(``The Commission may act . . . to enjoin a potential fraud or
prosecute a fraud that failed, without proof of actual loss to any
victim.'').
---------------------------------------------------------------------------

    One commenter argued against applying the negligence standard
applicable to the misconduct prohibited by Rules 9j-1(a)(3) and (4) to
attempts to engage in that misconduct because it ``may capture conduct
that is not itself fraudulent or manipulative'' but rather ``legitimate
business activities'' and would have a ``chilling effect on the market
for security-based swaps.'' \154\ Another commenter noted that sections
17(a)(2) and (3) of the Securities Act do not prohibit ``attempts'' and
that ``the Commission should either eliminate the reference to attempts
in Rules 9j-1(a)(3) and (4)'' or clarify the standard required for
liability for attempted conduct prohibited under those paragraphs of
Rule 9j-1.\155\ Similarly, one commenter believed that including
attempts within the scope of conduct covered by Rule 9j-1 was broader
than the scope of conduct covered by section 17(a) of the Securities
Act and warranted the application of an intent standard.\156\
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    \154\ LSTA Letter at 7.
    \155\ See IIB-ISDA-SIFMA Letter at 13 (arguing that ``[p]arties
cannot be held to a standard of strict liability with regards to
fluid discussions in the course of negotiating complex
transactions--not to mention the potential for good faith mistakes
to arise in connection with ongoing payment and delivery
obligations'').
    \156\ See MFA Letter at 12. See also IIB-ISDA-SIFMA Letter at 13
(arguing for a different standard for attempted conduct).
---------------------------------------------------------------------------

    Although, as discussed above, the Commission disagrees with
assertions that a different standard would capture legitimate business
decisions,\157\ we nevertheless agree that scienter is the proper
standard for attempts at conduct that would violate paragraphs (a)(3)
or (a)(4) of final Rule 9j-1.\158\ Therefore, while final Rule 9j-1
retains the non-scienter-based standard for the underlying conduct
described in paragraphs (a)(3) and (4), the Commission is revising the
final rule in order to separate the attempted conduct from paragraphs
(a)(3) and (4) of proposed Rule 9j-1 into a new paragraph (a)(5).
Scienter is the standard that will apply to Rule 9j-1(a)(5).
---------------------------------------------------------------------------

    \157\ See supra notes 144-147 and accompanying text.
    \158\ In other contexts, courts have recognized that a scienter
standard may be appropriate for attempts even when it is not
required for the violation attempted. See, e.g., United States v.
Cote, 504 F.3d 682, 687 (7th Cir. 2007). See also United States v.
Gracidas-Ulibarry, 231 F.3d 1188, 1192 (9th Cir. 2000) (recognizing
``the doctrine that the crime of attempt requires a showing of
specific intent even if the crime attempted does not'' (internal
quotation marks omitted)).
---------------------------------------------------------------------------

B. Prohibition on Price Manipulation

1. Proposed Approach
    Partly in response to manufactured credit events and other
opportunistic CDS strategies observed over the last decade,\159\
paragraph (b) of proposed Rule 9j-1 was designed to address price
manipulation and attempted price manipulation, similar to 17 CFR 180.2
(``CFTC Rule 180.2'').\160\ Paragraph (b) of proposed Rule 9j-1 would
have made it unlawful for any person to, directly or indirectly,
manipulate or attempt to manipulate the price or valuation of any
security-based swap, or any payment or delivery related thereto.
---------------------------------------------------------------------------

    \159\ See supra section I.B.2. See also 2021 Proposing Release,
87 FR at 6654-55 (discussing the manufactured credit events and
other opportunistic strategies in the CDS market identified by the
Commission that ``may adversely affect the integrity, confidence,
and reputation of the credit derivatives markets) (quoting the 2019
Joint Statement). To be clear, Rule 9j-1, including Rule 9j-1(b),
applies to all security-based swaps and is not limited to CDS.
    \160\ See 17 CFR 180.2.
---------------------------------------------------------------------------

    Proposed Rule 9j-1(b) was designed to capture misconduct such as
situations in which a payment under the security-based swap is
intentionally or recklessly distorted for the benefit of one of the
security-based swap counterparties or situations in which a person
intentionally or recklessly causes or avoids the purchase or sale of a
security-based swap for the benefit of one counterparty. The proposed
rule was not designed to capture affirmative actions taken in the
ordinary course of a security-based swap transaction or the reference
underlying security.\161\ In this regard, the 2021 Proposing Release
stated that a determination as to whether manipulation or attempted
manipulation under Rule 9j-1(b) occurred would largely depend on the
facts and circumstances of each particular situation. However, as a
general matter the Commission would expect to use its authority to
bring an enforcement action under Rule 9j-1(b) when a party took action
for the purposes of avoiding or causing, or increasing or decreasing, a
payment under a security-based swap in a manner that would not have
occurred but for such actions, or when an action appeared to be
designed almost exclusively to harm a counterparty.\162\ The Commission
specifically stated in the 2021 Proposing Release that its intent was
not to discourage lenders and prospective lenders from discussing or

providing financing or other forms of relief to reference entities to
avoid defaulting on their debt.
---------------------------------------------------------------------------

    \161\ See 2021 Proposing Release, 87 FR at 6663.
    \162\ Id.
---------------------------------------------------------------------------

2. Commission Action
    The Commission is adopting a price manipulation rule as proposed in
Rule 9j-1(b), but as a new paragraph (6) to Rule 9j-1(a). Consistent
with the revisions to Rule 9j-1(a) discussed above in section II.A, the
placement of the price manipulation rule in a new paragraph to Rule 9j-
1(a), rather than in standalone paragraph 9j-1(b) as proposed,
clarifies that the prohibited manipulative conduct must occur in
connection with effecting, or attempting to effect a transaction in any
security-based swap or in connection with purchasing or selling, or
inducing or attempting to induce the purchase or sale, of any security-
based swap.\163\ We discuss this change in more detail below.
---------------------------------------------------------------------------

    \163\ See Rule 9j-1(a)(6).
---------------------------------------------------------------------------

    The Commission received multiple comment letters specifically
addressing paragraph (b) of proposed Rule 9j-1. One commenter was
supportive of proposed Rule 9j-1(b) and the application of a ``facts
and circumstances'' analysis to determine whether conduct in connection
with a security-based swap is manipulative.\164\ Another commenter
supported the Commission's addition of paragraph (b) to ``better
protect the fairness of markets, and better enable appropriate
enforcement to police abuses in the swaps markets.'' \165\
---------------------------------------------------------------------------

    \164\ See Fletcher Letter at 2 (stating that a facts and
circumstances ``approach avoids bright-line rules that potentially
create opportunities to engage in manipulative behavior within the
letter but not the spirit of the law, and provides the staff of the
Commission with the flexibility it needs to evaluate transactions in
an ever-evolving marketplace'').
    \165\ AFRED Letter at 4-5 (stating specifically that Rule 9j-1
would enable the Commission ``to crack down on fraudulent conduct in
the [CDS] market that unnecessarily triggers a counterparty to post
collateral related to a default for the CDS buyers' benefit'').
---------------------------------------------------------------------------

    However, most of the comments addressing paragraph (b) of proposed
Rule 9j-1 argued against the new provision or asked for added
clarity.\166\ One commenter argued that the Commission's guidance with
regard to the standard to be applied to determine liability under the
proposed rule was insufficient and that it was unclear how courts would
apply the standard absent a ``deceptive intent'' requirement.\167\
---------------------------------------------------------------------------

    \166\ See Milbank Letter at 2-5; MFA Letter at 17-18; LSTA
Letter at 6; IIB-ISDA-SIFMA Letter at 13-15.
    \167\ Milbank Letter at 3 (citing case law in which ``anti-
manipulation provisions of existing securities laws are generally
interpreted . . . to prohibit conduct that is intended to deceive
investors by artificially affecting market activity or prices, with
deceptive intent being an essential element for conduct to be
considered `manipulative''').
---------------------------------------------------------------------------

    The Commission has carefully considered the comments. The
Commission is adopting final Rule 9j-1(a)(6) to prohibit manipulation
and attempted manipulation of the price or valuation of any security-
based swap, including any payment or delivery related thereto, in
connection with effecting or attempting to effect a transaction in, or
purchasing or selling, or inducing or attempting to induce the purchase
or sale of, any security-based swap. The Commission will apply a
scienter standard--which includes intentional or reckless misconduct--
to determine whether conduct is in violation of final Rule 9j-
1(a)(6).\168\
---------------------------------------------------------------------------

    \168\ Courts have found that use of the term ``manipulative'' in
the statute would evidence a Congressional intent to proscribe only
knowing or intentional misconduct and that, accordingly, the
Commission must establish that the misconduct was made with
scienter. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193
(1976). The Supreme Court has defined scienter as ``a mental state
embracing intent to deceive, manipulate or defraud.'' Id. In
addition, scienter may also be established by a finding of
recklessness. See, e.g., Sunstrand Corp. v. Sun Chemical Corp., 553
F.2d 1033, 1045 (7th Cir. 1977).
---------------------------------------------------------------------------

    Many of the commenters critical of proposed Rule 9j-1(b) believed
that it was too broad and would lack clarity in application, thereby
leading to a chilling effect on the security-based swap market and the
credit market.\169\ Several commenters focused on the ``facts and
circumstances analysis'' described by the Commission in proposing Rule
9j-1(b) for determining whether a violation of the rule has occurred.
In general, these commenters believed that the facts and circumstances
test was not an adequate standard to determine when manipulation or
attempted manipulation prohibited by proposed Rule 9j-1(b) occurred.
One commenter pointed to the standard articulated by the CFTC in the
enforcement of CFTC Rule 180.2 to argue for a clearer standard
regarding manipulative conduct.\170\ When adopting CFTC Rule 180.2, the
CFTC reiterated that it would be guided by a four-part test for
manipulation that it had developed in case law under sections 6(c)
\171\ and 9(a)(2) \172\ of the Commodity Exchange Act to determine
whether to apply CFTC Rule 180.2. Under this four-part test, to bring
action, the CFTC would consider ``(1) [t]hat the accused had the
ability to influence market prices; (2) that the accused specifically
intended to create or effect a price or price trend that does not
reflect legitimate forces of supply and demand; (3) that artificial
prices existed; and (4) that the accused caused the artificial
prices.'' \173\ Another commenter pointed to the amended definition of
``Failure to Pay'' in the ISDA Credit Derivatives Definition as an
example of the type of guidance the commenter believed would be helpful
to market participants in determining what actions may be construed as
misconduct or manipulation.\174\
---------------------------------------------------------------------------

    \169\ See, e.g., Milbank Letter at 2 (arguing that the provision
is overbroad and ambiguous and that the Commission should provide
``additional clarity as to the standard that would apply to claims
brought under proposed Rule 9j-1(b)''); MFA Letter at 17-18
(positing that the scope of the provision is overly broad and that
``market participants will reduce their lending activity as well as
their security-based swap and securities market activity, or avoid
certain markets altogether''); LSTA Letter at 6 (finding that the
provision introduces additional uncertainty for lenders).
    \170\ See MFA Letter at 18 (``The CFTC's anti-manipulation rules
applicable to swap transactions, which are similar and analogous to
security-based swaps in many respects, set out a much clearer
standard regarding manipulative conduct.''). CFTC Rule 180.2
addresses price manipulation and provides that ``[i]t shall be
unlawful for any person, directly or indirectly, to manipulate or
attempt to manipulate the price of any swap, or of any commodity in
interstate commerce, or for future delivery on or subject to the
rules of any registered entity.'' Prohibition on the Employment, or
Attempted Employment, of Manipulative and Deceptive Devices and
Prohibition on Price Manipulation, 76 FR 41398, 41707 (July 14,
2011) (``CFTC Rule 180.2 Adopting Release'').
    \171\ 7 U.S.C. 6c.
    \172\ 7 U.S.C. 13(a)(2).
    \173\ See CFTC Rule 180.2 Adopting Release, 76 FR at 41407. In
addition, a violation of CFTC Rule 180.2 requires a showing of
``specific intent.'' Id. (``[The CFTC] reaffirms the requirement
under final Rule 180.2 that a person must act with the requisite
specific intent. In other words, recklessness will not suffice under
final Rule 180.2 as it will under final Rule 180.1.''). In contrast,
for purposes of liability under Rule 9j-1, scienter includes
recklessness as established by a long line of case law. See supra
note 129.
    \174\ Letter from Jennifer Han, Managed Funds Association, dated
July 8, 2022 (``July 2022 MFA Letter''), at 5-7. In 2019, ISDA
introduced amendments to its Credit Derivatives Definitions designed
to address certain issues related to manufactured credit events,
which ISDA termed ``narrowly tailored credit events'' (``ISDA
Amendments''). See 2019 Narrowly Tailored Credit Event Supplement to
the 2014 ISDA Credit Derivatives Definition (July 15, 2019),
available at https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
---------------------------------------------------------------------------

