require the SDR to also provide market participants with the option of
using its services separately.\74\ For instance, if an SDR or its
affiliate

provides an ancillary matching and confirmation service, then the SDR
would be prohibited from requiring a market participant to use and pay
for that matching and confirmation service as a condition of using the
SDR's data collection service. In evaluating the fairness and
reasonableness of fees that an SDR charges for bundled and unbundled
services, the Commission would take into consideration the cost to the
SDR of making those services available on a bundled or unbundled basis,
as the case may be.
---------------------------------------------------------------------------

    \74\ See also CPSS-IOSCO, supra note 55 (``To the extent a
[trade repository] provides complementary post-trade processing
services, these should be available independently from its
recordkeeping function so that users can selectively utilise the
services they require from the suite of services a [trade
repository] may offer.'').
---------------------------------------------------------------------------

    Third, proposed Rule 13n-4(c)(1)(iii) would require each SDR to
establish, monitor on an ongoing basis, and enforce clearly stated
objective criteria that would permit fair, open, and not unreasonably
discriminatory access to services offered and data maintained by the
SDR as well as fair, open, and not unreasonably discriminatory
participation by market participants, market infrastructures, venues
from which data can be submitted to the SDR, and third party service
providers that seek to connect to or link with the SDR. The Commission
is concerned, among other things, that an SDR, controlled or influenced
by a market participant, may limit the level of access to the services
offered or data maintained by the SDR as a means to impede competition
from other market participants or third party service providers. To
satisfy the requirements of this proposed rule, an SDR should seek to
ensure that its practices and procedures do not stifle innovation and
competition in the provision of post-trade processing services. The
Commission concurs with the CPSS-IOSCO consultative report's
recommendation that ``[r]equirements that limit access and
participation on grounds other than risks should be avoided'' and that
``[d]enials of access should only be based on risk-related criteria''
\75\ (e.g., risks related to the security or functioning of the SDR).
Moreover, ``[m]arket infrastructures and service providers that may or
may not offer potentially competing services should not be subject to
anti-competitive practices such as product tying, contracts with non-
compete and/or exclusivity clauses, overly restrictive terms of use and
anti-competitive price discrimination.'' \76\
---------------------------------------------------------------------------

    \75\ See CPSS-IOSCO, supra note 55.
    \76\ Id.
---------------------------------------------------------------------------

    Finally, proposed Rule 13n-4(c)(1)(iv) would require each SDR to
establish, maintain, and enforce written policies and procedures
reasonably designed to review any prohibition or limitation of any
person with respect to access to services offered, directly or
indirectly, or data maintained by the SDR and to grant such person
access to such services or data if such person has been discriminated
against unfairly. The Commission preliminarily believes that for any
such policies and procedures to be reasonable, at a minimum, those
involved in the decision-making process of prohibiting or limiting a
person from access to an SDR's services or data cannot be involved in
the review of whether the prohibition or limitation was appropriate.
Otherwise, the purpose of the review process would be undermined. An
SDR should consider whether its internal review process is best
delegated to the SDR's board of directors, a body performing a function
similar to the board of directors (collectively, ``board''), or an
executive committee.

Request for Comment

    The Commission requests comment on the following specific issues:
     Are the Commission's proposed rules implementing the first
core principle appropriate and sufficiently clear? If not, why not and
what would be better alternatives?
     Is the Commission's proposed definition of ``market
participant'' appropriate? If not, is it over-inclusive or under-
inclusive and how should it be defined?
     Would the proposed rules relating to fees provide
sufficient flexibility to SDRs such that they can operate in a
commercially viable manner?
     Besides an SDR's costs of providing its services, what
other factors should the Commission consider in determining whether the
SDR's fees, dues, other charges, rebates, or discounts for such
services are fair and reasonable?
     Are there circumstances in which it would be fair or
reasonable for an SDR to charge a reporting or non-reporting
counterparty to an SBS a fee or require that a counterparty invest in
certain technologies to satisfy the SDR that the SBS data submitted to
the SDR is accurate? Under what circumstances and for what purposes
might allowing SDRs to charge higher fees or requiring counterparties
to invest in certain technologies be appropriate?
     Is the Commission's proposed rule requiring an SDR's fees
to be fair, reasonable, and non-discriminatory appropriate and
sufficiently clear? If not, why not and what would be a better
alternative?
     Are there circumstances in which it would be fair and
reasonable for an SDR to charge a counterparty to an SBS a fee to
satisfy itself that the SBS data submitted to the SDR by the other
counterparty to the SBS is accurate?
     In what instances would an SDR differentiate among its
users with respect to fees, dues, other charges, discounts, and
rebates? Should any of those instances be explicitly prohibited or
restricted?
     Are there any other requirements that the Commission
should impose on an SDR that would promote competition?
     Is the Commission's proposed rule requiring an SDR to
permit market participants to access specific SDR services separately
appropriate and sufficiently clear? If not, why not?
     Are there instances in which permitting an SDR to offer
bundled services that are not provided separately would be better for
market participants or the SBS market as a whole? For example, would
bundling certain services improve data quality or promote efficiency?
If so, what services should be permitted to be bundled?
     Are there any other factors not mentioned that the
Commission should take into consideration with respect to requiring the
unbundling of services and fees?
     Should the Commission require an SDR to notify the
Commission about the outcome of the SDR's internal review of any
prohibition or limitation of access to its services or data? If so,
should the Commission specify a timeframe in which an SDR must notify
the Commission? What should the timeframe be?
     Are the Commission's proposed rules regarding an SDR's
criteria relating to access to services and data and participation
appropriate and sufficiently clear? If not, why not and what would be a
better alternative?
     Should the Commission prescribe specific criteria for
fair, open, and not unreasonably discriminatory access and
participation? If so, what should the criteria be?
     In what instances (besides risk-related reasons) would it
be reasonable for an SDR to deny access to its services and data?
     Is the Commission's proposed rule requiring an SDR to
review its denials of access appropriate and sufficiently clear? If
not, why not and what would be a better alternative?
     Are there any measures that the Commission can require
that would result in a more meaningful internal review process? For
example, should the Commission explicitly require that the board review
all denials of access? If so, within what timeframe should the review
be completed?

     Should the Commission require an SDR to promptly file
notice with the Commission if the SDR, in its capacity as an SDR rather
than a SIP, prohibits or limits any person's access to services offered
or data maintained by the SDR? If not, why not and what would be a
better approach?
     What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     How might the evolution of the SBS market over time affect
SDRs or impact the Commission's proposed rule?
     What is the likely impact of the Commission's proposed
rule on the development and use of different technologies for reporting
SBS transaction information to SDRs and for accessing the services
offered and data maintained by SDRs?

b. Second Core Principle: Governance Arrangements

    To implement the second core principle, proposed Rule 13n-4(c)(2)
would require each SDR to establish governance arrangements that are
well defined and include a clear organizational structure with
effective internal controls. The proposed rule would also require an
SDR's governance arrangements to provide for fair representation of
market participants.\77\ This requirement is similar to requirements
imposed on exchanges.\78\ Additionally, an SDR would be required to
provide representatives of market participants, including end-
users,\79\ who are on the board with the opportunity to participate in
the process for nominating directors and with the right to petition for
alternative candidates.\80\ The Commission notes that directors of an
SDR owe a fiduciary duty to the SDR and all of its shareholders, and
that the board as a whole is ultimately responsible for overseeing the
SDR's compliance with the SDR's statutory obligations.
---------------------------------------------------------------------------

    \77\ Proposed Rule 13n-4(c)(2)(ii).
    \78\ Exchange Act Section 6(b)(3) 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. See 15 U.S.C. 78f(b)(3).
    \79\ The term ``end-user'' would be defined as any counterparty
that is described in Exchange Act Section 3C(g)(1) and the rules and
regulations thereunder. Proposed Rule 13n-4(a)(6).
    \80\ Proposed Rule 13n-4(c)(2)(iii).
---------------------------------------------------------------------------

    The proposed rule would further require each SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that the SDR's senior management and each member of
the board or committee that has the authority to act on behalf of the
board possess requisite skills and expertise to fulfill their
responsibilities in the management and governance of the SDR, to have a
clear understanding of their responsibilities, and to exercise sound
judgment about the SDR's affairs.\81\ This proposed requirement is
based on a recommendation in the CPSS-IOSCO consultative report.\82\
Given an SDR's unique role in an SBS market, the Commission
preliminarily believes that it is particularly important that those who
are managing and overseeing an SDR's activities are qualified to do so.
An SDR's failure to comply with its statutory obligations, for example,
could impact the SBS market as a whole.
---------------------------------------------------------------------------

    \81\ Proposed Rule 13-4(c)(2)(iv).
    \82\ See CPSS-IOSCO, supra note 55.
---------------------------------------------------------------------------

    As part of its consideration of governance issues as they pertain
to SDRs, the Commission is considering whether potential conflicts
between commercial incentives of owners of an SDR and statutory
objectives would warrant prescriptive rules relating to governance,
particularly in light of the Commission's general oversight authority
and the other specific rules proposed in this release intended to
minimize conflicts and ensure that SDRs meet core principles.\83\ As
discussed further below, the owners of an SDR may have an interest in
maximizing the potential commercial value of the information reported
to the SDR, which depends on the extent to which the SDR and its
affiliates are permitted to use such information for commercial
purposes. The Commission is not at this time proposing to preclude an
SDR or its affiliates from making commercial use of the transaction
data, e.g., by developing analytical reports or tools that are derived
from aggregate transaction reports. This commercial interest may
conflict with the statutory objective of protecting data privacy and
providing for fair and open access to the data maintained by the SDR.
For example, an SDR might attempt to restrict access to parties who
would seek to use the data for their own commercial purposes.
---------------------------------------------------------------------------

    \83\ See, e.g., proposed Rule 13n-4(c)(1) (implementing core
principle relating to market access to SDRs' services and data),
supra Section III.D.2.a; proposed Rule 13n-4(c)(3) (implementing
core principle relating to conflicts of interest), infra Section
III.D.2.c; and proposed Rule 13n-5 (requiring an SDR to accept all
SBSs in a given asset class if it accepts any SBS in that asset
class), infra Section III.E.2.a. See also Item 32 of proposed Form
SDR (requiring disclosure of instances in which an SDR has
prohibited or limited a person with respect to access to the SDR's
services or data).
---------------------------------------------------------------------------

