The Commission requests comment on all aspects of proposed Rule
813. Is the proposed rule sufficiently clear? Do commenters believe
that SB SEFs would encounter issues in establishing an automated
surveillance system for real-time monitoring of trading and in
collecting or assessing data to allow the SB SEF to respond promptly to
market abuses or disruptions? Would proposed Rule 813(c), which would
require participants to provide access to their books and records to
the SB SEF and the Commission, be difficult for any particular group of
participants (e.g., non-registered ECPs or foreign participants) to
comply with? If so, how should the Commission modify the rule to
address any such issues?
    Should SB SEFs be required to exchange information with each other
regarding trading by their mutual participants to facilitate
surveillance and investigation of potential

manipulative or otherwise violative activity? If so, under what
circumstances? Should SB SEFs be required to become members of the
Intermarket Surveillance Group (``ISG''),\183\ or to form a similar
group among themselves? If so, should all SB SEFs be required to join?
If not, what types of SB SEFs should be required to join? For example,
should SB SEFs be required to join if they trade a certain volume
threshold of SB swaps? If so, what should that volume threshold be?
Should SB SEFs be required to share information with other regulatory
authorities (including SROs)? For example, if a SB SEF detects an
unusually high activity in a particular SB swap, what guidelines would
be appropriate for the sharing of this information with the Commission
and the other regulatory authorities that regulate the underlying
asset?
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    \183\ ISG was established in the early 1980s and is comprised of
an international group of exchanges, market centers and market
regulators. ISG states that its purpose is to effectively detect and
prevent unfair transactions across markets through market
information sharing among its members. See ISG's Web site at http://www.isgportal.org for additional information on ISG.
---------------------------------------------------------------------------

XI. Core Principle 5--Ability To Obtain Information

    Section 3D(d)(5) of the Exchange Act (Core Principle 5) requires a
SB SEF to establish and enforce rules that would allow the SB SEF to
obtain any necessary information to perform any of the functions
described in the Core Principles for SB SEFs, provide the information
to the Commission on request, and have the capacity to carry out such
international information-sharing agreements as the Commission may
require.\184\ To implement Core Principle 5, the Commission is
proposing Rule 814 of Regulation SB SEF.
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    \184\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(5) of the Exchange Act).
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    Proposed Rule 814(a) would require each SB SEF to establish and
enforce rules requiring its participants to furnish to the SB SEF, upon
request and in the form and manner prescribed by the SB SEF, any
information that is necessary for the SB SEF to perform its
responsibilities including, without limitation, surveillance,
investigating, examinations and discipline of participants. Such
information may include, without limitation, financial information,
books, accounts, records, files, memoranda, correspondence, and any
other information pertaining to orders, requests for quotes, responses,
quotations, or other trading interest entered and transactions executed
on or through the SB SEF.\185\ Proposed Rule 814(a) further would
require each SB SEF to establish and enforce rules requiring its
participants to cooperate with the SB SEF and any representative of the
Commission and allow access by the SB SEF and any representative of the
Commission at such reasonable times as the SB SEF or the Commission
representative may request to examine the books and records of the SB
SEF participant, or to obtain or verify other information related to
orders, requests for a quote, responses, quotations, or other trading
interest entered and transactions executed on or through, the SB SEF's
facilities. These provisions would permit a SB SEF and any
representative of the Commission to have access to any information that
the SB SEF participants are required to make, keep, and preserve
pursuant to any Commission or other rule, and should therefore assist
the SB SEF to more effectively perform its obligations, as required by
the Core Principles, and the Commission to perform its oversight
responsibilities for SB SEFs.
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    \185\ The requirement that SB SEF participants make, keep and
preserve books and records is independent of proposed Rule 814. See
17 CFR 240.17a-3 and 240.17a-4, which are applicable to registered
broker-dealers. See also Public Law 111-203, Sec.  764(a) (adding
Section 15F(f)(B) of the Exchange Act, requiring each registered SB
swap dealer and major SB swap participant to keep books and records
as may be prescribed by the Commission). See also proposed Rule
809(c)(2)(i), requiring registered SB swap dealers and registered
major SB swap participants to meet the minimum recordkeeping and
reporting requirements imposed by the Commission. With respect to
eligible contract participants, proposed Rule 809(c)(2)(ii) would
require eligible contract participants to meet the recordkeeping and
reporting requirements established by the SB SEF pursuant to
proposed Rule 813.
---------------------------------------------------------------------------

    Proposed Rule 814(b) would similarly require the SB SEF to
cooperate with any representative of the Commission and allow access by
any representative of the Commission to examine the books and records
required to be kept by the SB SEF pursuant to proposed Rule 818, to
obtain or verify other information related to orders, requests for
quote, responses, quotations, or other trading interest entered and
transactions executed on or through its facilities, and otherwise
provide to any representative of the Commission, upon request, such
information that the SB SEF may possess or obtain from its participants
pursuant to proposed Rule 814(a). The Commission preliminarily believes
that these provisions would be instrumental in enabling the Commission
to carry out its oversight and regulation of SB SEFs and the SB swap
market and would support the requirement in Core Principle 5 that the
SB SEF establish and enforce rules that would allow the SB SEF to
obtain any necessary information to perform any of the functions
described in the Core Principles and provide the information to the
Commission on request.
    The Commission preliminarily believes that proposed Rule 814 would
reasonably clarify the statutory language of Core Principle 5, which
requires a SB SEF to have the ability to ``obtain information'' and
``provide the information to the Commission on request.'' Specifically,
the Commission believes that it is important to its ability to regulate
and oversee SB SEFs for the Commission to be able to obtain information
by specifying that SB SEFs and SB SEF participants must cooperate,
furnish information upon request, provide access to books and records,
and be subject to examination.\186\ These proposed requirements also
would enable the SB SEF to monitor participants on its system and
enforce compliance with its rules, as required by Section 3D(d) of the
Exchange Act.
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    \186\ The proposed requirements are analogous to the provisions
of Section 17(b) of the Exchange Act, which provides that the
records of a national securities exchange, among other things, shall
be subject to reasonable periodic, special or other examinations by
representatives of the Commission, and Rule 17a-4(j) under the
Exchange Act, requiring exchange members, brokers and dealers to
furnish promptly copies of records that are required to be preserved
under the rule to representatives of the Commission. 15 U.S.C.
78q(b)(1) and 17 CFR 240.17a-4(j).
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    Further, proposed Rule 814(b)(3) would require a SB SEF to have the
capacity to carry out such international information-sharing agreements
as the Commission may require.\187\ Proposed Rule 814(b)(4) would
require every SF SEF to certify at the time of registration on Form SB
SEF, and annually thereafter as part of the annual compliance report
described in Rule 823, that the SB SEF has the capacity to fulfill its
obligations under any international information-sharing agreements to
which it is a party as of the date of such certification.
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    \187\ The Commission notes that it is not unusual for a national
securities exchange to enter into an information-sharing agreement
with a foreign exchange for the purpose of securing information in
connection with trading in securities on the foreign exchange that
could impact the trading of securities on the U.S. exchange. See,
e.g., Securities Exchange Act Release No. 59835 (April 28, 2009), 74
FR 21041 (May 6, 2009) (noting, in connection with proposed listing
standards, that NYSE Arca, Inc. had in place an information sharing
agreement with the London Metal Exchange (``LME'') for the purpose
of providing information in connection with trading in or related to
futures contracts traded on LME.
---------------------------------------------------------------------------

    These proposed regulations would implement the provision of Core
Principle 5 requiring SB SEFs to have the capacity to carry out such

international information-sharing agreements as the Commission may
require. The Commission preliminarily believes that the proposed rule
would help ensure that the SB SEF has the ability to fulfill its
regulatory and reporting responsibilities with respect to its market
place and its participants, and that the Commission has the information
necessary to fulfill its oversight and regulatory responsibilities
related to the SB swaps market. The proposed rule also would facilitate
information-sharing in the global SB swaps market.
    The Commission requests comment on all aspects of proposed Rule 814
relating to the ability to obtain information. Is the proposal that a
SB SEF require its participants to furnish information upon request,
cooperate with and provide access to the SB SEF too burdensome? Is the
proposal that the SB SEF require its participants to furnish
information upon request, cooperate with and provide access to any
representative of the Commission appropriate?
    Is the proposal to similarly require the SB SEF to furnish
information upon request, cooperate with and provide access to any
representative of the Commission at reasonable times as requested,
appropriate? Are there other approaches that the Commission should take
to implement the requirement that the SB SEF have the ability to obtain
information and provide it to the Commission? Is there information that
SB SEFs should be required to provide to the Commission on a regular,
periodic basis? If so, what types of information should be provided in
such a manner? How often should such information be provided?
    Are there any other requirements with respect to international
information-sharing agreements that a SB SEF should be required to
comply with? Are the proposed requirements too burdensome? If so, why?
What are the costs and benefits of the proposed requirements? Should
the Commission require a SB SEF to enter into information-sharing
agreements with U.S. trading venues for SB swaps, as the Commission may
require, or as necessary or appropriate to fulfill its regulatory and
reporting responsibilities? Are there any other requirements with
respect to domestic information-sharing agreements with which a SB SEF
should be required to comply? If so, please explain.

XII. Core Principle 6--Financial Integrity of Transactions

    Section 3D(d)(6) of the Exchange Act (Core Principle 6) requires
every SB SEF to establish and enforce rules and procedures for ensuring
the financial integrity of SB swaps entered on or through the
facilities of the SB SEF, including the clearance and settlement of SB
swaps pursuant to Section 3C(a)(1) of the Exchange Act.\188\ Pursuant
to Section 3C(a)(1) of the Exchange Act, SB swap transactions must be
cleared through a clearing agency registered with the Commission or a
clearing agency exempt from registration, if the Commission has
determined that the SB swap is required to be cleared.\189\
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    \188\ See Public Law 111-203, Sec.  763(a) (adding Section
3C(a)(1) of the Exchange Act).
    \189\ The clearing requirement in Section 3C(a) of the Exchange
Act contains certain exceptions. For example, Section 3C(g) of the
Exchange Act states that a counterparty that is not a financial
entity that is using a SB swap to hedge or mitigate commercial risk
is not subject to the clearing requirement. Section 3C(g)(1)(C)
requires each such counterparty to notify the Commission of how it
generally meets its financial obligations associated with entering
into non-cleared SB swaps. See Section 3C of the Exchange Act for
all applicable exceptions and exemptions to the clearing
requirements for SB swaps and the requirements relating to clearing
agencies of SB swaps.
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    The Commission believes that it is important that SB SEFs set
specific standards designed to ensure the financial integrity of all
their participants. Proposed Rule 815(a) would implement the
requirements of Section 3D(d)(6) of the Exchange Act. Proposed Rule
815(b) would permit the rules of a SB SEF to allow a participant
trading a SB swap that will not be cleared through a registered
clearing agency to consider counterparty credit risk in selecting
potential counterparties, notwithstanding the requirements of proposed
Rule 810(b)(2).\190\ The Commission believes that these requirements,
taken together, should strengthen the financial integrity of SB swap
transactions that occur on the SB SEFs by reducing the counterparty
credit risks associated with uncleared SB swaps transactions.
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    \190\ Proposed Rule 810(b)(2) would prohibit a SB SEF's rules
from unreasonably limiting any person in respect to access to the
services offered by such SB SEF in an unfair or discriminatory
manner. See supra Section VII for a discussion of proposed Rule
810(b)(2).
---------------------------------------------------------------------------

    As noted above,\191\ the Commission identified in the Regulation MC
Proposing Release certain conflicts of interest that may provide
incentives for certain dominant market participants to limit access by
potential competing market participants to SB SEFs. A SB SEF could put
in place participant standards, including capital requirements and
other financial requirements, in a way that would unfairly restrict
access to a SB SEF. For example, a SB SEF could have a very high
capital requirement for participation that may exclude some smaller
dealers from participation in the SB SEF. On the one hand, while
appropriate participation standards, including financial requirements,
would support this Core Principle that requires SB SEFs to have rules
and procedures for ensuring the financial integrity of SB swaps entered
on or through the facilities of the SB SEF, unduly high standards may
without justification exclude persons who are otherwise qualified to
trade on the SB SEF. On the other hand, the Commission is mindful that
broadening access could come at the expense of sound risk management
practices. Thus, lessening capital or other financial requirements to
increase participation beyond a certain level may increase the overall
risk of the SB SEF's operations.
---------------------------------------------------------------------------

    \191\ See supra Section VI, discussing access to SB SEFs.
---------------------------------------------------------------------------

    The Commission seeks comments on all aspects of this proposed Rule
815. The Commission seeks comments on whether an SB SEF should be
prohibited from imposing higher capital requirements than the capital
requirements imposed by any rules or regulations that the Commission
may impose on participants of SB SEFs because such higher standards
could be utilized as a means to deter access to a SB SEF. If such a
prohibition were adopted, would it be appropriate for the SB SEF to
tailor capital requirements to the status of the participant on an
objective basis, e.g., having different capital requirements for a
liquidity provider with market maker obligations than a participant
without such obligations? If adopted, should such prohibition apply to
trading in cleared and uncleared SB swaps? In addition, the Commission
seeks comment on what additional safeguards, if any, would be necessary
to ensure the financial integrity of SB swap transactions executed on a
SB SEF. For swaps cleared by a registered clearing agency, should a SB
SEF be required to ensure that it has the capacity to route
transactions to the clearing agency? With respect to swaps that are not
cleared, should a SB SEF be required to have rules requiring the
transacting members to have entered into a credit arrangement for the
transaction, demonstrate an ability to exchange collateral, and have
appropriate credit filters in place?