    Similarly, one commenter believed that proposed Rule 9j-1(b)
included a ``manipulation standard that is new to securities markets''
and requested further guidance or definition to avoid ``the chilling
effect that a poorly-understood standard could have on legitimate
conduct.'' \175\ In the commenter's view, ``the Commission should
articulate as precisely as possible (a) what potential conduct or
activity is targeted, (b) which market participants would be harmed by
it, and (c) why it is that the existing market infrastructure (whether
the existing anti-

fraud rules or the provisions of the relevant contracts) does not
already provide sufficient protection.'' \176\ A significant concern
for the commenter was whether market participants would be able to
determine that their actions were manipulative and in violation of
proposed Rule 9j-1(b). Absent a clear standard, they argued that market
participants may determine to reduce their activity, which would have
broad negative impacts on liquidity in the security-based swap market
and broader economy.\177\ Finally, the commenter requested that the
Commission provide guidance with regard to the types of conduct or
activities that would violate proposed Rule 9j-1(b) and those that
would not violate proposed Rule 9j-1(b) under any implemented ``facts
and circumstances'' test.\178\ A separate commenter requested that the
Commission ``tailor'' proposed Rule 9j-1(b) so that it includes a
specific description of what constitutes manipulative conduct.\179\
---------------------------------------------------------------------------

    \175\ IIB-ISDA-SIFMA Letter at 13.
    \176\ Id. at 14 (stating that care should be taken to correctly
analyze the potential impact of new manipulation standards such as
that in Rule 9j-1(b)).
    \177\ Id. at 13-14.
    \178\ Id. at 16.
    \179\ See MFA July 2022 Letter at 10. The commenter also
believed that the Commission should re-propose Rule 9j-1(b) for
public comment to allow market participants ``to adequately assess
the potential impact of [proposed Rule 9j-1(b)] on the security-
based swap markets and . . . on the broader market for corporate
debt.'' Id.
---------------------------------------------------------------------------

    The Commission is revising the price manipulation provision,
originally proposed as Rule 9j-1(b) and adopted as final Rule 9j-
1(a)(6), in response to the comments above. Consistent with the
revisions to final Rule 9j-1(a) discussed above in section II.A, Rule
9j-1(a)(6) will apply to conduct undertaken in connection with
effecting or attempting to effect a transaction in any security-based
swap, and to purchasing or selling, or inducing or attempting to induce
the purchase or sale of, any security-based swap (including but not
limited to, in whole or in part, the execution, termination (prior to
its scheduled maturity date), assignment, exchange, or similar transfer
or conveyance of, or extinguishing of any rights or obligations under,
a security based-swap).\180\ As the Supreme Court has stated,
``fraudulent manipulation of [securities] prices . . . unquestionably
qualifies as a fraud `in connection with the purchase or sale' of
securities.'' \181\ Rule 9j-1(a)(6) also prohibits the manipulation (or
attempted manipulation) of the valuation of any security-based swap, or
any payment or delivery related thereto, to the extent such misconduct
is in connection with effecting or attempting to effect a transaction
in, or purchasing or selling, or inducing or attempting to induce the
purchase or sale of, any security-based swap.\182\
---------------------------------------------------------------------------

    \180\ See supra section II.A.
    \181\ Dabit, 547 U.S. at 89.
    \182\ The Commission has the authority to prohibit attempted
manipulation based on section 9(j)'s application to ``attempt[s] to
induce the purchase or sale of'' any security-based swap, as well as
case law establishing that manipulative conduct need not be
successful to violate the securities laws. See supra note 112.
---------------------------------------------------------------------------

    A determination as to whether a person has violated final Rule 9j-
1(a)(6) will depend on the facts and circumstances of each particular
situation. The assessment of facts and circumstances is an objective
evaluation that considers all relevant information surrounding the
alleged misconduct, including both quantitative and qualitative
factors, to determine whether prohibited manipulation is present. A
``facts and circumstances'' analysis will provide the Commission with
the flexibility it needs to address an evolving security-based swap
market, including the ever-changing CDS market, and potential
misconduct in those markets. Bright line rules or tests, on the other
hand, may artificially exclude manipulative and attempted manipulative
conduct and could create a roadmap for market participants to avoid
liability for manipulative actions. A substantial body of case law
regarding manipulative behavior exists with regard to other antifraud
and anti-manipulation provisions in the Securities Act and Exchange Act
to which the Commission will look to assess whether a violation of Rule
9j-1(a)(6) has occurred.\183\ In addition, the Commission reiterates
that case law requires a showing of scienter to bring an action for
manipulation or attempted manipulation and that it will apply a
scienter standard to determine whether conduct is in violation of Rule
9j-1(a)(6).
---------------------------------------------------------------------------

    \183\ See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185
(1976); Markowski v. SEC, 274 F.3d 525 (D.C. Cir. 2001); United
States v. Mulheren, 938 F.2d 364 (2d Cir. 1991); SEC v. Malenfant,
784 F. Supp. 141, 144 (S.D.N.Y. 1992); SEC v. Markusen, 2016 U.S.
Dist. LEXIS 55419 (D. Minn. Apr. 25, 2016); Sharette v. Credit
Suisse Intern, 127 F. Supp. 3d 60 (S.D.N.Y. 2015); ATSI
Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir.
2007); Wilson v. Merrill Lynch & Co., 671 F.3d 120 (2d Cir. 2011);
SEC v. Schiffer, 1998 U.S. Dist. LEXIS 8579 (S.D.N.Y. June 10,
1998).
---------------------------------------------------------------------------

    Also, as noted, commenters encouraged the Commission to explicitly
recognize certain market activities as legitimate.\184\ The Commission
declines to carve out from the application of Rule 9j-1(a)(6)
categories of market activities based on hypothetical fact patterns as
requested by commenters. Liability under Rule 9j-1(a)(6) will depend
upon an analysis of all relevant information. A different approach
could artificially exclude manipulative conduct, particularly given the
complex fact patterns generally at issue in many security-based swap
transactions. As discussed in the 2021 Proposing Release, Rule 9j-
1(a)(6) applies to actions taken outside the ordinary course of a
typical lender-borrower relationship, such as an action taken for the
purposes of avoiding or causing, or increasing or decreasing, a payment
under a security-based swap in a manner that would not have occurred
but for such actions, or when an action appears to be designed almost
exclusively to harm counterparties, and is not intended to discourage
lenders from discussing or providing financing or relief to avoid
default.\185\ Moreover, the fact that the Commission will apply a
scienter standard for liability under Rule 9j-1(a)(6) should lessen
concerns regarding any ``chilling effects'' of the new rule.\186\
Further, as discussed in section II.E.2, the affirmative defenses of
final Rule 9j-1(e) do not apply to the anti-manipulation provision in
Rule 9j-1(a)(6) because paragraph (a)(6) does not apply to affirmative
actions taken in the ordinary course of a security-based swap
transaction or the reference underlying security while aware of
material nonpublic information. To be clear, Rule 9j-1(a)(6) will
require that security-based swap market participants take care that
their legitimate market activities remain within the scope of the
typical lender-borrower relationship and do not cross the line into
prohibited manipulation. However, the use of a facts and circumstances
analysis, along with the use of a scienter standard, to identify
manipulative conduct addresses commenters concerns that legitimate
market activities would be captured by the prohibitions of Rule 9j-
1(a)(6) or otherwise chilled.
---------------------------------------------------------------------------

    \184\ See IIB-ISDA-SIFMA Letter at 15-23.
    \185\ See 2021 Proposing Release, 87 FR at 6663. As discussed
above, the text of revised Rule 9j-1(a) also specifies that such
actions must occur in connection with effecting or attempting to
effect a transaction in, or purchasing or selling, or inducing or
attempting to induce the purchase or sale of, any security-based
swap.
    \186\ See Letter from Som-lok Leung, International Association
of Credit Portfolio Managers (``IACPM''), dated Mar. 21, 2022
(``IACPM Letter''), at 4; MFA Letter at 8-10; LSTA Letter at 5, 7-
10; IIB-ISDA-SIFMA Letter at 13-22.
---------------------------------------------------------------------------

    However, to further address commenter concerns, the Commission
reiterates that Rule 9j-1(a)(6) prohibits, among other things, a
situation where a person (or group of persons) intentionally or
recklessly causes or

avoids the purchase or sale of a security-based swap for the benefit of
a counterparty, or to harm a counterparty, to a security-based swap.
This may include, for example, orphaning a CDS,\187\ avoiding
termination of a CDS for a period of time, or causing the termination
of a CDS. But a person simply profiting from a CDS position after a
company's bankruptcy, which such person could have prevented by
participating in a financing to the company, without more, is not in
and of itself improper conduct for purposes of Rule 9j-1(a)(6).
---------------------------------------------------------------------------

    \187\ ``Orphaning'' a CDS refers to a situation where the debt
of a reference entity is eliminated or reduced for the purposes of
moving the price of CDS. The end result of such activity is that CDS
buyers continue to pay (and CDS sellers continue to receive)
premiums on CDS that will never default. Similarly, a CDS protection
seller could offer financing to the company to avoid a credit event
and subsequent CDS payout, with the financing timed so that the
company's bankruptcy is merely delayed until after the CDS expires.
---------------------------------------------------------------------------

    The Commission also recognizes that reference entities often rely
on financing and other forms of relief to avoid defaulting on their
debt. We understand that CDS transactions are an important means by
which debt holders hedge their underlying debt instruments, and that
the absence of such hedging opportunities could impact prospective
investors' willingness and ability to invest in that underlying market.
The final rule is not intended to discourage lenders and prospective
lenders from discussing or providing such financing or relief, even
when those persons also hold CDS positions. Rather, the Commission is
adopting Rule 9j-1(a)(6) to account for actions taken outside the
ordinary course of a typical lender-borrower relationship (or a
prospective lender-borrower relationship). Although, as discussed, any
such determination would need to be based on the facts and
circumstances of a particular situation, as a general matter an action
that appears to be designed almost exclusively to harm one or more CDS
counterparties would likely fall within the prohibition in Rule 9j-
1(a)(6). Security-based swap market participants should and can take
care that their legitimate market activities remain within the scope of
the typical lender-borrower relationship and do not cross the line into
prohibited manipulation. Using a ``facts and circumstances'' analysis
to identify conduct that is prohibited by Rule 9j-1(a)(6), the
Commission will consider all relevant facts in any attempt to determine
whether prohibited manipulation or attempted manipulation has occurred.
Further, the Commission will apply a scienter standard, which will work
to eliminate legitimate conduct from the scope of Rule 9j-1(a)(6). As
discussed above, the adoption of a ``facts and circumstances'' analysis
is appropriate given the complex fact patterns in many security-based
swap transactions.
    Proposed Rule 9j-1(b) was intended to address, among other things,
a number of the manufactured credit events or other opportunistic
strategies in the CDS market observed over the last decade.\188\ In re-
proposing Rule 9j-1, the Commission provided specific examples of
manufactured or other opportunistic CDS strategies that had been
reported by academics and the press.\189\ Commenters raised concerns
both that industry efforts, such as the ISDA Amendments and anti-net
short provisions, have successfully addressed opportunistic strategies
such as those described in the 2021 Proposing Release,\190\ and that
the description of the manufactured credit events or opportunistic
strategies identified by the Commission were ``overly-broad and capture
legitimate market activities.'' \191\ One commenter asked the
Commission to ``refine the descriptions of'' manufactured credit events
or opportunistic strategies that they believe are too broad and have
been addressed by industry efforts.\192\ With regard to industry
efforts, the anti-net short provisions and ISDA Amendments are narrowly
focused and have limited ability to reduce fraudulent and manipulative
activity in the security-based swap market. The ISDA Amendments do not
address all of the concerns identified in the 2019 Joint Statement,
including, but not limited to, addressing opportunistic strategies that
do not involve narrowly tailored credit events.\193\ Anti-net short
provisions are limited to syndicated bank loans and would not apply to
fraudulent activity in the security-based swap market that does not
involve such loans. Thus, even if these industry efforts were
successful in reducing fraudulent activity, their impact likely would
be limited by their narrow scope. In response to requests to refine the
descriptions of manufactured credit events in the 2021 Proposing
Release, the Commission agrees that there may be circumstances in which
the types of conduct described may not be the result of manipulation or
attempted manipulation; however, the facts and circumstances analysis
and scienter standard sufficiently tailor final Rule 9j-1(a)(6) to
properly capture manipulative conduct. Therefore, the Commission
declines to revise the descriptions.
---------------------------------------------------------------------------