    In order to address this issue, the Commission could choose to
prescribe minimum requirements pertaining to board composition or
impose ownership restrictions. For example, the Commission could
require each SDR to establish a governance arrangement with a certain
percentage of independent directors \84\ (e.g., majority of independent
directors, 35% independent directors) on its board and any committee
that has the delegated authority to act on behalf of the board so as
not to undermine the effect of the former requirement. The Commission
could also require each SDR to establish a nominating committee that is
composed of a certain percentage of independent directors (e.g.,
majority or solely composed of independent directors). Additionally,
the Commission could require each SDR to establish governance
arrangements that would restrict any SDR participant and its related
persons or any person and its related persons \85\ from (1)
beneficially owning,\86\ directly or indirectly, any

interest in the SDR that exceeds a certain percentage (e.g., 20 percent
for any SDR participant and its related persons, 40 percent for any
person and its related persons) of any class of securities, or other
ownership interest, entitled to vote of such SDR, or (2) directly or
indirectly voting, causing the voting of, or giving any consent or
proxy with respect to the voting of, any interest in the SDR that
exceeds a certain percentage (e.g., 20 percent) of the voting power of
any class of securities or other ownership interest of such SDR. The
Commission recently has proposed similar requirements for SBS clearing
agencies and SB SEFs, which pose a different set of competing
interests.\87\
---------------------------------------------------------------------------

    \84\ The term ``independent director'' may generally be defined
as a director who has no material relationship with the SDR, any
affiliate of the SDR, an SDR participant, or any affiliate of an SDR
participant. The term ``material relationship'' may be defined as a
relationship, whether compensatory or otherwise, that reasonably
could affect the independent judgment or decision-making of the
director. The term ``participant'' when used with respect to an SDR
may be defined as any person who uses an SDR's services. Such term
would not include a person whose only use of an SDR is through
another person who is a participant.
    \85\ The term ``related person'' may be defined as (i) any
affiliate of an SDR participant; (ii) any person associated with an
SDR participant; (iii) any immediate family member of an SDR
participant who is a natural person, or any immediate family member
of the spouse of such person, who, in each case, has the same home
as the SDR participant, or who is a director or officer of the SDR,
or any of its parents or subsidiaries; or (iv) any immediate family
member of a person associated with an SDR participant who is a
natural person, or any immediate family member of the spouse of such
person, who, in each case, has the same home as the person
associated with the SDR participant or who is a director or officer
of the SDR, or any of its parents or subsidiaries. The term
``immediate family member'' may be defined as a person's spouse,
parents, children, and siblings, whether by blood, marriage, or
adoption, or anyone residing in such person's home.
    \86\ The term ``beneficial ownership'' (including the terms
``beneficially owns'' or any variation thereof) may have the same
meaning, with respect to any security or other ownership interest,
as set forth in Exchange Act Rule 13d-3(a), as if such security or
other ownership interest were a voting equity security registered
under Exchange Act Section 12; provided that to the extent any
person is a member of a group within the meaning of Exchange Act
Section 13(d)(3), such person shall not be deemed to beneficially
own such security or other ownership interest for purposes of this
section, unless such person has the power to direct the vote of such
security or other ownership interest.
    \87\ See Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR
65882 (Oct. 26, 2010).
---------------------------------------------------------------------------

Request for Comment

     Should the Commission's proposed rule regarding fair
representation of market participants include fair representation of
others (e.g., public representation)? What are the advantages and
disadvantages of including others?
     What requirements, if any, should be in place with respect
to the duties owed by the board to mitigate tensions between commercial
interests and statutory goals? What types of tensions might exist and
how do they compare in severity and consequences to those that exist in
clearing agencies or exchanges?
     Is the proposed definition of ``end-user'' appropriate and
sufficiently clear? If not, why not and how should it be defined?
     Should end-users or any other group be given guaranteed
rights of participation in an SDR's governance? Alternatively, should
the Commission require an SDR to establish governance arrangements
whereby certain market participants, including end-users, may consult
with the board on matters of concern?
     Is requiring an SDR's management to meet certain minimum
standards appropriate? If not, what would be a better alternative?
     Is requiring the members of an SDR's board or committee(s)
to meet certain minimum standards appropriate? Does the answer depend
upon whether the Commission requires that a certain percentage of the
SDR's board be independent? If so, in what way? Would minimum standards
have a significant effect on the experience and efficiency of an SDR's
board?
     What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule encourage or impede
competition and the establishment of a greater number of SDRs?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare with the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     How might the evolution of the SBS market over time affect
SDRs or impact the Commission's proposed rule?
     Should the Commission require an SDR to have independent
directors on its board and board committees? If not, why not and what
would be a better alternative to improve governance and mitigate any
tensions between commercial interests and statutory goals? If so, what
should be the required composition of the board and each board
committee? How should the terms ``independent director'' and ``related
person'' be defined? Should the Commission rely on definitions from
existing rules (e.g., Exchange Act Rule 10A-3(b)(1)(ii)(A) or
Instruction 1 to Item 404(a) of Regulation S-K)?
     Would requiring the board and each board committee to be
composed of at least 35% independent directors improve governance of
the SDR or effectively address concerns pertaining to conflicting
interests of SDR owners? What potential benefits or drawbacks might
result from requiring at least 35% of an SDR's board and each board
committee to be independent directors? Would 35% be sufficient to give
independent directors a meaningful voice within the board and board
committees? If not, would a higher or lower level be appropriate?
     Should the Commission require that a majority of an SDR's
board and each board committee be independent directors? What potential
benefits or drawbacks might result from such a requirement? Would a
majority independent board be likely to enhance an SDR's management of
any tensions between commercial interests and statutory goals or to
enhance its compliance with the proposed rules? Would a majority
independent board be necessary to ensure that an SDR appropriately
manages any tensions between commercial interests and statutory goals?
     Should there be a minimum requirement on the number of
independent directors on the board or each board committee? If so, what
should the minimum requirement be and why? For example, would a minimum
requirement of two independent directors be sufficient?
     How are independent directors likely to affect the
activities of the SDR? What are their incentives to assure open and
fair access to the services offered and data maintained by the SDR? Do
independent directors have any conflicts of interest that would affect
their ability to facilitate this objective?
     Would participant owners of an SDR be able to exercise
undue influence over an SDR even if at least 35% of the board consists
of independent directors? Would the requirement of at least 35%
independent board effectively insulate an SDR from undue influence by
its participant owners?
     Would participant owners of an SDR be able to exercise
undue influence over an SDR even if the majority of the board consists
of independent directors? Would the requirement of a majority
independent board effectively insulate an SDR from undue influence by
its participant owners?
     Should the Commission require each SDR to establish a
nominating committee? If not, why not and what would be a better
approach? If so, what should be the required composition of the
nominating committee? Would 51 percent, 100 percent, or some other
percentage be sufficient to avoid undue influence by participants? What
is the potential impact of requiring the nominating committee to be
composed of a majority of independent directors? What is the potential
impact of requiring the nominating committee to be solely composed of
independent directors? What is the likely impact of requiring the
nominating committee to be composed of another percentage of
independent directors? Should the Commission require that all or a
majority of the nominating committee be independent even if it does not
establish requirements for independent directors on an SDR's board? Why
or why not? What are the benefits or drawbacks of composition
requirements directed specifically to an SDR's nominating committee?
     Should the Commission require an SDR to establish any
other committee? If so, what would be the responsibilities of such
committee?

     Should the Commission impose any ownership and voting
limitations on SDR participants and others? If not, why not and what
would be a better alternative to minimize any tensions between
commercial interests and statutory goals? If so, what should the
required ownership and voting limitations be? For example, would 20%
ownership and voting limitations on an SDR participant and its related
persons be sufficient to limit the ability of a market participant or a
group of participants from exercising undue influence or control over
the governance of the SDR? Should the 20% limitations be higher or
lower given the existing concentration of the industry in a small
number of large dealers? Would a 40% ownership limitation for any
person and its related persons be sufficient to limit anyone from
exercising undue influence or control over the governance of the SDR?
Should the 40% ownership limitation be higher or lower given the
existing concentration of the industry in a small number of large
dealers?
     Would requirements related to the governance arrangements
(i.e., independent directors, nominating committee) of an SDR be more
or less effective than ownership or voting limitations at addressing
any tensions between commercial interests and statutory goals? Could
restrictions regarding the governance arrangements of an SDR, on their
own, be sufficient to effectively address concerns pertaining to undue
influence (assuming that such restrictions are necessary for this
purpose)? Would it be appropriate or necessary to require both
governance arrangements and ownership or voting limitations in order to
effectively address these concerns?
     If the Commission were to require ownership and voting
interest limitations, should the Commission permit an SDR's board to
waive the limitations for a person who is not an SDR participant and
its related persons provided that certain conditions are met? If so,
under what conditions (e.g., waiver is consistent with the SDR's
statutory obligations, waiver would not impair the Commission's ability
to enforce the Federal securities laws and the rules and regulations
thereunder, such person and its related persons can comply with the
Federal securities laws and the rules and regulations thereunder, such
person and its related persons irrevocably submit to the jurisdiction
of the United States federal courts and Commission, such person's books
and records related to an SDR's activities would be subject at all
times to the Commission's inspection and examination, the Commission
would have access to such person's books and records at all times)?
Should the waiver be subject to the Commission's review?
     If the Commission were to impose ownership and voting
interest limitations, should limitations be phased in for SDRs to
provide a grace period for those entities that would not meet the
limits at the outset, but that could potentially meet them at a later
date, e.g., one year after the registration of an SDR with the
Commission?
     If the Commission were to impose ownership and voting
interest limitations, should the Commission specifically require
remediation by any SDR when any person and its related persons exceed
the ownership or voting limitations? For example, should the Commission
explicitly require that an SDR's policies and procedures provide a
mechanism to divest any interest owned or not give effect to any voting
interest held by any person and its related persons in excess of the
proposed limitations?
     Are there other methods for mitigating any tensions
between commercial interests and statutory goals without placing any
voting and ownership limitations?
     Are there potential ways to more narrowly target voting
and ownership limitations while effectively mitigating any tensions
between commercial interests and statutory goals?
     How do potential tensions between commercial interests and
statutory goals for SDRs differ from tensions for clearing agencies and
SEFs? Is there a qualitative difference? Are potential tensions more or
less attenuated for SDRs?
     How are potential tensions between commercial interests
and statutory goals for SDRs similar to potential tensions for clearing
agencies and SEFs? Would such similarities warrant similar restrictions
regarding their governance arrangements and/or voting and ownership
limitations?
     Are there any other restrictions or measures that the
Commission should impose on SDRs to improve governance and mitigate any
tensions between commercial interests and statutory goals at SDRs?
     Is it important that the Commission and the CFTC adopt
compatible provisions regarding governance for SDRs? To what degree are
SDRs registered with the Commission also likely to register as swap
data repositories with the CFTC? Would incompatible or conflicting
governance provisions provide significant difficulties for SDRs?
c. Third Core Principle: Rules and Procedures for Minimizing and
Resolving Conflicts of Interest
    As mentioned above, each SDR is statutorily required to establish
and enforce written policies and procedures reasonably designed to
minimize conflicts of interest in the SDR's decisionmaking process and
to establish a process for resolving any such conflicts of
interest.\88\ Based on information provided by industry representatives
regarding how SDRs will likely operate, the Commission preliminarily
believes that a small number of dealers could control SDRs, which may
require SDR owners to balance competing interests.\89\ Owners of an SDR
could derive greater revenues from their non-repository activities in
the SBS market than they would from sharing in the profits of the SDR
in which they hold a financial interest. In addition, there may be a
tension between an SDR's statutory obligations (e.g., maintaining the
privacy of data reported to the SDR) and its own commercial interests
or those of its owners.\90\
---------------------------------------------------------------------------

