[Federal Register Volume 75, Number 231 (Thursday, December 2, 2010)]
[Proposed Rules]
[Pages 75208-75288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29710]
[[Page 75207]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 242
Regulation SBSR--Reporting and Dissemination of Security-Based Swap
Information; Proposed Rule
Federal Register / Vol. 75 , No. 231 / Thursday, December 2, 2010 /
Proposed Rules
[[Page 75208]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 242
[Release No. 34-63346; File No. S7-34-10]
RIN 3235-AK80
Regulation SBSR--Reporting and Dissemination of Security-Based
Swap Information
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: In accordance with Section 763 (``Section 763'') and Section
766 (``Section 766'') of Title VII (``Title VII'') of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank
Act''), the Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information (``Regulation SBSR'')
under the Securities Exchange Act of 1934 (``Exchange Act'').\1\
Proposed Regulation SBSR would provide for the reporting of security-
based swap information to registered security-based swap data
repositories or the Commission and the public dissemination of
security-based swap transaction, volume, and pricing information.
Registered security-based swap data repositories would be required to
establish and maintain certain policies and procedures regarding how
transaction data are reported and disseminated, and participants of
registered security-based swap data repositories that are security-
based swap dealers or major security-based swap participants would be
required to establish and maintain policies and procedures that are
reasonably designed to ensure that they comply with applicable
reporting obligations. Finally, proposed Regulation SBSR also would
require a registered SDR to register with the Commission as a
securities information processor on existing Form SIP.
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\1\ 15 U.S.C. 78a et seq. All references in this release to the
Exchange Act refer to the Securities Exchange Act of 1934, as
amended by the Dodd-Frank Act.
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DATES: Comments should be received on or before January 18, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7- on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-34-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at
(202) 551-5602, David Michehl, Senior Special Counsel, at (202) 551-
5627, Sarah Albertson, Special Counsel, at (202) 551-5647, Natasha
Cowen, Special Counsel, at (202) 551-5652, Yvonne Fraticelli, Special
Counsel, at (202) 551-5654, Geoffrey Pemble, Special Counsel, at (202)
551-5628, Brian Trackman, Special Counsel, at (202) 551-5616, Mia Zur,
Special Counsel, at (202) 551-5638, Kathleen Gray, Attorney, at (202)
551-5305, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing Regulation SBSR
under the Exchange Act providing for the reporting of security-based
swap information to registered security-based swap data repositories or
the Commission, and the public dissemination of security-based swap
transaction, volume, and pricing information. The Commission is
soliciting comments on all aspects of the proposed rules and will
carefully consider any comments received.
I. Introduction
A. Background
On July 21, 2010, the President signed the Dodd-Frank Act into
law.\2\ The Dodd-Frank Act was enacted to, among other things, promote
the financial stability of the United States by improving
accountability and transparency in the financial system.\3\ Title VII
of the Dodd-Frank Act provides the Commission and the Commodity Futures
Trading Commission (``CFTC'') with the authority to regulate over-the-
counter (``OTC'') derivatives in light of the recent financial crisis,
which demonstrated the need for enhanced regulation in the OTC
derivatives markets. The Dodd-Frank Act is intended to close loopholes
in the existing regulatory structure and to provide the Commission and
the CFTC with effective regulatory tools to oversee the OTC derivatives
markets, which have grown exponentially in recent years and are capable
of affecting significant sectors of the U.S. economy. The primary goals
of Title VII, among others, are to increase the transparency and
efficiency of the OTC derivatives markets and to reduce the potential
for counterparty and systemic risk.\4\
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\2\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Pub. L. No. 111-203, H.R. 4173).
\3\ See id. at Preamble.
\4\ See ``Financial Regulatory Reform--A New Foundation:
Rebuilding Financial Supervision and Regulation,'' U.S. Department
of the Treasury, pp. 47-48 (June 17, 2009).
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The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps'' (``SBSs''), and
the CFTC and the Commission will jointly regulate ``mixed swaps.'' \5\
The Dodd-
[[Page 75209]]
Frank Act amends the Exchange Act to require the Commission to adopt
rules providing for, among other things (1) the reporting of SBSs to a
registered security-based swap data repository (``SDR'') \6\ or to the
Commission; and (2) real-time public dissemination of SBS transaction,
volume, and pricing information.\7\ To fulfill these requirements, the
Commission today is proposing Regulation SBSR, which would be comprised
of Rules 900 to 911 under the Exchange Act. In preparation for the
rulemakings required by the Dodd-Frank Act, the Commission and the CFTC
held a joint public roundtable (the ``Market Data Roundtable'') on
September 14, 2010, to gain further insight into many of the issues
addressed in this proposal.\8\ In addition, the Commission has offered
the opportunity for the public to express its views on the Commission
rulemakings required by the Dodd-Frank prior to proposing rules.\9\ The
rules proposed today generally take into account the views expressed at
the Market Data Roundtable, as well as any comments received.
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\5\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board of Governors
of the Federal Reserve System (``Federal Reserve''), shall jointly
further define the terms ``swap,'' ``security-based swap,'' ``swap
dealer,'' ``security-based swap dealer,'' ``major swap
participant,'' ``major security-based swap participant,'' ``eligible
contract participant,'' and ``security-based swap agreement.'' These
terms are defined in Sections 721 and 761 of the Dodd-Frank Act and,
with respect to the term ``eligible contract participant,'' in
Section 1a(18) of the Commodity Exchange Act (``CEA''), 7 U.S.C.
1a(18), as re-designated and amended by Section 721 of the Dodd-
Frank Act. Further, Section 721(c) of the Dodd-Frank Act requires
the CFTC to adopt a rule to further define the terms ``swap,''
``swap dealer,'' ``major swap participant,'' and ``eligible contract
participant,'' and Section 761(b) of the Dodd-Frank Act requires the
Commission to adopt a rule to further define the terms ``security-
based swap,'' ``security-based swap dealer,'' ``major security-based
swap participant,'' and ``eligible contract participant,'' with
regard to SBSs, for the purpose of including transactions and
entities that have been structured to evade Title VII of the Dodd-
Frank Act. Finally, Section 712(a) of the Dodd-Frank Act provides
that the Commission and CFTC, after consultation with the Federal
Reserve, shall jointly prescribe regulations regarding ``mixed
swaps,'' as may be necessary to carry out the purposes of Title VII.
To assist the Commission and CFTC in further defining the terms
specified above, and to prescribe regulations regarding ``mixed
swaps'' as may be necessary to carry out the purposes of Title VII,
the Commission and the CFTC sought comment from interested parties.
See Securities Exchange Act Release No. 62717 (August 13, 2010), 75
FR 51429 (August 20, 2010) (File No. S7-16-10) (advance joint notice
of proposed rulemaking regarding definitions contained in Title VII
of the Dodd-Frank Act) (``Definitions Release'').
\6\ A SDR is ``any person that collects and maintains
information or records with respect to transactions or positions in,
or the terms and conditions of, security-based swaps entered into by
third parties for the purpose of providing a centralized
recordkeeping facility for security based swaps.'' See Section
3(a)(75) of the Exchange Act, 15 U.S.C. 78c(a)(75). The Commission
is also proposing today new Rules 13n-1 through 13n-11 under the
Exchange Act relating to the SDR registration process, the duties of
SDRs, and the core principles for operating a registered SDR. See
Securities Exchange Act Release No. 63347 (November 19, 2010) (``SDR
Registration Proposing Release'').
\7\ Rules governing the reporting and dissemination of swaps are
the subject of a separate rulemaking by the CFTC.
\8\ The Commission and the CFTC solicited comments on the Market
Data Roundtable. See Securities Exchange Act Release No. 62863
(September 8, 2010), 75 FR 55575 (September 13, 2010). Comments
received by the Commission are available at http://www.sec.gov/cgi-bin/ruling-comments?ruling=df-title-vii-real-time-reporting&rule_path=/comments/df-title-vii/real-time-reporting&file_num=DF%20Title%20VII%20-%20Real%20Time%20Reporting&action=Show_Form&title=Real-Time%20Reporting%20-%20Title%20VII%20Provisions%20of%20the%20Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.
\9\ See http://www.sec.gov/spotlight/regreformcomments.shtml.
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In a separate release, the Commission is today proposing new rules
under the Exchange Act governing the security-based swap data
repository registration process, duties, and core principles.\10\
Proposed Rules 13n-1 through 13n-11 under the Exchange Act would, among
other things, require SDRs to comply with the requirements and core
principles described in Section 13(n) of the Exchange Act. An SDR also
would be required to appoint a chief compliance officer and specify the
duties of the chief compliance officer.
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\10\ See SDR Registration Proposing Release, supra note 6.
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Taken together, the rules that the Commission proposes today would
establish comprehensive regulation of SBS data and thus provide
transparency for SBSs to regulators and the markets. The proposed rules
would require SBS transaction information to be (1) provided to
registered SDRs in accordance with uniform data standards; (2) verified
and maintained by registered SDRs, which would serve as secure,
centralized recordkeeping facilities that are accessible by regulators
and relevant authorities; and (3) publicly disseminated in a timely
fashion by registered SDRs. In combination, these proposed rules are
designed to promote transparency and efficiency in the SBS markets and
create an infrastructure to assist the Commission and other regulators
in performing their market oversight functions.
In proposing these rules, the Commission is mindful that there may
be differences between the SBS market and the other securities markets
that the Commission regulates. For example, though the marketplace has
developed standardized terms for various types of SBSs, contracts are
nevertheless customizable. Furthermore, unlike bonds or equity
securities, SBSs are not today readily fungible. The liquidity
characteristics of SBSs also may differ in comparison with other
markets. Relative to the overall equity markets, SBSs trade much less
frequently, though the trading frequency of some illiquid equities
would be comparable to that of some SBSs. The liquidity of SBSs
compared to the bond market depends on the specifics of the SBS and the
bond (e.g., Treasury, corporate, municipal). Many bonds do not have
standardized SBS analogs and would therefore be more liquid than
bespoke customizable SBS contracts that would function as the analog.
But some market participants have found the SBSs written on some
issuers and securities to be more liquid and readily tradable during
certain periods of time than the underlying securities themselves.
Another notable distinction is that the SBS market does not
generally have the equivalent of a ``retail'' segment characterized by
a high-volume of small-sized trades. Though some swaps on some interest
rates, indices, and currencies may support high volumes, many SBSs
trade infrequently. For example, an analysis by the staff of trading in
single-name credit default swaps (``CDS'') show that approximately 90%
of single-name CDS on corporate issuers trade at an average of five
times or less per day, with an average trade size of over $5
million.\11\ This same analysis shows that 89% of single-name CDS on
sovereign issuers trade at an average of ten times or less per day,
with an average trade size of over $12 million.
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\11\ This analysis is based on a sample of dollar-quoted, gold
record transactions submitted to the Depository Trust & Clearing
Corporation (``DTCC'') between August 1, 2009, and July 30, 2010.
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The Commission also is mindful that, both over time and as a result
of Commission proposals to implement the Dodd-Frank Act, the further
development of the SBS market may alter some of the specific calculus
for future regulation of reporting and real-time public dissemination
of SBS transaction information. During the process of implementing the
Dodd-Frank Act and beyond, the Commission will therefore closely
monitor developments in the SBS market.
B. Overview of Security-Based Swap Reporting and Dissemination
Requirements in the Dodd-Frank Act
1. Security-Based Swap Reporting Requirements
The Dodd-Frank Act adds several provisions to the Exchange Act that
require the reporting of information relating to SBSs. Section 3C(e) of
the Exchange Act \12\ requires the Commission to adopt rules that
provide for the reporting of SBS data as follows: (1) SBSs entered into
before the date of enactment of Section 3C shall be reported to a
registered SDR or the Commission no later than 180 days after the
effective date of Section 3C (i.e., 540 days after the enactment of the
Dodd-Frank Act); and (2) SBSs entered into on or after the date of
enactment of Section 3C shall be reported to a registered SDR or to the
Commission no later than the later of (1) 90 days after the effective
date of Section 3C (i.e., 450 days after the enactment of the Dodd-
Frank Act),
[[Page 75210]]
or (2) such other time after entering into the SBS as the Commission
may prescribe by rule or regulation.
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\12\ 15 U.S.C. 78c-3(e).
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In addition, Section 13A(a)(1) of the Exchange Act \13\ requires
that each SBS that is not accepted for clearing by any clearing agency
or derivatives clearing organization be reported to (1) an SDR, or (2)
in the case in which there is no SDR that would accept such SBS, to the
Commission, within such time period as the Commission may by rule or
regulation prescribe. Section 13(m)(1)(G) of the Exchange Act \14\
provides, further, that each SBS (whether cleared or uncleared) shall
be reported to a registered SDR. Section 13(m)(1)(F) of the Exchange
Act \15\ states that the parties to a SBS, including agents of the
parties to a SBS, shall be responsible for reporting SBS transaction
information to the appropriate registered entity in a timely manner as
may be prescribed by the Commission.\16\
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\13\ 15 U.S.C. 78m-1(a)(1).
\14\ 15 U.S.C. 78m(1)(G).
\15\ 15 U.S.C. 78m(m)(1)(F).
\16\ In addition, Section 13A(a)(2) of the Exchange Act requires
the Commission to adopt an interim final rule providing for the
reporting of SBSs entered into before the date of enactment of the
Dodd-Frank Act the terms of which had not expired as of that date.
To satisfy this requirement, the Commission adopted Rule 13Aa-2T
under the Exchange Act, an interim final temporary rule for the
reporting of such SBSs. See Securities Exchange Act Release No.
63094 (``Interim Rule Release'').
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Section 13(n)(4)(A)(i) of the Exchange Act \17\ requires the
Commission to prescribe standards that specify the data elements for
each SBS that must be collected and maintained by each registered SDR.
Further, Section 13(n)(4)(A)(ii) of the Exchange Act \18\ requires the
Commission, in carrying out Section 13(n)(4)(A)(i) of the Exchange Act,
to prescribe consistent data element standards applicable to registered
entities and reporting counterparties. Under Section 13(n)(5) of the
Exchange Act, a registered SDR must, among other things, maintain the
SBS data it collects in the form and manner prescribed by the
Commission, provide the Commission or its designee with direct
electronic access, and make SBS data available on a confidential basis,
upon request, to certain regulatory authorities.\19\
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\17\ 15 U.S.C. 78(n)(4)(A)(i).
\18\ 15 U.S.C. 78(n)(4)(A)(ii).
\19\ These responsibilities of registered SDRs under Section
13(n)(5) of the Exchange Act, 15 U.S.C. 78m(n)(5), will be the
subject of a separate Commission rulemaking. See SDR Registration
Proposing Release, supra note 6.
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2. Security-Based Swap Dissemination Requirements
Section 13(m)(1)(B) of the Exchange Act \20\ authorizes the
Commission to make SBS transaction and pricing data available to the
public in such form and at such times as the Commission determines
appropriate to enhance price discovery, subject to the general
requirement in Section 13(m)(1)(C) of the Exchange Act \21\ that all
SBS transactions be subject to real-time public reporting. Section
13(m)(1)(C) authorizes the Commission to provide by rule for the public
availability of SBS transaction, volume, and pricing data as follows:
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\20\ 15 U.S.C. 78m(m)(1)(B).
\21\ 15 U.S.C. 78m(m)(1)(C).
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(1) With respect to those SBSs that are subject to the mandatory
clearing requirement described in Section 3C(a)(1) of the Exchange Act
(including those SBSs that are excepted from the requirement pursuant
to Section 3C(g) of the Exchange Act), the Commission shall require
real-time public reporting for such transactions; \22\
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\22\ Section 3C(a)(1) of the Exchange Act provides that it shall
be unlawful for any person to engage in a SBS unless that person
submits such SBS for clearing to a clearing agency that is
registered under the Exchange Act or a clearing agency that is
exempt from registration under the Exchange Act if the SBS is
required to be cleared. Section 3C(g)(1) of the Exchange Act
provides that requirements of Section 3C(a)(1) will not apply to a
SBS if one of the counterparties to the SBS (1) is not a financial
entity; (2) is using SBSs to hedge or mitigate commercial risk; and
(3) notifies the Commission, in a manner set forth by the
Commission, how it generally meets its financial obligations
associated with entering into non-cleared SBSs.
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(2) With respect to those SBSs that are not subject to the
mandatory clearing requirement described in Section 3C(a)(1) of the
Exchange Act, but are cleared at a registered clearing agency, the
Commission shall require real-time public reporting for such
transactions;
(3) With respect to SBSs that are not cleared at a registered
clearing agency and which are reported to a SDR or the Commission under
Section 3C(a)(6),\23\ the Commission shall require real-time public
reporting for such transactions, in a manner that does not disclose the
business transactions and market positions of any person; and
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\23\ The reference in Section 13(m)(1)(C)(iii) of the Exchange
Act to Section 3C(a)(6) of the Exchange Act is incorrect. Section 3C
of the Exchange Act does not contain a paragraph (a)(6).
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(4) With respect to SBSs that are determined to be required to be
cleared under Section 3C(b) of the Exchange Act but are not cleared,
the Commission shall require real-time public reporting for such
transactions.\24\
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\24\ Section 3C(b)(1) of the Exchange Act requires the
Commission to review on an ongoing basis each SBS, or any group,
category, type, or class of SBS to make a determination that such
SBS, or group, category, type, or class of SBS should be required to
be cleared.
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Section 13(m)(1)(A) of the Exchange Act \25\ states that the term
``real-time public reporting'' means to report data relating to a SBS
transaction, including price and volume, as soon as technologically
practicable after the time at which the SBS transaction has been
executed.
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\25\ 15 U.S.C. 78m(m)(1)(A).
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With respect to SBSs that are subject to Sections 13(m)(1)(C)(i)
and (ii) of the Exchange--i.e., SBSs that are subject to the mandatory
clearing requirement in Section 3C(a)(1) (including those SBSs that are
not cleared pursuant to the exception in Section 3C(g)(1)) and SBSs
that are not subject to the mandatory clearing requirement in Section
3C(a)(1) but are cleared--Section 13(m)(1)(E) of the Exchange Act \26\
requires that the Commission's rule providing for the public
availability of SBS transaction and pricing data contain provisions to:
(1) Ensure that such information does not identify the participants;
(2) specify the criteria for determining what constitutes a large
notional SBS transaction (block trade) for particular markets and
contracts; (3) specify the appropriate time delay for reporting large
notional SBS transactions (block trades) to the public; and (4) that
take into account whether public disclosure will materially reduce
market liquidity.
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\26\ 15 U.S.C. 78m(m)(1)(E).
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Section 13(m)(1)(D) of the Exchange Act \27\ authorizes the
Commission to require registered entities \28\ to publicly disseminate
the SBS transaction and pricing data required to be reported under
Section 13(m)(1) of the Exchange Act. In addition, Section
13(n)(5)(D)(ii) of the Exchange Act states that a registered SDR shall
provide data ``in such form and at such frequency as the Commission may
require to comply with the public reporting requirements set forth in
subsection (m).'' \29\
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\27\ 15 U.S.C. 78m(m)(1)(D).
\28\ The Exchange Act does not define the term ``registered
entity'' or ``registered entities.'' The Commission believes that
the term ``registered entities'' in Sections 13(m)(1)(F) and
13(n)(4)(A)(ii) of the Exchange Act includes registered SDRs because
SDRs are required to register with the Commission pursuant to
Section 13(n) of the Exchange Act, 15 U.S.C. 78m(n).
\29\ 15 U.S.C. 78m(n)(5)(D)(ii).
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II. Description of Proposed Rules
A. Overview
In general, proposed Regulation SBSR would provide for the
reporting of three broad categories of SBS information: (1) Information
that would be required to be reported to a registered SDR in real
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time and publicly disseminated; \30\ (2) additional information that
would be required to be reported to a registered SDR or, if there is no
registered SDR that would receive such information, to the Commission,
within specified timeframes, but that would not be publicly
disseminated; and (3) information about ``life cycle events'', as
defined in proposed Rule 900 \31\ and discussed below, that would be
reported as a result of a change to information previously reported for
a SBS. As described in greater detail below, proposed Regulation SBSR
would identify the SBS transaction information that would be required
to be reported, establish reporting obligations, and specify the
timeframes for reporting and disseminating information.
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\30\ See proposed Rule 900 (defining ``real time'' to mean, with
respect to the reporting of SBS information, as soon as
technologically practicable, but in no event later than 15 minutes
after the time of execution of the SBS, and defining ``time of
execution'' as the point at which the counterparties to a SBS become
irrevocably bound under applicable law). See also infra Section III
(discussing proposed rules relating to real-time public
dissemination of SBS transaction information).
\31\ Proposed Rule 900 would provide definitions of various
terms used in proposed Regulation SBSR and further provide that
terms that appear in Section 3 of the Exchange Act, 15 U.S.C. 78c,
would have the same meaning as in Section 3 and the rules or
regulations thereunder.
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In addition, proposed Regulation SBSR would require a registered
SDR to publicly disseminate the SBS information that would be required
to be reported in real time. Proposed Regulation SBSR also would
require a registered SDR to register with the Commission as a
securities information processor (``SIP'') on existing Form SIP.
B. Who Must Report
Section 13(m)(1)(F) of the Exchange Act \32\ provides that parties
to a SBS (including agents of parties to a SBS) shall be responsible
for reporting SBS transaction information to the appropriate registered
entity in a timely manner as may be prescribed by the Commission.
Section 13A(a)(3) of the Exchange Act \33\ specifies the party
obligated to report SBSs that are not accepted by any clearing agency
or derivative clearing organization. Proposed Rule 901(a) would specify
which counterparty is the ``reporting party'' for a SBS, thereby
implementing Sections 13(m)(1)(F) and 13A(a)(3) of the Exchange Act, as
follows:
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\32\ 15 U.S.C. 78m(m)(1)(F).
\33\ 15 U.S.C. 78m[A(a)(3)].
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With respect to a SBS in which only one counterparty is a
security-based swap dealer (``SBS dealer'') or major security-based
swap participant (``major SBS participant''),\34\ the SBS dealer or
major SBS participant shall be the reporting party;
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\34\ See 15 U.S.C. 78c(a)(71) (defining ``security-based swap
dealer''); 15 U.S.C. 78c(a)(67) (defining ``major security-based
swap participant''). See also supra note 5.
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With respect to a SBS in which one counterparty is a SBS
dealer and the other counterparty is a major SBS participant, the SBS
dealer shall be the reporting party; and
With respect to any other SBS not described in the first
two cases, the counterparties to the SBS shall select a counterparty to
be the reporting party.
The Exchange Act, as modified by the Dodd-Frank Act, does not
explicitly specify which counterparty should be the reporting party for
those SBSs that are cleared by a clearing agency or derivative clearing
organization. The Commission preliminarily believes that, for the sake
of uniformity and ease of applicability, the duty to report a SBS
should attach to the same counterparty regardless of whether the SBS is
cleared or uncleared. In addition, the Commission preliminarily
believes that SBS dealers and major SBS participants generally should
have the responsibility to report SBS transactions, as they are more
likely than other counterparties to have appropriate systems in place
to facilitate reporting.
Accordingly, with respect to a SBS where both counterparties are
U.S. persons,\35\ proposed Rule 901(a) would assign reporting
responsibilities as follows:
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\35\ See proposed Rule 900 (defining ``U.S. person'' to mean a
natural person that is a U.S. citizen or U.S. resident or a legal
person that is organized under the corporate laws of any part of the
United States or has its principal place of business in the United
States). See also infra Section VIII (discussing application of
proposed Regulation SBSR to cross-border SBS transactions).
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With respect to a SBS in which only one counterparty is a
SBS dealer or major SBS participant, the SBS dealer or major SBS
participant would be the reporting party;
With respect to a SBS in which one counterparty is a SBS
dealer and the other counterparty is a major SBS participant, the SBS
dealer would be the reporting party; and
With respect to any other SBS not described in the first
two cases, the counterparties to the SBS would select a counterparty to
be the reporting party.
Proposed Rule 901(a)(1) would provide that, where only one
counterparty to a SBS is a U.S. person, the U.S. person would be the
reporting party. The Commission preliminarily believes that, where only
one counterparty is a U.S. person, assigning the reporting duty to the
counterparty that is a U.S. person would help to assure compliance with
the reporting requirements of proposed Regulation SBSR.
In addition, it is possible that a SBS executed in the United
States or through any means of interstate commerce, or that is cleared
through a clearing agency having its principal place of business in the
United States, could be executed between two counterparties neither of
which is a U.S. person. Proposed Rule 901(a)(3) would provide that, if
neither party is a U.S. person but the SBS is executed in the United
States or through any means of interstate commerce, or is cleared
through a clearing agency having its principal place of business in the
United States,\36\ the counterparties to the SBS would be required to
select a counterparty to be the reporting party.\37\
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\36\ See proposed Rules 908(a)(2) and (3) and infra Section
VIII.
\37\ See infra Section VIII (discussing the requirements for the
reporting of a SBS if the SBS is executed in the United States or
through any means of interstate commerce, or is cleared through a
registered clearing agency having its principal place of business in
the United States).
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To comply with the duty to report in real time itself, a reporting
party likely would need to develop and maintain an internal order
management system (``OMS'') capable of capturing all relevant SBS data
and sending it in real time. The Commission further believes that each
reporting party likely would need to establish and maintain an
appropriate compliance program and support for the operation of the OMS
and reporting mechanism, which could include transaction verification
and validation protocols, and necessary technical, administrative, and
legal support. However, proposed Rule 901(a) would not prevent a
reporting party to a SBS from entering into an agreement with a third
party to report the transaction on behalf of the reporting party. For
example, for a SBS executed on a security-based swap execution facility
(``SB SEF'') \38\ or a national securities exchange, the SB SEF or
national securities exchange could transmit a transaction report for
the SBS to a registered SDR. By specifying the reporting party with the
duty to report SBS information under proposed Regulation SBSR, the
Commission does not intend to inhibit the development of commercial
ventures to provide trade processing services to SBS counterparties.
Nevertheless, a SBS counterparty that is a reporting party would retain
the obligation to ensure
[[Page 75212]]
that information is provided to a registered SDR in the manner and form
required by proposed Regulation SBSR, even if the reporting party has
entered into an agreement with a third party to report on its
behalf.\39\
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\38\ See 15 U.S.C. 78c(a)(77) (defining ``security-based swap
execution facility''). The registration and regulation of SB SEFs is
the subject of a separate Commission rulemaking.
\39\ Thus, a reporting party would be liable for a violation of
proposed Rule 901 if, for example, a SB SEF acting on the reporting
party's behalf reported a SBS transaction to a registered SDR late
or inaccurately.
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Request for Comment
The Commission requests comment on all aspects of the proposal as
to who would be responsible for reporting SBSs to a registered SDR.
1. Do any entities currently have the functionality to report SBSs,
as proposed, to data repositories? If so, who? Do commenters think it
is likely that entities other than SBS counterparties will develop the
functionality to report SBSs to registered SDRs? If so, what are these
entities and how will they operate?
2. Should the Commission require one or more entities other than a
SBS counterparty, such as a registered SB SEF, a national securities
exchange, a clearing agency, or a broker, to report SBSs? Or do
commenters agree with the Commission's approach of assigning the
responsibility to report to a counterparty, while allowing the
counterparty to have an agent (such as a SB SEF) act on its behalf?
3. In practice, would reporting parties employ agents? Should the
Commission encourage this?
4. Are the obligations assigned in proposed Rule 901(a)
sufficiently clear?
5. For SBSs executed on a SB SEF or national securities exchange,
would the counterparties to the SBS have the information necessary to
know which counterparty would incur the reporting obligation? For
example, for an anonymous SBS executed on a SB SEF and cleared by a
clearing agency, would the counterparties know each other's identities?
If not, what steps could they take to obtain enough information to be
able to ascertain which party has the reporting obligation? Could the
SB SEF provide that information to the counterparties? Alternatively,
should the reporting obligation be assigned to the SB SEF or other
trading venue?
6. In cases where counterparties would be required to select which
counterparty would report the transaction, is additional Commission
guidance likely to be necessary? Should the Commission adopt a default
mechanism to allocate the reporting obligation in such cases? For
example, if a SBS is between two SBS dealers, should the Commission
mandate that the ``seller'' always have the responsibility for
reporting?
7. Do commenters agree with the Commission's proposed approach for
reporting for SBSs where only one counterparty is a U.S. person? If
not, how should it be revised?
8. Do commenters agree with the Commission's proposed approach for
reporting for SBSs where neither counterparty is a U.S. person? If not,
how should it be revised?
9. To what extent would reporting parties have to obtain new or
update existing OMSs and establish appropriate compliance programs to
satisfy the real-time reporting obligations of proposed Rule 901(c)?
Would current systems be able to handle this responsibility? Could
current systems be upgraded or would they have to be replaced
completely?
C. Where Information Is Reported
Proposed Rule 901(b) would require a reporting party to report the
information required under proposed Regulation SBSR to a registered SDR
or, if there is no registered SDR that would accept the information, to
the Commission. The Commission believes that it would be very unlikely
that there would be a situation where a reporting party would be
required to report to the Commission rather than a registered SDR.
Proposed Rule 13n-5(b)(1)(ii) under the Exchange Act would require a
registered SDR that accepts reports for any SBS in a particular asset
class to accept reports for all SBSs in that asset class.\40\ Thus, a
reporting party would not be able to report a SBS transaction to the
Commission unless no registered SDR accepts transaction information for
any SBS in the same asset class as the transaction. In addition, there
currently exist entities that accept SBS transaction data in CDS and
equity swaps that would likely be required to register as a SDR.
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\40\ See SDR Registration Proposing Release, supra note 6.
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Request for Comment
10. Is the Commission's belief that it would be unlikely to have a
situation where a reporting party must report to the Commission rather
than a registered SDR reasonable?
11. Do commenters believe that there will be at least one
registered SDR in each SBS asset class?
12. Are there any SBS asset classes for which there might not be a
registered SDR?
III. Information To Be Reported in Real Time
A. Introduction
Proposed Rule 901 divides the SBS information that would be
required to be reported into three broad categories: (1) Information
that would be required to be reported in real time pursuant to proposed
Rule 901(c) \41\ and publicly disseminated pursuant to proposed Rule
902; (2) additional information that would be required to be reported
(but not publicly disseminated) pursuant to proposed Rule 901(d)(1)
\42\ within the timeframes specified in proposed Rule 901(d)(2), which
would vary depending on whether the transaction was executed and
confirmed electronically or manually; and (3) life cycle event
information that would be required to be reported under proposed Rule
901(e).\43\
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\41\ See infra Section III.B (discussing the categories of
information to be provided for real-time reporting).
\42\ See infra Section IV.B (discussing those data elements
required under Rule 901(d)(1)).
\43\ See infra Section IV.D (discussing the reporting of life
cycle event information). A registered SDR would be required to
adopt policies and procedures to determine, among other things,
whether and how it would publicly disseminate reports of life cycle
events. See proposed Rule 907(a)(4).
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The Commission notes that, although only the information specified
in proposed Rule 901(c) would be required to be reported in real time,
proposed Rule 901(c) would not prevent a reporting party from reporting
some or all of the additional information required under proposed Rule
901(d)(1) at the same time that it reports the information required
under proposed Rule 901(c). In other words, proposed Rule 901 would not
mandate separate reports for the SBS information required under
paragraphs (c) and (d) of proposed Rule 901; if a reporting party
wished to provide all of the information required under proposed Rule
901 in a single transaction report, it would be free to do so--provided
it could provide all of the information within the timeframe required
by proposed Rule 901(c).
B. Categories of Information To Be Provided for Real-time Reporting
Proposed Rule 901(c) would set forth the categories of information
pertaining to a SBS transaction that a reporting party would be
required to report to a registered SDR in real time. For the reasons
discussed below, the Commission preliminarily believes that the SBS
information required to be reported under proposed Rule 901(c)--which
the registered SDR would publicly disseminate pursuant to
[[Page 75213]]
proposed Rule 902--would serve the objectives of Section 13(m) of the
Exchange Act by enhancing price discovery in the SBS market.
The Commission recognizes that the SBS market involves complex
instruments and that reporting conventions continue to evolve.
Consequently, in developing proposed Rule 901, the Commission explored
various alternative approaches, including mandating by rule an
enumerated list of all specific data elements to be reported. The
Commission believes that such a list likely would have to vary by asset
class (e.g., CDS and equity-based swaps), and would require further
variations based on sub-asset type.\44\ The Commission understands,
based on discussion with industry participants, that between 50 and 100
or more separate data elements could be used to express a typical CDS.
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\44\ For example, the following types of CDS could each require
a different list of data elements: Single-name CDS, index CDS, loan
CDS, and CDS on asset-backed securities.
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A Commission rule that attempted to identify each data element for
each SBS asset class or sub-asset type could be less flexible in
responding to changes in the marketplace, including the introduction of
new types of SBSs, because it would be necessary for the Commission to
amend its rules each time it sought to require the reporting of
additional or different data elements. Accordingly, rather than
enumerating each data element for each SBS asset class or sub-asset
type that would be required to be reported, proposed Rule 901(c) would
instead specify the categories of information that would be required to
be reported for each SBS transaction. Furthermore, proposed Rule 907,
discussed more fully below, would require each registered SDR to
establish, maintain, and make publicly available policies and
procedures that, among other things, specify the data elements of a SBS
(or a life cycle event) that a reporting party would be required to
report. These data elements would be required to include, at a minimum,
the data elements required under proposed Rule 901(c) (for information
that will be publicly disseminated) and proposed Rule 901(d) (for non-
disseminated regulatory information). The Commission preliminarily
believes that proposed Rule 901(c), together with these policies and
procedures, would promote the reporting of uniform, material
information for each SBS, while providing flexibility to account for
changes to the SBS market over time.
The Commission discusses below the SBS data that would be required
to be reported in real time, and which would be publicly disseminated.
1. Asset Class
Proposed Rule 901(c)(1) would require the reporting party to report
the asset class of the SBS and, if the SBS is an equity derivative,
whether the SBS is a total return swap or is otherwise designed to
offer risks and returns proportional to a position in the equity
security or securities on which the SBS is based. Proposed Rule 900
would define ``asset class'' to mean those SBSs in a particular broad
category, including, but not limited to, credit derivatives, equity
derivatives, and loan-based derivatives. The Commission believes that
identifying the asset class would provide market participants with
basic information about the SBS transaction to identify the type of SBS
being publicly reported. In addition, requiring the reporting party to
indicate whether the SBS is an equity total return swap or is otherwise
designed to offer risks and returns proportional to a position in the
equity security or securities on which the SBS is based would enable a
registered SDR to know if the SBS was excluded from being a block
trade.\45\
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\45\ See proposed Rule 907(b)(4)(ii).
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2. Date and Time of Execution
Proposed Rule 901(c)(4) would require the reporting party to report
the date and time, to the second, of execution of a SBS, so that prices
of transactions that are disseminated in real time can be properly
ordered, and so the Commission can have a detailed record of when any
given SBS was executed. In the absence of this information, market
participants and regulators would not know whether transaction reports
they are seeing reflect the current state of the market.
The Commission preliminarily believes that the time at which the
SBS transaction has been executed should be the point at which the
counterparties to a SBS become irrevocably bound under applicable
law.\46\ For example, in the context of SBSs, an oral agreement over
the phone will create an enforceable contract, and the time of
execution would be deemed to be the time that the parties to the
telephone call agree to the material terms.\47\ The Commission
recognizes that trades agreed to over the phone would need to be
systematized for purposes of fulfilling this reporting requirement (as
well as real-time reporting of other data elements) by being entered in
an electronic system that assigns a time stamp. The Commission believes
that it is consistent with Congress' intent for orally negotiated SBS
transactions to be systematized as quickly as possible so that they
could be publicly disseminated using electronic means.\48\
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\46\ See proposed Rule 900. Section 13(m)(1)(A) of the Exchange
Act defines ``real time'' in relation to the ``execution'' of the
SBS, not when it is confirmed or cleared.
\47\ The Dodd-Frank Act amends the definition of ``security''
under the Securities Act and Exchange Act to explicitly include
SBSs, and the execution of the transaction will be the sale for
purposes of the federal securities laws. See Securities Act Release
No. 3591 (July 19, 2005), 70 FR 44722 (August 3, 2005), notes 391
and 394 (explaining when a sale occurs under the Securities Act).
\48\ The Senate Report accompanying the Dodd-Frank Act indicates
that ``[m]arket participants--including exchanges, contract markets,
brokers, clearing houses and clearing agencies-were consulted and
affirmed that the existing communications and data infrastructure
for the swaps markets could accommodate real time swap transaction
and price reporting.'' The Senate Report stated, further, that real
time swap transaction and price reporting would narrow swap bid/ask
spreads, make for a more efficient swaps market and benefit
consumers and counterparties overall. See 156 Cong. Rep. S5921 (July
15, 2010). In light of this acknowledgement of the benefits of real-
time SBS transaction and price reporting, and the apparent
feasibility of such reporting, the Commission believes that Congress
intended for orally negotiated SBS transactions to be systematized
as quickly as possible and reported in real time.
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The Commission is proposing that the date and time of execution be
expressed using Coordinated Universal Time (``UTC''), a slight
variation on Greenwich Mean Time.\49\ SBSs are traded globally, and the
Commission expects that many SBSs subject to these reporting and
dissemination rules would be executed between counterparties in
different time zones. In the absence of a uniform standard, it might
not be clear whether the date and time of execution were being
expressed from the standpoint of the time zone of the first
counterparty, the second counterparty, or the registered SDR itself.
Mandating a common standard for expressing date and time is designed to
alleviate any potential confusion on the part of registered SDRs,
counterparties, other market participants, and the public as to when
the SBS was executed. The Commission believes that UTC is an
appropriate and well known standard
[[Page 75214]]
suitable for purposes of reporting the time of execution of SBSs.
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\49\ The generally acknowledged acronym for Coordinated
Universal Time is ``UTC,'' rather than ``CUT.'' The International
Telecommunication Union, an agency of the United Nations that
oversees information and communication technology issues, wanted
Coordinated Universal Time to have the same symbol in all languages.