    \188\ See 2021 Proposing Release, 87 FR at 6663.
    \189\ See supra section I.B.2. See also 2021 Proposing Release,
87 FR at 6654-55 (describing in more detail examples of manufactured
credit events and other opportunistic strategies in the CDS market
reported by academics and the press).
    \190\ See IIB-ISDA-SIFMA Letter at 19-20; LSTA Letter at 4; MFA
July 2022 Letter at 4-10; Milbank Letter at 6.
    \191\ IIB-ISDA-SIFMA Letter at 20-23.
    \192\ See IIB-ISDA-SIFMA Letter at 19.
    \193\ See 2021 Proposing Release, 87 FR at 6655 n.31.
---------------------------------------------------------------------------

    One commenter requested that the ``valuation'' prong of proposed
Rule 9j-1(b) be removed because ``a prohibition on manipulation of the
`valuation' of an asset does not exist in any U.S. regulatory context
and would require a new body of case law to be formed to determine how
any such new prohibition should be interpreted.'' \194\ The commenter
argued that case law focuses on divergences between price and value and
that ``no analogy can be drawn in cases where it is the change in value
that is prohibited.'' \195\ The Commission declines to remove the
manipulation of a security-based swap's valuation from the scope of
Rule 9j-1(a)(6) because the pricing and valuation of security-based
swaps are intrinsically connected. For example, although CDS pricing
can be complex, ``[t]he basic idea of CDS pricing is that the present
value of all the CDS premium payments should equal to the present value
of the expected payoff from the CDS for the [net present value] to be 0
for both parties of the contract (resulting in each party being equally
well off).'' \196\ In other words, a CDS typically is priced to allow
the protection seller to recover its potential cash outflows upon a
credit event and termination of the CDS, or its ``expected loss.'' The
protection seller will determine the value of the expected loss based
on several factors, including the likelihood of default and cost of
capital. The value of the expected loss drives the price of the CDS and
the payout upon termination of the CDS. Similarly, the price of a TRS
typically is the difference between the present value of both ``legs''
of the transaction's cash flows. Therefore, actions to manipulate price
will affect valuation and vice versa. Additionally, market participants

may rely on models to price or value the swap.\197\ This suggests that
``valuation'' of a security-based swap has a role in the market and
should be included in the anti-manipulation provisions of Rule 9j-
1(a)(6). Further, by prohibiting the manipulation of a security-based
swap's valuation, Rule 9j-1(a)(6) will help to prevent manipulation of
payments and deliveries under a security-based swap ``from distorting
the price and market for such security-based swaps, as well as for the
reference underlying, and improperly interfering with the independent
and proper functioning of the markets.'' \198\
---------------------------------------------------------------------------

    \194\ Milbank Letter at 3 (citing to Santa Fe Industries, Inc.
v. Green, 430 U.S. 462, 476 (1977), to argue that ``
`[m]anipulation' is `virtually a term of art when used in connection
with securities markets' . . . The term refers generally to
practices, such as wash sales, matched orders, or rigged prices,
that are intended to mislead investors by artificially affecting
market activity'').
    \195\ Milbank Letter at 3.
    \196\ Yuan Wen and Jacob Kinsella, Credit Default Swap--Pricing
Theory, Real Data Analysis and Classroom Applications Using
Bloomberg Terminal, available at https://data.bloomberglp.com/bat/sites/3/2016/10/WhitePaper_Wen.pdf.
    \197\ The Commission has previously recognized that market
participants may rely on models for pricing and valuation of
security-based swaps. See, e.g., Business Conduct Standards Adopting
Release, 81 FR at 29988 (in the context of daily marks, stating that
``even if the mark is calculated based on internal models or such
indices, its provision by the SBS Entity will further the goal of
providing helpful transparency into the SBS Entity's pricing and
valuation of the security-based swap by providing a helpful
reference point that the SBS Entity's counterparty can take into
account when evaluating the pricing and valuation of the SBS.'').
    \198\ 2010 Rule 9j-1 Proposing Release, 75 FR at 68565-66.
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    Rule 9j-1(a)(6) prohibits manipulation in connection with effecting
or attempting to effect a transaction in, any security-based swap, or
purchasing or selling, or inducing or attempting to induce the purchase
or sale of, any security-based swap, which may include intentionally or
recklessly distorting payments related to a security-based swap to
benefit, or harm, one of the security-based swap counterparties, or
actions that serve little to no economic purpose other than to
artificially influence the composition of the deliverable obligations
in a CDS auction and affect the security-based swap's valuation and
price. To remove the valuation prong from final Rule 9j-1(a)(6) would
create a gap in the prohibition against the manipulation or attempted
manipulation of prices in the security-based swap market.

D. Liability Under Rules 9j-1(b) and (c)

1. Proposed Approach
    The Commission included paragraphs (c) and (d) of re-proposed Rule
9j-1 to make it clear that market participants could not avoid
liability under the rule by effecting a fraudulent scheme through the
purchase or sale of an underlying security, rather than the purchase or
sale of the security-based swap on which it is based, and vice versa.
The first of those two provisions would have provided that a person
could not escape liability for trading based on possession of material
nonpublic information about a security by purchasing or selling a
security-based swap based on that security (as opposed to trading in
the security itself). The second provision would have provided that a
person could not escape liability under section 9(j) or Rule 9j-1 by
purchasing or selling the underlying security (as opposed to purchasing
or selling a security-based swap that is based on that security).
2. Commission Action
    One commenter specifically addressed these provisions and was
supportive, noting that the antifraud and anti-manipulation provisions
in proposed Rules 9j-1(a) and (b) would be enhanced by the addition of
proposed Rules 9j-1(c) and (d).\199\ In contrast, one commenter
questioned the Commission's authority to extend the prohibitions of
Rule 9j-1 to the purchase and sale of underlying securities.\200\ After
considering these comments, the Commission adopts Rules 9j-1(c) and (d)
largely as proposed but renumbered as final Rules 9j-1(b) and (c),
respectively.
---------------------------------------------------------------------------

    \199\ See Better Markets Letter at 9.
    \200\ See MFA Letter at 8-9.
---------------------------------------------------------------------------

a. Rule 9j-1(b)
    The Commission is adopting Rule 9j-1(b), as proposed in paragraph
(c). Final Rule 9j-1(b) provides that wherever communicating, or
purchasing or selling a security (other than a security-based swap)
while in possession of, material nonpublic information would violate,
or result in liability to any purchaser or seller of the security under
either the Exchange Act or the Securities Act, or any rule or
regulation thereunder, such conduct in connection with a purchase or
sale of a security-based swap with respect to such security or with
respect to a group or index of securities including such security shall
also violate, and result in comparable liability to any purchaser or
seller of that security under such provision, rule, or regulation.\201\
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    \201\ Final Rule 9j-1(b) includes non-substantive corrections to
punctuation.
---------------------------------------------------------------------------

    Although generally a situation where a person uses material
nonpublic information about a security in connection with the purchase
or sale of a security-based swap would be subject to the existing
antifraud authority under the Federal securities laws, particularly
section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, market
participants also would benefit from a clarified interpretation of that
statutory provision in this rulemaking.\202\ This is particularly true
given that the issuer of a security-based swap (i.e., each counterparty
to the transaction) is different from the issuer of the underlying
security (i.e., the reference entity). Accordingly, the Commission is
now adopting Rule 9j-1(b) to provide that a person making a purchase or
sale of a security-based swap while in possession of material nonpublic
information with respect to the security underlying such security-based
swap is subject to liability.
---------------------------------------------------------------------------

    \202\ Pursuant to section 20(d) of the Exchange Act, a person
with material nonpublic information about a security cannot avoid
liability under the securities laws by making purchases or sales in
a swap on a broad-based index containing the security (e.g., the S&P
500), which would be a security-based swap agreement, whereas the
statute is silent as to the permissibility of trading on such
material nonpublic information by making purchases or sales of a
security-based swap (e.g., a swap on the security itself). The
Commission does not construe that silence as an intent to exclude
security-based swaps from the scope of section 20(d) and the
Commission has the authority under section 9(j) to prescribe means
reasonably designed to prevent fraud, manipulation, or deceit with
respect to security-based swap transactions. In addition, Section
9(j) makes it unlawful for any person to directly or indirectly take
the actions described in that section.
---------------------------------------------------------------------------

b. Rule 9j-1(c)
    The Commission also is adopting Rule 9j-1(c) largely as it was
proposed as paragraph (d), with a clarifying edit as discussed
below.\203\ Final Rule 9j-1(c) will address a situation similar to the
one described above. Specifically, it provides that wherever taking any
of the actions set forth in Rule 9j-1(a) involving a security-based
swap would violate, or result in liability under section 9(j) of the
Exchange Act or Rule 9j-1(a), such conduct, when taken by a
counterparty to such security-based swap (or any affiliate of, or a
person acting in concert with, such security-based swap counterparty in
furtherance of such prohibited activity), in connection with a purchase
or sale of a security, loan, or group or index of securities on which
such security-based swap is based shall also violate, and shall be
deemed a violation of, section 9(j) or Rule 9j-1(a). The adopted rule
text is modified from the 2021 Proposing Release to now include a
reference to ``loan.'' The addition clarifies the scope of underlying
products that apply, and is consistent with the underlying products
included in the definition of ``security-based

swap'' in section 3(a)(68)(A) of the Exchange Act.\204\
---------------------------------------------------------------------------

    \203\ In addition, final Rule 9j-1(c) includes non-substantive
corrections to punctuation and two non-substantive revisions: (1)
the word ``whenever'' at the start of the paragraph has been
replaced with the word ``wherever'' to be consistent with the
language in paragraph (b); and (2) the references to ``paragraphs
(a) or (b)'' of Rule 9j-1 have been replaced with just a reference
to ``paragraph (a)'' to reflect the placement of paragraph (b) of
proposed Rule 9j-1 into a new paragraph (a)(6) of final Rule 9j-1.
    \204\ See 15 U.S.C. 78c(68)(A).
---------------------------------------------------------------------------

    This provision prevents a person from escaping liability under
section 9(j) or Rule 9j-1(a) with respect to a security-based swap by
limiting all of its actions to purchases or sales of the security,
loan, or narrow-based security index underlying that security-based
swap. For example, if a person with an existing total return swap on
equity securities issued by XYZ Corporation subsequently engages in a
number of wash trades to artificially inflate the price of the equity
securities in order to benefit from the manipulated price by way of
their existing security-based swap position, such person would be
liable for violations of Exchange Act section 9(j) and Rule 9j-1
regardless of the fact the manipulation was conducted through purchases
or sales of the equity securities.
    In response to the commenter who questioned the Commission's
authority to extend the prohibitions of Rule 9j-1 to the purchase or
sale of underlying securities,\205\ the Commission clarifies that final
Rule 9j-1(c) does not create a separate category of prohibited activity
absent a connection to security-based swaps. Rather, this provision is
reasonably designed to prevent fraud, manipulation, or deceit with
respect to security-based swaps where that misconduct is accomplished
through transactions in the underlying security, loan, or group or
index of securities. This provision is necessary because security-based
swaps by their nature are tied intrinsically to activity in the markets
for other securities.
---------------------------------------------------------------------------

    \205\ MFA Letter at 9.
---------------------------------------------------------------------------

    Moreover, this provision does not impose liability on a person for
violations of section 9(j) of the Exchange Act and Rule 9j-1 based
solely on the impact of that person's purchases or sales on the equity,
debt, or loan markets. The rule states that the person engaged in
prohibited activities in the equity, debt, or loan markets must be a
counterparty to a security-based swap that references such equity or
debt securities or loan, or be an affiliate of, or a person acting in
concert with, such security-based swap counterparty in furtherance of
such prohibited activity. Accordingly, the Commission would analyze
whether transactions in the underlying equity or debt securities or
loan have been used as the mechanism to violate section 9(j) and Rule
9j-1. The Commission would also analyze the same transactions to
determine whether they independently violate other antifraud and anti-
manipulation provisions of the securities laws--including sections 9
and 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as
section 17(a) of the Securities Act.

