confirmation process. See Section I.A. above. Thus, clearing agency
confirmation practices generally provide for the acknowledgment and
verification of SBS transactions for purposes of this exception.
---------------------------------------------------------------------------

1. Exception for Transactions Executed on a Security-Based Swap
Execution Facility or National Securities Exchange
    As discussed above, the trade acknowledgment and verification rules
being adopted today are designed to provide in a timely manner a
definitive record of the contract terms to which the counterparties
have agreed, thus providing legal certainty about the terms of their
agreement in case those terms are later disputed, and serving to reduce
operational risk. The Commission understands that there are existing
execution facilities that, in connection with facilitating the
execution of SBSs transactions on their platform also provide a
mechanism that obtains the agreement of the counterparties to the terms
of the executed SBS transaction. As suggested by a commenter,\169\ the
Commission believes that it is appropriate to provide an exception from
the trade acknowledgment and verification requirements in the
circumstances where the execution facility on which the SBS transaction
is executed is essentially already providing the same service for an
SBS transaction executed on its platform. The Commission believes that
providing an exception for SBS transactions executed on an SBSEF or
national securities exchange, provided that the rules, procedures or
processes of the SBSEF or exchange provide for the acknowledgment and
verification of all terms of the SBS no later than the time required by
paragraphs (b) and (d)(2) of Rule 15Fi-2, will serve the intended
purpose of the rule in a more efficient manner than if the rule were
applied without the exception because SBS Entities will not need
processes or systems to provide trade acknowledgments for transactions
when execution on the SBSEF or national securities exchange provides
the same result. Such an exception is also generally consistent with
the CFTC Rule, as two commenters urged.\170\ This consistency will
permit SBS Entities that are also registered as Swap Entities to rely
on executing a transaction on an SBSEF or national securities exchange
to comply with the requirements of Rule 15Fi-2 in the same manner they
may rely on execution on a swap execution facility or designated
contract market for compliance with the CFTC Rule.
---------------------------------------------------------------------------

    \169\ See note 164, supra.
    \170\ MarkitSERV at 9; ISDA II at 3, 8.
---------------------------------------------------------------------------

    The Commission further believes that it is appropriate to require,
as part of the exception, that the rules, procedures or processes of
the SBSEF or national securities exchange provide for the
acknowledgment and verification of all terms of the SBS no later than
the time required by paragraphs (b) and (d)(2) of the rule. Otherwise,
the Commission is concerned that SBS transactions executed on SBSEFs or
national securities exchanges could end up not being acknowledged and
verified either pursuant to the rules, procedures or processes of the
SBSEF or the exchange, or pursuant to the requirements of this rule,
for an extended period of time, which would undermine the objective of
the rule to provide legal certainty as to the terms of SBS transactions
in a timely manner.
    As adopted, the exception applies to transactions executed on
either a security-based swap execution facility or a national
securities exchange. Final Rule 15Fi-1(f) defines the term ``security-
based swap execution facility'' to mean a security-based swap execution
facility as defined in Section 3(a)(77) of the Exchange Act \171\ that
is registered pursuant to Section 3D of the Exchange Act,\172\ and
Final Rule 15Fi-1(g) defines the term ``national securities exchange''
to mean an exchange as defined in Section 3(a)(1) of the Exchange Act
\173\ that is registered pursuant to Section 6 of the Exchange

Act.\174\ These definitions limit the exception in Final Rule 15Fi-2(f)
to such organized platforms for the trading of SBSs that are registered
with the Commission. The Commission believes that it is appropriate to
impose this limitation, as those entities are subject to the
Commission's oversight, which will help to ensure that the exception
supports the objectives of Final Rule 15Fi-2 to promote timely and
accurate documentation of SBS transactions. The Commission will be able
to review the operations of these entities, in particular how the
rules, procedures, and processes for providing the trade
acknowledgments and obtaining verification operate in practice.\175\
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    \171\ 15 U.S.C. 78c(a)(77).
    \172\ 15 U.S.C. 78c-4.
    \173\ 15 U.S.C. 78c(a)(1).
    \174\ 15 U.S.C. 78f.
    \175\ See Exchange Act Sec. 3D, 15 U.S.C. 78c-4 (statutory
authority to oversee SBSEFs) and Registration and Regulation of
Security-Based Swap Execution Facilities, Exchange Act Release No.
63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (proposing rules
to register and regulate SBSEFs); see also Exchange Act Section 6,
15 U.S.C. 78f and Exchange Act Section 19, 15 U.S.C. 78s (statutory
authority to oversee national securities exchanges).
---------------------------------------------------------------------------

    SBS Entities executing transactions on organized trading platforms
that are not registered with the Commission, such as a foreign
organized trading platform that is not registered with the Commission,
are not within the scope of this exception, for the reasons discussed
above. In such cases, an SBS Entity retains the obligation to comply
with the trade acknowledgment and verification requirements of Final
Rule 15Fi-2 when executing a transaction on one of these alternative
platforms. The Commission notes, however, that an SBS Entity may allow
such an alternative platform to provide a trade acknowledgment on its
behalf, but the SBS Entity would retain ultimate responsibility for its
own compliance with the rule.\176\
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    \176\ See discussion of an SBS Entity relying on a third party
to provide a trade acknowledgment on its behalf in Section II.B.3,
supra.
---------------------------------------------------------------------------

    The exception in Rule 15Fi-2(f)(1) as adopted also addresses one
commenter's concern that SBSEFs may lack certain information necessary
to confirm trades. Under the exception in Final Rule 15Fi-2(f)(1), an
SBSEF or exchange's rules, procedures or processes must provide for the
acknowledgment and verification of all the terms of an SBS
transaction--which is the same content as is required by Final Rule
15Fi-2(c) for a trade acknowledgment provided by an SBS Entity. Thus,
if the rules, procedures or processes of the SBSEF or exchange do not
provide for the acknowledgment and verification of all terms of an SBS
transaction no later than the time required by paragraphs (b) and
(d)(2) of Rule 15Fi-2, the exception would not be available and an SBS
Entity would itself be required to provide a trade acknowledgment for
such transactions in compliance with Rule 15Fi-2.
2. Exception for Transactions Accepted for Clearing by a Clearing
Agency
    As noted above, the Commission is also adopting Final Rule 15Fi-
2(f)(2), which provides an exception to the general requirements in
Rule 15Fi-2 with respect to any SBS transaction that is submitted for
clearing to a clearing agency, subject to certain conditions. In
particular, the exception will apply only if: (A) The SBS transaction
is submitted for clearing as soon as technologically practicable, but
in any event no later than the time established for providing a trade
acknowledgment under Final Rule 15Fi-2(b); and (B) the rules,
procedures or processes of the clearing agency provide for or require
the acknowledgement and verification of all terms of the security-based
swap transaction prior to or at the same time that the security-based
swap transaction is accepted for clearing.\177\ For the agency model of
clearing, the exception in paragraph (f)(2) of Rule 15Fi-2 will apply
to the initial bilateral transaction between two counterparties that
they submit to clearing--the alpha transaction--provided that the
conditions are satisfied.\178\ For the principal model of clearing,
this exception will not apply to the original bilateral transaction
between the two counterparties, as that transaction is not submitted
for clearing.
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    \177\ Clearing agency rules, processes, and procedures generally
refer to ``confirming'' transaction data as opposed to
``acknowledgment'' and ``verification,'' however, for purposes of
Rule 15Fi-2(f)(2), the Commission is treating confirming
transactions under these rules, processes, or procedures as
equivalent to providing a trade acknowledgment and verifying it.
    \178\ In contrast, the exception in paragraph (e) of Rule 15Fi-2
as adopted will apply to the transactions that result once the
clearing agency accepts the original bilateral transaction for
clearing, namely the beta and gamma transactions to which the
clearing agency is a counterparty. See supra Section II.F
(discussing the exception for clearing transactions).
---------------------------------------------------------------------------

    The rules, procedures, and processes of registered clearing
agencies that provide central counterparty services for SBSs are
generally designed to ensure that the terms of SBS transactions
submitted for clearing have been matched and confirmed prior to or at
the same time the transaction is accepted by the registered clearing
agency for clearing. In particular, the rules, procedures, and
processes of registered clearing agencies that offer central
counterparty services for SBS are designed to ensure that the clearing
agency will accept an SBS transaction for clearing only if it has been
matched and confirmed prior to acceptance and processing by the
registered clearing agency for clearing, either by an authorized
execution or processing platform, through an inter-dealer broker, or
through the clearing agency's own communications with the parties to
the transaction.\179\ The Commission therefore believes that it is
unnecessary to require an SBS Entity to comply with the trade
acknowledgment and verification requirements of Rule 15Fi-2 for SBS
transactions that are submitted to clearing, in circumstances where the
clearing agency's rules provide for the same result as those the rule
is designed to achieve (subject to the conditions discussed).
---------------------------------------------------------------------------

    \179\ See note 168 supra.
---------------------------------------------------------------------------

    The Commission also believes that it is appropriate to condition
the exception on the requirement that the SBS transaction is submitted
for clearing as soon as technologically practicable, but in any event
no later than the time established for providing a trade acknowledgment
under Final Rule 15Fi-2(b). The Commission is concerned that otherwise
such SBS transactions could end up not being acknowledged and verified
either pursuant to the rules of the clearing agency, or pursuant to the
requirements of this rule, for an extended period of time, which would
undermine the objective of the rule to provide legal certainty as to
the terms of SBS transactions in a timely manner.
    As adopted, the exception applies to transactions submitted to and
accepted for clearing by a registered clearing agency that performs
central counterparty services for SBS transactions, subject to certain
conditions. Final Rule 15Fi-1(b) defines the term ``clearing agency''
to mean a clearing agency as defined in Section 3(a)(23) of the
Exchange Act that is registered pursuant to Section 17A of the Exchange
Act and that provides central counterparty services for SBS
transactions. For the reasons discussed in Section F above, this
definition limits the exception in Final Rule 15Fi-2(f) to clearing
agencies that are registered with the Commission.
3. Trade Acknowledgment and Verification After Notice That an SBSEF or
Exchange Has Not Acknowledged and Verified a Transaction or That a
Transaction Has Not Been Accepted for Clearing by a Clearing Agency
    As discussed above, the exception in Final Rule 15Fi-2(f)(1)
applies only to SBS transactions executed on an SBSEF or a national
securities exchange where

the rules, processes, or procedures of the execution facility provide
for the acknowledgment and verification of all terms of the SBS no
later than the time required by paragraphs (b) and (d)(2) of the rule.
Likewise, the exception in Final Rule 15Fi-2(f)(2) applies only to SBS
transactions that are timely submitted to clearing at a clearing agency
where the rules of the clearing agency provide for or require the
acknowledgment and verification of all terms of the security-based swap
transaction prior to or at the same time that the security-based swap
transaction is accepted for clearing. There might be instances even
with respect to an SBSEF or national securities exchange that has such
rules, procedures or processes, where an SBS Entity receives notice
that an SBS transaction it executed on an SBSEF or a national
securities exchange has not been acknowledged and verified. Similarly,
there may be circumstances where an SBS submitted for clearing to a
clearing agency is not accepted for clearing. In these circumstances,
the Commission does not believe that the objectives of Rule 15Fi-2
would be satisfied unless the SBS Entity itself were to comply with the
provisions of the rule, to help ensure that the SBS transaction is in
fact acknowledged and verified. Thus, Rule 15Fi-2(f)(3) as adopted
provides that, if an SBS Entity receives notice that an SBS transaction
has not been acknowledged and verified pursuant to the rules,
procedures or processes of an SBSEF or a national securities exchange,
or accepted for clearing by a clearing agency, the SBS Entity shall
comply with the requirements of Rule 15Fi-2 with respect to such SBS
transaction as if such SBS transaction were executed at the time the
SBS Entity receives such notice. This also makes clear how the timing
requirements in paragraph (b) of Rule 15Fi-2 apply in these
circumstances, where an SBS Entity would not know it has an obligation
to provide a trade acknowledgment until it has received notice from the
SBSEF or national securities exchange that the transaction has not been
acknowledged and verified pursuant to its rules, procedures or
processes, or notice from the clearing agency that the transaction has
not been accepted for clearing.
    The Commission notes that whether a contract that has not been
acknowledged and verified by the SBSEF or national securities exchange,
or that has not been accepted for clearing by a clearing agency,
continues to exist may depend on the rules of the SBSEF, national
securities exchange, or those of the clearing agency, or the agreement
of the counterparties. If the result is that the counterparties have
executed an SBS transaction, then the SBS Entity would be required to
comply with the requirements of Rule 15Fi-2 with respect to that
transaction. To the extent that the result is that the parties have not
executed an SBS transaction, or that the SBS transaction that was
executed is now extinguished, then there is no SBS transaction for
which it is necessary to comply with Rule 15Fi-2.