English and French speakers wanted the initials of both their
respective language's terms to be used internationally: ``CUT'' for
``coordinated universal time'' and ``TUC'' for ``temps universel
coordonn[eacute].'' This resulted in the final compromise of
``UTC.'' See http://www.nist.gov/physlab/div847/utenist.cfm#cut.
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3. Price
Proposed Rule 901(c)(7) would require the reporting of the price of
a SBS transaction, expressed in terms of the commercial conventions
used in that asset class.\50\ The Commission recognizes that the price
of a SBS generally would not be a simple number, as with stocks, but
would be expressed in terms of the quoting conventions for that SBS.
For example, a CDS may be quoted in terms of the economic spread--which
is variously referred to as the ``traded spread,'' ``quote spread,'' or
``composite spread''--expressed as a number of basis points per annum.
Alternately, CDS can be quoted in terms of prices representing a
discount or premium over par. In contrast, an equity or loan total
return swap may be quoted in terms of a LIBOR-based floating rate
payment, expressed as a floating rate plus a fixed number of basis
points.
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\50\ One commenter identified the traded price as one of the
elements that should be included in a SBS transaction report. See
letter from James W. Toffey, Chief Executive Officer, Benchmark
Solutions, to David A. Stawick, Secretary, CFTC, and Elizabeth M.
Murphy, Secretary, Commission, dated October 1, 2010 (``Benchmark
Letter'') at 2.
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The Commission preliminarily believes that, because these quoting
conventions are widely used and understood by SBS market participants,
requiring the price of a SBS to be reported in terms of one of these
existing quoting conventions would be consistent with the mandate in
Section 13(m)(1)(B) of the Exchange Act to enhance price discovery. As
discussed further below, however, proposed Rule 907(a)(1) would require
a registered SDR to establish, maintain, and make publicly available
policies and procedures that specify the data elements of a SBS that a
reporting party must report, which would include the elements that
constitute the price. The Commission preliminarily believes that,
because of the many different conventions that exist to express the
price in various SBS markets and the new conventions that might arise
in the future, some flexibility should be given to registered SDRs to
select appropriate conventions for denoting the price of different
asset classes of SBSs.
4. Other Terms of the SBS
Proposed Rule 901(c) would require the reporting of, among other
things, information that identifies the SBS instrument \51\ and the
specific asset(s) or issuer(s) of a security or indexes on which the
SBS is based; the notional amount(s) of the SBS and the currenc(ies) in
which the notional amount(s) is expressed; the effective date of the
SBS; the scheduled termination date of the SBS; and the terms of any
fixed or floating rate payments and the frequency of any payments. The
Commission preliminarily believes that this information is fundamental
to understanding the SBS transaction being publicly reported, and that
a SBS transaction report that lacked such information would not be
meaningful.
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\51\ See proposed Rule 900 (defining ``security-based swap
instrument'' to mean each SBS in the same asset class, with the same
underlying reference asset, reference issuer, or reference index).
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For example, some types of SBSs are contractual agreements that
generally involve the periodic exchange of cash flows from specified
assets over a defined time period. These cash flows are based on the
notional amount(s) of the SBS--i.e., the notional principal(s) of the
SBS is used to calculate the periodic payments made under the
agreement. Accordingly, information that identifies the asset(s),
including a narrow-based index, or issuer(s) of the security or
securities on which a SBS is based, the notional amount(s) of the SBS
(including the currenc(ies) in which it is expressed), the effective
date, and the scheduled termination date of that SBS are fundamental
elements of the transaction that would enhance price discovery.\52\
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\52\ One commenter believed that a SBS transaction report should
include: (1) The traded price and execution time; (2) the
counterparty type, including a designation for an ``end user;'' (3)
the notional size of the transaction; and (4) contract ``open
interest.'' See Benchmark Letter at 2. In addition, the commenter
believed that the reference data for a SBS must include ``standard
attributes necessary to derive cash flows and any contingent claims
that can alter or terminate payments'' of the SBS. See id. at 1. As
described above, the proposed rules would require the real-time
reporting of price and time of execution, notional size, and an
indication of whether a SBS is between two dealers. The proposed
rules would not require the reporting of ``open interest.'' However,
another Commission rulemaking will provide regulators with the
ability to monitor open SBS positions. See SDR Registration
Proposing Release, supra note 6.
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The Commission anticipates that, for at least some standardized
instruments, conventions about how a SBS instrument is referred to can
become so well known that certain terms of the underlying contract can
be assumed, and thus would not need to be specifically provided
pursuant to other provisions of proposed Rule 901(c).
5. Whether the SBS Will Be Cleared by a Clearing Agency
Proposed Rule 901(c)(9) would require the reporting party to
indicate whether or not the SBS will be cleared by a clearing agency.
This factor can impact the price of the SBS. If a SBS is not cleared,
one counterparty might charge a higher price to do the trade because of
the counterparty credit risk it would incur (which might be
significantly diminished if the SBS were centrally cleared). Because
the use of a clearing agency to clear a SBS would thus impact price,
knowing whether a SBS will be cleared should provide market
participants with additional information that would be useful in
assessing the reported price for a SBS, thus enhancing price discovery.
Therefore, the Commission is proposing to require that this data
element be reported in real time and publicly disseminated.
6. Indication That a Transaction Is Between Two SBS Dealers
Proposed Rule 901(c)(10) would require the reporting party to
indicate if both counterparties to the SBS are SBS dealers. The
Commission preliminarily believes that such an indication would enhance
market transparency and provide more accurate information about the
pricing of the SBS transaction, and thus about trading activity in the
SBS market. Prices of transactions involving a dealer and non-dealer
are typically ``all-in'' prices that include a mark-up or mark-down,
while interdealer transaction prices typically do not. Thus, the
Commission believes that requiring an indication of whether a SBS was
an interdealer transaction or a transaction between a dealer and a non-
dealer counterparty would enhance transparency by allowing market
participants to more accurately assess the reported price for a SBS.
7. If Applicable, an Indication That the SBS Transaction Does Not
Accurately Reflect the Market
In some instances, a SBS transaction might not reflect the current
state of the market. Thus, publicly disseminating a report of that
transaction without an indication to that effect could mislead market
participants and other observers. The Commission does not expect that a
registered SDR would be able to identify such cases. Therefore,
proposed Rule 901(c)(11) would require the reporting party to alert the
registered SDR in such cases. This could occur, for example, if the
reporting party were reporting the transaction late (i.e., over 15
minutes after the time of execution). An aged transaction by definition
no longer represents the current state of the market, and a reporting
party would therefore be required to indicate that the
[[Page 75215]]
transaction is being reported late.\53\ Other situations where this
could occur are inter-affiliate transfers and assignments where the new
counterparty has no opportunity to negotiate the terms, including the
price, of taking on the position. In such cases, there might not be an
arm's length negotiation over the terms of the SBS transaction, and
disseminating a report of the transaction report without noting that
fact would be inimical to price discovery. Accordingly, the Commission
preliminarily believes that a reporting party must note such
circumstances in its real-time transaction report to a registered SDR.
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\53\ The registered SDR could deduce that a transaction has been
reported late by looking to the time of execution, a data element
required to be reported by proposed Rule 901(c)(4). However, if a
registered SDR received a transaction report submitted with an
anomalous time stamp, the registered SDR might not know whether the
time stamp was correct and the trade was reported late, or whether
the trade was reported in a timely fashion but the time stamp was
inaccurate. Supplementing the time stamp with a ``late'' indicator
would confirm to the registered SDR that the transaction was in fact
being reported late.
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The Commission further notes that a registered SDR would be
required to have policies and procedures that, among other things,
describe how reporting parties shall report SBS transactions that, in
the estimation of the registered SDR, do not accurately reflect the
market.\54\ The Commission expects that these policies and procedures
would require, among other things, different indicators being applied
in different situations.
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\54\ See proposed Rule 907(a)(4); infra Section VI.A.
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8. Indication for Customized Trades
Proposed Rule 901(c)(12) would provide that the reporting party
must indicate if the SBS is customized to the extent that the other
information provided pursuant to proposed Rule 901(c) does not provide
all of the material information necessary to identify such customized
SBS or does not contain the data elements necessary to calculate the
price of the SBS. The Commission believes that reporting highly
customized SBS in this manner would promote transparency by providing
market participants with knowledge of the transaction in a given asset
class and on certain reference securities or issuers while, at the same
time, making clear that the reported data elements would not, and would
not be required to, provide sufficient information to fully understand
all aspects of the customized transaction. The Commission preliminarily
believes that requiring public dissemination of more detailed
information about customized SBSs would be of limited utility in
facilitating price discovery because of the unique nature of such
transactions.
Request for Comment
The Commission requests comment generally on all aspects of the
categories of information that would be required to be reported in real
time for public dissemination.
13. Do commenters agree with the proposed categories of information
that would be required to be reported in real time for public
dissemination? If not, what additional specific categories of
information should be required to be reported in real time for public
dissemination, and why? How would public dissemination of such
additional information enhance price discovery or market liquidity?
14. What categories of information, if any, should not be required
to be reported in real time for public dissemination, and why? Would
the public dissemination of certain information materially reduce
market liquidity? If so, how, specifically, would dissemination of the
particular information affect liquidity? Please supply data to support
your answer.
15. Does proposed Rule 901(c) provide adequate guidance with
respect to the information that must be reported? If not, what
additional guidance do commenters believe is necessary?
16. Would the real-time dissemination of the categories of
information specified in proposed Rule 901(c) serve the objectives of
Section 13(m) of the Exchange Act by enhancing price discovery in the
SBS market? If so, how? Would disclosure of certain categories of
information not further price discovery? If so, why not? Please provide
examples.
17. Is it necessary to require dissemination of the date of
execution, unless it is a date other than the current date?
18. Do commenters agree that it would be feasible to require SBSs
agreed to by phone to be entered into an electronic system that assigns
a time stamp? Why or why not?
19. Do commenters agree that the time of execution should be
reported to the second? Why or why not? Should it be reported in a
finer increment?
20. Would requiring the reporting and dissemination of price in
terms of the existing quoting conventions provide adequate information
regarding the price of a SBS? Where more than one quoting or pricing
convention exists within an asset class, what convention should be
used? Should proposed Regulation SBSR require specific conventions to
be used?
21. Are there specific data elements that should be required to be
reported to help understand the price of a SBS? If so, what are they,
and do they vary by asset class? Or by some further categorization?
22. Are there categories of SBSs that do not have an existing
quoting convention? If so, how should ``price'' be expressed for those
SBSs? What data elements should be required to be reported and
disseminated to capture the price of such SBSs?
23. Would information regarding whether a SBS is cleared impact the
price of the SBS? If not, why not? Would the reporting party in all
cases know whether the SBS transaction will be cleared?
24. Would information concerning whether a SBS is a transaction
between two SBS dealers enhance transparency and provide more accurate
information about the pricing of the SBS? If not, why not?
25. In a SBS executed on a SB SEF or national securities exchange,
would a counterparty know in real time the category of its
counterparty, e.g., whether its counterparty is a SBS dealer, a major
SBS participant, or not?
26. Do commenters agree that it would be appropriate for reporting
parties to report whether a SBS transaction accurately reflects the
market? How should such ``off-market'' transactions be defined? Could
public dissemination of potential off-market transactions (e.g.,
related to portfolio compressions) make it more difficult for market
participants to understand and analyze market pricing?
27. Do commenters agree with the proposed approach for real-time
reporting and public dissemination with respect to customized SBSs?
Should the Commission require that additional information be reported
and publicly disseminated for these SBSs? How practical would it be to
report and publicly disseminate sufficient details about a customized
SBSs in real time? Is there sufficient agreement over which SBSs should
be considered customized for this purpose or is additional guidance
needed? Is there a risk that this rule could be applied inconsistently
by counterparties or across asset classes? Would public dissemination
of information concerning customized SBSs materially reduce market
liquidity? If so, why?
28. Would real-time transaction reports of customized SBSs have
price discovery value? If so, in what way and how much? If not, why
not? Would price discovery be enhanced by
[[Page 75216]]
requiring public dissemination of additional details of a customized
SBS at a later time? If so, what additional details of the transaction
should be publicly disseminated, and when?
29. Would any of the data elements specified in proposed Rule
901(c), if reported in real time, reveal the trading strategies or
positions of any person? If so, how?
30. What do commenters believe would be the costs of reporting and
publicly disseminating the proposed categories of information for SBSs?
Or the benefits? Please be specific in your responses, and quantify
your answers to the extent possible.
C. Definition of Real Time
Proposed Rule 900 would define ``real time'' to mean, with respect
to the reporting of SBS transaction information, ``as soon as
technologically practicable, but in no event later than 15 minutes
after the time of execution of the SBS transaction.'' \55\ The
Commission preliminarily believes that this proposed definition of
``real-time'' reporting is consistent with Sections 13(m)(1)(A) and (B)
of the Exchange Act and technologically practicable in light of current
industry practice.\56\ Based on its discussions with market
participants, the Commission understands that much of the
infrastructure necessary to support real-time reporting to a registered
SDR may already be in place.\57\ The Commission understands, further,
that the SBS market is almost entirely institutional, and large
institutions have in place the systems and processes necessary to
support trading and risk management of complex structured products. In
many cases, trade details will already be systematized and little or no
manual intervention would be necessary to aggregate or send the
transaction data. In such cases, where it is technologically
practicable for a reporting party to report the SBS transaction
information required by proposed Rule 901(c) in one second, then it
would be required to report the SBS transaction to a registered SDR in
one second.
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\55\ See supra note 30 (noting that the ``time of execution''
would mean the point at which the counterparties to a SBS become
irrevocably bound under applicable law).
\56\ The Commission notes, in addition, that the Senate report
accompanying the Dodd-Frank Act indicates that ``[m]arket
participants--including exchanges, contract markets, brokers,
clearing houses and clearing agencies--were consulted and affirmed
that the existing communications and data infrastructure for the
swaps markets could accommodate real time swap transaction and price
reporting.'' See 156 Cong. Rec. S5921 (July 15, 2010).
\57\ See, e.g., CFTC and SEC, Public Roundtable to Discuss Swap
Data, Swap Data Repositories, and Real Time Reporting, transcript
available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/derivative18sub091410.pdf, comments of Sean Bernardo, Managing
Director of Tullett Prebon Americas Corp. and representing the
Wholesale Market Brokers Association, at 297 (``From the brokers'
perspective, however you tell us to send those [transactions]
straight to you, whatever the time frame is, we're able to do that,
whether it's done voice, whether it's done electronic, or whether
it's done hybrid''), and at 310 (``From the brokers' perspective, we
already have these systems in place for 99 percent of these products
already in some way, shape, or form. So, as far as upgrading them,
we're upgrading the systems on a regular basis. So, I think, again,
we can accommodate the needs that you have, and we currently do a
lot of the reporting and * * * processing with the firms'').
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The Commission recognizes that, in other cases, a SBS transaction
might be negotiated orally, and some manual data entry might be
necessary before a transaction report could be sent. At the same time,
however, the Commission believes it is appropriate to encourage market
participants to take steps to minimize manual handling of such
transactions, because the Dodd-Frank Act requires price and volume
information of all SBS transactions to be disseminated publicly as soon
as technologically practicable after the time of execution.
Furthermore, the Commission notes that real-time reporting under
proposed Rule 901(c) would require only certain elements of the trade
to be systematized and reported, not all of the data elements that are
required for full regulatory reporting under proposed Rule 901(d). The
Commission is, therefore, proposing a 15-minute outer boundary for
real-time public reporting of the data elements specified in proposed
Rule 901(c) following the SBS's time of execution.\58\
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\58\ One commenter believed that SBS transaction reports should
be disseminated to the market within five minutes of execution, or
as soon as technologically feasible. See Benchmark Letter at 2. The
commenter noted that ``the sooner post trade data is accessible to
the market, the more effectively it can feed back into the update
cycle of pre-trade information. Better pre-trade information allows
investors to make more well-informed decisions regarding market
values, risk and helps assure that investors achieve best
execution.'' Id. Another commenter argued that ``voice/hybrid
execution systems'' should have the same reporting timeframes as
venues that execute electronically, because ``a bifurcated
requirement could result in an inaccurate trade tape confusing the
market and regulator alike,'' and because ``such a bifurcation might
also create a `race to the slowest' * * * as certain market
participants, seeking to shroud their trading, favor slower
reporting SEF's with their business over more efficient and
transparent counterparts.'' See letter from James Cawley, CEO,
Javelin Capital Markets, to SEC and CFTC (October 20, 2010)
(``Javelin Letter'') at 2. The Commission further notes that the
Financial Industry Regulatory Authority (``FINRA'') requires its
members to report transactions in corporate and agency debt
securities to FINRA's Transaction Reporting and Compliance Engine
(``TRACE'') within 15 minutes of the time of execution. See FINRA
Rule 6730(a). For purposes of TRACE reporting, the time of execution
generally means the time when the parties to the trade agree to all
of the terms of the transaction that are sufficient to calculate the
dollar price of the trade. See FINRA Rule 6710(d). FINRA has
indicated that, based on 2009 figures, approximately 98% of
corporate bond trades were reported within 15 minutes, 96% within
ten minutes, and 92% within five minutes. See e-mail from Steve
Joachim, Executive Vice President for Transparency Services, FINRA,
to Michael Gaw, Assistant Director, Division of Trading and Markets,
Commission (November 17, 2010).
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Under the proposed approach, a reporting party would not be
permitted to delay submission of a transaction report required by
proposed Rule 901(c) while preparing the information necessary to
provide a transaction report under proposed Rule 901(d), even if the
reporting party could prepare the latter in under 15 minutes. Assume,
for example, that two counterparties execute a SBS on an electronic
trading platform, which permits the collection and transmission of all
information required by proposed Rule 901(c) in one second, and all
other details of the SBS can be confirmed in eight minutes. The
reporting party would not be permitted to wait eight minutes to send a
single transaction report containing the information required under
proposed Rules 901(c) and (d) to a registered SDR. Instead, the
reporting party would be required to send the information required by
proposed Rule 901(c) in one second--because one second in this example
is as soon as technologically practicable--and to send the information
required by proposed Rule 901(d) in eight minutes. The Commission
preliminarily believes that this approach is most conducive to price
discovery. Collecting data elements that have less bearing on price
discovery (such as those required by proposed Rule 901(d)) should not
slow down the public dissemination of data elements that would
facilitate price discovery (i.e., those required by proposed Rule
901(c)).
Request for Comment
31. Do commenters agree with the proposed definition of ``real
time''? Would it be technologically practicable in all cases to report
the information that would be required under proposed Rule 901(c)
within 15 minutes? If not, why not? Would it be technologically
practicable for some, but not all, SBSs? Or some, but not all, of the
data elements? If so, what are the differentiating factors?
32. Should the Commission require shorter reporting time frames for
certain SBS transactions? For example, should electronically executed
SBSs be
[[Page 75217]]
reported as soon as technologically practical but in any event no later
than 5 seconds? 30 seconds? Some other period? What should that period
be, and why?
33. Should the Commission require longer reporting time frames for
orally executed SBS transactions (such as 30 minutes)? If so, what
should that longer period be, and why?
34. If there were a longer reporting time frame for orally executed
SBSs, would the potential benefits of real-time public reporting be
compromised? If so, how? If not, why not? Would this create an
incentive for market participants to prefer oral negotiation of SBSs to
delay real-time reporting of their transactions?
35. In the context of real-time reporting of SBS transactions, what
is ``technologically practicable''? Should the Commission define that
term specifically? What systems and processes would be necessary to
report orally concluded SBSs as soon as technologically practicable?
Does this imply a requirement that all such SBSs must be immediately
systematized?
36. What do commenters believe would be the costs of reporting the
proposed data elements within 15 minutes? What would be the benefits?
Please be specific in your response, and quantify the costs and
benefits to the extent possible.
IV. Additional Reporting of Regulatory Information
A. Introduction
Proposed Rule 901(d) would require the reporting, within specified
timeframes, of certain SBS transaction information that would not be
publicly disseminated, in addition to the information required to be
reported in real time pursuant to proposed Rule 901(c) that would be
publicly disseminated. The Commission believes that the information
that would be reported pursuant to proposed Rule 901(d) would
facilitate regulatory oversight and monitoring of the SBS market by
providing comprehensive information regarding SBS transactions and
trading activity.\59\ The Commission believes, further, that this
information would assist the Commission in detecting and investigating
fraud and trading abuses in the SBS market.
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\59\ To the extent the Commission receives information that is
reported under proposed Rule 901(d), such information would be kept
confidential, subject to the provisions of the Freedom of
Information Act.
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B. Data Elements Required Under Proposed Rule 901(d)
The data elements that would be required to be reported by the
reporting party for each SBS pursuant to proposed Rule 901(d) are
discussed below.
1. Unique Identifiers
Proposed Rule 901(d) would require the reporting of a participant
ID of each counterparty and, as applicable, the broker ID, desk ID, and
trader ID of the reporting party. The Commission preliminarily believes
that reporting of this information would help promote effective
oversight, enforcement, and surveillance of the SBS market by the
Commission and other regulators. For example, activity could be tracked
by a particular participant, a particular desk, or a particular trader.
Regulators could observe patterns and connections in trading activity,
or examine whether a trader had engaged in questionable activity across
different SBS instruments. These identifiers also would facilitate
aggregation and monitoring of the positions of SBS counterparties,
which could be of significant benefit for systemic risk management.
The Commission understands that some efforts have been undertaken--
in both the private and public sectors, both domestically and
internationally--to establish a comprehensive and widely accepted
system for identifying entities that participate not just in the SBS
market, but in the financial markets generally. Such a system could be
of significant benefit to regulators worldwide, as each market
participant could readily be identified using a single reference code
regardless of the jurisdiction or product market in which the market
participant was engaging. Such a system also could be of significant
benefit to the private sector, as market participants would have a
common identification system for all counterparties and reference
entities, and would no longer have to use multiple identification
systems. The enactment of the Dodd-Frank Act and the establishment of a
comprehensive system for reporting and dissemination of SBSs--and for
reporting and dissemination of swaps, under the jurisdiction of the
CFTC--offer a unique opportunity to facilitate the establishment of a
comprehensive and widely accepted system for identifying entities that
participate not just in the SBS market, but in the financial markets
generally.\60\
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\60\ One commenter believes that a single source of reference
data and a standard set of unique identifiers must be used across
the industry (i.e., SB SEFs and SDRs) to ensure the comparability of
similar contracts. The commenter urged the Commission to work with
the industry to standardize terms and definitions of all reference
data components and establish a single master reference data source.
See Benchmark Letter at 1. See also Neal S. Wolin, Deputy Secretary
of the Treasury, Remarks at Georgetown University McDonough School
of Business (October 25, 2010), available at http://www.treas.gov/press/releases/tg923.htm (stating that the Office of Financial
Research (``OFR'') ``is working with regulators and industry, laying
the groundwork to standardize financial reporting and develop
reference data that will identify and describe financial contracts
and institutions. Data standardization will provide for more
consistent and complete reporting, making the data available to
decision makers easier to obtain, digest, and utilize. Over the
coming weeks and months, the OFR will begin to define a set of
standards for reporting of financial transaction and position data.
The OFR will collaborate with the financial industry, data experts,
and regulators to develop an approach to standardization that works
for everyone'').
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The Commission preliminarily believes that a registered SDR must
have a systematic means to identify and track all products and all
persons involved in SBS transactions captured and recorded by the
registered SDR. Therefore, the Commission is requiring that a ``unique
identification code'' (``UIC'') be assigned to each such product or
person (or unit thereof, such as a branch or desk of a financial
institution). Thus, under proposed Regulation SBSR, the ``participant
ID'' would mean the UIC assigned to a participant.\61\ ``Broker ID''
would be defined as the UIC assigned to an entity acting as a broker
for a participant. ``Desk ID'' would be defined as the UIC assigned to
the trading desk of a participant or of a broker of a participant, and
``trader ID'' would be defined as the UIC assigned to a natural person
who executes SBSs.
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\61\ ``Participant'' would be defined as: (1) a U.S. person that
is a counterparty to a SBS that is required to be reported to a
registered SDR; or (2) a non-U.S. person that is a counterparty to a
SBS that is (i) required to be reported to a registered SDR; and
(ii) executed in the United States or through any means of
interstate commerce, or cleared through a clearing agency having its
principal place of business in the United States. See proposed Rule
900.
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Under the definition of ``unique identification code'' in proposed
Rule 900, a UIC would have to be assigned by or on behalf of an
internationally recognized standards-setting body (``IRSB'') that
imposes fees and usage restrictions that are fair and reasonable and
not unreasonably discriminatory. The Commission seeks to avoid
requiring market participants to participate in a system that would
require them to pay unreasonable fees, or that would permit
discrimination among potential users of the system. Thus, the
definition of ``UIC'' would further provide that, if no standards-
setting body meets these criteria, a
[[Page 75218]]
registered SDR would be required to assign all necessary UICs using its
own methodology.
The Commission preliminarily believes that, if an IRSB meets these
criteria, the UICs employed by a registered SDR must come from the
IRSB, and participants of that registered SDR must take necessary steps
to obtain UICs from that IRSB. However, it could take an extended
period for an IRSB to assign, or establish protocols for assigning,
UICs for all entities participating in the SBS market. A registered SDR
would be required to use the UICs available from the IRSB's system,
while using its own methodology to assign the rest. In addition, the
definition of ``UIC'' would provide that, if a standards-setting body
meets these criteria but has not assigned a UIC to a particular person,
unit of a person, or product, a registered security-based swap data
repository would be required to assign a UIC to that person, unit of a
person, or product using its own methodology.
The proposed definition of ``UIC'' would not require that a UIC be
assigned ``by'' a IRSB itself. Rather, the proposed definition would
provide only that the UIC be assigned ``by or on behalf of'' the IRSB.
This is designed to preserve flexibility in how UICs may be assigned.
An IRSB might establish the general protocols under which UICs are
assigned, while another entity operating as an agent on behalf of the
IRSB might assign the UICs pursuant to the protocols established by the
IRSB. The proposed definition would allow for that possibility.
2. Other Terms of the SBS
Proposed Rule 901(d) would require identification of the amount(s)
and currenc(ies) of any up-front payment(s) and a description of the
terms and contingencies of the payment streams of each counterparty to
the other; \62\ the title of any master agreement, or any other
agreement governing the transaction (including the title of any
document governing the satisfaction of margin obligations),
incorporated by reference and the date of any such agreement; and the
data elements necessary to calculate the market value of a
transaction.\63\ In addition, for a SBS that is not cleared, proposed
Rule 901(d) would require a description of the settlement terms,
including whether the SBS is cash-settled or physically settled, and
the method for determining the settlement value.\64\
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\62\ For example, this would include, for a CDS, an indication
of the counterparty purchasing protection and the counterparty
selling protection, and the terms and contingencies of their
payments to each other; and for other SBSs, an indication of which
counterparty is long and which is short. This information could be
useful to regulators in investigating suspicious trading activity.
\63\ The Commission believes that these elements would include,
for a SBS that is not cleared, information related to the provision
of collateral, such as the title and date of the relevant collateral
agreement.
\64\ One commenter believed that a SBS transaction report should
include information necessary to derive cash flows and any
contingent claims that could alter or terminate payments of the SBS.
See Benchmark Letter at 1. This is similar to the information
required by proposed Rule 901(d)(1)(iii).
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The Commission believes that each of these data elements would
facilitate regulatory oversight of counterparties and the SBS market
generally by providing information concerning counterparty obligations
and risk exposures. For example, the reporting of data elements
necessary to calculate the market value of a transaction would allow
regulators to value an entity's SBS positions and calculate the
exposure resulting from those positions. The Commission understands,
based on discussions with industry participants, that market
participants currently provide this information regarding SBSs to data
repositories.
3. Clearing Information
Proposed Rule 901(d) would require the reporting of the name of the
clearing agency, if the SBS is cleared. The Commission believes that
the identity of the clearing agency that cleared a SBS is fundamental
information regarding a cleared SBS. This information would allow
regulators to verify, if necessary, that a SBS was cleared, and to
easily identify the clearing agency that cleared the transaction.
Proposed Rule 901(d) also would require the reporting party to
report, if the SBS is not cleared, whether the exception provided in
Section 3C(g) of the Exchange Act was invoked. Section 3C(g)(1) of the
Exchange Act provides that the requirements of Section 3C(a)(1) will
not apply to a SBS if one of the counterparties to the SBS: (1) Is not
a financial entity; (2) is using SBSs to hedge or mitigate commercial
risk; and (3) notifies the Commission, in a manner set forth by the
Commission, how it generally meets its financial obligations associated
with entering into non-cleared SBSs. The application of the clearing
exception in Section 3C(g)(1) of the Exchange Act is solely at the
discretion of the SBS counterparty that satisfies these conditions.\65\
Section 3C(g)(6) of the Exchange Act \66\ authorizes the Commission,
among other things, to request information from those persons claiming
the clearing exception as necessary to prevent abuse of the exceptions
described in Section 3C(g) of the Exchange Act. The Commission believes
that information regarding whether the exception in Section 3C(g)(1)
was invoked for a non-cleared SBS would assist the Commission in
overseeing and monitoring the use of the exception. This information
would be a necessary preliminary step in determining whether the
exception was properly invoked.\67\
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\65\ See 15 U.S.C. 78c[C(g)(2)].
\66\ 15 U.S.C. 78c[C(g)(6)].
\67\ The use of this exception, and further information required
to be reported regarding this exception, will be the subject of
another Commission rulemaking. Any comments regarding this exception
should be submitted in connection with that proposal.
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4. Execution Venue
Proposed Rule 901(d) would require the reporting party to report
the venue where the SBS was executed, or whether the SBS was executed
bilaterally in the OTC market. The venue where a SBS is executed is
necessary for investigating any potential improper behavior relating to
the transaction. For example, regulators investigating a suspected
abuse or other impropriety would need to know the execution venue in
order to obtain records from the venue to assist in their
investigation.
Request for Comment
The Commission requests comment on all aspects of the proposed
additional information that would be required to be reported pursuant
to proposed Rule 901(d).
37. Do commenters agree with the information that the Commission
has proposed to be required to be reported pursuant to proposed Rule
901(d)? Should additional information be reported? If so, what
information, and why?
38. Are there any data elements proposed to be reported that
commenters believe should not be reported? If so, why not?
39. Should proposed Rule 901(d) also require reporting of the
purpose of the SBS transaction (such as market making, directional
trade, or asset hedge)? If so, what categories of purposes should be
established, and why?
40. Is it possible that inconsistencies in pricing conventions
among SBS market participants could result in uninformative prices
being reported to a registered SDR? Could a reporting party use
variation in pricing conventions to obscure pricing information? Do
commenters believe that proposed Regulation SBSR should prescribe the
[[Page 75219]]
specific pricing conventions that should be used?
41. Does proposed Rule 901(d) provide adequate guidance with
respect to the information that must be reported?
42. Do commenters agree that the information described above
regarding the material terms of a SBS would be useful for monitoring
risk exposure and for other regulatory purposes? Why or why not?
43. Would it be difficult or cost prohibitive for reporting parties
to report such information? If so, why?
44. Do SBS counterparties employ transaction-level collateral
arrangements? If so, what specific information on transaction-level
collateral information should be reported to a registered SDR?
45. Do commenters agree that the participant ID of each
counterparty, and, as applicable, the broker ID, desk ID, and trader ID
of the reporting party or its broker would be useful information to be
reported? Why or why not? Would these identifiers be helpful for
conducting regulatory oversight, including measuring risk exposure? How
costly would it be for participants to report this information for each
SBS?
46. Are there other entities that may play some part in the
execution or reporting of a SBS transaction? If so, what are they?
Should their identification information be reported to a registered
SDR?
47. Are there additional subunits of a legal person, besides the
desk, that should be identified by a UIC? If so, what are those
subunits and how should they be defined?
48. Would the reporting party be in a position to know, in all
cases, the participant ID of its counterparty? If a SBS is executed on
a SB SEF, would the SB SEF be able to provide the reporting party the
participant ID of the counterparty? If not, what alternative would be
available to have this information reported?
49. Does an IRSB currently exist or will one exist in the near
future that could carry out the functions envisioned by proposed
Regulation SBSR? What additional steps would need to be taken for that
entity to carry out these functions?
50. Who would own the intellectual property underlying the UICs
assigned by or on behalf of an IRSB? Would a registered SDR have to pay
fees to obtain UICs from an IRSB? If so, how much? What usage
restrictions might the owners of the relevant intellectual property
impose on registered SDRs or on consumers of the market data feed? Are
any fees and usage restrictions imposed by an IRSB (or any entity that
might become an IRSB) fair and reasonable and not unreasonably
discriminatory? If not, in what way are they not?
51. Are there any issues that could result from the Commission
requiring that UICs only be assigned by or on behalf of an IRSB that
imposes fees and usage restrictions that are fair and reasonable and
not unreasonably discriminatory? Would imposing such a standard allow
for any activity that could undermine the ability of market
participants to effectively obtain or use the UICs as anticipated? In
the alternative, should the Commission require that there be no fees
related to the use of UICs?
52. Would any end users of SBS market data disseminated by a
registered SDR have to pay fees relating to an IRSB? If so, why? How
much would these fees be?
53. How do data repositories currently identify participants and
products? If UICs cannot be assigned by or on behalf of an IRSB, would
the current methodologies of data repositories be adequate for
assigning UICs pursuant to proposed Regulation SBSR? What would be the
likely costs to a registered SDR of assigning such UICs itself?
54. What would be the potential impact on market participants and
registered SDRs if no IRSB emerges and there are multiple SDRs per
asset class assigning UICs?
55. What additional steps can or should the Commission take to
promote internationally recognized standards for UICs?
56. Are there any other factors not already discussed that the
Commission should take into account when considering voluntary
consensus standards for UICs?
C. Reporting Timeframes for Regulatory Information
The Dodd-Frank Act does not specify the timeframes under which SBS
transaction information, beyond that necessary to support real-time
public dissemination for enhancing price discovery, must be reported to
a registered SDR or to the Commission for regulatory purposes. However,
the Commission preliminarily believes that, to further the objectives
of the Dodd-Frank Act, SBS transaction information should be reported
within a reasonable time following the time of execution--i.e., the
point at which the counterparties to a SBS become irrevocably bound
under applicable law--rather than waiting until the time a transaction
is confirmed.\68\ For purposes of proposed Regulation SBSR, the time a
transaction is confirmed means the production of a confirmation that is
agreed to by the parties to be definitive and complete and that has
been manually, electronically, or, by some other legally equivalent
means, signed.\69\ Requiring reporting at or after the time a SBS
transaction is confirmed, rather than at the time of execution, could
encourage counterparties to delay confirming in order to delay the
reporting of a transaction.
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\68\ See proposed Rule 900 (defining ``time of execution'');
supra Section III.B.2.
\69\ See proposed Rule 900 (defining ``confirm'').
``Confirmation'' refers to the specific documentation that evidences
the legally binding agreement. Section 15F(i)(2) of the Exchange Act
provides that SBS dealers and major SBS participants shall conform
with such standards as may be prescribed by the Commission that
relate, among other things, to timely and accurate confirmation of
SBSs. Requirements for confirmations issued by SBS dealers and major
SBS participants will be the subject of a separate Commission
rulemaking.
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The Commission recognizes that the amount of time required for
counterparties to report the data elements that would be required to be
reported under proposed Rule 901(d)(1) could vary depending upon, among
other things, the extent to which the SBS is customized and whether the
SBS is executed or confirmed electronically or manually. The Commission
believes that the extent to which a SBS is executed or confirmed
electronically is an indication of the degree to which the SBS is or
could be systematized, and thus could directly impact the amount of
time needed to report such SBS. For example, the Commission believes,
based on discussions with industry participants, that the required
information would be available relatively quickly for a SBS that is
executed and confirmed electronically because most of the information
required to be reported would already be in an electronic format. On
the other hand, the Commission recognizes that, for those SBSs that are
not executed or confirmed electronically, additional time may be needed
to systematize the information required to be reported under proposed
Rule 901(d) and put it into an acceptable format. Accordingly, proposed
Rule 901(d)(2) would obligate a reporting party to report the
regulatory, non-real-time information required to be reported under
proposed Rule 901(d)(1) promptly, but in no event later than:
15 minutes after the time of execution for a SBS that is
executed and confirmed electronically;
30 minutes after the time of execution for a SBS that is
confirmed
[[Page 75220]]
electronically but not executed electronically; or
24 hours after execution for a SBS that is not executed or
confirmed electronically.
The Commission preliminarily believes that requiring a SBS that is
executed and confirmed electronically to be reported promptly, but in
no event later than 15 minutes after the time of execution, is
appropriate because such SBS could be easily systematized (if it is not
already), thus allowing the SBS to be reported within a time period
similar to that required for real-time reporting. The Commission
further believes that, for a SBS that is confirmed electronically but
not executed electronically, additional time would be needed to report
such SBS. However, the Commission preliminarily believes that 30
minutes would be a sufficient amount of time because such SBS already
would be put into electronic form for confirmation, and thus likely
could be easily systematized and would not require a significant amount
of manual handling.
Finally, since a SBS that is not executed or confirmed
electronically would likely not already be systematized and could
require a significant amount of manual intervention, the proposed rules
would allow additional time for reporting. For this group of SBSs, the
Commission seeks to balance the need to allow market participants
sufficient time to determine the terms of their trade, with the need
for regulators to have current and complete information about positions
in the SBS market.
Request for Comment
The Commission requests general comments on the proposed reporting
times and the basis for the proposed reporting times.
57. Do commenters believe that there should be different reporting
times based on whether a SBS is executed or confirmed manually or
electronically? If so, why? If not, what other basis should be used to
distinguish reporting timeframes, and why? Should all SBSs be reported
in the same time frame? If so, what should the timeframe be, and why?
58. Do commenters agree that the reporting time for a SBS that is
executed and confirmed electronically should be 15 minutes after the
time of execution? Should that period be shorter, for example, 30
seconds, one minute, or five minutes? Why or why not?
