Initial costs                                             Ongoing costs
                                     -------------------------------------------------------------------------------------------------------------------
                                                     Per entity                                 Aggregate                   Per entity       Aggregate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Registered entity:
    Security-based swap dealer        $530,991................................  $12,743,784.............................          $2,797         $67,128
     registration.
    Security-based swap dealer        ........................................  ........................................       3,000,000      72,000,000
     capital requirement.
    Broker-dealer registration......  $301,400................................  $7,233,600..............................          54,800       1,315,200
    Broker-dealer capital             ........................................  ........................................       3,000,000      72,000,000
     requirement.
    Risk management control systems.  $525,333................................  $12,607,992.............................          71,000       1,704,000
    Applicable SBSD requirements....  $2,107,341..............................  $50,576,184.............................         520,735      12,497,640
   Recordkeeping:
         If registered        $530,935................................  $12,742,440.............................         101,353       2,432,472
         entity is a registered
         security-based swap dealer
         and registered broker-
         dealer or registered entity
         is a stand-alone registered
         broker-dealer.
         If registered        $243,376................................  $5,841,024..............................          61,140       1,467,360
         entity is a stand-alone
         registered SBSD.
         If registered        $187,388................................  $4,497,312..............................          44,405       1,065,720
         entity is a bank registered
         SBSD.
    Trading relationship              $3,150..................................  $75,600.................................           3,692          88,608
     documentation.
    Consent to service of process...  $423....................................  $10,152.................................  ..............  ..............
    Development of policies and       $4,230..................................  $101,520................................  ..............  ..............
     procedures for threshold
     compliance documentation.
    Receipt and maintenance of        ........................................  ........................................          21,996         527,904
     compliance documentation.
    Notice by registered entity.....  $212....................................  $5,088..................................  ..............  ..............
    Analysis of inter-dealer          $16,320.................................  $391,680................................          18,190         436,560
     activity.
Non-U.S. entity:
    Trading relationship              $3,150..................................  $75,600.................................           7,384         177,216
     documentation.
    Consent to service of process...  $423....................................  $10,152.................................  ..............  ..............
    Disclosure of limited Title VII   $30,598 and 100 hours...................  $734,352 and 2,400 hours................  ..............  ..............
     applicability.
    ``Listed jurisdiction''           $119,364................................  $358,092................................  ..............  ..............
     applications.
    Development of policies and       $4,230..................................  $101,520................................  ..............  ..............
     procedures for threshold
     compliance documentation.
    Creation and conveyance of        ........................................  ........................................          43,992       1,055,808
     compliance documentation.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    If a non-U.S. person or its affiliated group seeks to rely on the
exception using a registered security-based swap dealer, that person or
its affiliated group would incur the cost of registering one U.S.-based
entity as a security-based swap dealer (if there otherwise is not an
affiliated security-based swap dealer present).\462\ The Commission
estimates per entity initial costs of registering a security-based swap
dealer of approximately $530,991.\463\ In addition, the non-U.S. person
or its affiliated group would incur ongoing costs associated with its
registered security-based swap dealer of approximately $2,797.\464\
Based on the Commission's estimate that up to 24 \465\ persons might
avail themselves of the exception, the aggregate initial costs
associated with registering security-based swap dealers under the
exception would be approximately $12,743,784 and the aggregate ongoing
costs would be approximately $67,128.\466\ The U.S. person affiliate of
such a non-U.S. person or affiliated group would also be required to
meet minimum capital requirements as a registered security-based swap
dealer.\467\ At a minimum, the Commission estimates the ongoing cost of
this capital to be approximately $3 million \468\ per entity and $72
million in aggregate.\469\ To the extent that this capital is held in
liquid assets \470\ that generate a positive return to the registered
security-based swap dealer, that positive return could be used to
offset, at least in part, the ongoing cost of capital.
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    \461\ Certain cost estimates presented in this section differ
from those presented in the Proposing Release (see Proposing
Release, 84 FR at 24255-61). There are a number of reasons for such
differences. First, the Commission now adjusts for inflation through
June 2019, whereas in the Proposing Release, the Commission adjusted
for inflation through the end of 2018 (see note 458, supra). Second,
the Commission now uses data through the end of 2018 to estimate the
capital requirement for the registered entity, whereas in the
Proposing Release, the Commission used data through the first
quarter of 2018. Third, the Commission has revised the cost
estimates associated with the suitability condition to reflect (a)
the number of non-U.S. counterparties presented in Part VII.A.4 note
663, infra, and (b) modifications to the suitability condition as
discussed in Part II.C.2, supra, and Part VII.A.4, infra. Fourth,
the Commission has removed the costs associated with the proposed
portfolio reconciliation requirement, which the Commission is not
adopting. Fifth, the Commission has revised the cost associated with
the capital requirement for the registered entity if it is a
registered broker, in light of modifications discussed in Part
II.C.1, supra.
    \462\ This is a Title VII programmatic cost and is in addition
to other Title VII programmatic costs discussed in Part VI.B.1.b,
infra.
    \463\ This estimate incorporates quantifiable initial costs
presented in the Registration Adopting Release, 80 FR at 48990-95 &
49005-06, adjusted for inflation. Specifically, per entity initial
costs in 2019 dollars are estimated as $13,027 (filing Form SBSE) +
$13,289 (senior officer certification) + $449,700 (associated
natural person certifications) + $27,110 (associated entity person
certifications) + $27,865 (initial filing of Schedule F) = $530,991.
    \464\ This estimate incorporates quantifiable annual costs
presented in the Registration Adopting Release, 80 FR at 48990-95 &
49005-06, adjusted for inflation. Specifically, per entity ongoing
costs in 2019 dollars are estimated as $931 (amending Form SBSE) +
$1,505 (amending Schedule F) + $51 (retaining signature pages) +
$310 (filing withdrawal form) = $2,797.
    \465\ See Part VI.A.7, supra.
    \466\ Aggregate initial costs calculated as 24 x $530,991 =
$12,743,784. Aggregate ongoing costs calculated as 24 x $2,797 =
$67,128.
    \467\ A registered non-bank security-based swap dealer may be
subject to minimum fixed-dollar capital requirements of $20 million
or $1 billion in net capital and $100 million or $5 billion in
tentative net capital, depending in part on whether it is a stand-
alone security-based swap dealer or a security-based swap dealer
that is dually registered as a broker-dealer, and on whether it uses
models to compute deductions for market and credit risk. See
Capital, Margin, and Segregation Adopting Release, 84 FR at 43874-
76. Registered security-based swap dealers that have a prudential
regulator must comply with capital requirements that the prudential
regulators have prescribed. See Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (adopting capital
requirements for bank security-based swap dealers).
    \468\ This estimation assumes that the registered entity relies
on the limited exemption from broker registration, does not use
models to compute deductions for market or credit risk, and thus
must maintain a minimum net capital of $20 million. See Part II.C,
supra, and Capital, Margin, and Segregation Adopting Release, 84 FR
at 43875. The Commission estimated the cost of capital in two ways.
First, the time series of average return on equity for all U.S.
banks between the fourth quarter 1983 and the fourth quarter 2018
(see Federal Financial Institutions Examination Council (US), Return
on Average Equity for all U.S. Banks [USROE], retrieved from FRED,
Federal Reserve Bank of St. Louis on July 26, 2019, available at
https://fred.stlouisfed.org/series/USROE), are averaged to arrive at
an estimate of 11.28%. The cost of capital is calculated as 11.28% x
$20 million = $2.256 million or approximately $2.3 million. The
Commission believes that use of the historical return on equity for
U.S. banks adequately captures the cost of capital because of the 12
persons that were identified in the 2017 TIW data as persons that
potentially may use the exception, eight are banks and three have
bank affiliates. See Part VI.A.7, supra. To the extent that this
approach does not adequately capture the cost of capital of persons
that are not banks or have no bank affiliates, the Commission
supplements the estimation by also using the annual stock returns on
financial stocks to calculate the cost of capital. With this second
approach, the annual stock returns on a value-weighted portfolio of
financial stocks from 1983 to 2018 (see Professor Ken French's
website, available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and accessed on July 26, 2019) are
averaged to arrive at an estimate of 16.05%. The cost of capital is
calculated as 16.05% x $20 million = $3.21 million or approximately
$3.2 million. The final estimate of the cost of capital is the
average of $2.3 million and $3.2 million = (2.3 + 3.2)/2 = $2.75
million or approximately $3 million.
    \469\ Aggregate costs calculated as $3 million x 24 entities =
$72 million.
    \470\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879.
---------------------------------------------------------------------------

    If a non-U.S. person or its affiliated group seeks to rely on the
exception using a registered broker-dealer, that person or its
affiliated group would incur the cost of registering one entity as a
broker-dealer (if there otherwise is not an affiliated broker-dealer
present). The Commission estimates the per entity initial costs of
registering a broker-dealer to be approximately $301,400,\471\ and
estimates the per entity ongoing costs of meeting registration
requirements as a broker-dealer to be approximately $54,800 \472\ per
year. Based on the Commission's estimate that up to 24 \473\ persons
might avail themselves of the exception and assuming that these persons
choose to do so by using registered broker-dealers, the Commission
estimates the aggregate initial costs of broker-dealer registration to
be $7,233,600 \474\ and the aggregate
ongoing costs of meeting broker-dealer registration requirements to be
$1,315,200 \475\ per year. Non-U.S. persons meeting the conditions of
the exception by using a registered broker-dealer would additionally
incur the cost of complying with applicable requirements associated
with the registered broker-dealer status, including maintaining a
minimum level of net capital. The Commission estimates the ongoing cost
of this capital to be approximately $3 million \476\ per

entity. If the up to 24 persons that might use the exception choose to
do so by using registered broker-dealers, the estimated aggregate
ongoing cost of capital is approximately $72 million.\477\ To the
extent that this capital is held in liquid assets \478\ that generate a
positive return to the registered broker-dealer, that positive return
would offset, at least in part, the ongoing cost of capital.
---------------------------------------------------------------------------

    \471\ The Commission previously estimated that an entity would
incur costs of $275,000 to register as a broker-dealer and become a
member of a national securities association. See Crowdfunding,
Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71388, 71509
(Nov. 16, 2015) (``Regulation Crowdfunding Adopting Release'').
Adjusted for inflation, these costs are $301,400 in 2019 dollars.
    \472\ The Commission previously estimated that an entity would
incur ongoing annual costs of $50,000 to maintain broker-dealer
registration and membership of a national securities association.
See Regulation Crowdfunding Adopting Release, 80 FR at 71509.
Adjusted for inflation, these costs are $54,800 in 2019 dollars. The
estimation of ongoing annual costs is based on the assumption that
the entity would use existing staff to perform the functions of the
registered broker-dealer and would not incur incremental costs to
hire new staff. To the extent that the entity chooses to hire new
staff, the ongoing annual costs may be higher.
    \473\ See Part VI.A.7, supra.
    \474\ Aggregate broker-dealer registration costs calculated as
$301,400 x 24 entities = $7,233,600.
    \475\ Aggregate ongoing costs of meeting broker-dealer
registration requirements calculated as = $54,800 x 24 entities =
$1,315,200.
    \476\ This estimation assumes that the registered entity does
not use models to compute deductions for market or credit risk and
thus must maintain a minimum net capital of $20 million (see Part
II.C, supra). The Commission believes that the methodology for
estimating the cost of capital of a registered security-based swap
dealer is also appropriate for estimating the cost of capital of a
registered broker-dealer (see note 468, supra). Using the historical
return on equity for all U.S. banks, the Commission calculated the
cost of capital as 11.28% x $20 million = $2.256 million or
approximately $2.3 million. The Commission believes that use of the
historical return on equity for U.S. banks adequately captures the
cost of capital because of the 12 persons that were identified in
the 2017 TIW data as persons that potentially may use the exception,
eight are banks and three have bank affiliates. See Part VI.A.7,
supra. To the extent that this approach does not adequately capture
the cost of capital of persons that are not banks or have no bank
affiliates, the Commission supplements the estimation by also using
the annual stock returns on financial stocks to calculate the cost
of capital. With this second approach, the Commission calculated the
cost of capital as 16.05% x $20 million = $3.21 million or
approximately $3.2 million. The final estimate of the cost of
capital is the average of $2.3 million and $3.2 million = (2.3 +
3.2)/2 = $2.75 million or approximately $3 million.
    \477\ Aggregate costs calculated as $3 million x 24 entities =
$72 million.
    \478\ See Exchange Act Rule 15c3-1.
---------------------------------------------------------------------------