E. Safe Harbors and Affirmative Defenses

1. Proposed Approach
    In response to operational concerns raised by commenters with
regard to the 2010 Proposed Rule, the Commission proposed two limited
safe harbors from re-proposed Rule 9j-1(a) to address situations when a
counterparty to a security-based swap was required to take certain
actions while in possession of material nonpublic information.\206\
First, proposed Rule 9j-1(f)(1), would have allowed a person to take
action in accordance with binding contractual rights and obligations
under a security-based swap (as reflected in the written security-based
swap documentation governing such transaction or any amendment
thereto), so long as the person could demonstrate that: (1) the
security-based swap was entered into, or the amendment was made, before
the person became aware of such material nonpublic information; and (2)
the entry into, and the terms of, the security-based swap were
themselves not a violation of any provision of proposed Rule 9j-
1(a).\207\
---------------------------------------------------------------------------

    \206\ See 2021 Proposing Release, 87 FR at 6662, 6662 n.87.
    \207\ Id. at 6662.
---------------------------------------------------------------------------

    Second, recognizing the important operational benefits and market
efficiencies related to security-based swap portfolio compression,
proposed Rule 9j-1(f)(2) would have provided a safe harbor for
transactions effected in connection with certain types of bilateral or
multilateral portfolio compression exercises.\208\ This proposed safe
harbor would have provided that a person would not be liable under re-
proposed Rule 9j-1(a) solely for reason of being aware of material
nonpublic information for ``security-based swap transactions effected
by a person pursuant to a bilateral portfolio compression exercise (as
defined in Sec.  240.15Fi-1(a)) or a multilateral portfolio compression
exercise (as defined in Sec.  240.15Fi-1(j)) so long as: (i) any such
transactions are consistent with all of the terms of a bilateral
portfolio compression exercise or multilateral portfolio compression
exercise, including as it relates to, without limitation, the
transactions to be included in the exercise, the risk tolerances of the
persons participating in the exercise, and the methodology used in the
exercise; and (ii) all such terms were agreed to by all participants of
the bilateral portfolio compression exercise or multilateral portfolio
compression exercise prior to the commencement of the applicable
exercise.'' \209\
---------------------------------------------------------------------------

    \208\ See id. at 6662-63.
    \209\ Re-proposed Rule 9j-1(f)(2); 2021 Proposing Release, 87 FR
at 6662.
---------------------------------------------------------------------------

2. Commission Action
    As discussed above, in response to operational concerns raised in
response to the 2010 Proposed Rule, the Commission included two limited
safe harbors from re-proposed Rule 9j-1(a).\210\ After further
consideration and as described in more detail below, the Commission is
not adopting either proposed safe harbor. Instead, the Commission is
adopting two affirmative defenses from Rules 9j-1(a)(1) through (a)(5).
One affirmative defense is for actions taken in connection with the
binding contractual rights and obligations under a security-based swap
(similar to the proposed safe harbor). The other affirmative defense
takes account of reasonable policies and procedures that ensure that
individuals making investment decisions are not engaging in prohibited
conduct in final Rules 9j-1(a)(1) through (a)(5). These affirmative
defenses, while not identical to the affirmative defenses under Rule
10b5-1, are similar in that they apply to situations in which a person
can demonstrate that material nonpublic information did not factor into
their investment decision.
---------------------------------------------------------------------------

    \210\ See 2021 Proposing Release, 87 FR at 6660-62.
---------------------------------------------------------------------------

    Consistent with the analogous provisions of Rule 10b5-1, final Rule
9j-1 does not provide for an affirmative defense for violations of the
anti-manipulation provision in Rule 9j-1(a)(6). Paragraph (a)(6) of
Rule 9j-1 does not apply to actions that the affirmative defenses
address: those taken in the ordinary course of a security-based swap
transaction (including actions related to the reference underlying
security) while aware of material nonpublic information.\211\
---------------------------------------------------------------------------

    \211\ Final Rule 9j-1(a)(6) is discussed in section II.C above.
---------------------------------------------------------------------------

    Several commenters urged the Commission to make the affirmative
defenses under Rule 10b5-1 available under Rule 9j-1, to address
situations in which a counterparty comes into possession of material
nonpublic information during the life of a security-based swap.\212\
Rule 10b5-1 applies to

insider trading cases under section 10(b) of the Exchange Act, and Rule
10b-5 thereunder, and includes affirmative defenses for: (1) purchases
or sales pursuant to a binding contract, an instruction to another
person to execute the trade for the instructing person's account, or a
written trading plan under certain conditions; \213\ and (2)
transactions by an entity if the individual making the investment
decision on behalf of the entity was not aware of the material
nonpublic information and the entity had implemented reasonable
policies and procedures to ensure that the individuals making
investment decisions would not violate insider trading laws.\214\
---------------------------------------------------------------------------

    \212\ See ACLI Letter at 2, 5; IIB-ISDA-SIFMA Letter at 4-5, 10;
MFA Letter at 13-16; LSTA Letter at 9; Letter from Lindsey Weber
Kiljo and William C. Thum, Asset Management Group of SIFMA (``SIFMA
AMG''), dated Mar. 21, 2022 (``SIFMA AMG Letter''), at 11-12.
    \213\ See 17 CFR 240.10b5-1(c)(1) (``Rule 10b5-1(c)(1)'').
    \214\ See 17 CFR 240.10b5-1(c)(2) (``Rule 10b5-1(c)(2)'').
---------------------------------------------------------------------------

    Several commenters noted that most security-based swap market
participants are global financial firms that have spent considerable
resources to meet the requirements of current Rule 10b5-1(c)(2), by
separating their organizations so that individuals on the public side
can engage in dealing and market-making activity, while individuals on
the private side are allowed to possess material nonpublic
information.\215\ One commenter stated that the current policies and
procedures restrict access to material nonpublic information by those
individuals who engage in security-based swap transactions for hedging
or other purposes.\216\ Since neither of the Rule 10b5-1 defenses
explicitly applied to proposed Rule 9j-1 for security-based swaps, one
commenter noted the ``confusion and regulatory uncertainty'' that would
be created with the omission of a Rule 10b5-1(c)(2)-type defense from
Rule 9j-1 (because identical conduct in the context of a security-based
swap transaction could implicate both Rule 10b-5 and Rule 9j-1, but the
affirmative defense would only be available under Rule 10b-5).\217\
---------------------------------------------------------------------------

    \215\ See IACPM Letter at 4; IIB-ISDA-SIFMA Letter at 5; MFA
Letter at 13-14.
    \216\ See LSTA Letter at 9.
    \217\ IIB-ISDA-SIFMA Letter at 5.
---------------------------------------------------------------------------

    In addition, certain commenters expressed concern with the
operational impacts of Rule 9j-1(a) on the capital and loan markets.
One commenter argued that the application of proposed Rule 9j-1 to the
ongoing, ``non-volitional'' rights and obligations that occur
throughout the life of a security-based swap could ``cast uncertainty
on a wide range of bona fide conduct necessary to the operation of the
capital markets.'' \218\ The commenter urged the Commission to
``provide an affirmative defense for actions taken by a person in
accordance with binding contractual rights and obligations under [a
security-based swap] . . . or to fulfill a regulatory obligation in
connection with [a security-based swap] . . . if the person did not act
intentionally or recklessly in connection with such action and . . .
complied in good faith with written policies and procedures reasonably
designed to meet the obligation.'' \219\ The commenter was concerned
that the negligence standard applicable to re-proposed Rules 9j-1(a)(3)
and (4), in particular, could lead to potential fraud liability for
good faith, non-volitional conduct.\220\ Another commenter addressed
operational concerns related to the credit markets and argued that the
proposed rule would ``create considerable uncertainty with respect to
the legitimate business decisions of lenders and impair the [security-
based swap] market and loan market.'' \221\ The commenter explained
that if the rule were to apply to any activity that potentially affects
the stream of payments, deliveries or other ongoing obligations or
rights between parties to a security-based swap, ``each party will have
to implement controls and mechanisms to track decisions made in
connection with each payment, delivery, obligation or right as well as
to track changes in its positions in the security-based swap and
reference underlying.'' \222\
---------------------------------------------------------------------------

    \218\ Id. at 8-10.
    \219\ Id. at 10-11, 11 n.18 (referencing a safe harbor adopted
by the CFTC in connection with non-scienter fraud and manipulative
prohibitions as part of its swap dealer business conduct standards).
    \220\ Id. at 9. The commenter stated that it did not have the
same concerns about proposed Rule 9j-1(b) (now Rule 9j-1(a)(6)),
because the scienter standard applicable to that provision is
``sufficient to distinguish illegitimate conduct from merely
negligent acts that affect payment or delivery obligations.''
    \221\ LSTA Letter at 3-10.
    \222\ Id. The LSTA supported the principles underlying section
9(j) but did not see the need for a new rule in light of existing
antifraud rules and further believed that the existing antifraud
rules would address several of the manufactured credit events
described in the 2021 Proposing Release and that the adoption of
anti-net short provisions would address other concerns. Id. at 3-4.
The Commission believes that the affirmative defense provided by new
Rule 9j-1(e)(2) will address these concerns.
---------------------------------------------------------------------------

    The Commission agrees with commenters that an affirmative defense
similar to those available under Rule 10b5-1 (when the investment
decision is not based on material nonpublic information) is important
given the similarity in the antifraud provisions. The Commission also
agrees that the affirmative defenses would address concerns regarding
market disruption. As a result, the Commission is adopting two
affirmative defenses similar in concept to the affirmative defenses in
Rule 10b5-1(c).\223\ However, the Commission is adapting the
affirmative defenses for the specific context of Rule 9j-1. In
particular, the Commission is not adopting an affirmative defense that
is as broad as the affirmative defenses in Rule 10b5-1(c)(1). Rather,
as discussed below, the Commission is limiting the relevant Rule 9j-1
affirmative defense to actions taken pursuant to binding contractual
rights under the documentation governing a security-based swap. The
Rule 10b5-1(c)(1) affirmative defenses relate to advance planning of
purchases or sales pursuant to a binding contract, an instruction to
another person to execute the trade for the instructing person's
account, or a written trading plan under certain conditions.\224\ Those
Rule 10b5-1(c)(1) affirmative defenses were created to ``provide
appropriate flexibility to those who would like to plan securities
transactions in advance, at a time when they are not aware of material
nonpublic information, and then carry out those pre-planned
transactions at a later time, even if they later become aware of
material nonpublic information.'' \225\ That flexibility is warranted
in the context of corporate insiders and others who periodically come
into possession of material nonpublic information but may want to
schedule orderly trading of securities of an issuer on a liquid public
market. It is not appropriate in the context of security-based swaps,
which are typically bespoke, created and

issued by the counterparties, and thinly traded.
---------------------------------------------------------------------------

    \223\ Much of the development of insider trading law has
resulted from court cases. The Supreme Court has stated that
``[u]nder the `traditional' or `classical theory' of insider trading
liability, [section] 10(b) and Rule 10b-5 are violated when a
corporate insider trades in the securities of his corporation on the
basis of material, nonpublic information.'' O'Hagan, 521 U.S. at
651-52 (emphasis added). See also Selective Disclosure and Insider
Trading, Exchange Act Release No. 43154 (Aug. 15, 2000), 65 FR
51716, 51727 (Aug. 24, 2000) (discussing the awareness standard
required for insider trading liability and adopting the definition
of ``on the basis'' of material nonpublic information in Rule 10b5-
1(b)). In this regard, any of the actions set forth in Rule 9j-1(a)
with regard to a security-based swap are ``on the basis of''
material nonpublic information about that security-based swap, the
issuer of that security-based swap, or the security underlying that
security-based swap, if the person taking the action was aware of
the material nonpublic information when the person took the action.
    \224\ See Rule 10b5-1(c)(1).
    \225\ See Insider Trading Arrangements and Related Disclosures,
Exchange Act Release No. 96492 (Dec. 14, 2022), 87 FR 80362, 80363
(Dec. 29, 2022) (``Rule 10b5-1 Amendments'').
---------------------------------------------------------------------------

    Accordingly, the Commission is adopting two affirmative defenses to
liability under paragraphs (a)(1) through (a)(5) of final Rule 9j-1.
a. Affirmative Defense: Binding Contractual Obligations
    First, the Commission is adopting an affirmative defense that
maintains the substance of the safe harbor provision in re-proposed
Rule 9j-1(f)(1), which would have applied to actions taken pursuant to
binding rights and obligations in written documentation governing a
security-based swap that was entered into prior to the person coming
into possession of material nonpublic information. As adopted, the
provision in Rule 9j-1(e)(1) (renumbered from proposed paragraph (f))
is an affirmative defense, rather than a safe harbor, to be consistent
with the structure of current Rule 10b5-1(c)(1). The affirmative
defense in final Rule 9j-1(e)(1) provides that actions that would
otherwise violate the prohibitions of Rule 9j-1(a)(1) through (5) are
not a violation ``solely for reason of being aware of material
nonpublic information'' if such actions are ``taken by a person in
accordance with binding contractual rights and obligations under a
security-based swap (as reflected in the written security-based swap
documentation governing such transaction or any amendment thereto).''
\226\ Under this affirmative defense, consistent with Rule 10b5-
1(c)(1), a market participant may take action when aware of material
nonpublic information but may avoid liability: ``so long as the person
demonstrates that: (i) [t]he security-based swap was entered into, or
the amendment was made, before the person became aware of such material
nonpublic information, and (ii) [t]he security-based swap was entered
into in good faith and not as part of a plan or scheme to evade the
prohibitions of [Rule 9j-1].'' \227\
---------------------------------------------------------------------------

    \226\ See final Rule 9j-1(e)(1).
    \227\ See final Rule 9j-1(e)(1).
---------------------------------------------------------------------------