XIII. Core Principle 7--Emergency Authority

    Section 3D(d)(7) of the Exchange Act (Core Principle 7) requires SB
SEFs to adopt rules to provide for the exercise

of emergency authority, in consultation or cooperation with the
Commission, as is necessary and appropriate, including the authority to
liquidate or transfer open positions in any SB swap or to suspend or
curtail trading in a SB swap.\192\ The Commission is proposing Rule 816
to implement Core Principle 7.
---------------------------------------------------------------------------

    \192\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(7) of the Exchange Act).
---------------------------------------------------------------------------

    Proposed Rule 816(a) would require that every SB SEF establish
rules and procedures to provide for the exercise of emergency
authority, in consultation or cooperation with the Commission, as
necessary or appropriate. ``Emergency'' would be defined in proposed
Rule 800 to have the same meaning as set forth in Section 12(k)(7) of
the Exchange Act.\193\ The Commission believes that the definition of
``emergency'' in Section 12(k)(7) of the Exchange Act has the advantage
of being broad enough to cover unusual or extreme circumstances without
being unduly restrictive. The Commission also believes that the
proposed use of the Exchange Act's definition of emergency would foster
consistency among rules regarding the exercise of emergency authority
and promote the use of a consistent definition across securities
markets generally.
---------------------------------------------------------------------------

    \193\ See 15 U.S.C. 78l(k)(7) (defining the term emergency to
mean ``(A) a major market disturbance characterized by or
constituting--(i) sudden and excessive fluctuations of securities
prices generally, or a substantial threat thereof, that threaten
fair and orderly markets; or (ii) a substantial disruption of the
safe or efficient operation of the national system for clearance and
settlement of transactions in securities, or a substantial threat
thereof; or (B) a major disturbance that substantially disrupts, or
threatens to substantially disrupt--(i) the functioning of
securities markets, investment companies, or any other significant
portion or segment of the securities markets; or (ii) the
transmission or processing of securities transactions.''
---------------------------------------------------------------------------

    Proposed Rule 816(c) would require that every SB SEF have rules
that permit the SB SEF to immediately take any or all of the following
actions during an emergency: (1) Impose or modify trading limits, price
limits, position limits, or other market restrictions, including
suspending or curtailing trading on its market in any SB swap or class
of SB swaps; (2) extend or shorten trading hours; (3) coordinate
trading halts with markets trading a security or securities underlying
any SB swap; (4) coordinate with a registered clearing agency to
liquidate or transfer positions in any open SB swap of one of its
participants; and (5) any action directed by the Commission. The
Commission preliminarily believes that the actions proposed in proposed
Rule 816(c)(1) through (4) would be important powers for a SB SEF to
have immediately without the need to seek additional authority from the
Commission when an emergency has occurred. The proposed rule would
enable a SB SEF to respond promptly during an emergency to maintain
fair and orderly markets and foster market integrity and efficiency
when ordinary authority would be insufficient.
    In light of the breadth of the proposed emergency authority for SB
SEFs, proposed Rule 816 also would require that every SB SEF have rules
governing the exercise of such emergency authority. Pursuant to
proposed Rule 816(b), SB SEF rules and procedures would be required to
specify: the person or persons authorized by the SB SEF to declare an
emergency; how the SB SEF would notify the Commission and the public of
its decision to exercise its emergency authority; the processes for
decision making by facility personnel with respect to exercise of
emergency authority, including alternate lines of communication and
guidelines to avoid conflicts of interest in the exercise of such
authority; and the processes for determining that an emergency no
longer exists and notifying the Commission and the public of such
decision. The Commission believes that it is important that SB SEFs put
in place a process for exercising emergency authority in order to help
ensure that a SB SEF is prepared prior to any emergency situation and
to help ensure that a SB SEF exercises emergency authority
appropriately and uniformly.
    Proposed Rule 816(d) would require every SB SEF to promptly notify
the Commission of the exercise of its emergency authority and, within
two weeks following cessation of the emergency, submit written
documentation explaining the basis for declaring an emergency, how
conflicts of interest were minimized, and the extent to which the
facility considered the effect of its emergency action on the markets
for the SB swap and any security or securities underlying the SB swap.
Proposed Rule 816(d) also would provide that, if a SB SEF implements
any rule or rule amendment in the exercise of its emergency authority,
it shall file such rule or rule amendment with the Commission pursuant
to Rule 806 prior to the implementation of such rule or rule amendment,
or, if not practicable, within 24 hours after implementation of such
rule or rule amendment. The Commission preliminarily believes that
while it is important to provide SB SEFs with the tools necessary to
react in emergency situations, requiring SB SEFs to submit a notice
and, if applicable, file a certified emergency rule or rule amendment
in accordance with proposed Rule 806, would help to deter SB SEFs from
using such tools inappropriately. In addition, requiring a SB SEF to
notify the Commission and, if applicable, file a certified emergency
rule or rule amendment, would allow the Commission to determine whether
a SB SEF acted in compliance with proposed Rule 816 and should provide
the Commission timely information with respect to the actions taken in
any emergency situation.
    While some national securities exchanges have rules providing for
the exercise of emergency authority by the exchange,\194\ there is no
specific Commission rule detailing how national securities exchanges
should address the issue of emergency authority. In light of the
mandate in Core Principle 7 that SB SEFs adopt rules governing the
exercise of emergency authority, and in light of the fact that it is
likely the same entities will be registered as SB SEFs and SEFs, the
Commission's approach to implementing Core Principle 7 is guided by the
approach the CFTC has taken with respect to the CEA's requirement that
a designated contract market adopt rules to provide for the exercise of
emergency authority.\195\
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    \194\ See, e.g., NYSE Rule 49 and Nasdaq Bylaws Article IX,
Section 5.
    \195\ See Section 5(d) of the CEA, 7 U.S.C. 7(d) (requiring a
board of trade to adopt rules to provide for the exercise of
emergency authority, in consultation or cooperation with the CFTC,
where necessary and appropriate). See also 17 CFR part 38, Appendix
B to part 38 implementing Section 5(d) of the CEA. Appendix B to
part 38 provides, in part, that a designated contract market should
have clear procedures for the exercise of emergency authority and
should, among other things, be able to impose or modify price
limits, order the liquidation or transfer of open positions, order
the fixing of a settlement price, order a reduction in positions,
extend or shorten the expiration date or the trading hours, suspend
or curtail trading on the market, order the transfer of customer
contracts and the margin for such contracts from one member
including non-intermediated market participants of the contract
market to another, or alter the delivery terms or conditions, or, if
applicable, should provide for such actions through its agreements
with its third-party provider of clearing services.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of the
proposed rule regarding emergency authority. Additionally, the
Commission requests comments as to whether the proposed list of
emergency actions that a SB SEF may take is appropriate. Are there any
additional actions that should be included? Are there any proposed
actions that should not be included? Why or why not?
    The Commission notes that it is common for a national securities
exchange to consult and cooperate with the Commission prior to
responding to highly unusual or emergency market

conditions and expects that a SB SEF would likely do the same before
exercising its emergency authority pursuant to proposed Rule 816.
However, the Commission requests comment on whether it should require
that a SB SEF consult and cooperate with the Commission before it takes
any emergency action. Why or why not? Is the proposed definition of
emergency appropriate? Is there another definition of emergency that
would be more appropriate? Would it be preferable for the Commission
not to define the term emergency? If not, why not? The Commission
further requests comment on whether the proposed list of rules
specifying processes for exercising emergency authority in proposed
Rule 816(b) is appropriate. Are there any additional processes that
should be included? Are there any proposed processes that should not be
included? Why or why not?

XIV. Core Principle 8--Timely Publication of Trading Information

    Section 3D(d)(8) of the Exchange Act (Core Principle 8) requires SB
SEFs to make public timely information on price, trading volume, and
other trading data on SB swaps to the extent prescribed by the
Commission and to have the capacity to electronically capture and
transmit and disseminate trade information with respect to transactions
executed on or through the facility.\196\ Section 13(m)(1) of the
Exchange Act separately authorizes the Commission to make SB swap
transaction, volume and pricing data available to the public in such
form and at such times as the Commission determines appropriate to
enhance price discovery.\197\ The Commission has separately proposed
rules relating to the reporting and public dissemination of SB swap
transaction and pricing data.\198\
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    \196\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(8) of the Exchange Act).
    \197\ See Public Law 111-203, Sec.  763(i), (adding Section
13(m) of the Exchange Act).
    \198\ The Commission recently proposed Regulation SBSR that
would require reporting and real-time public dissemination of
certain information regarding SB swap transactions. Proposed
Regulation SBSR identifies the SB swap information that would be
required to be reported and disseminated, establishes reporting
obligations, and specifies the time frames for reporting and
disseminating. Proposed Regulation SBSR would require a registered
SDR to publicly disseminate certain SB swap information that is
reported to it in real time. See Reporting and Dissemination
Release, supra note 6.
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    To implement Core Principle 8, the Commission is proposing Rule
817. Proposed Rule 817(a) enumerates the requirements of Section
3D(d)(8) of the Exchange Act. Thus, every SB SEF would be required to:
(1) Have the capacity to electronically capture, transmit, and
disseminate information on price, trading volume, and other trading
data on all SB swaps executed on or through the SB SEF; and (2) make
public timely information on price, trading volume, and other trading
data on SB swaps, to the extent and in the manner prescribed by the
Commission. As noted, the Commission has separately proposed rules
relating to the public dissemination of SB swap transaction and pricing
data.\199\ The Commission is not at this time proposing any additional
requirements on SB SEFs relating to the public dissemination of such
data.\200\
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    \199\ Id.
    \200\ The rules proposed by the Commission pursuant to Section
13(m) of the Exchange Act would limit the public dissemination of SB
swap transaction information by any person other than a registered
SDR. Specifically, proposed Rule 242.902(d) of Regulation SBSR would
prohibit any person other than a registered SDR from making
available to one or more persons (other than a counterparty)
information relating to a SB swap before the earlier of: (1) 15
minutes after the time of execution of the SB swap; or (2) the time
that a registered SDR publicly disseminates a report of that SB
swap. This prohibition on dissemination to one or more persons
(other than a counterparty) during such time period would apply to
SB SEFs and its participants, as it would to all other persons. See
Reporting and Dissemination Release supra note 6.
---------------------------------------------------------------------------