    To the extent that a non-U.S. person or its affiliated group seeks
to rely on the exception by using a registered broker-dealer that is
not approved to use models and is not dually registered as a security-
based swap dealer or an OTC derivatives dealer, such a non-U.S. person
or its affiliated group would incur costs to establish and maintain
risk management control systems as if the registered entity also were a
security-based swap dealer.\479\ The Commission estimates the per
entity initial costs of such risk management control systems to be
approximately $525,333,\480\ and estimates the per entity ongoing costs
of such risk management control systems to be approximately
$71,000.\481\ If the up to 24 persons that might use the exception
choose to do so by using registered broker-dealers that are not
approved to use models and are not dually registered as security-based
swap dealers or OTC derivatives dealers, the estimated aggregate
initial costs and ongoing costs would be approximately
$12,607,992,\482\ and $1,704,000,\483\ respectively.
---------------------------------------------------------------------------

    \479\ See Section II.C.1.b, supra.
    \480\ Per entity initial costs = 2,000/3 hours x $423/hour
national hourly rate an attorney + 2,000/3 hours x $202/hour
national hourly rate for a risk management specialist + 2,000/3
hours x $139/hour national hourly rate for an operations specialist
+ per entity hardware and software expenses of $16,000 = $525,333.33
or approximately $525,333. See Capital, Margin, and Segregation
Adopting Release, 84 FR at 43962 and Section VII.A.4.g, infra. The
per hour figures for an attorney, a risk management specialist, and
an operations specialist are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, as modified
by Commission staff to adjust for inflation and to account for an
1,800-hour work-year, and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead.
    \481\ Per entity ongoing costs = 250 hours x $202/hour national
hourly rate for a risk management specialist + per entity ongoing
cost of $20,500 = $71,000.
    \482\ Aggregate initial costs calculated as $525,333 x 24
entities = $12,607,992.
    \483\ Aggregate ongoing costs calculated as $71,000 x 24
entities = $1,704,000.
---------------------------------------------------------------------------

    To the extent that a non-U.S. person has an existing, registered
broker-dealer affiliate,\484\ and uses that affiliate to rely on the
conditional exception, the non-U.S. person would not incur costs
associated with registering a broker-dealer and the incremental
compliance cost would be limited to costs associated with complying
with the other conditions of the exception as discussed below.
---------------------------------------------------------------------------

    \484\ Analyses of 2017 TIW data indicate that of the six non-
U.S. persons that potentially may use the exception, four have
majority-owned registered broker-dealer affiliates. See Part VI.A.7,
supra.
---------------------------------------------------------------------------

    In addition to registering either as security-based swap dealers or
as broker-dealers, U.S. person affiliates of non-U.S. persons seeking
to rely on the exception would be required to comply with applicable
security-based swap dealer requirements, including those related to
disclosures of risks, characteristics, incentives, and conflicts of
interest, suitability,\485\ communications, and trade acknowledgment
and verification.\486\ The Commission, estimates initial costs
associated with these requirements of up to approximately $2,107,341
per entity,\487\ or up to $50,576,184 in aggregate,\488\ and ongoing
costs associated with these requirements of approximately $520,735 per
entity,\489\ or up to $12,497,640 in aggregate.\490\
---------------------------------------------------------------------------

    \485\ See note 461, supra, discussing, among other things, that
the cost estimate associated with the suitability condition has been
revised to reflect modifications to the suitability condition as
discussed in Part II.C.2, supra, and Part VII.A.4, infra.
    \486\ See Exchange Act Rule 3a71-3(d)(1)(ii)(B). The costs of
complying with applicable security-based swap dealer requirements
are Title VII programmatic costs and are in addition to other Title
VII programmatic costs discussed in Part VI.B.1.b, infra.
    \487\ This estimate incorporates quantifiable initial costs
presented in the Business Conduct Adopting Release, 81 FR at 30092-
93, 30111, 30117, 30126, and the Trade Acknowledgment and
Verification Adopting Release, 81 FR at 39839, adjusted for
inflation where applicable. Specifically, initial costs associated
with disclosures, suitability, communications, and trade
acknowledgment and verification in 2019 dollars are estimated as
$980,288 (disclosures) + $970,031 (suitability) + $18,034
(communications) + $138,988 (trade acknowledgment and verification)
= $2,107,341. The cost associated with disclosures has been adjusted
to account for the fact that the disclosures of clearing rights and
daily mark are not part of paragraph (d)(1)(ii)(B)(1) of Exchange
Act Rule 3a71-3.
    As discussed above, the Commission assumes that the compliance
costs incurred by the U.S. registered entity in connection with the
amendment would be passed on to the non-U.S.-person affiliate. To
the extent that the registered entity complies with the disclosure
condition by delegating to the non-U.S.-person affiliate the tasks
of delivering the required disclosures and creating (but not
maintaining) books and records relating to those disclosures as
required by Rule 3a71-3(d)(1) (iii)(B)(1) (see Part II.C.2, supra),
the cost associated with the disclosure condition and the cost
associated with Rule 3a71-3(d)(1) (iii)(B)(1) could be incurred
directly, at least in part, by the non-U.S.-person affiliate. The
Commission does not believe such delegation affects the estimation
of the costs associated with the disclosure condition and Rule 3a71-
3(d)(1) (iii)(B)(1). Further, to the extent that the registered
entity complies with the trade acknowledgment and verification
condition by delegating to the non-U.S. person-affiliate the tasks
of delivering the required trade acknowledgment or verification and
creating (but not maintaining) books and records relating to that
trade acknowledgment or verification as required by Rule 3a71-
3(d)(1) (iii)(B)(1) (see Part II.C.2, supra), the cost associated
with the trade acknowledgment and verification condition and the
cost associated with Rule 3a71-3(d)(1) (iii)(B)(1) could be incurred
directly, at least in part, by the non-U.S.-person affiliate. The
Commission does not believe such delegation affects the estimation
of the costs associated with the trade acknowledgment and
verification condition and Rule 3a71-3(d)(1)(iii)(B)(1).
    In estimating the cost associated with the trade acknowledgment
and verification condition, the Commission assumes that the
registered entity relies on the exemption from Rule 10b-10 (see
Exchange Act Rule 3a71-3(d)(5)) to the extent that the registered
entity is a registered broker and Rule 10b-10 applies to the
transaction that is subject to the exception. If such an entity does
not rely on the exemption from Rule 10b-10, the cost associated with
the trade acknowledgment and verification condition could be higher.
    \488\ Aggregate initial costs = Per entity initial costs of
$2,107,341 x 24 entities = $50,576,184.
    \489\ This estimate incorporates quantifiable ongoing costs
presented in the Business Conduct Adopting Release, 81 FR at 30092-
93, 30111, 30126, and the Trade Acknowledgment and Verification
Adopting Release, 81 FR at 39839, adjusted for inflation where
applicable. Specifically, ongoing costs associated with disclosures,
and trade acknowledgment and verification are estimated in 2019
dollars as $424,407 (disclosures) + $96,328 (trade acknowledgment
and verification) = $520,735. The cost associated with disclosures
has been adjusted to account for the fact that the disclosures of
clearing rights and daily mark are not part of paragraph
(d)(1)(ii)(B)(1) of Rule 3a71-3.
    \490\ Aggregate ongoing costs = Per entity ongoing costs of
$520,735 x 24 entities = $12,497,640.
---------------------------------------------------------------------------

    If the registered entity is a registered stand-alone security-based
swap dealer, it also would be responsible for creating and maintaining
books and records related to the transactions subject to the exception
that are required, as applicable, by Exchange Act Rules 18a-5 and 18a-
6, including any books and records requirements relating to the
provisions specified in paragraph (d)(1)(iii)(B) of Rule 3a71-3. The
Commission estimates the initial costs associated with Exchange Act
Rules 18a-5 and 18a-6 to be approximately $243,376 per entity,\491\ or
up to

$5,841,024 in aggregate,\492\ and ongoing costs associated with these
rules of approximately $61,140 per entity,\493\ or up to $1,467,360 in
aggregate.\494\ The discussion in Part VI.A.7 above suggests that a
number of the persons that may make use of the exception likely would
be banks.\495\ In light of this finding, the Commission also presents
cost estimates associated with Exchange Act Rules 18a-5 and 18a-6 under
the assumption that the registered security-based swap dealer is a bank
registered security-based swap dealer. The Commission estimates the
initial costs associated with these rules to be approximately $187,388
per entity,\496\ or up to $4,497,312 in aggregate,\497\ and ongoing
costs associated with these rules of approximately $44,405 per
entity,\498\ or up to $1,065,720 in aggregate.\499\
---------------------------------------------------------------------------

    \491\ The per entity initial costs associated with Exchange Act
Rule 18a-5 (assuming that the stand-alone registered security-based
swap dealer does not have a prudential regulator and is not an ANC
stand-alone registered security-based swap dealer) = 320 hours x
$315/hour national hourly rate for a compliance manager + per entity
external costs of $1,000 = $101,8000. See Recordkeeping and
Reporting Adopting Release, 84 FR at 68609-11 for burden hours and
external costs. The $315 per hour figure for a compliance manager is
from SIFMA's Management and Professional Earnings in the Securities
Industry--2013, as modified by Commission staff to adjust for
inflation and to account for an 1,800-hour work-year, and multiplied
by 5.35 to account for bonuses, firm size, employee benefits, and
overhead.
    The per entity initial costs associated with Exchange Act Rule
18a-6 (assuming that the stand-alone registered security-based swap
dealer does not have a prudential regulator and is not an ANC stand-
alone registered security-based swap dealer) = 408 hours x $347/hour
national hourly rate for a senior database administrator = $141,576.
See Recordkeeping and Reporting Adopting Release, 84 FR at 68611-14
for burden hours. The $347 per hour figure for a senior database
administrator is from SIFMA's Management and Professional Earnings
in the Securities Industry--2013, as modified by Commission staff to
adjust for inflation and to account for an 1,800-hour work-year, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    The per entity initial costs associated with Exchange Act Rules
18a-5 and 18a-6 = $101,800 + 141,576 = $243,376.
    \492\ Aggregate initial costs = Per entity initial costs of
$243,376 x 24 entities = $5,841,024.
    \493\ The per entity ongoing costs associated with Exchange Act
Rule 18a-5 (assuming that the stand-alone registered security-based
swap dealer does not have a prudential regulator and is not an ANC
stand-alone registered security-based swap dealer) = 400 hours x
$71/hour national hourly rate for a compliance clerk + per entity
external costs of $4,650 = $33,050. See Recordkeeping and Reporting
Adopting Release, 84 FR at 68609-11 for burden hours and external
costs. The $71 per hour figure for a compliance clerk is from
SIFMA's Office Salaries in the Securities Industry (Oct. 2013), as
modified by Commission staff to adjust for inflation and to account
for an 1,800-hour work-year, and multiplied by 2.93 to account for
bonuses, firm size, employee benefits, and overhead.
    The per entity ongoing costs associated with Exchange Act Rule
18a-6 (assuming that the stand-alone registered security-based swap
dealer does not have a prudential regulator and is not an ANC stand-
alone registered security-based swap dealer) = 310 hours x $71/hour
national hourly rate for a compliance clerk + per entity external
costs of $6,080 = $28,090. See Recordkeeping and Reporting Adopting
Release, 84 FR at 68611-14 for burden hours and external costs.
    The per entity ongoing costs associated with Exchange Act Rules
18a-5 and 18a-6 = $33,050 + 28,090 = $61,140.
    \494\ Aggregate ongoing costs = Per entity ongoing costs of
$61,140 x 24 entities = $1,467,360.
    \495\ See Part VI.A.7, supra, stating that of the 12 persons
identified in 2017 TIW data as potential users of the exception,
eight are banks.
    \496\ The per entity initial costs associated with Exchange Act
Rule 18a-5 (assuming that the registered security-based swap dealer
has a prudential regulator) = 260 hours x $315/hour national hourly
rate for a compliance manager = $81,900. See Recordkeeping and
Reporting Adopting Release, 84 FR at 68609-11 for burden hours. See
note 491, supra, for a derivation of the national hourly rate for a
compliance manager.
    The per entity initial costs associated with Exchange Act Rule
18a-6 (assuming that the registered security-based swap dealer has a
prudential regulator) = 304 hours x $347/hour national hourly rate
for a senior database administrator = $105,488. See Recordkeeping
and Reporting Adopting Release, 84 FR at 68611-14 for burden hours.
See note 491, supra, for a derivation of the national hourly rate
for a senior database administrator.
    The per entity initial costs associated with Exchange Act Rules
18a-5 and 18a-6 = $81,900 + $105,488 = $187,388.
    \497\ Aggregate initial costs = Per entity initial costs of
$187,388 x 24 entities = $4,497,312.
    \498\ The per entity ongoing costs associated with Exchange Act
Rule 18a-5 (assuming that the registered security-based swap dealer
has a prudential regulator) = 325 hours x $71/hour national hourly
rate for a compliance clerk = $23,075. See Recordkeeping and
Reporting Adopting Release, 84 FR at 68609-11. See note 493, supra,
for a derivation of the national hourly rate for a compliance clerk.
    The per entity ongoing costs associated with Exchange Act Rule
18a-6 (assuming that the registered security-based swap dealer has a
prudential regulator) = 230 hours x $71/hour national hourly rate
for a compliance clerk + per entity external costs of $5,000 =
$21,330. See Recordkeeping and Reporting Adopting Release, 84 FR at
68611-14 for burden hours and external costs.
    The per entity ongoing costs associated with Exchange Act Rules
18a-5 and 18a-6 = $23,075 + 21,330 = $44,405.
    \499\ Aggregate ongoing costs = Per entity ongoing costs of
$44,405 x 24 entities = $1,065,720.
---------------------------------------------------------------------------