    Framing this relief as an affirmative defense rather than as a safe
harbor, and restricting its use to circumstances in which the security-
based swap was entered into in good faith and not as part of a plan or
scheme to evade the prohibitions of the rule, is consistent with Rule
10b5-1(c)(1) treatment of the defense. As discussed above, multiple
commenters requested the Commission adopt affirmative defenses based on
the Rule 10b5-1(c) defenses.\228\ Rule 10b5-1(c)(1) provides an
affirmative defense from Rule 10b-5 liability in circumstances where it
is apparent that the trading was not made on the basis of material
nonpublic information because ``the trade was made pursuant to a
binding contract, an instruction to another person to execute the trade
for the instructing person's account, or a written plan for the trading
of securities . . . adopted at a time that the person was not aware of
material nonpublic information.'' \229\ Similarly, Rule 9j-1(e)(1)
provides an affirmative defense from Rule 9j-1(a) liability when an
action is taken not on basis of material nonpublic information, but
pursuant to binding contractual rights and obligations reflected in the
written documentation governing a security-based swap.
---------------------------------------------------------------------------

    \228\ See supra note 212.
    \229\ See Rule 10b5-1 Amendments, 87 FR 80362, 80363 (adopting
revisions to the Rule 10b5-1(c)(1) affirmative defense to apply a
cooling-off period on persons other than the issuer of securities
subject to a plan, impose a certification requirement on directors
and officers of those issuers, limit the ability of persons other
than the issuer to use multiple-overlapping Rule 10b5-1 plans, limit
the use of single-trade plans by persons other than the issuer to
one such single-trade plan in any 12-month period, and add a
condition that all persons entering into a Rule 10b5-1 plan must act
in good faith with respect to that plan).
---------------------------------------------------------------------------

    If the security-based swap was entered into in good faith and not
as part of a plan or scheme to evade the prohibitions of the rule, the
new Rule 9j-1(e)(1) affirmative defense will allow counterparties to
take actions that are required by, and in accordance with, the written
agreements governing the security-based swap (i.e., actions in the
normal course of the security-based swap transaction) even when aware
of material nonpublic information. For example, the Rule 9j-1(e)(1)
affirmative defense would apply to making a standardized coupon payment
or delivering collateral to a counterparty (and would also permit the
counterparty to receive the coupon payment or collateral), while such
person is aware of material nonpublic information, so long as both
actions are required by the terms of the transaction and documented in
writing. In contrast, the affirmative defense would not apply if a
counterparty took some action to fraudulently increase (in the case of
the receiving counterparty) or decrease (in the case of the delivering
counterparty) the amount of such payment or collateral transfer. Rule
9j-1(e) provides an affirmative defense when a person's conduct would
violate Rule 9j-1(a)(1) through (5) ``solely'' because he or she is
``aware of material nonpublic information.'' But actions to
fraudulently increase or decrease payments or collateral transfer--when
taken in connection with effecting or attempting to effect a
transaction in, or purchasing or selling, or inducing or attempting to
induce the purchase or sale of, any security-based swap--would violate
Rule 9j-1(a) regardless of the possession of material nonpublic
information.
    A person relying on the affirmative defense in adopted final Rule
9j-1(e)(1) must demonstrate that they entered into the security-based
swap, or amendment, before becoming ``aware of'' the material nonpublic
information rather than before they ``came into possession'' of the
information, as required in re-proposed Rule 9j-1.\230\ The change in
the rule text to an awareness standard, rather than a possession
standard, brings the Rule 9j-1(e)(1) affirmative defense in line with
the Commission's intent, as described in the 2021 Proposing Release
preamble.\231\ The change also makes Rule 9j-1(e)(1) consistent with
Rule 10b5-1(c)(1), which requires that the person entered into a
binding contract before becoming ``aware of'' the material nonpublic
information.\232\
---------------------------------------------------------------------------

    \230\ See 2021 Proposing Release, 87 FR at 6703.
    \231\ See 2021 Proposing Release, 87 FR at 6662.
    \232\ See 17 CFR 240.10b5-1(c)(1)(i)(A).
---------------------------------------------------------------------------

b. Affirmative Defense: Policies and Procedures
    Second, Rule 9j-1(e)(2) provides a defense from liability under
Rules 9j-1(a)(1) through (5) for actions taken by a person, other than
a natural person, who demonstrates that: (1) the individual making the
investment decision on behalf of the person was not aware of the
material nonpublic information; and (2) the person had implemented
reasonable policies and procedures, taking into consideration the
nature of the person's business, to ensure that individuals making
investment decisions would not be in violation of Rule 9j-1(a)(1)
through (5).\233\ These policies and procedures may include those that
restrict an individual from effecting a transaction in, or purchasing
or selling, any security, including any security-based swap, as to
which the individual possesses material nonpublic information, or those
that prevent individuals from becoming aware of such information.\234\
Rule 9j-1(e)(2) is modeled on Rule 10b5-1(c)(2) and addresses concerns
raised by commenters that the proposed rule would have a chilling
effect on the markets. Rule 9j-1(e)(2) recognizes that

many market participants, such as lenders and life insurance companies,
employ compliance programs which include, among other things,
information barriers that prevent access to material nonpublic
information by their employees who engage in security-based swap
transactions for hedging or other purposes.
---------------------------------------------------------------------------

    \233\ Final Rule 9j-1(e)(2).
    \234\ See final Rule 9j-1(e)(2)(ii).
---------------------------------------------------------------------------

c. Proposed Safe Harbor: Compression
    Because the Commission is adopting final Rule 9j-1(e)(2), the
Commission is not adopting proposed Rule 9j-1(f)(2), which would have
provided a safe harbor for transactions made in connection with certain
portfolio compression exercises. The proposed safe harbor would have
conflicted with Rules 10b-5 and 10b5-1 by providing the same action
with protection from liability under Rule 9j-1, but not Rule 10b-5. In
proposing the portfolio compression safe harbor, the Commission
recognized the benefits provided by portfolio compression along with
the ``largely administrative nature of the portfolio compression
process.'' \235\ To be clear, the Commission continues to support
portfolio compression and its benefits.\236\ Providing the safe harbor
as proposed, however, would have sanctioned the use of material
nonpublic information under Rule 9j-1, even though that use would have
been prohibited by Rule 10b-5. Adopting Rule 9j-1(e)(2) instead will
avoid confusion that could have resulted by treating the same conduct
differently under Rules 10b-5 and 9j-1. In addition, the Rule 9j-
1(e)(2) will provide security-based swap market participants the
flexibility needed to engage in bilateral and multilateral portfolio
compression exercises. The affirmative defense should be consistent
with the manner in which Rules 10b-5 and 10b5-1(c)(2) currently apply
to compression exercises and eliminates concerns that compression
exercises may be more than merely administrative and could be made on
the basis of material nonpublic information.
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    \235\ 2021 Proposing Release, 87 FR at 6662-63 (describing the
operational benefits and efficiencies resulting from portfolio
compression).
    \236\ As the Commission recognized when it adopted portfolio
compression requirements for SBS Entities, there are times when
entering into compression exercises would not be appropriate. See
Risk Mitigation Techniques for Uncleared Security-Based Swaps,
Exchange Act Release No. 87762 (Dec. 18, 2019), 85 FR 6359, at 6370
(Feb. 4, 2020) (``Risk Mitigation Adopting Release''). As a result,
17 CFR 240.15Fi-4 provides that the policies and procedures required
under the rule will need to provide that portfolio compression
exercises occur ``when appropriate.'' It would not be appropriate to
enter into compression exercises when doing so would be on the basis
of material nonpublic information in violation of Commission rules,
including Rule 10b-5 or final Rule 9j-1.
---------------------------------------------------------------------------

d. Other Requested Safe Harbors and Affirmative Defenses
    Certain commenters were supportive of the proposed safe harbors
\237\ but also believed that the safe harbors were too narrow and urged
the adoption of additional Rule 9j-1 safe harbors for legitimate
restructuring transactions, hedging activity related to lending,
transactions with counterparty disclosure regarding status as a lender
and access to material nonpublic information from the borrower,
multilateral amendment exercises (including ISDA protocols) or
bilateral equivalents, participation in determinations committee, or
for publicly executed strategies.\238\ One commenter raised concerns
that the proposed safe harbor only addresses situations where a lender,
aware of material nonpublic information, exercises rights or takes
actions with respect to security-based swaps, but not if the lender
exercises rights or remedies under a credit, loan, or similar
agreement, while aware of material nonpublic information.\239\ The
Commission declines to adopt additional safe harbors. The affirmative
defenses the Commission is adopting provide consistency with Rule 10b5-
1. Additionally, they will address concerns expressed by market
participants advocating for additional safe harbors by permitting
persons to enter into certain types of activity, pursuant to the
requirements of the affirmative defenses, while also addressing
concerns about fraud and manipulation for the entire security-based
swap market.
---------------------------------------------------------------------------

    \237\ Only one commenter specifically addressed the compression
safe harbor of re-proposed Rule 9j-1(f)(2). See IIB-ISDA-SIFMA
Letter at 11. The commenter noted that ``the important operational
benefits and efficiencies for market participants'' supporting the
safe harbor for portfolio compression exercises would also support a
safe harbor for ``other centralized market activities'' including
multilateral amendment exercises (such as an ISDA protocol) and the
use of determinations committees. Id.
    \238\ See Fletcher Letter at 4; IACPM Letter at 4; MFA Letter at
10-12; LSTA Letter at 8-9; IIB-ISDA-SIFMA Letter at 11-12.
    \239\ See LSTA Letter at 8-9.
---------------------------------------------------------------------------

    In response to the proposed safe harbors, one commenter urged for
the elimination of all safe harbors from proposed Rule 9j-1(a)
liability because the Commission had ``not demonstrated that a safe
harbor from the prohibition on fraud and manipulation is necessary or
appropriate.'' \240\ This same commenter also argued for compliance
with Rule 9j-1(a) rather than for the adoption of safe harbors that it
believed would encourage unlawful behavior.\241\ Another commenter
argued that the proposed safe harbors were overly broad and protective
of actions that are inherently fraudulent.\242\ However, as discussed
above, the Commission agrees with commenters that an affirmative
defense similar to those available under Rule 10b5-1 (when the
investment decision is not based on material nonpublic information) is
important given the similarity in the antifraud provisions. The
Commission also agrees that the affirmative defenses would address
concerns regarding market disruption while also addressing concerns
about fraud and manipulation in the security-based swap market.
Therefore, the Commission is adopting the affirmative defenses as
discussed above.
---------------------------------------------------------------------------

    \240\ Better Markets Letter at 9. This commenter stated that it
``[d]oes not appear there is any need for a safe harbor such as the
one proposed by the SEC, because it is not clear how a prohibition
on fraud and manipulation could possibly apply to the performance of
completely non-volitional, contractual requirements, of a contract
that was entered into without fraudulent, deceptive, or manipulative
intent.'' Id. at 10. See also WebForm Comments from Anonymous
Penguin, dated Oct. 7, 2022 (``Anonymous Penguin Comments''), at 1
(arguing for no affirmative defense from liability); WebForm
Comments from J.T., dated Nov. 15, 2022 (``J.T. Comments''), at 1
(arguing for no safe harbor for binding contractual rights and
obligations under a security-based swap).
    \241\ Better Markets Letter at 12 (pointing to experience with
Rule 10b5-1 and citing studies and Wall Street Journal reporting).
    \242\ See WebForm Comments from Michael, dated Jan. 3, 2023
(``Michael Comments''), at 1.
---------------------------------------------------------------------------

    In addition to the request for the inclusion of additional safe
harbors and affirmative defenses, commenters also addressed the scope
of Rule 9j-1 as it applies to different types of security-based swap
instruments. One commenter argued for carving out sovereign debt from
the scope of Rule 9j-1 due to the unlikelihood that holders of
security-based swaps on sovereign debt would be able to manufacture
credit events or otherwise engage in opportunistic trading, especially
life insurers which are prohibited by state law from entering into
speculative or abusive trading.\243\ While security-based swaps related
to sovereign debt may present fewer opportunities for manufactured
credit events or opportunistic strategies, by regulated and non-
regulated market participants alike, such instruments are not without
risk of fraudulent and manipulative conduct and should

remain within the scope of Rule 9j-1.\244\ One commenter supported
adopting different rules for CDS as opposed to other security-based
swaps due to ``the structure and nature of CDS instruments,'' which the
commenter believes make CDS more susceptible to opportunistic
strategies.\245\ However, non-CDS security-based swaps are also
susceptible to fraud and manipulation and, therefore, the Commission
makes no change to the scope of Rule 9j-1 to treat CDS differently from
other security-based swaps. Additionally, Rule 9j-1 is tailored
appropriately to address fraud and manipulation for the entire
security-based swap market.
---------------------------------------------------------------------------

    \243\ See ACLI at 3, 13-14 (arguing that sovereign debt should
be excluded from the scope of both final Rule 9j-1 and final Rule
10B-1).
    \244\ As of Nov. 25, 2022, sovereign CDS have the second highest
gross notional amount outstanding among credit security-based swaps.
See infra section V.C.2, Table 1. The Commission further observes
that the share of CDS written on sovereign debt has risen from less
than four percent of the total notional amounts outstanding in the
global CDS market in 2007 to 14 percent at the end of 2020. For
single-name CDS during that same period, the share of the sovereign
sector grew from six percent to close to one-third. See Antulio N.
Bomfim, ``Credit Default Swaps,'' Finance and Economics Discussion
Series 2022-023 at 4, Washington: Board of Governors of the Federal
Reserve System (2022), available at https://doi.org/10.17016/FEDS.2022.023. See also Ben St. Clair, ``Pimco Loses $400m on Failed
Russia CDS Bets,'' Risk.Net (June 20, 2022) (describing the effects
on CDS of Russia's failure to pay additional interest due on its
sovereign bonds in Apr. 2022).
    \245\ See Fletcher Letter at 4.
---------------------------------------------------------------------------

III. Rule 15fh-4(c): Preventing Undue Influence Over Chief Compliance
Officers; Policies and Procedures Regarding Compliance With Rule 9j-1
and Rule 15fh-4(c)

A. Proposed Approach

    The Commission also proposed a rule aimed at protecting the
independence and objectivity of an SBS Entity's CCO by preventing the
personnel of an SBS Entity from taking actions to coerce, mislead, or
otherwise interfere with the CCO. Specifically, proposed Rule 15Fh-4(c)
(``proposed Rule 15Fh-4(c)'') would have made it unlawful for any
officer, director, supervised person, or employee of an SBS Entity, or
any person acting under such person's direction, to directly or
indirectly take any action to coerce, manipulate, mislead, or
fraudulently influence the SBS Entity's CCO in the performance of their
duties under the Federal securities laws or the rules and regulations
thereunder.