    \88\ See Public Law 111-203, Sec.  763(i) (adding Exchange Act
Section 13(n)(7)(C)).
    \89\ See Office of the Comptroller of the Currency, Quarterly
Report on Bank Trading and Derivatives Activities, First Quarter
2010 (``Derivatives activity in the U.S. banking system continues to
be dominated by a small group of large financial institutions. Five
large commercial banks represent 97% of the total banking industry
notional amounts * * *.'').
    \90\ See, e.g., CPSS-IOSCO consultative report, supra note 55
(noting the conflicts of interest ``between the unique public role
of the [SDR] and its own commercial interests particularly if the
[SDR] offers services other than recordkeeping or between commercial
interests relating to different participants and linked market
infrastructures and service providers'').
---------------------------------------------------------------------------

    A few entities that presently provide or anticipate providing
repository services have identified conflicts of interest that could
arise at an SDR. First, owners of an SDR could have commercial
incentives to exert undue influence to control the level of access to
the services offered and data maintained by the SDR and to implement
policies and procedures that would further their self-interests to the
detriment of others.\91\ Specifically, owners of an SDR could exert
their influence and control to prohibit or limit access to the services
offered and data maintained by the SDR in order to

impede competition.\92\ Second, an SDR could favor certain market
participants over others with respect to the SDR's services and pricing
for such services.\93\ Third, an SDR could require that services be
purchased on a ``bundled'' basis, as discussed above.\94\ Finally, an
SDR or a person associated with the SDR could misuse or misappropriate
data reported to the SDR for financial gain.\95\ As one repository
noted, ``SDR data is extremely valuable and could be sold either stand
alone or enhanced with other market data and analysis. The use of this
data in this matter would present competitive problems'' as well as
conflicts of interest issues.\96\ Because these conflicts have been
identified by only a few potential SDRs, the Commission recognizes that
this information may not reflect all business models for SDRs. The
Commission invites comment on this issue.
---------------------------------------------------------------------------

    \91\ See, e.g., Reval, Responses to the CFTC's Questions on the
SDR Requirements (available at<EMAIL_ADDRESS>
(stating that an SDR with any ownership or revenue sharing
arrangements directly or indirectly with a dealer would be an
obvious conflict of interest) (``Reval Response Letter'').
    \92\ See, e.g., Warehouse Trust Company, Draft Response to CFTC
re: CFTC Request for Information regarding SDR Governance (available
at<EMAIL_ADDRESS>(stating that ``ownership of an SDR
could lead to access restrictions on non-owners.'') (``Warehouse
Trust Response Letter'').
    \93\ See Reval Response Letter, supra note 91 (``Preferential
treatment in services provided by an SDR could also occur * * *.'').
    \94\ See Warehouse Trust Letter, supra note 92 (``The issue of
vertical bundling could arise where [SEFs and clearing agencies]
have preferred access or servicing arrangements with SDRs primarily
due to ownership overlaps.'').
    \95\ See Reval Response Letter, supra note 91 (``There will
always be an underlying conflict to ensure that the position
information or client activity does not get into the hands of
investors or an SDR business partner who could benefit from that
information.'').
    \96\ See Warehouse Trust Letter, supra note 92; see also Reval
Response Letter, supra note 91 (``[I]f only one SDR is created for
an asset class and that SDR is held by a market participant that
could gain by having an edge on when the information is received, it
could have a trading edge.'').
---------------------------------------------------------------------------

    Proposed Rule 13n-4(c)(3) would provide general examples of
conflicts of interest that should be considered by an SDR, including,
but not limited to: (1) Conflicts between the commercial interests of
an SDR and its statutory responsibilities, (2) conflicts in connection
with the commercial interests of certain market participants or linked
market infrastructures, third party service providers, and others, (3)
conflicts between, among, or with persons associated with the SDR,
market participants, affiliates of the SDR, and nonaffiliated third
parties,\97\ and (4) misuse of confidential information, material,
nonpublic information, and/or intellectual property. Such conflicts of
interest could limit the benefits of an SDR and undermine the mandatory
reporting requirement in Exchange Act Section 13(m)(G), thereby
impacting efficiency in the SBS market.\98\
---------------------------------------------------------------------------

    \97\ The term ``nonaffiliated third party'' of an SDR would be
defined as any person except (1) the SDR, (2) an SDR's affiliate, or
(3) a person employed by an SDR and any entity that is not the SDR's
affiliate (and ``nonaffiliated third party'' includes such entity
that jointly employs the person). See proposed Rule 13n-4(a)(8).
    \98\ See Public Law 111-203, Sec.  763(i). Exchange Act Section
13(m)(G) imposes a mandatory reporting requirement, which provides
that ``[e]ach security-based swap (whether cleared or uncleared)
shall be reported to a registered security-based swap data
repository.''
---------------------------------------------------------------------------

    Proposed Rule 13n-4(c)(3)(i) would require each SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to identify and mitigate potential and existing conflicts of
interest in the SDR's decisionmaking process on an ongoing basis. The
Commission preliminarily believes that requiring an SDR to conduct
ongoing identification and mitigation of conflicts of interest is
important because such conflicts can arise gradually over time or
unexpectedly. Furthermore, a situation that is acceptable one day may
present a conflict of interest the next. In order to identify and
address potential conflicts that may arise over time, the Commission
believes that, in general, an SDR's procedures should provide a means
for regular review of conflicts as they impact the SDR's decisionmaking
processes.
    Proposed Rule 13n-4(c)(3)(ii) would require an SDR to recuse any
person involved in a conflict of interest from the decisionmaking
process for resolving any conflicts of interest. The Commission
preliminarily believes that such recusal is necessary to eliminate an
apparent conflict of interest in an SDR's decisionmaking process.
Additionally, recusal would increase confidence in the SDR's
decisionmaking process and avoid an appearance of impropriety.
    Finally, proposed Rule 13n-4(c)(3)(iii) would require an SDR to
establish, maintain, and enforce reasonable written policies and
procedures regarding the SDR's non-commercial and/or commercial use of
the SBS transaction information that it receives from a market
participant, any registered entity, or any other person. The Commission
recognizes that an SDR may have commercial incentives to operate as an
SDR. To the extent that an SDR uses data that it receives from others
for commercial purposes, the Commission preliminarily believes that
such uses should be clearly defined and disclosed to market
participants. If, for example, a market participant agrees to waive
confidentiality of the data that it provides to an SDR, then, at the
very least, the market participant should understand how an SDR is
going to use that data and the scope of the market participant's
waiver.

Request for Comment

    The Commission requests comment on the following specific issues:
     Is the Commission's proposed definition of ``nonaffiliated
third party'' appropriate and sufficiently clear? If not, why not and
how should it be defined?
     Are the Commission's proposed rules implementing the third
core principle appropriate and sufficiently clear? If not, why not and
what would be a better alternative?
     Are the Commission's examples of potential conflicts of
interest in its proposed rules adequate? If not, are there other
examples of conflicts that the Commission should identify in its rule?
     Do commenters agree with the potential conflict concerns
that the Commission has identified in this release? How might conflicts
of interest change as SDRs become more established? How might
competitive forces within the SBS market affect or change current
conflicts of interest? What potential new conflicts of interest could
arise that the Commission should consider? Will competition potentially
create different or additional conflicts of interest that the
Commission should consider? Will competition potentially mitigate
conflicts of interest?
     What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     Should the Commission require an SDR to identify and
mitigate conflicts of interest in an SDR's governance arrangements
periodically rather than on an ongoing basis? Should the proposed
requirement extend to any other circumstances?
     Is the Commission's proposed rule requiring recusal of any
person involved in a conflict of interest appropriate and sufficiently
clear? If not, what would be a better alternative?
     Is the Commission's proposed requirement relating to an
SDR's non-commercial and commercial use of data

appropriate and sufficiently clear? If not, why not and what would be a
better alternative?
     Are there conflicts of interest specific to the commercial
use of data by an SDR that the Commission should address? What are
these conflicts? Can they be mitigated? If so, by what means?
     Should the Commission restrict or prohibit an SDR's use of
data for commercial purposes? If so, in what way? For example, should
the Commission prohibit an SDR's use of data for commercial purposes
unless an SDR obtains express written consent from the market
participants submitting such data? Should the Commission require that
an SDR's policies and procedures require it to obtain consent from
market participants before the SDR uses the data for any purpose or
transmits such data to other parties other than regulators? Should the
Commission require that an SDR's policies and procedures require it to
obtain consent from market participants before the SDR provides
aggregated SBS transaction data to the public without charge?
     If some commercial use of data is permitted, should
particular commercial uses of data by an SDR nonetheless be prohibited?
If so, which uses should be prohibited and why? Should certain
potential uses of data, or the use of particular types of data, pose
particular concern to the Commission? Which uses or data types are
they, and how should the Commission respond?
     Should an SDR's affiliates be subject to any or all of the
restrictions on commercial use that are imposed on an SDR? Should the
Commission restrict the ability of an SDR to share data with any of its
affiliates? For example, should an SDR be prohibited from sharing data
with an affiliate unless the same data is also made available at the
same time and on reasonable terms to market participants that are not
affiliates? Should an SDR be prohibited from sharing certain types of
data with an affiliate that trades SBSs?
     Would full disclosure by an SDR of its commercial use of
data provide meaningful protection for market participants? Are market
participants likely to have a meaningful choice to preclude the
commercial use of their transaction data by choosing to report
transactions to an SDR that does not make commercial use of the data?
If commercial use of data is permitted, is it likely that any SDR would
refrain from such use?
     What are the possible consequences of restricting or
prohibiting an SDR's use of the data that it receives for commercial
purposes? For example, would it deter persons from registering as SDRs?
Would it result in existing SDRs to cease operating as such? Would
prohibiting an SDR from making commercial use of data reported to it
have positive benefits, such as enhancing the confidence of market
participants that their trade or position information will not leak
into the market?
     Would an SDR need to use data that it receives for
commercial purposes in order to be a viable business? If so, explain.
     Are there any additional requirements that the Commission
should impose to implement the third core principle?