    If the registered entity is a registered security-based swap dealer
and a registered broker-dealer, or if the registered entity is a stand-
alone registered broker-dealer, then it would need to comply with
Exchange Act Rules 17a-3 and 17a-4, including any books and records
requirements relating to the provisions specified in paragraph
(d)(1)(iii)(B) of Rule 3a71-3. The Commission estimates the initial
costs associated with Exchange Act Rules

17a-3 and 17a-4 to be approximately $530,935 per entity,\500\ or up to
$12,742,440 in aggregate,\501\ and ongoing costs associated with these
rules of approximately $101,353 per entity,\502\ or up to $2,432,472 in
aggregate.\503\
---------------------------------------------------------------------------

    \500\ The Commission estimates these costs in two parts: (1)
Costs associated with the SBS requirements of Exchange Act Rules
17a-3 and 17a-4, i.e., recordkeeping requirements mandated under the
Dodd-Frank Act with respect to broker-dealer SBSDs that were adopted
in the Recordkeeping and Reporting Adopting Release and (2) costs
associated with the non-SBS requirements of Exchange Act Rules 17a-3
and 17a-4.
    The per entity initial costs associated with the SBS
requirements of Exchange Act Rule 17a-3 (assuming the entity is not
an ANC broker-dealer) = 150 hours x $315/hour national hourly rate
for a compliance manager = $47,250. See Recordkeeping and Reporting
Adopting Release, 84 FR at 68609-11. See note 491, supra, for a
derivation of the national hourly rate for a compliance manager.
    To estimate the per entity initial costs associated with the
non-SBS requirements of Exchange Act Rule 17a-3, the Commission
assumes these costs are proportional to the per entity ongoing costs
associated with the non-SBS requirements of Exchange Act Rule 17a-3.
Further, the Commission assumes that this proportion is equal to the
proportion of per entity initial costs to per entity ongoing costs
associated with the SBS requirements of Exchange Act Rule 17a-3. As
discussed in note 502, infra, the Commission estimates the per
entity ongoing costs associated with the SBS requirements of
Exchange Act Rule 17a-3 as $10,082. The proportion of per entity
initial costs to per entity ongoing costs associated with the SBS
requirements of Exchange Act Rule 17a-3 is $47,250/$10,082 or
approximately 4.7. The per entity initial costs associated with the
non-SBS requirements of Exchange Act Rule 17a-3 is estimated as 4.7
x $59,186 (per entity ongoing costs associated with non-SBS
requirements of Exchange Act Rule 17a-3, see note 502, infra) =
$278,174.20 or approximately $278,174.
    The per entity initial costs associated with the SBS
requirements of Exchange Act Rule 17a-4 (assuming the entity is not
an ANC broker-dealer) = 156 hours x $347/hour national hourly rate
for a senior database administrator = $54,132. See Recordkeeping and
Reporting Adopting Release, 84 FR at 68611-14. See note 491, supra,
for a derivation of the national hourly rate for a senior database
administrator.
    To estimate the per entity initial costs associated with the
non-SBS requirements of Exchange Act Rule 17a-4, the Commission
assumes these costs are proportional to the per entity ongoing costs
associated with non-SBS requirements of Exchange Act Rule 17a-4.
Further, the Commission assumes that this proportion is equal to the
proportion of per entity initial costs to per entity ongoing costs
associated with SBS requirements of Exchange Act Rule 17a-4. As
discussed in note 502, infra, the Commission estimates the per
entity ongoing costs associated with the SBS requirements of
Exchange Act Rule 17a-4 as $8,432. The proportion of per entity
initial costs to per entity ongoing costs associated with SBS
requirements of Exchange Act Rule 17a-4 is $54,132/$8,432 or
approximately 6.4. The per entity initial costs associated with non-
SBS requirements of Exchange Act Rule 17a-4 is estimated as 6.4 x
$23,653 (per entity ongoing costs associated with non-SBS
requirements of Exchange Act Rule 17a-4, see note 502, infra) =
$151,379.20.
    The per entity initial costs associated with Exchange Act Rules
17a-3 and 17a-4 = $47,250 + $278,174.20 + $54,132 + $151,379.20 =
$530,935.40 or approximately $530,935.
    \501\ Aggregate initial costs = Per entity initial costs of
$530,935 x 24 entities = $12,742,440.
    \502\ The Commission estimates these costs in two parts: (1)
Costs associated with the SBS requirements of Exchange Act Rules
17a-3 and 17a-4, i.e., recordkeeping requirements mandated under the
Dodd-Frank Act with respect to broker-dealer SBSDs that were adopted
in the Recordkeeping and Reporting Adopting Release and (2) costs
associated with the non-SBS requirements of Exchange Act Rules 17a-3
and 17a-4.
    The per entity ongoing costs associated with the non-SBS
requirements of Exchange Act Rule 17a-3 = 673.40 hours x $71/hour
national hourly rate for a compliance clerk + per entity external
costs of $11,374.15 in 2019 dollars = $59,185.55, or approximately
$59,186. Per entity ongoing burden hours = total burden hours of
2,763,612/4,104 broker-dealer respondents = 673.40 hours. See U.S.
Securities and Exchange Commission, ``Supporting Statement for the
Paperwork Reduction Act Information Collection Submission for Rule
17a-3'' (Mar. 9, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=72125401. See note 493, supra, for a
derivation of the national hourly rate for a compliance clerk.
    The per entity ongoing costs associated with the SBS
requirements of Exchange Act Rule 17a-3 (assuming the entity is not
an ANC broker-dealer) = 142 hours x $71/hour national hourly rate
for a compliance clerk = $10,082 (See Recordkeeping and Reporting
Adopting Release, 84 FR at 68609-11).
    The per entity ongoing costs associated with the non-SBS
requirements of Exchange Act Rule 17a-4 = 257 hours x $71/hour
national hourly rate for a compliance clerk + per entity external
costs of $5,406 in 2019 dollars = $23,653. See U.S. Securities and
Exchange Commission, ``Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-4''
(Oct. 19, 2016), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68823501.
    The per entity ongoing costs associated with the SBS
requirements of Exchange Act Rule17a-4 (assuming the entity is not
an ANC broker-dealer) = 72 hours x $71/hour national hourly rate for
a compliance clerk + per entity external costs of $3,320 = $8,432
(See Recordkeeping and Reporting Adopting Release, 84 FR at 68611-
14).
    The total per entity ongoing costs = $59,186 + $10,082 + $23,653
+ $8,432 = $101,353.
    \503\ Aggregate ongoing costs = Per entity ongoing costs of
$101,353 x 24 entities = $2,432,472.
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    The registered entity also must obtain from the non-U.S. person
relying on the exception, and maintain for not less than three years
following the ``arranging, negotiating, or executing'' activity
pursuant to the exception, the first two years in an easily accessible
place, documentation encompassing all terms governing the trading
relationship between the non-U.S. person and its counterparty relating
to the transactions subject to this exception, including, without
limitation, terms addressing payment obligations, netting of payments,
events of default or other termination events, calculation and netting
of obligations upon termination, transfer of rights and obligations,
allocation of any applicable regulatory reporting obligations,
governing law, valuation, and dispute resolution.\504\ The Commission
believes that both the registered entity and its non-U.S. affiliate
will incur costs to comply with this condition.\505\ However as
discussed above, the Commission believes that the costs incurred by the
registered entity would be passed on to the non-U.S. affiliate. For
registered entities, the Commission estimates the initial costs
associated with this condition to be approximately $3,150 per
registered entity,\506\ or up to $75,600 in aggregate,\507\ and ongoing
costs associated with this condition of approximately $3,692 per
registered entity,\508\ or up to $88,608 in aggregate.\509\ For non-
U.S. entities, the Commission estimates the initial costs associated
with this condition to be approximately $3,150 per non-U.S.
entity,\510\ or up to $75,600 in aggregate,\511\ and ongoing costs
associated with this condition of approximately $7,384 per non-U.S.
entity,\512\ or up to $177,216 in aggregate.\513\
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    \504\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(2).
    \505\ See Part VII.A.4.d, infra.
    \506\ As discussed in Part VII.A.4.d, infra, the condition
imposes an initial burden of 20 hours. The Commission assumes that
the burden will be allocated equally between the registered entity
and the non-U.S. entity. Therefore, a registered entity will incur
initial costs associated with a burden of 10 hours = 10 hours x
$315/hour national hourly rate for a compliance manager = $3,150.
See note 491, supra, for a derivation of the national hourly rate
for a compliance manager.
    \507\ Aggregate initial costs = Per entity initial costs of
$3,150 x 24 entities = $75,600.
    \508\ Per entity ongoing costs = 1 hour x 52 weeks x $71/hour
national hourly rate for a compliance clerk= $3,692. See note 493,
supra, for a derivation of the national hourly rate for a compliance
clerk.
    \509\ Aggregate ongoing costs = Per entity ongoing costs of
$3,692 x 24 entities = $88,608.
    \510\ As discussed in note 506, supra, a non-U.S. entity will
incur initial costs associated with a burden of 10 hours = 10 hours
x $315/hour national hourly rate for a compliance manager = $3,150.
See note 491, supra, for a derivation of the national hourly rate
for a compliance manager.
    \511\ Aggregate initial costs = Per entity initial costs of
$3,150 x 24 entities = $75,600.
    \512\ Per entity ongoing costs = 2 hours x 52 weeks x $71/hour
national hourly rate for a compliance clerk = $7,384. See note 493,
supra, for a derivation of the national hourly rate for a compliance
clerk.
    \513\ Aggregate ongoing costs = Per entity ongoing costs of
$7,384 x 24 entities = $177,216.
---------------------------------------------------------------------------

    The registered entity also would be responsible for obtaining from
the non-U.S. person relying on this exception, and maintaining for not
less than three years following the ``arranging, negotiating, or
executing'' activity pursuant to the exception, the first two years in
an easily accessible place, written consent to service of process for
any civil action brought by or proceeding before the Commission,
providing that process may be served on the non-U.S. person by service
on the registered entity in the manner set forth in the registered
entity's current Form