H. Exemption From Rule 10b-10

    The Dodd-Frank Act amended the Exchange Act definition of
``security'' to include any ``security-based swap.'' \180\
Consequently, security-based swaps, as securities, are fully subject to
the federal securities laws and regulations, including Rule 10b-10
under the Exchange Act.\181\ Rule 10b-10 generally requires that
broker-dealers effecting securities transactions on behalf of or with
customers, provide to their customers, at or before completion of the
securities transaction, a written notification containing certain basic
transaction terms.\182\ The Commission anticipates that some SBS
Entities may also be registered broker-dealers. Therefore, in the
absence of an exemption, an SBS Entity that is also a broker or dealer
could be required to comply with both Rule 10b-10 and Rule 15Fi-2 with
respect to the same transaction. This could be duplicative and overly
burdensome. The Commission thus proposed paragraph (f) of Rule 15Fi-1,
which would provide that an SBS Entity that is also a broker or dealer
and that complies with the requirement to provide a trade
acknowledgment as required by proposed Rule 15Fi-1(b) with respect to
an SBS transaction is exempt from the requirements of Exchange Act Rule
10b-10 \183\ with respect to the SBS transaction.
---------------------------------------------------------------------------

    \180\ Pub. L. 111-203, 124 Stat. 1376, 1755 Dodd-Frank Act Sec.
761(a)(2) (codified at Exchange Act Section 15 U.S.C. 78c 3(a)(10)
(2010)).
    \181\ 17 CFR 240.10b-10.
    \182\ Examples of transaction terms included on a rule 10b-10
confirmation include: the date of the transaction; the identity,
price, and number of shares bought or sold; the capacity of the
broker-dealer; the dollar or yield at which a transaction in a debt
security was effected, and under specified circumstances, the
compensation paid to the broker-dealer by the customer or other
parties. Id.
    \183\ 17 CFR 240.10b-10.
---------------------------------------------------------------------------

    The proposed exemption in paragraph (f) would have applied solely
to transactions in SBS in which an SBS Entity is also a broker or a
dealer, and would not have applied to a transaction by a broker-dealer
that is not also an SBS Entity. In other words, a broker-dealer that is
not an SBS Entity would continue to comply with Rule 10b-10 to the
extent that it effects transactions in SBSs with customers.
    The Commission did not receive any comments on the proposed
exemption from Rule 10b-10 in proposed Rule 15Fi-1(f). In response to
its July 2011 Exchange Act Exemptive Order \184\ granting temporary
exemptive relief from compliance with certain provisions of the
Exchange Act that would have applied to SBS activities due to the
expansion of the Exchange Act definition of ``security'' to include
SBSs, the Commission received a comment letter that requested the
Commission provide an exemption from Rule 10b-10 in connection with SBS
transactions.\185\ The commenter noted that we proposed to exempt
registered broker-dealers from Rule 10b-10 if the broker complies with
the confirmation requirements for SBSs that applies to SBS dealers. The
commenter recommended that the Commission also exempt a broker from
Rule 10b-10 with respect to its brokering activities, regardless of
whether the broker is an SBS dealer.\186\ The commenter suggested, when
talking about certain categories of rules applicable to broker-dealers
that include Rule 10b-10, that applying Rule 10b-10 would be
unnecessary when applied to SBS dealing and brokering activities in
light of the new SBS regulatory regime, and stated its view that
broker-dealers that engage in SBS brokering activities should be exempt
from pre-Dodd Frank provisions to the extent they comply with the
corresponding SBS provisions that apply to SBS dealers.\187\
---------------------------------------------------------------------------

    \184\ See note 189, infra.
    \185\ Securities Industry and Financial Markets Association,
dated Dec. 5, 2011 (``SIFMA'') at 5 (available at http://www.sec.gov/comments/s7-27-11/s72711-10.pdf).
    \186\ Id.
    \187\ Id. at 2-3.
---------------------------------------------------------------------------

    The Commission continues to believe that an exemption from Rule
10b-10 is appropriate to avoid potentially duplicative and overly
burdensome documentation requirements on security-based swap
transactions and thus it is adopting the exemption substantially as
proposed but re-designated as Final Rule 15Fi-2(g) and with changes as
noted below.\188\
---------------------------------------------------------------------------

    \188\ See Final Rule 15Fi-2(g).
---------------------------------------------------------------------------

    As noted in Section B.1 above, because the rule applies solely to
an SBS Entity that ``purchases'' or ``sells'' an SBS, it is effectively
limited to principal transactions in which the SBS Entity is a
counterparty to the transaction and is acting for its own account.
Thus, the exemption from Rule

10b-10 as proposed in Rule 15Fi-1(f) and as adopted in paragraph (g) of
Rule 15Fi-2 applies solely to principal transactions. Final Rule 15Fi-
2(g) has been modified from the proposal to make explicit that the
exemption from Rule 10b-10 applies only when the SBS Entity is
purchasing from or selling to a counterparty (i.e., an SBS Entity is
acting as principal for its own account in a security-based swap
transaction). The Commission recognizes that some SBS Entities may also
engage in SBS brokerage or agency transactions. Any broker acting as an
agent in an SBS transaction, regardless of whether it is also
registered as an SBS Entity, would continue to be required to comply
with Rule 10b-10.\189\ Regarding the comment recommending that a broker
that complies with the SBS confirmation rule with respect to its
brokering activity in SBSs be exempt from Rule 10b-10, the Commission
believes such an exemption is unnecessary because the trade
acknowledgment and verification requirements adopted today in Rule
15Fi-2 are designed for, and only apply to, principal transactions by
an SBS dealer. The rule as adopted today thus does not apply to
brokerage or agency transactions, which are different in structure and
involve different activity by a broker than principal transactions by
an SBS dealer. In contrast, Rule 10b-10 applies to both principal and
agency transactions, and contains required disclosures specifically for
when a broker-dealer is acting as agent.\190\ Since Rule 15Fi-2 does
not require a trade acknowledgment for an SBS Entity's brokerage or
agency transactions, and therefore compliance with Rule 15Fi-2 would
not result in any duplication of efforts by the SBS Entity effecting
the brokerage or agency transaction, the Commission does not believe
that there is a need to provide an exemption from providing a
confirmation under Rule 10b-10 for an SBS Entity's brokerage or agency
transactions.
---------------------------------------------------------------------------

    \189\ On July 1, 2011, the Commission issued an order granting
temporary exemptive relief from compliance with certain provisions
of the Exchange Act that would have applied to SBS activities due to
the expansion of the Exchange Act definition of ``security'' to
include SBSs. Subject to certain conditions, the order provided
temporary exemptions (including from Exchange Act Rule 10b-10
relating to the confirmation of securities transactions) in
connection with SBS activity by certain eligible contract
participants (as defined in section 1a of the Commodity Exchange
Act) and registered broker-dealers. See Order Granting Temporary
Exemptions under the Securities Exchange Act of 1934 in Connection
with the Pending Revisions of the Definition of ``Security'' to
Encompass Security-Based Swaps, Exchange Act Release No. 64795 (Jul.
1, 2011), 76 FR 39927 (Jul. 7, 2011) (``Exchange Act Exemptive
Order''). The Exchange Act Exemptive Order also provided that
pursuant to section 36 of the Exchange Act, until such time as the
underlying exemptive relief expires, no contract entered into on or
after July 16, 2011 shall be void or considered voidable by reason
of section 29(b) of the Exchange Act because any person that is a
party to the contract violated a provision of the Exchange Act for
which the Commission provided exemptive relief in the Exchange Act
Exemptive Order. On February 5, 2014, the Commission extended the
expiration date for the temporary exemption relating to Exchange Act
Rule 10b-10 until the earliest compliance date set forth in any
final rules regarding trade acknowledgment and verification of SBS
transactions. See Order Extending Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Revision of
the Definition of ``Security'' to Encompass Security-Based Swaps,
and Request for Comment, Exchange Act Release No. 71485 (Feb. 5,
2014), 79 FR at 7734 (Feb. 10, 2014). With the adoption of this
Final Rule, the exemption from Exchange Act Rule 10b-10 provided for
in the Exchange Act Exemptive Order, as well as the related
exemption from Section 29(b) with respect to Rule 10b-10, will
expire upon the compliance date of Rule 15Fi-2, which is discussed
further in Section V.A. below.
    \190\ See Rule 10b-10(a)(2)(i).
---------------------------------------------------------------------------

    The Commission also is changing the exemption in Final Rule 15Fi-
2(g) to clarify that an SBS Entity that is also a broker or dealer may
rely on the exemption from Rule 10b-10 if it complies with either
paragraph (a) or (d)(2) of Final Rule 15Fi-2. This change makes it
clear that the exemption is also available to an SBS Entity that
receives a trade acknowledgment from its counterparty to an SBS and
timely verifies or disputes the terms of the trade acknowledgment in
compliance with the rule. The proposed exemption in Rule 15F-1(f) from
Rule 10b-10 would have applied only to an SBS Entity that sent a trade
acknowledgment. The Commission recognizes, however, that an SBS Entity
that is also a broker-dealer and that receives a trade acknowledgment
pursuant to Rule 15Fi-2 from its counterparty to the SBS may
nevertheless have an independent obligation under Rule 10b-10 to send
that counterparty a confirmation. The Commission believes that not
exempting the SBS Entity that receives and responds to the trade
acknowledgment from the requirement to send its counterparty a
confirmation for the same transaction raises the same potentially
duplicative and overly burdensome documentation requirements on
security-based swap transactions if both Rules 10b-10 and 15Fi-2 were
to apply to the same transactions. Thus, the Commission believes that
it is appropriate to provide an exemption from Rule 10b-10 in this
situation to avoid duplicative and overly burdensome documentation
requirements on security-based swap transactions.

III. Cross-Border Application of Trade Acknowledgment and Verification
Requirements

A. Proposed Application

    In the Cross-Border Proposing Release, the Commission preliminarily
interpreted the Title VII requirements associated with registration to
apply generally to the activities of registered entities.\191\ In
reaching that preliminary conclusion, the Commission did not concur
with the views of certain commenters that the Title VII requirements
should not apply to the foreign security-based swap activities of
registered entities, stating that such a view could be difficult to
reconcile with, among other things, the statutory language describing
the requirements applicable to security-based swap dealers.\192\
---------------------------------------------------------------------------

    \191\ See Cross-Border Proposing Release, 78 FR at 30986 (``We
are proposing to apply the Title VII requirements associated with
registration (including, among others, capital and margin
requirements and external business conduct requirements) to the
activities of registered entities to the extent we have determined
that doing so advances the purposes of Title VII.'' (footnotes
omitted)).
    \192\ See id. at 30986 (``Although some commenters suggested
that a territorial approach would prohibit the Commission from
applying Title VII to the foreign security-based swap activities of
even registered entities, such an interpretation of the application
of Title VII to registered entities is difficult to reconcile with
the statutory language describing the requirements applicable to
registered security-based swap dealers, with the text of Section
30(c), or with the purposes of Title VII and the nature of risks in
the security-based swap market as described above. We have long
taken the view that an entity that has registered with the
Commission subjects itself to the entire regulatory system governing
such registered entities.'').
---------------------------------------------------------------------------

    Implementing those principles, the Commission preliminarily
identified the statutory provision related to documentation standards--
which in part requires the Commission to adopt rules governing
documentation standards for SBS Entities--as addressing entity-level
requirements relating to the security-based swap dealer as a whole,
rather than requirements specifically applicable to particular
transactions,\193\ and the Commission accordingly proposed to apply the
entity-level requirements on a firm-wide basis to address risks to the
security-based swap dealer as a whole.\194\ The Commission similarly
expressed the preliminary view that major security-based swap
participants

should be required to adhere to the entity-level requirements.\195\
---------------------------------------------------------------------------