    In addition, proposed Rule 817(b) would require that, if any SB SEF
makes available information regarding a SB swap transaction to any
person other than a counterparty to the transaction, then the SB SEF
must make that information available to all participants on terms and
conditions that are fair and reasonable and not unfairly
discriminatory. This proposed requirement is designed to prevent a SB
SEF from providing information on SB swap transactions to certain
persons (other than counterparties) and not to others, or provide such
information pursuant to different terms that are not justified. The
Commission believes that fair, reasonable, non-discriminatory access to
market information is essential to providing a level playing field for
all market participants and that the proposed requirement in Rule
817(b) would prevent developments in the SB swap market that could
undermine the goal of post-trade price transparency.
    Proposed Rule 817(c) would also prohibit a SB SEF from making any
information regarding a SB swap transaction publicly available prior to
the time a SDR is permitted to do so under proposed Rule 902 of
Regulation SBSR under the Act.\201\
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    \201\ The Commission recently proposed Regulation SBSR, which
would require reporting and real-time public dissemination of
certain information regarding SB swap transactions. Proposed
Regulation SBSR identifies the SB swap information that would be
required to be reported and disseminated, establishes reporting
obligations, and specifies the timeframes for reporting and
disseminating. Proposed Regulation SBSR would require a registered
SDR to publicly disseminate certain SB swap information that is
reported to it in real time. See Reporting and Dissemination Release
supra note 6.
---------------------------------------------------------------------------

    The Commission understands, however, that for business reasons
counterparties to a SB swap transaction may prefer to have a SB SEF act
as its reporting agent for purposes of complying with the
counterparty's responsibility under proposed Regulation SBSR to report
required transaction information to a registered SDR. Proposed Rule
817(b) therefore would permit a SB SEF, acting as agent, to report
transaction information on behalf of a counterparty responsible for
submitting transaction information to a registered SDR. Under proposed
Rule 817(c), SB SEFs would be permitted to publicly disseminate SB swap
transaction information, but could not do so prior to the time SDRs
would be permitted to do so under proposed Rule 902 of Regulation SBSR
under the Act. Thus, a SB SEF could not publicly disseminate complete
transaction reports for block trades (i.e., including the transaction
ID and the full notional size) until the times specified in Rule
902(b)(1) through (3).\202\
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    \202\ As proposed, subject to some exceptions, Rule 902(b) of
Regulation SBSR would prohibit the public dissemination of the
complete transaction report of a block trade (including the
transaction ID and the full notional size): (1) Executed on or after
5:00 UTC and before 23:00 UTC of the same day, until 7:00 UTC of the
following; and (2) executed on or after 23:00 UTC and up to 5:00 UTC
of the following day, until 13:00 UTC of that following day.
---------------------------------------------------------------------------

    The Commission believes that its proposed rules for implementation
of Core Principle 8 would clarify the extent and manner in which SB
SEFs could make information on transactions executed on the SB SEF
available in a manner consistent with the requirements of proposed
Regulation SBSR. The Commission requests comment on all aspects of
proposed Rule 817 with respect to the timely publication of trading
information. Additionally, the Commission requests comment on whether
the proposed role of SB SEFs in the public dissemination of transaction
information is appropriate. Should SB SEF's be able to compete with
SDRs for potential customers of transaction data? How, if at all, would
the prohibition on dissemination of transaction information in proposed
Rule 902 of Regulation SBSR impact the development of the market for SB
swaps? Should the Commission prohibit

a SB SEF from disseminating the full size of a block trade after the
period specified in Rule 902(d), which could be after 15 minutes, but
before a SDR has disseminated the full size of the block trade? Would
such a prohibition be necessary? Or is it reasonable to expect that a
SB SEF would not disseminate block trade information before a SDR if
the SB SEF's market participants did not want dissemination of such
information? With respect to data that a SDR is required to disseminate
under proposed Rule 902 of Regulation SBSR, would proposed Rule 817(c)
be effective in ensuring that SB SEF data feeds do not have any
advantage over SDR data feeds? If not, should the proposed rule be
revised, and if so, how so? Are SB SEFs likely to sell or otherwise
disseminate market data following dissemination of data by a registered
SDR? If not, why not?

XV. Core Principle 9--Recordkeeping

    Section 3D(d)(9) of the Exchange Act (Core Principle 9) requires SB
SEFs to maintain records of all activities relating to the business of
the facility, including a complete audit trail, in a form and manner
acceptable to the Commission for a period of five years. This Core
Principle also requires SB SEFs to report to the Commission, in a form
and manner acceptable to the Commission, such information as the
Commission determines to be necessary or appropriate for the Commission
to perform the duties of the Commission under the Exchange Act. In
addition, this Core Principle requires the Commission to adopt data
collection and reporting requirements for SB SEFs that are comparable
to corresponding requirements for clearing agencies and SDRs.
    The Commission is proposing Rule 818 setting forth the
recordkeeping and reporting obligations of SB SEFs to implement this
Core Principle. This proposed rule is comparable to the recordkeeping
and reporting obligations of national securities exchanges and ATSs
under the Exchange Act.\203\
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    \203\ See, e.g., 17 CFR 240.17a-1, 240-17a-3, and 17a-4, and 17
CFR 242.301-03.
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    Proposed Rule 818(a) would require every SB SEF to keep and
preserve at least one copy of all documents, including all
correspondence, memoranda, papers, books, notices, accounts, and other
such records, including the audit trail records, as shall be made and
received in the conduct of its business. Proposed Rule 818(b) would
require SB SEFs to keep and preserve such documents and other records
for a period of not less than five years, the first two years in an
easily accessible place. Proposed Rule 818(c) would require SB SEFs to
establish and maintain the records necessary to create a meaningful
audit trail. Specifically, the Commission proposes that SB SEFs
establish and maintain accurate, time-sequenced records of all
inquiries, responses, orders, quotations or other trading interest, and
transactions that are received by, originated on, or executed on the SB
SEF.\204\ These records must include the key terms of each inquiry,
response, order, quotation or other trading interest or transaction and
must document the complete life of each inquiry, response, order,
quotation or other trading interest or transaction on the SB SEF,
including any modification, cancellation, execution, or any other
action taken with respect to such order, inquiry, response, quotation,
or transaction.\205\ Further, proposed Rules 818(e) and (f) would
require a SB SEF to report to the Commission such information as the
Commission may, from time to time, determine to be necessary for the
Commission to perform its duties under the Exchange Act, and upon
request of any representative of the Commission, to promptly furnish to
each representative copies of any documents, in such form and manner
acceptable to such representative, required to be kept and preserved by
the SB SEF pursuant to proposed Rules 818(a) and (b).
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    \204\ Id.
    \205\ See proposed Rule 818(c).
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    The Commission would use the information required under proposed
Rules 818(a) through (c) to carry out its oversight responsibility over
SB SEFs. The records required to be kept, maintained, and provided to
the Commission under these provisions would provide an additional tool
to help the Commission to determine whether a SB SEF is operating in
compliance with the Exchange Act and the rules and regulations
thereunder. The audit trail information required to be maintained under
proposed Rule 818(c) would facilitate the ability of the SB SEF and the
Commission to examine the complete history of all trading interest
entered into and transactions executed on a SB SEF. This audit trail
information would help the SB SEF and the Commission to detect and
deter fraudulent and manipulative acts and prepare reconstructions of
activity on a SB SEF or in the SB swaps market, and generally to
understand the causes of unusual market activity.
    Proposed Rule 818(d) would require a SB SEF to establish, maintain,
and enforce written policies and procedures to verify the accuracy of
the transaction data it collects and reports.\206\ This requirement is
based on the premise that transaction data is only useful if it is
accurate. If it is not accurate, then it will not enhance transparency.
The SB swaps market participants must be able to trust that the
information they receive is accurate in order to make appropriate
investment decisions. Further, a SB SEF must have accurate information
if it is to effectively carry out its obligations to surveil the market
and enforce it rules. Similarly, the Commission must be able to trust
that the information it receives is accurate so that it can oversee the
market and properly determine whether the SB SEF is carrying out its
statutory mandate.
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    \206\ Nothing in proposed Regulation SBSR would prohibit a SB
SEF from serving as the reporting agent on behalf of the
counterparty with the obligation to report a trade to the SDR, if
the counterparty effected the trade on the SB SEF. See Reporting and
Dissemination Release, supra note 6.
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    The Commission requests comment on all aspects of proposed Rule
818. Are the documents required to be preserved pursuant to proposed
Rule 818(a) appropriate? Are there additional documents that a SB SEF
should be required to preserve? Is the proposed time period for record
retention appropriate? Should SB SEF's be required to keep such records
for a longer or shorter period of time? Are the records required to be
preserved to maintain an audit trail pursuant to proposed Rule 818(c)
appropriate? Are there additional records that a SB SEF should be
required to keep? Should the Commission require SB SEFs to keep audit
trail records in a particular format? What are the benefits and
drawbacks of allowing each SB SEF to determine its own format to keep
audit trail records? Would allowing each SB SEF to determine its own
format for the maintenance of an audit trail hamper the Commission's
ability to analyze trading activity across multiple SB SEFs? If yes,
then how?
    Is it appropriate to require SB SEFs to have policies and
procedures to verify the accuracy of transaction data? If not, why not?
In the absence of such requirements, how should the Commission ensure
the integrity of transaction data that originates on or passes through
a SB SEF? What are the specific benefits and drawbacks of any suggested
approaches?
    Proposed Rules 818(e) and (f) require a SB SEF to promptly furnish
information and records required to be kept under the Rule to the
Commission upon request. What, if any, additional reports or records
should be furnished to the Commission upon request? What,

if any, reports or records should the Commission require on a periodic
basis? A SB SEF is required to promptly furnish information to the
Commission in a manner that is acceptable to the Commission. Are there
particular time or format constraints or challenges that the Commission
should be aware of with respect to such requests? Would the
recordkeeping and reporting requirements be overly burdensome to SB
SEFs? If so, why? Or, should the Commission require SB SEFs to provide
the Commission direct electronic access to such information and
records? Would such direct access be more or less burdensome to SB SEFs
than the proposed requirements? If so, what requirements should the
Commission consider limiting to reduce the burdens? What would be the
basis, if any, to justify reducing the recordkeeping and reporting
requirements for SB SEFs that are, as proposed, comparable to
requirements for national securities exchanges that also trade SB
swaps?

XVI. Core Principle 10--Antitrust Concerns

    Section 3D(d)(10) of the Exchange Act (Core Principle 10) \207\
provides that, unless necessary or appropriate to achieve the purposes
of the Exchange Act, a SB SEF shall not: (1) Adopt any rules or take
any actions that result in any unreasonable restraint of trade, or (2)
impose any material anticompetitive burden on trading or clearing. The
Commission is proposing to implement this Core Principle in proposed
Rule 819 by incorporating the statutory language.\208\ The Commission
requests comment on all aspects of the proposed Rule 819. What do
commenters believe would be a ``material anticompetitive burden'' on
trading and clearing? Should the Commission prescribe specific rules or
offer guidance to address such situations?
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    \207\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(10) of the Exchange Act).
    \208\ As discussed further in Section XVII below, the Commission
proposed a number of requirements in Regulation MC designed to
mitigate conflicts of interest relating to SB SEFs. The additional
rules the Commission is proposing herein are designed to work
together with proposed Regulation MC to help mitigate potential
conflicts of interest, as identified in the Regulation MC Proposing
Release. In addition, as discussed in Section XVII, the Commission
is proposing governance rules that also are designed to help
mitigate potential conflicts of interest relating to SB SEFs.
    The Commission notes that the statutory language of Section
3D(d)(10)(B) of the Exchange Act differs somewhat from the
requirements in the Exchange Act relating to national securities
exchanges. Section 6(b)(8) of the Exchange Act, 15 U.S.C. 78f(b)(8),
requires that the rules of a national securities exchange not impose
any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
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XVII. Core Principle 11--Conflicts of Interest

    Section 3D(d)(11) of the Exchange Act (Core Principle 11) requires
a SB SEF to establish and enforce rules to minimize conflicts of
interest in its decision-making process and establish a process for
resolving the conflicts of interest.\209\ Pursuant to this directive,
the Commission is proposing Rule 820 to mitigate conflicts of interest
through governance arrangements applicable to SB SEFs.
---------------------------------------------------------------------------

    \209\ See Public Law 111-203, Sec.  763(c) (adding Section
3D(d)(11) of the Exchange Act).
---------------------------------------------------------------------------