BD, SBSE, SBSE-A, or SBSE-BD, as applicable.\514\ The Commission
believes that both the registered entity and its non-U.S. affiliate
will incur one-time costs to comply with this condition.\515\ For
registered entities, the Commission estimates the one-time costs
associated with this condition to be approximately $423 per registered
entity,\516\ or up to $10,152 in aggregate.\517\ For non-U.S. entities,
the Commission estimates the one-time costs associated with this
condition to be approximately $423 per non-U.S. entity,\518\ or up to
$10,152 in aggregate.\519\ To the extent both parties agree to use an
industry-standard consent provision,\520\ these costs may be limited.
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    \514\ See Exchange Act Rule 3a71-3(d)(1)(iii)(B)(3).
    \515\ See Part VII.A.4.e, infra. The Commission assumes that the
burden will be allocated equally between the registered entity and
the non-U.S. entity. The burden associated with the registered
entity's maintenance of records related to the consent to service
condition are included in the Commission's estimate of the burden
associated with the registered entity's maintenance of records
related to the recordkeeping provisions.
    \516\ Per entity initial costs = 1 hour x $423/hour for national
hourly rate for an attorney = $423. The hourly cost figure is based
upon data from SIFMA's Management and Professional Earnings in the
Securities Industry--2013 (modified by the Commission staff to
adjust for inflation and to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead).
    \517\ Aggregate initial costs = Per entity initial costs of $423
x 24 entities = $10,152.
    \518\ See note 516, supra.
    \519\ See note 517, supra.
    \520\ See Part VII.A.4.e, infra.
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    Although costly, the Commission believes that the conditions
associated with the exception afford appropriate counterparty
protections under Title VII and the Commission has considered the
benefits of these specific Rule provisions in prior Commission
releases.\521\ In the context of the exception, these conditions would
benefit non-U.S. counterparties. Moreover, the registered entity would
be required to notify non-U.S. counterparties, in connection with each
transaction covered by the exception, that the non-U.S. person is not
registered as a security-based swap dealer and that certain Exchange
Act provisions or rules do not apply to the transaction.\522\ The final
rules require the registered entity to provide the notice
contemporaneously with, and in the same manner as, the arranging,
negotiating, or executing activity at issue. The final rules also
provide that, during a period in which the counterparty is not a
customer \523\ of the registered entity or a counterparty to a
security-based swap with the registered entity, the notice need only be
provided contemporaneously with, and in the same manner as, the first
arranging, negotiating, or executing activity with that counterparty,
rather than with each such activity during the period in which the
counterparty is not such a customer or counterparty. Because this
single notice is permitted only during a period in which the
counterparty is not a customer of the registered entity or a
counterparty to a security-based swap with the registered entity, the
final rules would require the registered entity to resume providing the
notice contemporaneously with, and in the same manner as, each
arranging, negotiating, or executing activity at issue if the
counterparty later becomes a customer of the registered entity or a
counterparty to a security-based swap with the registered entity. The
Commission believes that non-U.S. persons would incur an upfront cost
of $734,352 and 2,400 hours \524\ to develop appropriate disclosures,
but that non-U.S. persons using the exception would integrate these
disclosures into existing trading systems so that the ongoing costs of
delivering these disclosures would be insubstantial. Furthermore,
disclosures are only required when the identity of the counterparty is
known to the registered entity, so anonymous transactions would not be
subject to this requirement.\525\
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    \521\ See Business Conduct Adopting Release; Trade
Acknowledgment and Verification Adopting Release; and Recordkeeping
and Reporting Adopting Release.
    \522\ See Exchange Act Rule 3a71-3(d)(1)(iv).
    \523\ The term ``customer'' is defined consistent with the
definition of the term in Rule 15c3-3, the customer protection rule
that applies to brokers and dealers. See Exchange Act Rule 15c3-
3(a)(1).
    \524\ See Part VII.A.4.a and note 653, infra, stating that each
non-U.S. person would spend 100 hours and incur approximate costs of
$30,598 in 2019 dollars to develop policies and procedures to help
ensure that appropriate disclosures are provided. The aggregate
upfront costs are = $30,598 x 24 entities = $734,352. The aggregate
burden hours are = 100 x 24 entities = 2,400 hours. These cost
estimates are based on the assumption that none of the non-U.S.
persons would use the alternative means of satisfying the condition
(i.e., single disclosure) (see Part VII.A.4.a, infra). To the extent
that non-U.S. persons rely on single disclosure as a means of
satisfying the condition, the costs associated with the condition
could be reduced.
    \525\ See Proposing Release, 84 FR at 24224 n.149, for
circumstances in which the registered entity engaged would not know
the identity of the counterparty.
---------------------------------------------------------------------------

    These required notices would benefit non-U.S. counterparties by
informing them of the regulatory treatment of transactions under the
exception. To the extent that non-U.S. counterparties value elements of
the Title VII regulatory framework that do not apply to transactions
under the exception, they may attempt to negotiate more favorable
prices to compensate themselves for the additional risks they may
perceive. Alternatively, non-U.S. counterparties that prefer
transactions fully covered by the Commission's security-based swap
regulatory framework could search for a registered security-based swap
dealer willing to transact with all Title VII protections in place.
    The final rules include a cap of $50 billion on the aggregate gross
notional value of covered inter-dealer security-based swap positions
that a registered entity may support on behalf of its non-U.S. person
affiliates that choose to rely on the conditional exception. To comply
with this provision, registered entities will develop policies and
procedures for threshold compliance documentation at a one-time cost of
$4,230 per registered entity,\526\ or $101,520 in aggregate.\527\
Registered entities will further incur ongoing costs associated with
receipt and maintenance of compliance documentation received from non-
U.S. persons.\528\ The Commission estimates annual costs associated
with receipt and maintenance of compliance documentation of $21,996 per
registered entity,\529\ or $527,904 in aggregate.\530\ Use of the
exception further requires the registered entity to file a notice with
the Commission that the registered entity's associated persons will be
used in connection with the exception. The Commission estimates that
preparation and filing of such notice would entail initial costs of
approximately $212 per registered entity,\531\ or $5,088 in

aggregate.\532\ Finally, registered entities that support ANE activity
on behalf of non-U.S. person affiliates may choose to develop systems
to determine whether their covered inter-dealer positions exceed the
$50 billion cap. The Commission estimates such systems or modifications
to existing systems could cost a registered entity approximately
$16,320 in upfront costs,\533\ or $391,680 in aggregate.\534\ Periodic
assessment of positions against the $50 billion cap could cost an
additional $18,190 per registered entity on an annual basis,\535\ or
$436,560 in aggregate.\536\
---------------------------------------------------------------------------

    \526\ Per entity initial costs = 10 hour x $423/hour for
national hourly rate for an attorney = $4,230. The hourly cost
figure is based upon data from SIFMA's Management and Professional
Earnings in the Securities Industry--2013 (modified by the
Commission staff to adjust for inflation and to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead).
    \527\ Aggregate initial costs = Per entity initial costs of
$4,230 x 24 entities = $101,520.
    \528\ The registered entities are required to maintain such
documentation for not less than three years following the
``arranging, negotiating, or executing'' activity pursuant to the
exception, the first two years in an easily accessible place. See
Rule 3a71-3(d)(1)(iii)(B)(2).
    \529\ Per entity annual cost = 52 hour x $423/hour for national
hourly rate for an attorney = $21,996. The hourly cost figure is
based upon data from SIFMA's Management and Professional Earnings in
the Securities Industry--2013 (modified by the Commission staff to
adjust for inflation and to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead).
    \530\ Aggregate annual costs = Per entity annual costs of
$21,996 x 24 entities = $527,904.
    \531\ Per entity initial costs = 0.5 hour x $423/hour for
national hourly rate for an attorney = $211.50 or approximately
$212. The hourly cost figure is based upon data from SIFMA's
Management and Professional Earnings in the Securities Industry--
2013 (modified by the Commission staff to adjust for inflation and
to account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead).
See Section VII.A.4.h, infra.
    \532\ Aggregate initial costs = Per entity initial costs of $212
x 24 entities = $5,088.
    \533\ Estimate based on prior Commission estimates of the costs
of systems non-U.S. persons might implement to determine whether
their dealing transactions exceed the de minimis thresholds, and
adjusted for inflation to 2019 dollars. See Cross-Border Adopting
Release, 79 FR at 47332. These initial systems costs would be lower
for registered entities with systems already in place to assess
whether their security-based swap transaction activity exceeds the
de minimis threshold.
    \534\ Aggregate initial costs = Per entity initial costs of
$16,320 x 24 entities = $391,680.
    \535\ Estimate based on prior Commission estimates of the costs
of systems non-U.S. persons might implement to determine whether
their dealing transactions exceed the de minimis thresholds, and
adjusted for inflation to 2019 dollars. See Cross-Border Adopting
Release, 79 FR at 47332. These ongoing systems costs would be lower
for registered entities with systems already in place to assess
whether their security-based swap transaction activity exceeds the
de minimis threshold.
    \536\ Aggregate annual costs = Per entity annual costs of
$18,190 x 24 entities = $436,560.
---------------------------------------------------------------------------

    As discussed in Part II above, non-U.S. persons operating in listed
jurisdictions could rely on the conditional exception. By doing so,
these non-U.S. persons may gain a competitive advantage over non-U.S.
persons operating in unlisted jurisdictions. In particular, non-U.S.
persons operating in listed jurisdictions and that rely on the
exception may incur lower regulatory burdens \537\ than non-U.S.
persons operating in unlisted jurisdictions. This cost advantage may be
limited if the Commission subsequently orders additional unlisted
jurisdictions to be designated as listed jurisdictions, and non-U.S.
persons operating in these jurisdictions rely on the conditional
exception following the designation. This cost advantage also may be
limited if non-U.S. persons operating in unlisted jurisdictions could
set up operations in a listed jurisdiction to rely on the exception.
---------------------------------------------------------------------------

    \537\ These non-U.S. persons may incur lower regulatory burdens
to the extent that they avoid the costs of assessing market-facing
activity and the costs of compliance with conditions set forth under
the exception are lower than the compliance costs in the absence of
the exception and the costs of business restructuring. In contrast,
non-U.S. persons in unlisted jurisdictions may have to incur the
costs of assessing market-facing activity. Further, for these non-
U.S. persons, the costs of complying with the full set of security-
based swap dealer requirements and business restructuring may be
higher than compliance costs associated with the exception.
---------------------------------------------------------------------------

    For non-U.S. persons in jurisdictions that are not yet designated
as listed jurisdictions by the Commission, an application for listed
jurisdiction designation would be filed pursuant to Rule 0-13 and, like
the exception, is purely voluntary. Thus, the Commission expects that,
to the extent that market participants submit applications for
designation of one or more listed jurisdictions, non-U.S. persons would
do so only to the extent that they believe that compliance with each
relevant jurisdiction's regulatory regime, in combination with the
other conditions of the exception, was less burdensome than the
alternatives of (i) incurring assessment costs related to de minimis
calculations and potential compliance with the Title VII regulatory
framework for dealers, and (ii) restructuring their security-based swap
businesses to avoid arranging, negotiating, or executing transactions
with non-U.S. counterparties using personnel located in the United
States. The Commission estimates that three non-U.S. persons that seek
to rely on the exception would file listed jurisdiction
applications.\538\ The Commission estimates the costs associated with
each application to be approximately $119,364, or up to $358,092 in
aggregate.\539\ Any costs incurred by a non-U.S. person in filing an
application for a listed jurisdiction may be obviated in part by the
provision that permits a foreign financial regulatory authority or
authorities supervising such a non-U.S. person or its security-based
swap activities to file such an application. Further, the non-U.S.
persons (or their financial regulatory authorities) in those
jurisdictions that are designated as listed jurisdictions by the
Commission may avoid the costs of filing an application.
---------------------------------------------------------------------------

    \538\ See Part VII.A.4.f, infra.
    \539\ The Commission assumes that the costs associated with
filing an application for a qualified jurisdiction designation are
the same as the costs associated with filing a substituted
compliance request with respect to business conduct requirements.
See Business Conduct Adopting Release, 81 FR at 30097, 30137, and
Part VII.A.4.f, infra. The Commission estimates the per entity costs
of filing an application in 2016 dollars as: $30,400 (internal
counsel) + $80,000 (external counsel) = $110,400. Adjusted for CPI
inflation, the per entity costs of filing an application in 2019
dollars are = $119,364. The aggregate costs of filing applications =
Per entity costs of $119,364 x 3 entities = $358,092.
---------------------------------------------------------------------------

    Finally, a non-U.S. person that chooses to use the conditional
exception would be required to develop policies and procedures, jointly
with the registered entity that supports its ANE activity, for
documentation to support compliance with the $50 billion covered inter-
dealer position threshold. The Commission estimates that a non-U.S.
person, similar to a registered entity, would incur initial costs of
$4,230,\540\ or $101,520 in aggregate,\541\ to develop these policies
and procedures. Moreover, to maintain compliance with the cap on
covered inter-dealer positions a non-U.S. person would incur ongoing
costs to create compliance documentation and convey this documentation
to the registered entity that supports its ANE activity. The Commission
estimates annual costs of $43,992 per non-U.S. person,\542\ or
$1,055,808 in aggregate,\543\ associated with creation and conveyance
of compliance documentation.
---------------------------------------------------------------------------

    \540\ Per entity initial costs = 10 hour x $423/hour for
national hourly rate for an attorney = $4,230. The hourly cost
figure is based upon data from SIFMA's Management and Professional
Earnings in the Securities Industry--2013 (modified by the
Commission staff to adjust for inflation and to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead).
    \541\ Aggregate initial costs = Per entity initial costs of
$4,230 x 24 entities = $101,520.
    \542\ Per entity annual costs = 104 hour x $423/hour for
national hourly rate for an attorney = $43,992. The hourly cost
figure is based upon data from SIFMA's Management and Professional
Earnings in the Securities Industry--2013 (modified by the
Commission staff to adjust for inflation and to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead).
    \543\ Aggregate annual costs = Per entity annual costs of
$43,992 x 24 entities = $1,055,808.
---------------------------------------------------------------------------