    \193\ See id. at 31013 (addressing the documentation standard
requirements of Exchange Act Section 15F(i) in conjunction with
other risk management requirements applicable to registered
security-based swap dealers); see generally id. at 31009-16
(comparing entity-level and transaction-level requirements
generally).
    \194\ See id. at 31011.
    \195\ See id. at 31035.
---------------------------------------------------------------------------

    The Commission did not propose any exception from the application
of the entity-level requirements to security-based swap dealers.\196\
The Commission, however, has adopted rule amendments to provide
exceptions from the business conduct requirements under Exchange Act
Section 15F(h)--other than supervision requirements pursuant to
Exchange Act Section 15F(h)(1)(B)--for security-based swap dealers and
major security-based swap participants in connection with certain
foreign security-based swap activity.\197\
---------------------------------------------------------------------------

    \196\ ``The Commission preliminarily believes that entity-level
requirements are core requirements of the Commission's
responsibility to ensure the safety and soundness of registered
security-based swap dealers. The Commission preliminarily believes
that it would not be consistent with this mandate to provide a
blanket exclusion to foreign security-based swap dealers from
entity-level requirements applicable to such entities.'' Id. at
31024 (footnotes omitted). The Commission further expressed the
preliminary view that concerns regarding the application of entity-
level requirements to foreign security-based swap dealers would
largely be addressed through the proposed approach to substituted
compliance. See id.
    \197\ In part, U.S. and non-U.S. security-based swap dealers
have been excepted from application of those business conduct
standards to their ``foreign business.'' See Exchange Act Rule 3a71-
3(a)(8), (a)(9), (c) (excepting foreign dealers in connection with
any transaction with a non-U.S. counterparty that does not involve
certain activities in the U.S., or any transaction with a U.S.
counterparty that is a transaction through that counterparty's
foreign branch; also excepting U.S. dealers in connection with any
transaction through the dealer's foreign branch with a non-U.S.
counterparty or with a U.S. counterparty that is conducted through
that counterparty's foreign branch); see also Business Conduct
Adopting Release, 81 FR at 30065-69.
    U.S. and non-U.S. major security-based swap participants also
have been excepted from those business conduct standards with
respect to certain foreign activities. See Exchange Act Rule 3a67-
10(d) (excepting foreign major participants in connection with any
transaction with a non-U.S. counterparty and any transaction with a
U.S. counterparty that is a transaction through that counterparty's
foreign branch; also excepting U.S. major participants in connection
with any transactions conducted through a foreign branch with a non-
U.S. counterparty or with a U.S.-person counterparty that
constitutes a transaction through the counterparty's foreign
branch); see also Business Conduct Adopting Release, 81 FR at 30069.
---------------------------------------------------------------------------

B. Commenter Views

    Certain commenters expressed views challenging the proposed cross-
border scope of the trade acknowledgment and verification requirements.
In particular, one commenter expressed the view that these requirements
(as well as certain other Title VII requirements) should be deemed to
be transaction-level requirements, and that their cross-border
application should differ depending on the type of counterparty in
question.\198\ A commenter to the Proposing Release stated the view
that when practices imposed on U.S. entities are more burdensome than
corresponding practices in other jurisdictions, those practices should
apply only to U.S. customer business.\199\
---------------------------------------------------------------------------

    \198\ See SIFMA/FSR/FIA Letter at A22-23 (stating in relevant
part that confirmation requirements should be considered to be
transaction-level requirements, and that the application of such
requirements should depend on the circumstances of a particular
security-based swap including the status of the counterparty; also
citing CFTC cross-border guidance which identifies those
requirements as being transaction-level).
    \199\ See ISDA Letter (Feb. 22, 2011) at 8 (``In the interests
of maintaining the competitiveness of U.S. markets and U.S. SBS
Entities, we believe that to the extent practices imposed on U.S.
SBS Entities are different from and more burdensome than those
imposed on equivalent entities in other jurisdictions, those
practices should apply to U.S. customer business only. As we have
stated previously, it is essential that U.S. regulations not hamper
the overseas activities of U.S. SBS Entities. Nor should non-U.S.
entities find access to the U.S. markets impaired.'').
---------------------------------------------------------------------------

    One commenter generally urged us to follow cross-border approaches
that are similar to those taken by the CFTC.\200\ The CFTC has taken a
different position with regard to corresponding requirements pursuant
to the CEA.\201\
---------------------------------------------------------------------------

    \200\ See, e.g., CDEU Letter at 2 (``Conflicting regulatory
regimes will lead to an inefficient financial system, increasing
compliance costs without securing any further reductions in systemic
risks. Accordingly, the SEC's proposed application and rules
relating to the cross-border application of Title VII should ensure
that such rules will not conflict with the guidance adopted by the
CFTC. The SEC should also work closely with the CFTC when
determining whether substituted compliance is applicable with
respect to a particular jurisdiction.'').
    \201\ Under the CFTC's cross-border guidance, trade confirmation
requirements pursuant to CEA section 4s(i) are considered to be
``Category A'' transaction-level requirements. See CFTC,
``Interpretive Guidance and Policy Statement Regarding Compliance
With Certain Swap Regulations,'' 78 FR 45292, 45335 (July 26, 2013).
In contrast to the Commission's approach with regard to security-
based swaps (which would apply those requirements to the entirety of
registered security-based swap dealers' security-based swap
businesses, with the availability of substituted compliance for non-
U.S. dealers), under the CFTC's guidance such Category A
transaction-level swap requirements:
    (a) Generally appear not to apply to a non-U.S. swap dealer's
transaction with a non-U.S. counterparty (other than a guaranteed or
conduit affiliate). See id. at 45352-53 (stating that ``generally
there may be a relatively greater supervisory interest on the part
of foreign regulators with respect to transactions between two
counterparties that are non-U.S. persons so that application of the
Category A Transaction-Level Requirements may not be warranted.'').
    (b) Generally appear to apply to a non-U.S. swap dealer's
transactions with U.S. counterparties (other than foreign branches
of U.S. banks) without the availability of substituted compliance,
with the proviso that such a non-U.S. dealer would be deemed in
compliance with the relevant Dodd-Frank requirements ``where it
complies with requirements in its home jurisdiction that are
essentially identical to the Dodd-Frank requirements.'' See id. at
45353.
    (c) Generally appear to apply to the transactions of a swap
dealer that is a foreign branch of a U.S. bank, but with substituted
compliance available for the foreign branch's transactions with non-
U.S. counterparties. See id. at 45350-51 (noting ``the interests of
foreign regulators in applying their transaction-level requirements
to a swap taking place in their jurisdiction'' along with the fact
that foreign branches ``are subject generally to direct or indirect
oversight by U.S. regulators because they are part of a U.S.
person''). Substituted compliance generally would not be available
for that foreign branch's transactions with U.S. counterparties,
unless the counterparty also is a foreign branch. See id. at 45350
(noting the CFTC's ``strong supervisory interests in entities that
are part of or extensions of'' U.S. swap dealers).
---------------------------------------------------------------------------

C. Response to Comments and Final Interpretation

    The Commission continues to believe that the trade acknowledgment
and verification requirements are entity-level requirements that apply
to a security-based swap dealer's or a major security-based swap
participant's business with foreign counterparties to the same extent
that they apply to the dealer's or major participant's U.S.
business.\202\ This scope is consistent with Exchange Act Section
15F(i), which provides that each registered security-based swap dealer
and major security-based swap participant ``shall conform with such
standards as may be prescribed by the Commission, by rule or
regulation, that relate to timely and accurate confirmation,
processing, netting, documentation, and valuation of all security-based
swaps.'' \203\
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    \202\ See note 192, supra (Cross-Border Proposing Release noted
our longstanding view that ``an entity that has registered with the
Commission subjects itself to the entire regulatory system governing
such registered entities'').
    \203\ 15 U.S.C. 78o-10(i).
---------------------------------------------------------------------------

    In reaching this conclusion, the Commission is persuaded that the
trade acknowledgment and verification requirements play an important
role in addressing risks to the security-based swap dealer and the
major security-based swap participant as a whole, including risks
related to the entity's financial stability. In this regard, we have
taken into account commenter views that these requirements should be
deemed to be transaction-level requirements, and that their cross-
border application should differ depending on the type of counterparty
in question,\204\ and that when practices imposed on U.S. entities are
more burdensome than corresponding practices in other jurisdictions,
those practices should apply only to U.S. customer business.\205\ We
further recognize that the CFTC has taken a different position with
regard to corresponding requirements pursuant to the CEA, and have
considered

commenter views urging us to follow cross-border approaches similar to
those taken by the CFTC.\206\
---------------------------------------------------------------------------

    \204\ See note 198, supra.
    \205\ See note 199, supra.
    \206\ See notes 200 and 201, supra.
---------------------------------------------------------------------------

    We believe it is especially significant that, as we previously
recognized, if an SBS transaction ``is not reduced to writing, a court
may have to supply contract terms upon which there was no previous
agreement,'' and prudent practice requires that ``the parties document
the transaction in a complete and definitive written record so there is
legal certainty about the terms of the agreement in case those terms
are later disputed.'' \207\ The GAO further has recognized that
``[h]aving unconfirmed trades could allow errors to go undetected that
might subsequently lead to losses and other problems,'' and that the
associated operational risks ``have the potential to contribute to
broader market problems.'' \208\ As a result, an alternative approach
that does not require a registered entity to take steps to reduce the
terms of a transaction to writing and take steps to help detect any
errors could be expected to contribute to operational risk and legal
uncertainty. Those risks would impact the entity's business as a whole,
and not merely specific security-based swap transactions. Because those
risks may raise questions regarding the validity--and even the
existence--of outstanding security-based swaps, those risks may also
hinder the settlement process and lead to instability within the
broader security-based swap market. Accordingly, the Commission
believes that it is appropriate to apply these trade acknowledgment and
verification requirements to the entirety of a security-based swap
dealer's and major security-based swap participant's security-based
swap business.\209\
---------------------------------------------------------------------------

    \207\ See Proposing Release, 76 FR at 3860.
    \208\ See GAO Confirmation Report, supra note 9, at 15. The GAO
further noted: ``Errors could be made at any time--for example,
counterparties could miscommunicate when making a trade or dealers
could enter the wrong trade data into their systems. If such errors
go undetected, a dealer could make an incorrect premium payment to a
counterparty or inaccurately measure and manage risk exposures,
notably market and counterparty credit risks. Similarly, errors
could lead to legal disputes between a dealer and a counterparty if
a credit event triggered a contract settlement.'' Id.
    \209\ Given the role of trade acknowledgment and verification
practices in helping avoid disputes regarding the existence and
terms of security-based swaps, and so in helping to avoid risks to
market participants, the entity-level nature of the associated
requirements may be distinguished from certain transaction-level
business conduct rules that the Commission previously adopted
related to recommendations, communications and disclosures. See
Business Conduct Adopting Release, 81 FR at 30065-69 (addressing
business conduct standards described in Exchange Act Section 15F(h)
and underlying rules and regulations).
---------------------------------------------------------------------------

    In sum, we believe that the considerations discussed above support
the conclusion that an alternative approach--whereby the trade
acknowledgment and verification requirements are applied only to
transactions involving U.S. counterparties (and/or transactions
connected with dealing activity in the U.S.)--could lead to operational
risk and legal uncertainty, which would impact the registered entity as
well as its counterparties. For those reasons, we conclude that for
purposes of the Exchange Act, the trade acknowledgment and verification
requirements are entity-level requirements that are applicable to the
entirety of a registered dealer's and major participant's security-
based swap business.\210\
---------------------------------------------------------------------------

    \210\ Concerns regarding the application of such entity-level
requirements in connection with foreign activities further may be
addressed through the potential availability of substituted
compliance. See note 196, supra.
---------------------------------------------------------------------------

IV. Availability of Substituted Compliance for Trade Acknowledgment and
Verification Requirements

A. Existing Substituted Compliance Rule

    Earlier this year, the Commission adopted Exchange Act Rule 3a71-6
to provide that non-U.S. SBS Entities could satisfy applicable business
conduct requirements under Section 15F by complying with comparable
regulatory requirements of a foreign jurisdiction, subject to certain
conditions. The rule in part provides that the Commission shall not
make a determination providing for substituted compliance unless the
Commission determines, among other things, that the foreign regulatory
requirements are comparable to otherwise applicable requirements.\211\
In adopting that substituted compliance rule, the Commission addressed
a range of issues and concerns that commenters had raised in response
to the substituted compliance proposal that was set forth in the Cross-
Border Proposing Release.
---------------------------------------------------------------------------