E. Proposed Rule Regarding Data Collection and Maintenance

    The Commission is proposing Rule 13n-5 under the Exchange Act to
specify the data collection and maintenance requirements applicable to
SDRs.\99\
---------------------------------------------------------------------------

    \99\ Proposed Rule 13n-5 is being promulgated under Exchange Act
Sections 13(n)(4)(B), 13(n)(7)(D), and 13(n)(9). See Public Law 111-
203, Sec.  763(i).
---------------------------------------------------------------------------

1. Definitions
    Proposed Rule 13n-5(a) would define terms used in the proposed
rule. Proposed Rule 13n-5(a)(1) would define ``transaction data'' to
mean all the information reported to the SDR pursuant to the Exchange
Act and the rules and regulations thereunder.\100\ This would include
all information, including life cycle events, required to be reported
to the SDR under Rule 901 of proposed Regulation SBSR.\101\
---------------------------------------------------------------------------

    \100\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act (adding Exchange Act Section
13(m)), the Commission is considering rules requiring an SDR to
publicly disseminate certain SBS data that has been affirmed by the
parties but has not necessarily been confirmed. See Regulation SBSR
Release (proposed Rule 902), supra note 9. Any comments regarding
the public dissemination proposed rules should be submitted in
connection with that proposal. In another separate proposal relating
to implementation of Section 763(i) of the Dodd-Frank Act (adding
Exchange Act Section 13(n)(5)(E)), the Commission is considering
rules that would require SDRs to collect data related to monitoring
the compliance and frequency of end-user clearing exemption claims.
Any comments regarding the end-user clearing exemption proposed
rules should be submitted in connection with that proposal.
    \101\ A definition of ``life cycle event'' is being proposed in
proposed Regulation SBSR. See Regulation SBSR Release (proposed Rule
900), supra note 9.
---------------------------------------------------------------------------

    Proposed Rule 13n-5(a)(2) would define ``position'' as the gross
and net notional amounts of open SBS transactions aggregated by one or
more attributes, including, but not limited to, the (i) underlying
instrument, index, or reference entity; (ii) counterparty; (iii) asset
class; (iv) long risk of the underlying instrument, index, or reference
entity; and (v) short risk of the underlying instrument, index, or
reference entity.\102\ Position data is required to be provided by SDRs
to certain entities pursuant to Exchange Act Section 13(n)(5)(G).\103\
Therefore, the Commission proposes defining the term, and has designed
this definition to reflect the way the term is currently used in the
industry.\104\ The proposed term is designed to be sufficiently
specific so that SDRs are aware of the types of position calculations
that regulators may require an SDR to provide, while at the same time,
provide enough flexibility to encompass the types of position
calculations that regulators and the industry will find important as
new types of SBS are developed.
---------------------------------------------------------------------------

    \102\ For purposes of this definition, positions aggregated by
long risk would be only for the aggregate notional amount of SBSs in
which a market participant has long risk of the underlying
instrument, index, or reference entity. Similarly, positions
aggregated by short risk would be only for the aggregate notional
amount of SBSs in which a market participant has short risk of the
underlying instrument, index, or reference entity. For SBSs other
than credit default swaps, a counterparty has long risk where the
counterparty profits from an increase in the price of the underlying
instrument or index, and a counterparty has short risk where the
counterparty profits from a decrease in the price of the underlying
instrument or index. For credit default swaps, a counterparty has
long risk where the counterparty profits from a decrease in the
price of the credit risk of the underlying index or reference
entity, and a counterparty has short risk where the counterparty
profits from an increase in the price of the credit risk of the
underlying index or reference entity. As market events require, the
Commission may request that an SDR calculate positions in another
manner and to provide those positions to the Commission on a
confidential basis.
    \103\ See Public Law 111-203, Sec.  763(i) (adding Exchange Act
Section 13(n)(5)(G)); see also proposed Rule 13n-4(b)(9).
    \104\ The Commission notes that Section 763(h) of the Dodd-Frank
Act adds Exchange Act Section 10B, which provides, among other
things, for the establishment of position limits for any person that
holds SBSs. Specifically, Section 10B(a) provides that ``[a]s a
means reasonably designed to prevent fraud and manipulation, the
Commission shall, by rule or regulation, as necessary or appropriate
in the public interest or for the protection of investors, establish
limits (including related hedge exemption provisions) on the size of
positions in any security-based swap that may be held by any
person.'' In addition, Exchange Act Section 10B(d) provides that the
Commission may establish position reporting requirements for any
person that effects transactions in SBSs, whether cleared or
uncleared. See Public Law 111-203, Sec.  763(h).
---------------------------------------------------------------------------

    Proposed Rule 13n-5(a)(3) would define ``asset class'' as ``those
security-based swaps in a particular broad category, including, but not
limited to, credit derivatives, equity derivatives, and loan-based
derivatives.'' The Commission is proposing this definition in order to
implement proposed Rule 13n-5(b)(1)(ii), discussed below.

Proposed Rule 13n-5(b)(1)(ii) would require an SDR, if it accepts any
SBS in a given asset class, to accept all SBSs in that asset class.

Request for Comment

    The Commission requests comment on the following specific issues:
     Are these proposed definitions over-inclusive or under-
inclusive? Is there some data that is captured by the term
``transaction data'' that should not be subject to the collection and
maintenance requirements described below? Is there data that should be
subject to these requirements that is not included in the proposed
definition of ``transaction data''?
     Is the proposed definition of ``position'' sufficiently
precise?
     Are there other attributes of SBSs for which the
Commission should specifically require SDRs to calculate positions?
     Exchange Act Section 10B authorizes the Commission to
establish limits on the size of positions in any SBS that may be held
by any person. Would the definition of ``position'' in proposed Rule
13n-5(a)(2) be appropriate for purposes of any rules the Commission
might propose with regard to position limits?
     Is the proposed definition of ``asset class'' sufficiently
precise? Is there another definition of ``asset class'' that better
describes the broad categories of SBSs commonly referred to as credit
derivatives, equity derivatives, and loan-based derivatives, but
excluding those that are not SBSs?
     Should each SDR be allowed to define the ``asset class''
for which it will accept SBS transaction data under proposed Rule 13n-
5(b)(1)(ii)?
2. Requirements
a. Transaction Data
    Proposed Rule 13n-5(b)(1)(i) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed for the reporting of transaction data to the SDR, and would
require the SDR to accept all transaction data that is reported to the
SDR in accordance with such policies and procedures. A fundamental goal
of Title VII is to have all SBSs reported to SDRs.\105\ This proposed
requirement would prevent SDRs from rejecting SBSs for arbitrary or
anti-competitive reasons, minimize the number of SBSs that are not
accepted by an SDR, and to the extent that the SDR's policies and
procedures make clear what SBSs the SDR will accept, make it easier for
market participants to determine whether there is an SDR that will
accept a particular SBS.\106\
---------------------------------------------------------------------------

    \105\ See Exchange Act Section 13(m)(1)(G) requiring ``[e]ach
security-based swap (whether cleared or uncleared)'' to be reported
to a registered SDR. Public Law 111-203, Sec.  763(i).
    \106\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act, the Commission is considering
additional rules requiring an SDR to have policies and procedures
relating to the reporting of SBS data to the SDR. See Regulation
SBSR Release (proposed Rule 907), supra note 9. Any comments
regarding the proposed reporting rules should be submitted in
connection with that proposal.
---------------------------------------------------------------------------

    Proposed Rule 13n-5(b)(1)(ii) would require an SDR, if it accepts
any SBS in a given asset class, to accept all SBSs in that asset class
that are reported to it in accordance with its policies and procedures
required by paragraph (b)(1) of the proposed rule. This proposed
requirement is designed to maximize the number of SBSs that are
accepted by an SDR. The Commission preliminarily believes that if
certain SBSs are not accepted by any SDR and are reported to the
Commission instead, the purpose of the Dodd-Frank Act to have
centralized data on SBSs for regulators and others to access could be
undermined. Without this requirement, the transaction costs for the
Commission and other regulators to gather complete information on the
SBS market could be higher. In addition, the Commission preliminarily
believes that this proposed requirement would make it easier for market
participants to determine whether there is an SDR that will accept a
particular SBS.
    However, an SDR would be required to accept only those SBSs from
the asset class that are reported in accordance with the SDR's policies
and procedures required by paragraph (b)(1) of this proposed rule.\107\
For example, an SDR's policies and procedures could prescribe the
necessary security and connectivity protocols that market participants
must have in place prior to transmitting transaction data to the SDR.
An SDR would not be required to accept transaction data from market
participants that did not comply with these protocols; otherwise the
transmission of the transaction data could compromise the SDR's
automated systems.
---------------------------------------------------------------------------

    \107\ An SDR would be required to disclose to market
participants its criteria for providing others with access to
services offered and data maintained by the SDR pursuant to proposed
Rule 13n-10(b)(1), as discussed in Section III.J of this release.
Therefore, market participants would be aware of an SDR's policies
and procedures for reporting data.
---------------------------------------------------------------------------