(b) Title VII Programmatic Costs and Benefits
    The exclusion of transactions that must be counted against the de
minimis threshold will affect the set of registered security-based swap
dealers subject to security-based swap dealer regulation and in turn
determine the allocation and flow of programmatic costs and benefits
arising from such regulation.
    The Commission believes that Rule 3a71-3(d)(1)(v) would support the
Title VII regime's programmatic benefit of mitigating risks in foreign
security-based swap markets that may flow into U.S. financial markets
through liquidity spillovers.\544\ Specifically, Rule 3a71-

3(d)(1)(v) would require a non-U.S. person relying on the exception to
be subject to the margin and capital requirements of a listed
jurisdiction when engaging in transactions subject to the exception. As
discussed earlier,\545\ the listed jurisdiction condition is intended
to help avoid creating an incentive for dealers to book their
transactions into entities that solely are subject to the regulation of
jurisdictions that do not effectively require security-based swap
dealers or comparable entities to meet certain financial responsibility
standards. Absent this type of condition, non-U.S. persons that rely on
the exception could gain a competitive advantage because they would be
able to conduct security-based swap dealing activity in the United
States without being subject to even minimal financial responsibility
standards and incurring the associated compliance costs. Such non-U.S.
persons potentially could provide liquidity to market participants at
more favorable prices, but potentially also at greater risk, compared
to registered security-based swap dealers. Generally, this condition
would benefit non-U.S. counterparties. It provides them with assurances
that the non-U.S. person has sufficient financial resources to engage
in security-based swap activity and that the non-U.S. person's risk
exposures to other counterparties are appropriately managed. This
supports the Title VII regime's programmatic benefit of preventing
risks in foreign security-based swap markets from flowing into U.S.
financial markets through liquidity spillovers.
---------------------------------------------------------------------------

    \544\ As the Commission noted elsewhere, in a highly
concentrated global security-based swap market, the failure of a key
liquidity provider poses a particularly high risk of propagating
liquidity shocks not only to its counterparties but to other
participants, including other dealers. To the extent that U.S.
persons are significant participants in the market, the liquidity
shock may propagate to these U.S. persons and from these U.S.
persons to the U.S. financial system as a whole, even if the
liquidity shock originates with the failure of a non-U.S. person
liquidity provider. See ANE Adopting Release, 81 FR at 8611-12,
8630.
    \545\ See Part II.C.5, supra.
---------------------------------------------------------------------------

    The Commission believes that another potential programmatic benefit
of the amendment is to reduce market fragmentation and associated
distortions. In the ANE Adopting Release, the Commission noted that the
``arranged, negotiated, or executed'' counting requirement may cause
non-U.S. dealers to restructure their operations to avoid using U.S.
personnel in order to avoid triggering security-based swap dealer
obligations. Such restructuring may result in market fragmentation.
Nevertheless, to the extent that the restructuring costs incurred by
non-U.S. dealers offset the benefits from avoiding dealer registration,
the likelihood or extent of market fragmentation and associated
distortions may be attenuated, but not eliminated.\546\ The Commission
believes that the amendment, by permitting a non-U.S. person further
flexibility to opt into a Title VII compliance framework that is
compatible with its existing business practices, could further reduce
the incentives of non-U.S. persons to restructure and further reduce
the likelihood or extent of market fragmentation and associated
distortions.\547\
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    \546\ See ANE Adopting Release, 81 FR at 8630.
    \547\ One commenter perceived a tension between, on the one
hand, the reduction in market fragmentation as a result of the
amendment and, on the other hand, the exacerbation of market
fragmentation if non-U.S. dealers limit themselves to trading with
non-U.S. persons to avoid triggering security-based swap dealer
obligations absent the rules adopted in the ANE Adopting Release
(see ANE Adopting Release, 81 FR at 8610-11). See AFR letter at 4.
The market fragmentation in both instances have different causes.
The market fragmentation in the first instance stems from
restructuring by non-U.S. dealers to avoid using U.S. personnel; the
market fragmentation discussed in the ANE Adopting Release stems
from the way non-U.S. dealers select their trading counterparties.
The amendment addresses, among other things, market fragmentation
that stems from restructuring by non-U.S. dealers.
---------------------------------------------------------------------------

    The above discussion notwithstanding, the Commission is mindful
that the likelihood of market fragmentation and associated distortions
might increase if U.S.-based dealing entities rely on the conditional
exception by booking transactions with non-U.S. counterparties into
non-U.S. affiliates, thereby avoiding the application of the full set
of security-based swap dealer requirements to those transactions and
the associated security-based swaps.\548\ As discussed further below,
U.S.-based dealing entities that use the conditional exception in this
manner may incur lower compliance costs when providing liquidity to
non-U.S. counterparties and may decide to limit their liquidity
provision only to non-U.S. counterparties. To the extent that these
U.S.-based dealing entities choose to provide liquidity only to non-
U.S. counterparties, security-based swap liquidity may fragment into
two pools: One pool that caters to U.S. counterparties and another pool
that caters to non-U.S. counterparties.
---------------------------------------------------------------------------

    \548\ See Proposing Release, 84 FR at 24219, and Part VI.A.7,
supra.
---------------------------------------------------------------------------

    The amendment could promote competition in the security-based swap
market to the extent that competitive effects arise from differences
between the full set of requirements for registered security-based swap
dealers (that otherwise would apply to the non-U.S. entity) and the
conditions applicable to the registered U.S. entity under the
amendment. As discussed more fully below,\549\ a non-U.S.-person dealer
that uses the exception may become more competitive in the market for
liquidity provision because (a) the non-U.S.-person dealer may incur
lower compliance costs when providing liquidity to non-U.S.
counterparties and (b) non-U.S. counterparties may incur lower costs
when transacting with the non-U.S.-person dealer. The set of dealing
entities that benefit from such competitive effects might expand to the
extent that U.S.-based dealing entities that are primarily or wholly
responsible for managing interactions with non-U.S. counterparties may
rely on the conditional exception by booking transactions into non-U.S.
affiliates.\550\ Nevertheless, this competitive effect may be
attenuated by the condition that makes the exception available only to
non-U.S. persons that are subject to the margin and capital
requirements of a listed jurisdiction.
---------------------------------------------------------------------------

    \549\ See Part VI.B.2, infra.
    \550\ See Proposing Release, 84 FR at 24219.
---------------------------------------------------------------------------

    The amendment potentially could limit the programmatic benefits of
Title VII regulation because the non-U.S. person taking advantage of
the conditional exception would not be subject to the full suite of
Title VII business conduct and financial responsibility requirements.
This limitation of programmatic benefits might increase to the extent
that U.S.-based dealing entities that primarily or wholly are
responsible for managing interactions with non-U.S. counterparties may
rely on the conditional exception by booking transactions into non-U.S.
affiliates.\551\ Because the non-U.S. person would not be subject to
Title VII business conduct requirements, the associated Title VII
counterparty protections would not apply to the non-U.S. person's
communications with non-U.S. counterparties. The non-U.S.
counterparties thus would not benefit from those protections in their
dealings with the non-U.S. person relying on the exception,
notwithstanding the U.S. arranging, negotiating, and executing activity
that led to the transactions at issue.\552\
---------------------------------------------------------------------------

    \551\ See id.
    \552\ The antifraud provisions of the federal securities laws
and certain relevant Title VII requirements would continue to apply
to the transactions. See note 24, supra.
---------------------------------------------------------------------------

    Similarly, Title VII financial responsibility requirements
applicable to security-based swap dealers would not apply to the non-
U.S. person, notwithstanding that the transactions would result from
arranging, negotiating, and executing activity in the United States.
The financial

responsibility requirements serve to prevent the spread to U.S.
financial markets of financial contagion that originates from the
failure of one or more non-U.S. persons engaged in arranging,
negotiating, and executing activity in the United States.\553\ However,
the fact that these requirements would not apply to non-U.S. persons
taking advantage of the conditional exception could limit the Title VII
regulatory regime's ability to protect U.S. financial markets from
financial contagion. This concern would be mitigated by the condition
that makes the exception available only to non-U.S. persons that are
subject to the margin and capital requirements of a listed
jurisdiction, which would afford the Commission flexibility to
designate jurisdictions with appropriately robust financial
responsibility requirements as listed jurisdictions.
---------------------------------------------------------------------------

    \553\ See ANE Adopting Release, 81 FR at 8612.
---------------------------------------------------------------------------

    Non-U.S. persons would face important limits on their ability to
rely on the conditional exception. First, such non-U.S. persons could
not rely on the exception if the gross notional value of covered inter-
dealer security-based swap positions made in reliance on the
conditional exception, aggregated across their non-U.S. affiliates,
exceeded $50 billion over the course of the immediately preceding 12
months. If this threshold were to be breached, the non-U.S. person
relying on the exception must count against the de minimis thresholds
all of its (and its non-U.S. person affiliates') covered inter-dealer
security-based swap positions connected with dealing activity subject
to the exception over the course of the immediately preceding 12
months, including any transactions below the $50 billion limit.\554\
This condition mitigates incentives for financial groups, including
U.S. financial groups, to restructure their business to avoid the
application of certain Title VII requirements by carrying out
substantial amounts of transactions against other dealers using one or
more unregistered foreign dealers. As a result, this condition will
help preserve the programmatic effects of Title VII regulation of
covered inter-dealer security-based swap activities while also reducing
the potential that reliance on the exception by foreign dealers would
distort markets by conferring competitive advantages on foreign dealers
relative to U.S. dealers. Second, competitive disparities and limits to
the programmatic effects of Title VII may be more generally offset to
the extent that non-U.S. counterparties value the protections afforded
them by Title VII regulation and prefer to transact with dealing
entities that are subject to the full scope of Title VII regulation,
rather than with non-U.S. persons that rely on the conditional
exception.
---------------------------------------------------------------------------

    \554\ See Exchange Act Rule 3a71-3(d)(6)(ii)(B). The de minimis
thresholds to the ``security-based swap dealer'' definition appear
in Rule 3a71-2(a)(1).
---------------------------------------------------------------------------

2. Effects on Efficiency, Competition, and Capital Formation
    As discussed earlier, the amendment could reduce the regulatory
burden for non-U.S. persons that engage in security-based swap
arranging, negotiating, and executing activity with non-U.S.
counterparties using affiliated U.S.-based personnel because these non-
U.S. persons could avail themselves of an additional, potentially
lower-cost, means of engaging in arranging, negotiating, and executing
activity with non-U.S. counterparties.\555\ To the extent that the
regulatory burden for such non-U.S. persons is reduced as a result of
the amendment, resources could be freed up for investing in profitable
projects, which would promote investment efficiency and capital
formation. In addition, a reduction in regulatory burden for such non-
U.S. persons could allow these persons to operate their security-based
swap dealing business more efficiently. To the extent that these non-
U.S. persons carry out security-based swap dealing activity with
counterparties around the world \556\ and choose to pass on cost
savings flowing from their improved efficiency in the form of lower
prices for liquidity provision, counterparties around the world could
benefit by being able to transact at lower costs. A reduction in
regulatory burden associated with the amendment could lower entry
barriers into the security-based swap market and increase the number of
non-U.S.-person dealers that are willing to provide liquidity to non-
U.S. counterparties using affiliated U.S.-based personnel. An increase
in the number of such non-U.S.-person dealers may increase competition
for liquidity provision to non-U.S. counterparties, which could lower
transaction costs for these counterparties and improve their ability to
hedge economic exposures. To the extent that non-U.S.-person dealers
focus their market-making activities on non-U.S. counterparties and
avoid U.S. counterparties, the competition for liquidity provision to
U.S. counterparties may decline, which could increase transaction costs
for U.S. counterparties and impair their ability to hedge their
economic exposures or to incur economic exposures. In addition, to the
extent that increased transaction costs reduce the expected profits
from trading on new information, market participants may be less
willing to transact in the security-based swap market in response to
new information. Such reduced participation in the security-based swap
market might impede the incorporation of new information into security-
based swap prices, reducing the informational efficiency of these
markets.
---------------------------------------------------------------------------

    \555\ See Part VI.B.1, supra.
    \556\ See Part VI.A.2.c, supra.
---------------------------------------------------------------------------