    \211\ See Business Conduct Adopting Release, 81 FR at 30074.
---------------------------------------------------------------------------

    When the Commission adopted a substituted compliance rule that
solely addressed the business conduct requirements, it stated that it
expected to assess the potential availability of substituted compliance
in connection with other requirements when the Commission considers
final rules to implement those requirements.\212\
---------------------------------------------------------------------------

    \212\ As proposed, substituted compliance potentially would have
been available in connection with the requirements applicable to
security-based swap dealers pursuant to Exchange Act Section 15F,
other than the registration requirements applicable to dealers.
Because the trade acknowledgment and verification requirements being
adopted today are grounded in Section 15F, substituted compliance
generally would have been available for those requirements under the
proposal.
---------------------------------------------------------------------------

B. Response to Comments and Final Rule

    The Commission is amending Exchange Act rule 3a71-6 to provide SBS
Entities that are not U.S. persons with the potential to avail
themselves of substituted compliance to satisfy the Title VII trade
acknowledgment and verification requirements. In amending the rule, the
Commission concludes that the principles associated with substituted
compliance for the business conduct requirements in large part should
similarly apply to the trade acknowledgment and verification
requirements. Accordingly, except as discussed below, the revised
substituted compliance rule applies to the trade acknowledgment
requirements in the same manner as it applies to the business conduct
requirements.\213\
---------------------------------------------------------------------------

    \213\ The discussions in the Business Conduct Adopting Release,
including those regarding consideration of supervisory and
enforcement practices (see id. at 30079), regarding certain multi-
jurisdictional issues (see id. at 30079-80), and regarding
application procedures (see id. at 30080-81) are applicable to the
trade acknowledgment and verification requirements.
---------------------------------------------------------------------------

1. Basis for Substituted Compliance in Connection With the Trade
Acknowledgment and Verification Requirements
    In light of the global nature of the security-based swap market and
the prevalence of cross-border transactions within that market, there
is the potential that the application of the Title VII trade
acknowledgment and verification requirements may lead to requirements
that are duplicative of or in conflict with applicable foreign
requirements, even when the two sets of requirements implement similar
goals and lead to similar results. Those results have the potential to
disrupt existing business relationships, and, more generally, to reduce
competition and market efficiency.\214\
---------------------------------------------------------------------------

    \214\ See generally Business Conduct Adopting Release, 81 FR at
30073-74 (addressing basis for making substituted compliance
available in the context of the business conduct requirements).
---------------------------------------------------------------------------

    To address those effects, the Commission concludes that under
certain circumstances it may be appropriate to allow for the
possibility of substituted compliance whereby market participants may
satisfy the trade acknowledgment and verification requirements by
complying with comparable foreign requirements. Allowing for the
possibility of

substituted compliance in this manner may be expected to help achieve
the benefits of the trade acknowledgment and verification
requirements--helping to curb legal uncertainty and operational risk to
participants in security-based swap transactions and in the broader
market--in a way that helps avoid regulatory duplication or conflict
and hence promotes market efficiency, enhances competition and
facilitates a well-functioning global security-based swap market.
Accordingly, paragraph (d) of the rule has been revised to identify the
trade acknowledgment and verification requirements of Title VII as
being potentially eligible for substituted compliance.\215\
---------------------------------------------------------------------------

    \215\ Paragraph (a)(1) of the rule provides that the Commission
may, conditionally or unconditionally, by order, make a
determination with respect to a foreign financial regulatory system
that compliance with specified requirements under the that foreign
financial system by a security-based swap dealer and/or by a
registered major security-based swap participant, or class thereof,
may satisfy the corresponding requirements identified in paragraph
(d) of the rule that would otherwise apply.
---------------------------------------------------------------------------

2. Comparability Criteria, and Consideration of Related Requirements
    As discussed when we adopted Exchange Act rule 3a71-6, the
Commission will endeavor to take a holistic approach in determining the
comparability of foreign requirements for substituted compliance
purposes, focusing on regulatory outcomes as a whole rather than on
requirement-by-requirement similarity.\216\ The Commission's
comparability assessments associated with the trade acknowledgment and
verification rules accordingly will consider whether, in the
Commission's view, the foreign regulatory system achieves regulatory
outcomes that are comparable to the regulatory outcomes associated with
those Exchange Act requirements.
---------------------------------------------------------------------------

    \216\ See Business Conduct Adopting Release, 81 FR at 30078-79.
---------------------------------------------------------------------------

    In response to commenter requests for guidance regarding criteria
that the Commission will consider as it assesses comparability,\217\
the final rule provides that prior to making a substituted compliance
determination in connection with the trade acknowledgment and
verification requirements, the Commission intends to consider whether
the information that is required to be provided pursuant to the
requirements of the foreign financial regulatory system, and the manner
and timeframe by which that information must be provided, are
comparable to those required pursuant to the applicable Exchange Act
provisions.\218\
---------------------------------------------------------------------------

    \217\ See id.
    \218\ See Exchange Act Rule 3a71-6(d)(2)(i).
---------------------------------------------------------------------------

    In application, the Commission may determine to conduct its
comparability analyses regarding the trade acknowledgment and
verification requirements in conjunction with comparability analyses
regarding other Exchange Act requirements that, like the trade
acknowledgment and verification requirements, promote risk management
in connection with security-based swap dealers and major security-based
swap participants. Accordingly, depending on the applicable facts and
circumstances, the comparability assessment associated with the trade
acknowledgment and verification requirements may constitute part of a
broader assessment of the foreign regulatory system's risk mitigation
requirements, and the applicable comparability assessments may be
conducted at the level of those risk mitigation requirements as a
whole.

V. Effective and Compliance Dates

    As addressed below, Rules 15Fi-1 and 15Fi-2 being adopted today
will be effective 60 days following publication in the Federal Register
and will have a compliance date that is the same as the compliance date
of the SBS Entity registration rules. If any provision of Rules 15Fi-1
and 15Fi-2, or the application thereof to any person or circumstance,
is held to be invalid, such invalidity shall not affect other
provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.

A. Trade Acknowledgment and Verification Rule

    Final Rules 15Fi-1 and 15Fi-2 will be effective 60 days from the
date of the publication of those rules in the Federal Register.
    However, the Commission notes that only registered SBS Entities
must conform to the standards of Final Rules 15Fi-1 and 15Fi-2. Thus,
SBS Entities will not be required to comply with Final Rules 15Fi-1 and
15Fi-2 until they are registered. Therefore, the Commission is adopting
a compliance date for Final Rules 15Fi-1 and 15Fi-2 that is the same as
the compliance date of the SBS Entity registration rules, which is the
later of: Six months after the date of publication in the Federal
Register of a final rule release adopting rules establishing capital,
margin and segregation requirements for SBS Entities; the compliance
date of final rules establishing recordkeeping and reporting
requirements for SBS Entities; the compliance date of final rules
establishing business conduct requirements under Exchange Act Sections
15F(h) and 15F(k); or the compliance date for final rules establishing
a process for a registered SBS Entity to make an application to the
Commission to allow an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on the SBS Entity's behalf.\219\ This timing should provide SBS
Entities ample time to review the final trade acknowledgment and
verification rules and determine how they will comply.
---------------------------------------------------------------------------

    \219\ See Registration Process for Securities-Based Swap Dealers
and Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015).
---------------------------------------------------------------------------

    Two commenters suggested that we should implement the trade
acknowledgment rule in phases.\220\ One suggested that the trade
acknowledgment requirements should be ``both phased and aspirational''
because it may only become ``workable in the years to come.'' \221\
This commenter suggested that the Commission engage in an ongoing
dialogue with the leaders of the SBS industry to tighten the trade
acknowledgment timeframe over an extended period.\222\ The other
commenter suggested that the suggested phases could be based, for
example, upon the complexity of products or the average time to confirm
similar transactions.\223\ Otherwise, the commenter speculated that
``premature implementation'' could cause unspecified ``adverse market
consequences.'' \224\
---------------------------------------------------------------------------

    \220\ ISDA I at 5; MarkitSERV at 2, 11.
    \221\ ISDA I at 5.
    \222\ Id. at 6.
    \223\ MarkitSERV at 11.
    \224\ Id.
---------------------------------------------------------------------------

    At this time, the Commission is not adopting a phased-in compliance
schedule or adopting timing requirements that tighten over time. The
Commission believes the compliance date of Final Rules 15Fi-1 and 15Fi-
2 is sufficient for SBS Entities to come into full compliance because:
(1) The subset of SBS Entities that are also swap dealers or major swap
participants have been required to comply with the CFTC Rule since
2014,\225\ which suggests that compliance with the Commission's
substantially similar Final Rules should not pose novel compliance
challenges

for SBS Entities that are also swap dealers or major swap participants;
(2) as discussed in the prior paragraph, no SBS Entity will be required
to comply with the Final Rules until they are registered, and the
requirement to register will not arise until the future point when the
Commission has adopted certain other enumerated SBS rules; and (3) the
timing requirement adopted in paragraph (b) of the Rule 15Fi-2 as
compared to the proposed rule should ease SBS Entities' challenges
meeting their compliance obligations when the rule does come into
force. Thus, the Commission believes that the rule as adopted
effectively addresses the concerns underlying the suggestion for a
phased-in approach.
---------------------------------------------------------------------------

    \225\ The CFTC Rule contained a phased implementation schedule,
which provided that Swap Entities would have additional time to
provide a trade acknowledgment or confirm a transaction, as
applicable, depending on the asset class of the swap. The
implementation schedule required full compliance with the rule's
timing requirements for all transactions in all asset classes
executed after August 31, 2014. For a full discussion of the phased
compliance schedule, see 77 FR at 55941.
---------------------------------------------------------------------------

B. Substituted Compliance Rule

    The effective date of these amendments to Exchange Act Rule 3a71-6
will be 60 days following publication in the Federal Register.
    Earlier this year, when the Commission adopted Rule 3a71-6 to
provide for substituted compliance in conjunction with the final rules
associated with the business conduct requirements, the Commission
stated that the effective date of the substituted compliance rule would
be 60 days following publication in the Federal Register. The
Commission further stated that there would be no separate compliance
date in connection with the substituted compliance rule because the
rule did not impose obligations upon entities separate and apart from
the underlying business conduct requirements. The Commission added that
security-based swap dealers and major security-based swap participants
would not be required to comply with those requirements until they are
registered.\226\
---------------------------------------------------------------------------

    \226\ See Business Conduct Adopting Release, 81 FR at 30082.
---------------------------------------------------------------------------

    The same principles apply to this amendment to the substituted
compliance rule, as security-based swap dealers and major security-
based swap participants will not be required to comply with the
underlying trade acknowledgment and verification requirements until
they are registered. Accordingly, there will be no separate compliance
date for the substituted compliance rule. As we noted in connection
with the business conduct requirements, the Commission would consider
substituted compliance requests that are submitted prior to the
compliance date for the entity registration requirements.\227\
---------------------------------------------------------------------------

    \227\ See id.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

A. Introduction

    The Paperwork Reduction Act of 1995 (``PRA'') \228\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any ``collection of information.'' \229\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. In addition, 44 U.S.C. 3507(a)(1)(D) provides that before
adopting (or revising) a collection of information requirement, an
agency must, among other things, publish a notice in the Federal
Register stating that the agency has submitted the proposed collection
of information to the Office of Management and Budget (``OMB'') and
setting forth certain required information, including (1) a title for
the collection of information; (2) a summary of the collection of
information; (3) a brief description of the need for the information
and the proposed use of the information; (4) a description of the
likely respondents and proposed frequency of response to the collection
of information; (5) an estimate of the paperwork burden that shall
result from the collection of information; and (6) notice that comments
may be submitted to the agency and director of OMB.\230\
---------------------------------------------------------------------------

    \228\ 44 U.S.C. 3501 et seq.
    \229\ 44 U.S.C. 3502(3).
    \230\ 44 U.S.C. 3507(a)(1)(D) (internal formatting omitted); see
also 5 CFR 1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Final Rule 15Fi-2 and Rule 3a71-6 contain ``collection of
information requirements'' within the meaning of the PRA. Final Rule
15Fi-1 defines relevant terms and is not a ``collection of
information.''