59. Do commenters agree that the reporting time for a SBS that is
confirmed electronically but not executed electronically should be 30
minutes after the time of execution? Should that period be shorter, for
example, one minute, five minutes, or 15 minutes? Why or why not?
60. Do commenters agree that the reporting time for a SBS that is
not executed or confirmed electronically should be 24 hours? Should
that period be shorter--perhaps eight hours? 12 hours? Should that
period be longer--perhaps 36 hours? 48 hours? Why or why not? If the
time period were greater than 24 hours, how significant would be the
risks that regulators would not know of SBS positions recently taken by
counterparties engaging in SBSs that are not executed or confirmed
electronically?
61. Do commenters agree with the proposed timeframes for reporting
information required to be reported pursuant to proposed Rule
901(d)(1)? Would the timeframes in proposed Rule 901(d)(2) provide
adequate time for reporting the information that would be required to
be reported under proposed Rule 901(d)(1)? If not, why not? Should the
time frame for reporting be shorter or longer? Why or why not?
62. Would public dissemination of information in the proposed
timeframes materially reduce market liquidity? If so, for what types of
SBSs? Why? What timeframe(s) would balance the concerns about market
liquidity with the requirement for real-time reporting?
63. Are there customized SBSs for which it would be too difficult
or burdensome to report within 24 hours? How long do those SBS
transactions currently take to report to a SDR? What steps would have
to be taken to accelerate reporting for such SBS transactions?
D. Reporting of Life Cycle Events
Proposed Rule 901(e) would require the reporting of certain ``life
cycle event'' information. Proposed Rule 900 would define a ``life
cycle event'' to mean, with respect to a SBS, any event that would
result in a change in the information reported to a registered SDR
pursuant to proposed Rule 901, including a counterparty change
resulting from an assignment or novation; a partial or full termination
of the SBS; a change in the cash flows originally reported; for a SBS
that is not cleared, any change to the collateral agreement; or a
corporate action affecting a security or securities on which the SBS is
based (e.g., a merger, dividend, stock split, or bankruptcy).
Notwithstanding the above, a life cycle event shall not include the
scheduled expiration of the SBS, 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 SBS.
For any life cycle event that results in a change to information
previously reported, proposed Rule 901(e) would require the reporting
party to promptly provide updated information reflecting such change to
the entity to which it reported the original transaction, using the
transaction ID, except that:
(1) If a reporting party ceases to be a counterparty to a SBS due
to an assignment or novation, the new counterparty would be the
reporting party following such assignment or novation, if the new
counterparty is a U.S. person; and
(2) If, following an assignment or novation, the new counterparty
is not a U.S. person, the counterparty that is a U.S. person would be
the reporting party following such assignment or novation.
As discussed in greater detail below, proposed Rule 907(a)(1) would
require the policies and procedures of a registered SDR to specify the
data elements of a life cycle event that a reporting party would be
required to report, which would include, at a minimum, the data
elements specified in proposed Rules 901(c) and (d). Proposed Rule
901(g) would require a registered SDR to assign a transaction ID to
each SBS reported by a reporting party. The assignment of a transaction
ID, which would be included in a life cycle event report, would
facilitate the reporting of life cycle event information by identifying
the particular SBS transaction to which the life cycle event
pertained.\70\
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\70\ See infra Section IV.E.2 (discussing proposed Rule 901(g)).
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The reporting of life cycle event information would provide
regulators with access to information about significant changes that
occur over the duration of a SBS, including, for example, a
counterparty change resulting from an assignment or novation, a change
in the data elements necessary to calculate the value of the SBS, a
partial or full termination of the SBS prior to the scheduled
termination date of the SBS, or a modification of the periodic cash
flows originally reported. The Commission preliminarily believes that
the reporting of life cycle event information would help to assure that
regulators have accurate and up-to-date information concerning
outstanding SBSs and the current obligations and exposures of SBS
counterparties.\71\
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\71\ In a separate rulemaking today, the Commission is proposing
to require a registered SDR to establish, maintain, and enforce
policies and procedures reasonably designed to calculate positions
for all persons with open SBSs maintained by the registered SDR, and
is requesting comment on whether a SDR should calculate (on at least
a daily basis) the market value of each position in SBSs for which
the registered SDR maintains transaction data. See SDR Registration
Proposing Release, supra note 6 (proposing Rule 13n-5(b)(2) under
the Exchange Act).
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[[Page 75221]]
Request for Comment
The Commission requests comment on all aspects of the proposed life
cycle event reporting requirements.
64. Do participants agree with the proposed definition of life
cycle event? What life cycle event information should be reported?
Should changes to all information that would be required to be reported
under proposed Rules 901(c) and (d) be updated, or only specific items?
If so, which items, and why?
65. Should a life cycle event report be formatted to include only
the transaction ID and the updated information, or should it include
the transaction ID, the updated information, and the other information
that would be required to be reported under proposed Rules 901(c) and
(d)? Should the Commission prescribe the format of a life cycle event
report, or allow a registered SDR to determine the format of the
report?
66. Does the proposed rule provide adequate guidance concerning the
life cycle events that would be required to be reported? If not, what
areas require further guidance? Does the proposed rule provide adequate
guidance regarding what information would be required to be reported
for each life cycle event?
67. What benefits would result from the reporting of life cycle
events? What would be the costs of such reporting?
68. Is it appropriate to require that life cycle events be reported
promptly? If not, what should be the appropriate timeframe for
reporting such events?
E. Additional Requirements Applicable to Registered SDRs or
Participants
1. Time Stamp for Reported Information
Proposed Rule 901(f) would require a registered SDR to time stamp,
to the second, receipt of any information required to be submitted
pursuant to proposed Rule 901(c), (d), or (e). The Commission believes
that this requirement would help regulators to evaluate certain trading
activity. For example, a reporting party's pattern of submitting late
transaction reports could be an indicator of weaknesses in the
reporting party's internal compliance processes. Accordingly, the
Commission believes that the ability to compare the time of execution
reported with the time of receipt of the report by the registered SDR
could be an important component of surveillance activity conducted by
regulators.
2. Transaction Identifiers
Proposed Rule 901(g) would require a registered SDR to assign a
transaction ID to each SBS transaction reported to it. Proposed Rule
900 would define ``transaction ID'' to mean the unique identification
code assigned by a registered SDR to a specific SBS. The Commission
preliminarily believes that, because each transaction is unique, it is
not necessary or appropriate to look to an IRSB for assigning such
identifiers. Accordingly, a registered SDR would be required to use its
own methodology for assigning transaction IDs.\72\
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\72\ Cf. supra Section IV.B.1 (discussing participant IDs,
broker IDs, desk IDs, and trader IDs, which could be used for
multiple transactions across multiple asset classes).
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The Commission preliminarily believes that a unique transaction ID
would allow registered SDRs, regulators, and counterparties to more
easily track a SBS over its duration and facilitate the reporting of
life cycle events and the correction of errors in previously reported
SBS information. The transaction ID of the original SBS would allow for
the linking of the original report to a report of a life cycle event.
Similarly, the transaction ID would be required to be included on an
error report to identify the transaction to which the error report
pertained.
3. Counterparty ID Information
As discussed above, proposed Rule 901(d) would require the
reporting of a participant ID of each counterparty and, as applicable,
the broker ID, desk ID, and trader ID of the reporting party or its
broker.\73\ For regulators to monitor the SBS positions of market
participants, evaluate trading activity, and conduct effective
oversight and enforcement of the SBS market, it is important that the
applicable UICs for both counterparties to a SBS be available to
regulators.
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\73\ See id.
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Proposed Rule 901(d) would require the reporting party, for each
SBS for which it is a reporting party, to report the participant ID of
itself and its counterparty, and (as applicable) the reporting party's
broker ID, desk ID, and trader ID. The reporting party would not be
required to report the broker ID, desk ID, and trader ID for its
counterparty. However, nothing in proposed Regulation SBSR would
prevent a reporting party from reporting, or providing for the
reporting to a registered SDR, of its counterparty's applicable UICs.
For example, orders entered into an electronic trading system could be
coded to include all relevant UICs. When the system matches two orders,
it could bundle information about both orders (including the UICs) into
a transaction report for the reporting party to report to a registered
SDR, or the execution venue could provide the UICs directly to the
registered SDR on behalf of the reporting party. Further, in a
bilateral negotiated SBS, the counterparties could agree to have the
non-reporting-party participant provide the applicable UICs to the
reporting party for reporting to the registered SDR.
The Commission preliminarily believes that, to the extent that it
is not feasible or desirable in a particular SBS transaction for the
reporting party to report UICs, proposed Regulation SBSR should contain
some means for the registered SDR to obtain the applicable UICs from
the counterparty that is not the reporting party. Accordingly, proposed
Rule 906(a) would set forth a procedure designed to ensure that a
registered SDR obtains applicable UICs for both counterparties to a
SBS, not just the reporting party. Proposed Rule 906(a) would require a
registered SDR to identify any SBS reported to it for which the
registered SDR did not have a participant ID and (if applicable), the
broker ID, desk ID, and trader ID of each counterparty. Proposed Rule
906(a) would further require the registered SDR, once a day, to send a
report to each participant identifying, for each SBS to which that
participant is a counterparty, the SBS(s) for which the registered SDR
lacks participant ID and (if applicable) broker ID, desk ID, and trader
ID. Finally, under proposed Rule 906(a), a participant that receives
such a report would be required to provide the missing UICs to the
registered SDR within 24 hours of receipt of the report.
The Commission preliminarily believes that the registered SDR would
be in the best position to know whether the reporting party had
reported the UICs for its counterparty, and to request the missing UICs
from any participant as necessary. In addition, the Commission
recognizes that some reasonable period should be afforded to the
registered SDR to determine what UICs have not been reported, to
provide the report to each participant requesting such information, and
for the participant to complete and return the report. The Commission
preliminarily believes that it would be reasonable to require a
registered SDR to produce only one such report per day, and to allow a
participant up to 24 hours to complete
[[Page 75222]]
and return the report with the requested information.
4. Parent and Affiliate Information
The Commission also preliminarily believes that, to be able to
effectively report on participant positions to assist the Commission
and other regulators in monitoring systemic risk, a registered SDR
should be able to identify all SBS positions within the same ownership
group. Therefore, the Commission is proposing Rule 906(b), which would
require each participant of a registered SDR to provide to the
registered SDR information sufficient to identify its ultimate
parent(s) \74\ and any affiliate(s) \75\ of the participant that also
are participants of the registered SDR. Proposed Rule 906(b) also would
require a participant to promptly notify the registered SDR of any
changes to that information. Under proposed Rule 906(b), a participant
would be required to provide this ownership and affiliation information
to a registered SDR immediately upon becoming a participant (in other
words, as soon as a SBS for which it is a counterparty is required to
be reported to the registered SDR). As with other UICs,\76\ an ultimate
parent ID would be the unique identification code assigned to an
ultimate parent by or on behalf of an IRSB (or, if no standards-setting
body meet the required criteria or the IRSB has not assigned a UIC to a
particular person or unit thereof, by the registered SDR).
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\74\ See proposed Rule 900 (defining ``parent'' as a legal
person that controls a participant); Rule 900 (defining ``ultimate
parent'' as a legal person that controls a participant and that
itself has no parent); Rule 900 (defining ``control'' for purposes
of proposed Regulation SBSR as the possession, direct or indirect,
of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract or otherwise. A person would be presumed to
control another person if the person: (1) Is a director, general
partner or officer exercising executive responsibility (or having
similar status or functions); (2) directly or indirectly has the
right to vote 25% or more of a class of voting securities or has the
power to sell or direct the sale of 25% or more of a class of voting
securities; or (3) in the case of a partnership, has the right to
receive, upon dissolution, or has contributed, 25% or more of the
capital). The proposed definitions of ``parent'' and ``ultimate
parent'' are designed to identify particular categories of
affiliated entities based on their ability to control a participant.
Thus, a ``parent'' refers to a legal person that controls a
participant, and the ``ultimate parent'' refers to an entity that
controls a participant but that itself has no parent and thus is not
controlled by another entity.
\75\ See proposed Rule 900 (defining ``affiliate'' as any person
that, directly or indirectly, controls, is controlled by, or is
under common control with, a person).
\76\ See supra Section IV.B.1.
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Request for Comment
The Commission requests comment on all aspects of the proposed time
stamp and identifier requirements.
69. Would it be feasible for a registered SDR to time stamp, to the
second, information that would be submitted pursuant to proposed Rule
901? Would some other time increment be appropriate? If so, why?
70. Would requiring a transaction ID for each reported SBS help
facilitate reporting of all events related to that SBS? If not, what
alternative method should be required to allow for tracking of all
events related to a SBS throughout its life?
71. Would transaction IDs be helpful to counterparties? If so, how?
72. Should registered SDRs have the sole responsibility to assign
transaction IDs? Would it be feasible for other registered entities
(e.g., exchanges or SB SEFs) to assign transaction IDs?
73. Do existing SDRs that accept reports of SBSs assign transaction
IDs or an equivalent identifier? If so, how?
74. Do commenters agree that the applicable UICs for both
counterparties to a SBS would be useful to regulators? Why or why not?
75. Is the method set forth in proposed Rule 906(a) a practical way
for the registered SDR to obtain the applicable UICs from the other
counterparty if necessary? Why or why not? If not, what better
mechanism should be required to ensure that a registered SDR has
applicable UICs for both counterparties for any SBSs for which it acts
as a repository?
76. Do commenters agree with the proposal to require participants
to provide the required UICs within 24 hours? If not, why not? How long
should the counterparty be given to complete the report?
77. Would it be more practicable and less burdensome to require a
registered SDR to post on its Web site (in an area accessible only to
participants) reports identifying missing UICs and requiring
participants to check these reports daily, rather than requiring the
registered SDR to send these reports to participants each day, as
provided in proposed Rule 906(a)?
78. Would it be unduly burdensome to require a registered SDR to
periodically obtain information from each participant that identifies
the participant's ultimate parent(s) and any other participant(s) with
which the counterparty is affiliated? If so, why? Would there be an
easier method for assuring that such information is readily available
to regulators? If so, what is it?
79. How much information about its counterparty should a reporting
party be expected to obtain? Would it be practical to require the
reporting party to report applicable UICs on behalf of its
counterparty? If not, what alternative do commenters propose? For
example, should the Commission directly require each counterparty to
report applicable UICs for each SBS?
80. For SBSs executed on a SB SEF or on a national securities
exchange where a reporting party might not know the identity of its
counterparty, how should the reporting of counterparty UICs be
addressed? Should the Commission require the SB SEF or national
securities exchange to report to the registered SDR, at a minimum, the
participant ID of the counterparty?
81. Do commenters agree with the need for, and the goal of, having
parent and affiliate information reported to a registered SDR?
82. What difficulties do commenters envision in establishing and
implementing a UIC system for ultimate parents and affiliates of
participants of a registered SDR?
6. Format of Reported Information
a. Data Format
To develop a meaningful reporting and dissemination regime for
SBSs, the Commission believes that it is essential that all required
information for all SBS transactions be reported in a uniform
electronic format.\77\ Accordingly, proposed Rules 901(h) and 907(a)(2)
together would mandate the use of a uniform reporting format for SBS
information reported to a particular registered SDR. Specifically,
proposed Rule 901(h) would require the reporting party to
electronically transmit the information required to be reported by
proposed Rule 901 in a format as required by the registered SDR. In
addition, proposed Rule 907(a)(2) would require a registered SDR to
have policies and procedures that specify the data format (which must
be an open-source structured data format that is widely used by
participants), connectivity requirements, and other protocols for
submitting information.\78\
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\77\ In a separate rulemaking today, the Commission is proposing
various requirements for registered SDRs that would include, among
other things, standards regarding data that registered SDRs would be
required to collect and maintain. See SDR Registration Proposing
Release, supra note 6.
\78\ See infra Section VI.
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The Commission recognizes that this likely would require some
change in existing practice, particularly with respect to highly
customized transactions that may not be electronically executed or
confirmed currently. However, the Commission
[[Page 75223]]
believes that such a requirement would provide significant benefits by
allowing for more efficient use and analysis of the data. The
Commission understands that, currently, information for certain SBSs is
communicated using an open-source structured data format called
Financial Products Markup Language (``FpML''), which is accepted and
used industry-wide and has a sufficiently flexible structure to
accommodate new products and asset classes.\79\
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\79\ FpML is based on XML (eXtensible Markup Language), the
standard meta-language for describing data shared between
applications. The Commission preliminarily believes that FpML would
be an appropriate format for data reporting, in part because it is
already widely understood and used and can be used across multiple
asset classes.
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Request for Comment
The Commission requests comment on all aspects of the proposed
rules regarding the electronic submission of information required under
proposed Rule 901 and the formatting of information that would be
required to be reported to a registered SDR.
83. Are there different standard data formats currently in use
depending on the type or class of SBS?
84. Should the registered SDR have the flexibility to specify
acceptable data formats, connectivity requirements, and other protocols
for submitting information? Are there disadvantages to this approach?
If so, what are they and how should they be addressed?
85. Are there concerns with a registered SDR requiring use of FpML
to report SBSs? If so, what are they? Are there any licensing fees
associated with use of FpML? If so, what actions should the Commission
take, if any, to help ensure wide availability of a common data format
by all participants?
86. Are commenters concerned that varying reporting formats would
develop if there were more than one registered SDR in each asset class?
If so, should there be a uniform reporting format across all registered
SDRs? How would commenters recommend that the Commission achieve this
goal? Should the Commission require all registered SDRs to use the same
format and the same data elements?
b. Reference Codes
The Commission understands that there are--or could be developed--
industry conventions for identifying SBSs or reference entities on
which SBS are based through readily available reference codes
comparable to the CUSIP identifier used for debt, equity, and certain
derivative securities.\80\ Proposed Rule 903 would permit the use of
codes in place of certain data elements for purposes of reporting and
disseminating the information required under proposed Regulation SBSR,
provided that the information needed to interpret such codes is widely
available on a non-fee basis. Specifically, proposed Rule 903 would
provide that a reporting party could provide information to a
registered SDR pursuant to proposed Rule 901, and a registered SDR
could publicly disseminate information pursuant to proposed Rule 902,
using codes in place of certain data elements, provided that the
information necessary to interpret such codes is widely available on a
non-fee basis.
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\80\ The CUSIP number for a security uniquely identifies a
company or issuer, the type of security, and other information about
the instrument. From the CUSIP number for a debt instrument, for
example, market participants are able to determine the issuer, the
date of maturity, the interest rate, the coupon structure, and other
terms of the instrument.
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The Commission preliminarily believes that it is appropriate for
the information required to interpret any codes used for reporting SBSs
be widely available on a non-fee basis. If the information necessary to
interpret such codes were not widely available, or available only for a
fee, SBS transaction and pricing data might not be meaningfully
available to the public. In the absence of proposed Rule 903, a
registered SDR potentially could use proprietary code information,
thereby requiring all consumers of its SBS market data to purchase from
the code creator information necessary to interpret the codes.
Request for Comment
The Commission requests comment on all aspects of the proposed
rules regarding the use of reference codes.
87. Do commenters agree it would be useful to permit the use of
codes in place of specific data elements? Why or why not?
88. Are such codes currently in use? How would proposed Rule 903
affect how market participants employ any existing codes? Should the
Commission permit registered SDRs to publicly disseminate SBS
information using existing codes? Are market participants able to
understand the codes without having to pay licensing or other usage
fees?
89. Who might in the future develop any codes to be used in place
of specific data elements? Would it be costly to develop these codes?
90. Is it feasible for information necessary to interpret these
codes to be widely available on a non-fee basis? If not, why not? Would
codes be developed if developers were not able to charge fees for the
information necessary to interpret the codes? How would permitting
developers of codes to charge fees for information necessary to
interpret the codes affect SBS market participants? Would SBS market
participants effectively be compelled to purchase this information?
91. If fees are necessary to protect the investment in intellectual
property, what standards should be established to assure that such fees
are fair and reasonable and not unreasonably discriminatory?
92. Do commenters believe a better approach would be to permit the
use of fee-based codes for reporting information to a registered SDR,
provided that SBS transaction reports are disseminated by the
registered SDR without the codes, or with codes that are widely
available on a non-fee basis? Should a registered SDR be expected to
pay any fees or be subject to any usage restrictions imposed by the
code creator? Would these fees and usage restrictions impact the
public's access to the registered SDR's market data feed?
F. Reporting of Data for Historical SBSs
Section 3C(e)(1) of the Exchange Act requires the Commission, no
later than 180 days after the effective date of Section 3C, to adopt
rules providing for the reporting to a registered SDR or to the
Commission of SBSs entered into before the date of enactment of Section
3C. Section 3C(e)(2) of the Exchange Act requires the Commission to
adopt rules that provide for the reporting of SBSs entered into on or
after the date of enactment of Section 3C no later than the later of
(1) 90 days after the effective date of Section 3C, or (2) such other
time after entering into the SBS as the Commission may prescribe by
rule or regulation.
The statutory provision applicable to the reporting of SBSs entered
into prior to the date of enactment does not limit the SBSs subject to
the reporting. In contrast, the statutory provision requiring the
Commission to adopt an interim final rule for the reporting of SBSs
entered into prior to the effective date of the Dodd-Frank Act does
limit the applicability of that rule to such SBSs that had ``not
expired as of the date of enactment.'' \81\ Indeed, the statutory
language applicable in this proposal would not prohibit collection of
SBS data on all SBSs entered into since the first SBS, whether or not
those SBS positions remain open or have been closed. This would
potentially capture a very large amount of data on SBSs going
[[Page 75224]]
back many years. The Commission preliminarily believes that an attempt
to collect many years' worth of transaction-level SBS data (including
closed or expired SBSs) would not enhance the goal of price discovery,
nor would it be particularly useful to regulators or market
participants in implementing a forward-looking SBS reporting and
dissemination regime. Furthermore, collecting, reporting, and
processing all such data would involve substantial costs to market
participants with little potential benefit. Accordingly, the Commission
has proposed to limit the reporting of SBSs entered into prior to the
date of enactment to those SBSs that had not expired as of that date
(``pre-enactment SBSs'').\82\
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\81\ 15 U.S.C. 78m[A(a)(2)(A)].
\82\ See proposed Rule 900 (defining ``pre-enactment security-
based swap'' to mean any SBS executed before July 21, 2010--the date
of enactment of the Dodd-Frank Act--the terms of which had not
expired as of that date).
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The Commission acknowledges that reporting parties will not
necessarily possess all of the information required by proposed Rule
901(c) and (d) with respect to pre-enactment SBSs or SBSs executed on
or after July 21, 2010, and before the effective reporting date \83\
(``transitional SBSs'') (and together with pre-enactment SBSs,
``historical SBSs''). Thus, proposed Rule 901(i) would require a
reporting party to report all of the information required by proposed
Rules 901(c) and (d) for any historical SBSs, to the extent such
information is available.\84\ For example, a reporting party would not
have to report the time stamp of a historical SBS if a time stamp had
not already been captured. In addition, if the terms of a SBS had been
amended since the initial time of execution, only the most current
version of the SBS would be considered the historical SBS that had to
be reported pursuant to proposed Rules 901(i) and 910(a).
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\83\ See proposed Rule 900 (defining ``effective reporting
date,'' with respect to a SDR, as the date six months after the
registration date); proposed Rule 900 (defining ``registration
date,'' with respect to a SDR, as the date on which the Commission
registers the SDR, or, if the Commission registers the SDR before
the effective date of proposed Regulation SBSR, the effective date
of proposed Regulation SBSR).
\84\ Information concerning historical SBSs would be reported,
but would not be publicly disseminated. See proposed Rules 901(i)
and 910. This reporting is consistent with the requirements
contained in Rule 13Aa-2T(b)(1) under the Exchange Act, as the
Commission recognizes that such information may not be available.
See Interim Rule Release, supra note 16. Furthermore, if a reporting
party has reported a SBS to a registered SDR pursuant to proposed
Rule 901(i), the reporting party would become obligated to report to
the registered SDR any life cycle events pertaining to that SBS. See
proposed Rule 901(e).
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By requiring reporting of pre-enactment SBS transactions, proposed
Rule 901(i) would provide the Commission with insight as to outstanding
notional size, number of transactions, and number and type of
participants in the SBS market. This would provide a starting benchmark
against which to assess the development of the SBS market over time
and, thus, represent a first step toward a more transparent and well
regulated market for SBSs. The data reported pursuant to proposed Rule
901(i) also could help the Commission prepare the reports that it is
required to provide to Congress. Further, proposed Rule 901(i) would
require market participants to inventory their positions in SBS to
determine what information needs to be reported, which could benefit
market participants by encouraging management review of their internal
procedures and controls.
The Commission notes that, especially with respect to CDSs,
reporting parties may already have reported SBS information about
historical SBSs to a data repository. Should such a data repository
become registered with the Commission, the Commission would not require
reporting parties to submit duplicate information to the registered
SDR, except to the extent the reporting party has information in its
possession that satisfies the provisions of proposed Rules 901(c) and
(d) that had not previously been reported to the registered SDR.
Request for Comment
The Commission requests comment on all aspects of the proposed
rules relating to pre-enactment SBSs and transitional SBSs.
93. Do commenters agree with the proposed reporting requirements
for historical SBSs? Should the Commission extend the reporting
requirement to include SBSs that were entered into prior to the date of
enactment of the Dodd-Frank Act that had expired as of that date? If
so, what information should be reported with respect to these SBSs?
Would this approach be feasible? What would be the benefits of such an
approach? Who would use this information, and for what purpose(s)? What
would be the costs of this approach?
94. Would data concerning expired SBSs be of use to anyone? If so,
who would use this information, and for what purpose?
95. Should the proposed rule ``grandfather'' all SBSs previously
reported to a SDR regardless of whether the reporting party has
information in its possession that satisfies the provisions of proposed
Rule 901(c) and (d) that had not previously been reported to the
registered SDR?
V. Public Dissemination of Security-Based Swap Transaction Information
In seeking to carry out Congress's mandate to require real-time
public reporting for all SBSs, the Commission is mindful of Congress's
statement in Section 13(m)(1)(B) of the Exchange Act \85\ that ``[t]he
purpose of [Section 13(m)] is to authorize the Commission to make
security-based swap transaction and pricing data available to the
public in such form and at such times as the Commission determines
appropriate to enhance price discovery.'' Section 13(m)(1)(E)(iv) of
the Exchange Act \86\ further provides that the rule promulgated by the
Commission to carry out the real-time reporting mandate shall contain
provisions that take into account whether the public disclosure will
materially reduce market liquidity.\87\
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\85\ 15 U.S.C. 78m(m)(1)(B).
\86\ 15 U.S.C. 78m(m)(1)(E)(iv).
\87\ This provision applies only with regard to SBSs described
in clauses (i) and (ii) of Section 13(m)(1)(C) of the Exchange Act,
not SBSs described in clauses (iii) and (iv) of Section 13(m)(1)(C).
See supra Section I.B.2 (describing which SBSs fall into each of
these four categories).
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By reducing information asymmetries, post-trade transparency has
the potential to lower transaction costs, improve confidence in the
market, encourage participation by a larger number of market
participants, and increase liquidity in the SBS market. The current
market is opaque. Market participants, even dealers, lack an effective
mechanism to learn the prices at which other market participants
transact. In the absence of post-trade transparency, market
participants do not know whether the prices they are paying or would
pay are higher or lower than what others are paying for the same SBS
instruments. Currently, market participants resort to ``screen-
scraping'' e-mails containing indicative quotation information to
develop a sense of the market. Supplementing that effort with prompt
last-sale information would provide all market participants with more
extensive and more accurate information on which to make trading and
valuation determinations.
SBSs are complex derivative instruments, and there exists no single
accepted way to model a SBS for pricing purposes. Post-trade pricing
and volume information could allow valuation models to be adjusted to
reflect how other market participants have valued a SBS instrument at a
specific moment in time. Public, real-time dissemination of
[[Page 75225]]
last-sale information also could aid dealers in deriving better
quotations, because they would know the prices at which other market
participants have traded. The same information could aid end users in
evaluating current quotations, because they would be able to inquire
from dealers why the quotations that the dealers are providing them
differ from the prices of the most recent transactions. Furthermore,
end users that could view last-sale information in real time would be
able to test whether quotations offered by dealers before the last sale
were close to the price at which the last sale was executed. In this
manner, post-trade transparency could promote price competition and
more efficient price discovery in the SBS market.
In other markets, greater post-trade transparency has increased
competition among market participants and reduced transaction costs. A
number of studies of the corporate bond market, for example, have found
that post-trade transparency, resulting from the introduction of TRACE,
has reduced transaction costs.\88\
---------------------------------------------------------------------------
\88\ See Amy K. Edwards, Lawrence Harris, & Michael S. Piwowar,
Corporate Bond Market Transparency and Transaction Costs, J. of
Fin., Vol. 62, at 1421-1451 (2007); Hendrik Bessembinder, William F.
Maxwell, & Kumar Venkataraman, Market Transparency, Liquidity,
Externalities and Institutional Trading Costs in Corporate Bonds, J.
of Fin. Econ., Vol. 82, at 251-288 (2006). It should be noted that
Amy Edwards, one of the co-authors of the first article cited,
currently serves as an economist in the Commission's Division of
Risk, Strategy, and Financial Innovation.
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However, the structure of the SBS market and the way in which
participants manage risk in this market might be sufficiently different
from other financial markets to warrant different approaches to post-
trade transparency. The SBS market is almost wholly institutional,
unlike other securities markets where there is substantial retail
participation. Moreover, the SBS market has many fewer market
participants, fewer transactions, and larger trade sizes relative to
other securities markets. It could be argued that post-trade
transparency in the SBS market might not have the same effects as in
other securities markets. Indeed, one study of TRACE stated that
``[o]ur evidence suggests that the availability of last sale price
information may have little impact on spreads for less active bonds''
and that ``[w]e do not find any effect (positive or negative) of
transparency for very thinly traded bonds.'' \89\
---------------------------------------------------------------------------
\89\ Michael A. Goldstein, Edith S. Hotchkiss, & Erik R. Sirri,
Transparency and Liquidity: A Controlled Experiment on Corporate
Bonds, Rev. of Fin. Stud., Vol. 20, Issue 4, at 235-273 (2007), at
269, 270.
---------------------------------------------------------------------------
It could be argued that post-trade transparency in the SBS market,
particularly for large-sized trades, might even adversely impact
liquidity by increasing the costs of dealers to hedge. In a typical
SBS, one party (the ``natural long'') either has a risk position that
it wishes to offset (because, for example, it is long the bonds of a
reference company) or it wishes to establish a risk position. The
natural long typically would approach one or more dealers to take the
other side of the trade. If a dealer were to enter into a SBS with the
natural long, the dealer typically would seek to lay off that risk as
much as possible, perhaps with another dealer. Eventually, however, the
risk would typically be assumed by a market participant (the ``natural
short'') who is willing to assume the risk being laid off by the
natural long. In the SBS market, dealers generally are not natural
longs or natural shorts, because they do not seek to profit by taking
long or short risk positions. Dealers profit, rather, by collecting
spreads between the price at which they buy risk and the price at which
they sell risk, and by charging commissions.
The larger the natural long's initial risk position, the more
difficult it would likely be for a dealer that enters into an SBS with
the natural long to lay off the risk. All other things being equal, it
would likely be easier for the dealer to find another dealer or a
natural short willing to take on a small risk than a larger one. This
is the case even in an opaque market, such as the SBS market as it
exists today. The difficulties in transferring the risk could be even
greater if the transaction details of the initial SBS between the
natural long and the dealer were publicly disseminated in real time. A
dealer trying to engage in hedging transactions following an initial,
large SBS trade could be put in a weaker bargaining position relative
to subsequent counterparties, who could anticipate the structure of the
hedge.
In an opaque market, market participants have to rely primarily on
their understanding of the market's fundamentals to arrive at a price
at which they would be willing to assume risk. With immediate real-time
public dissemination of a block trade, however, market participants who
might be willing to offset that risk--i.e., other dealers and natural
shorts--could extract rents from a dealer that takes the risk from the
natural long. Because the initial dealer would not internalize those
higher costs, it would most likely seek to pass those costs on to the
natural long in the form of a higher price for the initial SBS up
front. Alternatively, the initial dealer could choose not to enter into
the initial SBS if the dealer's cost to hedge increased. In other
words, increasing the dealer's initial cost to hedge could increase
costs to those seeking to take a natural long position both in the form
of less favorable SBS prices for the natural long and potentially fewer
counterparties for a natural long to transact with, if certain dealers
were to scale back their activity in the SBS market. This could lead to
less liquidity in the SBS market, and thus lower trading volume and
less ability for market participants to manage risk.\90\ It also might
be argued that increased post-trade transparency could drive large
trades to other markets that offer the opacity desired by traders,
creating fragmentation and harming price efficiency and liquidity. This
possibility is consistent with the argument that large, informed
traders may prefer a less transparent trading environment that allows
them to minimize the price impact of their trades.\91\
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\90\ See N.Y. Naik, A. Neuberger, & S. Viswanathan, Trade
Disclosure Regulation in Markets with Negotiated Trades, Rev. of
Fin. Stud., Vol. 2, Issue 4, at 873-900 (1999).
\91\ See Ananth Madhavan, Consolidation, Fragmentation, and the
Disclosure of Trading Information, Rev. of Fin. Stud., Vol. 8, Issue
3, at 579-603 (1995).
---------------------------------------------------------------------------
Under this view of the SBS market, real-time public dissemination
of SBS block trades could result in market inefficiencies, as evidenced
by fewer transactions or less liquidity. If the natural long were
unable or unwilling to assume higher costs for the initial SBS
transaction, it might be left with an undesired level of risk, because
the market has been unable to relocate the risk to others who are more
willing or able to assume it. Furthermore, higher overall transaction
costs could hurt dealers, even though they can pass on to the natural
long the higher costs to hedge. This is because post-trade transparency
could cause overall transaction volumes to decline, thereby reducing
profits accruing to dealers, whether in the form of spreads or
commissions. Furthermore, to the extent natural shorts are able under a
post-trade transparency regime without a block trade exception to
extract rents from natural longs (albeit indirectly), there could be a
wealth transfer from natural longs to natural shorts. This could be
viewed as inefficient, because the prices charged (and presumably
obtained) by the natural shorts are not based solely on economic
fundamentals, but also are impacted by the predicament of the natural
longs (or dealers that have traded with the natural longs), where all
market participants
[[Page 75226]]
know that the natural longs (or the dealers) have a large risk position
that they presumably will wish to offset in the near future.
On the other hand, fully and immediately disseminating SBS
transactions to the public--even those of large notional size--could
incentivize additional market participants to compete to purchase the
risk that the natural long is trying to acquire or offset. In other
words, the desire by natural shorts to extract rents from natural longs
might be offset by more natural shorts competing to acquire the risk.
In this view, greater post-trade transparency would result in lower
rather than higher costs for natural longs to offset or acquire their
risk positions. In the existing, opaque market for SBSs, any individual
market participant possesses only incomplete knowledge of when
transactions occur, and thus when opportunities arise to enter the
market by offering to offset risk. Moreover, any individual market
participant possesses only incomplete information about where others
view the price of risk. Real-time public dissemination of both the
price and full size of all SBS transactions, including block trades,
could cause more market participants to bid to take on risk after
seeing a report of the block trade. Moreover, full post-trade
transparency of block trades would allow natural shorts to know the
prices at which natural longs transacted, which would enable natural
shorts to bid more efficiently to accept the risk, particularly if
natural shorts used the post-trade information as an input to, rather
than as a substitute for, their own independent valuation and pricing
decisions. Currently, a natural short--without knowledge of the price
at which the natural long transacted--could underprice its willingness
to acquire the risk, resulting in a windfall profit for the dealer, who
can capture a greater spread.
Discussed in greater detail below are the provisions in proposed
Regulation SBSR relating to post-trade transparency. In particular, the
Commission is proposing Rules 907(b) and 902(b) relating to block
trades, and is thereby taking into account the possibility that public
disclosure required under the Dodd-Frank Act could materially reduce
market liquidity for SBSs of large notional size.\92\ These proposed
rules are designed to balance the benefits of post-trade transparency
against the potential harm that could be done to dealers and natural
longs that could face higher costs of transferring or hedging a large
risk position after other market participants learn of the execution of
a block trade.
---------------------------------------------------------------------------
\92\ See 15 U.S.C. 78m(m)(1)(E)(iv).
---------------------------------------------------------------------------
The Commission acknowledges that it would be difficult at this
stage to accurately predict how post-trade transparency in general, or
the particular methods of post-trade transparency discussed in this
release, would affect the SBS market. The Commission is mindful that
there are similarities and differences between the SBS market and the
other securities markets that the Commission regulates, and that these
similarities and differences may impact how post-trade transparency
could affect the SBS market, in contrast to how post-trade transparency
affects other securities markets. Moreover, the effects of immediate
real-time dissemination could differ between the near term and the long
term, particularly as the SBS market evolves in response to other
regulatory actions. The Commission expects that, as post-trade
transparency is implemented in the SBS market, new data will come to
light that will inform the discussion and could cause subsequent
revision of Regulation SBSR. Whatever approach is ultimately adopted,
the Commission will study the development of the market closely,
particularly with regard to block trades, and make subsequent revisions
to the rules relating to post-trade transparency in the SBS market as
necessary or appropriate.
Request for Comment
The Commission requests comment generally on how the Commission
should address Congress's instruction in Section 13(m)(1)(E)(iv) of the
Exchange Act that, with respect to certain SBSs, the rule promulgated
by the Commission to carry out the real-time reporting mandate shall
contain provisions that take into account whether the public disclosure
will materially reduce market liquidity. In particular:
96. Would post-trade transparency have an effect on the SBS market
similar to its effect in other securities markets? Why or why not?
97. Academic studies of other securities markets generally have
found that post-trade transparency reduces transaction costs and has
not reduced market liquidity. How do those markets differ or compare to
the SBS market? How would those similarities or differences affect
post-trade transparency in the SBS market?