    The amendment might generate certain competitive effects due to
gaps between the full set of requirements for registered security-based
swap dealers and the conditions applicable to the registered entity of
the non-U.S. person under the amendment,\557\ though these effects will
be tempered to the extent that the non-U.S.-person dealer passes on
compliance costs incurred by its U.S. registered entity to the non-U.S.
counterparty. First, under Rule 3a71-3(d)(1)(C), the exception would
not be conditioned on the registered entity of the non-U.S. person
dealer having to comply with requirements pertaining to ECP
verification, daily mark disclosure, and ``know your counterparty.''
\558\ Thus, to the extent that the non-U.S. person adheres only to the
provisions specifically required by the conditions set forth under the
amendment, the non-U.S. person dealer could incur lower compliance
costs in providing liquidity to non-U.S. counterparties than under
current rules, relative to the baseline. In that case, the non-U.S.
person-dealer might be able to lower the price at which it offers
liquidity to a non-U.S. counterparty. However, under the exception the
non-U.S. person must have a U.S. affiliate that is registered with the
Commission. The extent to which the non-U.S. person dealer may offer a
more competitive price would depend in part on whether the non-U.S.
person dealer will pass on compliance costs incurred by its U.S.
registered entity to the non-U.S. counterparty in the form of a higher
price for providing liquidity to the non-U.S. counterparty. To the
extent that the non-U.S. person-dealer offers liquidity to the non-U.S.
counterparty at a price that fully

recovers the compliance costs incurred by its U.S. registered entity,
any price reduction that could be offered by the non-U.S.-person dealer
might be limited.
---------------------------------------------------------------------------

    \557\ As context, the use of the ``arranged, negotiated, or
executed'' counting standard was intended in part to avoid allowing
competitive disparities between registered security-based swap
dealers and entities that otherwise could engage in security-based
swap market-facing activity in the United States without having to
register as security-based swap dealers. See Proposing Release, 84
FR at 24208-09.
    \558\ See Business Conduct Adopting Release, 81 FR at 29978.
---------------------------------------------------------------------------

    Second, a non-U.S. counterparty may prefer to enter into a
security-based swap transaction with a non-U.S.-person dealer that
takes advantage of the conditional exception, rather than a U.S.
registered security-based swap dealer, not only because the non-U.S.
person dealer may offer more competitive prices, but also because the
non-U.S. counterparty may itself avoid certain costs by transacting
with a non-U.S. person dealer. For example, Title VII financial
responsibility requirements applicable to security-based swap dealers
would not apply to the non-U.S. person dealer under the amendment,
although the non-U.S. person dealer would be subject to the margin and
capital requirements of a listed jurisdiction. To the extent that a
non-U.S. counterparty has already established with the non-U.S. person
dealer the necessary margin agreement that is compliant with the margin
requirements of the listed jurisdiction, the non-U.S. counterparty
could avoid the additional costs of negotiating and adhering to a new
margin agreement that is compliant with the Commission's Title VII
margin requirements, if the non-U.S. counterparty transacts with the
non-U.S. person dealer.
    These competitive effects may create an incentive for entities that
carry out their security-based swap dealing business in a U.S. person
dealer with non-U.S. person counterparties to restructure a proportion
of this business to be carried out in a non-U.S. person dealer
affiliate. The extent to which such entities are willing or able to
restructure would be limited. Market forces could limit incentives to
restructure to the extent that non-U.S. counterparties value the
protections afforded them by Title VII regulation and prefer to
transact with dealing entities that are subject to the full scope of
Title VII regulation, rather than with non-U.S. persons that rely on
the conditional exception. Further, the $50 billion aggregate notional
value cap on covered inter-dealer security-based swap positions applied
to registered entities that support non-U.S. person affiliates'
reliance on the conditional exemption, limits non-U.S. persons' ability
to restructure their security-based swap businesses.
3. Additional Alternatives Considered
    In developing these amendments, the Commission considered a number
of alternatives. This section outlines these alternatives and discusses
the potential economic effects of each.
(a) Proposed Alternative 1
    The Commission is adopting Alternative 2 to the exception, which
requires that the arranging, negotiating, and executing activity in the
United States be performed by personnel associated either with a
registered security-based swap dealer or with a registered broker--but
is modifying elements of Alternative 2 from the proposal in response to
concerns raised by commenters.\559\
---------------------------------------------------------------------------

    \559\ See Exchange Act Rule 3a71-3(d)(1)(i)(A).
---------------------------------------------------------------------------

    As an alternative, the Commission could have adopted Alternative 1,
which would have required the arranging, negotiating, and executing
activity in the United States to be performed by personnel associated
with registered security-based swap dealers.\560\ Some commenters
rejected Alternative 1 in favor of Alternative 2 because it provides
more flexibility to market participants to utilize U.S. personnel
associated with either a registered broker or a registered security-
based swap dealer.\561\ To the extent that market participants would
choose not to rely on the exception if Alternative 1 were adopted,
because of the absence of a registered broker option, Alternative 1 may
have been less effective in supporting the use of ``arranged,
negotiated, or executed'' criteria as part of de minimis counting,
while avoiding negative consequences that otherwise may be associated
with those criteria could be attenuated. In light of this concern, the
Commission believes that the adopted approach is preferable to the
alternative.
---------------------------------------------------------------------------

    \560\ See Proposing Release, 84 FR at 24291.
    \561\ See note 87, supra.
---------------------------------------------------------------------------

(b) Requiring the Registered Entity To Comply With ECP Verification and
``Know Your Counterparty''
    When identifying the security-based swap dealer requirements that
are applicable to a registered entity for purposes of this rulemaking,
the Commission considered requiring the registered entity to comply
with ECP verification and ``know your counterparty'' requirements,
along with other security-based swap dealer requirements, even if the
registered entity is not a party to the resulting security-based swap.
Although this alternative would lead to greater conformity with the
full set of security-based swap dealer requirements, the provisions in
question may require knowledge that may not be readily available to the
registered entity when it engages in limited arranging, negotiating,
and executing activity in connection with the security-based swaps
addressed by the exception. These operational difficulties may prevent
the registered entity from complying with the provisions or may require
the registered entity to incur costs to ensure compliance. The
Commission estimates that, if included as part of the conditions of the
exception, the ECP verification and know your counterparty requirements
would impose initial costs of approximately $3,006 per registered
entity,\562\ or $72,144 in aggregate,\563\ and ongoing costs of
approximately $94,497 per registered entity,\564\ or $2,267,928 in
aggregate.\565\ Further, the non-U.S. counterparties transacting with
the non-U.S. persons making use of the exception that are not also
participating in swap markets and relying on industry established
verification of status protocol may incur initial costs associated with
the verification of status requirement and related adherence
letters.\566\ The Commission estimates these aggregate initial costs at
approximately $473,598.\567\ All non-U.S. counterparties (or their
agents) transacting with the non-U.S. persons making use of the
exception would also be required to collect and provide essential facts
to the registered entities to comply with the ``know your
counterparty'' obligations for an aggregate initial cost of
approximately

$6,631,926.\568\ To the extent that the knowledge needed to comply with
these requirements may not be readily available to the registered
entity and the registered entity has to expend additional resources to
obtain that knowledge, the actual costs incurred by the registered
entity to comply with these requirements may be higher. The Commission
acknowledges that a non-U.S. person making use of the exception
potentially could mitigate the compliance costs of the registered
entity by transacting only with non-U.S. counterparties that are known
ECPs to the registered entity. By doing so, the registered entity could
avoid expending additional resources to learn about the non-U.S.
counterparties' ECP status. However, as a result of this approach, the
non-U.S. person may have to forgo transacting with new non-U.S.
counterparties whose ECP status is not known to the registered entity.
The non-U.S. person would thus have to balance the cost savings
associated with transacting only with a set of known non-U.S.
counterparties against the revenues that may be forgone by not
transacting with new non-U.S. counterparties whose ECP status is
unknown to the registered entity.
---------------------------------------------------------------------------

    \562\ This estimate incorporates quantifiable initial costs
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation.
    \563\ Aggregate initial costs = Per entity initial costs of
$3,006 x 24 entities = $72,144.
    \564\ This estimate incorporates quantifiable initial costs
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation.
    \565\ Aggregate initial costs = Per entity initial costs of
$94,497 x 24 entities = $2,267,928.
    \566\ In the Business Conduct Adopting Release, the Commission
assumed that counterparties that are swap market participants likely
already adhere to the relevant protocol and would not have any
start-up or ongoing burdens with respect to verification. See
Business Conduct Adopting Release, 81 FR at 30091. The Commission
continues to believe that this assumption is valid and thus, for
purposes of this alternative, the Commission believes that only non-
U.S. counterparties that are not swap market participants will incur
verification-related costs. As discussed in Part VI.A.7, supra, the
Commission estimates that up to 24 persons likely may use the
exception, and that their registered entity affiliates may arrange,
negotiate, or execute transactions with up to 1,614 non-U.S.
counterparties, of which 498 do not participate in swap markets.
    \567\ This estimate incorporates quantifiable initial costs
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation. Per counterparty initial costs in
2019 dollars = $951. Aggregate initial costs = Per entity initial
costs of $951 x 498 counterparties = $473,598.
    \568\ This estimate incorporates quantifiable initial costs
presented in the Business Conduct Adopting Release, 81 FR at 30090-
92, 30110, adjusted for inflation. Per counterparty initial costs in
2019 dollars = $4,109. Aggregate initial costs = Per entity initial
costs of $4,109 x 1,614 counterparties = $6,631,926.
---------------------------------------------------------------------------

    As another alternative, the Commission considered requiring
compliance with the ECP verification and ``know your counterparty''
requirements with a one-time carve out when the non-U.S. counterparty
is unknown to the registered entity and there is no basis to believe
that the registered entity would have further interactions with that
non-U.S. counterparty. Although such a carve out may reduce compliance
costs arising from transactions that likely would pose the greatest
operational difficulties in terms of obtaining knowledge needed for
complying with the ECP verification and know your counterparty
requirements, the Commission is also cognizant that the carve out may
create new costs associated with assessing when the carve out would
apply. The Commission is concerned that these new assessment costs may
impose an additional burden on the registered entity and may offset any
reduction in compliance costs associated with a one-time carve out. As
with the previous alternative, a non-U.S. person making use of the
exception potentially could mitigate the compliance costs of the
registered entity by transacting only with non-U.S. counterparties that
are ECPs known to the registered entity. As discussed above, the non-
U.S. person would thus have to balance the cost savings associated with
this approach against the revenues that may be forgone by not
transacting with new non-U.S. counterparties whose ECP status is
unknown to the registered entity.
    In light of these compliance challenges and the fact that the
amendment does include conditions designed to impose a minimum standard
of conduct upon security-based swap dealers in connection with their
transaction-related activities, the Commission believes that the
adopted approach is preferable to these alternatives.
(c) Requiring the Registered Entity To Comply With Daily Mark
Disclosure
    The Commission also considered requiring the registered entity to
comply with daily mark disclosure, along with other security-based swap
dealer requirements, even if the registered entity is not a party to
the resulting security-based swap. Similar to the discussion of ECP
verification and know your counterparty requirements above, this
alternative would lead to greater conformity with the full set of
security-based swap dealer requirements. However, it may require
knowledge that may not be readily available to the registered entity
when it engages in limited arranging, negotiating, and executing
activity in connection with the security-based swaps addressed by the
exception. Further, the daily mark disclosure is predicated on the
existence of an ongoing relationship between the security-based swap
dealer and the counterparty that may not be present in connection with
the transactions at issue, and would be linked to risk management
functions that are likely to be associated with the entity in which the
resulting security-based swap position is located.\569\ These
operational difficulties may prevent the registered entity from
complying with the daily mark disclosure requirement or may require the
registered entity to incur an unreasonably high cost to ensure
compliance. In light of these compliance challenges and the fact that
the amendment does include conditions designed to impose a minimum
standard of conduct upon security-based swap dealers in connection with
their transaction-related activities, the Commission believes that the
adopted approach is preferable to this alternative.
---------------------------------------------------------------------------

    \569\ See Proposing Release, 84 FR at 24223.
---------------------------------------------------------------------------

(d) Requiring a Limited Disclosure of Incentives and Conflicts
    As an alternative to the disclosure requirements set forth under
Rule 3a71-3(d)(1)(ii)(B)(1), the Commission considered requiring the
registered entity to disclose its own material incentives and conflicts
of interest, but not requiring the registered entity to disclose the
incentives and conflicts of interest of its non-U.S. affiliate. While
this alternative might help to mitigate the costs associated with
disclosing the incentives and conflicts of interest of the non-U.S.
affiliate,\570\ the benefits associated with such disclosures \571\ may
also decrease because non-U.S. counterparties would not know about the
incentives and conflicts of interest of the non-U.S. affiliate prior to
entering into security-based swaps with the non-U.S. affiliate. In
light of this concern, the Commission believes that the adopted
approach is preferable to this alternative.
---------------------------------------------------------------------------

    \570\ See Business Conduct Adopting Release, 81 FR at 30112.
    \571\ See id. at 30111-12.
---------------------------------------------------------------------------

(e) Requiring the Non-U.S. Person To Be Domiciled in a G-20
Jurisdiction or in a Jurisdiction Where the Non-U.S. Person Would Be
Subject to Basel Capital Requirements
    As alternatives to paragraph (d)(1)(v), the Commission considered a
requirement that the non-U.S. person be domiciled in a G-20
jurisdiction or in a jurisdiction where the non-U.S. person would be
subject to Basel capital requirements as commenters have suggested.
While the Commission acknowledges that these alternatives are clearly
defined and would provide certainty to market participants, the
Commission believes these alternatives potentially could create
opportunities for regulatory arbitrage whereby a non-U.S. person may
relocate its operations to a jurisdiction that imposes lower financial
responsibility standards. The non-U.S. person may thus enjoy a cost
advantage relative to other dealers that operate under higher
regulatory burdens, while not being subject to equally rigorous
financial responsibility standards. Further, as discussed earlier,\572\
the fact that a jurisdiction is a member of the G-20 or subscribes to
Basel standards does not by itself provide assurance that the
jurisdiction has implemented appropriate financial responsibility
standards.
---------------------------------------------------------------------------

    \572\ See Part II.C.5, supra.