B. Rule 15Fi-2

    In accordance with 44 U.S.C. 3507 and 5 CFR 1320.11, the Commission
submitted proposed Rule 15Fi-1 to OMB for review. The title of the new
information collection will be ``Rule 15Fi-2--Trade Acknowledgment and
Verification of Security-Based Swap Transactions.'' Compliance with the
collection of information requirements is mandatory. The OMB has
assigned control number 3235-0713 to the new collection of information.
    In the proposing release, the Commission solicited comment on the
collection of information requirements and the accuracy of the
Commission's statements. As discussed more fully above in Section I.A.,
the Commission received seven comments in total on the proposed rule.
One commenter raised an issue with the Commission's estimate of the
cost for each SBS Entity to develop an internal order and trade
management systems (``OMS''), and is addressed below.
1. Summary of Collection of Information
    As discussed above, Exchange Act Section 15F(i)(1) provides that
SBS Entities ``shall conform with such standards as may be prescribed
by the Commission, by rule or regulation, that relate to timely and
accurate confirmation, processing, netting, documentation, and
valuation of all security-based swaps.'' \231\ Section 15F(i)(2) of the
Exchange Act further provides that the Commission must adopt rules
governing documentation standards for SBS Entities. Accordingly, the
Final Rules provide documentation standards for the timely and accurate
acknowledgment and verification of SBS transactions by SBS Entities.
Rule 15Fi-1 contains definitions of the relevant terms. Rule 15Fi-2
contains seven paragraphs: (a) The trade acknowledgment obligations of
specific SBS Entities; (b) the prescribed time frames under which a
trade acknowledgment must be sent; (c) the form and content
requirements of the trade acknowledgment; (d) SBS Entities'
verification obligations; (e) a limited exception from the requirement
to provide a clearing agency a trade acknowledgment in a clearing
transaction, (f) a limited exception from the requirement to provide a
trade acknowledgment for certain transactions executed on a security-
based swap execution facility or a national securities exchange or
accepted for clearing by a clearing agency; and (g) a limited exemption
from the requirements of Exchange Act Rule 10b-10 \232\ for a broker-
dealer acting as principal for its own account in a security-based swap
transaction.
---------------------------------------------------------------------------

    \231\ 15 U.S.C. 78o-8.
    \232\ 17 CFR 240.10b-10.
---------------------------------------------------------------------------

    Under paragraph (a) of Rule 15Fi-2, sending an SBS trade
acknowledgment is the obligation of a particular SBS Entity (i.e., an
SBS dealer or major-SBS participant) depending on whether the SBS
Entity and its counterparty are SBS dealers or major SBS participants
and/or in accordance with any agreements between the counterparties
that delineate the trade acknowledgment responsibility.
    Paragraph (b) of Rule 15Fi-2 requires trade acknowledgments to be
provided promptly, but in no event later than the end of the first
business day following

the day of execution.\233\ Paragraph (c) of Rule 15Fi-2 requires trade
acknowledgments to be provided through electronic means that provide
reasonable assurance of delivery and must disclose all the terms of the
security-based swap transaction.\234\ Paragraph (d)(1) of Rule 15Fi-2
requires SBS Entities to establish, maintain, and enforce policies and
procedures reasonably designed to obtain prompt verification of SBS
trade acknowledgments. Regardless of the method of transmittal, when an
SBS Entity receives a trade acknowledgment, pursuant to paragraph
(d)(2) of the rule, it must promptly verify the accuracy of the trade
acknowledgment or dispute the terms with its counterparty.
---------------------------------------------------------------------------

    \233\ Rule 15Fi-2(b).
    \234\ See Rule 15Fi-2(c); see also discussion in Section II.D.
supra.
---------------------------------------------------------------------------

    Paragraphs (e), (f), and (g) of Final Rule 15Fi-2 are exemptive
provisions and are not a collection of information.
2. Proposed Use of Information
    The trade acknowledgment and verification requirements of Rule
15Fi-2 apply to both types of SBS Entities depending on whether the
entity and its counterparty are SBS dealers or major SBS participants
and on any agreements between the counterparties addressing the
obligation to send a trade acknowledgment. Generally, the transaction
details that must be provided in a trade acknowledgment serve as a
written record by which the counterparties to a transaction memorialize
the terms of a transaction. In effect, the trade acknowledgment
reflects the contract entered into between the counterparties. In
addition, the rule's verification requirements are intended to ensure
that the written record of the transaction (i.e., the trade
acknowledgment) accurately reflects the terms of the transaction as
understood by the respective counterparties. In situations in which an
SBS Entity is provided a trade acknowledgment that is not an accurate
reflection of the agreement, Rule 15Fi-2 requires the SBS Entity to
dispute the terms of the transaction.
3. Respondents
    Rule 15Fi-2 applies only to SBS Entities, that is, to SBS dealers
and major SBS participants, both of which will be registered with the
Commission. In the Proposing Release the Commission stated its belief
that approximately 50 entities may meet the definition of SBS dealer,
and up to five entities may meet the definition of major SBS
participant. We received no comments on these estimates and continue to
believe they are appropriate. Thus, approximately 55 entities may be
required to register with the Commission as SBS Entities and thus,
would be subject to the trade acknowledgment and verification
requirements of Rule 15Fi-2.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
    Pursuant to Rule 15Fi-2, all SBS transactions must be acknowledged
and verified through the methods and by the timeframes prescribed in
the rule. Collectively, paragraphs (a), (b), (c), and (d) of Rule 15Fi-
2 identify the information to be included in a trade acknowledgment;
the party responsible for sending the trade acknowledgment; the
permissible methods for sending the trade acknowledgment; and criteria
for verifying the terms of a trade acknowledgment. In 2015, there were
2,436,531 single-name credit default swap (``CDS'') transactions
reported to the DTCC Derivatives Repository Limited Trade Information
Warehouse (``TIW'').\235\ For purposes of this analysis, we assume
there were approximately 2.44 million single-name CDS transactions in
2015. In addition, although we lack comprehensive data on equity swaps
and other security-based swaps, we have estimated in prior rulemakings
that single-name CDS represent approximately 82% of the total SBS
market. This implies that there are an additional 540,000 transactions,
or approximately 2.98 million total SBS transactions. Assuming that at
least one SBS Entity is a party to every SBS transaction, the
Commission estimates that the number of SBS transactions subject to
Rule 15Fi-2 would be approximately 54,182 transactions per SBS Entity
per year.\236\
---------------------------------------------------------------------------

    \235\ See Part VII.B.1 below for additional details.
    \236\ This figure is based on the following: (2,980,000
estimated SBS transactions)/(55 SBS Entities) = 54,182 SBS
transactions per SBS Entity per year. The Commission understands
that many of these transactions may arise from previously executed
SBS transactions.
---------------------------------------------------------------------------

    The Commission believes that most transactions will be
electronically executed and cleared through the facilities of a
clearing agency. The Commission understands that the clearing of SBS
transactions through the facilities of a clearing agency generally
includes the matching and verification of such transactions. The
Commission has taken this process into account in paragraph (e) of Rule
15Fi-2, which excepts SBS Entities from the obligation to provide a
trade acknowledgment in clearing transactions. The Commission estimates
that of the approximately 2.98 million SBS transactions estimated per
year based on the 2015 data, approximately 1.32 million will be
clearing transactions excepted from the trade acknowledgment
requirement pursuant to paragraph (e) of Rule 15Fi-2. Of the remaining
1.66 million transactions, approximately 75%, or 1.25 million, will be
transactions executed on an SBSEF or exchange and thus excepted from
the trade acknowledgment requirement pursuant to the exception for in
paragraph (f) of Rule 15Fi-2. Thus, we estimate that SBS Entities will
have to provide approximately 0.41 million trade acknowledgments
pursuant to Final Rule 15Fi-2.
    In the Proposing Release, the Commission stated its assumption that
most SBS Entities do not currently have the platforms necessary for
processing, acknowledging, and verifying SBS transactions
electronically, whether internally or by transmitting the necessary
data packages to the facilities of a clearing agency for processing.
Therefore, the Commission believed that SBS Entities will have to
develop OMSs connected or linked to the facilities of a clearing agency
and able to process SBS transactions internally if necessary.\237\ One
commenter agreed that appropriate platforms and processes will need to
be developed by the industry, but did not indicate how many SBS
Entities will need to develop OMSs or how much they will cost, although
the commenter did state that the estimate in the proposing release was
too low.\238\
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    \237\ The Commission believes that systems for acknowledging and
verifying SBS transactions will likely be an additional
functionality of an OMS that SBS Entities will have to use to report
SBS transactions to an SBS data repository. See SBSR Proposing
Release, supra note 31.
    \238\ ISDA I at 8.
---------------------------------------------------------------------------

    Based on our staff's discussions with industry participants and
incorporated in our other rulemaking related to the Dodd-Frank
Act,\239\ the Commission preliminarily estimated that the development
of an OMS for electronic processing of SBS transactions with the
capabilities described above would impose a one-time aggregate burden
of approximately 19,525 hours, or 355 burden hours per SBS Entity.\240\
This

estimate assumes that SBS Entities will not have to develop an entirely
new OMS but rather would leverage existing trading and processing
platforms and adapt those systems to satisfy the functionalities
described above. In addition, the Commission further estimated that
Rule 15Fi-2 would impose an ongoing annual hour burden of approximately
23,980 hours or 436 hours per SBS Entity.\241\ This estimate includes
day-to-day technical support of the OMS, as well as the amortized
annual burden associated with system or platform upgrades and periodic
implementation of significant updates based on new technology,
products, or both.
---------------------------------------------------------------------------

    \239\ See Proposing Release, 76 FR at 3869.
    \240\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Sr.
Programmer at 160 hours) + (Sr. Systems Analyst at 160 hours) +
(Compliance Manager at 10 hours) + (Director of Compliance at 5
hours) + (Compliance Attorney at 20 hours)) x 55 (SBS Entities)] =
19,525 burden hours at 355 hours per SBS Entity. The Commission
understands that many SBS Entities may already have computerized
systems in place for electronically processing SBS transactions,
whether internally or through a clearing agency. This may result in
lesser burdens for those parties.
    \241\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Sr.
Programmer at 32 hours) + (Sr. Systems Analyst at 32 hours) +
(Compliance Manager at 60 hours) + (Compliance Clerk at 240 hours) +
(Director of Compliance at 24 hours) + (Compliance Attorney at 48
hours)) x (55 SBS Entities)] = 23,980 burden hours, or 436 hours per
SBS Entity.
---------------------------------------------------------------------------

    In addition, pursuant to paragraph (d)(1) of Rule 15Fi-2, SBS
Entities must establish, maintain, and enforce written policies and
procedures reasonably designed to obtain prompt verification of
transaction terms. While the burden of these policies and procedures
will vary, the Commission estimates that policies and procedures would
require an average of 80 hours per respondent to initially prepare and
implement, with a total initial burden of 4,400 hours for all
respondents.\242\ Once these policies and procedures are established,
the Commission estimates that it will take an average of 40 hours
annually to maintain these policies and procedures per respondent, with
a total estimated average annual burden of 2,200 hours for all
respondents.\243\
---------------------------------------------------------------------------

    \242\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 40 hours) + (Director of Compliance at 20 hours) +
(Deputy General Counsel at 20 hours)) x (55 SBS Entities)] = 4,400
burden hours, or 80 hours per SBS Entity.
    \243\ This estimate is based on Commission staff discussions
with market participants and is calculated as follows: [((Compliance
Attorney at 20 hours) + (Director of Compliance at 10 hours) +
(General Counsel at 10 hours)) x (55 SBS Entities)] = 2,200 burden
hours, or 40 hours per SBS Entity.
---------------------------------------------------------------------------