    The Commission recently proposed new Regulation MC as part of its
rulemaking \210\ mandated by Section 765 of the Dodd-Frank Act.\211\
Section 765 of the Dodd-Frank Act requires the Commission to adopt
rules to mitigate specified conflicts of interest relating to SB SEFs,
security-based swap clearing agencies, and SBS exchanges.\212\ As the
Commission explained in the Regulation MC Proposing Release, a conflict
of interest could arise when a small number of market participants
exercise control or influence over a SB SEF, either through ownership
of voting interests or participation in the governance of the SB SEF.
When a small group of market participants also dominate much of the
trading in SB swaps, control of a SB SEF by these participants raises a
heightened concern. Such market participants, through ownership
interest in or influence over the governance of a SB SEF, potentially
could exercise their influence to limit the number of direct
participants in the SB SEF and restrict the scope of SB swaps that are
listed for trading on a SB SEF in an effort to limit competition and
increase their ability to maintain higher profit margins.\213\ The
Commission also believes that a SB SEF's ownership and governance
structure could create an incentive for behaviors that would promote
its owners' commercial interests over its market oversight
responsibilities.\214\ Each of these potential conflicts of interest
could limit the benefits of centralized trading in the SB swap market
and potentially undermine the mandatory trading requirement in Section
3C(h) of the Exchange Act, thereby negatively affecting efficiency and
competition in the SB swap markets.\215\
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    \210\ See Regulation MC Proposing Release, supra note 82.
    \211\ See Public Law 111-203, Sec.  765.
    \212\ Id.
    \213\ See Regulation MC Proposing Release, 75 FR at 65890, supra
note 82.
    \214\ The Commission notes that an entity that registers as a SB
SEF would have oversight responsibility over its market pursuant to
the Exchange Act (as amended by the Dodd-Frank Act), and rules
adopted thereunder. See Public Law 111-203, Sec.  763(c). Similarly,
all national securities exchanges, including those that may post or
make available for trading SB swaps, have oversight responsibilities
over their markets and their members pursuant to the Exchange Act.
See Section 6 of the Exchange Act, 15 U.S.C. 78(f).
    \215\ See Public Law 111-203, Sec.  763(a). Section 3C(h) of the
Exchange Act imposes a mandatory trading requirement, which provides
that counterparties shall execute a transaction in a SB swap subject
to the clearing requirement of Section 3C(a)(1) on an exchange or a
registered SB SEF or a SB SEF that is exempt from registration
pursuant to Section 3D(e).
---------------------------------------------------------------------------

    Accordingly, the Commission proposed in Regulation MC to, among
other things, impose a 20% limit on ownership (based on interests
entitled to vote) and voting interest by any direct participants of SB
SEFs; require the board of a SB SEF be composed of a majority of
independent directors; require a fully independent nominating
committee; require a fully independent ROC; and require the SB SEF to
inform the Commission when a recommendation of the ROC is not
implemented by the board.\216\
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    \216\ See Regulation MC Proposing Release, supra note 82.
---------------------------------------------------------------------------

    As discussed above, in this proposal, the Commission is proposing
rules relating to impartial access to SB SEFs and a review process for
those SB swaps to be traded on a SB SEF, that are designed to work
together with Regulation MC to help mitigate potential conflicts of
interest.\217\ As described in this section, the Commission also is
proposing additional governance rules that are designed to mitigate
potential conflicts of interest.\218\ The proposed rules in this
proposal--regarding both impartial access and governance--seek to
address the same conflicts of interest issues as identified in proposed
Regulation MC, but using different mechanisms. The Commission will
consider both rulemaking proposals as a whole, including how they
interact with each other, when considering how best to address these
conflicts of interest issues. As requested in detail below, in
reviewing the proposed rules, commenters are encouraged to do the same.
---------------------------------------------------------------------------

    \217\ See supra Sections VI and VII.
    \218\ See proposed Rule 820.
---------------------------------------------------------------------------

    The Commission's proposal for SB SEFs is informed by the
Commission's experience with national securities exchanges.
Historically, national securities exchanges were owned by their members
and were structured as

not-for-profit or similar organizations.\219\ With the advent of
shareholder-owned exchanges, the Commission became concerned that the
introduction of a class of owner that does not trade on the exchange
could exacerbate the possibility that an exchange would put its
commercial interests ahead of its responsibilities as a regulator.\220\
The Commission also recognizes the potential for any person that
directly or indirectly controls an exchange or facility thereof to
direct its operation so as to cause the exchange to neglect its
regulatory obligations under the Exchange Act or to improperly
interfere with or restrict the ability of the Commission to effectively
carry out its oversight responsibilities.\221\
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    \219\ A ``member'' when used with respect to a national
securities exchange means (i) any natural person permitted to effect
transactions on the floor of the exchange without the services of
another person acting as broker, (ii) any registered broker or
dealer with which such a natural person is associated, (iii) any
registered broker or dealer permitted to designate as a
representative such a natural person, and (iv) any other registered
broker or dealer which agrees to be regulated by such exchange and
with respect to which the exchange undertakes to enforce compliance
with the provisions of the Exchange Act, the rules and regulations
thereunder, and its own rules. See Section 3(a)(3)(A) of the
Exchange Act, 15 U.S.C. 78c(a)(3)(A).
    \220\ See, e.g., Securities Exchange Act Release No. 62158 (May
24, 2010), 75 FR 30082 (May 28, 2010) (order approving the
demutalization of CBOE) (``Exchange Act Release No. 62158'').
    \221\ Because ATSs do not have the regulatory obligations that
are required of national securities exchanges under the Exchange
Act, the Commission has not to date required ATSs to have governance
structures that are similar to those of national securities
exchanges.
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    The Commission has considered the conflicts between an exchange's
regulatory responsibilities and its commercial interests in operating a
marketplace for the trading of securities.\222\ To address these types
of concerns, the Commission has approved proposed procedures,
consistent with the requirements of Section 6 of the Exchange Act,\223\
for an approach to mitigate conflicts of interest for national
securities exchanges through the Commission's review of proposals by
exchanges with respect to their ownership \224\ and governance
structures (generally from member-owned to shareholder-owned
organizations) or of applications by entities to register as national
securities exchanges.\225\ In its review, the Commission has examined
the way in which an exchange addresses certain governance principles.
Among other things, the Commission looks to assure that an exchange
provides fair representation of members in the selection of directors
and the administration of its affairs, and provide that one or more
directors be representative of issuers and investors and not be
associated with a member of the exchange, broker or dealer, consistent
with the requirement in Section 6(b)(3) of the Exchange Act.\226\
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    \222\ The Commission's recognition of potential conflicts of
interest at exchanges and its approach to date in reviewing and
approving measures designed to mitigate those conflicts of interest
are a useful point of reference as the Commission identifies and
develops proposals to mitigate the conflicts of interest potentially
faced by SB SEFs as the trading of SB Swaps moves to regulated
markets. However, the Commission recognizes that a SB SEF's
regulatory obligations are not the same as a national securities
exchange's regulatory obligations.
    \223\ See Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
    \224\ The Commission is not proposing rules with respect to
ownership and voting limitations for SB SEFs as part of this
rulemaking. The Commission has proposed ownership and voting
limitations for participants in a SB SEF, as well as for
participants in a SBS exchange, as part of Regulation MC. See
proposed Rule 702 of Regulation MC.
    \225\ See, e.g., Exchange Act Release No. 62158, supra note 220;
Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR
13151 (March 18, 2010) (In the Matter of the Applications of EDGX
Exchange, Inc., and EGDA Exchange, Inc. for Registration as National
Securities Exchanges; Findings, Opinion, and Order of the
Commission) (``Exchange Act Release No. 61698''); Securities
Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498
(August 21, 2008) (In the Matter of the Application of BATS
Exchange, Inc. for Registration as a National Securities Exchange;
Findings, Opinion, and Order of the Commission) (``Exchange Act
Release No. 58375''); and Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251 (March 6, 2006) (order approving
the merger of NYSE and Archipelago and NYSE's demutualization).
    \226\ 15 U.S.C. 78f(b)(3). Specifically, Section 6(b)(3) of the
Exchange Act requires that the rules of an exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs, and must provide that one or more
directors be representative of issuers and investors and not be
associated with a member of the exchange, broker or dealer. 15
U.S.C. 78f(b)(3). Pursuant to Section 6(b)(3), the Commission has
approved SRO rules requiring that at least 20% of the directors on
the board be selected by exchange members, as well as SRO rules
requiring that exchange members be permitted to participate in the
nomination process of such representative directors, with the right
to petition for alternative candidates. See, e.g., Exchange Act
Release No. 58375, 73 FR at 49500, id .
---------------------------------------------------------------------------

    To complement the governance requirements proposed in Regulation
MC, the Commission proposes additional substantive requirements with
respect to the governance of SB SEFs that are designed to address the
conflict of interest concerns identified above. The Commission proposes
that SB SEF participants be provided ``fair representation'' in the
selection of directors of the SB SEF and administration of its affairs.
Thus, the proposed rule would require the rules of a SB SEF to assure a
fair representation of its participants \227\ in the selection of its
directors and administration of its affairs, but no less than 20% of
the total number of directors of the SB SEF must be selected by the SB
SEF's participants.\228\ The Commission preliminarily believes that the
proposed 20% requirement strikes a proper balance by giving SB SEF
participants a practical voice in the governance of the SB SEF and the
administration of its affairs, without undermining the overall
independence of the Board.\229\
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    \227\ See proposed Rule 800 (defining the term ``participant''
as a person that is permitted to directly engage in or effect
transactions on the SB SEF).
    \228\ See proposed Rule 820(a). The Commission notes that
national securities exchanges have established a 20% member director
requirement for their boards of directors. See, e.g., EDGX Exchange,
Inc. Amended and Restated Bylaws, Article III, Section 2(a)(iv) and
BATS Y-Exchange Amended and Restated by-Laws Article III, Section
2(b)(ii).
     The Commission proposes to define the term ``Board'' as the
Board of Directors or Board of Governors of the SB SEF or any
equivalent body. See proposed Rule 800 under Regulation SB SEF. The
proposed definition is substantially identical to that proposed in
the Regulation MC Proposing Release with respect to SB SEFs. See
supra note 82.
    \229\ Proposed Regulation MC would require that a Board of a SB
SEF be composed of a majority of independent directors. See proposed
Rule 702(c)(1) under proposed Regulation MC and the Regulation MC
Proposing Release, supra note 82.
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    To ensure that SB SEF participants truly have a voice in the
selection of directors, the Commission also proposes that SB SEF
participants be permitted to participate in the nomination process of
such representative directors, with the right to petition for
alternative candidates. The proposed rule would require the rules of a
SB SEF to establish a fair process for SB SEF participants to nominate
an alternative candidate or candidates to the Board by petition and the
percentage of SB SEF participants that is necessary to put forth such
alternative candidate or candidates.\230\ A SB SEF would have some
flexibility in implementing a fair process for members to select Board
candidates.\231\ In adopting such rules, a SB SEF should endeavor to
strike an appropriate balance that provides SB SEF participants a
practical mechanism to put forth alternative candidates, without
jeopardizing the overall integrity of the nominating process. The SB
SEF participant candidates, of course, would

be required to satisfy all relevant eligibility criteria for directors.
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    \230\ See proposed Rule 820(c).
    \231\ The Commission notes that national securities exchanges
have implemented the 20% member director requirement by various
means. For example, the BATS Y-Exchange, Inc. has a separate member
nominating committee that will nominate candidates for each member
representative director position on the exchange's board. BATS
Global Markets, as the sole shareholder of BATS Y-Exchange, Inc.,
will elect those candidates nominated by the member nominating
committee as member representative directors. See BATS Y-Exchange
Amended and Restated by-Laws Article III, Section 4.
---------------------------------------------------------------------------