98. The SBS market currently is almost wholly institutional. Would
this characteristic impact the effect of post-trade transparency on the
SBS market? If so, how and how much? Are the needs of market
participants in the SBS market for access to transaction information
different than the needs of market participants in other securities
markets for access to transaction information?
99. A significant amount of trading in the SBS market is currently
carried out by only a limited number of market participants. Would this
characteristic impact the effect of post-trade transparency on the SBS
market? If so, how and how much? For example, is there a concern that
it would be easier to determine the identity of the counterparties to a
SBS transaction in certain instances based on the real-time transaction
report? If so, what would be the harm, if any, of such knowledge? Would
the answer differ depending upon the liquidity of the SBS instrument,
or whether it was a customized SBS or not?
100. Overall, the SBS market is significantly more illiquid than
other securities markets that have post-trade transparency regimes. How
would this characteristic impact, if at all, the effect of post-trade
transparency on the SBS market? Do commenters believe that post-trade
transparency could materially reduce market liquidity in the SBS
market, or particular subsets thereof? Why and how? Please be specific
in your response and provide data to the extent possible.
101. In an illiquid market (such as the CDS market for smaller
reference entities), there will likely be fewer last-sale prints than
in a more liquid market (such as the CDS market for large corporate
debt issuers). Would these few last-sale prints in the illiquid market
have more, less, or the same value as prints in the more liquid market?
Why or why not?
102. How would a post-trade transparency regime in SBSs affect the
liquidity of the underlying securities? For example, how, if at all,
would the post-trade transparency regime affect liquidity in the
corporate bond market?
103. Should there be exceptions other than a block trading
exception to post-trade transparency to avoid unnecessarily reducing
market liquidity, e.g., for SBSs based on illiquid securities? Please
be specific in your response and provide data to the extent possible.
104. As noted above, Section 13(m)(1)(E)(iv) of the Exchange Act
provides that, with respect to real-time public dissemination of
information about SBSs that are subject to mandatory clearing or that
are not subject to mandatory clearing but are cleared regardless, the
rule promulgated by the Commission regarding such
[[Page 75227]]
dissemination shall contain provisions ``that take into account whether
the public disclosure will materially reduce market liquidity.'' Do
commenters believe that there are circumstances under which real-time
public dissemination of information about SBS transactions, as
contemplated by proposed Regulation SBSR, whether or not the
transactions are block trades, would materially reduce market
liquidity? If so, how, why, and under what circumstances would real-
time public dissemination affect market liquidity? If market liquidity
would be materially reduced, how do commenters believe that the
Commission should address that issue, given the general requirement in
Section 13(m)(1)(C) of the Exchange Act that the Commission generally
shall require real-time public reporting for all SBSs?
A. Registered SDRs as Entities With Duty To Disseminate
The Dodd-Frank Act identifies four types of SBSs and states, with
respect to each, that the Commission shall require real-time public
reporting for such transactions.\93\ In implementing the requirements
of the Dodd-Frank Act, the Commission preliminarily believes that the
best approach would be to require registered SDRs to disseminate SBS
transaction information, and to require other market participants to
report such information to a registered SDR in real time, so that the
registered SDR can in turn provide transaction reports to the public in
real time.\94\ Under this approach, market participants would not have
to obtain SBS market data from other potential sources of SBS
transaction information--such as SB SEFs, clearing agencies, brokers,
or the counterparties themselves--to obtain a comprehensive view of the
SBS market. Requiring registered SDRs to be the registered entities
with the duty to disseminate information would produce some degree of
mandated consolidation of SBS transaction data and help to provide
consistency in the form of the reported information. This approach is
designed to limit the costs and difficulty to market participants of
obtaining and assembling data feeds from multiple venues that might
disseminate information using different formats.
---------------------------------------------------------------------------
\93\ See 15 U.S.C. 78m(m)(1)(C).
\94\ One commenter has expressed support for this approach. See
Benchmark Letter at 2 (arguing that trade reporting and
dissemination, including the reference data and identifier system,
``should be provided via a non-profit industry utility such as a
SDR''). See also letter from Larry E. Thompson, General Counsel,
DTCC, to Mary Schapiro, Chairman, Commission, and Gary Gensler,
Chairman, CFTC, at 1 (November 15, 2010) (stating that a registered
SDR ``should be able to provide * * * a framework for real-time
reporting from swap execution facilities and derivatives
clearinghouses'').
---------------------------------------------------------------------------
Multiple uniquely formatted data feeds could impair the ability of
market participants to receive, understand, or compare SBS transaction
data and thus undermine its value. The Commission is cognizant of this
potential and seeks public comment on means to address this issue. One
way to address that issue would be to dictate the exact format and mode
of providing required SBS transaction data to the public. Although this
approach could promote consistency, the Commission preliminarily
believes that such an approach could inhibit innovation and the
development of best practices, and could inadvertently omit key
elements to a successful SBS transaction reporting system. The
Commission also preliminarily believes that such an approach may be
difficult to administer over time.
The Commission understands that existing SDRs that accept SBS data
do not currently have the functionality to publicly disseminate data in
real time. The Commission notes that nothing in the proposal would
prohibit a registered SDR from contracting with a vendor to carry out
the dissemination function. Over time, as registered SDRs and SBS
transaction reporting become more established, it is possible that
alternative approaches for reporting and disseminating SBS transaction
information could develop. Thus, the proposal would not prohibit
registered SDRs that cover the same asset classes from acting together
to create a central consolidator that would disseminate information for
all SBSs in that asset class. Allowing registered SDRs to satisfy their
dissemination obligation by providing information to a third party that
would consolidate and disseminate information for all SBSs in an asset
class might provide an economic incentive for registered SDRs to
create, fund, and operate a single central consolidator.
The Commission is sensitive to the possibility that there could
emerge multiple registered SDRs in an asset class. Should this occur,
the Commission and the markets would be confronted with the possibility
that different registered SDRs could adopt different dissemination
protocols, potentially creating fragmentation in SBS market data. Based
on conversations with market participants, however, the Commission
preliminarily believes that the most likely outcome is for the market
to have only a few registered SDRs (although nothing in the Dodd-Frank
Act prevents more from being established). Furthermore, even if
multiple registered SDRs were to be established in an asset class, it
is unclear whether market participants would have an incentive to
spread their business across those multiple registered SDRs. The
Commission seeks comment on the likelihood of multiple registered SDRs
per asset class emerging; how that would likely affect market
participant behavior; and what steps, if any, that the Commission
should take to address any attendant regulatory issues that could
arise.
One step that the Commission could take would be to require one
consolidated reporting entity to disseminate all SBS transaction data
for that asset class, by requiring each registered SDR in an asset
class to provide all of its SBS data to a ``central processor'' that
would also be a registered SDR. There is substantial precedent for this
approach in the equity markets, where market participants may access a
consolidated quote for national markets system securities and a
consolidated tape reporting executed transactions. A central processor
could receive a data feed from each registered SDR, consolidate the
information, and then publicly disseminate the consolidated data.
However, this approach likely would take more time to implement and may
not be warranted given the present SBS market structure. Furthermore,
as noted above, the proposal would not prohibit registered SDRs that
cover the same asset classes from determining on their own to act
together to create a central processor.
Another approach would be to require public dissemination pursuant
to a ``first touch'' or ``modified first touch'' approach. For a first
touch approach, a SBS dealer or major SBS participant that is a party
to the SBS would be responsible for dissemination, and for SBSs in
which no SBS dealer or major SBS participant is a party, the SDR would
be responsible for dissemination. Under a modified first touch
approach, a SB SEF or national securities exchange would be required to
disseminate the information for those SBSs executed on the SB SEF or
national securities exchange. In connection with either of these
approaches, the Commission could allow a party required to disseminate
to satisfy its obligation if it provided the information to a third-
party consolidator that would disseminate the information for all SBSs
in that asset class. However, if that did not occur in a timely
manner--if, for example, the reporting parties could not agree on the
practicalities of such an undertaking, or if not all reporting parties
wanted to join--it would result
[[Page 75228]]
in less consolidation than the proposed approach to require registered
SDRs to disseminate the SBS data.
Request for Comment
The Commission requests comment on all aspects of the proposed
rules requiring registered SDRs to disseminate SBS information.
105. Would requiring registered SDRs to disseminate SBS information
be an effective means of dissemination? Why or why not? Would another
approach be more effective? What would be the advantages, or
disadvantages, of requiring different registered entities, in addition
to or instead of registered SDRs, to disseminate SBS information?
106. Would the presence of multiple disseminators increase the need
for a consolidated data feed? Why or why not?
107. Should the Commission require consolidation of data feeds now?
Or over time if multiple registered SDRs begin to operate in an asset
class?
108. What are the costs and benefits of requiring registered SDRs
to disseminate SBS data? Would this approach have an impact on an
entity's desire to become a registered SDR? Are other entities, such as
SB SEFs, better suited to disseminate SBS data? How should the
Commission balance the costs to particular entities with the benefits
of greater consolidation of publicly disseminated SBS data?
B. Dissemination in Real Time
Proposed Rule 902(a) would require a registered SDR to publicly
disseminate a transaction report of a SBS, other than a block
trade,\95\ immediately upon (1) receipt of information about the SBS
from a reporting party, or (2) re-opening following a period when the
registered SDR was closed.\96\ The Commission preliminarily believes
that ``immediately'' as used in this context would require a wholly
automated process to accept the incoming information, process the
information to assure that only information required to be disseminated
is disseminated, and disseminate a trade report through electronic
means. The transaction report that is disseminated would be required to
consist of all the information reported by the reporting party pursuant
to proposed Rule 901(c),\97\ along with any indicator or indicators
contemplated by the registered SDR's policies and procedures.\98\ In
addition, the registered SDR would be required to have policies and
procedures that specify the specific data elements that must be
reported to it and the format for reporting this information,\99\ which
could help to provide greater uniformity in the disseminated
transaction data.
---------------------------------------------------------------------------
\95\ See infra Section V.C (discussing block trades).
\96\ The Commission notes that FINRA disseminates information on
all transactions in TRACE-eligible securities immediately upon
receipt of a transaction report. See FINRA Rule 6750(a). The
Commission also notes that the Municipal Securities Rulemaking Board
disseminates information on most transactions in municipal
securities almost immediately. See http://emma.msrb.org/EducationCenter/FAQs.aspx?topic+AboutTrade.
\97\ See supra Section III.B (discussing the data elements
required to be reported in real time by proposed Rule 901(c)).
\98\ See proposed Rule 907(a)(4).
\99\ See proposed Rules 907(a)(1) and (2).
---------------------------------------------------------------------------
The Commission recognizes that there may be circumstances when a
registered SDR's systems might be unavailable for publicly
disseminating transaction data. In such cases, as provided in proposed
Rule 902, the registered SDR would be required to disseminate the
transaction data immediately upon its re-opening.\100\
---------------------------------------------------------------------------
\100\ See infra Section V.D (discussing proposed Rule 904, which
deals with hours of operation of registered SDRs and related
operational procedures).
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C. Block Trades
The Commission proposes to establish criteria for what constitutes
a block trade and for specifying a time delay for disseminating certain
information about a block trade to the public, for all SBSs except
those that are determined to be required to be cleared under Section
3C(b) of the Exchange Act but are not cleared.\101\ Proposed Rule
907(b) would establish criteria for what constitutes a block trade, and
proposed Rule 902(b) would specify the time delay for disseminating
certain information about a block trade to the public.
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\101\ See 15 U.S.C. 13m(m)(1)(C)(iv) (providing that, with
respect to SBSs that are determined to be required to be cleared
under Section 3C(b) but are not cleared, the Commission shall
require real-time public reporting of such transactions).
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1. Role of Registered SDRs Generally
Proposed Rule 900 would define ``block trade'' to mean a large
notional SBS transaction that meets the criteria set forth in proposed
Rule 907(b). Proposed Rule 907(b)(1) would require a registered SDR to
establish and maintain written policies and procedures for calculating
and publicizing block trade thresholds for all SBS instruments reported
to the registered SDR in accordance with the criteria and formula for
determining block size as specified by the Commission. In determining
block trade thresholds, a registered SDR would be performing
mechanical, non-subjective calculations.
The Commission preliminarily believes that requiring a registered
SDR to calculate and publicize block trade thresholds pursuant to its
written policies and procedures would allow for a more streamlined and
accurate process, as registered SDRs would have more ready access to
the data necessary to make block trade calculations. Further, placing
the responsibility on registered SDRs rather than reporting parties
would eliminate the burden on reporting parties for making block trade
calculations, and should provide greater uniformity in what constitutes
a block trade.
2. Block Trade Threshold
As noted above, Section 13m(1)(E)(ii) of the Exchange Act \102\
requires the Commission rule for real-time public dissemination of SBS
transactions ``to specify the criteria for determining what constitutes
a large notional security-based swap transaction (block trade).'' In
this release, the Commission is proposing general criteria that it
would consider when setting specific block trade thresholds, but is not
proposing specific thresholds at this time. The Commission believes
that it would be appropriate to seek additional comment from the
public, as well as to collect and analyze additional data on the SBS
market, in the coming months. The Commission intends to propose
specific block trade thresholds simultaneous with the adoption of
Regulation SBSR (in whatever form it may ultimately take).
---------------------------------------------------------------------------
\102\ 15 U.S.C. 13m(m)(1)(E)(ii). This provision applies with
respect to SBSs that are subject to mandatory clearing and SBSs that
are not subject to mandatory clearing but are cleared at a
registered clearing agency.
---------------------------------------------------------------------------
The Commission preliminarily believes that the general criteria for
what constitutes a large notional SBS transaction must be specified in
a way that takes into account whether public disclosure of such
transactions would materially reduce market liquidity, but presumably
should be balanced by the general mandate of Section 13(m)(1) of the
Exchange Act, which provides that data on SBS transactions must be
publicly disseminated in real time, and in a form that enhances price
discovery. In considering criteria for what constitutes a large
notional SBS, the Commission notes that there are mechanisms by which
reporting data on any SBS might impact liquidity. If the intent to
trade were publicly reported prior to a transaction taking place (i.e.,
if there were pre-trade transparency), it would be reasonable to
suppose that the marketplace would have an opportunity to react to this
information in a way that
[[Page 75229]]
impacted the ability of such a transaction to be completed at the
desired price, which might in turn impact the liquidity of such a
market by causing participants to withdraw from trading or reduce the
size of their trades.
However, this effect could not manifest itself directly via post-
trade transparency, since the transaction has already taken place. For
post-trade transparency to have a negative impact on liquidity, market
participants would need to be affected in a way that either: (1)
Impacted their desire to engage in subsequent transactions unrelated to
the first, or (2) impacted their ability to follow through with further
actions after the reported transaction has been completed that they
feel are a necessary consequence of the reported transaction. In
instance (1), post-trade dissemination of transaction prices, without
necessarily any reference to notional size, could impact the desire for
certain market participants to trade if spreads narrowed, because price
transparency led to an increased negotiating ability for market
participants who otherwise would not have been privy to such
information. But this same transparency also could lead to an increase
in liquidity if other market participants increase their trading as a
result of having access to new information or of narrower spreads. It
may not be possible to estimate with any certainty which of these
factors will outweigh the other as the SBS market continues to evolve.
Analogs to other markets (such as fixed income or equities) may provide
guidance; however, those markets each have structures and instruments
that differ significantly from the SBS market.
In determining whether there should be a delay in the disclosure of
prices of SBS block trades, without necessarily any reference to
notional size, the Commission is guided by the general mandate of
Section 13(m)(1) of the Exchange Act, which provides that transaction
information should be disseminated in a form that enhances price
discovery. Nonetheless, the Commission recognizes that mandating
disclosure of trades below a certain size would essentially signal to
the market that a trade was at or above that size--that is to say,
would signal that the trade was ``of size''--even when there is no
disclosure of the precise size of the trade if it is above some
threshold size. The Commission preliminarily believes that even in very
illiquid markets transaction prices form the foundation of price
discovery. Past transactions may not be indicative of those in the
future, and may not themselves accurately reflect fundamental value,
but they provide an objective starting point for participants to
consider. Moreover, in an illiquid market, the low frequency of
transactions and potentially wide variation of past prices inform
participants as to uncertainty in pricing that they may expect in the
future, which may not only influence trading decisions, but could also
play a role in mark-to-market valuations and risk management. There
does not seem to be a reason that post-trade price disclosure for large
notional SBS transactions would be less relevant for price discovery
than similar disclosure for other SBSs. Therefore, as described further
below, the Commission is proposing that prices for block trades be
disseminated in the same fashion as prices for non-block-trade
transactions.
In contrast, instance (2) above considers that disclosure that a
block trade has taken place, with or without the exact size of the
trade, may lead to a reduction in liquidity if one or both of the
parties engaged in such a transaction need to take further actions in
the marketplace after the reported transaction was completed and
disseminated, and dissemination would inhibit their ability to take
such action. In this situation, one or both of the parties might choose
not to have participated in the original transaction.
One reason an SBS counterparty might desire to take further action
after an initial transaction is completed would be for hedging
purposes. This hedge may take the form of re-entering the SBS market on
the contra side, or hedging the exposure underlying the initial SBS by
taking a contra position in the cash security market. Whether or not
one or more parties to a transaction will be subsequently hedging its
exposure after the transaction is complete cannot be discerned from
data about the transaction. However, if a transaction is to be hedged,
the size of the transaction would be a factor in how readily the hedge
can be executed.
For transactions that are sufficiently small, disseminating the
exact size of the transaction would likely not provide other market
participants with information that could be used to the detriment of
the hedging party, since the hedging transaction would be
indistinguishable from other market activity. However, for transactions
that are sufficiently large, it may be the case that disseminating the
size of such a transaction would provide a signal to other market
participants that there is the potential, though not certainty, that a
large transaction could take place in an SBS or a related security.
Market participants might be able to use this information to their
advantage in a way that disadvantages the hedging party and disincents
that party from engaging in such types of SBS transactions. In this
fashion, post-trade transparency for one transaction is transformed
into pre-trade signaling for another.
To address this issue, the Commission preliminarily believes that
the size of an SBS transaction that is sufficiently large to signal
other market participants that there is the potential for a subsequent
outsized transaction, should itself be suppressed to provide time for
those subsequent transactions, if any, to be absorbed by the market.
Moreover, the Commission recognizes that mandating disclosure of trades
below a certain size would essentially signal to the market that a
trade was at or above that size--that is to say, would signal that a
trade was ``of size''--even when there is no disclosure of the precise
size of the trade, if it is above some threshold size.
There are a variety of metrics that can be used to determine the
criteria for whether or not a SBS transaction should be considered a
block trade. These include the absolute size of the transaction, the
size of the transaction relative to other similar transactions, the
size of the transaction relative to some measure of overall volume for
that SBS instrument, and the size of the transaction relative to some
measure of overall volume for the security or securities underlying the
SBS. The most relevant metric would depend on the specific nature and
timing of the hedging, which cannot be discerned from data about the
transaction. However, if the goal of not publicly disseminating the
size of a large notional SBS transaction is to prevent inadvertent
signaling to the market of potential large subsequent transactions,
then criteria should be chosen in a way that minimizes such signaling.
This suggests the use of one or more metrics that can help
distinguish ordinary transaction sizes from extraordinary transaction
sizes. An ordinary transaction size would be one in which the size of
subsequent hedging transactions (if any) would be indistinguishable
from the rest of the market. Extraordinary transaction sizes would be
those in which subsequent transactions could be distinguished from the
rest of the market.
One possibility could be to order the sizes of all transactions for
a given SBS instrument and identify the top N-percent as large.
However, it is not a priori obvious what percent should be used. Also,
using a simple percentile threshold would not account for the
distribution of trade sizes that could be widely dispersed or narrowly
clustered. In addition, the distribution of the trade sizes could
change over time.
[[Page 75230]]
A second possibility would be to examine trade size data to
determine if the distribution of trade sizes suggests thresholds that
could be used to discern ordinary versus extraordinary trade size. The
figure below plots the distribution of trade sizes, bucketed in bins of
$5 million, for over 370,000 single name corporate CDS
transactions.\103\ Almost half of all trades have sizes of less than $5
million, and over 90% have sizes less than $15 million. There is a
small cluster of trades between $15 million and $30 million, followed
by a long tail beginning at $30 million and extending to over $100
million.
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\103\ See supra note 11.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP02DE10.025
These data would suggest two possible thresholds--$15 million or
$30 million. A cutoff of $15 million would have resulted in about 8% of
trades executed over this time period being considered large notional,
and a cutoff of $30 million would have resulted in about 1% of trades
being considered large notional.
The second figure below presents similar data for over 20,000
sovereign CDS transactions from the same source over the same time
period. The plot suggests similar cutoff points, although there are
notably many more transactions in the tail for sovereign CDS than there
were for single-name corporate CDS. A cutoff of $15 million would
result in about 26% of all trades being considered large notional, and
a cutoff of $30 million would result in about 7.5% of all trades being
considered large notional.
[[Page 75231]]
[GRAPHIC] [TIFF OMITTED] TP02DE10.027
BILLING CODE 8011-01-C
Splitting the universe of transactions into single-name corporate
CDS and sovereign CDS would not provide for potential differences
between individual corporates or sovereigns that may have unique
distributions or liquidity profiles. As a further consideration, the
Commission notes that some SBSs may trade very infrequently, such as
only a few times per month. Under these conditions, it would not be
obvious how to distinguish an ordinary sized transaction from an
extraordinary size. However, if a market were that illiquid it would
most likely not be the case that subsequent hedging would be done in
that same market. In such case, it is somewhat harder to see how the
post-trade reporting of size would further impact the ability for one
or more market participants to affect subsequent hedging transactions,
since in such an illiquid market it may not be possible to hedge at
all.
The Commission also notes that this criterion considers only
typical trade sizes within the CDS market without regard to overall
daily, weekly, or monthly volume. This criterion also does not consider
liquidity or volume in the underlying cash markets. Inclusion of volume
metrics may be helpful in defining the criteria for what constitutes a
block trade. For example, a single trade that is equivalent in size to
a full- or half-day's average volume may be considered out-sized. On
the other hand, if a particular SBS trades only once or twice per day
then every trade would be equivalent to a full or half-day's average
size. The Commission invites comment on if and how volume
considerations should be included in the criteria for setting block
trade thresholds.
For the reasons discussed above, a simple metric based on recent
trade sizes of SBSs designed to help distinguish ordinary from
extraordinary trade sizes could address the issue of inadvertently
signaling market participants that a potential large transaction in a
specific SBS or underlying security may be forthcoming as the result of
one or more participants hedging a just-completed large notional
transaction. On the other hand, the Commission recognizes that
requiring disclosure of the fact that a block trade took place may
raise some of the same concerns as requiring disclosure of the exact
size of the large trade, and that to mandate disclosure of trades below
a certain size is tantamount to mandating disclosure that a large trade
occurred, even if the precise size of the trade is not disclosed. The
Commission is interested in and invites comment on whether there are
other means by which the dissemination protocol for block trades could
effectively not reveal the size of a block trade or mitigate the
potential effects of revealing that a block trade took place, while
still offering the price component in real time. For example, could the
block trade be disseminated with a ``proxy'' size, such as the size of
the block trade threshold or a randomized size, with no identifier
showing that the trade is a block trade?
Finally, the Commission preliminarily believes that it would not be
appropriate to establish different block trade thresholds for similar
instruments with different maturities. This is reflected in the
proposed definition of ``security-based swap instrument,'' which would
mean ``each security-based swap in the same asset class, with the same
underlying reference asset, reference issuer, or reference index.''
\104\ The proposed definition would not include any distinction based
on tenor or date until expiration. The Commission is proposing this
approach for three reasons. First, the larger the number of
distinctions between SBS instruments that are created by the proposed
rule, the larger the number of potentially
[[Page 75232]]
illogical categorizations at the margins. For example, there would be
little economic rationale to draw a distinction between SBSs alike in
all respects except that they had maturities one day apart. Second, the
Commission understands that SBSs in the same asset class, with the same
underlying reference asset, reference issuer, or reference index have
pricing impacts on each other, regardless of their maturities. This is
because market participants typically price SBSs based on the same
reference issuer or index along a curve, whereby prices at points along
the curve where no hard data exist may be interpolated or extrapolated
from different points along the curve where harder data (such as
publicly disseminated last-sale prints) may exist. Thus, even if a SBS
of an unusual maturity were traded only infrequently, the market in
that SBS would likely be affected more by the characteristics of other
SBSs based in the same asset class, with the same underlying reference
asset, reference issuer, or reference index, rather than the fact that
there is low liquidity in SBSs having that specific maturity. Third, a
regime that differentiated SBSs based on maturities could invite market
participants to fragment the market by creating SBSs with non-standard
maturities in an effort to gain more favorable block trade treatment.
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\104\ See proposed Rule 900.
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3. Exclusions From Block Trade Definition
Proposed Rule 907(b)(2)(i) would provide that a registered SDR
shall not designate as a block trade any SBS that is an equity total
return swap or is otherwise designed to offer risks and returns
proportional to a position in the equity security or securities on
which the security-based swap is based.\105\ A SBS can be designed as a
synthetic substitute for a position in the underlying equity security
or securities. There is no delay in the reporting of block trade
transactions for equity securities in the United States. Proposed Rule
907(b)(2)(i) is designed to discourage SBS market participants from
evading post-trade transparency in the equity securities markets by
using synthetic substitutes in the SBS market.\106\
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\105\ Proposed Rule 901(c)(1) would require the reporting party
to report, in real time, the asset class of the SBS and, if the SBS
is an equity derivative, whether it is a total return swap or is
otherwise designed to offer risks and returns proportional to a
position in the equity security or securities on which the SBS is
based.
\106\ As an example: Bank DEF wants to purchase ten million
shares of Company XYZ and would like to avoid real-time public
reporting of the purchase. If Bank DEF purchased those shares on a
national securities exchange, the purchase would be reported in real
time. However, Bank DEF could instead enter into a total return swap
with ten million shares of XYZ as a reference asset and create an
economically similar position. If the total return swap, but not the
equity security transaction, were afforded a block trade exception
under proposed Regulation SBSR, this disparate regulatory treatment
might influence market participants' investment choices.
---------------------------------------------------------------------------
Proposed Rule 907(b)(2)(ii) would provide that a registered SDR
shall not designate as a block trade any SBS contemplated by Section
13(m)(1)(C)(iv) of the Exchange Act, i.e., any SBS that is determined
to be required to be cleared under Section 3C(b) of the Exchange Act,
but that is not cleared. The Dodd-Frank Act expressly requires the
Commission to mandate real-time public dissemination for SBSs that are
determined to be required to be cleared but are not cleared.
4. Public Dissemination of Block Trades
Proposed Rule 902(b) would provide that a registered SDR shall
publicly disseminate a transaction report of an SBS that constitutes a
block trade immediately upon receipt of information about the block
trade from the reporting party. The transaction report would be
required to consist of all the information reported by the reporting
party pursuant to proposed Rule 901(c), except for the notional size,
plus the transaction ID and an indicator that the report represents a
block trade. The Commission proposes that the registered SDR would be
required to publicly disseminate a complete transaction report for such
block trade (including the transaction ID and the full notional size)
as follows:
Proposed Rule 902(b)(1) would provide that, if the SBS was
executed on or after 05:00 UTC and before 23:00 UTC of the same day
(which corresponds to 12 midnight and 6 p.m. EST), the transaction
report (including the transaction ID and the full notional size) shall
be disseminated at 07:00 UTC of the following day (which corresponds to
2 a.m. EST of the following day).
Proposed Rule 902(b)(2) would provide that, if the SBS was
executed on or after 23:00 UTC and up to 05:00 UTC of the following day
(which corresponds to 6 p.m. until midnight EST), the transaction
report (including the transaction ID and the full notional size) shall
be disseminated at 13:00 UTC of that following day (which corresponds
to 8 a.m. EST of the following day).
Under proposed Rule 902(b), market participants would learn the
price of an SBS block trade in real time, although not the notional
size. The Commission preliminarily believes that this approach promotes
the public's interest in price discovery without subjecting the block
trade counterparties to undue risk of a significant change in the price
necessary to hedge the market risk created by entering into the block
trade. Other market participants would know the SBS transaction was
above a certain size, and it may be possible to infer the size or
direction of a large trade before the size is publicly disseminated,
based on the liquidity premium inferred from the reported trade price.
The Commission recognizes that the disclosure that a block trade took
place, even without disclosure of the exact size, can still implicate
some of the concerns regarding subsequent hedging that were previously
discussed. On the other hand, there would still be substantial risk for
any other market participant that seeks to take long or short market
positions solely to profit from the information that a block trade
occurred, due to the uncertainty regarding the true size of the trade.
Moreover, disseminating the price in real time could allow all market
participants to obtain useful information about the block trade for
valuation purposes, even though they would not learn about the full
size of the block trade until later.\107\ The Commission notes that the
approach that it is proposing here is similar to TRACE's handling of
block trades.\108\
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\107\ SBS market participants typically value their holdings at
the end of the business day. If no information about a block trade
were made public until after the end of the business day (for
example, if the block trade occurred at 15:00 UTC/noon EST but no
public trade report were required until eight hours later, i.e., at
23:00 UTC/8:00 p.m. EST), all market participants would lose a
potentially significant input into their valuation methodologies.
This could be the case in particular for infrequently traded SBS
instruments, where there are few last-sale prints. This would also
likely be the case for market participants that hold SBS instruments
in notional sizes similar to the undisseminated SBS block trade. A
large position might be valued less on a per-unit basis than a
smaller position, due to an illiquidity premium. Seeing the price of
the block trade in real time could be useful for market participants
that must value a larger SBS position, because the price of the
reported block trade (even if the exact size is unknown) would also
likely reflect an illiquidity premium to some extent.
\108\ FINRA rules require member broker-dealers to report
transactions in corporate and agency debt securities to TRACE within
15 minutes. FINRA publicly disseminates a transaction report
immediately upon receipt of the information. If the par value of the
trade exceeds $5 million (in the case of investment grade bonds) or
$1 million (in the case of non-investment-grade bonds) the quantity
disseminated by TRACE will be either ``5 million+'' or ``1
million+''. At no time will TRACE subsequently disseminate the full
size of the trade. See TRACE User Guide, version 2.4 (last update
March 31, 2010), at 50.
---------------------------------------------------------------------------
Unlike TRACE, however, the Commission is proposing a second wave of
transaction reporting, which would include the full notional size of
the
[[Page 75233]]
block trade, after an appropriate delay. Under proposed Rules 907(b)(1)
and (2), all block trades would have at least an eight-hour delay
before the full notional size would be disseminated. Proposed Rule
907(b) would establish a cut-off time of 23:00 UTC, which correspond to
6 p.m. EST. Block trades executed on or after 05:00 UTC (which
corresponds to midnight EST) and up to 23:00 UTC (6 p.m. EST) would
have to have their full notional size disseminated by 07:00 UTC, which
corresponds to 2 a.m. EST. Thus, most block trades executed on a given
U.S. day would have their full notional sizes disseminated overnight.
However, block trades executed on or after 23:00 UTC (6 p.m. EST) and
before 05:00 UTC (midnight EST) would instead have their full notional
sizes disseminated at 13:00 UTC, which corresponds to 8 a.m. EST of the
following U.S. day. If there were only one point in the day when a
registered SDR were required to disseminate the full notional sizes,
block trades executed a short time before the second wave of
dissemination would not benefit from the proposed delay in the
dissemination of the notional size. Under the proposed approach, block
trades executed during a period that runs roughly from the close of the
U.S. business day to midnight EST would have their full sizes
disseminated by a registered SDR at a time that corresponds to the
opening of business on the next U.S. day.
The Commission preliminarily believes that disseminating the full
size of a block trade, albeit with a delay, would further promote price
transparency while having only minimal costs. The ability to view the
full notional size, although with a delay of between eight and 26
hours,\109\ would allow market participants to understand the full
scope of activity in the market. At the same time, market participants
that execute block trades would have at minimum eight hours to hedge or
take other action to minimize their risks before the full size of their
trades was disseminated. Based on preliminary discussions with market
participants, the Commission believes that the proposed delay of
between eight and 26 hours, which in most cases would represent the
better part of a business day, would allow sufficient time for the
counterparties to the transaction to take follow-up action as needed.
The Commission preliminarily believes, therefore, that these time
periods strike a reasonable balance between the goals of post-trade
transparency and of providing market participants that trade in large
size a reasonable opportunity to mitigate their risks.
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\109\ Market participants would be able to view the full
notional size of a SBS transaction no sooner than eight hours and no
more than 26 hours after the time of execution. A SBS block trade
executed at 05:00 UTC would have its full size disseminated by a
registered SDR at 07:00 UTC of the next day, which is 26 hours
later. Any other SBS block trade would be disseminated after a
shorter delay. For example, a SBS block trade executed at 17:00 UTC
also would be disseminated with its full size at 07:00 UTC of the
next day, which is 14 hours later. A SBS block trade executed at
04:59:59 would have its full size disseminated by a registered SDR
at 13:00 UTC of that same day, just over eight hours later.
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Finally, proposed Rule 907(b)(3) would provide that, if a
registered SDR is in normal closing hours or special closing hours
\110\ at a time when it would be required to disseminate information
about a block trade pursuant to this section, the registered SDR shall
instead disseminate information about the block trade immediately upon
re-opening. Under proposed Rules 907(b)(1) and (2), a registered SDR
could otherwise be required to disseminate the full report of a block
trade, including the notional size, at a time when it is closed.
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\110\ See infra Section V.E (discussing hours of operation of
registered SDRs).
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5. No Delay in Reporting Block Trades to Registered SDR
Because the registered SDR, rather than the reporting party, would
have the responsibility to determine whether a transaction qualifies as
a block trade, the reporting party would be required to report a SBS to
a registered SDR or the Commission pursuant to the time frames set
forth in Rules 901(c) and (d), regardless of whether the reporting
party believes the transaction qualifies for block trade treatment.
6. Block Trade Policies and Procedures
Proposed Rule 907(b)(1) would provide that a registered SDR shall
establish and maintain written policies and procedures for calculating
and publicizing block trade thresholds for all SBS instruments reported
to the registered SDR. At a minimum, a registered SDR would be required
to establish written policies and procedures reasonably designed to:
(1) Immediately determine whether a SBS reported to the registered SDR
constitutes a block trade and, if so, (2) disseminate information about
the block trade in a manner consistent with proposed Rule 902(b).
As noted above, the specific threshold that a registered SDR would
have to apply to make the block trade calculations will be established
in a future Commission rulemaking.
Request for Comment
The Commission requests comment generally on all aspects of the
proposed rules regarding block trades, including the proposed criteria
and the proposed exclusions. In particular, the Commission specifically
requests comment on the following issues:
109. Do commenters agree with the approach of having a registered
SDR calculate and publicize block size thresholds, in accordance with
the criteria established by the Commission? Why or why not? If not,
what would be an alternative approach?
110. If there is more than one registered SDR for an asset class,
how would the Commission ensure that all registered SDRs calculated the
same block trade thresholds for the same SBS instrument? How should the
Commission address this issue? Is it feasible to expect multiple
registered SDRs in the same asset class to obtain each others' market
data feeds to obtain the data with which to calculate block trade
thresholds?
111. If commenters believe that there would be adverse price impact
for traders if all information on block trades was made available in
real time, do commenters have any studies or empirical evidence to
support that assertion? What would be the long-term effects on the
market if all market participants knew the full transaction details of
all SBSs in real time? Would this impact liquidity? If so, how?
112. Some participants in the Market Data Roundtable referred to
the likelihood of ``front running'' if all information on block trades
were made available in real time. How would front running occur in the
SBS market if all the details of block trades were disseminated in real
time?
113. How do counterparties hedge large SBS trades? At what notional
trade size does it become difficult to hedge a SBS such that a
dissemination delay is necessary? How does this vary by asset class?
How long does it take to complete a hedge? What characteristics of a
SBS instrument or asset class affect the length of time needed to
deploy the hedge?
114. Does a counterparty's ability to hedge a trade increase or
decrease depending on market characteristics such as trading volume and
trading frequency? Does this depend on asset class, and within an asset
class does it depend on maturity or other contract characteristics?
115. Do commenters agree that the criteria for determining whether
or not a SBS transaction is considered a block trade should be based on
a distribution
[[Page 75234]]
of past trade sizes? Should overall volume also be considered? Should
volume or trade sizes in the cash market be considered?
116. Should block trade thresholds be determined with more
granularity, such as on a SBS instrument by instrument basis?
117. How often should thresholds be updated? What should be the
appropriate look back period for data used to determine thresholds?
118. Is there a preferred formulaic way of computing the thresholds
from trade size or other distributions? Should a simple percentile cut-
off be chosen? If so, how? Would a standard deviation metric be
appropriate?
119. How might trading change as a result of the chosen threshold?
Could these provisions be gamed? Would market participants change their
trading patterns to purposely skew the distribution to alter the
threshold when they are next updated?
120. For any criterion that takes into account trading activity in
the SBS instrument, should inter-affiliate transactions or trades
resulting from portfolio compressions be excluded? If so, why? Are
there other types of SBSs that should be excluded? If so, why? How
could those exclusions be defined so as to prevent market participants
from inappropriately deeming a SBS as qualifying for an exclusion?
121. Should there be a fixed minimum notional size threshold below
which no SBS could be considered a block trade? If so, what should that
threshold be and why? Should there be a different fixed minimum
threshold for different asset classes or SBS instruments? If so, why?
What would those different thresholds be?
122. Do commenters agree with the proposed exclusions from the
block trade determination? If so, why or why not? Should other kinds of
transactions be prevented from having a block trade exception?
123. Do commenters believe that block trades (however defined)
should be treated differently from other trades for purposes of public
dissemination? If so, why? If not, why not?
124. What would be the effect of having no or only a short
dissemination delay for a block trade report that includes the full
notional size? Would it enhance or slow the speed of price discovery
and the level of price efficiency in the market? Would it increase or
decrease competition among market participants in general, or SBS
dealers in particular? Would any short-term increases in the cost of
hedging be offset by reductions in the cost of hedging in the longer
term?