    The Commission received one comment on the estimated cost
associated with the burden of developing an OMS. That commenter wrote
that the estimated cost very seriously underestimated the actual cost,
but provided no specific cost estimates.\244\ The commenter
subsequently stated to Commission staff that SBS Entities have now
developed OMSs to comply with the CFTC Rule, and the cost of modifying
the OMSs to comply with the Commission rule will depend on how closely
aligned the Commission rule is to the CFTC Rule.\245\ Since the rule
the Commission is adopting is much more closely aligned with the CFTC
Rule than the proposed rule was, we believe our original estimates do
not underestimate the actual cost of the rule as adopted. Therefore, in
light of our decision to much more closely align the Commission rule
with the CFTC Rule, we believe our estimates remain appropriate.
---------------------------------------------------------------------------

    \244\ ISDA I at 8.
    \245\ Memorandum from the Division of Trading and Markets
regarding a March 4, 2016, conference call with representatives of
ISDA.
---------------------------------------------------------------------------

5. Retention Period of Recordkeeping Requirements
    Pursuant to amendments to the Exchange Act from Title VII of the
Dodd-Frank Act, the Commission has adopted separate rules for SBS
transactions that include, among other things, transaction reporting
requirements.\246\ The Commission has proposed additional recordkeeping
and reporting rules as well.\247\ Because a trade acknowledgment will
serve as a written record of the transaction, the information required
by Rule 15Fi-2 will be required to be maintained by an SBS Entity
subject to the proposed rules, if adopted. These requirements are
subject to separate PRA submissions under those rulemakings.
---------------------------------------------------------------------------

    \246\ See SBSR Adopting Release, supra note 49.
    \247\ See SBS Books and Records Proposing Release, supra note
128.
---------------------------------------------------------------------------

6. Collection of Information is Mandatory
    Each collection of information discussed above is a mandatory
collection of information.
7. Confidentiality
    By its terms, information collected pursuant to Rule 15Fi-2 will
not be available to the public. Under other Commission rules, however,
some of the information required to be included in a trade
acknowledgment, as described in paragraph (c) of Rule 15Fi-2, will be
otherwise publicly available. In particular, under Regulation
SBSR,\248\ SBS Entities are required to report certain SBS transaction
details to an SBS data repository that will, in turn, publicly
disseminate SBS transaction data. To the extent, however, that the
Commission receives confidential information pursuant to this
collection of information that is otherwise not publicly available,
that information will be kept confidential, subject to applicable law.
---------------------------------------------------------------------------

    \248\ See SBSR Adopting Release, supra note 49.
---------------------------------------------------------------------------

C. Rule 3a71-6
    The amendment to Rule 3a71-6 that we are adopting today amends an
existing collection of information.\249\ A title and control number
already exists for Rule 3a71-6--OMB control number 3235-0715 for ``Rule
3a71-6 Substituted Compliance for Foreign Security-Based Swap
Entities''--and the Commission will use that control number 3235-0715
for this amended collection of information.
---------------------------------------------------------------------------

    \249\ See Business Conduct Adopting Release, 81 FR at 30082
(addressing collection of information in connection with adoption of
substituted compliance rule for business conduct requirements).
---------------------------------------------------------------------------

    In the Cross Border Proposing Release, the Commission solicited
comment on the collection of information requirements and the accuracy
of the Commission's statements. The Commission received no comments on
the proposed information collection requirements.
1. Summary of Collection of Information
    Rule 3a71-6, as amended, permits security-based swap entities to
comply with the Title VII trade acknowledgment and verification
requirements by following the comparable regulatory requirements of a
foreign jurisdiction. The availability of substituted compliance would
be predicated on a determination by the Commission that the relevant
foreign requirements are comparable to the requirements that otherwise
would be applicable, taking into account the scope and objectives of
the relevant foreign requirements,\250\ and the effectiveness of
supervision and enforcement under the foreign regulatory system.\251\
The availability of substituted compliance further would be predicated
on there being a supervisory and enforcement MOU or other arrangement
between the Commission and the relevant foreign authority addressing
oversight and supervision under the substituted compliance
determination.\252\
---------------------------------------------------------------------------

    \250\ In the specific context of substituted compliance for the
trade acknowledgment and verification requirements, prior to making
any comparability determination the Commission intends to consider
whether the information that is required to be provided to
counterparties pursuant to the foreign financial regulatory system's
rules is comparable to what Rule 15Fi-2 requires, and that the
foreign system's rules require trade acknowledgment and verification
in a manner and timeframe comparable to what Rule 15Fi-2 requires.
See Exchange Act Rule 3a71-6(d)(3).
    \251\ See Exchange Act Rule 3a71-6(a)(2)(i).
    \252\ See Exchange Act Rule 3a71-6(a)(2)(ii).
---------------------------------------------------------------------------

    Requests for substituted compliance may come from parties or groups
of

parties that may rely on substituted compliance, or from foreign
financial authorities supervising such persons' security-based swap
activities.\253\ Under the final rule, the Commission would make any
determinations with regard to the trade acknowledgment and verification
requirements, rather than on a firm-by-firm basis. Once the Commission
has made a substituted compliance determination, other similarly
situated market participants would be able to rely on that
determination to the extent applicable and subject to any corresponding
conditions. Accordingly, the Commission expects that requests for a
substituted compliance determination would be made only where an entity
seeks to rely on particular requirements of a foreign jurisdiction that
have not previously been the subject of a substituted compliance
request. The Commission believes that this approach would substantially
reduce the burden associated with requesting substituted compliance
determinations for an entity that relies on a previously issued
determination, and, therefore, complying with the Commission's rules
and regulations more generally.
---------------------------------------------------------------------------

    \253\ See Exchange Act Rule 3a71-6(c)(1). Such parties or groups
of parties may make requests only if each such party is directly
supervised by the foreign financial authority. See Exchange Act Rule
3a71-6(c)(2).
---------------------------------------------------------------------------

    As provided by Exchange Act Rule 0-13, which the Commission adopted
in 2014, applications for substituted compliance determinations in
connection with these requirements must be accompanied by supporting
documentation necessary for the Commission to make the determination,
including information regarding applicable requirements established by
the foreign financial regulatory authority or authorities, as well as
the methods used by the foreign financial regulatory authority or
authorities to monitor and enforce compliance with such rules, and to
cite to and discuss applicable precedent.\254\
---------------------------------------------------------------------------

    \254\ See Exchange Act Rule 0-13(e).
---------------------------------------------------------------------------

2. Proposed Use of Information
    The Commission would use the information collected pursuant to
Exchange Act Rule 3a71-6 to evaluate requests for substituted
compliance with respect to the trade acknowledgment and verification
requirements applicable to security-based swap entities. The requests
for substituted compliance determinations are required when a person
seeks a substituted compliance determination.
    Consistent with Exchange Act Rule 0-13(h), the Commission will
publish in the Federal Register a notice that that a complete
application has been submitted, and provide the public the opportunity
to submit to the Commission any information that relates to the
Commission action requested in the application.
3. Respondents
    Under the final rule, applications for substituted compliance in
connection with the trade acknowledgment and verification requirements
may be filed by foreign financial authorities, or by non-U.S. security-
based swap dealers or major security-based swap participants.
Consistent with prior estimates, the Commission staff expects that
there may be approximately 22 non-U.S. entities that may potentially
register as security-based swap dealers, out of approximately 50 total
entities that may register as security-based swap dealers.\255\
Potentially, all such non-U.S. security-based swap dealers, or some
subset thereof, may seek to rely on substituted compliance in
connection with these trade acknowledgment and verification
requirements.\256\
---------------------------------------------------------------------------

    \255\ See ``Application of the Title VII Security-Based Swap
Dealer De Minimis Counting Requirements to Activity in the United
States,'' Exchange Act Release No. 77104 (Feb. 10, 2016), 81 FR
8598, 8605 (Feb. 19, 2016) (``U.S. Activity Adopting Release''); see
also Business Conduct Adopting Release, 81 FR at 30090.
    \256\ Consistent with prior estimates, the Commission staff
further believes that there may be zero to five major security-based
swap participants. See Registration Adopting Release, 80 FR at
49000; see also Business Conduct Adopting Release, 81 FR at 30090
n.1526. It is possible that some subset of those entities will be
non-U.S. major security-based swap participants that will seek to
rely on substituted compliance in connection with the trade
acknowledgment and verification requirements.
---------------------------------------------------------------------------

    In practice, the Commission expects that the greater portion of any
such requests will be submitted by foreign financial authorities, given
their expertise in connection with the relevant substantive
requirements, and in connection with their supervisory and enforcement
oversight with regard to security-based swap dealers and their
activities.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
    Rule 3a71-6 under the Exchange Act would require submission of
certain information to the Commission to the extent security-based swap
dealers or major security-based swap participants elect to request a
substituted compliance determination with respect to the Title VII
trade acknowledgment and verification requirements. Consistent with
Exchange Act Rule 0-13, such applications must be accompanied by
supporting documentation necessary for the Commission to make the
determination, including information regarding applicable foreign
requirements, and the methods used by foreign authorities to monitor
and enforce compliance.
    The Commission expects that registered security-based swap dealers
and major security-based swap participants will seek to rely on
substituted compliance upon registration, and that it is likely that
the majority of such requests will be made during the first year
following the effective date. Requests would not be necessary with
regard to applicable rules and regulations of a foreign jurisdiction
that have previously been the subject of a substituted compliance
determination in connection with the applicable rules.
    As we previously discussed in the context of substituted compliance
for the business conduct requirements, the Commission expects that the
great majority of substituted compliance applications will be submitted
by foreign authorities, and that very few substituted compliance
requests will come from security-based swap dealers or major security-
based swap participants. For purposes of this assessment, the
Commission estimates that three such security-based swap entities will
submit such applications in connection with the trade acknowledgment
and verification requirements.\257\ The Commission estimates that the
total paperwork burden incurred by such entities associated with
preparing and submitting a request for a substituted compliance
determination in connection with the trade acknowledgment and
verification requirements will be approximately 240 hours, plus
$240,000 for the services of outside professionals for all three
requests.\258\
---------------------------------------------------------------------------

    \257\ See Business Conduct Adopting Release, 81 FR at 30097.
    \258\ In the Business Conduct Adopting Release, the Commission
stated that consistent with the per-request estimates in the Cross-
Border Proposing Release, the Commission estimates that the
paperwork burden associated with making each such substituted
compliance request would be approximately 80 hours of in-house
counsel time, plus $80,000 for the services of outside professionals
(based on 200 hours of outside time * 400). See Business Conduct
Adopting Release, 81 FR at 30097 n.1583; see also Cross-Border
Proposing Release, 78 FR at 31110.
    In the Business Conduct Adopting Release, the Commission further
stated that in practice those amounts may overestimate the costs of
requests pursuant to Rule 3a71-6 as adopted, as such requests would
solely address the business conduct requirements, rather than the
broader proposed scope of substituted compliance set forth in the
Cross-Border Proposing Release. See Business Conduct Adopting
Release, 81 FR at 30097 n.1583. To the extent that a security-based
swap dealer submits substituted compliance requests in connection
with both the business conduct requirements and the trade
acknowledgment and verification requirements, the Commission
believes that the paperwork burden associated with the requests
would be greater than that associated with a narrower request, given
the need for more information regarding the comparability of the
relevant rules and the adequacy of the associated supervision and
enforcement practices. In the Commission's view, however, the burden
associated with such a combined request would not exceed the prior
estimate.