    To the extent that an SDR already has systems in place to accept
and maintain SBSs in a particular asset class, the Commission
preliminarily believes that the requirement of proposed Rule 13n-
5(b)(1)(ii) would not add a material incremental financial or
regulatory burden to SDRs. The Commission preliminarily believes that
SDRs may have commercial incentives to limit SBSs for which they
receive reports to those with relatively standardized terms, for
operational reasons and because standardized instruments lend
themselves more readily to aggregation of information that would have
commercial value (to the extent that SDRs are entitled under the rules
the Commission adopts to use such information for commercial purposes).
Given these incentives, the requirement that, if an SDR accepts any SBS
in a given asset class, it must accept all SBSs in that asset class, is
meant to facilitate the aggregation of and access to SBS transaction
data.
    Proposed Rule 13n-5(b)(1)(iii) would require every SDR to
establish, maintain, and enforce written policies and procedures
reasonably designed to satisfy itself by reasonable means that the
transaction data that has been submitted to the SDR is accurate. This
proposed rule would also require SDRs to clearly identify the source
for each trade side and the pairing method (if any) for each
transaction in order to identify the level of quality of that
transaction data.
    Exchange Act Section 13(n)(5)(B) requires an SDR to ``confirm with
both counterparties to the security-based swap the accuracy of the data
that was submitted.'' \108\ This requirement is based on the premise
that an SDR is useful only insofar as the data it retains is
accurate.\109\ SBS data that is not trusted does not enhance
transparency. In order to ensure that the data submitted to an SDR is
accurate and agreed to by both counterparties, the SDR must
substantiate the accuracy of the data submitted with the
counterparties. The Commission understands that with respect to certain
asset classes, current market practice is for third party service
providers to provide electronic confirmations prior to the SBS data
reaching an SDR. The Commission preliminarily believes that an SDR
would be able to fulfill its responsibilities under Exchange Act
Section 13(n)(5)(B), proposed Rule 13n-4(b)(3),\110\ and this proposed
rule by

developing reasonable policies and procedures that rely on
confirmations completed by another entity, such as an SB SEF, clearing
agency, or third party vendor, as long as such reliance is reasonable.
The SDR would have a continuing responsibility to oversee and supervise
the performance of the third party confirmation provider. This could
include having policies and procedures in place to monitor the third
party confirmation provider's compliance with the terms of any
agreements and to assess the third party confirmation provider's
continued fitness and ability to perform the confirmations.
---------------------------------------------------------------------------

    \108\ See also proposed Rule 13n-4(b)(3).
    \109\ See, e.g., CPSS-IOSCO, supra note 55 (the primary public
policy benefit of an SDR is facilitated by the integrity of the
information maintained by an SDR).
    \110\ Proposed Rule 13n-4(b)(3) would require SDRs to
``[c]onfirm, as prescribed in Rule 13n-5, with both counterparties
to the security-based swap the accuracy of the data that was
submitted.''
---------------------------------------------------------------------------

    For example, if an SBS is traded on an SB SEF, that SB SEF would
confirm the accuracy of the transaction data with both counterparties,
and the SBS would then be reported to the SDR by the SB SEF. The SDR
would not need to further substantiate the accuracy of the transaction
data, as long as the SDR had a reasonable belief that the SB SEF had
performed an accurate confirmation. However, the SDR would not comply
with Exchange Act Section 13(n)(5)(B), proposed Rule 13n-4(b)(3), and
this proposed rule if the confirmation proves to be inaccurate and the
SDR had reason to know that its reliance on the SB SEF for providing
accurate confirmations was unreasonable. If an SBS is transacted by two
commercial end-users and is not electronically traded or cleared, and
is reported to the SDR by one of those end-users, the SDR may not have
any other entity that it can reasonably rely on, and may have to
contact each of the counterparties itself to substantiate the accuracy
of the transaction data.\111\
---------------------------------------------------------------------------

    \111\ The Commission preliminarily believes that an SDR should
make reasonable accommodations, including consideration of any cost
burdens, for a non-reporting counterparty of an SBS transaction in
connection with any follow-up by the SDR regarding the accuracy of
the counterparty's SBS transaction. These accommodations could, for
example, include providing means for non-reporting counterparties to
substantiate the accuracy of the transaction data without having to
incur significant systems or technology costs.
---------------------------------------------------------------------------

    Transaction data may vary in terms of reliability. Some transaction
data may have been affirmed by counterparties to an SBS, but not
confirmed.\112\ Some transaction data may have been confirmed
informally by the back-offices of the counterparties, but not be
considered authoritative. Other transaction data may have gone through
an electronic confirmation process and be considered authoritative by
the counterparties. In order for regulators to determine whether an SDR
has reasonable policies and procedures for satisfying itself that the
transaction data that has been submitted to the SDR is accurate, the
SDR must document the processes used by third parties to substantiate
the accuracy of the transaction data.
---------------------------------------------------------------------------

    \112\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act (adding Exchange Act Section
13(m)), the Commission is considering rules requiring an SDR to
publicly disseminate certain SBS data that has been affirmed by the
parties but has not necessarily been confirmed. See Regulation SBSR
Release (proposed Rule 902), supra note 9. Any comments regarding
the public dissemination proposed rules should be submitted in
connection with that proposal.
---------------------------------------------------------------------------

    Proposed Rule 13n-5(b)(1)(iv) would require SDRs to record promptly
the transaction data that it receives.\113\ It is important that SDRs
keep up-to-date records so that regulators and parties to SBSs will
have access to accurate and current information.\114\
---------------------------------------------------------------------------

    \113\ In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i) of
the Dodd-Frank Act, adding Exchange Act Section 13(n)(4)(A),
relating to standard setting and data identification. See Regulation
SBSR Release (proposed Rule 901), supra note 9. Any comments
regarding the data elements should be submitted in connection with
that proposal.
    \114\ See, e.g., CPSS-IOSCO, supra note 55 (``A [trade
repository] should promptly record the trade information it receives
from its participants. * * * Ideally, a [trade repository] should
record to its central registry information it receives from its
participants in real-time, and at a minimum, within one business
day.'').
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     What is the likely impact of these requirements on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting SBSs to the SDR?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     Should the Commission require an SDR to have any
particular substantive requirements in its policies and procedures,
such as requirements pertaining to robust passwords for persons
reporting transaction data?
     Does the definition of ``asset class'' in proposed Rule
13n-5(a)(3) provide sufficient guidance and clarity to entities that
may register as SDRs and to other market participants?
     Should the Commission require an SDR to accept all SBSs of
a given asset class? If not, what other mechanism should the Commission
use to prevent ``orphaned'' SBSs? How should the Commission address
SBSs that do not clearly belong to a particular asset class or that
could arguably belong to more than one asset class? Should the
Commission allow an SDR that accepts SBSs in one asset class to accept
an SBS that arguably belongs to that asset class, but which could also
belong to a second asset class, without requiring the SDR to then
accept all SBSs in the second asset class?
     Will the requirement of proposed Rule 13n-5(b)(1)(ii)
materially add to the costs of SDRs? How does this proposed requirement
affect the possible business models under which an SDR may operate or
the commercial viability of SDRs in general? Does it make any
particular business model more or less attractive?
     Should the Commission impose other requirements that may
increase access to an SDR, including:
    [cir] Any other requirements that may prevent an SDR from rejecting
those SBSs that are customized to such a degree that they are not in
the SDR's economic interest to accept them because the SDR will not be
able to perform downstream processing on the SBSs and may incur costs
in obtaining the information to calculate positions; and
    [cir] Requiring an SDR to employ technologies that accommodate a
wide range of technological capabilities among persons that desire to
report data to the SDR or other requirements that may prevent an SDR
from rejecting SBSs from less sophisticated persons that do not engage
in the volume of SBSs necessary to make it economically practicable to
invest in technologies that are industry standards?
     Should the Commission require an SDR itself to
substantiate the accuracy of the transaction data that has been
submitted to the SDR?
     Should the Commission require an SDR to have any
particular substantive requirements in its policies and procedures
relating to these rules?
     Should the Commission give more guidance as to what
constitutes reasonable reliance on a third party? For example, would it
be reasonable to rely on documents provided by the party to an SBS that
reports the SBS to an SDR? What if that party is a clearing agency that
became a party to the SBS as the central counterparty?
     Where an SDR relies on a third party to provide
confirmations, should the Commission give more guidance as

to the oversight by the SDR of the third party? For example, how often
should the SDR review the third party's confirmation procedures? Would
annually be sufficient?
     Where an SDR is unable to reasonably satisfy itself that
the transaction data is accurate, should the SDR reject the SBS? Should
that SBS instead be reported to the Commission pursuant to Exchange Act
Section 13A(a)(1)(B) and the rules and regulations promulgated
thereunder?
     Should the Commission give more guidance as to whether an
SDR (or the entity that it reasonably relies on) needs to get an
affirmative response from both counterparties when it attempts to
satisfy itself that the transaction data is accurate? Alternatively,
should the SDR submit the transaction data to a counterparty, and
require a response only if the counterparty disagrees with the
transaction data? Would this answer change if the SBS is cleared or if
the counterparty is an end-user?
     Should the Commission give more guidance as to whether
receipt by an SDR of a confirmation under Exchange Act Section
15F(i)(2) and the rules promulgated thereunder would be sufficient to
fulfill the SDR's duties under Exchange Act Section 13(n)(5)(B),
proposed Rule 13n-4(b)(3), and this proposed rule?
     Should the term ``promptly'' be defined or should the
Commission use another term such as ``as soon as technologically
practicable after the time at which the data has been submitted''?
     Should an SDR be required to record transaction data
promptly after execution of a transaction or promptly after
confirmation of the transaction?
b. Positions
    Proposed Rule 13n-5(b)(2) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to calculate positions for all persons with open SBSs for
which the SDR maintains records. Position data is required to be
provided by an SDR to certain entities pursuant to Exchange Act Section
13(n)(5)(G).\115\ Position information is important to regulators for
risk, enforcement, and examination purposes. In addition, having a
readily available source of position information can be useful to
counterparties themselves in evaluating their own risk. While much of
the information necessary for an SDR to calculate positions (as defined
in subsection (a)(2) of this proposed rule) will be reported to the SDR
as transaction data, some information may not. For example, credit
events for credit default swaps or events that result in the
termination or adjustment to an equity swap may not be reported.\116\
In order to meet its obligation to calculate positions, an SDR could
require reporting parties to report such events or it could have a
system that will monitor for and collect such information. In order for
the positions to be calculated accurately, the SDR will need to
promptly incorporate recently reported transaction data and collected
unreported data. It is important that the SDR keep up-to-date records
so that relevant authorities and parties to the SBS will have access to
accurate and current information.\117\
---------------------------------------------------------------------------