B. Commission Action

    After review of the comments, the Commission is adopting Rule 15fh-
4(c) as proposed. The final rule will protect the independence and
objectivity of an SBS Entity's CCO by preventing the personnel of an
SBS Entity from taking actions to coerce, mislead, or otherwise
interfere with the CCO.
    The Commission agrees with the two commenters who supported the
adoption of Rule 15fh-4(c) to further protect SBS Entities' CCOs from
undue influence.\246\ Recognizing the CCO's critical function, one
commenter believed the new rule would serve as an important deterrent
to improper interference with the CCO's duties.\247\ A second commenter
supported the rule because it would reinforce existing CCO independence
requirements and duties essential to effective risk management programs
of SBS Entities.\248\
---------------------------------------------------------------------------

    \246\ See Better Markets Letter at 14; Letter from Patrick T.
Campbell, New York City Bar Association, dated Mar. 21, 2022 (``NYC
Bar Letter'').
    \247\ See Better Markets Letter at 14.
    \248\ See NYC Bar Letter at 2-5.
---------------------------------------------------------------------------

    One commenter suggested that the proposed rule was unnecessary
because the existing requirements of 17 CFR 240.15Fk-1 (``Rule 15Fk-
1'') are sufficient to address the risks of undue influence on a
CCO.\249\ This commenter suggested that because the CCO is required to
report directly to the board of directors or senior officer of the SBS
Entity, and the CCO's compensation and removal requires approval of a
majority of the SBS Entity's board of directors, attempts by others to
influence the CCO inappropriately should be unavailing.\250\ The
Commission disagrees. When the Commission previously considered whether
to adopt a similar requirement, it concluded that requiring a majority
of the board to compensate and remove the CCO was sufficient to
establish CCO independence.\251\ However, in light of the rules
finalized subsequent to the CCO rules, including Rule 9j-1 (which is
being adopted in this release) and the risk mitigation requirements for
SBS Entities,\252\ a rule expressly prohibiting interference with the
performance of a CCO's duties is appropriate to: (1) deter any undue
influence even if not directly related to compensation or the threat of
removal of the CCO; and (2) help ensure the independence and
effectiveness of the CCO function.\253\ In connection with Rule 9j-1,
as well as other rules for which the CCO is responsible, undue
influence could arise from many actors (and many actions), and not
merely from those actors with the power to set compensation or with
hiring and firing authority over the CCO.\254\
---------------------------------------------------------------------------

    \249\ See Letter from Stephanie Webster, IIB, Chris Young, ISDA,
and Kyle Brandon, SIFMA, dated Mar. 21, 2022 (``IIB-ISDA-SIFMA CCO
Letter''), at 3.
    \250\ Id.
    \251\ The Commission considered and rejected a prohibition on
attempts by officers, directors, or employees to coerce, mislead, or
otherwise mislead the CCO when it adopted business conduct standards
for SBS Entities in 2016. See Business Conduct Standards Adopting
Release, 81 FR at 30054-55. That rulemaking included, among other
things, a rule to require an SBS Entity to designate a CCO and
impose certain duties and responsibilities on that CCO, as well as
antifraud provisions for SBS Entities. See 17 CFR 240.15Fk-1;
240.15Fh-4(a).
    \252\ Risk mitigation rules are designed to further effective
risk management by requiring the existence of sound documentation,
periodic reconciliation of portfolios, rigorously tested valuation
methodologies, and sound collateralization practices. See Risk
Mitigation Adopting Release, 85 FR at 6390-91.
    \253\ As the Commission explained when adopting similar rules
prohibiting persons from unduly influencing auditors pursuant to
section 303(a) of the Sarbanes Oxley Act of 2002 (``Sarbanes-Oxley
Act), activities by persons acting ``under the direction'' of
officers and directors of the issuer ``currently may constitute
violations of the anti-fraud or other provisions of the securities
laws or aiding or abetting or causing an issuer's violations of the
securities laws.'' Improper Influence on Conduct of Audits, Exchange
Act Release No. 47890 (May 20, 2003), 68 FR 31820, 31821 (May 28,
2003) (internal citations omitted). Nevertheless, like the rule
implementing section 303(a) of the Sarbanes-Oxley Act, Rule 15fh-
4(c) would provide the Commission with an additional means of
addressing efforts by persons acting under the direction of an
officer or director to thwart the responsibilities of the CCO. See
also Compliance Programs of Investment Companies and Investment
Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003),
68 FR 74714, 74721-22 (Dec. 24, 2003).
    \254\ For example, an employee at an SBS Entity planning an
opportunistic strategy could attempt to mislead the CCO by
submitting false documentation to the CCO in order to avoid
disclosing the build-up of a large position that might require
public reporting and thwart the plans of the employee.
---------------------------------------------------------------------------

    Moreover, existing 17 CFR 240.15Fh-3(h) (``Rule 15Fh-3(h)'')
requires an SBS Entity to establish and maintain a system to supervise
its business and the activities of its associated persons, which must
be reasonably designed to prevent violations of the provisions of
applicable Federal securities laws and the rules and regulations
thereunder.\255\ In addition, existing Rule 15Fk-1 requires an SBS
Entity to designate a CCO, who must comply with certain duties. Such
duties include ``[t]ak[ing] reasonable steps to ensure that the [SBS
Entity] establishes, maintains and reviews written policies and
procedures reasonably designed to achieve compliance with the [Exchange
Act] and the rules and regulations thereunder relating to its business
as [an SBS Entity].'' \256\ Failure to establish, maintain, and review
written policies and procedures reasonably designed to

achieve compliance with the Exchange Act and the rules and regulations
thereunder (including Rules 9j-1 and 15fh-4(c)) may result in
violations by the SBS Entity of Rule 15Fh-3(h), as well as Rule 15Fk-
1.\257\ Rule 15fh-4(c) protects investors and promotes the fairness of
the markets by supporting the ability of CCOs to meet their important
obligations to foster compliance without undue influence, which should
ultimately support the integrity of SBS Entities and the markets.
---------------------------------------------------------------------------

    \255\ See 17 CFR 240.15Fh-3(h).
    \256\ See 17 CFR 240.15Fk-1. Additionally, in its application
for registration, an SBS Entity is required to include a senior
officer's certification that the SBS Entity has developed and
implemented written policies and procedures reasonably designed to
prevent violation of Federal securities laws and the rules
thereunder. See 17 CFR 240.15Fb2-1(b).
    \257\ The SBS Entity could also face liability under 17 CFR
240.15Fb2-1(b) and (h) under such circumstances.
---------------------------------------------------------------------------

    One commenter argued that the scope of proposed Rule 15Fh-4(c) was
``unclear and could lead to confusion and uncertainty in the market as
to which activities are prohibited.'' \258\ This commenter went on to
suggest that, if the Commission did adopt Rule 15fh-4(c), the final
rule should clarify which activities are prohibited by including
materiality and intent standards that would limit the prohibited
interference to knowingly making untrue statements or omitting material
facts.\259\ The commenter believed that ambiguities could have a
chilling effect on communications between the CCO and personnel of the
SBS Entity.\260\
---------------------------------------------------------------------------

    \258\ IIB-ISDA-SIFMA CCO Letter at 1.
    \259\ See id. at 2 (stating that the rule is unclear and could
lead to confusion and uncertainty in the market as to which
activities are prohibited and that the rule does not provide any
materiality or intent standards, which could allow for immaterial or
inadvertent actions or statements to result in liability).
    \260\ Id. IIB-ISDA-SIFMA was concerned that questions could
arise as to whether good faith disagreements or legitimate
discussions ``involve[d] `interference' with or `undue influence'
over a CCO.'' Id.
---------------------------------------------------------------------------

    After considering the comments, the Commission declines to revise
Rule 15fh-4(c) and adopts the rule as proposed. Rule 15fh-4(c) protects
the independence and objectivity of an SBS Entity's CCO by prohibiting
undue influence by other personnel. The concerns regarding the rule
having a chilling effect on communications are misplaced since the rule
prohibits actions to coerce, manipulate, mislead, or fraudulently
influence CCOs--not good faith disagreements or legitimate discussions.
However, such influence could take many forms and is not limited to
material misstatements or omissions. As noted, the Commission has
adopted the majority of its Title VII rules related to security-based
swaps,\261\ including rules relating to trading relationship
documentation, dispute resolution, portfolio reconciliation, or
portfolio compression (``Risk Mitigation Rules''). As the Commission
explained when adopting the Risk Mitigation Rules, those rules were
designed to further effective risk management by requiring the
existence of sound documentation, periodic reconciliation of
portfolios, rigorously tested valuation methodologies, and sound
collateralization practices.\262\ Attempts by officers, directors, or
employees to hide transactions, submit false valuations, or manipulate
or fraudulently influence the CCO in the performance of their duties
related to the Risk Mitigation Rules would undermine the SBS Entity's
risk management and could pose risk to the market. Therefore, the
Commission is adopting a rule that is broad enough to apply to these
actions and any others that may undermine the independence and
responsibilities of the CCO.
---------------------------------------------------------------------------

    \261\ See supra note 16.
    \262\ See Risk Mitigation Adopting Release, 85 FR at 6390-91.
---------------------------------------------------------------------------

    A commenter also argued for more clarity with regard to the intent
and conduct required to be liable under Rule 15fh-4(c).\263\ The
Commission declines to make any revisions to the proposed rule in
response to this comment. Specifically, the acts to ``coerce,
manipulate, mislead, or fraudulently influence'' that would be
prohibited by Rule 15fh-4(c) imply compelling the CCO to act in a
certain way through pressure, threats, trickery, intimidation,
misrepresentation, or some other form of purposeful action not limited
to untrue statements or omissions of material facts, and therefore,
further clarity is not necessary.\264\ As noted, one of the purposes of
Title VII security-based swap legislation is promoting the integrity of
the security-based swap market. Such a purpose would not be served by
imposing a scienter or materiality requirement on Rule 15fh-4(c)
violations. Further, the Commission believes that the rule will
encourage directors, officers, supervised persons, or employees of SBS
Entities to exercise reasonable attention and care in their dealings
with CCOs.
---------------------------------------------------------------------------

    \263\ See IIB-ISDA-SIFMA CCO Letter at 2.
    \264\ The Commission came to a similar conclusion when adopting
similar rules prohibiting persons from unduly influencing auditors
pursuant to section 303(a) of the Sarbanes Oxley Act of 2002
(``Sarbanes-Oxley Act). See Improper Influence on Conduct of Audits,
Exchange Act Release No. 47890 (May 20, 2003), 68 FR 31820, 31823
(May 28, 2003).
---------------------------------------------------------------------------

    One commenter suggested expanding the scope of the rule to actions
taken to coerce, manipulate, mislead, or fraudulently influence all
officers and other decision-makers, and not limit the rule to actions
taken with respect to the SBS Entity's CCO.\265\ However, activities
taken by persons under the direction of officers and directors of an
issuer may already constitute violations of the securities laws.\266\
This additional rule is appropriate given the key role that the CCO
plays in an SBS Entity's compliance with the security-based swap
related regulations, such as the risk mitigation requirements for SBS
Entities. Furthermore, it provides an additional means of addressing
efforts by persons acting under the direction of an officer or director
to thwart the responsibilities of the CCO.
---------------------------------------------------------------------------

