoing
obligations between the transaction counterparties.\268\ Under the
alternative suggested, the important financial responsibility
requirements that Title VII imposes on security-based swap dealers
would not apply to the non-U.S. person with respect to that
transaction. Instead, the intermediating registered security-based swap
dealer would be subject to the financial responsibility rules with
respect to the transaction, but since it would not be a party to, and
would not bear the financial risk of, the security-based swap
transaction, it would not bear the ongoing financial risk of such
transaction. As a result, the financial responsibility requirements
imposed on the intermediating dealer would not address the dealing risk
posed by the non-U.S. person in this context.\269\
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    \267\ See note 229, supra.
    \268\ See Section II.A.3, supra.
    \269\ The Commission also is not proposing a dealer-to-dealer
exception modeled on Rule 15a-6(a)(4)(i) (providing that a foreign
broker or dealer shall be exempt from the registration requirements
of Section 15(a)(l) or 15B(a)(l) of the Exchange Act to the extent
that the foreign broker or dealer effects transactions in securities
with or for, or induces or attempts to induce the purchase or sale
of any security by ``[a] registered broker or dealer, whether the
registered broker or dealer is acting as principal for its own
account or as agent for others, or a bank acting in a broker or
dealer capacity as permitted by U.S. law'').
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Request for Comment
    The Commission requests comment on all aspects of the proposed rule
regarding the application of the de minimis exception to U.S. persons
and non-U.S. persons, including the following:
     Should the proposed rule limit the de minimis test to the
notional amount of a U.S. person's positions connected with its dealing
activity involving transactions with other U.S. persons or otherwise
conducted within the United States? For example, should the proposed
rule be altered to provide that U.S. banks would not include the
notional amount of transactions connected with the dealing activity of
their foreign branches in the de minimis calculation, rather than
counting these transactions against the de minimis threshold as
required under the proposed approach? Why or why not?
     Should the proposed rule require non-U.S. persons to count
transactions with the foreign branches of U.S. banks towards their de
minimis calculations? Why or why not?
     Should the proposed rule follow an approach modeled on
Rule 15a-6(a)(3), which would permit non-U.S. persons to conduct
security-based swap dealing activity within the United States without
registering with the Commission if those transactions were
intermediated by a registered U.S. security-based swap dealer? If so,
what compliance obligations, if any, should the unregistered non-U.S.