125. Do commenters agree with the proposed two-step process for
public dissemination of a block trade?
126. How likely is it that market participants would be able to
infer the size or direction of a large trade before the size is
publicly disseminated, based on the liquidity premium inferred from the
reported traded price? Is it feasible to remove the liquidity premium
component from the price of a large trade, leaving only a normalized
price for a standard (non-block) size trade to be reported in real
time, with the actual price including the liquidity premium component
being reported only at the time that actual trade size is revealed?
127. Would it be preferable to have a single transaction report for
a block trade that contains all transaction details, including the
notional size, but with a delay in dissemination of the complete trade
report? If so, why? What should that delay be? Five minutes? Ten
minutes? An hour? Three hours? At the end of the day? Why would this
length of time be appropriate?
128. Are there other means by which the dissemination protocol for
block trades could effectively not reveal the size of the block trade
while still offering the price component in real time? For example,
could the block trade be disseminated with a ``proxy'' size, such as
the size of the block trade threshold or a randomized size, with no
identifier showing that the trade is a block trade? Even if that
approach were to effectively not reveal the true size of the block,
would it do so at the cost of creating misinformation in the market?
129. Do commenters believe it is important for market participants
to have pricing information from block trades to set end-of-day marks?
When are these marks typically set? How valuable would it be in setting
end-of-day marks to know the price of a SBS block trade, even without
the full size?
130. If the Commission were to adopt a requirement that the price
and size of a block trade must be publicly disseminated before the time
that market participants typically set marks, would that cause SBS
counterparties to avoid executing block trades near that time? For
example, assume the Commission were to require that the full
transaction details of block trades had to be publicly disseminated by
a registered SDR at 21:00 UTC/4:00 p.m. EST, and that even a block
trade executed at 3:55 p.m. EST had to be disseminated at 4 p.m. EST.
Would this cause market participants to shift block trading earlier or
later in the day? If so, would there be any harm in such movement?
131. Do commenters agree with the Commission's proposed times for
disseminating the full notional size of block trades? If not, what
other times would be appropriate, and why? Would counterparties be able
to effectively hedge large SBSs executed toward the end of the day
during the time allowed by the proposed rules (i.e., between 6 p.m. and
midnight EST)?
132. Do commenters believe it would be more appropriate for a
registered SDR to disseminate the notional size of each block trade
after a fixed period after the trade report for that SBS transaction is
disseminated without the notional size, rather than requiring the
registered SDR to disseminate the full trade reports in two ``batches''
during the day? If so, what would be an appropriate delay for
disseminate the full notional size, and why?
133. Under the Commission's proposal, there would be at least an
eight-hour delay between the time of execution of a block trade and
when the full notional size is required to be disseminated by a
registered SDR. Is an eight-hour minimum appropriate? Should that
period be longer or shorter? Why?
134. Would the Commission's proposed times for disseminating block
trade information with the full notional size included cause any
disruptive change in trading patterns or activity for large SBS trades,
for example by providing market participants the incentive to move
block trading toward the very beginning of the day, or by prompting
market participants to avoid trading around the release of block trade
information at 07:00 UTC/2 a.m. EST and 13:00 UTC/8 a.m. EST?
135. Would the public dissemination of block trades as proposed
allow some market participants to infer the identity of the parties to
the transaction or materially reduce market liquidity? If so, how? Can
or should there be another means of suppressing the exact size of a
block trade?
D. SBS Information That Will Not Be Disseminated
The Commission is proposing Rule 902(c)(1), which would prohibit a
registered SDR from disseminating the identity of either counterparty
to a SBS, and Rule 902(c)(2), which would prohibit a registered SDR
from disseminating, with respect to a SBS that is not cleared at a
registered clearing agency and that is reported to a registered SDR,
any information disclosing the business transactions and market
positions of any person.\111\
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\111\ See 15 U.S.C. 13m(m)(1)(C)(iii) (``With respect to
security-based swaps that are not cleared * * * and which are
reported to a security-based swap data repository or the Commission
under section 3C(a)(6), the Commission shall require real-time
public reporting * * * in a manner that does not disclose the
business transactions and market positions of any person.''); 15
U.S.C. 13m(m)(1)(E)(i) (requiring that the Commission's rules
governing the dissemination of SBS transaction and pricing
information ``does not identify the participants''). The Commission
does not believe that the information that would be disseminated
pursuant to proposed Regulation SBSR would disclose the business
transactions, identities, or market positions of any person.
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[[Page 75235]]
In addition, proposed Rule 902(c)(3) would prohibit a registered
SDR from publicly disseminating any information regarding a SBS
reported pursuant to proposed Rule 901(i), which would require
participants to report pre-enactment and transitional SBSs.\112\ The
Commission preliminarily believes that price discovery would not be
enhanced by publicly disseminating information about historical
SBSs.\113\
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\112\ See proposed Rule 900 (defining ``pre-enactment security
based swap'' and ``transactional security-based swap'').
\113\ See supra Section IV.F.
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Request for Comment
136. Do commenters believe that information that would be
disseminated pursuant to proposed Regulation SBSR would disclose the
business transactions, identities, or market positions of any person?
137. If so, what revisions to proposed Regulation SBSR do
commenters believe would be necessary to avoid disclosing the business
transactions, identities, or market positions of any person?
E. Operating Hours of Registered SDRs
1. Continuous Operation
The Dodd-Frank Act does not explicitly address or prescribe the
hours of operation of the real-time reporting and dissemination regime.
However, to serve the goals of transparency and price discovery, the
Commission believes that it is appropriate to implement a system of
real-time reporting and dissemination that, in general, operates
continuously.\114\ Accordingly, proposed Rule 904 would require a
registered SDR to design its systems to allow for continuous receipt
and dissemination of SBS data, except that a registered SDR would be
permitted to establish ``normal closing hours.'' Such normal closing
hours may occur only when, in the estimation of the registered SDR, the
U.S. markets and other major markets are inactive. In addition, a
registered SDR would be permitted to declare, on an ad hoc basis,
special closing hours to perform routine system maintenance, subject to
certain requirements.
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\114\ The Commission is aware that one current data repository,
Warehouse Trust Company LLC, a subsidiary of DTCC, operates 24 hours
a day for six days a week.
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The Commission believes there are compelling reasons to adopt this
approach. First, the market for SBSs is global, and the Commission
believes the public interest is served by requiring continuous real-
time dissemination of any SBS transactions that would be required to be
reported to a registered SDR, no matter when they are executed. Second,
a continuous dissemination regime would reduce the incentive for market
participants to defer execution of SBS transactions until after regular
business hours to avoid real-time post-trade transparency. Third, the
Commission believes that this continuous dissemination regime would be
``technologically practicable,'' and thus consistent with the Dodd-
Frank definition of what constitutes real-time dissemination.\115\
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\115\ See 15 U.S.C. 78m(m)(1)(A).
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2. Normal Closing Hours and Special Closing Hours
Although the Commission believes that continuous operation of a
real-time reporting and dissemination regime should be the goal, the
Commission recognizes the potential need for a registered SDR to
establish normal closing hours to perform necessary system maintenance.
Such normal closing hours should occur only when, in the estimation of
the registered SDR, the U.S. markets and major foreign markets are
inactive. Consequently, proposed Rule 904(a) would allow a registered
SDR to establish normal closing hours during periods when, in its
estimation, the U.S. market and major foreign markets are inactive. A
registered SDR would be required to provide reasonable advance notice
to participants and to the public of its normal closing hours.\116\
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\116\ For example, a registered SDR could provide notices to its
participants or publicize its normal closing hours in a conspicuous
place on its Web site.
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Further, the Commission recognizes that unexpected circumstances
could arise that would require a registered SDR to temporarily make
unavailable its systems for processing transaction reports and publicly
disseminating transaction data. Consequently, proposed Rule 904(b)
would permit a registered SDR to declare, on an ad hoc basis, special
closing hours to perform system maintenance that cannot wait until
normal closing hours. A registered SDR would be required, to the extent
reasonably possible under the circumstances, to avoid scheduling
special closing hours during when, in its estimation, the U.S. market
and major foreign markets are most active, and to provide reasonable
advance notice of its special closing hours to participants and to the
public.
Paragraphs (c) to (e) of proposed Rule 904 would specify
requirements for handling and disseminating reported data during a
registered SDR's normal and special closing hours. During normal
closing hours and, to the extent reasonably practicable, during special
closing hours, a registered SDR would be required to have the
capability to receive and hold in queue transaction data it receives.
Immediately upon system re-opening following normal closing hours (or
opening following special closing hours, if it were able to hold
incoming data in queue), the registered SDR would be required to
publicly disseminate any transaction data required to be reported under
proposed Rule 901(c) that it received and held in queue. If the
registered SDR could not, while it was closed, receive and hold in
queue information required to be reported, it would be required,
immediately upon resuming normal operations, to send a notice to all
participants that it had resumed normal operations but could not, while
closed, receive and hold in queue such transaction information.
Thereafter, any participant that had an obligation to report
information, but was unable to do so because of the registered SDR's
inability to receive and hold data in queue, would be required to
immediately report the information to the registered SDR.
Regardless of the current operating status of a registered SDR,
reporting parties would be required to submit information to the
registered SDR under the same standards and permissible timing detailed
in proposed Rule 901. If a party that has an obligation to report the
transaction data is unable to do so because the registered SDR's system
is unable to receive and hold in queue such data, the reporting party
would be required to report any information that it was obligated to
report immediately after it received a notice that it was possible to
do so.
Request for Comment
The Commission requests comment on all aspects of the proposed
operating hours for registered SDRs.
138. Do commenters agree with the provisions that would allow
registered SDRs to have normal and special closing hours and the
proposed process for receipt and dissemination of data during and after
such hours?
139. Is it reasonable for the Commission to provide registered SDRs
with flexibility to set specific closing
[[Page 75236]]
times, or should the Commission adopt a rule that specifies hours of
operation?
140. Are there alternatives to allowing registered SDRs to close
during normal and special closing hours? Would it be feasible for
registered SDRs to operate without normal and special closing hours?
F. Procedures for Correcting Errors
Proposed Rule 905 would establish procedures to correct errors in
reported and disseminated SBS information. The Commission recognizes
that any system for transaction reporting must accommodate the
possibility that certain data elements may be incorrectly reported.
Proposed Rule 905 would establish error reporting procedures for
counterparties and for registered SDRs.
1. Counterparty Reporting Error
Proposed Rule 905(a) would apply where a counterparty discovers an
error after a SBS transaction has been reported. A counterparty that
was not the reporting party would be required to promptly notify the
reporting party of the error. A reporting party that discovers an error
or receives notification of an error from its counterparty would be
required to promptly submit to the entity to which it provided the
original transaction report an amended report pertaining to the
original transaction report. If the reporting party reported the
initial transaction to a registered SDR, the reporting party must
submit an amended report to the registered SDR in a manner consistent
with the policies and procedures contemplated by proposed Rule
907(a)(3).\117\ The Commission preliminarily believes that it is
reasonable to place the duty to submit a correction report on the
reporting party, because the reporting party was responsible for
submitting the initial transaction report. This approach should
establish a clear duty and help to avoid the submission of duplicative
error reports.
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\117\ See proposed Rule 905(a)(2).
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2. Responsibility of Registered SDR To Correct
Proposed Rule 905(b) outlines the duties of registered SDRs in
correcting information and re-disseminating corrected information.\118\
If the registered SDR either discovers an error in the SBS information
contained in its system or receives notice of an error from a
counterparty, the registered SDR would be required to verify the
accuracy of the terms of the SBS and, following such verification,
promptly correct the information in its system.\119\ Proposed Rule 905
would further require that, if the erroneous information contains any
information that falls into the categories enumerated in proposed Rule
901(c) as information required to be reported and disseminated in real
time, the registered SDR would be required to publicly disseminate a
corrected transaction report of the SBS promptly following verification
of the trade by the parties to the SBS, with an indication that the
report relates to a previously disseminated transaction.\120\
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\118\ See also SDR Registration Proposing Release, supra note 6
(proposing Rule 13n-5 under the Exchange Act).
\119\ See proposed Rule 905(b)(1). The Commission is also
proposing to require the registered SDR to establish and maintain
written policies and procedures that, among other things, specify
how reporting parties are to report corrections to previously
submitted information and how information in the records of the SDR,
upon being discovered to be erroneous, is to be corrected. See
proposed Rule 907(a)(3); infra Section VI.A (discussing the policies
and procedures of registered SDRs).
\120\ See proposed Rule 905(b)(2).
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Proposed Rule 907(a)(3) would require a registered SDR to, among
other things, establish and maintain written policies and procedures
for determining how participants would be required to report
corrections of prior reports. The registered SDR would have flexibility
to specify the modifiers or indicators to allow reporting parties to
submit reports distinguishing corrected trades from new trades and
indicating the actual execution date and time.
For example: Counterparty B (the reporting party) notices that
there is an error in the reported notional amount of a SBS transaction.
Counterparty B then would be required under proposed Rule 905(a) to
promptly notify the registered SDR to which it originally reported the
trade of the error in the notional amount. Because the notional amount
is one of the data elements that must be reported in real time under
proposed Rule 901(c), the registered SDR would be required to
immediately disseminate a corrected transaction report to the public,
with a notation indicating that it is a corrected trade report.
Request for Comment
The Commission requests comment on all aspects of the proposed
rules relating to procedures for correcting errors in reported and
disseminated SBS information.
141. Are the proposed obligations for submitting error reports
sufficiently clear?
142. Are additional requirements necessary? Are the proposed
requirements adequate to assure that errors are corrected promptly and
corrections are promptly disseminated as appropriate? If not, what
additional procedures should be required?
143. Do commenters agree with the proposed approach? Why or why
not?
144. Do commenters agree that error reports should be publicly
disseminated? Why or why not?
VI. Policies and Procedures of Registered SDRs
In designing a comprehensive system of transaction reporting and
post-trade transparency for all SBS--involving a constantly evolving
market, thousands of participants, and potentially millions of
transactions--the Commission preliminarily believes that it is not
necessary or appropriate for it to specify by rule every detail of how
this system should operate. On some matters, there may not be a single
correct approach for maximizing transparency and price discovery;
rather, it might be more important that there be a coordinated approach
that all market participants understand and adhere to.
The Commission believes that registered SDRs could play an
important role in developing, operating, and improving the system for
transaction reporting and post-trade transparency in SBS, as laid out
by Congress in the Dodd-Frank Act. Registered SDRs are placed at the
center of the market infrastructure, as the Dodd-Frank Act requires all
SBSs, whether cleared or uncleared, to be reported to them.\121\ The
Commission preliminarily believes that some reasonable flexibility
should be given to registered SDRs to carry out their functions--by,
for example, being able to specify data formats, connectivity
requirements, and other protocols for submitting information to them.
The Commission's intent is to set out broad principles that registered
SDRs and their participants would be required to follow, while
providing registered SDRs with flexibility in determining the precise
means of doing so.
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\121\ See 15 U.S.C. 13m(m)(1)(G).
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As discussed more fully below, a registered SDR would be required
to establish and maintain certain policies and procedures, including
policies and procedures to: (1) Enumerate the specific data elements of
SBS or life cycle event that a reporting party must report; (2) specify
one or more acceptable data formats, connectivity requirements, and
other protocols for submitting information; (3) promptly correct
information in its records that is discovered to be erroneous; (4)
determine whether and how life cycle events and other SBSs that may not
accurately reflect the market should be
[[Page 75237]]
disseminated; (5) assign or obtain certain unique identifiers; (6)
receive information concerning a participant's ultimate parent and
affiliated entities; and (7) handle block trades.
A registered SDR also would be required to make its policies and
procedures required by proposed Regulation SBSR publicly available on
its Web site.\122\ This would allow all interested parties to
understand how the registered SDR is utilizing the flexibility it has
in operating the transaction reporting and dissemination system.\123\
The Commission anticipates that participants might make suggestions to
the registered SDR for altering and improving that system, or
developing new policies and procedures to address new products or
circumstances, consistent with the principles set out in proposed
Regulation SBSR. In conclusion, the Commission preliminarily believes
that requiring registered SDRs to adopt and maintain policies and
procedures, as required under proposed Rule 907, would improve
compliance with proposed Regulation SBSR.
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\122\ See proposed Rule 907(c).
\123\ See SDR Registration Proposing Release, supra note 6,
proposed Rule 13n-10. Furthermore, proposed Form SDR would require
all of the policies and procedures required by proposed Regulation
SBSR be submitted by a data repository registering with the
Commission. See SDR Registration Proposing Release, supra note 6,
Exhibit GG to proposed Form SDR.
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A. Elements of Policies and Procedures
Proposed Rule 907(a)(1) of Regulation SBSR would require a
registered SDR to establish and maintain written policies and
procedures that enumerate the specific data elements of a SBS or a life
cycle event that a reporting party must report. These data elements
would be required to include, at a minimum, those specified in proposed
Rules 901(c) and (d). The Commission expects that the policies and
procedures adopted under proposed Rule 907(a)(1) would explain to
reporting parties how to report if all the SBS transaction data
required by Rules 901(c) and (d) is being reported simultaneously, and
how to report if responsive data are being provided at separate
times.\124\
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\124\ In the latter case, the Commission expects that the
registered SDR would provide the reporting party the transaction ID
after the reporting party reports the information required by
proposed Rule 901(c). The reporting party would then include the
transaction ID with its submission of data required by proposed Rule
901(d), thereby allowing the registered SDR to match the real-time
report and the subsequent regulatory report.
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Proposed Rule 907(a)(2) would require a registered SDR to establish
and maintain written policies and procedures that specify one or more
acceptable data formats (each of which must be an open-source
structured data format that is widely used by participants),
connectivity requirements, and other protocols for submitting
information. The Commission preliminarily believes that a registered
SDR should have reasonable flexibility to design its systems and
develop ways for participants to input information into those systems.
Proposed Rule 907(a)(3) would require a registered SDR to establish
and maintain written policies and procedures for specifying how
reporting parties are to report corrections to previously submitted
information, making corrections to information in its records that is
subsequently discovered to be erroneous, and applying an appropriate
indicator to any report required to be disseminated by proposed Rule
905(b)(2), which would denote that the report relates to a previously
disseminated transaction. There could be a number of acceptable ways to
carry out the general directive to correct erroneous information, and
reasonable flexibility should be afforded a registered SDR in this
regard. Use of transaction IDs assigned by the registered SDR would
facilitate this process, as this would offer a clear way for
participants and the registered SDR to refer to an earlier
transaction.\125\ The Commission preliminarily believes that a
registered SDR should be required to have an appropriate means to
confirm that the information provided by the reporting party is indeed
correct.
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\125\ See supra Section IV.E.2.
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Finally, the policies and procedures required by proposed Rule
907(a)(3) would have to address applying an appropriate indicator to
any new transaction report required by proposed Rule 905(b)(2) that the
report relates to a previously disseminated transaction. It is
essential that market observers understand that the transaction report
triggered by proposed Rule 905 does not represent a new transaction,
but merely a correction to a previous transaction. Without some kind of
indication to that effect, market observers could misunderstand the
true state of the market. Therefore, the Commission preliminarily
believes that the registered SDR must apply an appropriate indication
to the publicly disseminated transaction report.
Proposed Rule 907(a)(4) would require a registered SDR to establish
and maintain written policies and procedures describing how reporting
parties shall report--and, consistent with the enhancement of price
discovery, how the registered SDR shall publicly disseminate--reports
of, and adjustments due to, life cycle events; SBS transactions that do
not involve an opportunity to negotiate any material terms, other than
the counterparty; and any other SBS transactions that, in the
estimation of the registered SDR, do not accurately reflect the market.
As noted above, all SBS transactions must be reported to a registered
SDR, pursuant to proposed Rules 901(c) and (d). However, some SBSs
might not involve arm's-length negotiations that reflect competitive
price discovery.\126\ Similarly, there might be no price discovery in
the case of an assignment where the new counterparty to which a SBS is
assigned has no opportunity to negotiate a different price. Proposed
Rule 907(a)(4) would provide some flexibility to a registered SDR
regarding how to publicly disseminate transaction reports for such
SBSs. The registered SDR could determine in some cases that an
indication should be provided that explains the circumstances. Publicly
disclosed policies and procedures would permit market observers to
understand which indicators applied to which circumstances. The
Commission expects that the policies and procedures would direct
reporting parties to provide additional information to the registered
SDR about the existence of such circumstances. Furthermore, the
Commission preliminarily believes that all transactions reported late
(i.e., over 15 minutes after time of execution) should bear an
indicator so that market participants know that the transaction was
reported late. While there is likely to be value in disseminating the
transaction report, all market participants should understand that the
report is no longer timely and thus would not reflect the current
market at the time of dissemination.
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\126\ This could be the case, for example, with an inter-
affiliate transfer.
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Finally, the policies and procedures required by proposed Rule
907(a)(4) would be required to address applying an appropriate
indicator to reports of, and adjustments due to, life cycle events. As
with corrected transaction reports, it is essential that market
observers understand that the transaction report triggered by a life
cycle event does not represent a new transaction, but merely a change
to the terms of a previously executed SBS. Without an indicator to that
effect, market observers could misunderstand the true state of the
market. Therefore, the Commission preliminarily believes that the
registered SDR must apply an appropriate indicator to the publicly
disseminated transaction report.
[[Page 75238]]
Proposed Rule 907(a)(5) would require a registered SDR to establish
and maintain written policies and procedures for assigning: (1) A
transaction ID to each SBS that is reported to it; and (2) UICs
established by or on behalf of an IRSB (or, if such UICs are not yet
able to be so assigned, for assigning UICs in a consistent manner using
its own methodology). Proposed Rule 907(a)(6) would require a
registered SDR to establish and maintain written policies and
procedures for periodically obtaining from each participant information
that identifies the participant's ultimate parent(s) and any other
participant(s) with which the counterparty is affiliated, using
ultimate parent IDs and participant IDs. The Commission expects that
the registered SDR's policies and procedures would address the
relationship between itself and an IRSB, and how UICs could be obtained
from the IRSB or an agent or other person acting on its behalf.
Furthermore, the Commission expects that, if an IRSB exists and the
registered SDR is using UICs assigned by that IRSB or on its behalf,
the registered SDR's policies and procedures should explain how a
participant could obtain applicable UICs from the IRSB. To the extent
that the IRSB cannot provide certain UICs required of a participant by
proposed Regulation SBSR, the registered SDR's policies and procedures
would be required to explain the process by which a participant could
obtain such UICs from the registered SDR.
Proposed Rule 907(d) would require a registered SDR to review and,
as necessary, update its policies and procedures required by proposed
Regulation SBSR at least annually, and to indicate the date on which
they were last reviewed. Periodic review should help ensure that a
registered SDR's policies and procedures remain well-functioning over
time. Indicating the date on which the policies and procedures were
last reviewed would allow regulators and market participants to
understand which version of the policies and procedures are current.
The Commission is proposing recordkeeping and retention rules for
registered SDRs in a separate rulemaking.\127\ Prior versions of a
registered SDR's policies and procedures would be records under that
proposed rule, and thus would be required to be retained in accordance
with those rules. Access to these records would permit the Commission,
when conducting a review of past actions, to understand what policies
and procedures were in force at the time.
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\127\ See SDR Registration Proposing Release, supra note 6,
proposed Rule 13n-7 under the Exchange Act.
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Proposed Rule 907(e) would require a registered SDR to have the
capacity to provide to the Commission, upon request, information or
reports related to the timeliness, accuracy, and completeness of data
reported to it pursuant to proposed Regulation SBSR and the registered
SDR's policies and procedures thereunder.\128\ Under Title VII of the
Dodd-Frank Act, the Commission is responsible for regulating and
overseeing the SBS market. The Commission preliminarily believes that,
to carry out this responsibility, it could be valuable to obtain
information from each registered SDR related to the timeliness,
accuracy, and completeness of data reported to it. Required data
submissions that are untimely, inaccurate, or incomplete could
compromise the regulatory data that the Commission would utilize to
carry out its oversight responsibilities. Furthermore, required data
submissions that are untimely, inaccurate, or incomplete could diminish
the value of publicly disseminated reports that promote transparency
and price discovery. Information or reports provided to the Commission
by a registered SDR related to the timeliness, accuracy, and
completeness of data could assist the Commission in examining for
compliance with proposed Regulation SBS and in bringing enforcement or
other administrative actions as necessary and appropriate.
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\128\ See id., proposed Rule 13n-8 under the Exchange Act
(requiring every registered SDR to promptly report to the
Commission, in a form and manner acceptable to the Commission, such
information as the Commission determines to be necessary or
appropriate for the Commission its duties under the Exchange Act and
the rules and regulations thereunder).
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Request for Comment
The Commission requests comment on all aspects of the proposed
policies and procedures for registered SDRs.
145. Do commenters agree, overall, with the proposed policies and
procedures for registered SDRs? Why or why not?
146. Should proposed Rule 907 specify more detailed elements to be
included in the required policies and procedures? If so, what should
those elements be? Or, are the proposed policies and procedures too
prescriptive? If so, in what way(s)?
147. Should a registered SDR have flexibility to specify acceptable
data formats, connectivity requirements, and other protocols for
submitting information? Why or why not? Are there disadvantages to this
approach? If so, how should they be addressed?
148. Should all acceptable data formats be open-source structured
data formats? What data formats are currently in use by SDRs? Would
they qualify as open-source structured data formats?
149. Assuming special indicators on certain publicly disseminated
trade reports may be necessary, do commenters agree that a registered
SDR should have the flexibility to determine and apply those
indicators? If not, can commenters suggest another system for assigning
relevant indicators?
150. What kinds of special circumstances would warrant indicators
for public dissemination? What should those indicators be? How should
they be reflected on the publicly disseminated trade report?
151. Should inter-affiliate transactions be publicly disseminated
with an indicator? Should they be disseminated at all? Why or why not?
152. Should portfolio compressions and terminations be publicly
disseminated with an indicator? Should they be disseminated at all? Why
or why not?
153. Should a registered SDR have the flexibility to determine
whether a SBS transaction does not accurately reflect the market or
would not enhance price discovery if disseminated? If so, how should
the registered SDR exercise such flexibility? What criteria should it
use? What are examples of transactions that commenters believe should
be reported to a registered SDR but should not be publicly
disseminated? Why should they not be publicly disseminated?
154. Multi-lateral netting and portfolio compression are post-trade
processes designed to reduce gross exposure and leave only net
exposure. These processes typically entail the termination of open
contracts and the establishment of new contracts representing only the
net position. How, if at all, should SBSs related to multi-lateral
netting and portfolio compression be reported to and disseminated by a
registered SDR? What if the netting involves a payment that is
determined by market value?
155. How should a registered SDR's policies and procedures address
the use of UICs assigned under the auspices of a voluntary consensus
standards body?
156. What are the costs for registered SDRs to adopt and implement
the proposed policies and procedures? What are the benefits of
requiring registered SDRs to adopt and implement these policies and
procedures?
157. Should a data repository seeking to register with the
Commission be
[[Page 75239]]
required to provide the policies and procedures required by proposed
Rule 907 as part of its Form SDR submission?
VII. Policies and Procedures of SBS Dealers and Major SBS Participants
For the proposed SBS reporting requirements established by the
Dodd-Frank Act to achieve the objective of enhancing price transparency
and providing regulators with access to data to help carry out their
oversight responsibilities, the information that participants provide
to registered SDRs must be reliable. Accordingly, proposed Rule 906(c)
would require a participant that is a SBS dealer or major SBS
participant to establish, maintain, and enforce written policies and
procedures that are reasonably designed to ensure compliance with the
SBS transaction reporting obligations set forth in proposed Regulation
SBSR and the policies and procedures of any registered SDR in which it
is a participant. Such policies and procedures are intended to provide
a system of controls that facilitate complete and accurate reporting of
SBS information by these participants, consistent with their
obligations under the Dodd-Frank Act and proposed Regulation SBSR.
The Commission believes that proposed Rule 906(c) should result in
greater accuracy and completeness of reported SBS transaction data.
Without written policies and procedures, compliance with reporting
obligations may depend too heavily on key individuals or unreliable
processes. The Commission believes that requiring participants that are
SBS dealers or major SBS participants to establish written policies and
procedures should promote clear, reliable reporting that can continue
independent of any specific individuals. The Commission further
believes that requiring such participants to adopt and maintain
policies and procedures relevant to their reporting responsibilities,
as required under proposed Rule 906(c), would help to improve the
degree and quality of overall compliance with the reporting
requirements set out in proposed Regulation SBSR.
The policies and procedures required by proposed Rule 906(c) should
be designed to foster compliance with the real-time reporting
requirements specified in proposed Rule 901(c), as well as the
additional reporting requirements specified in proposed Rules 901(d)
and (e). These policies and procedures, among other things, should
address: (1) The reporting process and designation of responsibility
for reporting SBS transactions; (2) the process for systematizing
orally negotiated SBS transactions; (3) OMS outages or malfunctions,
and when and how backup systems are to be used in connection with
required reporting; (4) verification and validation of all information
relating to SBS transactions reported to a registered SDR; (5) a
training program for employees responsible for SBS transaction
reporting; (6) control procedures relating to SBS transaction reporting
and designation of personnel responsible for testing and verifying such
policies and procedures; and (7) reviewing and assessing the
performance and operational capability of any third party that carries
out any duty required by proposed Regulation SBSR on behalf of the
entity.\129\
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\129\ See supra Section II.B (noting that proposed Rule 901
would not prohibit a reporting party from having a third-party agent
carry out reporting duties on its behalf).
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Each participant that is a SBS dealer or major SBS participant also
would be required to review and, as needed, update its policies and
procedures at least annually.\130\ Periodic review should help ensure
that a participant's policies and procedures remain well functioning
over time.
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\130\ See proposed Rule 906(c).
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The value of requiring policies and procedures in promoting
regulatory compliance is well-established. For example, internal
control systems have long been used to strengthen the integrity of
financial reporting. Congress recognized the importance of internal
control systems in the Foreign Corrupt Practices Act, which requires
public companies to maintain a system of internal accounting
controls.\131\ Broker-dealers also must maintain policies and
procedures for various purposes.\132\ The Commission preliminarily
believes that requiring participants that are SBS dealers or major SBS
participants to adopt and maintain policies and procedures designed to
promote compliance with proposed Regulation SBSR and the policies and
procedures of any registered SDR of which it is a participant would be
consistent with Congress's goals in adopting the Dodd-Frank Act.
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\131\ See 15 U.S.C. 78m(b)(2)(B).
\132\ See, e.g., FINRA Conduct Rule 3010(b) (requiring FINRA
member broker-dealers to establish and maintain written procedures
''that are reasonably designed to achieve compliance with applicable
securities laws and regulations, and the applicable Rules of [the
NASD]''; FINRA Conduct Rule 3012 (requiring FINRA member broker-
dealers to establish and maintain written supervisory procedures to
ensure that internal policies and procedures are followed and
achieve their intended objectives).
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Request for Comment
The Commission requests comment on all aspects of the proposed
requirement that participants that are SBS dealers or major SBS
participants establish policies and procedures.
158. Do commenters think proposed Rule 906(c) is necessary? Would
SBS dealers and major SBS participants otherwise implement written
policies and procedures to ensure compliance with the reporting
obligations in proposed Regulation SBSR?
159. Should proposed Rule 906(c) specify elements to be included in
the required policies and procedures, such as those discussed above? If
so, what elements should be included in the proposed rule, and why?
VIII. Jurisdictional Matters
Proposed Rule 908 is designed to clarify the application of
proposed Regulation SBSR to cross-border SBS transactions and to non-
U.S. persons.\133\
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\133\ See proposed Rule 900 (defining ``U.S. person'' to mean a
natural person that is a U.S. citizen or U.S. resident or a legal
person that is organized under the corporate laws of any part of the
United States or has its principal place of business in the United
States).
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A. When is a SBS subject to Regulation SBSR?
Proposed Rule 908(a) would require a SBS to be reported if the SBS:
(1) Has at least one counterparty that is a U.S. person; (2) was
executed in the United States or through any means of interstate
commerce; or (3) was cleared through a registered clearing agency
having its principal place of business in the United States. In
addition, any SBS that is required to be reported to a registered SDR
pursuant to proposed Rule 908(a) also would be required to be publicly
disseminated by the registered SDR. The Commission preliminarily
believes that, if there are sufficient jurisdictional ties to the
United States to warrant reporting of the SBS, other market
participants should have knowledge of the SBS transaction.
The Commission preliminarily believes that, if a U.S. person
executes a SBS anywhere in the world, that SBS should be reported to a
registered SDR, pursuant to proposed Regulation SBSR. Because the U.S.
person is assuming risk, U.S. regulators have an interest in ensuring
that they have appropriate knowledge of the transaction. The Commission
notes that it is proposing to define ``U.S. person'' in proposed Rule
900 to mean ``a natural person that is a U.S. citizen or U.S. resident
or a legal person that is organized under the corporate laws of any
part of the United States or has its principal place of
[[Page 75240]]
business in the United States.'' The Commission intends for this
proposed definition to include branches and offices of U.S. persons.
Because a branch or office has no separate legal existence under
corporate law, the branch or office would be an integral part of the
U.S. person itself.
A SBS also would have to be reported if the SBS were executed in
the United States or through any means of interstate commerce. For
example, even if both counterparties are not U.S. persons, U.S.
regulators have a strong interest in having knowledge of and being able
to regulate any activity conducted within the United States or through
any means of interstate commerce.
Under proposed Rule 908(a)(3), a SBS would have to be reported
pursuant to proposed Regulation SBSR--even if both counterparties are
not U.S. persons--if the SBS were cleared through a clearing agency
having its principal place of business in the United States. It is
possible that two counterparties, neither of whom is a U.S. person,
could execute a SBS outside the United States, but clear the SBS
through a clearing agency having its principal place of business in the
United States. The Commission preliminarily believes that such SBS
should be reported to a registered SDR. If a SBS is cleared by a
clearing agency having its principal place of business in the United
States, U.S. regulators should have access to information regarding the
SBS through a registered SDR.\134\ Moreover, if non-U.S. persons
determined to clear a SBS through a clearing agency having its
principal place of business in the United States, this suggests that
the clearing agency has made the SBS eligible for clearing because at
least some U.S. counterparties might wish to trade the SBS as well.
Requiring the SBS to be reported to a registered SDR also would cause a
transaction report of the SBS to be publicly disseminated, thus
promoting price discovery for market participants in the United States
and elsewhere.
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\134\ While U.S. regulators also would have access to
information about the SBS through the U.S. clearing agency,
requiring the SBS to be reported to a registered SDR would reduce
the fragmentation of the regulatory data.
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It is possible that there could be a clearing agency registered
with the Commission under Section 17A of the Exchange Act \135\ but
having its principal place of business outside the United States.
Although that clearing agency might service U.S. persons, it also would
likely provide clearing services to many non-U.S. persons. The
Commission does not intend for proposed Regulation SBSR to apply to
such non-U.S. persons solely because they clear a SBS through a
clearing agency registered with the Commission but not having its
principal place of business in the United States.\136\ However,
proposed Regulation SBSR would apply with respect to that SBS if either
counterparty were a U.S. person, or if the SBS had been executed in the
United States or through any means of interstate commerce (including by
clearing through a clearing agency having its principal place of
business in the United States).
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\135\ 15 U.S.C. 78q-1.
\136\ For example, assume that Clearing Agency A has its
principal place of business in an E.U. member state, but is also
registered as a clearing agency in the United States under Section
17A of the Exchange Act because it has sufficient contacts with U.S.
participants to require registration under Section 17A. Assume
further that Counterparty X executes a SBS with Counterparty Y, both
X and Y are each domiciled in an E.U. member state, the SBS is
executed in an E.U. member state and does not involve any means of
interstate commerce in the United States. Under proposed Rule 908,
this SBS would not be required to be reported to a registered SDR
solely because it was cleared by a clearing agency registered under
Section 17A.
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It should be noted that a registered SDR could receive reports of
foreign SBS transactions that are not required to be reported pursuant
to proposed Rule 908(a). The registered SDR may determine to publicly
disseminate reports of such foreign SBS transactions, but would not be
required to do so by proposed Regulation SBSR.
B. When is a counterparty to a SBS subject to Regulation SBSR?
Proposed Rule 908(b) would provide that, notwithstanding any other
provision of Regulation SBSR, no counterparty to a SBS would incur any
obligation under Regulation SBSR unless it is: (1) A U.S. person; (2) a
counterparty to a SBS executed in the United States or through any
means of interstate commerce; or (3) a counterparty to a SBS cleared
through a clearing agency having its principal place of business in the
United States. For the reasons discussed above, the Commission
preliminarily believes that, if a U.S. person executes a SBS anywhere
in the world, that U.S. person should become subject to Regulation
SBSR.
Non-U.S. persons who are counterparties to U.S. persons could,
therefore, have SBSs to which they are counterparties reported to and
held by a registered SDR. If none of these SBSs were executed in the
United States or through any means of interstate commerce, however, the
non-U.S. person would not become a ``participant'' of the registered
SDR and would not become subject to proposed Regulation SBSR.\137\
Thus, the non-U.S. person would not have to provide any UICs pursuant
to proposed Rule 906(a) or parent and affiliate information to a
registered SDR pursuant to proposed Rule 906(b).
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\137\ See proposed Rule 900 (defining ``participant'' as (1) A
U.S. person that is a counterparty to an SBS that is required to be
reported to a registered SDR; or (2) A non-U.S. person that is a
counterparty to an SBS that is (i) required to be reported to a
registered SDR; and (ii) that is executed in the United States or
through any means of interstate commerce, or cleared through a
clearing agency having its principal place of business in the United
States).
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C. An Example
Assume that X (a U.S. bank) enters into an SBS with Y (a Japanese
bank). The SBS is effected in Japan, involves no means of interstate
commerce, and is not cleared by a clearing agency having its principal
place of business in the United States. Because the SBS has at least
one counterparty that is a U.S. person, proposed Rule 908(a)--which
describes when an SBS is not required to be reported because it is
outside the jurisdiction of the Exchange Act--would not apply.