    Further, the Commission proposes that SB SEF participant-owners be
restricted in their ability to participate in the ``fair
representation'' process. The rules of a SB SEF would therefore require
the SB SEF to preclude any SB SEF participant, or any group or class of
participants, either alone or together with its related persons, that
beneficially owns, directly or indirectly, an interest in the SB SEF
from dominating or exercising disproportionate influence in the
selection of the fair representation directors if the participant or
participants may thereby dominate or exercise disproportionate
influence in the selection or appointment of the entire Board.\232\ For
example, if a group of five participants together owned the SB SEF and,
as a result of such ownership, were effectively able to select the
directors on the Board of the SB SEF, those owners would be precluded
from also being the fair representation directors on the Board. The
Commission believes that such a requirement should help mitigate any
conflicts of interest that may arise between SB SEF participants who
are also owners of the SB SEF. Given the nature of the conflict
concerns for the trading of SB swaps and the structure of the SB swaps
market--namely, the dominance by a small group of dealers and the
concerns with respect to undue influence in the operation of the SB SEF
\233\--the Commission believes that it is necessary and appropriate for
the Commission to require that a SB SEF take means to prevent a SB SEF
participant or group of participants from exerting undue influence in
the nomination and selection of the entire Board.
---------------------------------------------------------------------------

    \232\ See proposed Rule 820(a).
    \233\ For further discussion of the current structure of the SB
swaps market, see the Regulation MC Proposing Release, supra note
82, at Section III.B.
---------------------------------------------------------------------------

    Finally, the Commission proposes that at least one director on the
Board of a SB SEF shall be representative of investors who are not SB
swap dealers or major SB swap participants and such director must not
be a person associated with a SB SEF participant.\234\ The Commission
believes that requiring representation by investors who are not SB swap
dealers or major SB swap participants, or associated with SB SEF
participants, would provide an important perspective to the governance
and administration of a SB SEF. Investor directors could provide unique
and different perspectives from dealers and other participants of the
SB SEF, which should enhance the ability of the Board to address issues
in an impartial fashion and consequently support the integrity of a SB
SEF's governance.
---------------------------------------------------------------------------

    \234\ See proposed Rule 820(b). The term ``person associated
with a participant'' is proposed to mean any partner, officer,
director, or branch manager of such participant (or any person
occupying a similar status or performing similar functions), any
person directly or indirectly controlling, controlled by, or under
common control with such participant, or any employee of such
participant. See proposed Rule 800. The proposed definition is
substantially identical to the definition of ``person associated
with a security-based swap execution facility participant'' that has
been proposed under Regulation MC. See proposed Rule 700(t) under
Regulation MC and Regulation MC Proposing Release, supra note 82.
---------------------------------------------------------------------------

    The Commission believes that the proposed governance requirements,
described above, are important to help ensure that all SB SEF
participants and investors have a voice in the administration and
governance of the SB SEF. The proposed requirements should reduce the
possibility that a single group of market participants has the ability
to unfairly disadvantage other market participants through the SB SEF
governance process. Moreover, the proposed requirements for SB SEFs
would be consistent with Exchange Act requirements for national
securities exchanges.\235\ The Commission believes that similar
requirements for SB SEFs would help to minimize conflicts of interest
in the SB SEF decision-making process.
---------------------------------------------------------------------------

    \235\ See Section 6(b)(3) of the Exchange Act, 15 U.S.C.
78f(b)(3).
---------------------------------------------------------------------------

    The Commission requests comments on all aspects of the proposed
rules related to governance of the SB SEF. Are there provisions of the
proposed rules that are unnecessary or are there other provisions that
should be added? If so, why? Are there aspects of the proposed rules
that would be difficult for SB SEFs to implement and, if so, why would
that be the case?
    Should the Commission adopt compositional requirements to provide
certain constituencies a guaranteed voice in the selection of the SB
SEF's directors and the administration of its affairs, in addition to
those proposed? For example, the proposed ``fair representation''
requirement relates to the fair representation of a SB SEF's
participants. Should the requirement instead specifically require fair
representation of specific categories of participants, such as SB swap
dealers and major SB swap participants? Are there constituencies that
commenters believe should be entitled to representation in the election
of the Board of a SB SEF that are not addressed in this proposal?
    Should the ``fair representation'' proposal be broadened to include
non-participant dealers? Would representation by non-participant
dealers be useful to help assure that SB SEFs implement rules and
procedures that are designed to provide impartial access? If commenters
believe that such representation should be required, should non-
participant dealers be provided representation in addition to any
required independent directors,\236\ or should they be a subset of
independent directors?
---------------------------------------------------------------------------

    \236\ See Regulation MC Proposing Release, supra note 82.
---------------------------------------------------------------------------

    Are the provisions relating to the ``fair representation''
requirements appropriate? Should the proposed 20% minimum threshold for
``fair representation'' be higher or lower? Do commenters agree that it
is appropriate for a SB SEF to restrict the ability of a SB SEF
participant that is also an owner to dominate or exercise influence in
the selection of ``fair representation'' directors, particularly if the
SB SEF would thereby dominate the selection or appointment of the
entire Board? If not, why not? If so, why? Is the proposed rule's
requirement that the Board include at least one investor representative
appropriate? Should SB SEFs be required to have more than one investor
representative on its Board? If so, how many, and why?
    Should the Commission require a specific percentage of the total
number of SB SEF participants to put forth alternative member candidate
or candidates by petition that would be required to be set forth in the
SB SEF's rules? If so, what percentage would be appropriate? In the SRO
Governance Proposing Release, the Commission proposed a threshold of
10% as the percentage of members necessary to put forth an alternative
member candidate or candidates for the exchange board of
directors.\237\ Would a 10% threshold be appropriate for SB SEFs as
well? Should investors who are not SB SEF participants be provided with
further representation in the governance and administration of a SB SEF
beyond representation on the SB SEF Board? \238\

Should the Commission require SB SEFs to have a participation committee
that would, for example, determine the standards and requirements for
participant eligibility and review denials of participation
applications? If so, should there be any requirements as to the
composition of such a committee? For example, should any such committee
be required to have a majority of independent directors? Would some
other percentage of independence be appropriate for a participation
committee? Should the Commission require investor representation on a
participation committee? If so, should the Commission require a minimum
percentage of investor representation and if so what percentage and
why?
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    \237\ See Securities Exchange Act Release No. 50699 (November
18, 2004), 69 FR 71126 (December 8, 2004) at 71137-71138. See also,
e.g., NASDAQ Stock Market LLC, Bylaws, Article II, Section 1(b)(ii)
stating that Nasdaq members may submit a petition in support of an
alternate candidate (i.e., candidate not selected by the nominating
committee) provided that the petition is executed by ``10% or more
of all Nasdaq Members.''
    \238\ See discussion supra at Section VIII.B discussing proposed
Rule 811(c)(2), which would provide that the SB SEF must establish a
swap review committee that would provide for the fair representation
of participants of the SB SEF and other market participants, such
that each class of participant and other market participants would
be given the right to participate in such committee and no single
class of participant or category of market participant would
predominate.
---------------------------------------------------------------------------

    As noted above, various provisions of proposed Regulation SB SEF,
such as the impartial access requirements of proposed Rule 811(b) and
the governance requirements of proposed Rule 820 are intended to be
complementary measures, along with proposed Regulation MC, designed to
mitigate conflicts of interest for SB SEFs. The Commission seeks
commenters' views regarding the interaction of proposed Regulation SB
SEF with proposed Regulation MC. Taking into account both proposals,
commenters should address whether the proposals contained in Regulation
SB SEF would appropriately address conflicts of interest concerns or
whether they should be revised either as unnecessary or insufficient to
address conflicts of interest. Are there any redundancies or gaps for
mitigating conflicts of interest that should be addressed?
    In reviewing proposed Rule 820 specifically, commenters are asked
to consider how this proposed rule would work together with Regulation
MC. Are the requirements of proposed Rule 820 and the requirements of
Regulation MC mutually supportive? Are any of the requirements of
proposed Rule 820 redundant with, or otherwise unnecessary in light of,
the proposed requirements of Regulation MC? Are there additional or
different measures that the Commission should take to mitigate
conflicts of interest? For example, should the Commission require SB
SEFs to make publicly available, or available to the Commission but not
to the public, Board and committee decisions with respect to the
listing of SB swaps? Should the Commission require that the independent
directors of the Board conduct and submit to the Commission, or make
publicly available, an annual governance self-assessment, which would
include ways in which the SB SEF addressed conflicts of interest? If
so, are there particular areas that should be the focus of any such
annual governance self-assessment? What would be the benefits and
drawbacks of any such annual governance self-assessment? Should
proposed Form SB SEF require SB SEFs to provide details about the
background of each independent director and why it believes that each
independent director qualifies as independent? \239\
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    \239\ See Section XXII for a description of proposed Form SB
SEF, which would require the disclosure of certain information
relating to directors of an SB SEF. Proposed Exhibit C to Form SB
SEF would require that an applicant provide a list of the officers
and directors of the SB SEF, or persons performing similar
functions, who presently hold or have held their offices or
positions during the previous year, and a list of all standing
committees and their members, indicating the following for each:
their name and title; date of commencement and termination of term
of office or position; the type of business in which each is
primarily engaged (e.g., SB swap dealer, major SB swap participant,
inter-dealer broker, end-user etc.); and, if such person is a
director, whether such director qualifies as an ``independent
director'' pursuant to proposed Rule 800 under Regulation SB SEF and
whether such director is a member of any standing committees or
committees that have the authority to act on behalf of the Board or
the nominating committee.
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    A number of commenters on Regulation MC raised concerns about the
overall approach of, and the proposed requirements in, Regulation MC
and expressed a range of views.\240\ Several other commenters on
Regulation MC, however, generally supported the overall approach to
mitigate conflicts of interest and expressed a range of views on the
proposed requirements.\241\ In particular, the Commission notes that
some commenters who have submitted comment letters on proposed
Regulation MC raised additional sources of conflicts to consider.\242\
These commenters suggested that the Commission should focus on
conflicts arising from dealers directing volume to SBS exchanges and SB
SEFs, dealer concentration of market activity, and close association of
the dealers with decision-making in SBS exchanges and SB SEFs. Namely,
the commenters believed that the Commission should address the
incentives SB SEFs and SBS exchanges may use to attract business, such
as volumetric or profit-based incentives. The commenters argued that if
arrangements to attract large liquidity providers' business are overly
generous, such arrangements may undermine any improvements made by the
proposed voting and ownership limitations and governance requirements
in Regulation MC. Do commenters agree with these concerns? If not, why
not? If so, do commenters believe that the Commission should take any
measures to mitigate these concerns? For example, should the Commission
prohibit, or take other measures with respect to, revenue sharing,
volume discounts, rebates, and other similar arrangements by a SB SEF
to attract order flow? Should SB SEFs be required to file with the
Commission any arrangements with participants, potential participants,
or other market participants that would promote the sending of order
flow to the SB SEF, such as equity incentive plans? Would such
requirements help to mitigate conflicts of interest?
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    \240\ See, e.g., Letter from Nancy C. Gardner, Executive Vice
President & General Counsel, Thomson Reuters Markets, to Elizabeth
M. Murphy, Secretary, Commission, dated November 24, 2010, Letter
from Lee H. Olesky, Chief Executive Officer, and Douglas L.
Friedman, General Counsel, Tradeweb Markets LLC, to David A.
Stawick, Secretary, CFTC, dated November 17, 2010, and Letter from
Ernest C. Goodrich, Jr., Managing Director, Deutsche Bank AG, and
Marcelo Riffaud, Managing Director, Deutsche Bank AG, to Elizabeth
M. Murphy, Secretary, Commission, and David A. Stawick, Secretary,
CFTC, dated November 8, 2010.
    \241\ See, e.g., Letter from U.S. Department of Justice,
Antitrust Division, In the Matter of: RIN 3235-AK47, File No. S7-27-
10, dated December 28, 2010, Letter from Mark Scanlan, Vice
President, Agriculture and Rural Policy, Independent Community
Bankers of America, to Elizabeth M. Murphy, Secretary, Commission,
dated November 26, 2010, and Letter from Laurel Leitner, Senior
Analyst, Council of Institutional Investors, to Elizabeth M. Murphy,
Secretary, Commission, dated November 19, 2010.
    \242\ Letter from U.S. Senator Carl Levin, Michigan, to
Elizabeth M. Murphy, Secretary, Commission, dated December 20, 2010;
Letter from Dennis M. Kelleher, President & CEO, and Wallace C.
Turbeville, Derivatives Specialist, Better Markets, Inc. to
Elizabeth M. Murphy, Secretary, Commission, dated November 26, 2010;
Letter from U.S. Senator Sherrod Brown, Ohio, to Elizabeth M.
Murphy, Secretary, Commission, and David A. Stawick, Secretary,
CFTC, dated November 17, 2010; Letter from U.S. Senator Tom Harkin,
Iowa, to Elizabeth M. Murphy, Secretary, Commission, and David A.
Stawick, Secretary, CFTC, dated November 17, 2010; and Letter from
Americans for Financial Reform, to Elizabeth M. Murphy, Secretary,
Commission, dated November 16, 2010.
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XVIII. Core Principle 12--Financial Resources