    \115\ See also proposed Rule 13n-4(b)(9).
    \116\ In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i) of
the Dodd-Frank Act, adding Exchange Act Section 13(n)(4)(A),
relating to standard setting and data identification. See Regulation
SBSR Release (proposed Rule 901), supra note 9. The proposed
definition of ``life cycle event'' in proposed Regulation SBSR
states, ``Notwithstanding the above, a life cycle event shall not
include the scheduled expiration of the security-based swap, a
previously described and anticipated interest rate adjustment (such
as a quarterly interest rate adjustment), or other event that does
not result in any change to the contractual terms of the security-
based swap.'' See Regulation SBSR Release (proposed Rule 900), supra
note 9. In order to calculate positions, SDRs may need this
information, which would not be required to be reported to it. Any
comments regarding the data elements should be submitted in
connection with that proposal.
    \117\ See, e.g., CPSS-IOSCO, supra note 55 (``Ideally, a [trade
repository] should record to its central registry information it
receives from its participants in real-time, and at a minimum,
within one business day.'').
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission specify particular standards or
procedures for calculating positions?
     What information will an SDR need to obtain in order to
calculate positions and how difficult will it be to obtain?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting SBSs to the SDR?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     The Commission understands that clearing agencies
typically produce market values on cleared SBSs. However, many types of
SBSs may not be cleared in the near term. Should the Commission require
SDRs to calculate market values of each position at least daily and
provide them to the Commission? In your comment, please consider the
following:
    [cir] What would be the benefits and burdens of such a requirement?
    [cir] Should the requirement to calculate market values of
positions be limited to certain types of SBSs, such as SBSs for which
the counterparties have agreed that the transaction information
maintained by the SDR is the primary record of the trade to the
exclusion of any records held by the counterparties?
    [cir] Should ``market value'' be defined, and if so, how?
    [cir] Will the information necessary for calculating market values
of the positions already be at the SDR? What information besides
transaction data and positions will be required for the SDR to
calculate the market values of positions? Would SDRs be able to obtain
the necessary information to calculate market values? Why or why not?
How could the SDR obtain the necessary information?
    [cir] To the extent that other entities, such as SB SEFs, SBS
dealers, or clearing agencies, already perform such calculations, would
it be sufficient for the SDR to obtain the market values from such
entity?
    [cir] How frequently should such valuations be performed? Would
daily valuation be too onerous for SDRs? What about weekly or monthly
valuation?
    [cir] Would market values be meaningful in assessing risk without
knowing the margin calls and collateral posted? Should SDRs also be
required to maintain margin call and collateral information?
    [cir] How long should the SDR be required to maintain such market
values? Would five years be adequate? What about the same time period
as the Commission requires for positions?
c. Maintain Accurate Data
    Proposed Rule 13n-5(b)(3) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that the transaction data and positions that it
maintains are accurate. Maintaining accurate records is a core

function of an SDR.\118\ Maintaining accurate records requires
diligence on the part of an SDR; SBSs can be amended, assigned, or
terminated and positions change upon the occurrence of new events (such
as corporate actions). Therefore, it is important that an SDR has
policies and procedures to ensure reasonably the accuracy of the
transaction data and positions that it maintains. These policies and
procedures could include portfolio reconciliation.\119\
---------------------------------------------------------------------------

    \118\ See Section II, Role, Regulation, and Business Models of
SDRs, of this release.
    \119\ See, e.g., ISDA Operations Committee, Process Working
Group, Recommended Practices for Portfolio Reconciliation, version
4.7 (Feb. 2006) (describing recommended practices for portfolio
reconciliation).
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission specify particular standards or
procedures for maintaining accurate data, such as portfolio
reconciliation and payment reconciliation?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBSs at the SDR?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     If portfolio reconciliation and/or payment reconciliation
is required, how often would it be done, and what should it entail?
Would the following definition of portfolio reconciliation be
sufficient: ``a means of ensuring that the SDR's record of security-
based swaps are synchronized with those of a person with open security-
based swaps maintained by the SDR''? If not, how should the term be
defined?
d. Data Retention
    Proposed Rule 13n-5(b)(4) would require SDRs to maintain the
transaction data for not less than five years after the applicable SBS
expires and historical positions for not less than five years (i) in a
place and format that is readily accessible to the Commission and other
persons with authority to access or view such information; and (ii) in
an electronic format that is non-rewriteable and non-erasable. A five-
year retention period is the current requirement for the records of
clearing agencies and other registered entities, and is the statutory
requirement for SB SEFs.\120\ Since an SBS transaction is ongoing, the
transaction data should be maintained for the duration of the SBS and
for five years after it expires. Positions are not tied to any
particular SBS transaction; therefore, the Commission proposes to
require positions, as required to be calculated pursuant to proposed
Rule 13n-5(b)(2), to be maintained for five years, similar to the
record retention requirement for clearing agencies.\121\
---------------------------------------------------------------------------

    \120\ See Exchange Act Rule 17a-1, 17 CFR 240.17a-1 (for
national securities exchanges, national securities associations,
clearing agencies and the MSRB); Exchange Act Section 3D(d)(9),
Public Law 111-203, Sec.  763(c) (for SB SEFs).
    \121\ See Exchange Act Rule 17a-1, 17 CFR 240.17a-1 (requiring
clearing agencies to retain data for five years).
---------------------------------------------------------------------------

    Alternatively, the Commission is considering requiring SDRs to
``maintain transaction data for not less than five years after the
applicable security-based swap expires or ten years after the
applicable security-based swap is executed, whichever is greater, and
historical positions for not less than five years.'' Some SBSs are, in
practice, of very short duration due to various reasons, including
being novated upon being submitted for clearing or being terminated
through portfolio compression. By requiring SDRs to retain data of all
SBSs for at least ten years after execution, regulators would be able
to use the data of the SBSs for analytical studies.
    The Commission proposes that the transaction data and positions be
in a place and format that is readily accessible to the Commission and
other persons with authority to access or view such information. The
Commission preliminarily believes that this proposed requirement would
ensure that SDRs maintain the information in an organized and
accessible manner so that users can easily obtain the data that they
need. The Commission also preliminarily believes that this proposed
requirement would ensure that the information is maintained in a common
and easily accessible format, such as a language commonly used in
financial markets.\122\
---------------------------------------------------------------------------

    \122\ An example of such a format is Financial products Markup
Language (``FpML''). FpML is based on XML (eXtensible Markup
Language), the standard meta-language for describing data shared
between applications.
---------------------------------------------------------------------------

    The proposed requirement for information to be in an electronic
format that is non-rewriteable and non-erasable is consistent with the
record retention format applicable to electronic broker-dealer
records.\123\ This proposed requirement would prevent the maintained
information from being modified or removed without detection.\124\
---------------------------------------------------------------------------

    \123\ See Exchange Act Rule 17a-4(f)(2)(ii)(A), 17 CFR 240.17a-
4(f)(2)(ii)(A). In Exchange Act Release No. 47806 (May 7, 2003), 68
FR 25281 (May 12, 2003), the Commission stated, among other things,
that a broker-dealer would not violate Exchange Act Rule 17a-
4(f)(2)(ii)(A) ``if it used an electronic storage system that
prevents the overwriting, erasing or otherwise altering of a record
during its required retention period through the use of integrated
hardware and software control codes.'' The Commission is proposing
to incorporate this interpretation into proposed Rule 13n-5(b)(4).
    \124\ Records made or kept by an SDR, other than transaction
data and positions, will be governed by proposed Rule 13n-7, as
discussed in Section III.G of this release.
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     Is the appropriate time period for the Commission to
require an SDR to maintain transaction data at least five years after
the applicable SBS expires and for positions at least five years? For
transaction data, would ten years after expiration of the applicable
SBS be more appropriate and why? \125\ What would be the benefits and
burdens associated with each of these time periods? Are there other
retention periods that would be more appropriate?
---------------------------------------------------------------------------

    \125\ The European Commission has recently proposed that trade
repositories maintain reported data ``for at least ten years
following the termination of the relevant contracts.'' See European
Commission, Proposal for a regulation of the European Parliament and
of the Council on OTC derivatives, central counterparties and trade
repositories (2010) (available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_proposallowbar;en.pdf).
---------------------------------------------------------------------------

     Should the Commission require SDRs to maintain transaction
data for five years after the applicable SBS expires or ten years after
the applicable SBS is executed, whichever is greater? What if the
Commission required SDRs to maintain transaction data for five years
after the applicable SBS expires or eight years after the applicable
SBS is executed, whichever is greater? What would be the benefits and
burdens associated with each of these time periods?
     Should the Commission instead require an SDR to maintain
the transaction data and positions for an indefinite period? What would
be the benefits and burdens of requiring an SDR to maintain such
information indefinitely?
     Should the Commission have additional requirements
regarding access to the transaction data and positions, such as
requiring such

information be maintained on a server in the United States?
     What is the likely impact of these requirements on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting and maintaining transaction data?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     Should the Commission require such information be kept in
a particular format that is accessible to the Commission, such as in
FpML? Alternatively, if the Commission does not want to specify a
particular technology, should it require such information be maintained
in ``a global standard for data modeling'' or other standard? Should
the Commission require that all SDRs maintain such information in the
same format?
     Should the Commission require that SDRs establish and
maintain effective interoperability and interconnectivity with other
SDRs, market infrastructures, and venues?
     Should the Commission specifically require the SDR to
organize and index accurately the transaction data and positions so
that the Commission and other users of such information are easily able
to obtain the specific information that they require?
     Is the proposed requirement that transaction data and
positions be kept in a non-rewriteable and non-erasable format too
restrictive? Are there other alternatives for protecting the accuracy
of such information over the time period that such information is
required to be maintained?
     Should the Commission require SDRs to verify automatically
the quality and accuracy of the storage media recording process? Should
the Commission require SDRs to serialize the original and, if
applicable, duplicate units of storage media, and time-date for the
required period of retention the information placed on such electronic
storage media? Should the Commission require SDRs to have in place an
audit system providing for accountability regarding inputting of
records required to be maintained and preserved pursuant to this
section and inputting of any changes made to every original and
duplicate record maintained and preserved thereby? \126\
---------------------------------------------------------------------------

    \126\ These requirements are consistent with the broker-dealer
retention requirements. See Exchange Act Rule 17a-4(f), 17 CFR
240.17a-4(f).
---------------------------------------------------------------------------

e. Controls To Prevent Invalidation
    Proposed Rule 13n-5(b)(5) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent any provision in a valid SBS from being invalidated
or modified through the procedures or operations of the SDR. Based on
staff discussions with market participants, the Commission understands
that SDRs, through their process of substantiating the accuracy of the
data or in their user agreements, may, and without the knowledge of the
counterparties, cause the modification of terms of an SBS. SBSs can be
highly negotiated between the counterparties, and the Commission
preliminarily believes these terms should not be modified or
invalidated without the full consent of the counterparties.