    \265\ Michael Comments at 1.
    \266\ See supra note 252.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \267\ imposes certain
requirements on Federal agencies in connection with the conducting or
sponsoring of any ``collection of information.'' \268\ Neither Rule 9j-
1 nor Rule 15fh-4(c) contain a collection of information requirement
within the meaning of the PRA. Specifically, Rule 9j-1 contains
prohibitions designed to prevent fraud, manipulation, and deception in
connection with effecting transactions in, or purchasing or selling, or
inducing or attempting to induce the purchase or sale of, any security-
based swap. Rule 15fh-4(c) generally makes it unlawful for certain
specified persons to directly or indirectly take any action to coerce,
manipulate, mislead, or fraudulently influence an SBS Entity's CCO in
the performance of their duties under the Federal securities laws or
the rules and regulations thereunder. Neither of those rules require a
person to establish, maintain, and enforce written policies and
procedures reasonably designed to ensure compliance with the applicable
rule. However, to the extent that a person is already subject to a
similar policies and procedures requirement, any updates to those
policies and procedures would likely be captured by an existing
collection of information. For example, as previously explained, Rule
15Fh-3(h) requires an SBS Entity to establish and maintain a system to
supervise its business and the activities of its associated persons and
that system must be reasonably designed to prevent violations of the
provisions of applicable Federal securities laws and the rules and
regulations thereunder. In the PRA analysis when that rule was adopted,
the Commission estimated that each SBS Entity would spend 60 hours per
year to update each of the policies and procedures required by Rule
15Fh-

3.\269\ Both Rule 9j-1 and Rule 15fh-4(c) are intended solely to
identify actions that an SBS Entity is not permitted to take, and as
such do not make substantive modifications to any existing collection
of information or impose new information collection requirements within
the meaning of the PRA. Accordingly, we are not revising any burden and
cost estimates in connection with these amendments.
---------------------------------------------------------------------------

    \267\ 44 U.S.C. 3501 et seq.
    \268\ See 44 U.S.C. 3502(3).
    \269\ See Business Conduct Standards Adopting Release, 81 FR at
30094.
---------------------------------------------------------------------------

V. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the
costs and benefits, of Rule 9j-1 and Rule 15fh-4(c). Section 3(f) of
the Exchange Act \270\ directs the Commission, when engaging in
rulemaking where it is required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. In addition,
section 23(a)(2) of the Exchange Act \271\ requires the Commission,
when making rules under the Exchange Act, to consider the impact that
the rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------

    \270\ 15 U.S.C. 78c(f).
    \271\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of Rule
9j-1 and Rule 15fh-4(c), including the anticipated benefits and costs
of the rules and their likely effects on efficiency, competition, and
capital formation. Many of the benefits and costs discussed below are
difficult to quantify. For example, the Commission cannot quantify the
impact of litigation and litigation risk on counterparties and
underlying entities or the overall impact on the credibility and
reputation of the security-based swap market. The extent of some of
these impacts will depend, in part, on events difficult to predict that
might affect security-based swaps, such as changes in counterparty or
reference underlying entity behavior. Reputational and credibility
effects also are difficult to measure. Therefore, while the Commission
attempted to quantify economic effects where possible, much of the
discussion of the anticipated economic effects below is qualitative and
descriptive in nature.
    The Commission received a number of comments related to various
aspects of the economic analysis of re-proposed Rule 9j-1 and proposed
Rule 15Fh-4(c). The Commission has considered and responded to these
comments in the sections that follow.

B. Broad Economic Considerations

    This section discusses certain aspects of the security-based swap
market that may raise concerns or may be associated with concerns that
would be addressed by final Rule 9j-1. The discussion is illustrative
and is not intended to exhaust all types of conduct that may implicate
final Rule 9j-1.
Opportunistic Strategies
    Opportunistic strategies often involve CDS buyers or sellers taking
steps, either with or without the participation of the underlying
entity, to avoid, trigger, delay, accelerate, decrease, and/or increase
payouts on CDS.\272\ When market participants employ one of these
strategies, they intend to obtain gains from the positions they hold
that go beyond those corresponding to the initial profit and loss
expectation (the initial payoff function) at trade execution. This
additional gain would be obtained to the direct detriment of a
counterparty that is unaware of that additional loss potential.\273\
One commenter pointed out that while CDS have many privately and
socially valuable uses, such instruments could lend themselves to
abuses such as opportunistic strategies.\274\
---------------------------------------------------------------------------

    \272\ See supra note 35 and accompanying text for a discussion
of the settlement process that determines payout on a CDS contract
that relies on the ISDA standard documentation.
    \273\ The market participant's gain from the transaction is
inversely proportional to the gain of the counterparty, so the
larger the market participant's position (and gain), the larger the
counterparty's loss.
    \274\ Letter from Henry T.C. Hu, dated Mar. 21, 2022, at 6.
---------------------------------------------------------------------------

    To the extent that market participants anticipate opportunistic
strategies, the CDS spread or price becomes a reflection of the
likelihood of an opportunistic strategy being announced (or, if already
announced, of succeeding) and decouples from the credit fundamentals of
the reference entity.\275\ This effect reduces the utility of the CDS
market as a venue to offload or take on the credit risk of a company
because prices no longer reflect credit risk; bona fide hedgers or
speculators in this market would be more likely to exit, as they cannot
readily ``trade'' the credit of a company.\276\ In addition to their
adverse impact on price efficiency, opportunistic strategies may impair
the liquidity of the CDS markets. The fact that a counterparty might
manufacture or delay a credit event in the future can deter others from
entering into such contracts. If fewer parties enter into CDS
contracts, the overall value of CDS as a risk-transferring instrument
for the market will be reduced.\277\ Two commenters suggested that
lenders may demand a higher rate of return (cost of debt) on new debt
issuances by a reference entity that was involved in a manufactured
credit event to compensate for the risk that such manufactured events
may recur in the future.\278\
---------------------------------------------------------------------------

    \275\ Two commenters noted that opportunistic strategies impede
price efficiency in the CDS market, particularly the CDS of
distressed issuers because such strategies can be more profitable
when implemented on distressed issuers. See AFRED Letter at 4-5;
Fletcher Letter at 3.
    \276\ See Gina-Gail S. Fletcher, Engineered Credit Default
Swaps: Innovative or Manipulative?, 94 N.Y.U. L. Rev. 1073 (2019)
(explaining that ``engineered'' or ``manufactured'' transactions
distort the information reflected in CDS spreads, to the point where
the default risk expressed in CDS spreads is no longer connected to
the financial condition of the underlying entity).
    \277\ See Fletcher Letter at 3.
    \278\ See AFRED Letter at 4; Fletcher Letter at 3.
---------------------------------------------------------------------------

C. Baseline

1. Existing Regulatory Frameworks
    As discussed in section I.A, because security-based swaps are
included in the Exchange Act's definition of ``security,'' participants
in the security-based swap market are currently subject to the general
antifraud and anti-manipulation provisions of the Federal securities
laws, including sections 9(a) and 10(b) of the Exchange Act, and Rule
10b-5 thereunder, and section 17(a) of the Securities Act. In
particular, Rule 10b5-1 provides that a person trades ``on the basis
of'' material nonpublic information when the person purchases or sells
securities while aware of the information. However, the rule also sets
forth several affirmative defenses to permit persons to trade in
certain circumstances where it is clear that the information was not a
factor in the decision to trade.\279\ Several commenters pointed out
that most security-based market participants have organized their
business activities and implemented policies and procedures to allow
them to rely on the affirmative defense provided by Rule 10b5-1(c)(2)
from liability under Rule 10b-5.\280\
---------------------------------------------------------------------------

    \279\ See Selective Disclosure and Insider Trading, Exchange Act
Release No. 43154 (Aug. 15, 2000), 65 FR 51716 (Aug. 24, 2000).
    \280\ See IACPM Letter at 4; IIB-ISDA-SIFMA Letter at 4-5; MFA
Letter at 13; SIFMA AMG Letter at 11. See also supra section II.E.2.
EBF supports the arguments in the IIB-ISDA-SIFMA Letter regarding
proposed Rule 9j-1. See Letter from EBF at 1; supra note 124.

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    In addition, the Dodd-Frank Act expanded the anti-manipulation
provisions of section 9 of the Exchange Act to encompass security-based
swap transactions and required the Commission to adopt rules to prevent
fraud, manipulation, and deception in connection with security-based
swaps.\281\ The Commission has now finalized a majority of its Title
VII rules related to SBS Entities, including rules that allow such
persons to manage the market, counterparty, operational, and legal
risks associated with their security-based swap business. These include
the Risk Mitigation Rules; \282\ rules relating to capital, margin, and
segregation requirements for SBSDs, MSBSPs, and broker-dealers; \283\
and rules relating to recordkeeping and reporting requirements for
SBSDs, MSBSPs, and broker-dealers.\284\ These rules are discussed in
the 2021 Proposing Release.\285\ As discussed earlier, the CFTC has
largely completed its Title VII rulemakings related to swaps, including
the adoption of antifraud and anti-manipulation rules.\286\
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    \281\ See supra note 4 and accompanying text.
    \282\ See supra section III.B and note 262.
    \283\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR 43872
(Aug. 22, 2019).
    \284\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers, Exchange Act Release No. 87005 (Sep. 19, 2019), 84
FR 68550 (Dec. 16, 2019).
    \285\ See 2021 Proposing Release, 87 FR at 6681-82.
    \286\ See supra note 16.
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    Finally, Rule 15Fk-1 requires an SBS Entity to designate a CCO and
imposes certain duties and responsibilities on that CCO.\287\
Additionally, the rule requires that a majority of the board approve
the compensation and removal of the CCO.\288\ Rule 15Fh-4(a) makes it
unlawful for an SBS Entity to: (1) employ any device, scheme, or
artifice to defraud any special entity or prospective customer who is a
special entity; (2) engage in any transaction, practice, or course of
business that operates as a fraud or deceit on any special entity or
prospective customer who is a special entity; or (3) engage in any act,
practice, or course of business that is fraudulent, deceptive, or
manipulative.\289\ Further, existing Rule 15Fh-3(h) requires an SBS
Entity to establish and maintain a system to supervise its business and
the activities of its associated persons; the system must be reasonably
designed to prevent violations of the provisions of applicable Federal
securities laws and the rules and regulations thereunder.\290\
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    \287\ See 17 CFR 240.15Fk-1(a) through (c).
    \288\ See 17 CFR 240.15Fk-1(d).
    \289\ See 17 CFR 240.15Fh-4(a).
    \290\ See 17 CFR 240.15Fh-3(h).
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2. Security-Based Swap Data, Market Participants, Dealing Structures,
and Levels of Security-Based Swap Trading Activity
    As of January 4, 2023, there were 50 entities registered with the
Commission as SBSDs, and no entities registered as MSBSPs.\291\ Market
participants such as SBSDs and MSBSPs were required to report security-
based swap transactions to registered security-based swap data
repositories (``SBSDRs'') pursuant to Regulation SBSR beginning on
November 8, 2021.
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    \291\ See List of Registered Security-Based Swap Dealers and
Major Security-Based Swap Participants, available at https://www.sec.gov/files/list_of_sbsds_msbsps_1_4_2023locked_final.xlsx
(providing the list of registered SBSDs and MSBSPs that was updated
as of Jan. 4, 2023).
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    The Commission uses information reported pursuant to Regulation
SBSR to two registered SBSDRs--Depository Trust & Clearing Corporation
Data Repository (``DDR'') and the ICE Trade Vault (``ITV'')--to
describe the baseline.\292\ Table 1 shows that U.S. security-based swap
market activity is split across three asset classes: credit, equity,
and interest rate. Based on information reported to DDR, as of November
25, 2022, there were approximately 523,000, 3.4 million, and 5,700
active security-based swaps in the credit, equity, and interest rate
asset classes, respectively. The gross notional amounts outstanding in
the credit, equity, and interest rate asset classes were respectively,
approximately $2.8, $3.6, and $0.18 trillion.\293\ Based on information
reported to ITV, as of November 25, 2022, there were approximately
155,000 active credit security-based swaps with gross notional amount
outstanding of approximately $1.9 trillion.
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    \292\ DDR operates as a registered SBSDR for security-based swap
transactions in the credit, equity, and interest rate derivatives
asset classes. ITV operates as a registered SBSDR for security-based
swap transactions in the credit derivatives asset class. See
Security-Based Swap Data Repositories; DTCC Data Repository (U.S.)
LLC; Order Approving Application for Registration as a Security-
Based Swap Data Repository, Exchange Act Release No. 91798 (May 7,
2021), 86 FR 26115 (May 12, 2021); Security-Based Swap Data
Repositories; ICE Trade Vault, LLC; Order Approving Application for
Registration as a Security-Based Swap Data Repository, Exchange Act
Release No. 92189 (June 16, 2021), 86 FR 32703 (June 22, 2021). The
statistics presented herein are based on the SBS Report. See supra
note 42.
    \293\ Active security-based swaps are those that have been
neither terminated nor reached their scheduled maturity and are
therefore open positions as of Nov. 25, 2022. Gross notional amount
outstanding represents the total outstanding notional value of
active, market-facing security-based swaps on Nov. 25, 2022.
Security-based swaps are considered to be ``market-facing'' when
they are executed at arms-length between third parties. While a
reporting party is only required to report a transaction to one
SBSDR--either DDR or ITV--some uncleared security-based swaps in DDR
also appear in ITV. This overlap is very limited in scope. As of
Nov. 25, 2022, there were 605 active credit security-based swaps in
ITV that were reported as uncleared (0.4% of the 154,903 active
credit security-based swaps in ITV). The 605 active credit security-
based swaps had a gross notional outstanding of $4.73 billion (0.3%
of the approximately $1,900 billion gross notional outstanding of
all active credit security-based swaps in ITV). These statistics
provide an upper bound of the overlap between ITV and DDR and
indicate that the overlap is very limited in scope. See SBS Report
at 4 and 10.
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    Table 1 also shows that U.S. security-based swap market
participants trade a variety of security-based swaps in each of the
three asset classes. Based on information reported to DDR, as of
November 25, 2022, active credit security-based swaps fall into five
product types. Single-name corporate CDS constitute the largest product
type, with approximately 364,000 active CDS and $1.6 trillion gross
notional amount outstanding. The second largest active credit security-
based swaps product type consists of single-name sovereign CDS, with
approximately 94,000 active CDS and $0.9 trillion gross notional amount
outstanding. For active equity security-based swaps, equity portfolio
swaps constitute the largest product type, with approximately 2.3
million active equity portfolio swaps and $1.7 trillion gross notional
amount outstanding. The second largest active equity security-based
swaps product type consists of equity swaps, with approximately 492,000
active equity swaps and $1.2 trillion gross notional amount
outstanding. Equity portfolio swaps and equity swaps can be further
divided into sub-products that include, among other things, equity
TRS.\294\ In the interest rate asset class, exotics constitute the
largest product type, with approximately $0.1 trillion gross notional
amount and 4,400 active exotic swaps outstanding. Based on information
reported to ITV, as of November 25, 2022, active credit security-based
swaps fall into two