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

(f) Not Requiring Notification to Counterparties of the Non-U.S. Person
    In identifying the conditions that would apply to the non-U.S.
person, the Commission considered omitting the notification
condition.\573\ The omission of this notification condition may reduce
cost and thus regulatory burden for the non-U.S. persons that rely on
the exception.
---------------------------------------------------------------------------

    \573\ See Part II.C.4, supra.
---------------------------------------------------------------------------

    However, the absence of this notification condition potentially
could reinforce the competitive disparity between the non-U.S. persons
that make use of the exception and registered security-based swap
dealers that comply with the full set of Title VII security-based swap
dealer requirements. As discussed above,\574\ non-U.S. persons that
avail themselves of the exception could bear lower costs compared to
registered security-based swap dealers that have to comply with the
full set of security-based swap dealer requirements.
---------------------------------------------------------------------------

    \574\ See Part VI.B.2, supra.
---------------------------------------------------------------------------

    To the extent that non-U.S. counterparties prefer to trade with
dealers that are subject to the full set of Title VII security-based
swap dealer requirements and the associated safeguards, in the absence
of the notification condition, non-U.S. persons that rely on the
exception could bear lower regulatory costs than registered security-
based swap dealers but may nevertheless be regarded by non-U.S.
counterparties as subject to similar Title VII safeguards as registered
security-based swap dealers. As a result, these non-U.S. persons
potentially could capture the business of non-U.S. counterparties from
registered security-based swap dealers that they otherwise might not
have captured if the notification condition had been part of the
exception. In light of this concern, the Commission believes that
requiring such notification to non-U.S. counterparties is preferable to
this alternative.
(g) ``No Management of Relationship'' Condition
    When identifying the conditions of the exception, the Commission
considered making the exception unavailable where U.S. personnel manage
the relationship with the non-U.S. counterparty to the security-based
swap. Such a condition might help address concerns that U.S.-based
dealers could use the exception to rebook transactions, which are
managed by U.S. personnel, to a non-U.S. affiliate to avoid triggering
security-based swap dealer registration. However, the Commission
recognizes that there may be challenges in articulating objective
criteria to identify when the exception would or would not be available
under this type of approach. Even if objective criteria could be
articulated, non-U.S. persons seeking to use the exception may have to
incur costs to satisfy these criteria on an ongoing basis. In light of
these concerns, the Commission believes that the adopted approach is
preferable to this alternative.

C. Amendment to Commission Rule of Practice 194

    Several key economic effects and tradeoffs inform the Commission's
analysis of adopting new paragraph (c)(2) of Rule of Practice 194.\575\
---------------------------------------------------------------------------

    \575\ See Rule of Practice 194 Adopting Release, 84 FR at 4922-
43.
---------------------------------------------------------------------------

    First, as the Commission discussed in the Rule of Practice 194
Adopting Release,\576\ increasing the ability of statutorily
disqualified persons to effect or be involved in effecting security-
based swap transactions on behalf of SBS Entities may give rise to
higher compliance and counterparty risks, increase costs of adverse
selection, decrease market participation, and reduce competition among
higher quality associated persons and SBS Entities.
---------------------------------------------------------------------------

    \576\ See id.
---------------------------------------------------------------------------

    Second, at the same time, the scope of conduct that gives rise to
disqualification is broad and includes conduct that may not pose
ongoing risks to counterparties.\577\ In addition, as discussed in the
Rule of Practice 194 Adopting Release and in greater detail below,
strong disqualification standards can also reduce competition and the
volume of service provision.
---------------------------------------------------------------------------

    \577\ As discussed in Part V.A. of the Rule of Practice 194
Adopting Release, the definition of disqualified persons, as applied
in the statutory prohibition in Exchange Act Section 15F(b)(6), is
broad. That definition disqualifies associated persons due to
violations of the securities laws, but also for felonies and
misdemeanors not related to the securities laws and/or financial
markets, and certain foreign sanctions. See id. at 4922, 4929.
---------------------------------------------------------------------------

    Third, public information about misconduct can give rise to capital
market participants voting with their feet (reputational costs), and
labor markets frequently penalize misconduct through firing or other
career outcomes in other settings, as discussed in the Rule of Practice
194 Adopting Release. If counterparties perceive the risks related to
disqualified associated persons to be high, counterparties may choose
to perform more in-depth due diligence related to their SBS Entity
counterparties or to transact with SBS Entities without disqualified
associated persons.
    Fourth, an overwhelming majority of dealers and most counterparties
transact across both swap and security-based swap markets, including in
financial products that are similar or identical in their payoff
profiles and risks. As discussed in the Rule of Practice 194 Adopting
Release, differential regulatory treatment of disqualification in swap
and security-based swap markets may disrupt existing counterparty
relationships and may increase costs of intermediating transactions for
some SBS Entities, which may be passed along to certain counterparties
in the form of higher transaction costs.
    Fifth, as also discussed in the Rule of Practice 194 Adopting
Release, market participants may value bilateral relationships with SBS
Entities, including with SBS Entities dually-registered as Swap
Entities, and searching for and initiating bilateral relationships with
new SBS Entities may involve costs for counterparties. For example,
security-based swaps are long-term contracts that are often
renegotiated, and disruptions to existing counterparty relationships
can reduce the potential future ability to modify a contract, which may
be priced in widening spreads.\578\
---------------------------------------------------------------------------

    \578\ See id. at 4922.
---------------------------------------------------------------------------

1. Costs and Benefits of the Amendment
    Once compliance with SBS Entity registration rules is required,
registered SBS Entities will be unable to utilize any statutorily
disqualified associated natural person, including natural persons with
potentially valuable capabilities, skills, or expertise, to effect or
be involved in effecting security-based swap transactions, absent
relief, including an order under Rule of Practice 194. Absent the
exclusion in Rule of Practice 194(c)(2), the statutory disqualification
prohibition set forth in Section 15F(b)(6) of the Exchange Act would
apply to all associated natural persons effecting or involved in
effecting security-based swap transactions on behalf of all registered
SBS Entities regardless of the nature of the conduct giving rise to the
disqualification.\579\ SBS Entities are, under the baseline regulatory
regime, unable to rely on statutorily disqualified associated persons
even if such persons are non-U.S. persons transacting exclusively with
non-U.S. counterparties. However, absent the exclusion provided in Rule
of Practice

194(c)(2), SBS Entities would still be able to apply to the Commission
for relief, and the Commission would still be able to grant relief,
including under Rule of Practice 194.
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    \579\ As noted above, Section 3(a)(39) of the Exchange Act
generally defines the circumstances that would subject a person to a
statutory disqualification with respect to membership or
participation in, or association with a member of, an SRO. See 15
U.S.C. 78c(a)(39).
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    Under the exclusion provided in Rule of Practice 194(c)(2), unless
a limitation applies,\580\ SBS Entities will be able to allow
statutorily disqualified associated natural persons that are not U.S.
persons to effect or be involved in effecting security-based swap
transactions with non-U.S. counterparties and foreign branches of U.S.
counterparties. The Commission received comment generally in support of
the proposed amendment \581\ and continues to believe that amendment to
Rule of Practice 194, to include subparagraph (c)(2), involves three
possible benefits.
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    \580\ An SBS Entity would not be able to avail itself of the
exclusion in paragraph (c)(2) if an associated person is currently
subject to certain orders.
    \581\ See, e.g., EBF letter at 6; IIB/SIFMA letter at 5, 29-30;
ISDA letter at 3, 16; see also European Commission email.
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    First, SBS Entities may benefit from greater flexibility in hiring
and managing non-U.S. employees transacting with foreign counterparties
and foreign branches of U.S. counterparties. To the degree that such
employees may have valuable skills, expertise, or counterparty
relationships that are difficult to replace and outweigh the
reputational and compliance costs of continued association, SBS
Entities would be able to continue employing them without being
required to apply for relief with the Commission. In addition, cross-
registered SBS Entities would experience economies of scope in
employing non-U.S. natural persons in their swap and security-based
swap businesses. Specifically, SBS Entities will be able to rely on the
same non-U.S. natural persons in transactions with the same
counterparties across integrated swap and security-based swap markets.
In addition, SBS Entities will no longer be required to apply for
relief under Rule of Practice 194 with respect to non-U.S. persons
transacting with foreign counterparties and foreign branches of U.S.
counterparties.\582\
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    \582\ As discussed in the economic baseline, the exclusion may
reduce the number of applications by between one and four
applications, resulting in potential cost savings of between $12,690
(=1 x 30 hours x Attorney at $423 per hour) and $50,760 (=4 x 30
hours x Attorney at $423 per hour).
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    Second, to the degree that SBS Entities currently pass along costs
to counterparties in the form of, for example, higher transaction
costs, the amendment may benefit non-U.S. counterparties and foreign
branches of U.S. counterparties through lower prices of available
security-based swaps. In addition, such counterparties of SBS Entities
would be able to continue transacting with the same non-U.S. associated
persons of the same SBS Entities across interconnected markets without
delays related to Commission review under Rule of Practice 194. Both
the returns and the risks from security-based swap transactions by
foreign branches of U.S. persons may flow to the U.S. business of U.S.
persons, contributing to profits and losses of U.S. persons.
    Third, the amendment may benefit disqualified non-U.S. natural
persons seeking to engage in security-based swap activity. Under the
amendment, an SBS Entity would no longer be required to incur costs
related to applying for relief under Rule of Practice 194 in order to
allow a disqualified non-U.S. natural person to transact with foreign
counterparties and foreign branches of U.S. counterparties. The
amendment to Rule of Practice 194, to include subparagraph (c)(2), may
reduce direct costs to SBS Entities of hiring and retaining
disqualified non-U.S. employees. This may improve employment
opportunities for disqualified non-U.S. natural persons in the
security-based swap industry. However, research in other contexts
points to large reputational costs from misconduct, and some papers
show that employers may often fire and replace employees engaging in
misconduct to manage these reputational costs, as discussed in the Rule
of Practice 194 Adopting Release.\583\
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    \583\ See Rule of Practice 194 Adopting Release, 84 FR at 4932.
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    Rule of Practice 194(c)(2) would result in SBS Entities being less
constrained by the general statutory prohibition in their security-
based swap activity with foreign counterparties and foreign branches of
U.S. counterparties. The Commission continues to recognize that
associating with statutorily disqualified natural persons effecting or
involved in effecting security-based swaps on behalf of SBS Entities
may give rise to counterparty and compliance risks. For example, as the
Commission discussed elsewhere, in other settings, individuals engaged
in misconduct are significantly more likely to engage in repeated
misconduct.\584\ Data in the Rule of Practice 194 Adopting Release
suggests that, in analogous disqualification review processes in swap
and broker-dealer settings, the application rate is low, but there are
incidences of repeated misconduct.\585\ The Commission also continues
to recognize that statutory disqualification and an inability to
continue associating with SBS Entities creates disincentives against
underlying misconduct for associated persons and that there may be
spillover effects on other associated persons within the same SBS
Entity.\586\ Further, the Commission recognizes that, under the
amendment, the Commission would be unable to make an individualized
determination about whether permitting a given non-U.S. associated
natural person to effect or be involved in effecting security-based
swaps on behalf of an SBS Entity is consistent with the public
interest.
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    \584\ For a more detailed discussion, see id.
    \585\ See id. at 4928.
    \586\ For example, as discussed in the Rule of Practice Adopting
Release, Dimmock, Gerken, and Graham (2018) examine customer
complaints against FINRA-registered representatives in 1999 through
2011, and argue that misconduct of individuals influences the
misconduct of their coworkers. Using mergers of firms as a quasi-
exogenous shock, the paper examines changes in an adviser's
misconduct around changes to an employee's coworkers due to a
merger. The paper estimates that an employee is 37% more likely to
commit misconduct if her new coworkers encountered in the merger
have a history of misconduct. The paper contributes to broader
evidence on peer effects, connectedness, and commonality of
misconduct, and can help explain the distributional properties in
the prevalence of misconduct across firms documented in Egan,
Matvos, and Seru (2017). See Stephen G. Dimmock, William C. Gerken,
& Nathaniel P. Graham, Is Fraud Contagious? Coworker Influence on
Misconduct by Financial Advisors, 73 J. Fin. 1417 (2018); see also
Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial
Adviser Misconduct, 127 J. POL. ECON. 233 (2019).
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    The Commission also notes that the amendment would allow SBS
Entities to rely on disqualified non-U.S. personnel in their
transactions with both foreign counterparties and foreign branches of
U.S. counterparties. To the degree that statutory disqualification may
increase risks to counterparties, to the degree that SBS Entities may
choose to rely on disqualified foreign personnel despite reputational
and compliance costs of association, and to the extent that such
counterparties do not move their business to other personnel or SBS
Entity, this may increase risks to foreign branches of U.S.
counterparties. Depending on the consolidation and ownership structure
of counterparties, some of the returns as well as losses in foreign
branches may flow through to some U.S. parent firms. However, the
adopted approach provides for identical treatment of foreign
counterparties and foreign branches of U.S. counterparties, reducing
potential competitive disparities between them in security-based swap
markets.
    Importantly, the exclusion would more closely harmonize the
Commission's approach with the approach already being followed with
respect to foreign personnel of Swap