Therefore, the SBS must be reported to a registered SDR. X would be the
reporting party, as proposed Rule 901(a)(1) provides that, where only
one counterparty to an SBS is a U.S. person, the U.S. person shall be
the reporting party. X also would be a participant because it is a U.S.
person that is a counterparty to an SBS that is required to be reported
to a registered SDR. However, Y would not be a participant under
proposed Rule 900, and would incur no obligations under proposed
Regulation SBSR. Although the SBS is required to be reported to a
registered SDR, the SBS was not executed in the United States or
through any means of interstate commerce, or cleared through a clearing
agency having its principal place of business in the United States.
Thus, the Commission anticipates that there would be some SBSs reported
to and captured by a registered SDR where only one counterparty of the
SBS is a participant.
IX. Fair and Non-Discriminatory Access to SBS Market Data
A. SBS Market Data Disseminated by Registered SDRs
As noted above, the Commission preliminarily believes that post-
trade transparency could spur significant improvements in the SBS
market. Some of the benefits could include greater price competition,
lower transaction
[[Page 75241]]
costs, enhanced liquidity, and improved ability of market participants
to value their positions. Therefore, fair access to last-sale data
appears critical--particularly since registered SDRs would collectively
have data on all SBSs executed in the market. The Commission
preliminarily believes that market observers should not be forced to
pay excessive fees or be subject to unfair usage restrictions imposed
by registered SDRs. The Commission therefore seeks to ensure that these
data feeds would be available to all market observers on terms that are
fair and reasonable and not unreasonably discriminatory.
In a separate rulemaking proposal regarding the registration and
regulation of SDRs being issued today, the Commission is proposing
rules that would require SDRs to comply with certain core principles.
To comply with these core principles, an SDR would be required, among
other things, to establish and enforce clearly stated and objective
criteria that would permit fair, open, and not unreasonably
discriminatory access to services offered and data that would be
disseminated by the SDR, as well as fair, open, and not unreasonably
discriminatory participation by market participants, market
infrastructures, venues from which data could be submitted to the SDR,
and third-party service providers that seek to connect or link with the
SDR.\138\ In addition, an SDR would be required to establish policies
and procedures for reviewing any prohibition or limitation of any
person's access to services offered, directly or indirectly, or data
maintained and disseminated by the SDR, and--if it finds that the
person has been discriminated against unfairly--granting to such person
access to its services or data.\139\
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\138\ See proposed Rule 13n-4(c)(1)(iv) under the Exchange Act.
\139\ See proposed Rule 13n-4(c)(1)(v) under the Exchange Act.
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A registered SDR also would become subject to certain provisions of
Section 11A of the Exchange Act\140\ because it would be a SIP, as
defined by Section 3(a)(22)(A) of the Exchange Act.\141\ Section
11A(c)(1) of the Exchange Act \142\ provides that the Commission may
prescribe rules applying to SIPs (among other entities) that would
require them (among other things) to assure ``the fairness and
usefulness of the form and content'' of the information that they
disseminate,\143\ and to assure ``all other persons may obtain on terms
which are not unreasonably discriminatory'' the transaction information
published or distributed by SIPs.\144\ Section 11A(c)(1) applies
regardless of whether a SIP is registered with the Commission as such.
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\140\ 15 U.S.C. 78k-1.
\141\ 15 U.S.C. 78c(a)(22)(A) (defining SIP as ``any person
engaged in the business of (i) collecting, processing, or preparing
for distribution or publication, or assisting, participating in, or
coordinating the distribution or publication of, information with
respect to transactions in or quotations for any security (other
than an exempted security) or (ii) distributing or publishing
(whether by means of a ticker tape, a communications network, a
terminal display device, or otherwise) on a current and continuing
basis, information with respect to such transactions or
quotations''). SBSs are securities under the Exchange Act. See 15
U.S.C. 78c(a)(10). Further, pursuant to proposed Regulation SBSR, a
registered SDR would collect SBS transaction reports from
participants and participate in the distribution of such reports
and, thus, would be a SIP for purposes of the Exchange Act.
\142\ 15 U.S.C. 78k-1(c)(1).
\143\ 15 U.S.C. 78k-1(c)(1)(B).
\144\ 15 U.S.C. 78k-1(c)(1)(D).
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Section 11A(b)(1) of the Exchange Act \145\ provides that a SIP not
acting as the ``exclusive processor'' \146\ of any information with
respect to quotations for or transactions in securities is exempt from
the requirement to register with the Commission as a SIP unless the
Commission, by rule or order, determines that the registration of such
SIP ``is necessary or appropriate in the public interest, for the
protection of investors, or for the achievement of the purposes of
[Section 11A].'' Requiring a registered SDR to register with the
Commission as a SIP would subject that entity to Section 11A(b)(5) of
the Exchange Act,\147\ which provides that a registered SIP must notify
the Commission whenever it prohibits or limits any person's access to
its services. Upon its own motion or upon application by any aggrieved
person, the Commission could review the registered SIP's action.\148\
If the Commission finds that the person has been discriminated against
unfairly, it could require the SIP to provide access to that
person.\149\ Section 11A(b)(6) of the Exchange Act also provides the
Commission authority to take certain regulatory action as may be
necessary or appropriate against a registered SIP.\150\
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\145\ 15 U.S.C. 78k-1(b)(1).
\146\ 15 U.S.C. 78c(a)(22)(B) (defining ``exclusive processor''
as any securities information processor or self-regulatory
organization which, directly or indirectly, engages on an exclusive
basis on behalf of any national securities exchange or registered
securities association, or any national securities exchange or
registered securities association which engages on an exclusive
basis on its own behalf, in collecting, processing, or preparing for
distribution or publication any information with respect to (1)
transactions or quotations on or effected or made by means of any
facility of such exchange or (2) quotations distributed or published
by means of any electronic system operated or controlled by such
association).
\147\ 15 U.S.C. 78k-1(b)(5).
\148\ See 15 U.S.C. 78k-1(b)(5)(A).
\149\ See 15 U.S.C. 78k-1(b)(5)(B).
\150\ See 15 U.S.C. 78k-1(b)(6) (providing that the Commission,
by order, may censure or place limitations upon the activities,
functions, or operations of any registered SIP or suspend for a
period not exceeding 12 months or revoke the registration of any
such processor, if the Commission finds, on the record after notice
and opportunity for hearing, that such censure, placing of
limitations, suspension, or revocation is in the public interest,
necessary or appropriate for the protection of investors or to
assure the prompt, accurate, or reliable performance of the
functions of such SIP, and that such SIP has violated or is unable
to comply with any provision of this title or the rules or
regulations thereunder).
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The Commission preliminarily believes that the additional authority
over a registered SDR/SIP provided by Sections 11A(b)(5) and 11A(b)(6)
of the Exchange Act would help ensure that these entities offer their
SBS market data on terms that the Commission believes would be fair and
reasonable and not unreasonably discriminatory. Therefore, the
Commission preliminarily believes that the registration of SDRs as SIPs
would be necessary or appropriate in the public interest, for the
protection of investors, or for the achievement of the purposes of
Section 11A of the Exchange Act. Section 11A of the Exchange Act
establishes broad goals for the development of the securities markets
and charges the Commission with establishing rules and policies that
are designed to further these objectives. Section 11A(a) states, among
other things, that it is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets
to assure economically efficient execution of securities transactions;
the availability to brokers, dealers, and investors of information with
respect to quotations for and transactions in securities; and an
opportunity for investors' orders to be executed without the
participation of a dealer. SIP registration could assist in achieving
these objectives in the still-developing SBS market. Therefore, the
Commission preliminarily believes that the registration of SDRs as SIPs
would be necessary or appropriate in the public interest, for the
protection of investors, or for the achievement of the purposes of
Section 11A. Accordingly, the Commission is proposing Rule 909, which
would require a registered SDR to register with the Commission as a
SIP.\151\
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\151\ A registered SDR would register as a SIP by filing
(existing) Form SIP with the Commission.
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B. SBS Market Data Disseminated by Other Market Participants
The measures described above are designed to ensure that SBS market
data
[[Page 75242]]
disseminated by registered SDRs is available to the public on terms
that are fair and reasonable and not unreasonably discriminatory. This
is particularly important since all SBS must be reported to a
registered SDR,\152\ and registered SDRs exclusively would have the
responsibility under proposed Regulation SBSR to publicly disseminate
SBS transaction data to the public.
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\152\ See 15 U.S.C. 78m(m)(1)(G).
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Nevertheless, other private sources of market data reflecting
subsets of the SBS market could arise.\153\ Differences in access to
that market data--for example, if some market participants could obtain
the data sooner than others--could create an unfair competitive
landscape. Therefore, the Commission is proposing Rule 902(d), which
would impose a partial and temporary restriction on sources of SBS
market data other than registered SDRs. Proposed Rule 902(d) would
provide that no person (other than a registered SDR) shall make
available to one or more persons (other than a counterparty) a
transaction report of a SBS before the earlier of: (1) 15 minutes after
execution of the SBS; or (2) the time that a registered SDR publicly
disseminates a report of that SBS.
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\153\ For example, a SB SEF would have information about SBSs
executed on its systems and could find that commercial opportunities
exist to sell such information.
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Under proposed Rule 902(d), the temporary restriction on other
market participants that may wish to disseminate information relating
to a SBS transaction would last no longer than 15 minutes. Under
proposed Regulation SBSR, a transaction report of a SBS would be
expected to be publicly disseminated within 15 minutes of execution.
The Commission preliminarily believes that it is not necessary or
appropriate to require other sources of market data to withhold
dissemination of a transaction report beyond 15 minutes if a registered
SDR is not able to do so in a timely fashion. Proposed Rule 902(d)
would, however, permit the transfer of information of a SBS before
dissemination by a registered SDR to a counterparty to that SBS.
Therefore, one counterparty would be permitted to pass details of the
SBS to the other counterparty, or a SB SEF on which the SBS was
executed could pass details of the SBS to either or both of the
counterparties.
By proposing Rule 902(d), the Commission seeks to balance the goal
of promoting robust and fair competition among all market
participants--by allowing them to view the same comprehensive source of
SBS market data at the same time--with that of allowing market
participants to devise new value-added market data products.
Request for Comment
The Commission requests comment on all aspects of its proposal
relating to fair and non-discriminatory access to SBS market data. In
particular:
160. Do commenters have any potential concerns with market
participants' access to data disseminated by registered SDRs? If so,
what steps should the Commission do to address them?
161. Do commenters agree with the proposal to require registered
SDRs to register with the Commission as SIPs? Why or why not?
162. Would SIP registration entail costs and burdens that are
unreasonable or unnecessary in light of the requirements associated
with SDR registration? What additional burdens, if any, would be
associated with SIP registration?
163. In the SDR Registration Proposing Release, the Commission is
proposing a Form SDR that is similar to but separate from existing Form
SIP. Should the Commission combine Forms SIP and Form SDR such that an
SDR would register as a SIP and SDR using only one form? Or should the
elements necessary for registration as an SDR be a supplement to Form
SIP? Are there any specific items on Form SIP that should be added to
Form SDR that would help to facilitate the registration process?
164. Would it be beneficial for aggrieved persons to have the
ability to request that the Commission review a registered SDR's
prohibition or limitation on access its services, as contemplated by
Section 11A(b)(5) of the Exchange Act? Are there any concerns with
applying Section 11A(b)(5) to registered SDRs?
165. Are there additional means by which the Commission can or
should attempt to ensure that the market data fees and usage
restrictions imposed by registered SDRs are fair and reasonable and not
unreasonably discriminatory? If so, please describe.
166. Should market participants other than a registered SDR be
prohibited from distributing their SBS market data before transactions
are disseminated by a registered SDR? Why or why not?
167. Do commenters anticipate that market participants other than
registered SDRs will seek to sell SBS market data? Do commenters have a
view as to whether those additional market data products would compete
with or complement the required market data feed from registered SDRs?
168. Would proposed Rule 902(d) unnecessarily inhibit competition
and innovation in the provision of value-added market data services or
products? Please be specific in your response.
169. Are there alternative means to better ensure that all market
participants have full and fair access to SBS market data other than
placing a restriction on sources other than the registered SDRs? If so,
what are they and why would they be preferable to the proposal?
170. Would competitive forces act to ensure that all market
participants have full and fair access to SBS market data?
171. If commenters agree with proposed Rule 902(d), is 15 minutes
an appropriate length to restrict market participants other than
registered SDRs from disseminating SBS transaction data? Do commenters
think that period is too long or too short? Please be specific in your
response.
172. Should market participants other than registered SDRs that
publicly disseminate SBS transaction information be subject to the same
requirements regarding dissemination of block trades as registered
SDRs?
X. Implementation Timeframes
Proposed Rule 910 is designed to provide clarity as to SBS
reporting and dissemination timelines and to establish a phased-in
compliance schedule for those subject to proposed Regulation SBSR. The
Commission acknowledges that the system for reporting and dissemination
described in proposed Regulation SBSR would take a significant amount
of time and resources to implement effectively. While the Commission is
committed to fully implementing Congress's directive to require real-
time public reporting of all SBSs, market participants will need a
reasonable period in which to acquire or configure the necessary
systems, engage and train the necessary staff, and develop and
implement the necessary policies and procedures to implement the
proposed rules. The Commission preliminarily believes that the proposed
compliance timeframes described below should provide sufficient time
for reporting parties and SDRs to make the necessary technological and
other preparations needed to begin reporting and disseminating SBS
information, respectively, as required under proposed Regulation SBSR.
A. Compliance Schedule
The Commission is proposing a phased-in compliance schedule, with
respect to a SDR that registers with the Commission, as follows:
[[Page 75243]]
Reporting of pre-enactment SBSs, no later than January 12,
2012.
Proposed Rule 910(a) would require reporting parties to report to a
registered SDR any pre-enactment SBSs subject to reporting under
proposed Rule 901(i) no later than January 12, 2012 (180 days after the
effective date of the Dodd-Frank Act).\154\ Proposed Rule 900 would
define pre-enactment SBS to mean any SBS executed before July 21, 2010
(the date of enactment of the Dodd-Frank Act), the terms of which had
not expired as of that date. The Commission notes that Section 3C(e)(1)
of the Exchange Act \155\ requires SBSs entered into before the date of
enactment of Section 3C to be reported to a registered SDR or the
Commission no later than 180 days after the effective date of Section
3C (i.e., no later than January 12, 2012). The proposed timeframe would
help the Commission obtain relevant information about SBS transactions
necessary to prepare reports required by the Dodd-Frank Act. Further,
proposed Rule 910 would help promote timely implementation of
Regulation SBSR, and thereby facilitate achievement of the goals
articulated in the Dodd-Frank Act.
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\154\ See supra Section IV.F (discussing reporting requirements
for pre-enactment SBSs).
\155\ 15 U.S.C. 78c-3(e)(1).
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Phase 1, six months after the registration date (i.e., the
effective reporting date): \156\ Reporting parties shall begin
reporting, pursuant to proposed Rule 901, all SBS transactions executed
on or after the effective reporting date; reporting parties also shall
report to the registered SDR any transitional SBSs; \157\ SBS dealers
and major SBS participants shall comply with proposed Rule 906(c);
\158\ participants and the registered SDR must comply with proposed
Rule 905 \159\ (except with respect to dissemination) and proposed
Rules 906(a) and (b).\160\
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\156\ See proposed Rule 900 (defining ``registration date,''
with respect to a SDR, as the date on which the Commission registers
the SDR, or, if the Commission registers the SDR before the
effective date of proposed Regulation SBSR, the effective date of
proposed Regulation SBSR; and ``effective reporting date,'' with
respect to a SDR, as the date six months after the registration
date).
\157\ See supra Section IV.F (discussing reporting requirements
for transitional SBSs).
\158\ Proposed Rule 906(c) would require each SBS dealer and
major SBS participant to establish, maintain, and enforce written
policies and procedures that are reasonably designed to ensure that
it complies with any reporting obligations under proposed Regulation
SBSR.
\159\ Proposed Rule 905, among other things, would require a
registered SDR to correct erroneous information with respect to
SBSs.
\160\ Proposed Rule 906(a) would require a registered SDR to
notify participants at least once a day of SBSs for which the
registered SDR lacks a participant ID, broker ID, desk ID, or trader
ID. Proposed Rule 906(b) would require participants to provide to
the registered SDR information sufficient to identify its ultimate
parent(s) and any affiliate(s) of the participant that also are
participants of the registered SDR.
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The Commission preliminarily believes that, before reporting
parties and other participants could be expected to comply with
proposed Regulation SBSR, they must first know the policies and
procedures of the registered SDR that would receive and hold
transaction information regarding their SBSs.\161\ Phase 1 would
provide time for SBS dealers and major SBS participants to establish
their own policies and procedures, and implement necessary systems
changes, for complying with proposed Regulation SBSR and the policies
and procedures of the registered SDR. On the effective reporting date,
participants would be required to begin reporting SBSs to the
registered SDR in a manner consistent with proposed Rule 901, including
providing the real-time reports required by proposed Rule 901(c) and
the additional, regulatory SBS information required by proposed Rule
901(d). At that time, however, the registered SDR would not yet
publicly disseminate any transaction reports.
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\161\ As discussed in the SDR Registration Proposing Release, a
data repository seeking to register with the Commission would have
to provide the policies and procedures required by proposed Rule 907
as part of its application for registration. See SDR Registration
Proposing Release, supra note 6.
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Also on the effective reporting date, the registered SDR would be
required to begin preparing reports to each participant of any missing
UICs, and any participant receiving such a report would have to begin
providing the missing UICs to the registered SDR. The registered SDR
and its participants also would become subject to the error correction
requirements of proposed Rule 905 at this time, except that the
registered SDR would not yet be required to publicly disseminate any
corrected transaction reports (since it would not have disseminated a
report of the initial transaction).
Finally, the Commission notes that proposed Rules 901(i)
(establishing reporting requirements for pre-enactment and transitional
SBSs), 910(a) (requiring the reporting of pre-enactment SBSs by January
12, 2012), and 910(b)(2)(i) (requiring the reporting of transitional
SBSs by the effective reporting date) are together designed to assure
that a registered SDR would obtain a complete view of each
participant's open SBS positions by the time that the registered SDR is
about to both receive and publicly disseminate transaction reports of
SBSs.
Phase 2, nine months after the registration date: Wave 1
of public dissemination; the registered SDR would be required to comply
with proposed Rules 902 and 905 (with respect to dissemination of
corrected transaction reports) for 50 SBS instruments.
Nine months after the registration date and three months after the
effective reporting date, the registered SDR would be required to begin
disseminating transaction reports as follows: The registered SDR, in
consultation with the Commission's staff, would select 50 SBS
instruments for which it receives and holds transaction data. Beginning
on the date nine months after the registration date and continuing
every day thereafter, the registered SDR would be required to publicly
disseminate transaction reports in real time for those 50 SBS
instruments, including with respect to block trades. The three-month
period between the beginning of Phase 2 and the beginning of Phase 3
would allow the registered SDR a sufficient number of days to calculate
and publish the block trade levels for those 50 SBS instruments. Also
in Phase 2, the registered SDR would be required to begin disseminating
any corrected reports required by proposed Rule 905 for those 50 SBS
instruments. The Commission preliminarily believes, based on its
experience implementing aspects of Regulation NMS, that the public
dissemination of transaction reports for 50 SBS instruments is
appropriate in Phase 2.
Phase 3, 12 months after the registration date: Wave 2 of
public dissemination; the registered SDR must comply with proposed
Rules 902 and 905 (with respect to dissemination of corrected
transaction reports) for an additional 200 SBS instruments.
Twelve months after the registration date and six months after the
effective reporting date, the registered SDR would be required, in
consultation with the Commission's staff, to select an additional 200
SBS instruments for which to publicly disseminate transaction reports
in real time, apply the block trade exception with respect to those 250
SBS instruments, and disseminate any corrected transaction reports
required by proposed Rule 905 for those 250 SBS instruments. The
Commission preliminarily believes, based on its experience implementing
aspects of Regulation NMS, that the public dissemination of transaction
reports for 250 SBS instruments is appropriate in Phase 3.
[[Page 75244]]
Phase 4, 18 months after the registration date: Wave 3 of
public dissemination; All SBSs reported to the registered SDR shall be
subject to real-time public dissemination as specified in Rule 902.
Eighteen months after the registration date, proposed Regulation
SBSR would become operative with respect to every SBS transaction
reported to and held by the registered SDR. The Commission
preliminarily believes, based on its experience implementing aspects of
Regulation NMS, that requiring public dissemination of all SBSs
reported to the registered SDR is appropriate in Phase 4.
B. Prohibition During Phase-In Period
Proposed Rule 911 is designed to prevent evasion of the post-trade
transparency rules. The rule would provide that a reporting party shall
not report a SBS to a registered SDR in a phase-in period described in
proposed Rule 910 during which the registered SDR is not yet required
to publicly disseminate transaction reports for that SBS instrument
unless: (1) The SBS also is reported to a registered SDR that is
disseminating transaction reports for that SBS instrument, consistent
with proposed Rule 902; or (2) no other registered SDR is able to
receive, hold, and publicly disseminate transaction reports regarding
that SBS instrument.
The Commission is concerned that the development of new SDRs not be
used to undermine the goal of post-trade transparency for SBSs. This
could occur, for example, if a SDR were registered with the Commission,
and--pursuant to proposed Rule 910--the SDR were in a phase-in period
when it was not yet required to publicly disseminate transactions.
Participants in an existing registered SDR could seek to report their
SBSs to the second instead of the first registered SDR during the
former's phase-in period, to avoid having their SBS transactions
publicly disseminated in real time.
Under proposed Rule 911, counterparties would be permitted to
report any SBS to the first registered SDR, even though the first
registered SDR was in a phase-in period and not yet publicly
disseminating transaction reports, because no other registered SDR
could do so, either. However, if a later SDR registers and enters a
phase-in period, participants would not be permitted to report SBSs
exclusively to the subsequent registered SDR before it is required or
able under proposed Rule 910 to disseminate transaction reports, if an
earlier registered SDR could receive, hold, and publicly disseminate
transaction reports for that SBS. Thus, a participant could report the
SBS to both registered SDRs: To the newer one, to assist with
operational testing; and to the operating one, to ensure that a trade
report for that SBS was publicly disseminated in real time.
Request for Comment
The Commission requests comment on all aspects of the proposed
rules relating to the proposed implementation of proposed Regulation
SBSR, as provided in proposed Rules 910 and 911.
173. Are the proposed timeframes for reporting with respect to pre-
enactment SBSs sufficiently clear?
174. Are the obligations applicable to registered SDRs,
counterparties, and participants in each phase of the proposed phase-in
schedule sufficiently clear? If not, what obligations are unclear?
Please be specific in your response.
175. Do commenters generally agree with the proposed phase-in
approach to implementation of the reporting timeframes contained in
proposed Rule 910? Is the proposed phase-in schedule generally
appropriate to allow reporting parties and registered SDRs sufficient
time to implement the requirements of proposed Regulation SBSR? If not,
why not? What period of time would be sufficient?
176. Do commenters believe that registered SDRs would be able to
meet the requirements of proposed Phase 1? Why or why not? If three
months after the SDR's registration date is not a sufficient amount of
time to comply with proposed Rule 907, what amount of time would be
sufficient? Do commenters believe that registered SDRs would need
additional time to develop and implement certain policies and
procedures that would be required under proposed Rule 907? If so, why,
and which policies and procedures would require additional time to
develop and implement?
177. Do commenters believe that registered SDRs, reporting parties,
and participants would be able to satisfy their respective obligations
under proposed Phase 2 within the proposed time frame? Why or why not?
Would SBS counterparties and participants be able to comply,
respectively, with proposed Rules 901 and 906(b) and (c) within the
time frame specified in Phase 2? Why or why not? If not, what amount of
time would be sufficient? Would counterparties or participants require
additional time to comply with certain requirements in proposed Phase
2? If so, which requirement(s), and what additional amount of time
would be necessary? Would counterparties and participants have adequate
time to make any necessary systems changes to comply with the
requirements in proposed Phase 2?
178. Would registered SDRs be able to correct erroneous information
and notify counterparties of missing UICs within the time frame
specified in Phase 2? Why or why not? If not, what amount of time would
be adequate?
179. Do commenters believe that registered SDRs would be able to
begin publicly disseminating SBS information, including corrected
reports, and publicizing block trade levels, as would be required in
proposed Phase 3? Why or why not? Would any specific requirement in
proposed Phase 3 require additional time to implement? If so, which
requirement(s), and what amount of time would be sufficient?
180. Do commenters believe that real-time public dissemination of
SBS transaction reports should be required to commence for 50 SBS
instruments nine months after the registration date? Should that period
be longer or shorter? For example, should it be 12 months after the
registration date? If so, why? Should the first wave of public
dissemination be for more SBS instruments--perhaps 100? 200? Why or why
not?
181. Do commenters generally agree with the proposed implementation
schedule that would require public dissemination of SBSs in three
Waves, as provided in proposed Phases 3, 4, and 5? Why or why not? If
not, what approach would be more appropriate?
182. Should there be longer periods between Waves? If so, how long?
183. Is 50 SBSs an appropriate number of SBSs to include in
proposed Phase 3? Why or why not? If not, what number would be
appropriate?
184. Is it appropriate to require public dissemination of an
additional 200 SBSs in proposed Phase 4? Why or why not?
185. What criteria should be used to choose the first 50 and second
200 SBSs be publically disseminated?
186. Do commenters believe that registered SDRs would be able to
begin publicly disseminating all SBSs reported to the SDR 18 months
after registration, as would be required under proposed Phase 5? Why or
why not? If 18 months is not a sufficient amount of time, what amount
of time would be sufficient?
187. Do commenters agree with the objective of proposed Rule 911?
Why or why not?
188. Do commenters agree with the requirements of proposed Rule
911? Why or why not? Please be specific in your response. Do commenters
believe that the Commission should take a
[[Page 75245]]
different approach to preventing potential evasions of the post-trade
transparency rules? If so, what approach would be more appropriate?
Please be specific in your response.
189. Under proposed Rule 910, the Commission would require a newly
registered SDR to begin publicly disseminating trade reports for 50 SBS
instruments beginning nine months after its registration date, and for
an additional 200 SBS instruments beginning 12 months after its
registration date. The registered SDR would be required at those times
to calculate block trade thresholds in accordance with proposed Rule
907(b) and to disseminate reports of block trades in accordance with
proposed Rule 902(b) with respect to those initial 50 and subsequent
200 instruments. Under proposed Rule 902(b), the registered SDR would
be required to publicly disseminate a transaction report of the block
trade with all transaction details other than notional size, and to
disseminate the full trade report (including the notional size) at a
later time. Should the Commission instead, during the phase-in period,
provide for different approaches to publicly disseminating block trades
in order to measure their associated cost to market participants? The
Commission could require--at least for the phase-in period, but perhaps
beyond--that different SBS instruments or transactions be subject to
different block trade dissemination rules, to provide the Commission
and market participants the opportunity to assess the relative costs
and benefits of different approaches. For example, one group of SBS
instruments or transactions could be subject to block trade
dissemination mechanism described in proposed Rule 902(b). A second
group could be subject to a regime where the full details of the
transaction (including notional size) were disseminated, but with a
one-hour delay, a third group could be subject to a regime where the
full details were disseminated with a three-hour delay, and so on.
Would commentators support or oppose such an approach? Why? Are there
other approaches that should be considered in order to evaluate the
impact of different post-trade transparency regimes for block trades on
market quality? How long should each portion of the phase-in continue
and what variation in the number and type of SBS instruments or
transactions would be needed in each group to support a statistical
analysis to distinguish between the potentially different effects on
the markets resulting from distinct post-trade dissemination
requirements?
XI. Section 31 Fees
Section 31(c) of the Exchange Act \162\ provides that a national
securities association must pay fees based on the ``aggregate dollar
amount of sales transacted by or through any member of such association
otherwise than on a national securities exchange of securities * * *
registered on a national securities exchange or subject to prompt last
sale reporting pursuant to the rules of the Commission or a registered
national securities association.'' Pursuant to Section 761(a) of the
Dodd-Frank Act,\163\ SBSs are securities.\164\ When proposed Regulation
SBSR becomes effective, SBSs will be subject to prompt last-sale
reporting pursuant to the rules of the Commission because they will be
subject to real-time public dissemination. Therefore, a national
securities association the members of which effect SBS sales other than
on an exchange (including on a SB SEF) would be liable for Section 31
fees for any such sales.\165\ A national securities association
typically obtains funds to pay its Section 31 fees by imposing on its
members an offsetting fee on covered sales, and would likely take the
same approach with respect to SBSs.
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\162\ 15 U.S.C. 78ee(c).
\163\ 15 U.S.C. 78c(a).
\164\ See 15 U.S.C. 78c(a)(10).
\165\ National securities exchanges also would be liable for
fees in connection with transactions in SBSs that they execute. See
15 U.S.C. 78ee(b).
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Under the Exchange Act, brokers and dealers are required to join a
national securities association.\166\ The Dodd-Frank Act also provides
for the registration of SBS dealers \167\ and correspondingly amends
the definition of ``dealer'' under the Exchange Act to exempt from the
definition of dealer any person engaged in the business of buying and
selling SBSs, other than SBSs with or for persons that are not eligible
contract participants.\168\ Under the new definition of ``dealer,'' a
SBS dealer that buys and sells SBSs--other than with or for persons
that are not eligible contract participants--would not be required to
register as a dealer under the Exchange Act and thus would not be
required to join a national securities association.
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\166\ See 15 U.S.C. 78o(b)(8) (``It shall be unlawful for any
registered broker or dealer to effect any transaction in, or induce
or attempt to induce the purchase or sale of, any security (other
than or [sic] commercial paper, bankers' acceptances, or commercial
bills), unless such broker or dealer is a member of a securities
association registered pursuant to section 78o-3 of this title or
effects transactions in securities solely on a national securities
exchange of which it is a member.''). In addition, Rule 15b9-1(a)
under the Exchange Act, 17 CFR 240.15b9-1(a), provides that any
broker or dealer required by Section 15(b)(8) of the Exchange Act to
become a member of a registered national securities association
shall be exempt from such requirement if it (1) is a member of a
national securities exchange, (2) carries no customer accounts, and
(3) has annual gross income derived from purchases and sales of
securities otherwise than on a national exchange of which it is a
member in an amount no greater than $1,000. The gross income
limitation does not apply to income derived from transactions (1)
for the dealer's own account with or through another registered
broker or dealer, or (2) through the Intermarket Trading System. See
17 CFR 240.15b9-1(b).
\167\ See 15 U.S.C. 78o-8 (``The term `dealer' means any person
engaged in the business of buying and selling securities (not
including security-based swaps, other than security-based swaps with
or for persons that are not eligible contract participants) for such
person's own account through a broker or otherwise''); 15 U.S.C.
78c(71) (defining a security-based swap dealer ``any person who--(i)
holds themself out as a dealer in security-based swaps; (ii) makes a
market in security-based swaps; (iii) regularly enters into
security-based swaps with counterparties as an ordinary course of
business for its own account; or (iv) engages in any activity
causing it to be commonly known in the trade as a dealer or market
maker in security-based swaps'').
\168\ See 15 U.S.C. 78c(a)(5).
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Because the Dodd-Frank Act did not make corresponding changes for
SBS brokers, a SBS broker would be considered a broker for purposes of
the Exchange Act.\169\ Thus, brokers that buy or sell SBSs, SBS dealers
that buy and sell SBSs with or for persons that are not eligible
contract participants, and SBS dealers that buy and sell securities
other than SBSs would be required to join a national securities
association. However, SBS dealers that buy and sell only securities
that are SBSs would not be required to register as dealers under the
Exchange Act and thus would not be required to join a national
securities association.
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\169\ See 15 U.S.C. 78c(a)(4).
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The Commission is proposing to exempt SBSs from the calculation of
Section 31 fees.\170\ This exemption is designed to provide a more
level playing field among SBS market participants. A national
securities association would be able to collect funds to pay its
Section 31 fees only from SBS market participants that are required to
register with it. It would be unable to collect such member fees from
SBS dealers that are not required to register with it. Thus, absent an
exemption for all SBSs, the burden of indirectly paying the Section 31
fees would fall on some SBS market participants but not others.
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\170\ 15 U.S.C. 78ee(f) (``The Commission, by rule, may exempt
any sale of securities or any class of sales of securities from any
fee or assessment imposed by this section, if the Commission finds
that such exemption is consistent with the public interest, the
equal regulation of markets and brokers and dealers, and the
development of a national market system.'').
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[[Page 75246]]
In addition, the Commission proposes to revise Rule 31(a)(10)(ii)
under the Exchange Act \171\ to conform the definition of ``due date''
in that rule to Section 31(e)(2) of the Exchange Act, as amended by
Section 991 of the Dodd-Frank Act. This amendment provides that certain
fees and assessments required under Section 31 will be required to be
paid by September 25, rather than September 30.\172\ The Commission
proposes to make a corresponding amendment to the definition of ``due
date'' in Rule 31(a)(10)(ii) under the Exchange Act by replacing the
reference to ``September 30'' in that rule with a reference to
``September 25.''
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\171\ 17 CFR 240.31(a)(10)(ii).
\172\ Section 991 of the Dodd-Frank Act provides, in relevant
part: ``(1) AMENDMENTS.--Section 31 of the Securities Exchange Act
of 1934 (15 U.S.C. 78ee) is amended * * * in subsection (e)(2), by
striking `September 30' and inserting `September 25'.''
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Request for Comment
190. Do commenters agree with the proposal to exempt SBSs from
Section 31 fees? Why or why not?
191. How much transaction volume in SBSs would the Commission be
exempting from Section 31 fees on an annual basis?
192. If the Commission did not exempt SBSs from Section 31 fees,
how would a national securities association obtain funds to pay the
fees? Would the offsetting fees imposed on members of the national
securities association be fairly distributed?
193. Do commenters agree that the proposed exemption would create a
more level playing field among SBS market participants? Why or why not?
194. Absent the proposed exemption from Section 31 fees for SBSs,
would there be difficulties in collecting Section 31 fees for mixed
swaps (which are included with the definition of ``security-based
swap'' and are thus securities)?
XII. General Request for Comment
Title VII of the Dodd-Frank Act requires the SEC to consult and
coordinate to the extent possible with the CFTC for the purposes of
assuring regulatory consistency and comparability, to the extent
possible,\173\ and states that in adopting rules, the CFTC and SEC
shall treat functionally or economically similar products or entities
in a similar manner.\174\
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\173\ See Section 712(a)(2) of the Dodd-Frank Act.
\174\ See Section 712(a)(7) of the Dodd-Frank Act.
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The CFTC is adopting rules related to the reporting of swaps and
the public dissemination of swap transaction, pricing, and volume data,
as required under Sections 723, 727, and 729 of the Dodd-Frank Act.
Understanding that the Commission and the CFTC regulate different
products and markets and, as such, appropriately may be proposing
alternative regulatory requirements, the Commission requests comment on
the impact of any differences between the Commission and CFTC
approaches to the regulation of the reporting of swaps and SBSs and the
public dissemination of swap and SBS transaction, pricing, and volume
information.
In addition, legislatures and regulators in other jurisdictions are
undertaking efforts to improve regulation in the market for OTC
derivatives, including security-based swaps. The Commission requests
comment generally on the impact of any differences between the
Commission's proposed approach to the reporting and public
dissemination of SBSs and that of any relevant foreign jurisdictions.
195. Would the regulatory approaches under the Commission's
proposed rulemaking pursuant to Sections 763 and 766 of the Dodd-Frank
Act and the CFTC's proposed rulemaking pursuant to Sections 723, 727,
and 729 of the Dodd-Frank Act result in duplicative or inconsistent
efforts on the part of market participants subject to both regulatory
regimes or result in gaps between those regimes? If so, in what ways do
commenters believe that such duplication, inconsistencies, or gaps
should be minimized?
196. Do commenters believe the approaches proposed by the
Commission and the CFTC to regulate the reporting of swaps and SBSs,
and the public dissemination of swap and SBS transaction, volume, and
pricing information, are comparable? If not, why not?
197. Do commenters believe there are approaches that would make the
regulation of swap and SBS reporting and the public dissemination of
swap and SBS transaction, volume, and pricing information more
comparable? If so, what?
198. Do commenters believe that it would be appropriate for the
Commission to adopt an approach proposed by the CFTC that differs from
our proposal? Is so, which one(s)? We request commenters to provide
data, to the extent possible, supporting any such suggested approaches.
199. If registered SDRs would also be assuming real-time reporting
obligations under the CEA, should the phase-in schedules for reporting
obligations for swaps and SBSs be coordinated?
200. How will proposed Regulation SBSR interact with reporting and
public dissemination regimes in other jurisdictions? Will there be
significant differences? If so, would those differences result in
regulatory arbitrage? If so, what steps, if any, should the Commission
take to minimize opportunities for regulatory arbitrage?
XIII. Paperwork Reduction Act
Certain provisions of the proposed reporting rules proposed in this
release contain ``collection of information requirements'' within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\175\ The
Commission is therefore submitting relevant information to the Office
of Management and Budget (``OMB'') for review in accordance with 44
U.S.C. 3507 and 5 CFR 1320.11. Compliance with the collection of
information requirements would be mandatory. An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
Specific collections of information are discussed further below.
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\175\ 44 U.S.C. 3501 et seq.
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A. Definitions--Rule 900
Proposed Rule 900 of Regulation SBSR contains only definitions of
relevant terms and, thus, would not be a ``collection of information''
within the meaning of the PRA.
B. Reporting Obligations--Rule 901 of Regulation SBSR
Proposed Rule 901 of Regulation SBSR contains ``collection of
information requirements'' within the meaning of the PRA. The title of
this collection is ``Rule 901--Reporting Obligations.''