product types. Single-name corporate CDS constitute the largest product
type, with approximately 135,000 active CDS and $1.3 trillion gross
notional amount outstanding. The second largest active credit security-
based swaps product type consists of single-name sovereign CDS, with
approximately 20,000 active CDS and $0.5 trillion gross notional amount
outstanding.
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    \294\ An equity swap references a single underlier while an
equity portfolio swap involves a portfolio wrapper under which
multiple swaps can be traded with operational efficiency. See
Central Clearing in the Equity Derivatives Market: An ISDA Study,
ISDA.org (June 2014) at 10, available at https://www.isda.org/a/6PDDE/central-clearing-in-the-eqd-market-final.pdf. See ISDA, ISDA
Taxonomy 2.0_Finalized, ISDA.org (Sep. 4, 2019), available at
https://www.isda.org/a/o1MTE/ISDA-Taxonomy_EQ-CR-FX-IR_v2.0__3-_September_2019-FINAL.xls (indicating that equity portfolio swaps
and equity swaps can be further divided into sub-products that
include, among other things, equity TRS).

   Table 1--Gross Notional Amount and Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
                                    Asset Class and Product Classification a
----------------------------------------------------------------------------------------------------------------
                                                                              Gross notional
                                                                                amount        Active security-
           SBSDR                  Asset class            Product type          outstanding      based swap count
                                                                            (millions of USD)
----------------------------------------------------------------------------------------------------------------
DDR.......................  Credit................  Index.................             44,407              2,992
                                                    Single-Name: Corporate          1,556,315            364,465
                                                    Single-Name: Sovereign            900,072             93,807
                                                    TRS \b\...............            156,849             49,867
                                                    Other \c\.............            122,970             12,081
                                                                           -------------------------------------
                                                    Total.................          2,780,613            523,212
                            Equity................  Portfolio Swap........          1,688,672          2,266,706
                                                    Swap..................          1,183,279            491,508
                                                    Contract For                      398,952            642,965
                                                     Difference.
                                                    Option................              6,915              1,281
                                                    Forward...............              5,663              1,393
                                                    Other \d\.............            330,136             41,115
                                                                           -------------------------------------
                                                    Total.................          3,613,617          3,444,968
                            Interest Rate.........  Exotic................            153,306              4,419
                                                    Forward...............             23,818              1,164
                                                    Other \e\.............                868                122
                                                                           -------------------------------------
                                                    Total.................            177,992              5,705
ITV.......................  Credit................  Single-Name: Corporate          1,348,002            134,741
                                                    Single-Name: Sovereign            544,414             20,162
                                                                           -------------------------------------
                                                    Total.................          1,892,416            154,903
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps in DDR, this table incorporates only one of the two security-based swaps
  that result from the clearing process. For ITV, this table incorporates all of the cleared security-based
  swaps.
\b\ As a general matter, TRS include non-CDS debt-based security swaps, equity-based security swaps, and mixed
  swaps. Counterparties in the TRS market use the contracts to obtain exposure, usually leveraged, to the total
  economic performance of a security or index and benefit from not having to own the security itself. Market
  participants, such as mutual funds, hedge funds, and endowments, use TRS to obtain exposure in markets where
  they would face difficulties purchasing or selling the underlying security (e.g., a market participant may
  find it difficult to buy a foreign company's security or locate a security to sell short) while taking
  advantage of the capital efficiencies of not holding the security in their inventories. See also supra section
  I.B.1, which discusses the ongoing payment stream of TRS, among other things.
\c\ Includes the following products reported to SBSDRs: exotic, index tranche, swaptions, and other single-name
  (e.g., asset-backed, loan, and municipal security-based swaps).
\d\ ``Other'' is a category in the DDR Equity Product ID field. All Product ID categories are listed in the
  table.
\e\ Includes the following products reported to SBSDRs: inflation, debt option, and cross-currency.

    Table 2 shows that both SBS Entities and non-SBS Entities
participate in all three asset classes in the U.S. security-based swap
market. Based on information reported to DDR, as of November 25, 2022,
SBS Entities and non-SBS Entities had, respectively, entered into
approximately 813,000 and 234,000 active credit security-based
swaps.\295\ The gross notional amounts outstanding of the active credit
security-based swaps held by SBS Entities and non-SBS Entities were,
respectively, approximately $4.4 and $1.2 trillion. In the equity asset
class, SBS Entities and non-SBS Entities had, respectively, entered
into approximately 4.0 million and 2.9 million active equity security-
based swaps. The gross notional amounts outstanding of the active
equity security-based swaps held by SBS Entities and non-SBS Entities
were, respectively, approximately $4.5 and $2.7 trillion. In the
interest rate asset class, SBS Entities and non-SBS Entities had,
respectively, entered into approximately 6,200 and 5,200 active
interest rate security-based swaps. The gross notional amounts
outstanding of the active interest rate security-based swaps held by
SBS Entities and non-SBS Entities were, respectively, approximately
$0.2 and $0.1 trillion. Based on information reported to ITV, as of
November 25, 2022, SBS Entities and non-SBS Entities had, respectively,
entered into approximately 123,000 and 33,000 active credit security-
based swaps. The gross notional amounts outstanding of the active
credit security-based swaps held by SBS Entities and non-SBS Entities
were, respectively, approximately $1.6 and $0.3 trillion.
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    \295\ For cleared security-based swaps where at least one
counterparty is an SBS Entity, Table 2 reflects the security-based
swaps entered into by each of the original counterparties, but does
not include the positions of the clearing organizations themselves.
For uncleared security-based swaps, Table 2 reflects the security-
based swaps entered into by each of the original counterparties. See
SBS Report at 5.

   Table 2--Gross Notional Amount and Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
                                        Asset Class and Registrant Type a
----------------------------------------------------------------------------------------------------------------
                                                                              Gross notional
                                                                                amount        Active security-
           SBSDR                  Asset class           Registrant type        outstanding      based swap count
                                                                            (millions of USD)
----------------------------------------------------------------------------------------------------------------
DDR.......................  Credit................  Total.................          5,561,226          1,046,424
                                                    SBS Entities..........          4,403,130            812,647
                                                    Other.................          1,158,096            233,777
                            Equity................  Total.................          7,227,234          6,889,936
                                                    SBS Entities..........          4,490,592          4,013,393
                                                    Other.................          2,736,642          2,876,543
                            Interest Rate.........  Total.................            355,984             11,410
                                                    SBS Entities..........            210,663              6,214
                                                    Other.................            145,321              5,196
ITV.......................  Credit................  Total.................          1,897,249            155,578
                                                    SBS Entities..........          1,632,251            122,831
                                                    Other.................            264,998             32,747
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps where at least one counterparty is an SBS Entity, Table 2 reflects the
  security-based swaps entered into by each of the original counterparties, but does not include the positions
  of the clearing organizations themselves. For uncleared security-based swaps, Table 2 reflects the security-
  based swaps entered into by each of the original counterparties.

    In addition to information reported to registered SBSDRs, the
Commission also uses data from the DTCC Derivatives Repository Limited
Trade Information Warehouse (``DTCC-TIW'') to describe the baseline.
DTCC-TIW provides data regarding the activity of market participants in
the single-name CDS market during the period from 2006 to the end of
2021.\296\ The Commission acknowledges that limitations in the data
constrain the extent to which it is possible to quantitatively
characterize the security-based swap market.\297\ Based on an analysis
of DTCC-TIW data, staff concluded that there are 2,326 transacting
agents that engaged directly in trading between November 2006 and
December 2021 with 15,721 accounts.\298\
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    \296\ DTCC-TIW provides weekly positions and monthly transaction
files on a voluntary basis for single-name and index-based CDS.
These data cover all positions and transactions where one of the
counterparties is a U.S. entity or the reference entity is a U.S.
entity, with status as a U.S. entity determined by DTCC-TIW. In
DTCC-TIW, the Commission observes end of week CDS positions for all
U.S. entities, foreign counterparties to a U.S. entity, or foreign
counterparties trading a CDS referencing a U.S. underlying entity.
The DTCC-TIW data have limitations. The data do not address two
foreign counterparties with CDS referencing foreign underlying
entities. In addition, the DTCC-TIW data do not provide any intra-
weekly CDS position information, nor any information on the
underlying security holdings of reference entities. Further, DTCC-
TIW is a voluntary database where market participants on a voluntary
basis submit transactions and end of week holdings.
    \297\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and the knowledge and expertise of Commission staff.
    \298\ These 2,326 entities, which are presented in more detail
in Table 3, below, include all DTCC-TIW-defined ``firms'' shown in
DTCC-TIW as transaction counterparties that report at least one
transaction to DTCC-TIW as of Dec. 2021. The staff in the Division
of Economic and Risk Analysis classified these firms by machine-
matching names to known third-party databases and by manual
classification. See, e.g., Security-Based Swap Transactions
Connected with a Non-U.S. Person's Dealing Activity That Are
Arranged, Negotiated, or Executed By Personnel Located in a U.S.
Branch or Office or in a U.S. Branch or Office of an Agent;
Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8598, 8602 n.43 (Feb. 19,
2016). Manual classification was based in part on searches of the
EDGAR and Bloomberg databases, the SEC's Investment Adviser Public
Disclosure database, and a firm's public website or the public
website of the account represented by a firm. As mentioned above,
data on CDS market participants come from DTCC-TIW. Principal
holders of CDS risk exposure are represented by ``accounts'' in the
DTCC-TIW. ``Accounts'' as defined in the DTCC-TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person''
provided by Exchange Act Rule 3a71-3(a)(4)(i)(C). 17 CFR 3a71-
3(a)(4)(i)(C). One entity or legal person (known as ``transacting
agent'' in the terminology of DTCC-TIW) may have multiple accounts.
For example, a bank that is a transacting agent may have one DTCC-
TIW account for its U.S. headquarters and one DTCC-TIW account for
one of its foreign branches.
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    Data from the DTCC-TIW show that activity in the single-name CDS
market is concentrated among a relatively small number of entities,
predominantly registered SBSDs.\299\ The top two SBSDs (when accounts
are sorted by number of counterparties) each transacted with over a
thousand counterparty accounts, consisting of both other SBSDs and non-
SBSDs. The next 13 percent of SBSDs each transacted with 500 to 1,000
counterparty accounts; the following 21 percent of SBSDs each
transacted with 100 to 500 counterparty accounts; and 62 percent of
SBSDs each transacted security-based swaps with fewer than 100