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

5. Collection of Information Is Mandatory
    The application for substituted compliance is mandatory for all
foreign financial authorities or security-based swap dealers or major
security-based swap participants that seek a substituted compliance
determination.
6. Confidentiality
    The Commission generally will make requests for substituted
compliance determination public, subject to requests for confidential
treatment being submitted pursuant to any applicable provisions
governing confidentiality under the Exchange Act.\259\
---------------------------------------------------------------------------

    \259\ See Cross-Border Definitions Adopting Release, 79 FR at
47359 (discussing confidentiality provisions under the Exchange
Act).
---------------------------------------------------------------------------

VII. Economic Analysis

A. Introduction

    The Commission is adopting final rules under Sections 15F(i)(1) and
15F(i)(2) of the Exchange Act to prescribe standards to provide for
timely and accurate confirmation of SBS transactions. The security-
based swap market experienced substantial growth in the years prior to
the financial crisis; in single-name CDS alone, global notional grew
from $5.1 trillion outstanding in 2004 to a peak of $33.4 trillion
outstanding in mid-2008, a six-fold increase. Multi-name CDS, which may
include both SEC-regulated security-based swaps and CFTC-regulated
swaps, grew from $1.3 trillion global notional outstanding in 2004 to a
peak of $25.8 trillion outstanding at year-end 2007.\260\ During this
period of growth, as highlighted by the Government Accountability
Office (``GAO'') Confirmation Report, the credit derivatives industry
experienced an unprecedented increase in the backlog of unconfirmed
trades, reaching 153,860 unconfirmed trades by the end of September
2005, including 97,650 confirmations outstanding more than 30
days.\261\ The GAO viewed the lack of automation and the purported
assignment of positions by transferring parties to third parties
without notice to their counterparties as the primary factors
contributing to this backlog.\262\ The GAO also found that if new
transactions are left unconfirmed, there is no definitive written
record of the contract terms. Thus, in the event of a dispute, the
terms of the agreement must be reconstructed from other evidence, such
as email trails or recorded trader conversations. The GAO noted that
this process is cumbersome and may not be wholly accurate.
---------------------------------------------------------------------------

    \260\ Source: BIS, available at http://www.bis.org/statistics/derstats.htm.
    \261\ GAO Confirmation Report at 11. Note that this backlog
includes both single-name CDS (SBS) and index CDS (swaps)
    \262\ Several factors reduced the risk of unconfirmed trades due
to unilateral assignment, including: (1) The tendency for end-users
to assign contracts to dealers who were generally more credit-worthy
than the end-user; (2) dealers refusing to release posted collateral
until the dealer verified the assignment, and; (3) a novation
protocol in the ISDA Master Agreement that required counterparties
to obtain the written consent of their counterparties before
assigning a trade. Id. at 17-18.
---------------------------------------------------------------------------

    Unlike most other securities transactions, a security-based swap
gives rise to ongoing obligations between transaction counterparties
during the life of the transaction, including payments contingent on
specific events, such as a corporate default. Consequently,
confirmation of the terms of an SBS transaction is essential for SBS
Entities to effectively measure and manage market and credit risk. In
addition, unconfirmed trade assignments could create a situation where
a market participant has incorrect information about the identity of
its counterparty, impairing the proper measurement and management of
credit risk, and potentially placing the participant's financial
stability at risk. Finally, a backlog of unconfirmed trades could
hinder the settlement process, particularly if errors go undetected or
a counterparty disputes the terms of a transaction. In the case of a
credit event involving a reference entity with a large notional
outstanding and many counterparties, breakdowns in the settlement
process that result from unconfirmed trades could lead to broader
market instability.
    In light of the potential for inefficient risk management and
breakdowns in the settlement process, the Federal Reserve Bank of New
York initiated a joint regulatory initiative with other regulators in
September 2005 to reduce the outstanding backlog of unconfirmed trades.
Under this initiative, U.S. and foreign regulators worked with the 14
major credit derivative dealers to reduce the outstanding backlog of
unconfirmed trades.\263\ Specific details of the joint regulatory
initiative included increasing the use of electronic trade
confirmations systems, a protocol for ending unilateral trade
assignments, improvements in the settlement process around credit
events, and establishment of an electronic trade repository to record
and store the terms of all credit derivative transactions. As a result
of these efforts, by October 2006, the backlog of unconfirmed trades
had fallen to 37,306, a 76% decrease, while the backlog of
confirmations outstanding more than 30 days had fallen to 5,558, a 94%
decrease.
---------------------------------------------------------------------------

    \263\ Regulatory representatives from the OCC, SEC, FSA, German
Financial Supervisory Authority, and the Swiss Federal Banking
Commission attended the initial meeting in September 2005. The
participating dealers were Bank of America, Barclays Capital, Bear
Stearns, Citigroup, Credit Suisse First Boston, Deutsche Bank,
Goldman Sachs, HSBC, JP Morgan Chase, Lehman Brothers, Merrill
Lynch, Morgan Stanley, UBS, and Wachovia. Source: GAO-07-716.
---------------------------------------------------------------------------

    The need for regulatory coordination to reduce the confirmations
backlog highlights a fundamental economic consideration: Though all
market participants would benefit from a reduction in unconfirmed
trades and the associated market, credit, and settlement risks, no one
participant had the ability or incentive to unilaterally take steps to
reduce the backlog.\264\ Indeed, strategic and competitive
considerations among dealers may have contributed to the backlog.
According to the GAO Confirmation Report, a major contributing factor
to the backlog of unconfirmed trades was the increasing use of
unilateral trade assignments.\265\ Because assignments are typically
less expensive than terminations for hedge funds and other end users,
these market participants prefer to transact with dealers that will
accept unilateral assignments. Furthermore, assignees are likely to be
other dealers. The security-based swap market is a concentrated market,
with a small number of dealers responsible for the vast majority of
transaction volume. Dealers in this interconnected network rely on each
other as counterparties to share and hedge risks associated with
lending and other financial intermediation activities. Because
assignees are typically counterparties with whom dealers have ongoing
financial relationships and are

readily familiar, they are less likely to object to unilateral
assignments than if the assignee were an unknown credit risk.
---------------------------------------------------------------------------

    \264\ A situation where all market participants would
collectively benefit from a certain action--in this case, steps to
reduce the backlog of unconfirmed trades--but where no one
participant has the incentive to unilaterally take action is
commonly known as a ``collective action problem.''
    \265\ According to the report, while assignments accounted for
only 13% of dealing activity in September 2005, they accounted for
40% of the unconfirmed backlog outstanding for more than 30 days.
---------------------------------------------------------------------------

    The final trade acknowledgment and verification rules are designed
to prevent a recurrence of confirmation backlogs that developed during
the growth of the credit derivatives market. Although the factors that
led to the backlog are not present today, the Commission believes that
codifying existing practices may help to prevent a recurrence. More
specifically, we note that current practices with respect to security-
based swaps that developed out of the joint regulatory initiative are
voluntary.\266\ Individual dealers facing financial distress, such as a
liquidity crunch or cash flow problems, may have incentives to deviate
from current practice if, for example, extending dispute periods or
delaying confirmation allows a distressed dealer to conserve cash or
other financial resources. In addition, the agreement that developed
out of the joint regulatory initiative may not cover all market
participants that will register with the Commission as SBS Entities.
Therefore, we believe that the final trade acknowledgment and
verification rules will reduce the likelihood of a recurrence of the
confirmation backlog, as well as the market, credit, and settlement
risks that accompany a backlog.
---------------------------------------------------------------------------

    \266\ The backlog of unconfirmed credit derivative transactions
that developed prior to the financial crisis encompassed both CFTC-
regulated swaps and SEC-regulated security-based swaps. The CFTC has
promulgated final rules with respect to trade confirmations of
swaps; while the joint regulatory initiative covered both swaps and
security-based swaps, only practices with respect to security-based
swaps remain voluntary.
---------------------------------------------------------------------------

    In adopting final rules covering trade acknowledgment and
verification of security-based swap transactions, we are mindful of the
costs imposed by and the benefits obtained from our rules. Section 3(f)
of the Exchange Act provides that whenever the Commission is engaged in
rulemaking pursuant to the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission shall also consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.\267\ In addition, Section 23(a)(2)
of the Exchange Act requires the Commission, when making rules under
the Exchange Act, to consider the impact such rules would have on
competition.\268\ Exchange Act Section 23(a)(2) also provides that the
Commission shall not adopt any rule which would impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act. The discussion below addresses the
potential economic effects of the final trade acknowledgment and
verification rules, including the likely benefits and costs of the
rules and their potential impact on efficiency, competition, and
capital formation.
---------------------------------------------------------------------------

    \267\ 15 U.S.C. 78c(f).
    \268\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

B. Economic Baseline

    To assess the economic impact of the final trade acknowledgment and
verification rules, we are using as our baseline the security-based
swap market as it exists at this time, including applicable rules we
have already adopted but excluding rules that we have proposed but not
yet finalized.\269\ The analysis includes the statutory and regulatory
provisions that currently govern the security-based swap market
pursuant to the Dodd-Frank Act, as well as rules adopted in the
Intermediary Definitions Adopting Release,\270\ the Cross-Border
Adopting Release,\271\ and the Registration Adopting Release.\272\
These foundational rules establish a population of registered entities
required to comply with the trade acknowledgment and verification
requirements, and therefore establish the overall scope of our final
rules.\273\ Our understanding of the market is informed by available
data on security-based swap transactions, though we acknowledge the
data limit the extent to which we can quantitatively characterize the
market. Because these data do not cover the entire market, we have
developed an understanding of market activity using a sample that
includes only certain portions of the market.
---------------------------------------------------------------------------

    \269\ We also considered, where appropriate, the impact of rules
and technical standards promulgated by other regulators, such as the
CFTC and the European Securities and Markets Authority, on practices
in the security-based swap market.
    \270\ 77 FR 30596 (May 23, 2012).
    \271\ 79 FR 47277 (August 12, 2014).
    \272\ 80 FR 48963 (August 14, 2015).
    \273\ In addition, in Regulation SBSR, the Commission has also
adopted final reporting and public dissemination rules under Title
VII. These and forthcoming substantive requirements of Title VII may
affect how firms structure their security-based swap business and
market practices more generally, which could have additional
implications for the scope of final trade confirmation rules. If SBS
Entities operating globally are able to structure their business
along jurisdictional lines, greater or fewer transactions may be
covered by final trade confirmation rules, depending on whether
entities move business in or out of the Title VII framework.
---------------------------------------------------------------------------

    Furthermore, the overall Title VII regulatory framework will have
consequences for the transaction activity addressed by these final
rules. For example, the final trade confirmation rules include an
exception for transactions where the direct counterparty to the trade
is a registered clearing agency. Therefore, the scope of future
mandatory clearing requirements may affect the overall level of SBS
activity subject to the final rules, and therefore the overall costs
borne by registered SBS Entities. Similarly, the scope of future
mandatory trade execution requirements will affect the volume of
transactions that take place on swap execution facilities and other
trading platforms; such transactions also have an available exception,
which may further reduce the overall trade confirmation costs borne by
registered SBS Entities.
1. Available Data on Security-Based Swaps
    Our understanding of the security-based swap market is informed in
part by available data on security-based swap transactions, though we
acknowledge that limitations in the data limit the extent to which we
can quantitatively characterize the market. Because these data do not
cover the entire market, we have developed an understanding of market
activity using a sample of transactions data that includes only certain
portions of the market. We believe, however, that the data underlying
our analysis here provide reasonably comprehensive information
regarding single-name CDS transactions and the composition of
participants in the single-name CDS market.
    Specifically, our analysis of the state of the current security-
based swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``DTCC-TIW,''),
especially data regarding the activity of market participants in the
single-name CDS market during the period from 2008 to 2015. According
to data published by the Bank for International Settlements (``BIS''),
the global notional amount outstanding in equity forwards and swaps as
of June 2015 was $2.80 trillion. The notional amount outstanding in
single-name CDS was approximately $8.21 trillion, in multi-name index
CDS was approximately $6.91 trillion, and in multi-name, non-index CDS
was approximately $482 billion.\274\
---------------------------------------------------------------------------

    \274\ See Semi-annual OTC derivatives statistics at June 2015,
Tables D8 and D10.1, available at http://www.bis.org/statistics/d8.pdf and http://www.bis.org/statistics/d10_1.pdf (accessed
February 9, 2016).
---------------------------------------------------------------------------

    Our analysis here focuses on the data relating to single-name CDS.
As the BIS

figures show (and as we have previously noted), although the definition
of security-based swap is not limited to single-name CDS, single-name
CDS contracts make up a majority of security-based swaps, and we
believe that the single-name CDS data are sufficiently representative
of the market and therefore can directly inform the analysis of the
state of the current security-based swap market.\275\ We note that the
data available to us from TIW do not encompass those CDS transactions
that both: (i) Do not involve U.S. counterparties; \276\ and (ii) are
based on non-U.S. reference entities. Notwithstanding this limitation,
we believe that the TIW data provide sufficient information to identify
the types of market participants active in the security-based swap
market and the general pattern of dealing within that market.\277\
---------------------------------------------------------------------------