    Section 3D(d)(12)(A) of the Exchange Act (Core Principle 12)
requires SB SEFs to have adequate financial, operational, and
managerial resources to discharge each responsibility of the SB SEF, as
determined by the Commission. In addition, Section 3D(d)(12)(B) of the
Exchange Act states that the financial resources of a SB SEF shall be
considered to be adequate if the value of the financial resources (i)
enables the organization to meet its financial obligations to its
members and

participants notwithstanding a default by the member or participant
creating the largest financial exposure for that organization in
extreme but plausible market conditions; and (ii) exceeds the total
amount that would enable the SB SEF to cover the operating costs of the
SB SEF for a one year period, as calculated on a rolling basis. The
Commission believes that the financial strength of a SB SEF is vital to
ensure that a SB SEF can discharge its regulatory responsibilities in
accordance with the Exchange Act. Strong, viable SB SEFs will be a key
to market continuity and efficiency. Therefore, the Commission believes
that it is important to install safeguards to ensure that a SB SEF's
resources are adequate.
    The Commission proposes to implement in proposed Rule 821 the
requirements of Section 3D(d)(12) of the Exchange Act. Specifically,
proposed Rule 821(a) would require every SB SEF to have adequate
financial, operational, and managerial resources to discharge each
responsibility of the SB SEF, as determined by the Commission. Proposed
Rule 821(b) would state in part that the financial resources of a SB
SEF shall be considered to be adequate if the value of the financial
resources enables the SB SEF to meet its financial obligations to
participants notwithstanding a default by the participant creating the
largest financial exposure for the SB SEF in extreme but plausible
market conditions. This requirement would help ensure that the
financial failure of one participant would not be able to destroy the
financial viability of the entire SB SEF. Proposed Rule 821(b) would
require that in making this calculation (which is required by Section
3D(d)(12)(B) of the Exchange Act), a SB SEF shall use reasonable
estimates and assumptions and not overestimate resources or
underestimate expenses, liabilities, and financial exposure. This
requirement should provide guidance to SB SEFs on the estimates they
should use to comply with the requirements of Core Principle 12.
    Proposed Rule 821(b) also would state in part that the financial
resources of a SB SEF shall be considered to be adequate if the value
of the financial resources exceeds the total amount that would enable
the SB SEF to cover its operating costs for a one year period, as
calculated on a rolling basis. This test would help to ensure that a SB
SEF is in a sufficiently strong financial position to sustain
operations through unpredictable business cycles. As with the first
requirement, in making this calculation (which is required by Section
3D(d)(12)(B) of the Exchange Act), a SB SEF must use reasonable
assumptions and estimates and not overestimate resources or
underestimate expenses, liabilities, and financial exposure. Each of
these requirements would be an ongoing requirement and a SB SEF must
always be in compliance.\243\ The Commission seeks comments in general
regarding all aspects of these financial requirements.
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    \243\ In addition to the requirements of proposed Rule 821, a SB
SEF would be required to submit annual financial reports in
accordance with the requirements discussed in Section XXII of this
release.
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XIX. Core Principle 13--Systems Safeguards

    Section 3D(d)(13)(A) of the Exchange Act (Core Principle 13)
requires that a SB SEF shall establish and maintain a program of risk
analysis and oversight to identify and minimize sources of operations
risk, through the development of appropriate controls and procedures,
and automated systems, that: (1) Are reliable and secure and (2) have
adequate scalable capacity. Additionally, Section 3D(d)(13)(B) of this
Core Principle requires that a SB SEF establish and maintain emergency
procedures, backup facilities, and a plan for disaster recovery that
allow for: (1) Timely recovery and resumption of operations and (2) the
fulfillment of the responsibilities and obligations of the SB SEF.
Further, Section 3D(d)(13)(C) of this Core Principle requires that a SB
SEF shall periodically conduct tests to verify that the backup
resources of the SB SEF are sufficient to ensure continued: (1) Order
processing and trade matching, (2) price reporting, (3) market
surveillance, and (4) maintenance of a comprehensive and accurate audit
trail. The Commission is proposing Rule 822 to implement this Core
Principle.
    The Commission is proposing Rule 822 to provide standards for SB
SEFs with regard to their automated systems' capacity, resiliency, and
security.\244\ These standards are comparable to the standards
applicable to SROs, including national securities exchanges and
clearing agencies, pursuant to the Commission's Automation Review
Policy (``ARP'') standards.\245\ Systems failures can limit access to
quotes or other trading interest, call into question the integrity of
quotes or other trading interest, and prevent market participants from
being able to post quotes or other trading interest, and thereby have a
large impact on market confidence, risk exposure, and market
efficiency. To promote the maintenance of stable and orderly SB swap
markets, the Commission believes that SB SEFs should be required to
meet the ARP capacity, resiliency and security standards.\246\
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    \244\ Proposed Rule 822 is being promulgated under Section
3D(d)(13) of the Exchange Act.
    \245\ See Securities Exchange Act Release Nos. 27445 (Nov. 16,
1989), 54 FR 48703, 48706-48707 (November 24, 1989) (``ARP I
Release'') and 29185 (May 9, 1991), 56 FR 22490 (May 15, 1991)
(``ARP II Release''). See also Rule 301(b)(6) of Regulation ATS, 17
CFR 242.301(b)(6) and Securities Exchange Act Release No. 40760
(Dec. 8, 1998), 63 FR 70844 (December 22, 1998).
    \246\ Because SB SEFs would be an integral part of the market
for SB swaps, and therefore an integral part of the national market
system, the Commission believes that it is appropriate to model a SB
SEF's rules on system safeguards on ARP. Proposed Rule 822 will
impose data maintenance standards on SB SEFs that are comparable to
those imposed by the Commission on national securities exchanges by
applying the ARP standards to them. In addition, nearly identical
rules have been proposed by the Commission for SDRs, also applying
the ARP standards to those entities. See SDR Release, supra note 6.
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    Proposed Rule 822 would require a SB SEF to establish, maintain,
and enforce written policies and procedures designed to ensure that its
systems provide adequate levels of capacity, resiliency, and security;
and submit to the Commission annual reviews of its automated systems,
systems outage notices, and prior notices of planned system changes.
These proposed requirements essentially codify and parallel the ARP
requirements that have been in place for almost twenty years.
Commission staff has found these standards to be effective in
overseeing the capacity, resiliency, and security of major automated
systems in use in the securities markets. These proposed requirements,
as applied to the market for SB swaps, are designed to prevent and
minimize the impact of systems failures that might negatively impact
the stability of this market.

A. Requirements for SB SEFs' Automated Systems

1. Policies and Procedures
    Proposed Rule 822(a)(1) would require a SB SEF to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its systems provide adequate levels of
capacity, resiliency, and security. Such policies and procedures would
require a SB SEF to, at a minimum: (1) Establish reasonable current and
future capacity estimates; (2) conduct periodic capacity stress tests
of critical systems to determine such systems' ability to process
transactions in an accurate, timely, and efficient manner; (3) develop
and implement reasonable procedures to review and keep current its
system development and testing methodology; (4) review the

vulnerability of its systems and data center computer operations to
internal and external threats, physical hazards, and natural disasters;
and (5) establish adequate contingency and disaster recovery plans
which shall include plans to resume trading of SB swaps by the SB SEF
no later than the next business day following a wide-scale disruption.
In developing such contingency and disaster recovery plans, the SB SEF
would be required to take into account: (1) The extent of alternative
trading venues for the SB swaps traded by the SB SEF, including the
number of SB swaps traded on the SB SEF, the market share of the SB
SEF, and the number of participants in its SB SEF; and (2) the
necessity of geographic diversity and diversity of infrastructure
between the SB SEF's primary site and any back-up sites.
    This list of proposed requirements is based on existing ARP
requirements applied to significant-volume ATSs under Rule 301(b)(6) of
Regulation ATS.\247\ In addition, Commission staff has applied these
requirements to SROs and other entities in the securities markets for a
number of years in the context of its ARP inspection program.
---------------------------------------------------------------------------

    \247\ See 17 CFR 242.301(b)(6)(D)(ii).
---------------------------------------------------------------------------

    As a general matter, the Commission preliminarily believes that, if
a SB SEF's policies and procedures satisfy industry best practices
standards, then these policies and procedures would be adequate for
purposes of proposed Rule 822(a)(1).\248\ However, in the event that
industry best practices standards of widely recognized professional
organizations are not consistent with the public interest, protection
of investors, or the maintenance of fair and orderly markets, the
Commission would have flexibility to establish such standards that a SB
SEF would be required to meet to comply with proposed Rule
822(a)(1).\249\
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    \248\ Proposed Rule 822(a)(1) would require a SB SEF to
establish, maintain, and enforce written policies and procedures
reasonably designed to ensure that its systems provide adequate
levels of capacity, resiliency, and security. A SB SEF's policies
and procedures may still meet the requirement to be reasonably
designed to ensure that its systems provide adequate levels of
capacity, resiliency, and security without necessarily being
identical to industry best practices standards. However, generally
speaking, industry best practices standards would provide an
objective, easily identifiable standard.
    \249\ Industry best practices standards currently are
established by organizations such as: the Information Systems Audit
and Control Foundation (``ISACF''); the Federal Financial
Institutions Examination Council's (``FFIEC''); the Institute of
Internal Auditors (``IIA''); and the SANS Institute.
---------------------------------------------------------------------------

    The proposed rule would require a SB SEF to quantify, in
appropriate units of measure, the limits of the SB SEF's capacity to
receive (or collect), process, store, or display the data elements
included within each function, and identify the factors (mechanical,
electronic, or other) that account for the current limitations.\250\
This would make it easier for the Commission to detect any potential
capacity constraints of a SB SEF, which, if left unaddressed, could
compromise the ability of a SB SEF to collect and maintain SB swap
data. A SB SEF's failure to clearly understand and have procedures to
address its capacity limits would increase the likelihood that it would
experience a loss or disruption of system operations.
---------------------------------------------------------------------------

    \250\ See proposed Rule 822(a)(1)(i).
---------------------------------------------------------------------------

2. Objective Review
    Proposed Rule 822(a)(2) would require a SB SEF to submit an
objective review of its systems that support or are integrally related
to the performance of its activities to the Commission, on an annual
basis, within thirty calendar days of completion. This proposed
requirement is critical to help ensure that SB SEFs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities. Proposed Rule 800 would define
``objective review'' as ``an internal or external review, performed by
competent, objective personnel following established procedures and
standards, and containing a risk assessment conducted pursuant to a
review schedule.'' \251\ The proposed definition of ``objective
review'' is based on the standard for the review of automated systems
set forth in the ARP II Release.\252\
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    \251\ Proposed Rule 800 would define ``competent, objective
personnel'' as ``a recognized information technology firm or a
qualified internal department knowledgeable of information
technology systems.'' This proposed definition is based on the
standard for reviewers of automated systems set forth in the ARP II
Release. See ARP II Release, 56 FR 22490, supra note 245. Proposed
Rule 800 would define ``review schedule'' as ``a schedule in which
each element contained in paragraph (a)(1) of Rule 822 would be
assessed at specific, regular intervals.'' This proposed definition
codifies the Commission's policy set forth in the ARP II Release.
See ARP II Release, 56 FR 22490, supra note 245.
    \252\ See ARP II Release, 56 FR 22490, supra note 245.
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    As in the current ARP program, the Commission preliminarily
believes that a reasonable basis for determining that a review is
objective for purposes of proposed Rule 822(a)(2) is if the level of
objectivity of a SB SEF's reviewers complied with standards set by
widely recognized professional organizations.\253\ However, in the
event that industry best practices standards of widely recognized
professional organizations are not consistent with the public interest,
protection of investors, or the maintenance of fair and orderly
markets, the Commission would have flexibility to establish standards
that a SB SEF would be required to meet to comply with proposed Rule
822(a)(2).
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    \253\ Such standards are currently established by organizations
such as the IIA, the Information Systems Audit and Control
Association (``ISACA'') (formerly the Electronic Data Processing
Auditors Association (``EDPAA'')), and the American Institute of
Certified Public Accountants (``AICPA'').
     Proposed Rule 822(a)(2) would require a SB SEF to submit an
objective review of its systems that support or are integrally
related to the performance of its activities to the Commission, on
an annual basis, within thirty calendar days of completion. A SB
SEF's policies and procedures may still meet this requirement
without necessarily being identical to industry best practices
standards. However, generally speaking, industry best practices
standards would provide an objective, easily identifiable standard.
---------------------------------------------------------------------------