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission establish more specific requirements
to avoid contract invalidation by an SDR?
     What is the practical effect of this proposed requirement?
     Are such modifications actually occurring?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs
and the willingness of persons to register as SDRs?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
f. Dispute Resolution Procedures
    Proposed Rule 13n-5(b)(6) would require every SDR to establish
procedures and provide facilities reasonably designed to effectively
resolve disputes over the accuracy of the transaction data and
positions maintained by the SDR.\127\ The data maintained by the SDR
will be used by regulators to make assessments about counterparties,
such as whether the counterparty is a major SBS participant. The
counterparties also will use this data, and in some cases the data
maintained by the SDR may be considered by the counterparties to be the
legal record of the SBS. Counterparties, therefore, should have the
ability to dispute the accuracy of the data regarding their SBSs held
at the SDR. Providing the means to resolve such disputes should enhance
data quality and integrity.
---------------------------------------------------------------------------

    \127\ In a separate proposal, the Commission is proposing rules
regarding the correction of errors in SBS information maintained by
an SDR in association with requirements under Section 763(i) of the
Dodd-Frank Act. See Regulation SBSR Release (proposed Rules 905 and
907(a)(3)), supra note 9. Any comments regarding those proposed
rules should be submitted in connection with that proposal.
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission require an SDR to have any
particular requirements in its dispute resolution procedures under this
rule?
     Is dispute resolution a necessary service that must be
provided by an SDR?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs
and the willingness of persons to register as SDRs?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
g. Data Preservation After an SDR Ceases To Do Business
    Proposed Rule 13n-5(b)(7) would require an SDR, if it ceases to do
business, or ceases to be registered pursuant to Exchange Act Section
13(n) and the rules and regulations thereunder, to continue to
preserve, maintain, and make accessible the transaction data and
historical positions required to be collected, maintained, and
preserved by the rule in the manner required by the Exchange Act and
the rules and regulations thereunder (including in a place and format
that is readily accessible to the Commission and other persons with
authority to access or view such information, in an electronic format
that is non-rewriteable and non-erasable, and in a manner that protects
confidentiality and accuracy)

for the remainder of the period required by this rule (that is, not
less than five years after the applicable SBS expires for transaction
data and not less than five years for historical positions).\128\ Given
the importance of the records maintained by an SDR to the functioning
of the SBS market, if an SDR ceases to do business, this could cause
serious disruptions in the market should the information it maintains
become unavailable.
---------------------------------------------------------------------------

    \128\ This proposed requirement is based on Exchange Act Rule
17a-4(g), 17 CFR 240.17a-4(g), which applies to broker-dealer books
and records.
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission propose other requirements that
might be necessary or useful in protecting the information maintained
by an SDR if the SDR ceases to do business?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
h. Plan for Data Preservation
    Proposed Rule 13n-5(b)(8) would require an SDR to make and keep
current a plan to ensure that the transaction data and positions that
are recorded in the SDR continue to be maintained in accordance with
proposed Rule 13n-5(b)(7), which shall include procedures for
transferring the transaction data and positions to the Commission or
its designee (including another registered SDR). Given the importance
of the records maintained by an SDR to the functioning of the SBS
market, if an SDR ceases to do business, the absence of a plan to
transfer information could cause serious disruptions. The Commission
preliminarily expects that an SDR's plan would establish procedures and
mechanisms so that another entity would be in the position to maintain
this information after the SDR ceases to do business.

Request for Comment

    The Commission requests comment on the following specific issues:
     Should the Commission propose other requirements that
might be necessary or useful in protecting the information maintained
by an SDR if the SDR ceases to do business?
     To what extent does this requirement provide additional
protections beyond those of proposed Rule 13n-5(b)(7)?
     What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?

F. Proposed Rule Regarding Automated Systems

    The Commission is proposing Rule 13n-6 under the Exchange Act to
provide standards for SDRs with regard to their automated systems'
capacity, resiliency, and security.\129\ The standards being proposed
under this rule are comparable to the standards applicable to self-
regulatory organizations (``SROs''), including exchanges and clearing
agencies,\130\ and certain other entities, including significant-volume
alternative trading systems (``ATSs'') \131\ and market information
dissemination systems,\132\ pursuant to the Commission's Automation
Review Policy (``ARP'') standards. To promote the maintenance of a
stable and orderly SBS market, the Commission preliminarily believes
that SDRs should be required to meet the same capacity, resiliency, and
security standards applicable to SROs and certain other entities under
the Commission's current ARP program.\133\
---------------------------------------------------------------------------

    \129\ Proposed Rule 13n-6 is being promulgated under Exchange
Act Sections 13(n)(4)(B), 13(n)(7)(D), and 13(n)(9). See Public Law
111-203, Sec.  763(i).
    \130\ See Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR
48703 (Nov. 24, 1989) (``ARP I Release''); Exchange Act Release No.
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991) (``ARP II
Release'').
    \131\ See Rule 301(b)(6) of Regulation ATS, 17 CFR
242.301(b)(6); Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR
70844 (Dec. 22, 1998).
    \132\ See ARP II Release, 56 FR 22490, supra note 130 (the
Commission's ARP policies ``encompass SRO systems that disseminate
transaction and quotation information''); See also ARP I Release, 54
FR 48703, supra note 130 (discussing that ``the SROs have developed
and continue to enhance automated systems for the dissemination of
transaction and quotation information'').
    \133\ Clearing agencies are SROs and are therefore subject to
the Commission's Automation Review Policies. The Dodd-Frank Act
requires that the data maintenance standards of SDRs ``shall be
comparable to the data standards imposed by the Commission on
clearing agencies in connection with their clearing of security-
based swaps.'' Exchange Act Section 13(n)(4)(C), Public Law 111-203,
Sec.  763(i). Proposed Rule 13n-6 will impose data maintenance
standards on SDRs that are comparable to those imposed by the
Commission on clearing agencies by applying the ARP standards to
them.
---------------------------------------------------------------------------

    Systems failures can limit access to data, call into question the
integrity of data, and prevent market participants from being able to
report transaction data, and thereby have a large impact on market
confidence, risk exposure, and market efficiency. Proposed Rule 13n-6
would require an SDR to establish, maintain, and enforce written
policies and procedures reasonably 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. The 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 SBS
market are designed to prevent and minimize the impact of systems
failures that might negatively impact the stability of the SBS market.
1. Requirements for SDRs' Automated Systems
a. Policies and Procedures
    Proposed Rule 13n-6(b)(1) would require an SDR 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 shall,
at a minimum:
    (i) Establish reasonable current and future capacity estimates;
    (ii) Conduct periodic capacity stress tests of critical systems to
determine such systems' ability to process transactions in an accurate,
timely, and efficient manner;
    (iii) Develop and implement reasonable procedures to review and
keep current its system development and testing methodology;
    (iv) Review the vulnerability of its systems and data center
computer operations to internal and external threats, physical hazards,
and natural disasters; and
    (v) Establish adequate contingency and disaster recovery plans.''
    This list of proposed requirements is based on existing ARP
requirements applied to significant-volume ATSs

under Rule 301(b)(6) of Regulation ATS.\134\ In addition, the
Commission 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.
---------------------------------------------------------------------------

    \134\ See 17 CFR 242.301(b)(6).
---------------------------------------------------------------------------

    As a general matter, the Commission preliminarily believes that, if
an SDR's policies and procedures satisfy industry best practices
standards, then these policies and procedures would be adequate for
purposes of proposed Rule 13n-6(b)(1). However, in the unlikely 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 staff would have flexibility to establish such
standards.\135\
---------------------------------------------------------------------------

    \135\ 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 an SDR to quantify, in appropriate
units of measure the limits of the SDR'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.\136\ This will make it
easier for the Commission to detect any potential capacity constraints
of an SDR, which, if left unaddressed, could compromise the ability of
an SDR to collect and maintain SBS data. An SDR'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.
---------------------------------------------------------------------------

    \136\ Use of such appropriate units of measure is required in
proposed Form SDR Item 31. See also Form SIP, Item 27 for
SIPs. 17 CFR 249.1001.
---------------------------------------------------------------------------

b. Objective Review of Automated Systems
    Proposed Rule 13n-6(b)(2) would require an SDR 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 drawn from the ARP II Release.\137\ This proposed
requirement is critical to help ensure that SDRs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities. Proposed Rule 13n-6(a)(3)
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.'' \138\ The proposed definition of
``objective review'' in proposed Rule 13n-6(a)(3) is based on the
standard for the review of automated systems set forth in the ARP II
Release.\139\
---------------------------------------------------------------------------

    \137\ See ARP II Release, 56 FR 22490, supra note 130.
    \138\ Proposed Rule 13n-6(a)(4) 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 130. Proposed
Rule 13n-6(a)(5) would define ``review schedule'' as ``a schedule in
which each element contained in subsection (b)(1) of this Rule 13n-6
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 130.
    \139\ See ARP II Release, 56 FR 22490, supra note 130.
---------------------------------------------------------------------------

    As in the current ARP program, the Commission staff preliminarily
believes that a reasonable basis for determining that a review is
objective for purposes of proposed Rule 13n-6 is if the level of
objectivity of an SDR's reviewers complied with standards set by widely
recognized professional organizations.\140\ However, in the unlikely
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 staff would have flexibility to establish such
standards.
---------------------------------------------------------------------------

    \140\ 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'').
---------------------------------------------------------------------------

    The decision on which type of reviewer, an internal department or
an external firm, should perform the review is a decision for each SDR
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 13n-6(b)(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 13n-6(b)(2) would require
that the external firm issue a report of that review, which the SDR
must submit to the Commission on an annual basis, within thirty
calendar days of completion of the review.
    The proposed requirement in proposed Rule 13n-6(b)(2) that an SDR
submit an annual objective review to the Commission is drawn from the
ARP II Release.\141\ In addition, the proposed requirement in proposed
Rule 13n-6(b)(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.\142\
---------------------------------------------------------------------------