    \275\ While other repositories may collect data on transactions
in total return swaps on equity and debt, we do not currently have
access to such data for these products (or other products that are
security-based swaps). In the Cross-Border Proposing Release, we
explained that we believed that data related to single-name CDS was
reasonable for purposes of this analysis, as such transactions
appear to constitute roughly 82% of the security-based swap market
as measured on a notional basis. See Cross-Border Proposing Release,
footnote 1301 at 31120. No comments disputed these assumptions, and
we therefore continue to believe that, although the BIS data reflect
the global OTC derivatives market, and not just the U.S. market,
these ratios are an adequate representation of the U.S. market.
     Also consistent with our approach in that release, with the
exception of the analysis regarding the degree of overlap between
participation in the single-name CDS market and the index CDS market
(cross-market activity), our analysis below does not include data
regarding index CDS as we do not currently have sufficient
information to identify the relative volumes of index CDS that are
swaps or security-based swaps.
    \276\ We note that DTCC-TIW's entity domicile determinations may
not reflect our definition of ``U.S. person'' in all cases. Our
definition of ``U.S. person'' follows the Cross-Border Adopting
Release, at 47303.
    \277\ The challenges we face in estimating measures of current
market activity stem, in part, from the absence of comprehensive
reporting requirements for security-based swap market participants.
The Commission has adopted rules regarding trade reporting, data
elements, and public reporting for security-based swaps that are
designed, when fully implemented, to provide the Commission with
additional measures of market activity, which should allow us to
better understand and monitor activity in the security-based swap
market. See SBSR Adopting Release, 80 FR at 14699-700.
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2. Current Security-Based Swap Market
    In 2015, there were 2,436,531 single-name CDS transactions reported
to TIW, of which 1,080,716 were transactions with a clearing agency as
a counterparty.\278\ Currently, SBS transactions are negotiated and
executed bilaterally, typically with a dealer as one of the
counterparties. Indeed, based on our analysis of TIW data, 84.1% of
single-name CDS transactions between 2006 and 2015, as measured by
number of transaction-sides, were executed by ISDA-recognized dealers,
and greater than 50% of transactions are between two ISDA-recognized
dealers.\279\
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    \278\ For the purposes of this analysis, we assume there were
approximately 2.44 million single-name CDS transactions in 2015, of
which approximately 1.08 million were transactions with a clearing
agency as a counterparty. In addition to CDS, security-based swap
products include equity swaps, such as total return swaps on single
names and narrow-based security indexes. The Commission currently
lacks comprehensive data on equity swaps, including data on
transaction volumes and notional amounts. While there were greater
than 2.44 million security-based swap transactions in 2015, we do
not currently have sufficient information to precisely identify the
number of transactions beyond those that were single-name CDS.
However, while recognizing that average notional transaction amounts
for equity and multi-name credit default swaps may differ from
average notional transaction amounts for CDS, assuming that average
notional transaction amounts are in fact equal across all SBS
products, our estimate that single-name CDS constitute roughly 82%
of the security-based swap market implies that there were
approximately 540,000 security-based swap transactions in 2015 in
addition to the approximately 2.44 million single-name CDS
transactions we identify in the DTCC-TIW data, or 2.98 million total
SBS transactions.
    \279\ For the purpose of this analysis, the ISDA-recognized
dealers are those identified by ISDA as belonging to the G14 or G16
dealer group during the period: JP Morgan Chase NA (and Bear
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS,
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Credit
Agricole, Wells Fargo and Nomura. See, e.g., http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf.
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    Further analysis of the data reveals that approximately half of all
trading activity in North American single-name CDS between 2008 and
2015 was between counterparties domiciled in the United States and
counterparties domiciled abroad. Using the self-reported registered
office location of the TIW accounts as proxy for domicile, the
Commission estimates that only 12 percent of the global transaction
notional volume between 2008 and 2015 was between two U.S.-domiciled
counterparties, compared to 48 percent entered into between one U.S.-
domiciled counterparty and a foreign-domiciled counterparty and 40
percent entered into between two foreign-domiciled counterparties.\280\
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    \280\ The domicile classifications in TIW data are based on the
market participants' own reporting and have not been verified by
Commission staff. Prior to enactment of the Dodd-Frank Act, account
holders did not formally report their domicile to the TIW because
there was no systematic requirement to do so. After enactment of the
Dodd-Frank Act, the TIW has collected the registered office location
of the account. This information is self-reported on a voluntary
basis, and it is possible that some market participants may
misclassify their domicile status because the databases in TIW do
not assign a unique legal entity identifier to each separate entity.
It is also possible that the domicile classifications may not
correspond precisely to the definition of ``U.S. person'' under the
rules defined in Exchange Act Rule 3a71-3(a)(4), 17 CFR 240.3a71-
3(a)(4). Notwithstanding these limitations, the Commission believes
these statistics demonstrate the extent of cross-border activity in
the single-name CDS market.
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    When the domicile of TIW accounts is instead defined according to
the domicile of an account holder's ultimate parents, headquarters, or
home offices (e.g., classifying a foreign bank branch or foreign
subsidiary of a U.S. entity as domiciled in the United States), the
fraction of transactions entered into between two U.S.-domiciled
counterparties increases to 33 percent, and to 52 percent for
transactions entered into between a U.S.-domiciled counterparty and a
foreign-domiciled counterparty.
3. Current Estimates of Number of SBS Dealers and Major SBS
Participants
    Under the final rules, registered SBS Entities will be required to
provide trade acknowledgments to their counterparties, and will also be
required to have policies and procedures in place reasonably designed
to ensure prompt receipt of trade verifications from their
counterparties. In addition, when receiving a trade acknowledgment from
another entity, registered SBS Entities will be required to promptly
verify or dispute the terms of a trade acknowledgment with its
counterparty. The Commission recently adopted final registration
requirements for SBS Entities \281\ and expects market participants
meeting the registration thresholds outlined in the Intermediary
Definitions and Cross-Border Adopting Releases to register with the
Commission once substantive Title VII requirements that trigger
registration compliance are adopted. We anticipate that 50 entities
meeting registration thresholds for SBS dealers will seek to register
with the Commission.
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    \281\ 80 FR 48963.
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    As noted in the U.S. Activity Adopting Release, based on an
analysis of TIW data, out of more than 4,000 entities engaged in
single-name CDS activity worldwide in 2015, 104 entities engaged in
relevant single-name CDS activity at a sufficiently high level that
they would be expected to incur assessment costs to determine whether
they meet the ``security-based swap dealer'' definition.\282\
Approximately 47 of these entities are non-U.S. persons. Analysis of
those data further indicated that potentially 50 entities may engage in
dealing activity that would exceed

the de minimis threshold, and thus ultimately have to register as SBS
Dealers. Of these entities, we believe it is reasonable to expect 22 to
be non-U.S. persons.\283\ The Commission also undertook an analysis of
the number of security-based swap market participants likely to
register as major security-based swap participants, and estimated a
range of between zero and five such participants.\284\
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    \282\ See U.S. Activity Adopting Release, supra note 255, 81 FR
at 8605.
    \283\ These estimates are based on the number of accounts in
DTCC-TIW data with total notional volume in excess of de minimis
thresholds, increased by a factor of two, to account for any
potential growth in the security-based swap market, to account for
the fact that we are limited in observing transaction records for
activity between non-U.S. persons that reference U.S. underliers,
and to account for the fact that we do not observe security-based
swap transactions other than in single name CDS. See Cross Border
Dealing Activity Proposing Release, 80 FR at 27452; see also
Intermediary Definitions Adopting Release, footnote 1457 at 30725.
    \284\ See SBSR Adopting Release 14693; see also Cross-Border
Adopting Release, footnotes 150 and 153 at 47296 and 47297
(describing the methodology employed by the Commission to estimate
the number of potential SBS Dealers and Major SBS Participants).
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    In addition, in the proposed registration requirements for SBS
Dealers and Major SBS Participants, we estimated, based on our
experience and understanding of the swap and security-based swap
markets, that of the 55 firms that might register as SBS Dealers or
Major SBS Participants, approximately 35 would also register with the
CFTC as swap dealers or major swap participants.\285\ Available data
suggest that these numbers remain largely unchanged.\286\
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    \285\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 65543
(Oct. 12, 2011), 76 FR 65784, 65808 (Oct. 24, 2011).
    \286\ Based on our analysis of 2015 DTCC-TIW data and the list
of swap dealers provisionally-registered with the CFTC, and applying
the methodology used in the Intermediary Definitions Adopting
Release, we estimate that substantially all registered security-
based swap dealers would also register as swap dealers with the
CFTC. See Cross Border Dealing Activity Proposing Release, at 27458;
see also CFTC list of provisionally registered swap dealers,
available at http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.
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4. Trade Execution
    The Commission has not yet finalized mandatory trade execution
requirements or made available to trade determinations, and currently
there are no security-based swap execution facilities registered with
the Commission; security-based swaps continue to be negotiated and
executed almost exclusively on a bilateral basis. Therefore, while the
final trade confirmation rules contain an exception for transactions
executed on a swap execution facility or national securities exchange,
none of the approximately 2.98 million security-based swap transactions
that executed in 2015 would have been eligible for this exception.
    In the absence of SEF-executed SBS trades, we use data on index CDS
transactions executed on CFTC-registered swap execution facilities to
estimate the number of SBS transactions that may become eligible for
the exception for SEF-executed transactions. Specifically, we rely on
data tabulated by ISDA and published in the SwapsInfo Fourth Quarter
2015 Review.\287\ Based on these data, we estimate that approximately
75% of index CDS transactions were executed on a SEF in 2015.
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    \287\ Source: ISDA, available at http://www2.isda.org/functional-areas/research/research-notes/. ISDA bases its analysis
on public index CDS data disseminated by DTCC and Bloomberg swap
data repositories.
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    Applying this percentage to the number of single-name CDS
transactions we identify in 2015 suggests that as many as 1.02 million
single-name CDS transactions could be eligible for this exception
assuming that mandatory trade execution rules come into force.\288\ We
believe this estimate is an appropriate approach because single-name
and index CDS are similar products that allow market participants to
buy and sell default risk: A default event for a reference entity that
is an index component will result in payoffs on both single-name CDS
written on the reference entity and index CDS written on indices that
contain the reference entity. Because of this relationship between the
payoffs of single-name and index CDS products, prices of these products
depend upon one another, creating hedging opportunities across these
markets.\289\ These hedging opportunities mean that participants that
are active in one market are likely to be active in the other. The
Commission therefore believes that, in order to attract participants
seeking to transact across swap and SBS markets, SEFs may seek dual
registration status with both the Commission and the CFTC, with
authorization to provide markets for both index and single-name CDS.
Thus, we expect that once the Commission has adopted rules for SEFs,
index and single-name CDS may trade on the same execution facilities.
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    \288\ To arrive at this number, we first back out 1.08 million
clearing transactions from 2.44 million total CDS transactions. This
yields 1.36 million original bilateral transactions. Multiplying
this by 0.75 yields 1.02 million platform-executed transactions. To
account for non-CDS security-based swaps, we again rely on our
estimate that single-name CDS represent 82% of the total SBS market.
We also assume that ratio of cleared to non-cleared transactions is
the same across all security-based swaps. This implies that, of the
estimated 2.98 million SBS transactions in 2015, 1.32 million were
clearing transactions, which yields 1.66 million original bilateral
SBS transactions. Finally, making the further assumption that the
percentage of transactions executed on a SEF will also be the same
across all security-based swaps suggests that as many as 1.25
million SBS transactions could be eligible for the exception for
SEF-executed transactions.
    \289\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., Casella, George and Roger L.
Berger, ``Statistical Inference'' (2002), at 171.
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    Nevertheless, there are reasons to believe that a greater
percentage of SBS transactions will continue to be executed
bilaterally. The Commission believes that index CDS products are more
likely to be standardized products, used for common hedging scenarios.
SBS products, on the other hand, are more likely to be bespoke
products, customized for the unique hedging requirements of a
particular counterparty. Therefore, we consider our estimate of SBS
transactions eligible for the SEF exception to be an upper bound; the
actual number of platform-executed SBS transactions could be
considerably lower.
5. Clearing Activity
    The Commission has not yet made mandatory clearing determinations;
currently, security-based swaps are cleared on a voluntary basis. As we
noted above, out of the 2.44 million single-name CDS transactions in
2015, 1.08 million, or approximately 44%, were transactions with a