    The decision on which type of reviewer, an internal department or
an external firm, should perform the review is a decision for each SB
SEF to make. The Commission preliminarily believes that, as long as the
reviewer has the competence, knowledge, consistency, and objectivity
sufficient to perform the role, the review can be performed by either
recognized information technology firms or by a qualified internal
department knowledgeable of information technology systems.
    Proposed Rule 822(a)(2) would further require that, where the
objective review is performed by an internal department, an objective,
external firm must assess the internal department's objectivity,
competency, and work performance with respect to the review performed
by the internal department. Proposed Rule 822(a)(2) would require that
the external firm issue a report of that review, which the SB SEF must
submit to the Commission on an annual basis, within thirty calendar
days of completion of the review.
    The proposed requirement in proposed Rule 822(a)(2) that a SB SEF
submit an annual objective review to the Commission is drawn from the
ARP II Release.\254\ In addition, the proposed requirement in proposed
Rule 822(a)(2) that, where the objective review is performed by an
internal department, an objective, external firm must assess the
internal department's objectivity, competency, and work performance, is
similarly drawn from the ARP II Release.\255\
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    \254\ See ARP II Release, 56 FR 22490, supra note 245.
    \255\ See id.
---------------------------------------------------------------------------

    The proposed annual review would not be required to address each
element contained in proposed paragraphs (i) through (v) of Rule
822(a)(1) every year.

Rather, using its own risk assessment, a SB SEF's reviewer would review
each element on a ``review schedule,'' as defined in proposed Rule 800,
in which each element would be assessed at specific, regular intervals,
thus facilitating systematic and timely review of each element. This
should provide a reasonable and cost-effective level of assurance that
automated systems of SB SEFs are being adequately developed and managed
with respect to capacity, security, development, and contingency
planning concerns.
    The proposed requirement to submit an objective review within
thirty days of completion assures the Commission will have timely
notice of the information required. The Commission has found through
its experience with the current ARP program for SROs and other entities
in the securities market that an entity generally requires
approximately thirty calendar days after completion of the review to
complete the internal review process necessary to submit an annual
review to the Commission. A shorter timeframe might not provide a SB
SEF with sufficient time to complete its internal review of the
document; a longer timeframe might serve to encourage unnecessary
delays.
3. Material Systems Outages
    Under proposed paragraph (3) of Rule 822(a), a SB SEF would be
required to promptly notify the Commission in writing of material
system outages and any remedial measures that have been implemented or
are contemplated, including: (1) Immediately notifying the Commission
when a material systems outage is detected; (2) immediately notifying
the Commission when remedial measures are selected to address the
material systems outage; (3) immediately notifying the Commission when
the material systems outage is addressed; and (4) submitting to the
Commission within five business days of when the material systems
outage occurred a detailed written description and analysis of the
outage and any remedial measures that have been implemented or are
contemplated.
    This paragraph would codify the procedures followed by SROs and
certain other entities under the Commission's current ARP program with
respect to providing the staff with notification of material system
outages. In particular, proposed paragraph (3) would clarify that the
Commission expects to receive immediate notification that an outage has
been detected, that remedial measures have been selected to address the
outage, and that the outage has been addressed. Proposed paragraph (3)
also would clarify that a SB SEF should submit a detailed written
description and analysis of the outage within five business days of the
occurrence of the outage.
    The Commission preliminarily believes that the proposed rule would
assist the Commission in assuring that a SB SEF has diagnosed and is
taking steps to correct system disruptions, so that systems of the SB
SEF are reasonably equipped to accept and securely maintain transaction
data. The Commission preliminarily believes that requiring a SB SEF to
submit notifications of material system outages to the Commission is
essential to help ensure that the Commission can continue to
effectively oversee the SB SEF.
    Proposed Rule 800 would define ``material systems outage'' as an
unauthorized intrusion into any system, or an event at a SB SEF
involving systems or procedures that results in: (1) A failure to
maintain accurate, time-sequenced records of all orders, quotations,
and transactions that are received by, or originated on, the SB SEF;
(2) a disruption of normal operations, including switchover to back-up
equipment with no possibility of near-term recovery of primary
hardware; (3) a loss of use of any system; (4) a loss of transactions;
(5) excessive back-ups or delays in processing; (6) a loss of ability
to disseminate vital information; (7) a communication of an outage
situation to other external entities; (8) a report or referral of an
event to the SB SEF's Board or senior management; (9) a serious threat
to systems operations even though systems operations were not
disrupted; (10) a queuing of data between system components or queuing
of messages to or from participants of such duration that a
participant's normal service delivery is affected; or (11) a failure to
maintain the integrity of systems that results in the entry of
erroneous or inaccurate inquiries, responses, orders, quotations, other
trading interest, transactions, or other information in the SB SEF or
the securities markets.
    Based on its experience in requiring SROs and other entities to
report material systems outages in the context of the current ARP
program, the Commission preliminarily believes that this proposed
definition is appropriate for SB SEFs. The Commission preliminarily
believes that each of the events listed in paragraphs (1) through (11)
of proposed Rule 800 are significant events that warrant reporting to
the Commission because such material systems outages could negatively
impact the stability of the SB swap market. The application of the
proposed definition is relatively straightforward, and it focuses on
the types of events that the Commission preliminarily believes should
require notification to the Commission under proposed Rule 822(a)(3),
so that the Commission can respond appropriately to the event that
caused the loss or disruption.
    Specifically, the Commission preliminarily believes that proposed
paragraphs (1), (2), (3), (4), and (5) of proposed Rule 800 address
events that cause a significant loss or disruption of normal system
operations sufficient to warrant notification to the Commission. In
addition, the Commission preliminarily believes that proposed paragraph
(6) of proposed Rule 800 addresses a type of event that impairs
transparency or accurate and timely regulatory reporting.
    The Commission also preliminarily believes that proposed paragraphs
(7) and (8) of proposed Rule 800 are appropriate because communications
of an outage to entities outside of the SB SEF or to the SB SEF's Board
or senior management are indicia of a significant system outage
sufficient to warrant notification to the Commission. Specifically,
proposed paragraph (8)'s reference to ``a report or referral of an
event * * *'' seeks to address situations in which a SB SEF might seek
to apply an overly narrow definition of an ``outage situation'' in
proposed paragraph (7), in order to avoid reporting a problem that
nevertheless has a significant impact on the performance of the SB
SEF's systems and therefore warrants reporting to the Commission. For
example, where a SB SEF experiences a slowing, but not a stoppage, of
its ability to accept orders or quotes, and that slowing is
sufficiently significant to have been reported or referred to the SB
SEF's Board or senior management, the Commission preliminarily believes
that this situation would constitute a material system outage under
proposed paragraph (8) that must be reported to the Commission. By
including proposed paragraph (8) in the definition of ``material
systems outage,'' the Commission seeks to ensure that it is informed of
events that most entities subject to current ARP standards would
already understand should be covered under the current program. This
should permit the Commission to effectively monitor the operation of SB
SEF's automated systems. The Commission preliminarily believes that
proposed paragraphs (9) and (10) are appropriate because threats to
system operations and queuing of data are events that may

result in a significant disruption of normal system operations
warranting notification to the Commission.
    Proposed paragraph (11) of proposed Rule 800 covers a failure to
maintain the integrity of systems that results in the entry of
erroneous or inaccurate inquiries, responses, orders, quotations, other
trading interests, transactions, or other information in a SB SEF or to
market participants. This paragraph is designed to address the unique
role of SB SEFs in the SB swaps market. In particular, it is intended
to cover such events as breakdowns in a SB SEF's internal controls that
result in the entry of erroneous orders into the market. For example,
it is possible that a SB SEF could, while in the process of testing its
systems, inadvertently retain ``test'' data in its database. This, in
turn, could result in erroneous reporting of SB swaps to the SB SEF's
participants, registered SDRs, the Commission, other regulators, and
counterparties. Counterparties may become uncertain of their positions,
leading to market disruptions. This, in turn, could erode investor
confidence in the integrity of the SB swaps market, damaging liquidity
and impeding the capital formation process. Accordingly, the Commission
preliminarily believes that this type of breakdown in a SB SEF's
systems controls should be reported to the Commission.
    By including proposed paragraph (11) of proposed Rule 800 in the
definition of ``material systems outage,'' the Commission is seeking to
ensure that it is informed of events that could negatively impact the
integrity of systems that result in the entry of erroneous or
inaccurate transaction data or other information in a SB SEF or the
securities markets. This should permit the Commission to monitor
effectively the operation of each SB SEF's automated systems.
    The definition of material systems outage also includes an
unauthorized intrusion into any system. This includes unauthorized
intrusions by outside parties, insiders, or parties unknown. The
Commission preliminarily believes that including this in the definition
would assist the Commission's review by requiring SB SEFs to notify the
Commission of unauthorized intrusions into systems or networks, and
should permit the Commission to continue to effectively monitor the
operation of SB SEF's automated systems. SB SEFs would need to
immediately report unauthorized intrusions regardless of whether the
intrusions were part of a cyber attack, potential criminal activity,
other unauthorized attempts to retrieve, manipulate or destroy data or
to disrupt or destroy systems or networks, or any other malicious
activity affecting data, systems, or networks. If unauthorized
intrusions were successful in breaching systems or networks, SB SEFs
would need to report these intrusions even if the parties conducting
the unauthorized intrusion were unsuccessful in achieving their
apparent goals (such as the introduction of malware or other means of
disrupting or manipulating data, systems, or networks). SB SEFs would
need to follow up on their initial reports by sending the Commission
updates on any harm to data, systems, or networks as well as any
remedial measures that the SB SEFs are contemplating or undertaking to
address the unauthorized intrusions. SB SEFs, however, would not need
to report unsuccessful attempts at unauthorized intrusions that did not
breach systems or networks.
    The Commission preliminarily believes that the proposed five
business day requirement regarding submission of a written description
of material systems outages is an appropriate time period. In the
Commission's experience with the current ARP program for SROs and other
entities in the securities market, an entity generally requires
approximately five business days after the occurrence of a material
systems outage to gather all the relevant details regarding the scope
and cause of the outage. A shorter timeframe might not provide
sufficient time for the SB SEF to gather all relevant details
surrounding the outage and describe them in a written submission; a
longer timeframe might encourage unnecessary delays.
4. Material Systems Changes
    Under proposed paragraph (4) of Rule 822(a), a SB SEF would be
required to notify the Commission in writing at least thirty calendar
days before implementation of any planned material systems changes.
Proposed Rule 800 would define ``material systems change'' as ``a
change to automated systems that: (1) Significantly affects existing
capacity or security; (2) in itself, raises significant capacity or
security issues, even if it does not affect other existing systems; (3)
relies upon substantially new or different technology; (4) is designed
to provide a new service or function; or (5) otherwise significantly
affects the operations of the security-based swap execution facility.''
    Based on its experience in requiring SROs and other entities to
report material systems changes in the context of the current ARP
program, the Commission preliminarily believes that this proposed
definition is appropriate for SB SEFs. Each of the events listed in
paragraphs (1) through (5) are significant events that warrant
reporting to the Commission because any of those events can lead to a
material systems outage that could negatively affect the stability of
the SB swap market. The application of the proposed definition is
relatively straightforward, and it focuses on the types of events that
should require notification to the Commission under proposed Rule
822(a)(4). Specifically, the proposed paragraphs (1) through (4) are
events that concern the adequacy of capacity estimates, testing, and
security measures taken by a SB SEF, and thus are sufficiently
significant to warrant notification to the Commission. Proposed
paragraph (5) covering a change that ``otherwise significantly affects
the operations of the security-based swap execution facility'' is more
open-ended in order to require notification of other major systems
changes. Examples of changes that fall within proposed paragraph (5)
include, but are not limited to: Major systems architectural changes;
reconfigurations of systems that cause a variance greater than five
percent in throughput or storage; \256\ introduction of new business
functions or services; material changes in systems; changes to external
interfaces; changes that could increase susceptibility to major
outages; changes that could increase risks to data security; changes
that were, or will be, reported to or referred to a SB SEF's Board or
senior management; and changes that may require allocation or use of
significant resources.
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    \256\ The Commission has identified the five percent threshold
as triggering the definition of ``material systems change'' in
proposed Rule 800 because, based on experience in administrating the
ARP program in the equities markets for almost twenty years, it
believes that reconfigurations that exceed five percent in
throughput or storage typically have the greatest potential to cause
significant disruptions to automated systems.
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    The Commission preliminarily believes that the proposed thirty
calendar day requirement regarding pre-implementation written
notification to the Commission of planned material systems changes is
an appropriate time period. The Commission has found through its
experience with the current ARP program that this amount of time is
necessary for the Commission staff to evaluate the issues raised by a
planned material systems change. A shorter timeframe might not provide
sufficient time for the Commission staff to analyze the issues raised
by the systems change; a longer timeframe might unnecessarily delay the
covered entity in implementing the change.