    \141\ See ARP II Release, 56 FR 22490, supra note 130.
    \142\ See id.
---------------------------------------------------------------------------

    The proposed annual review would not be required to address each
element contained in proposed subsections (i)-(v) of Rule 13n-6(b)(1)
every year. Rather, using its own risk assessment, an SDR's reviewer
would review each element on a ``review schedule,'' as defined in
proposed Rule 13n-6(a)(5), 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 SDRs 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 an SDR
with sufficient time to complete its internal review of the document; a
longer timeframe might serve to encourage unnecessary delays.
c. Material Systems Outages
    Under proposed subsection (3) of Rule 13n-6(b), an SDR would be
required to promptly notify the Commission of material systems outages
and any remedial measures that have been implemented or are
contemplated,

including (i) immediately notifying the Commission when a material
systems outage is detected; (ii) immediately notifying the Commission
when remedial measures are selected to address the material systems
outage; (iii) immediately notifying the Commission when the material
systems outage is addressed; and (iv) 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 subsection would codify the procedures followed by SROs and
certain other entities under the Commission's current ARP program in
providing the staff with notification of material system outages. In
particular, proposed subsection (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 subsection (3)
would also clarify that an SDR 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 an SDR has diagnosed and is
taking steps to correct system disruptions, so that systems of the SDR
are reasonably equipped to accept and securely maintain transaction
data. The Commission preliminarily believes that requiring an SDR to
submit notifications of material system outages to the Commission is
essential to help ensure that the Commission can continue to
effectively oversee the SDR.
    Proposed Rule 13n-6(a)(1) would define ``material systems outage''
as an unauthorized intrusion into any system, or an event at an SDR
involving systems or procedures that results in (i) a failure to
maintain service level agreements or constraints;\143\ (ii) a
disruption of normal operations, including switchover to back-up
equipment with no possibility of near-term recovery of primary
hardware; (iii) a loss of use of any system; (iv) a loss of
transactions; (v) excessive back-ups or delays in processing; (vi) a
loss of ability to disseminate transaction data, or positions;\144\
(vii) a communication of an outage situation to other external
entities; (viii) a report or referral of an event to the SDR's board or
senior management; (ix) a serious threat to systems operations even
though systems operations were not disrupted; (x) a queuing of data
between system components or queuing of messages to or from customers
of such duration that a customer's normal service delivery is affected;
or (xi) a failure to maintain the integrity of systems that results in
the entry of erroneous or inaccurate transaction data or other
information in the SDR or the securities markets.
---------------------------------------------------------------------------

    \143\ A service level agreement is a contract between a third
party that manages and distributes software-based services and a
customer, which commits the third party to a required level of
service. A service level agreement should contain a specified level
of service, support options, enforcement or penalty provisions for
services not provided, a guaranteed level of system performance
regarding downtime or uptime, a specified level of customer support,
and indicate what software or hardware will be provided and for what
fee.
    \144\ Proposed Rule 13n-6(a)(6) would give the term
``transaction data'' the same meaning as in proposed Rule 13n-
5(a)(1). Proposed Rule 13n-6(a)(7) would give the term ``position''
the same meaning as in proposed Rule 13n-5(a)(2). See Section
III.E.1 of this release for the discussion of these definitions.
---------------------------------------------------------------------------

    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 definition is
appropriate for SDRs. The Commission preliminarily believes that each
of the events listed in paragraphs (i) through (xii) of proposed Rule
13n-6(a)(1) are significant events that warrant reporting to the
Commission because such material systems outages could negatively
impact the stability of the SBS 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 13n-6(b)(3), so that
the Commission can respond appropriately to the event that caused the
loss or disruption.
    Specifically, the Commission preliminarily believes that proposed
subsections (i), (ii), (iii), (iv), and (v) 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 subsection (vi) addresses a type
of event that impairs transparency or accurate and timely regulatory
reporting.
    The Commission also preliminarily believes that proposed
subsections (vii) and (viii) are appropriate because communications of
an outage to entities outside of the SDR, the board, or senior
management are indicia of a significant system outage sufficient to
warrant notification to the Commission. Specifically, proposed
subsection (viii)'s reference to ``a report or referral of an event * *
* '' seeks to address situations in which an SDR might seek to apply an
overly narrow definition of an ``outage situation'' in proposed
subsection (vii), in order to avoid reporting a problem that
nevertheless has a significant impact on the performance of the SDR's
systems and therefore warrants reporting to the Commission. For
example, where an SDR experiences a slowing, but not a stoppage, of its
ability to accept transaction data, and that slowing of data acceptance
is sufficiently significant to have been reported or referred to the
SDR's board or senior management, the Commission preliminarily believes
that this situation would constitute a material system outage under
proposed subsection (viii) that must be reported to the Commission. By
including proposed subsection (viii) in the definition of ``material
system 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
SDRs' automated systems. The Commission preliminarily believes that
proposed subsections (ix) and (x) 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.
    Subsection (xi) covers a failure to maintain the integrity of
systems that results in the entry of erroneous or inaccurate
transaction data or other information in an SDR or to market
participants. This subsection is designed to address the unique role of
SDRs in the SBS market. In particular, it is intended to cover such
events as breakdowns in an SDR's internal controls that result in the
entry of erroneous orders into the market. For example, it is possible
that an SDR 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 SBSs to 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 SBS market, damaging
liquidity and impeding the capital formation process. Accordingly, the
Commission preliminarily believes that this type of breakdown in an
SDR's

systems controls should be reported to the Commission.
    By including proposed subsection (xi) in the definition of
``material system 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 an SDR or the securities markets. This
should permit the Commission to monitor effectively the operation of
each SDR's automated systems.
    The definition of material systems outage also includes an
unauthorized intrusion by outside persons, insiders, or unknown
persons, into any system. The Commission preliminarily believes that
this provision would permit the Commission to effectively monitor the
operation of SDR's automated systems by requiring SDRs to notify the
Commission of unauthorized intrusions into systems or networks. SDRs
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, SDRs 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).
SDRs would need to supplement their initial reports by sending the
Commission updates on any harm to data, systems, or networks as well as
any remedial measures that the SDRs are contemplating or undertaking to
address the unauthorized intrusions. SDRs, 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 system 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
system 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 SDR to gather all relevant details surrounding
the outage and describe them in a written submission; a longer
timeframe might encourage unnecessary delays.
d. Material Systems Changes
    Under proposed subsection (4) of Rule 13n-6(b), an SDR would be
required to notify the Commission in writing at least thirty calendar
days before implementation of any planned material systems changes.
This proposed requirement is drawn from the ARP II Release.\145\
---------------------------------------------------------------------------

    \145\ See ARP II Release, 56 FR 22490, supra note 130.
---------------------------------------------------------------------------

    Proposed Rule 13n-6(a)(2) would define ``material systems change''
as ``a change to automated systems that: (i) Significantly affects
existing capacity or security; (ii) in itself, raises significant
capacity or security issues, even if it does not affect other existing
systems; (iii) relies upon substantially new or different technology;
(iv) is designed to provide a new service or function; or (v) otherwise
significantly affects the operations of the security-based swap data
repository.'' 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
definition is appropriate for SDRs. Each of the events listed in
paragraphs (i) through (v) 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 SBS 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 13n-
6(b)(2). Specifically, the proposed subsections (i)--(iv) are events
that concern the adequacy of capacity estimates, testing, and security
measures taken by an SDR, and thus are sufficiently significant to
warrant notification to the Commission. Proposed subsection (v)
covering a change that ``otherwise significantly affects the operations
of the security-based swap data repository'' is more open-ended in
order to require notification of other major systems changes. Examples
of changes that fall within proposed subsection (v) 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;\146\ 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 an SDR's board or senior management; and
changes that may require allocation or use of significant resources.
---------------------------------------------------------------------------

    \146\ The Commission has identified the five percent threshold
as triggering the definition of ``material systems change'' in
proposed Rule 13n-6(a)(2) 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.
---------------------------------------------------------------------------

    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.

Request for Comment

    The Commission requests comment on the following specific issues:
     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.
     Are there factors specific to SBS 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 SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
     With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     Should the Commission expressly require by rule:
    [cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) to be tested

periodically to assure their effectiveness and adequacy? \147\
---------------------------------------------------------------------------

    \147\ This requirement would be similar to what is required of
clearing agencies. See Exchange Act Release No. 16900 (June 17,
1980), 45 FR 41920 (June 20, 1980).
---------------------------------------------------------------------------

    [cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) 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 need 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 SDR
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? \148\
---------------------------------------------------------------------------

    \148\ These requirements are similar to requirements related to
disaster recovery plans of clearing agencies. See id. 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'').
---------------------------------------------------------------------------

    [cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) to include resources, emergency
procedures, and backup facilities sufficient to enable timely recovery
and resumption of its operations and resumption of its ongoing
fulfillment of its duties and obligations as an SDR, including, without
limitation, the duties set forth in Rule 13n-4, following any
disruption of its operations? \149\ If so, what should the recovery
time objective be? Should the SDR's contingency and disaster plans
(required in proposed paragraph (b)(1)(v)) and resources generally
enable resumption of the SDR's operations and resumption of ongoing
fulfillment of the SDR's duties and obligations during the next
business day following the disruption?
---------------------------------------------------------------------------

    \149\ For example, the BCP Whitepaper requires clearing and
settlement organizations to have a recovery time objective of
``within the business day on which the disruption occurs with the
overall goal of achieving recovery and resumption with two hours
after an event.''
---------------------------------------------------------------------------

    [cir] An SDR, to the extent practicable, to coordinate its
contingency and disaster recovery plans (required in proposed paragraph
(b)(1)(v)) with those of the SB SEFs, SBS markets, clearing agencies,
SBS dealers, and major SBS participants who report transaction data to
the SDR, and with those of regulators identified in Exchange Act
Section 13(n)(5)(G), with a view to enabling effective resumption of
the SDR's operations, including programs for periodic, synchronized
testing of these plans?
    [cir] An SDR, in developing its contingency and disaster recovery
plans, to take into account the business continuity-disaster recovery
plans of its telecommunications, power, water, and other essential
service providers?