Entities. As such, the Commission's assessment of the benefits and
potential counterparty risks of the relief discussed above is informed
by experience and data with respect to CFTC/National Futures
Association statutory disqualification review in swap markets,
including, among others: (i) The low incidence of statutory
disqualification of associated persons; (ii) the majority of
applications arising out of non-investment related conduct by
associated persons; and (iii) the absence of additional statutory
disqualification forms filed by swap dealers to request NFA
determination with respect to a new statutory disqualification for any
of the individuals.\587\ The Commission also notes that parallel swap
markets remain large, with multi-name credit default swaps representing
an increasing share of credit-default swap notional outstanding, and
highly liquid.\588\
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    \587\ See Rule of Practice Adopting Release, 84 FR at 4931.
    \588\ See, e.g., Inaki Aldasoro & Torsten Ehlers, The Credit
Default Swap Market: What a Difference a Decade Makes, BIS Q. Rev.,
June 2018, at 3 (Graph 1), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf, last accessed March 26, 2019; see also Richard
Haynes & Lihong McPhail, The Liquidity of Credit Default Index Swap
Networks (Working Paper, 2017).
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    Three factors may reduce the magnitude of the above economic costs
and benefits. First, the Commission will continue to be able, in
appropriate cases, to institute proceedings under Exchange Act Section
15F(l)(3) to determine whether the Commission should censure, place
limitations on the activities or functions of such person, suspend for
a period not exceeding 12 months, or bar such person from being
associated with an SBS Entity.\589\
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    \589\ See 15 U.S.C. 78o-10(l)(3).
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    Second, the security-based swap market is an institutional one,
with investment advisers, banks, pension funds, insurance companies,
and ISDA-recognized dealers accounting for 99.8% of transaction
activity.\590\ While security-based swaps may be more opaque than
equities and bonds and may give rise to greater information asymmetries
between dealers and non-dealer counterparties, institutional
counterparties may be more informed and sophisticated compared to
retail clients. However, given limited data availability on the
domiciles of non-dealer counterparties, the Commission is unable to
quantify how many non-institutional foreign counterparties may be
affected by the Rule.
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    \590\ See Rule of Practice 194 Adopting Release, 84 FR at 4925-
26, Table 1.
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    Importantly, the concentrated nature of security-based swap market-
facing activity may reduce the ability of counterparties to choose to
transact with SBS Entities that do not rely on disqualified personnel.
As the Commission estimated elsewhere, the top five dealer accounts
intermediated approximately 55% of all SBS Entity transactions by gross
notional, and the median counterparty transacted with 2 dealers in
2017.\591\ While reputational incentives may flow from a customer's
willingness to deal with an SBS Entity, the fact that the customer may
not have many dealers to choose from weakens those incentives. However,
the Commission also notes that market concentration is itself
endogenous to market participants' counterparty selection. That is,
counterparties trade off the potentially higher counterparty risk of
transacting with SBS Entities that rely on disqualified associated
persons against the attractiveness of security-based swaps (price and
non-price terms) that they may offer. If a large number of
counterparties choose to move their business to SBS Entities that do
not rely on disqualified associated persons (including those SBS
Entities that may currently have lower market share), market
concentration itself can decrease.
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    \591\ See id. at 4925.
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    Third, as discussed above, the exclusion will not be available with
respect to an associated person if that associated person is currently
subject to an order described in subparagraphs (A) and (B) of Section
3(a)(39) of the Exchange Act, with the limitation that an order by a
foreign financial regulatory authority described in subparagraphs
(B)(i) and (B)(iii) of Section 3(a)(39) shall only apply to orders by a
foreign financial regulatory authority in the jurisdiction where the
associated person is employed or located. In such circumstances,
affected SBS Entities will be required to apply for relief under Rule
of Practice 194 and will be unable to allow their disqualified
associated person entities to effect or be involved in effecting
security-based swaps on their behalf, pending review by the Commission.
2. Effects on Efficiency, Competition, and Capital Formation
    The Commission has assessed the effects of the amendment on
efficiency, competition, and capital formation. As noted above,
limiting the ability of statutorily disqualified persons to effect or
be involved in effecting security-based swaps on behalf of SBS Entities
may reduce compliance and counterparty risks and may facilitate
competition among higher quality associated persons and SBS Entities,
thereby enhancing integrity of security-based swap markets. At the same
time, limits on the participation of disqualified employees in
security-based swap markets may result in costs related to replacing or
reassigning an employee to SBS Entities or applying to the Commission
for relief. This may disrupt existing counterparty relationships across
closely linked swap and security-based swap markets and increase
transaction costs borne by counterparties, adversely effecting
efficiency and capital formation in swap and security-based swap
markets.
    In addition, if more SBS Entities seek to avail themselves of the
exclusion and retain, hire, or increase their reliance on disqualified
foreign personnel in their transactions with foreign counterparties, a
greater number of disqualified persons may seek employment and business
opportunities in security-based swap markets. As discussed in the Rule
of Practice 194 Adopting Release,\592\ there is a dearth of economic
research on these issues in derivatives markets, and the research in
other settings cuts both ways. On the one hand, a greater number of
disqualified persons active in security-based swaps could increase the
``lemons'' problem and related costs of adverse selection,\593\ since
market participants may demand a discount from counterparties if they
expect a greater chance that counterparties have employed disqualified
persons that are involved in arranging transactions. This effect could
lead to a reduction in informational efficiency and capital formation.
On the other hand, more flexibility in employing disqualified persons
may also increase competition and consumer surplus.\594\
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    \592\ See Rule of Practice 194 Adopting Release, 84 FR at 4923.
    \593\ See, e.g., George A. Akerlof, The Market for ``Lemons'':
Quality Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488
(1970). Informational asymmetry about quality can negatively affect
market participation and decrease the amount of trading--a problem
commonly known as adverse selection. When information about
counterparty quality is scarce, market participants may be less
willing to enter into transactions, and the overall level of trading
may fall.
    \594\ See Jonathan Berk & Jules H. van Binsbergen, Regulation of
Charlatans in High-Skill Professions (Stanford University Graduate
School of Business, Research Paper No. 17-43, 2017), available at
https://ssrn.com/abstract=2979134. The paper models the costs and
benefits of both disclosure and standards regulation of
``charlatans'' (professionals who sell a service they do not
deliver) in high skill professions. When there is a mismatch between
high demand for a skill and short supply of the skill, the presence
of charlatans in a profession is an equilibrium outcome.
Importantly, reducing the number of charlatans by regulation
decreases consumer surplus in their model. Both standards and
disclosure regulations drive charlatans out of the market, but the
resulting reduction in competition amongst producers actually
reduces consumer surplus. In turn, producers strictly benefit from
such regulation.

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    The amendment would preserve an equal competitive standing of U.S.
and non-U.S. SBS Entities with disqualified foreign personnel as they
compete for business with foreign counterparties and foreign branches
of U.S. counterparties. Importantly, under the baseline, both U.S. and
non-U.S. Swap Entities are able to transact with foreign counterparties
relying on their foreign disqualified personnel without applying to the
CFTC for relief from the statutory prohibition. As discussed in the
economic baseline, the Commission expects extensive cross-registration
of dealers across the two markets. As a result of the exclusion being
adopted, dually registered U.S. SBS Entities would be more likely to be
able to rely on at least some of the same disqualified foreign
personnel in transacting with the same counterparties in both swap
(e.g., index CDS) and security-based swap (e.g., single-name CDS)
markets.
    The amendment may create incentives for SBS Entities to relocate
their personnel (or the activities performed by U.S. personnel) outside
the U.S. to be able to avail themselves of the exclusion and avoid
being bound by the statutory prohibition. The cost of relocation will
depend on many factors, such as the number of positions being
relocated, the location of new operations, the costs of operating at
the new location, and other factors. These factors will, in turn,
depend on the relative volumes of market-facing activity that a firm
carries out on different underliers and with counterparties in
different jurisdictions. As a result of these dependencies, the
Commission cannot reliably quantify the costs of these alternative
approaches to compliance. However, the Commission believes that firms
would seek to relocate their personnel (or the activities performed by
U.S. personnel) only if they expect the relocations to be profitable.
    Further, the amendment may improve the employment and career
outcomes of disqualified foreign personnel relative to disqualified
U.S. personnel. As a result, disqualified personnel may seek to
relocate outside the U.S. and seek employment by SBS Entities in their
foreign business. To the degree that such relocation occurs, it may
reduce the effective scope of application of the statutory prohibition.
This may also lead to a separating equilibrium: It may decrease
counterparty risks and adverse selection costs of security-based swaps
in SBS Entities and in transactions with U.S. counterparties and
increase counterparty risks and adverse selection costs in transactions
with foreign counterparties and foreign branches of U.S.
counterparties.
3. Alternatives Considered
    The Commission has considered several alternatives to the amendment
to Rule of Practice 194(c)(2).
(a) Relief for All SBS Entities With Respect to Non-U.S. Personnel
Transacting With Non-U.S. Counterparties But Not With Foreign Branches
of U.S. Counterparties
    The Commission could have adopted an exclusion for all SBS Entities
with respect to foreign personnel transacting with foreign
counterparties, without making the exclusion available to foreign
personnel transacting with foreign branches of U.S. counterparties. As
discussed above, a history of statutorily disqualifying conduct may
signal higher ongoing risks to counterparties. SBS Entities may choose
to replace disqualified foreign personnel due to reputational and
compliance costs. In addition, the security-based swap market is
institutional in nature, and better informed institutional
counterparties may choose to move their business to another employee or
another SBS Entity without disqualified personnel. To the degree that
SBS Entities do not replace disqualified personnel and counterparties
do not move their business, the alternative may decrease risks to
foreign branches of U.S. counterparties relative to the adopted
approach. Since both potential returns and potential risks of foreign
branches may flow through to some U.S. parents (depending on the
counterparty's ownership and organizational structure), the alternative
could reduce the returns and risks of such U.S. counterparties'
parents.
    At the same time, the alternative approach would involve unequal
effects on foreign counterparties and foreign branches of U.S.
counterparties. Specifically, under the alternative, foreign
counterparties would be able to choose between transacting with those
SBS Entities that employ statutorily disqualified personnel and those
that do not, whereas foreign branches of U.S. counterparties would only
be able to transact with SBS Entities that do not employ statutorily