    The Commission requests comment on all aspects of proposed Rule
822(a). Should the Commission consider imposing other requirements or
standards? Should any of the proposed requirements be eliminated or
refined? If so, please explain your reasoning. Would it be appropriate
to impose the proposed systems safeguards requirements on SB SEFs only
after they account for a certain percentage of the total volume of
transactions, as measured by the aggregate total volume received by all
SB SEFs? If so, what is the appropriate volume level? Five percent? Ten
percent? Please be specific. In addition, the Commission is mindful of
the potential costs of a SB SEF's compliance with the proposed systems
safeguards and seeks commenters' views on whether there are ways to
minimize those costs while assuring adequate systems safeguards.
    Would it be appropriate to delay implementing the proposed systems
safeguards requirements on SB SEFs until after a specified period of
time, such as one year after Commission approval of the SB SEF's
registration? If so, is one year an appropriate time period? If not,
what would be an appropriate time period for any delay and why? Would
it be appropriate to delay implementation of systems safeguard
requirements until either a specified time period after the
Commission's approval of the SB SEF's registration and/or a particular
volume threshold such as those discussed above is reached? If so, why?
If not, why not? Are there other circumstances in which a SB SEF should
be excepted from systems safeguards requirements? If so, commenters
should provide a rationale.
    Are there factors specific to SB swap transactions that would make
applying a system that is traditionally used in the equity markets
inappropriate? What is the likely impact of these requirements on the
SB swaps market, including the impact on the incentives and behaviors
of SB SEFs, the willingness of persons to register as SB SEFs, and the
technologies used for maintaining SB swap data at the SB SEF?
    Should the Commission require a SB SEF's contingency and disaster
recovery plans (required in proposed paragraph (a)(1)(v) of proposed
Rule 822) to be tested periodically to assure their effectiveness and
adequacy? \257\ Should the Commission require such contingency and
disaster recovery plans to cover at a minimum: Preparation for
contingencies through such devices as appropriate remote and on-site
hardware back-up and periodic duplication and off-site storage of data
files? Off-site storage of up-to-date, duplicative software, files and
critical forms and supplies needed for processing operations, including
a geographically diverse back-up site that does not rely on same
infrastructure components (e.g., transportation, telecommunications,
water supply, and electric power) as the SB SEF primary operations
center? Immediate availability of software modifications, detailed
procedures, organizational charts, job descriptions, and personnel for
the conduct of operations under a variety of possible contingencies?
Emergency mechanisms for establishing and maintaining communications
with participants, regulators and other entities involved? \258\
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    \257\ This requirement would be similar to what is required of
clearing agencies and proposed to be required of SDRs. See Exchange
Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 20, 1980)
and SDR Release, supra note 6.
    \258\ These requirements are similar to requirements related to
disaster recovery plans of clearing agencies and proposed to be
required of SDRs. See id. and SDR release, supra note 6. The
requirement for geographical diversity is currently applicable to
securities firms. See Exchange Act Release No. 47638 (April 7,
2003), 68 FR 17809 (April 11, 2003) (the ``BCP Whitepaper'').
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    Should the Commission require a SB SEF's contingency and disaster
recovery plans (required in proposed paragraph (a)(1)(v) of proposed
Rule 822) to include resources, emergency procedures, and backup
facilities sufficient to enable timely recovery and resumption of its
operations following any disruption of its operations? If so, what
should the recovery time objective be? Should the SB SEF's contingency
and disaster plans and resources generally enable resumption of the SB
SEF's operations during the next business day following the disruption?
    Should the Commission require a SB SEF, to the extent practicable,
coordinate its contingency and disaster recovery plans (required in
proposed paragraph (a)(1)(v) of proposed Rule 822) with those of the
SDRs, clearing agencies, SB swap dealers, and major SB swap
participants, and with those of regulators in a manner adequate to
enable effective resumption of the SB SEF's operations following a
disruption causing activation of the SB SEF's contingency and disaster
recovery plans, including participating in periodic, synchronized
testing of its contingency and disaster recovery plans?
    Should the Commission require a SB SEF ensure that its contingency
and disaster recovery plans (required in proposed paragraph (a)(1)(v)
of proposed Rule 822) take into account the business continuity-
disaster recovery plans of its telecommunications, power, water, and
other essential service providers?
    Should the Commission require a SB SEF to identify the potential
risks that can arise as a result of interoperability and/or
interconnectivity with other market infrastructures and venues from
which data can be submitted to the SB SEF (such as exchanges, SDRs,
clearing agencies, SB swap dealers, and major SB swap participants) and
service providers and how the SB SEF mitigates such risks?
    Should the Commission require a SB SEF to abide by substantive
requirements (in addition to, or in place of, the policies and
procedures approach of proposed Rule 822(a)(1)), such as (i) having
robust system controls and safeguards to protect the data from loss and
information leakage, (ii) having high-quality safeguards and controls
regarding the transmission, handling, and protection of data to ensure
the accuracy, integrity, and confidentiality of the trade information
recorded in the SB SEF, or (iii) having reliable and secure systems and
having adequate, scalable capacity?
    Should the Commission require a SB SEF to establish, maintain, and
enforce written policies and procedures reasonably designed to ensure
that the transaction data that it accepts is from the entity it
purports to be from, such as requiring robust passwords?
    Are the time periods specified in proposed Rule 822(a)(2) through
(4) with respect to submission of annual reviews and written notices of
material system outages and material systems changes the correct time
periods to use? Should any of the proposed time periods be shortened or
lengthened? Should the time periods be replaced with less specific
requirements, such as ``promptly'' or ``timely''? If so, please explain
your reasoning.
    Should the Commission require the notification required by proposed
Rule 822(a)(4) to be sufficiently detailed to explain the new system
development process, the new configuration of the system, its
relationship to other systems, the timeframes or schedule for
installation, any testing performed or planned, and an explanation on
the impact of the change on the SB SEF's capacity estimates,
contingency protocols and vulnerability estimates? \259\
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    \259\ See ARP II Release, 56 FR 22490, supra note 245.
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    Are there specific provisions in the proposed definitions that
should be eliminated or refined? Are there some events which should be
included in the

definitions of ``material systems outage'' and ``material systems
change'' that are not, or events that should not be included in these
definitions but are? If so, please explain your reasoning.
    Are the definitions ``objective review'' and ``competent, objective
personnel'' parallel to the requirements for SROs and other entities in
the securities markets in the context of the current ARP program?
Should the objective review required in proposed Rule 822(a)(2) be done
on a regular, periodic basis, rather than on an annual basis?
    The proposed requirement for an objective review focuses on a
review of the SB SEF's automated systems that support or are integrally
related to the performance of its activities. Is this an appropriate
scope, or should other aspects of the SB SEF's operations be included?
If so, which? In addition is this scope sufficiently understandable or
should it be further defined?
    Is the requirement in proposed Rule 822(a)(2) for an objective,
external firm to assess the objectivity, competency, and work
performance of an internal department that performed an objective
review necessary or appropriate? If the objective review is done by an
internal department, should the Commission require that the objective
review be done by a department or persons other than those responsible
for the development or operation of the systems being tested?
    Do the proposed requirements for SB SEFs establish sufficient
criteria against which an evaluation can be performed by a third party?
If not, should the Commission impose a specific framework for the SB
SEFs to use in establishing automated systems and related controls? If
so, what would the critical components of the framework include? Are
existing frameworks available that are suitable for this purpose and,
if so, which ones would be considered appropriate?
    Should the Commission require the use of a specific framework by
outside or inside parties for evaluating whether SB SEFs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities? If so, what would the critical
components of the framework include? Are existing frameworks available
that are suitable for this purpose and, if so, which ones would be
considered appropriate?
    For reviews performed by internal audit departments, are the
requirements for an external firm involvement appropriate? If not, what
improvements could be made to promote appropriate reviews by external
firms in these circumstances?

B. Electronic Filing

    Proposed Rule 822(b) would require that every notification, review,
or description and analysis required to be submitted to the Commission
under proposed Rule 822 be submitted in an appropriate electronic
format to the Office of Market Operations at the Division of Trading
and Markets at the Commission's principal office in Washington, DC.
This proposed requirement is intended to make proposed Rule 822
consistent with electronic-reporting standards set forth in other
Commission rules under the Exchange Act, such as Rule 17a--25
(Electronic Submission of Securities Transaction Information by
Exchange Members, Brokers, and Dealers) \260\ and Rule 19b-4 (Filings
with respect to Proposed Rule Changes by Self-regulatory
Organizations).\261\
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    \260\ 17 CFR 240.17a-25.
    \261\ 17 CFR 240.19b-4.
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    The Commission preliminarily believes that the proposed provision
would benefit SB SEFs by automating the process by which they submit
notifications, reviews, and descriptions and analyses under proposed
Rule 822 to the Commission. The Commission currently receives this type
of information from SROs and other entities in the securities market in
electronic format. Moreover, as noted above, this provision is intended
to be consistent with other Commission rules.
    Proposed Rule 822(b) would require submission of notifications,
reviews, and descriptions and analyses in an ``appropriate electronic
format.'' The Commission anticipates that, if the provision is adopted,
the staff would work with SB SEFs to determine appropriate electronic
formats that could be used.
    The Commission requests comment on all aspects of proposed Rule
822(b) as well as on the following specific issues. Are there specific
provisions in proposed Rule 822(b) that should be eliminated or
refined? If so, please explain your reasoning.
    What is the likely impact of this requirement on the SB swap
market, including the impact on the incentives and behaviors of SB
SEFs, the willingness of persons to register as SB SEFs, and the
technologies used for reporting information to the Commission?

C. Confidential Treatment

    Proposed Rule 822(c) would provide that a person who submits a
notification, review, or description and analysis pursuant to this Rule
for which he or she seeks confidential treatment should clearly mark
each page or segregable portion of each page with the words
``Confidential Treatment Requested.'' Proposed Rule 822(c) would state
that ``[a] notification, review, or description and analysis submitted
pursuant to this [Rule] will be accorded confidential treatment to the
extent permitted by law.''
    The Commission would use the information collected under proposed
Rule 822 to evaluate whether SB SEFs are reasonably equipped to handle