1. Summary of Collection of Information
The Dodd-Frank Act amended the Exchange Act to require the
reporting of SBS transactions. Accordingly, the Commission is proposing
Rule 901 under the Exchange Act to implement this requirement. Proposed
Rule 901 would specify who reports SBS transactions, where such
transactions are to be reported, what information is to be reported,
and in what format. Counterparties to a SBS would be responsible for
reporting the SBS to a registered SDR, or, if there is no registered
SDR that would accept the SBS, to the Commission. Proposed Rule 901
generally would divide the SBS information that must be reported into
three categories: (1) Information that must be reported in real time
pursuant
[[Page 75247]]
to proposed Rule 901(c); \176\ (2) additional information that must be
reported pursuant to proposed Rule 901(d) within specified timeframes;
\177\ and (3) life cycle events that must be reported pursuant to
proposed Rule 901(e).\178\
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\176\ Proposed Rule 901(c) would provide that, for each SBS for
which it is the reporting party, the reporting party shall report
the following information in real time: (1) The asset class of the
SBS and, if the SBS is an equity derivative whether it is a total
return swap or is otherwise designed to offer risks and returns
proportional to a position in the equity security or securities on
which the SBS is based; (2) information that identifies the SBS
instrument and the specific asset(s) or issuer of a security on
which the SBS is based; (3) the notional amount(s), and the
currenc(ies) in which the notional amount(s) is expressed; (4) the
date and time, to the second, of execution, expressed using UTC; (5)
the effective date; (6) the scheduled termination date; (7) the
price; (8) the terms of any fixed or floating rate payments, and the
frequency of any payments; (9) whether or not the SBS will be
cleared by a clearing agency; (10) if both counterparties to a SBS
are SBS dealers, an indication to that effect; (11) if applicable,
an indication that the transaction does not accurately reflect the
market; and (12) if the SBS is customized to the extent that the
information provided in items (1) through (11) does not provide all
of the material information necessary to identify such customized
SBS or does not contain the data elements necessary to calculate the
price, an indication to that effect. See supra Section III.B.
\177\ Proposed Rule 901(d)(1) would provide that, in addition to
the information required under proposed Rule 901(c), for each SBS
for which it is the reporting party, the reporting party shall
report: (1) The participant ID of each counterparty; (2) as
applicable, the broker ID, desk ID, and trader ID of the reporting
party; (3) the amount(s) and currenc(ies) of any up-front payment(s)
and a description of the payment streams of each counterparty; (4)
the title of any master agreement, or any other agreement governing
the transaction (including the title of any document governing the
satisfaction of margin obligations), incorporated by reference and
the date of any such agreement; (5) the data elements necessary for
a person to determine the market value of the transaction; (6) if
the SBS will be cleared, the name of the clearing agency; (7) if the
SBS is not cleared, whether the exception in Section 3C(g) of the
Exchange Act was invoked; (8) if the SBS is not cleared, a
description of the settlement terms, including whether the SBS is
cash-settled or physically settled, and the method for determining
the settlement value; and (9) the venue where the SBS was executed.
Under proposed Rule 901(d)(2), any information required to be
reported pursuant to paragraph (d)(1) must be reported promptly, but
in no event later than: (1) 15 minutes after the time of execution
for a SBS that is traded and confirmed electronically; (2) 30
minutes after the time of execution for a SBS that is confirmed
electronically but not traded electronically; or (3) 24 hours after
execution for a SBS that is not executed or confirmed
electronically. See supra Sections IV.B. and C.
\178\ Proposed Rule 901(e) would require that, for any life
cycle event, and any adjustment due to a life cycle event, that
results in a change to information previously reported pursuant to
proposed Rule 901(c) or (d), the reporting party shall promptly
provide updated information reflecting such change to the entity to
which it reported the original transaction, using the transaction
ID, subject to two enumerated exceptions. However, if a reporting
party ceases to be a counterparty to a SBS due to an assignment or
novation, the new counterparty shall be the reporting party
following such assignment or novation, if the new counterparty is a
U.S. person. If, following an assignment or novation, the new
counterparty is not a U.S. person, the counterparty that is a U.S.
person shall be the reporting party. See supra Section IV.D.
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Proposed Rule 901(i) would require the reporting of all of the
information required by proposed Rules 901(c) and (d) for any pre-
enactment SBSs or transitional SBSs, to the extent such information is
available.
Proposed Rule 901 also would impose certain duties on a registered
SDR that receives SBS transaction data. Proposed Rule 901(f) would
require a registered SDR to time stamp, to the second, its receipt of
any information submitted to it pursuant to proposed Rule 901(c), (d),
or (e). Proposed Rule 901(g) would require a registered SDR to assign a
transaction ID to each SBS reported by a reporting party.
2. Proposed Use of Information
The SBS transaction information required to be reported pursuant to
proposed Rule 901 would be used by registered SDRs, market
participants, the Commission, and other regulators. The information
reported by reporting parties pursuant to proposed Rule 901 would be
used by registered SDRs to publicly disseminate real-time reports of
SBS transactions, as well as to offer a resource for regulators to
obtain detailed information about the SBS market. Market participants
would use the public market data feed to assess the current market for
SBSs and for valuation purposes. The Commission and other regulators
would use information about SBS transactions reported to and held by
registered SDRs for prudential oversight and to monitor potential
systemic risks, as well as to examine for improper behavior and to take
enforcement actions, as appropriate.
The transaction ID would be used on any subsequent transaction
report or information submitted by a reporting party regarding that SBS
(e.g., on an error report to identify the original transaction to which
the error report pertains).
3. Respondents
Proposed Rule 901 would apply to reporting parties.\179\ The
Commission preliminarily believes that up to 1,000 entities could be
reporting parties under proposed Rule 901(a), and that it is reasonable
to use the figure of 1,000 respondents for estimating collection of
information burdens under the PRA. The Commission preliminarily
believes, based on information currently available to it, that there
are and would continue to be approximately 1,000 entities regularly
engaged in the CDS marketplace, and that most of these entities are
likely to regularly participate in other SBS markets.\180\ Accordingly,
the Commission preliminarily believes that an estimate of 1,000
respondents (i.e., reporting parties) is appropriate.
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\179\ See proposed Rule 900 (defining ``reporting party'' as the
counterparty to an SBS with the duty to report information in
accordance with proposed Regulation SBSR to a registered SDR, or if
there is no registered SDR that would receive the information, to
the Commission).
\180\ The Commission includes in its estimate of reporting
parties clearing agencies, which under proposed Rule 901(e)(i) could
become the reporting parties for SBS transactions where the original
reporting party ceases to be a counterparty to the SBS following a
novation of the transaction. See supra Section IV.D.
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Proposed Rule 901 also would impose certain duties on registered
SDRs. Pursuant to Section 13(n) of the Exchange Act, an SDR must
register with the Commission.\181\ The Commission preliminarily
believes that the number of SDRs seeking to register would not exceed
ten. Accordingly, for purposes of estimating collection of information
burdens under proposed Regulation SBSR, including proposed Rule 901,
the Commission believes that it is reasonable to use ten as an estimate
of the number of registered SDRs.
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\181\ See 15 U.S.C. 78m(n). The Commission today is separately
proposing several rules to implement this requirement. See SDR
Registration Proposing Release, supra note 6.
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4. Total Initial and Annual Reporting and Recordkeeping Burdens
a. For Reporting Parties
Pursuant to proposed Rule 901, all SBS transactions must be
reported to a registered SDR or to the Commission. Together, sections
(a), (b), (c), (d), (e) and (h) of proposed Rule 901 set forth the
parameters that market participants must follow to report SBS
transactions. Proposed Rule 901(i) addresses the reporting of pre-
enactment SBSs. The proposed SBS reporting requirements would impose
initial and ongoing burdens on reporting parties. The Commission
preliminarily believes that these burdens would be a function of, among
other things, the number of reportable SBS transactions and the data
elements required to be reported for each SBS transaction.
Based on publicly available information and consultation with
industry sources, the Commission preliminarily believes that even the
most active participants in the SBS market do not enter into a large
number of new SBSs on a daily basis. Rather, most regularly active SBS
market
[[Page 75248]]
participants enter into only a small number of new SBSs during any
given time period, while a few larger dealers participate in the
majority of SBS transactions. The Commission has sought available
information in an effort to quantify the number of aggregate SBS
transactions on an annual basis. According to publicly available data
from DTCC, recently, there have been an average of approximately 36,000
CDS transactions per day,\182\ corresponding to a total number of CDS
transactions of approximately 13,140,000 per year. The Commission
preliminarily believes that CDSs represent 85% of all SBS
transactions.\183\ Accordingly, and to the extent that historical
market activity is a reasonable predictor of future activity,\184\ the
Commission preliminarily estimates that the total number of SBS
transactions that would be subject to proposed Rule 901 on an annual
basis would be approximately 15,460,000, which is an average of
approximately 42 per reporting party per day.\185\
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\182\ See, e.g., http://www.dtcc.com/products/derivserv/data_table_iii.php (weekly data as updated by DTCC).
\183\ The Commission's estimate is based on internal analysis of
available SBS market data. The Commission is seeking comment about
the overall size of the SBS market.
\184\ The Commission notes that regulation of the SBS markets,
including by means of proposed Regulation SBSR, could impact market
participant behavior.
\185\ These figures are based on the following: [13,140,000/
0.85] = 15,458,824. [((15,458,824 estimated SBS transactions)/(1,000
estimated reporting parties))/(365 days/year)] = 42.35, or
approximately 42 transactions per day. The Commission understands
that many of these transactions may arise from previously executed
SBS transactions.
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The Commission believes that reporting parties would face three
categories of burdens to comply with proposed Rule 901 of Regulation
SBSR. First, each reporting party would likely need to develop an
internal order and trade management system (``OMS'') capable of
capturing relevant SBS transaction information. The OMS would have to
include or be connected to a system designed to store SBS transaction
information. The Commission understands that it is current industry
practice, in many cases, to add SBS transaction details to the
transaction record post-execution in a process known as ``enrichment.''
Accordingly, the OMS would likely need to link both to the trade desk--
to permit real-time transaction reporting under proposed Rule 901(c)--
and to the back office--to facilitate reporting of complete
transactions as required under proposed Rule 901(d).
Second, each reporting party would have to implement a reporting
mechanism. This would include a system that ``packages'' SBS
transaction information from the reporting party's OMS, sends such
information, and tracks it. The reporting mechanism would also include
necessary data transmission lines to the appropriate registered SDR.
Third, each reporting party would have to establish an appropriate
compliance program and support for the operation of the OMS and
reporting mechanism. Relevant elements of the compliance program would
include transaction verification and validation protocols; the ability
to identify and correct erroneous transaction reports; and necessary
technical, administrative, and legal support. Additional operational
support would include new product development, systems upgrades, and
ongoing maintenance.
Internal Order Management. To comply with their reporting
obligations, reporting parties would likely need to develop and
maintain an internal OMS that can capture relevant SBS data. The
Commission preliminarily estimates that capturing SBS data in a manner
sufficient to comply with proposed Rule 901 would impose an initial
one-time aggregate burden of approximately 355,000 burden hours, which
corresponds to a burden of 355 hours for each reporting party.\186\
This estimate includes an estimate of the number of potential burden
hours required to amend internal procedures, design or reprogram
systems, and implement processes to ensure that SBS transaction data
are captured and preserved. The Commission further preliminarily
estimates that capturing SBS data in a manner sufficient to comply with
proposed Rule 901 would impose an annual aggregate burden of
approximately 436,000 burden hours, 436 burden hours for each reporting
party.\187\ This figure would include day-to-day support of the OMS, as
well as an estimate of the amortized annual burden associated with
system upgrades and periodic ``re-platforming'' (i.e., implementing
significant updates based on new technology). The Commission
preliminarily estimates that, to capture and maintain relevant
information and documents, reporting parties could incur aggregate
annual dollar cost burden (first-year and ongoing) of $1,000,000, which
corresponds to $1,000 for each participant.\188\ The figure is an
estimate of the hardware and associated maintenance costs for
sufficient memory to capture and store SBS transactions, including
redundant back-up systems.
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\186\ This figure is based on discussions of Commission staff
with various market participants and is calculated as follows:
[((Sr. Programmer at 160 hours) + (Sr. Systems Analyst at 160 hours)
+ (Compliance Manager at 10 hours) + (Director of Compliance at 5
hours) + (Compliance Attorney at 20 hours)) x (1,000 reporting
parties)] = 355,000 burden hours, which is 355 hours per reporting
party (assuming 1,000 reporting parties). The Commission
preliminarily believes that information on SBS transactions is
currently being retained by many market participants in the ordinary
course of business. This may result in lesser burdens for those
parties.
\187\ This figure is based on discussions of Commission staff
with various market participants and is calculated as follows:
[((Sr. Programmer at 32 hours) + (Sr. Systems Analyst at 32 hours) +
(Compliance Manager at 60 hours) + (Compliance Clerk at 240 hours) +
(Director of Compliance at 24 hours) + (Compliance Attorney at 48
hours)) x (1,000 reporting parties)] = 436,000 burden hours, which
is 436 hours per reporting party.
\188\ This estimate is based on discussions of Commission staff
with various market participants and is calculated as follows:
[($250/gigabyte of storage capacity) x (4 gigabytes of storage) x
(1,000 reporting parties)] = $1,000,000. The Commission
preliminarily believes that storage costs associated with saving
relevant SBS information and documents would not vary significantly
between the first year and subsequent years. Accordingly, the
Commission has preliminarily estimated the initial and ongoing
storage costs to be the same. Moreover, the per-entity annual data
storage figure of $1,000 is an average. Some parties may face higher
costs, while others would simply use existing storage resources.
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Summing these burdens, the Commission preliminarily estimates that
the initial (i.e., first-year) aggregate annualized burden on reporting
parties for internal order management under proposed Rule 901 would be
791,000 burden hours, which corresponds to 791 burden hours for each
reporting party.\189\ The Commission preliminarily estimates that the
initial aggregate annualized dollar cost burden would be $1,000,000,
which would correspond to $1,000 for each reporting party.\190\ The
Commission further preliminarily estimates that the ongoing aggregate
annualized burden on reporting parties for internal order management
under proposed Rule 901 would be 436,000 burden hours, which
corresponds to 436 burden hours for each reporting party.\191\ The
Commission preliminarily estimates that the ongoing aggregate
annualized dollar cost burden would be $1,000,000, which corresponds to
$1,000 for each reporting party.\192\
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\189\ This estimate is based on the following: [((355 one-time
burden hours for systems development) + (436 burden hours for annual
costs)) x (1,000 reporting parties)] = 791,000 burden hours, which
corresponds to 791 burden hours per reporting party.
\190\ See supra note 188.
\191\ See supra note 187.
\192\ See supra note 188.
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SBS Reporting Mechanism. Reporting parties would be required to
incur
[[Page 75249]]
initial one-time costs to establish connectivity to a registered SDR to
report SBS transactions. Depending on the number of SBS asset classes
that a reporting party transacts in, and which registered SDRs accept
the resulting SBS transaction reports, multiple connections to
different registered SDRs could be necessary. For purposes of
estimating relevant burdens, the Commission preliminarily estimates
that, on average, each reporting party would require connections to two
registered SDRs. The Commission bases this estimate on discussions with
market participants. We recognize that, in light of the developing SBS
market and regulatory structure, the actual average number of SDR
connections maintained by each reporting party may be different.
This estimate is based on the following factors. First, based on
discussions with SBS market participants, the Commission understands
that the majority of SBSs are comprised of CDS and equity-based swaps.
Accordingly, the Commission preliminarily believes that transactions in
these two asset classes would predominate. Moreover, the Commission
preliminarily believes that SBS market participants may not all
transact in each asset class. Thus, even if each registered SDR
accepted transaction reports only for a single SBS asset class, the
total number of connections needed by many reporting parties would
likely be limited. Next, the Commission also preliminarily believes
that, for operational efficiency, a reporting party would seek to use
only one registered SDR per asset class for repository services.
Accordingly, to the extent that a single registered SDR accepted SBSs
in multiple asset classes, a reporting party would need fewer
connections. Finally, a reporting party that required a significant
number of connections to registered SDRs could engage a third party--
for example, a dealer or connectivity services provider--instead of
independently establishing its own connections. Accordingly, the
Commission preliminarily believes that one connection may suffice for
many reporting parties.
On this basis, the Commission preliminarily estimates that the cost
to establish and maintain connectivity to a registered SDR to
facilitate the reporting required by proposed Rule 901 would impose an
annual dollar cost burden of approximately $200,000,000, which
corresponds to a dollar cost burden of $200,000 for each reporting
party.\193\
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\193\ This estimate is based on discussions of Commission staff
with various market participants, as well as the Commission's
experience regarding connectivity between securities market
participants for data reporting purposes. The Commission derived the
total estimated expense from the following: [($100,000 hardware- and
software-related expenses, including necessary back-up and
redundancy, per SDR connection) x (2 SDR connections per reporting
party) x (1,000 reporting parties)] = $200,000,000. The Commission
understands that many reporting parties already have established
linkages to entities that may register as SDRs, which could
significantly reduce the out-of-pocket costs associated with this
establishing the reporting function contemplated by proposed Rule
901.
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Moreover, the Commission believes that establishing a reporting
mechanism for SBS transactions would impose internal burdens on each
reporting party, including the development of systems necessary to
capture and send information from the entity's OMS to the relevant
registered SDR, as well as corresponding testing and support. The
Commission preliminarily estimates an initial one-time aggregate burden
of 172,000 burden hours, which corresponds to a burden of 172 burden
hours for each reporting party.\194\ In addition, the Commission
preliminarily estimates that reporting specific SBS transactions to a
registered SDR as required by proposed Rule 901 would impose an ongoing
aggregate burden of 77,300 burden hours, which corresponds to a burden
of approximately 80 burden hours for each reporting party.\195\
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\194\ This figure is based on discussions with various market
participants as follows: [((Sr. Programmer at 80 hours) + (Sr.
Systems Analyst at 80 hours) + (Compliance Manager at 5 hours) +
(Director of Compliance at 2 hours) + (Compliance Attorney at 5
hours)) x (1,000 reporting parties)] = 172,000 burden hours, which
is 172 hours per reporting party. The Commission preliminarily
believes that many dealers and major market participants already are
reporting SBS data to some extent in the ordinary course of
business. Thus, as a practical matter, these parties may face
substantially lower burdens.
\195\ This figure is based on discussions of Commission staff
with various market participants, as well as the Commission's
experience regarding connectivity between securities market
participants, including alternative trading systems and self-
regulatory organizations for data reporting purposes. The Commission
derived the total estimated initial burden from the following:
[(15,460,000 estimated total annual SBS transactions) x (0.005
hours/transaction)] = 77,300 burden hours, which is 77.3 burden
hours per reporting party.
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Thus, the Commission preliminarily estimates that the initial
(first-year) aggregate annualized burden on reporting parties for
reporting under proposed Rule 901 would be 249,300 burden hours, which
corresponds to approximately 250 burden hours for each reporting
party.\196\ The Commission preliminarily estimates that the initial
aggregate annualized dollar cost burden would be $200,000,000, which
corresponds to $200,000 for each reporting party.\197\ In addition, the
Commission preliminarily estimates that the ongoing aggregate
annualized burden on reporting parties under proposed Rule 901 would be
77,300 burden hours, which corresponds to approximately 80 burden hours
for each reporting party.\198\ The Commission preliminarily estimates
that the ongoing aggregate annualized dollar cost burden would be
$200,000,000, which corresponds to $200,000 for each reporting
party.\199\
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\196\ This estimate is based on the following: [((172 one-time
burden hours) + (77.3 burden hours for ongoing costs)) x (1,000
reporting parties)] = 249,300 burden hours, which corresponds to
249.3 burden hours per reporting party.
\197\ See supra note 193.
\198\ See supra note 195.
\199\ See supra note 193.
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Compliance and Ongoing Support. As stated above, in complying with
proposed Rule 901, each reporting party also would need to establish
and maintain an appropriate compliance program and support for the
operation of the OMS and reporting mechanism, which would include
transaction verification and validation protocols, and necessary
technical, administrative, and legal support. Additional operational
support would include new product development, systems upgrades, and
ongoing maintenance. The Commission preliminarily believes that initial
burdens associated with this aspect of proposed Rule 901--i.e., the
establishment of relevant compliance capability--would in significant
part involve the development of appropriate policies and procedures,
which, for those participants who are SBS dealers or major SBS
participants, is addressed in connection with proposed Rule
906(c).\200\ A reporting party also would need to design its OMS to
include tools to ensure accurate, complete reporting. On an ongoing
basis, a reporting party would need to employ appropriate technical and
compliance staff to maintain and support the operation of its order
management and reporting systems over time.
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\200\ See infra Section XIII.G.
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The Commission preliminarily estimates that designing and
implementing an appropriate compliance and support program would impose
an initial, one-time aggregate burden of approximately 180,000 burden
hours, which corresponds to a
[[Page 75250]]
burden of 180 burden hours for each reporting party.\201\
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\201\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer at 100
hours) + (Sr. Systems Analyst at 40 hours) + (Compliance Manager at
20 hours) + (Director of Compliance at 10 hours) + (Compliance
Attorney at 10 hours)) x (1,000 reporting parties)] = 180,000 burden
hours, which corresponds to 180 hours per reporting party.
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The Commission further preliminarily estimates that maintaining a
reporting party's compliance and support program would impose an
ongoing aggregate burden of approximately 218,000 burden hours, which
corresponds to a burden of 218 burden hours for each reporting
party.\202\ This figure includes day-to-day support of the OMS, as well
as an estimate of the amortized annual burden associated with system
upgrades and periodic re-platforming (i.e., implementing significant
updates based on new technology).
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\202\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer at 16
hours) + (Sr. Systems Analyst at 16 hours) + (Compliance Manager at
30 hours) + (Compliance Clerk at 120 hours) + (Director of
Compliance at 12 hours) + (Compliance Attorney at 24 hours)) x
(1,000 reporting parties)] = 218,000 burden hours, which is 218
hours per reporting party.
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Therefore, the Commission preliminarily estimates the initial
aggregate annualized burden on reporting parties for compliance and
ongoing support under proposed Rule 901 would be 398,000 burden hours,
which corresponds to 398 burden hours for each reporting party.\203\
The Commission further preliminarily estimates that the ongoing
aggregate annualized burden on reporting parties for compliance and
ongoing support under proposed Rule 901 would be 218,000 burden hours,
which corresponds to 218 burden hours for each reporting party.\204\
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\203\ This estimate is based on the following: [((180 one-time
burden hours) + (218 annual burden hours)) x (1,000 reporting
parties)] = 398,000 burden hours, which corresponds to 398 burden
hours per reporting party.
\204\ See supra note 202.
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Aggregate Burdens. Thus, the Commission estimates that the total
first-year burden--the initial aggregate annualized burden--on
reporting parties associated with proposed Rule 901 would be 1,438,300
burden hours, which corresponds to approximately 1,438 burden hours per
reporting party.\205\ In addition, the Commission preliminarily
estimates that the initial aggregate annualized dollar cost burden on
reporting parties associated with proposed Rule 901 would be
$301,000,000, which corresponds to a dollar cost burden of $301,000 per
reporting party.\206\
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\205\ This figure is based on summing the initial aggregate
annualized burdens for reporting parties under proposed Rule 901:
[(791,000) + (249,300) + (398,000)] = 1,438,300 burden hours.
\206\ This figure is based on summing the estimated first-year
aggregate annualized dollar cost burdens as follows: [($300,000,000)
+ ($1,000,000)] = $301,000,000.
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Likewise, the Commission estimates that the ongoing aggregate
annual burdens on reporting parties associated with proposed Rule 901
would be 731,300 burden hours, which corresponds to 731 burden hours
per reporting party.\207\ In addition, the Commission preliminarily
estimates that the ongoing, aggregate annualized dollar cost burden on
reporting parties associated with proposed Rule 901 would be
$301,000,000, which corresponds to a dollar cost burden of $301,000 per
reporting party.\208\
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\207\ This figure is based on summing estimated ongoing annual
aggregate burdens as follows: [(436,000) + (77,300) + (218,000)] =
731,300 burden hours.
\208\ This figure is based on summing the estimated first-year
aggregate annualized dollar cost burdens as follows: [($300,000,000)
+ ($1,000,000)] = $301,000,000.
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b. For Registered SDRs
Proposed Rule 901(f) would require a registered SDR to time-stamp
information that it receives. Proposed Rule 901(g) would require a
registered SDR to assign a unique transaction ID to each SBS it
receives. The Commission preliminarily believes that a registered SDR
would need to design its systems to include these capabilities, but
that such design elements would not pose additional significant burdens
to incorporate in the context of designing and building the
technological framework that would be required of a SDR to become
registered.\209\ Therefore, the Commission preliminarily estimates that
proposed Rules 901(f) and (g) would impose an initial one-time
aggregate burden of 1,200 burden hours, which corresponds to 120 burden
hours per registered SDR.\210\ This figure is based on an estimate of
ten registered SDRs. Once operational, these elements of each
registered SDR's system would have to be supported and maintained.
Accordingly, the Commission estimates that proposed Rule 901(f) and (g)
would impose an annual aggregate burden of 1,520 burden hours, which
corresponds to 152 burden hours per registered SDR.\211\ This figure
represents an estimate of the burden for a registered SDR for support
and maintenance costs for the registered SDR's systems to time stamp
incoming submissions and assign transaction IDs.
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\209\ The Commission is proposing Rules 13n-4(b), 13n-5, and
13n-6 under the Exchange Act, which would relate to the duties, data
collection and maintenance, and automated systems requirements for
SDRs. See SDR Registration Proposing Release, supra note 6.
\210\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer at 80
hours) + (Sr. Systems Analyst at 20 hours) + (Compliance Manager at
8 hours) + (Director of Compliance at 4 hours) + (Compliance
Attorney at 8 hours)) x (10 registered SDRs)] = 1,200 burden hours,
which is 120 hours per registered SDR.
\211\ This figure is based on discussions with various market
participants as follows: [((Sr. Programmer at 60 hours) + (Sr.
Systems Analyst at 48 hours) + (Compliance Manager at 24 hours) +
(Director of Compliance at 12 hours) + (Compliance Attorney at 8
hours)) x (10 SDRs)] = 1,520 burden hours, which is 152 hours per
registered SDR.
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Thus, the Commission preliminarily estimates that the first-year
aggregate annualized burden associated with proposed Rules 901(f) and
(g) would be 2,820 burden hours, which corresponds to 282 burden hours
per registered SDR.\212\ Correspondingly, the Commission preliminarily
estimates that the ongoing aggregate annualized burden associated with
proposed Rules 901(f) and (g) would be 1,520 burden hours, which
corresponds to 152 burden hours per registered SDR.\213\
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\212\ This figure is based on the following: [(1,200) + (1,520)]
= 2,720 burden hours, which corresponds to 272 burden hours per
registered SDR.
\213\ See supra note 211.
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5. Recordkeeping Requirements
Concurrently with proposed Regulation SBSR, the Commission is
issuing the SDR Registration Proposing Release, which includes
recordkeeping requirements for SBS transaction data received by a
registered SDR pursuant to proposed Regulation SBSR. Specifically,
proposed Rule 13n-5(b)(4) would require a registered SDR to maintain
the transaction data that it collects for not less than five years
after the applicable SBS expires, and historical positions and
historical market values for not less than five years.\214\
Accordingly, SBS transaction reports received by a registered SDR
pursuant to proposed Rule 901 would be required to be retained by the
SDR for not less than five years.
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\214\ See SDR Registration Proposing Release, supra note 6.
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6. Collection of Information is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
Information collected pursuant to proposed Rule 901(c) would be
widely available to the public to the extent it is incorporated into
SBS transaction reports that are publicly disseminated by a registered
SDR pursuant to
[[Page 75251]]
proposed Rule 902. A registered SDR would be under an obligation to
maintain the confidentiality of any information collected pursuant to
proposed Rule 901(d), pursuant to Sections 13(n)(5) of the Exchange Act
and proposed Rule 13n-9 thereunder.\215\ To the extent that the
Commission receives confidential information pursuant this collection
of information, such information would be kept confidential, subject to
the provisions of the Freedom of Information Act.
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\215\ See id.
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8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
201. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
202. How accurate are the Commission's preliminary estimates of the
burdens of the proposed collection of information associated with
proposed Rule 901? In particular, how many entities would incur
collection of information burdens pursuant to proposed Rule 901?
203. Would covered entities incur any initial burdens associated
with systems design, programming, expanding systems capacity, and
establishing compliance programs pursuant to proposed Rule 901?
204. Would there be different or additional burdens associated with
the collection of information under proposed Rule 901 that a covered
entity would not undertake in the ordinary course of business?
205. Are there additional burdens that the Commission has not
addressed in its preliminary burden estimates?
206. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
207. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
208. What entities may be subject to proposed Rule 901, whether
specific classes of entities may be impacted, how many entities may be
impacted, and will any such entity or class of entities be impacted
differently than others? In addition, the Commission seeks comment on
the accuracy of its estimates as to the number of participants in the
SBS market that would be required to report information pursuant to
proposed Rule 901.
C. Public Dissemination of Transaction Reports--Rule 902 of Regulation
SBSR
Certain provisions of proposed Rule 902 of Regulation SBSR contain
``collection of information requirements'' within the meaning of the
PRA. The title of this collection is ``Rule 902--Public Dissemination
of Transaction Reports.''
1. Summary of Collection of Information
Proposed Rule 902(a) generally would require that a registered SDR
publicly disseminate a transaction report for each SBS transaction
immediately upon receipt of information about the SBS submitted by a
reporting party pursuant to proposed Rule 901(c), along with any
indicator(s) contemplated by the registered SDR's policies and
procedures.\216\ If its systems are unavailable for publicly
disseminating transaction data immediately upon receipt, the registered
SDR would be required to disseminate the transaction data immediately
upon re-opening.
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\216\ See proposed Rule 907(a)(4).
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Pursuant to Rule 902(b), a registered SDR would be required to
publicly disseminate a transaction report of a SBS that constitutes a
block trade immediately upon receipt of information about the block
trade from the reporting party. The transaction report would consist of
all the information reported by the reporting party pursuant to
proposed Rule 901(c), except for the notional size, plus the
transaction ID and an indicator that the report represents a block
trade. The registered SDR would be required to publicly disseminate a
complete transaction report for such block trade (including the
transaction ID and the full notional size) at a later time.
Proposed Rule 902(c) would prohibit a registered SDR from
disseminating: (1) the identity of either counterparty to a SBS; (2)
with respect to a SBS that is not cleared at a registered clearing
agency and that is reported to a registered SDR, any information
disclosing the business transactions and market positions of any
person; (3) any information regarding a SBS reported pursuant to
proposed Rule 901(i).
2. Proposed Use of Information
The real-time public dissemination requirement contained in
proposed Rule 902 would provide post-trade transparency for SBS
transactions, as required by the Dodd-Frank Act. Publicly disseminated
reports of SBS transactions that are not block trades would include the
full notional size. Publicly disseminated reports of SBS transactions
that are block trades would occur pursuant to a two-step process.
First, a real-time report would be disseminated without the notional
size, but with an indication that the trade is a block trade as well as
a transaction ID. At a later time, a follow-on report would be
disseminated, including the notional size, with the transaction ID used
to connect the second report to the first report.
3. Respondents
The collection of information associated with the proposed Rule 902
would apply to registered SDRs. As noted above, the Commission
preliminarily believes that an estimate of ten registered SDRs is
reasonable for purposes of its analysis of potential burdens under the
PRA.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
Although proposed Rule 902 would not prescribe a manner of public
dissemination, the Commission anticipates that a registered SDR would
establish a mechanism functionally similar to one established by TRACE,
which is a system operated by FINRA for collecting and disseminating to
the public reports of trades in corporate and agency debt securities.
Simultaneously with this proposal, the Commission is proposing new
Rules 13n-1 through 13n-11 under the Exchange Act relating to the SDR
registration process, the duties of SDRs, and their core
principles.\217\ The SDR Registration Proposing Release covers
anticipated collections of information with respect to various aspects
of establishing and operating an SDR, including its start-up and
ongoing operations. Proposed Rule 13n-5(b)(1) would set forth
parameters each registered SDR would be required to follow with regard
to collecting and maintaining transaction data. Every SDR would be
required to (i) establish, maintain, and enforce written policies and
procedures for the reporting of transaction data to the SDR and shall
accept all transaction data that is reported in accordance with such
policies and procedures; (ii) accept all SBSs in any asset class that
are reported to it in accordance with its policies and procedures to
the extent that it accepts any SBS in a particular asset class; (iii)
establish, maintain, and enforce written policies and procedures to
verify the accuracy of the transaction data that has been submitted to
the SDR, including
[[Page 75252]]
clearly identifying the source for each trade side and the pairing
method (if any) for each transaction in order to identify the level of
quality of the transaction data; and (iv) promptly record the
transaction data it receives. The SDR Registration Proposing Release
describes the relevant burdens and costs that complying with proposed
Rule 13n-5(b)(1) would entail.
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\217\ See SDR Registration Proposing Release, supra note 6.
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The Commission preliminarily believes that a registered SDR would
be able to integrate the capability to publicly disseminate real-time
SBS transaction reports required under proposed Rule 902 as part of its
overall system development for transaction data. Accordingly, the
Commission believes that the burdens associated with enabling and
maintaining compliance with proposed Rule 902 would, as a practical
matter, represent a portion of a registered SDR's overall systems
development budget and process. Based on discussions with industry
participants, the Commission preliminarily estimates that to implement
and comply with the real-time public dissemination requirement of
proposed Rule 902, each registered SDR would incur a burden equal to an
additional 20% of the first-year and ongoing burdens discussed in the
SDR Registration Proposing Release.\218\
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\218\ See Section IV.D.2 (SDR Duties, Data Collection and
Maintenance, Automated Systems, and Direct Electronic Access) of the
SDR Registration Proposing Release. This estimate is based on
discussions with industry members and market participants, including
potential SDRs who would be required to register as SDRs under the
Dodd-Frank Act, and includes time necessary to design and program a
registered SDR's system to calculate and disseminate initial and
subsequent trade reports as well as annual costs associated with
systems testing and maintenance necessary for the special handling
of block trades. These figures do not include the development of
policies and procedures necessary to calculate block trade levels
pursuant to proposed Rule 907(b).
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On this basis, the Commission preliminarily estimates that the
initial one-time aggregate burden imposed by the proposed Rule 902 for
development and implementation of the systems needed to disseminate the
required transaction information, including the necessary software and
hardware, would be approximately 84,000 hours and a dollar cost of $20
million, which would correspond to a burden of 8,400 hours and a dollar
cost of $2 million for each registered SDR.\219\ In addition, the
Commission preliminarily estimates that annual aggregate burden
(initial and ongoing) imposed by the proposed Rule 902 would constitute
approximately 50,400 hours and a dollar cost of $12 million, which
would correspond to a burden of 5,040 hours and a dollar cost of $1.2
million for each registered SDR.\220\ Thus, the Commission
preliminarily estimates that the total first-year (initial) aggregate
annualized burden on registered SDRs associated with real-time public
dissemination requirement under proposed Rule 902 would be
approximately 134,400 hours and a dollar cost of $32 million, which
would correspond to a burden of 13,440 hours and a dollar cost of $3.2
million for each registered SDR.\221\
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\219\ See SDR Registration Proposing Release, supra note 6 for
the total burden associated with establishing SDR technology
systems. The Commission derived this estimated burden from the
following: [((Attorney at 1,400 hours) + (Compliance Manager at
1,600 hours) + (Programmer Analyst at 4,000 hours) + (Senior
Business Analyst at 1,400 hours)) x (10 registered SDRs)] = 84,000
burden hours, which corresponds to 8,400 hours per registered SDR.
\220\ See SDR Registration Proposing Release, supra note 6 for
the total ongoing annual burdens associated with operating and
maintaining SDR technology systems. The Commission derived this
estimated burden from the following: [((Attorney at 840 hours) +
(Compliance Manager at 960 hours) + (Programmer Analyst at 2,400
hours) + (Senior Business Analyst at 840 hours)) x (10 registered
SDRs)] = 50,400 burden hours, which corresponds to 5,040 hours per
registered SDR.
\221\ These estimates are based on the following: [(84,000 one-
time burden hours) + (50,400 annual burden hours)] = 134,400 burden
hours, which corresponds to 13,440 hours per registered SDR; [($20
million one-time dollar cost burden) + ([$12] million annual dollar
cost burden) = $32 million cost burden, which corresponds to $3.2
million per registered SDR.
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5. Recordkeeping Requirements
Pursuant to proposed Rule 13n-7(b) under the Exchange Act,\222\ a
registered SDR would be required to keep and preserve at least one copy
of all documents, including all documents and policies and procedures
required by the Exchange Act and the rules or regulations thereunder,
for a period of not less than five years, the first two years in a
place that is immediately available to the staff of the Commission for
inspection and examination. This requirement would encompass real-time
SBS transaction reports disseminated by the registered SDR.
Accordingly, SBS transaction reports disseminated by a registered SDR
pursuant to proposed Rule 902 would be required to be retained for not
less than five years.
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\222\ See SDR Registration Proposing Release, supra note 6.
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6. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
Information collected pursuant to proposed Rule 902 would be widely
available to the extent that it is incorporated into SBS transaction
reports that are publicly disseminated by a registered SDR pursuant to
proposed Rules 902(a) and (b). However, a registered SDR would be under
an obligation to maintain the confidentiality of any information that
is not subject to public dissemination. To the extent that the
Commission receives confidential information pursuant to this
collection of information, such information would be kept confidential,
subject to the provisions of the Freedom of Information Act.
8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
209. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
210. How accurate are the Commission's preliminary estimates of the
burdens of the proposed collection of information associated with
proposed Rule 902? In particular, how many entities would incur
collection of information burdens pursuant to proposed Rule 902?
211. Would registered SDRs incur any initial burdens associated
with systems design, programming, expanding systems capacity, and
establishing compliance programs pursuant to proposed Rule 902?
212. Would there be different or additional burdens associated with
the collection of information under proposed Rule 902 that a registered
SDR would not undertake in the ordinary course of business?
213. Are there additional burdens that the Commission has not
addressed in its preliminary burden estimates?
214. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
215. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
D. Coded Information--Rule 903 of Regulation SBSR
The Commission does not believe that proposed Rule 903 would be a
``collection of information'' within the meaning of the PRA because the
rule would merely permit reporting parties and registered SDRs to use
codes in place of certain data elements, subject to
[[Page 75253]]
certain conditions. The rule would offer subject entities greater
flexibility in meeting the obligations specified elsewhere in proposed
Regulation SBSR related to the reporting of SBS transactions.
E. Operating Hours of Registered Security-Based Swap Data
Repositories--Rule 904 of Regulation SBSR
Certain provisions of proposed Rule 904 contain ``collection of
information requirements'' within the meaning of the PRA. The title of
this collection is ``Rule 904--Operating Hours of Registered Security-
Based Swap Data Repositories.''
1. Summary of Collection of Information
Proposed Rule 904 would require a registered SDR to operate
continuously, subject to two exceptions. First, a registered SDR could
establish normal closing hours during periods when, in its estimation,
the U.S. market and major foreign markets are inactive. A registered
SDR would be required to provide reasonable advance notice to
participants and to the public of its normal closing hours. Second, a
registered SDR could declare, on an ad hoc basis, special closing hours
to perform system maintenance that cannot wait until normal closing
hours. A registered SDR would, to the extent reasonably possible under
the circumstances, be required to avoid scheduling special closing
hours during when, in its estimation, the U.S. market and major foreign
markets are most active; and provide reasonable advance notice of its
special closing hours to participants and to the public.
Paragraphs (c) and (e) of proposed Rule 904 would specify
requirements for handling and disseminating reported data during a
registered SDR's normal and special closing hours. First, during normal
closing hours and, to the extent reasonably practicable, during special
closing hours, a registered SDR would be required to have the
capability to receive and hold in queue transaction data it
receives.\223\ Second, if a registered SDR could not hold in queue
transaction data to be reported, it would be required, immediately upon
resuming normal operations, to send a notice to all participants that
it has resumed normal operations and to immediately disseminate the
transaction data required to be reported under proposed Rule 901(c) and
received from the participants following the notice.\224\
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\223\ See proposed Rule 904(c).
\224\ See proposed Rule 904(e).
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Two of the requirements contained in Rule 904 constitute
requirements already contained in other proposed rules. First, the
requirement in Rule 904(d) that, immediately upon system re-opening, a
registered SDR would be required to publicly disseminate any
transaction data required to be reported under proposed Rule 901(c) and
held in queue, is also contained in the proposed Rule 902(a). Second,
the requirement in proposed Rule 904(e) that, if a reporting party that
has an obligation to report transaction data could not to do so because
a registered SDR's system was unavailable, it would be required to
submit that information immediately after it receives a notice that it
is possible to do so, is already implicitly contained in proposed Rule
901.
2. Proposed Use of Information
The information that would be provided pursuant to proposed Rule
904 is necessary to allow participants and the public to know the
normal and special closing hours of the registered SDR, and to allow
participants to take appropriate action in the event that the
registered SDR cannot accept SBS transaction reports from participants.
3. Respondents
Proposed Rule 904 would apply to all registered SDRs. As noted
above, the Commission preliminarily estimates that there would be ten
registered SDRs.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
The Commission preliminarily estimates that that the one-time,
initial burden, as well as ongoing annualized burden for each
registered SDR associated with proposed Rule 904 would be minimal,
because registered SDRs would already have undertaken necessary steps
in compliance with other proposed rules. First, simultaneously with
this proposal, the Commission is proposing the SDR Registration
Proposed Rules, including proposed Rules 13n-1 through 240-13n-11.\225\
The SDR Registration Proposed Rules cover collections of information
with respect to various aspects of establishing and operating a
registered SDR, including, implicitly, its hours of operation.\226\
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\225\ See SDR Registration Proposing Release, supra note 6.
\226\ The requirement in proposed Rule 904(e) for the
participants to report information to the registered SDR upon
receiving a notice that the registered SDR resumed its normal
operations is already part of the participant's reporting
obligations under proposed Rule 901 and is already contained in the
burden estimate for the proposed Rule 901.
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The Commission preliminarily believes that the requirements for a
registered SDR to provide reasonable advance notice to participants and
to the public of its normal and special closing hours, as well as to
provide a notice to participants that it is possible to report
transaction data to a registered SDR after its system was unavailable,
would entail a minor burden. On this basis, the Commission
preliminarily estimates that the annual aggregate burden (first-year
and ongoing) imposed by proposed Rule 904 would be 360 hours, which
corresponds to 36 hours per registered SDR.\227\
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\227\ This figure is based on the Commission's experience as
follows: [(Operations Specialist at 3 hours/month) x (12 months/
year) x (10 registered SDRs)] = 360 burden hours.
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5. Recordkeeping Requirements
Concurrently with proposed Regulation SBSR, the Commission is
proposing the SDR Registration Proposed Rules.\228\ Proposed Rule 13n-
7(b) would require a registered SDR to keep and preserve at least one
copy of all documents, including all documents and policies and
procedures required by the Exchange Act and the rules or regulations
thereunder, for a period of not less than five years, the first two
years in a place that is immediately available to the staff of the
Commission for inspection and examination.\229\ This requirement would
encompass notices issued by a registered SDR to participants under
proposed Rule 904.
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\228\ See SDR Registration Proposing Release, supra note 6.
\229\ See id., proposed Rule 13n-7(b) under the Exchange Act.
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6. Collection of Information is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
The Commission anticipates that any notices issued by a registered
SDR to its participants would be publicly available.
8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
216. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
217. How accurate are the Commission's preliminary estimates of the
burdens of the proposed collection of information associated with
proposed Rule 904? In particular, how many
[[Page 75254]]
entities would incur collection of information burdens pursuant to
proposed Rule 904?
218. Would the burdens imposed under proposed Rule 904 be different
or additional to those that a registered SDR would undertake in the
ordinary course of business?
219. Are there additional burdens that the Commission has not
addressed in its preliminary burden estimates?
220. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
221. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
F. Correction of Errors in Security-Based Swap Information--Rule 905 of
Regulation SBSR
Certain provisions of proposed Rule 905 of Regulation SBSR contain
``collection of information requirements'' within the meaning of the
PRA. The title of this collection is ``Rule 905--Correction of Errors
in Security-Based Swap Information.''
1. Summary of Collection of Information
Proposed Rule 905 would establish duties for SBS counterparties and
registered SDRs to correct errors in information that previously has
been reported.
Counterparty Reporting Error. Under proposed Rule 905(a)(1), where
a counterparty that was not the reporting party for a SBS discovers an
error in the information reported with respect to such SBS, the
counterparty shall promptly notify the reporting party of the error.
Under proposed Rule 905(a)(2), where a reporting party for a SBS
transaction discovers an error in the information reported with respect
to a SBS, or receives notification from its counterparty of an error,
the reporting party shall promptly submit to the entity to which the
SBS was originally reported an amended report pertaining to the
original transaction report. The reporting party would submit an
amended report to the registered SDR in a manner consistent with the
policies and procedures of the registered SDR required pursuant to
proposed Rule 907(a)(3).
Duty of Registered SDR to Correct. Proposed Rule 905(b) would set
forth the duties of a registered SDR relating to corrections. If the
registered SDR either discovers an error in a transaction on its system
or receives notice of an error from a counterparty, proposed Rule
905(b)(1) would require the registered SDR to verify the accuracy of
the terms of the SBS and, following such verification, promptly correct
the erroneous information contained in its system. Proposed Rule
905(b)(2) would further require that, if the erroneous transaction
information contained any data that fall into the categories enumerated
in proposed Rule 901(c) as information required to be reported in real
time, the registered SDR would be required to publicly disseminate a
corrected transaction report of the SBS promptly following verification
of the SBS by the counterparties to the SBS, with an indication that
the report relates to a previously disseminated transaction.
2. Proposed Use of Information
The SBS transaction information required to be reported pursuant to
proposed Rule 905 would be used by registered SDRs, participants, the
Commission, and other regulators. Participants would be able to use
such information to evaluate and manage their own risk positions and
satisfy their duties to report corrected information to a registered
SDR. A registered SDR would need the required information to correct
its own records, in order to maintain an accurate record of a
participant's positions as well as to disseminate corrected
information. The Commission and other regulators would need the
corrected information to have an accurate understanding of the market
for surveillance and oversight purposes.
3. Respondents
Proposed Rule 905 would apply to participants of a registered SDR.
As noted above, the Commission has estimated that there may be 1,000
entities regularly engaged in the CDS marketplace. In addition, the
Commission estimates that there may be up to 4,000 SBS counterparties
that transact SBSs much less frequently. The Commission preliminarily
believes that these SBS counterparties would not be reporting parties.
However, these additional 4,000 counterparties would be
``participants'' as defined by proposed Rule 900. Accordingly, with
respect to burdens applicable to all SBS counterparties, the Commission
preliminarily believes that it is reasonable to use the estimate of
5,000 respondents for purposes of estimating collection of information
burdens under the PRA.
Proposed Rule 905 also would apply to registered SDRs. As noted
above, the Commission preliminarily estimates there would be ten
registered SDRs.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
The Commission preliminarily believes that promptly submitting an
amended transaction report to the appropriate registered SDR after
discovery of an error as required under proposed Rule 905(a)(2) would
impose a burden on reporting parties. Likewise, the Commission
preliminarily believes that promptly notifying the relevant reporting
party after discovery of an error as required under proposed Rule
905(a)(1) would impose a burden on non-reporting-party participants.
With respect to reporting parties, the Commission preliminarily
believes that proposed Rule 905(a) would impose an initial, one-time
burden associated with designing and building the reporting party's
reporting system to be capable of submitting amended SBS transactions
to a registered SDR. In addition, reporting parties would be required
to support and maintain the error reporting function.\230\
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\230\ The Commission preliminarily believes that the actual
submission of amended transaction reports required under proposed
Rule 905(a)(2) would not result in a material burden because this
would be done electronically though the reporting system that the
reporting party must develop and maintain to comply with proposed
Rule 901. The burdens associated with such a reporting system are
addressed in the Commission's analysis of proposed Rule 901. See
supra Section XIII.B.4.a and notes 193-195.
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The Commission preliminarily believes that designing and building
appropriate reporting system functionality to comply with proposed Rule
905(a)(2) would be a component of, and represent an incremental ``add-
on'' to, the cost to build a reporting system and develop a compliance
function as required under proposed Rule 901. Based on discussions with
industry participants, the Commission preliminarily estimates this
incremental burden to be equal to 5% of the one-time and annual burdens
associated with designing and building a reporting system that is in
compliance with proposed Rule 901,\231\ plus 10% of the corresponding
one-time and annual burdens associated with developing the reporting
party's overall compliance program required under proposed Rule
901.\232\ Thus, for reporting parties, the Commission preliminarily
estimates that proposed Rule 905(a) would impose an initial (first-
year) aggregate burden of 52,400 hours, which is 52.4 burden hours per
reporting party,\233\ and an
[[Page 75255]]
ongoing aggregate annualized burden of 25,800 hours, which is 25.8
burden hours per reporting party.\234\
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\231\ See supra notes 194 and 198.
\232\ See supra notes 201 and 202.
\233\ This figure is calculated as follows: [(((172 burden hours
one-time development of reporting system) x (0.05)) + ((80 burden
hours annual maintenance of reporting system) x (0.05)) + ((180
burden hours one-time compliance program development) x (0.1)) +
((218 burden hours annual support of compliance program) x (0.1))) x
(1,000 reporting parties)] = 52,400 burden hours, which is 52.4
burden hours per reporting party.
\234\ This figure is calculated as follows: [(((80 burden hours
annual maintenance of reporting system) x (0.05)) + ((218 burden
hours annual support of compliance program) x (0.1))) x (1,000
reporting parties)] = 25,800 burden hours, which is 25.8 burden
hours per reporting party.
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With regard to non-reporting-party participants, the Commission
preliminarily believes that proposed Rule 905(a) would impose an
initial and ongoing burden associated with promptly notifying the
relevant reporting party after discovery of an error as required under
proposed Rule 905(a)(1). The Commission preliminarily estimates that
the annual burden would be 2,920,000 hours, which corresponds to 730
burden hours per non-reporting-party participant.\235\ This figure is
based on the Commission's preliminary estimates of (1) 4,000 non-
reporting-party participants; (2) 11 transactions per day per non-
reporting-party participant; \236\ and (3) an error rate of one-third
(33%),\237\ or approximately 4 transactions per day per non-reporting-
party participant.
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\235\ This figure is based on the following: [(4 error
notifications per non-reporting-party participant per day) x (365
days/year) x (Compliance Clerk at 0.5 hours/report) x (4,000 non-
reporting-party participants)] = 2,920,000 burden hours, which
corresponds to 730 burden hours per non-reporting-party participant.
The Commission preliminarily believes that participants already
monitor their SBS transactions and positions in the ordinary course
of business. Thus, the Commission preliminarily believes that, as a
practical matter, proposed Rule 905 would not result in any
significant new burdens for these participants.
\236\ This figure is based on the following: [((15,458,824
estimated annual SBS transactions)/(4,000 estimated non-reporting-
party participants))/(365 days/year)] = 10.58, or approximately 11
transactions per day. See supra note 185. The Commission understands
that many of these transactions may arise from previously executed
SBS transactions.
\237\ In other words, the Commission is estimating that one-
third of all SBS transactions will require an amended report to be
submitted to the registered SDR pursuant to proposed Rule 905(a).
For purposes of its PRA analysis, the Commission is further assuming
that the both the non-reporting-party participant and the reporting
party discover all errors. The Commission recognizes that, as a
practical matter, there may be instances where one party fails to
detect an error.
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Proposed Rule 905(b) would require a registered SDR to develop
protocols regarding the reporting and correction of erroneous
information. The Commission preliminarily believes, however, that this
duty would represent only a minor extension of other duties for which
the Commission is estimating burdens, and consequently, would not
impose substantial additional burdens on a registered SDR. A registered
SDR would be required to have the ability to collect and maintain SBS
transaction reports and update relevant records under the SDR
Registration Proposing Release.\238\ Likewise, a registered SDR would
have the capacity to disseminate additional, corrected SBS transaction
reports under proposed Rule 902. The Commission preliminarily believes
that the burdens associated with proposed Rule 905--including systems
development, support, and maintenance--are addressed in the
Commission's analysis of those other rules. Thus, the Commission
preliminarily believes that proposed Rule 905(b) would impose only an
incremental additional burden on registered SDRs. The Commission
preliminarily estimates that to develop and publicly provide the
necessary protocols would impose on each registered SDR an initial one-
time burden of approximately 730 burden hours.\239\ The Commission
estimates that to review and update such protocols on an ongoing basis
would impose an annual burden on each SDR of approximately 1,460 burden
hours.\240\
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\238\ See supra note 6.
\239\ This figure is based on the following: [(Sr. Programmer at
80 hours) + (Compliance Manager at 160 hours) + (Compliance Attorney
at 250 hours) + (Compliance Clerk at 120 hours) + (Sr. System
Analyst at 80 hours) + (Director of Compliance at 40 hours)] = 730
burden hours.
\240\ This figure is based on the following: [(Sr. Programmer at
160 hours) + (Compliance Manager at 320 hours) + (Compliance
Attorney at 500 hours) + (Compliance Clerk at 240 hours) + (Sr.
System Analyst at 160 hours) + (Director of Compliance at 80 hours)]
= 1,460 burden hours.
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Accordingly, the Commission preliminarily estimates that the
initial (first-year) aggregate annualized burden on registered SDRs
under proposed Rule 905 would be 21,900 burden hours, which corresponds
to 2,190 burden hours for each registered SDR.\241\ The Commission
further preliminarily estimates that the ongoing aggregate annualized
burden on registered SDRs under proposed Rule 905 would be 14,600
burden hours, which corresponds to 1,460 burden hours for each
registered SDR.\242\
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\241\ This figure is based on the following: [(730 burden hours
to develop protocols) + (1,460 burden hours annual support)) x (10
registered SDRs)] = 21,900 burden hours, which corresponds to 2,190
burden hours per registered SDR.
\242\ This figure is based on the following: [(1,460 burden
hours annual support) x (10 registered SDRs)] = 14,600 burden hours,
which corresponds to 1,460 burden hours per registered SDR.
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5. Recordkeeping Requirements
Concurrently with proposed Regulation SBSR, the Commission is
proposing the SDR Registration Proposed Rules, which would include
recordkeeping requirements for SBS transaction data received by a
registered SDR pursuant to proposed Regulation SBSR.\243\ Specifically,
proposed Rule 13n-5(b)(5) under the Exchange Act would require a
registered SDR to maintain the transaction data for not less than five
years after the applicable SBS expires and historical positions and
historical market values for not less than five years. Accordingly, SBS
transaction reports received by a registered SDR pursuant to proposed
Rule 905 would be required to be retained for not less than five years.
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\243\ See SDR Registration Proposing Release, supra note 6.
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With respect to information disseminated by a registered SDR in
compliance with proposed Rule 905(b)(2), proposed Rule 13n-7(b) under
the Exchange Act would require a registered SDR to keep and preserve at
least one copy of all documents, including all policies and procedures
required by the Exchange Act and the rules or regulations thereunder
for a period of not less than five years, the first two years in a
place that is immediately available to the staff of the Commission for
inspection and examination.\244\ This requirement would encompass
amended real-time SBS transaction reports disseminated by the
registered SDR. Accordingly, SBS transaction reports disseminated by a
registered SDR pursuant to proposed Rule 905(b)(2) would be required to
be retained for not less than five years.
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\244\ See id.
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6. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
Information collected pursuant to proposed Rule 905 would be widely
available to the extent that it corrects information previously
reported pursuant to proposed Rule 901(c) and incorporated into SBS
transaction reports that are publicly disseminated by a registered SDR
pursuant to proposed Rule 902. Generally, however, a registered SDR
would be under an obligation to maintain the confidentiality of any
information collected pursuant to proposed Rule 901, pursuant to
Sections 13(n)(5) of the Exchange Act and proposed Rule 13n-9
thereunder.\245\ To the extent that the Commission receives
confidential information pursuant this collection of
[[Page 75256]]
information, such information would be kept confidential, subject to
the provisions of the Freedom of Information Act.
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\245\ See SDR Registration Proposing Release, supra note 6.
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8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
222. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
223. How accurate are the Commission's preliminary estimates of the
burdens of the proposed collection of information associated with
proposed Rule 905? In particular, how many entities would incur
collection of information burdens pursuant to proposed Rule 905?
224. Would covered entities incur any initial burdens associated
with systems design, programming, expanding systems capacity, and
establishing compliance programs pursuant to proposed Rule 905?
225. What entities may be subject to proposed Rule 905? In what
ways would these entities be impacted? Would any such entity or class
of entities be impacted differently than others?
226. How many entities might be impacted by proposed Rule 905? Are
the Commission's preliminary estimates as to the number of participants
in the SBS market that would be required to report and retain
information pursuant to the proposed rule accurate?
227. Are there additional burdens that the Commission has not
addressed in its preliminary burden estimates?
228. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
229. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
G. Other Duties of Participants--Rule 906 of Regulation SBSR
Certain provisions of proposed Rule 906 of Regulation SBSR contain
``collection of information requirements'' within the meaning of the
PRA. The title of this collection is ``Rule 906--Duties of All
Participants.''
1. Summary of Collection of Information
Proposed Rule 906(a) would set forth a procedure designed to ensure
that a registered SDR obtains relevant ID information for both
counterparties to a SBS, not just the IDs of the reporting party.
Proposed Rule 906(a) would require a registered SDR to identify any SBS
reported to it for which it does not have participant ID and (if
applicable) broker ID, desk ID, and trader ID of each counterparty.
Proposed Rule 906(a) would further require the registered SDR, once a
day, to send a report to each participant identifying, for each SBS to
which that participant is a counterparty, the SBS(s) for which the
registered SDR lacks participant ID and (if applicable) broker ID, desk
ID, and trader ID. Additionally, under proposed Rule 906(a), a
participant that receives such a report would be required to provide
the missing ID information to the registered SDR within 24 hours.
Proposed Rule 906(b) would require a participant to provide a
registered SDR with information identifying the participant's ultimate
parent(s) and affiliate(s) that may also be participants of the
registered SDR. Additionally, under proposed Rule 906(b), the
participant would be required to promptly notify the registered SDR of
any changes to the information provided.
Proposed Rule 906(c) would require each participant that is a SBS
dealer or major SBS participant to establish, maintain, and enforce
written policies and procedures that are reasonably designed to ensure
compliance with any SBS transaction reporting obligations in a manner
consistent with proposed Regulation SBSR and the registered SDR's
applicable policies and procedures. In addition, proposed Rule 906(c)
would require each such participant to review and update its policies
and procedures at least annually.
2. Proposed Use of Information
The information required to be provided by participants pursuant to
proposed Rule 906(a) would complete missing elements of SBS transaction
reports so that the registered SDR would have, and could make available
to regulators, accurate and complete records for reported SBS.
Similarly, proposed Rule 906(b) would be used to ensure that the
registered SDR would have, and could make available to regulators,
accurate and complete records for reported SBS regarding participant
parents and affiliates. The Commission would use this information in
its ongoing efforts to monitor and enforce compliance with the federal
securities laws, including proposed Regulation SBSR.
The policies and procedures required under proposed Rule 906(c)
would be used by participants to aid in their compliance with proposed
Regulation SBSR, and also used by the Commission as part of its ongoing
efforts to monitor and enforce compliance with the federal securities
laws, including proposed Regulation SBSR.
3. Respondents
Proposed Rules 906(a) and (b) would apply to all participants of
registered SDRs. Based on the information currently available to the
Commission, the Commission preliminarily estimates that there may be up
to 5,000 participants. Proposed Rule 906(c) would apply to participants
that are SBS dealers or major SBS participants. The Commission believes
that such entities would constitute the majority of reporting parties,
so that it is reasonable to use the figure of 1,000 respondents for
purposes of estimating collection of information burdens under the PRA.
Proposed Rule 906 also imposes certain duties on registered SDRs.
As noted above, the Commission is preliminarily estimating that there
would be ten registered SDRs.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
Proposed Rule 906(a) would require a registered SDR, once a day, to
send a report to each participant identifying, for each SBS to which
that participant is a counterparty, the SBS(s) for which the registered
SDR lacks participant ID and (if applicable) broker ID, desk ID, and
trader ID. The Commission preliminarily estimates that there would be a
one-time, initial burden of 112 burden hours for a registered SDR to
create a report template and develop the necessary systems and
processes to produce a daily report required by proposed Rule
906(a).\246\ Further, the Commission preliminarily estimates that there
would be an ongoing annualized burden of 308 burden hours for a
registered SDR to generate and issue the daily reports, and to enter
into its systems the ID information supplied by participants in
response to the daily reports.\247\
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\246\ The Commission has derived the total estimated burdens
based on the following estimates, which are based on the information
provided to the Commission: (Senior Systems Analyst at 40 hours) +
(Sr. Programmer at 40 hours) + (Compliance Manager at 16 hours) +
(Director of Compliance at 8 hours) + (Compliance Attorney at 8
hours) = 112 burden hours.
\247\ The Commission has derived the total estimated burdens
based on the following estimates, which are based on the information
provided to the Commission: (Senior Systems Analyst at 24 hours) +
(Sr. Programmer at 24 hours) + (Compliance Clerk at 260 hours) = 308
burden hours.
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Accordingly, the Commission preliminarily estimates that the
initial
[[Page 75257]]
aggregate annualized burden for registered SDRs under proposed Rule
906(a) would be 4,200 burden hours, which corresponds to 420 burden
hours per registered SDR.\248\ The Commission preliminarily estimates
that the ongoing aggregate annualized burden for registered SDRs under
proposed Rule 906(a) would be 3,080 burden hours, which corresponds to
308 burden hours per registered SDR.\249\
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\248\ The Commission derived its estimate from the following:
[(112 + 308 burden hours) x (10 registered SDRs)] = 4,200 burden
hours, which corresponds to 420 burden hours per registered SDR.
\249\ The Commission derived its estimate from the following:
[(308 burden hours) x (10 registered SDRs)] = 3,080 burden hours,
which corresponds to 308 burden hours per registered SDR.
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In addition, proposed Rule 906(a) would require any participant
that receives a daily report from a registered SDR to provide the
missing UICs to the registered SDR within 24 hours. The Commission
preliminarily estimates participants that are reporting parties would
bear no initial or ongoing burdens under proposed Rule 906(a). This
estimate is based on the Commission's preliminary belief that a
reporting party would structure its reporting program to be in
compliance with proposed Regulation SBSR, and consequently, would send
complete information as relates to itself for each SBS transaction
submitted to a registered SDR. The Commission further preliminarily
estimates that the initial and ongoing annualized burden under proposed
Rule 906(a) to participants that are not reporting parties would be
1,277,500 burden hours, which corresponds to 255.5 burden hours per
participant.\250\ This figure is based on the Commission's preliminary
estimates of (1) 5,000 participants; (2) 9 transactions per day per
participant; \251\ and (3) a missing information rate of 80%,\252\ or
approximately 7 transactions per day per participant.
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\250\ This figure is based on the following: [(7 missing
information reports per non-reporting-party participant per day) x
(365 days/year) x (Compliance Clerk at 0.1 hours/report) x (5,000
participants)] = 1,277,500 burden hours, which corresponds to 255.5
burden hours per participant.
\251\ This figure is based on the following: [((15,458,824
estimated annual SBS transactions)/5,000 estimated participants))/
(365 days/year)] = 8.47, or approximately 9 transactions per day.
See supra note 185. The Commission understands that many of these
transactions may arise from previously executed SBS transactions.
\252\ In other words, the Commission is estimating that 80% of
the time the reporting party would not know and thus would not be
able to report the necessary UICs of its counterparty. Therefore, a
registered SDR would have to obtain the missing UICs through the
process described in proposed Rule 906(a).
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Proposed Rule 906(b) would require every participant to provide the
registered SDR an initial parent/affiliate report and subsequent
reports, as needed. The Commission preliminarily estimates that each
participant would submit two reports each year.\253\ In addition, the
Commission preliminarily estimates that there would be 5,000
participants and that each one may connect to two registered SDRs.
Accordingly, the Commission preliminarily estimates that the initial
and ongoing aggregate annualized burden associated with proposed Rule
906(b) would be 10,000 burden hours, which corresponds to 2 burden
hours per participant.\254\
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\253\ During the first year, the Commission preliminarily
estimates each participant would submit its initial report and one
update report. In subsequent years, the Commission preliminarily
estimates that each participant would submit two update reports.
\254\ This figure is based on the following: [(Compliance Clerk
at 0.5 hours per report) x (2 reports/year/SDR connection) x (2 SDR
connections/participant) x (5,000 participants)] = 10,000 burden
hours, which corresponds to 2 burden hours per participant.
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Proposed Rule 906(c) would require each participant that is a SBS
dealer or major SBS participant to establish, maintain, and enforce
written policies and procedures that are reasonably designed to ensure
compliance with any SBS transaction reporting obligations in a manner
consistent with proposed Regulation SBSR and the registered SDR's
applicable policies and procedures. Proposed Rule 906(c) would also
require the review and updating of such policies and procedures at
least annually. The Commission preliminary estimates that the one-time,
initial burden for each covered participant to adopt written policies
and procedures as required under proposed Rule 906(c) would be
approximately 216 burden hours.\255\ Drawing on the Commission's
experience with other rules that require entities to establish and
maintain policies and procedures,\256\ this figure is based on the
estimated number of hours to develop a set of written policies and
procedures, program systems, implement internal controls and oversight,
train relevant employees, and perform necessary testing.
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\255\ This figure is based on the following: [(Sr. Programmer at
40 hours) + (Compliance Manager at 40 hours) + (Compliance Attorney
at 40 hours) + (Compliance Clerk at 40 hours) + (Sr. Systems Analyst
at 32 hours) + (Director of Compliance at 24 hours)] = 216 burden
hours per covered participant.
\256\ See Securities Exchange Act Release Nos. 62174 (May 26,
2010), 75 FR 32556 (June 8, 2010) (proposing Rule 613 of Regulation
NMS); 61908 (April 14, 2010), 75 FR 21456 (proposing large trader
reporting system).
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In addition, the Commission preliminarily estimates the burden of
maintaining such policies and procedures, including a full review at
least annually, as required by proposed Rule 906(c), would be
approximately 120 burden hours for each covered participant.\257\ This
figure includes an estimate of hours related to reviewing existing
policies and procedures, making necessary updates, conducting ongoing
training, maintaining internal controls systems, and performing
necessary testing. Accordingly, the Commission preliminarily estimates
that the initial aggregate annualized burden associated with proposed
Rule 906(c) would be 336,000 burden hours, which corresponds to 336
burden hours per covered participant.\258\ The Commission preliminarily
estimates that the ongoing aggregate annualized burden associated with
proposed Rule 906(c) would be 120,000 burden hours, which corresponds
to 120 burden hours per covered participant.\259\
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\257\ This figure is based on the following: [(Sr. Programmer at
8 hours) + (Compliance Manager at 24 hours) + (Compliance Attorney
at 24 hours) + (Compliance Clerk at 24 hours) + (Sr. Systems Analyst
at 16 hours) + (Director of Compliance at 24 hours)] = 120 burden
hours per covered participant.
\258\ This figure is based on the following: [(216 + 120 burden
hours) x (1,000 covered participants)] = 336,000 burden hours.
\259\ This figure is based on the following: [(120 burden hours)
x (1,000 covered participants)] = 120,000 burden hours.
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Therefore, the Commission preliminarily estimates that the initial
aggregate annualized burden associated with proposed Rule 906 would be
1,518,200 burden hours,\260\ and the ongoing aggregate annualized
burden would be 1,301,080 burden hours for all covered entities.\261\
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\260\ This figure is based on the following: [(4,200 burden
hours for registered SDRs under proposed Rule 906(a)) + (1,277,500
burden hours for non-reporting-party participants under proposed
Rule 906(a)) + (10,000 burden hours for participants under proposed
Rule 906(b)) + (336,000 burden hours for covered participants under
proposed Rule 906(c))] = 1,627,700 burden hours.
\261\ This figure is based on the following: [(3,080 burden
hours for registered SDRs under proposed Rule 906(a)) + (1,277,500
burden hours for non-reporting-party participants under proposed
Rule 906(a)) + (10,000 burden hours for participants under proposed
Rule 906(b)) + (120,000 burden hours for covered participants under
proposed Rule 906(c))] = 1,410,580 burden hours.
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5. Recordkeeping Requirements
Concurrently with proposed Regulation SBSR, the Commission is
issuing the SDR Registration Proposing Release, which would include
recordkeeping requirements for SBS transaction data received by a
registered SDR pursuant to proposed Regulation SBSR.\262\ Specifically,
proposed Rule 13n-5(b)(5) under the Exchange Act would require a
registered SDR to
[[Page 75258]]
maintain the transaction data for not less than five years after the
applicable SBS expires and historical positions and historical market
values for not less than five years.
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\262\ See supra note 6.
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With regard to other information that a registered SDR may receive
from participants pursuant to proposed Rule 906, proposed Rule 13n-7(b)
would require a registered SDR to keep and preserve at least one copy
of all documents, including all documents and policies and procedures
required by the Exchange Act and the rules or regulations thereunder
for a period of not less than five years, the first two years in a
place that is immediately available to the staff of the Commission for
inspection and examination.\263\ This requirement would encompass
materials received by a registered SDR from participants pursuant to
proposed Rule 906.
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\263\ See id.
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6. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
A registered SDR would be under an obligation to maintain the
confidentiality of any information collected pursuant to proposed Rule
906. To the extent that the Commission receives confidential
information pursuant this collection of information, such information
would be kept confidential, subject to the provisions of the Freedom of
Information Act.
8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
230. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
231. In what ways would entities covered by Rule 906 be impacted?
Would any such entity or class of entities be impacted differently than
others?
232. What would be the burdens on participants to provide to a
registered SDR and keep updated information about their ultimate
parents and affiliates that are also participants?
233. How many entities might be impacted by proposed Rule 906? Are
the Commission's preliminary estimates as to the number of participants
in the SBS market that would be required to report and retain
information pursuant to the proposed rule accurate?
234. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
235. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
236. Would proposed Rule 906 create any additional burdens not
discussed here? If so, please identify and quantify these burdens.
H. Policies and Procedures of Registered Security-Based Swap Data
Repositories--Rule 907 of Regulation SBSR
Certain provisions of proposed Rule 907 of Regulation SBSR contain
``collection of information requirements'' within the meaning of the
PRA. The title of this collection is ``Rule 907--Policies and
Procedures of Registered Security-Based Swap Data Repositories.'' The
Commission is applying for a new OMB Control Number for this collection
in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13.
1. Summary of Collection of Information
Proposed Rule 907 would require a registered SDR to establish and
maintain compliance with written policies and procedures: (1) That
enumerate the specific data elements of a SBS or a life cycle event
that a reporting party would report; (2) that specify data formats,
connectivity requirements, and other protocols for submitting
information; (3) for specifying how reporting parties are to report
corrections to previously submitted information, making corrections to
information in its records that is subsequently discovered to be
erroneous, and applying an appropriate indicator to any transaction
report required to be disseminated by proposed Rule 905(b)(2), which
would denote that the report relates to a previously disseminated
transaction; (4) describing how reporting parties shall report and,
consistent with the enhancement of price discovery, how the registered
SDR shall publicly disseminate, reports of, and adjustments due to,
life cycle events; SBS transactions that do not involve an opportunity
to negotiate any material terms, other than the counterparty; and any
other SBS transactions that, in the estimation of the registered SDR,
do not accurately reflect the market; (5) for assigning transaction IDs
and UICs related to its participants; and (6) for periodically
obtaining from each participant information that identifies the
participant's ultimate parent(s) and any other participant(s) with
which the counterparty is affiliated, using applicable UICs.
In addition, proposed Rule 907(b)(1) would require a registered SDR
to establish and maintain written policies and procedures for
calculating and publicizing block trade thresholds for all SBS
instruments reported to the registered SDR in accordance with the
criteria and formula for determining block size as specified by the
Commission.
Under proposed Rules 907(c) and (d), a registered SDR would be
required to make its policies and procedures publicly available on its
website, and review, and update as necessary, its policies and
procedures at least annually, indicating the date on which they were
last reviewed. Finally, proposed Rule 907(e) would require a registered
SDR to have the capacity to provide to the Commission, upon request,
information or reports related to the timeliness, accuracy, and
completeness of data reported to it pursuant to proposed Regulation
SBSR and the registered SDR's policies and procedures thereunder.
2. Proposed Use of Information
The policies and procedures required under proposed Rule 907 would
be used by registered SDRs to aid in their compliance with Regulation
SBSR, and also used by the Commission as part of its ongoing efforts to
monitor and enforce compliance with the federal securities laws,
including proposed Regulation SBSR. These policies and procedures also
would be used by participants of a registered SDR to understand the
specific data elements of SBS transactions that they must report, the
specific data formats they would be required to use, and for
understanding what constitutes a block trade in a SBS instrument.
Furthermore, market participants would use the information about block
trades calculated and publicized by a registered SDR to understand the
block trade thresholds for specific SBS instruments, and for
understanding the registered SDR's dissemination protocols generally.
Finally, any information or reports provided to the Commission pursuant
to proposed Rule 907(e) would be used by the Commission to assess the
timeliness, accuracy, and completeness of data reported pursuant to
proposed Regulation SBSR and as part of its general oversight of the
SBS markets.
[[Page 75259]]
3. Respondents
As noted above, the Commission preliminarily estimates that ten
registered SDRs would be subject to proposed Rule 907.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
The Commission preliminarily estimates that the one-time, initial
burden for a registered SDR to adopt written policies and procedures as
required under proposed Rule 907 would be approximately 15,000
hours.\264\ Drawing on the Commission's experience with other rules
that require entities to establish and maintain policies and
procedures,\265\ this figure is based on the estimated number of hours
to develop a set of written policies and procedures, program systems,
implement internal controls and oversight, train relevant employees,
and perform necessary testing.\266\ In addition, the Commission
preliminarily estimates the annual burden of maintaining such policies
and procedures, including a full review at least annually, making
available its policies and procedures on the registered SDR's website,
and compiling statistics on non-compliance, as required under proposed
Rule 907, would be approximately 30,000 hours for each registered
SDR.\267\ This figure includes an estimate of hours related to
reviewing existing policies and procedures, making necessary updates,
conducting ongoing training, maintaining relevant systems and internal
controls systems, calculating and publishing block trade thresholds,
performing necessary testing, monitoring participants, and compiling
data.
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\264\ This figure is based on the following: [(Sr. Programmer at
1,667 hours) + (Compliance Manager at 3,333 hours) + (Compliance
Attorney at 5,000 hours) + (Compliance Clerk at 2,500 hours) + (Sr.
System Analyst at 1,667 hours) + (Director of Compliance at 833
hours)] = 15,000 burden hours per registered SDR.
\265\ See infra at note 256.
\266\ This figure includes time necessary to design and program
systems and implement policies and procedures to calculate and
publish block trade thresholds for all SBS instruments reported to
the registered SDR, as would be required by proposed Rule 907(b). It
also includes time necessary to design and program systems and
implement policies and procedures to determine which reported trades
would not be considered block trades. This figure also includes time
necessary to design and program systems and implement policies and
procedures to assign certain IDs, as would be required by proposed
Rule 907(a)(5).
\267\ This figure is based on the following: [(Sr. Programmer at
3,333 hours) + (Compliance Manager at 6,667 hours) + (Compliance
Attorney at 10,000 hours) + (Compliance Clerk at 5,000 hours) + (Sr.
System Analyst at 3,333 hours) + (Director of Compliance at 1,667
hours)] = 30,000 burden hours per registered SDR.
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The Commission preliminarily believes that, as part of its core
functions, a registered SDR would have the capacity to provide to the
Commission, upon request, information or reports related to the
timeliness, accuracy, and completeness of data reported to it pursuant
to proposed Regulation SBSR and the registered SDR's policies and
procedures. Proposed Rule 13n-5(b) would require a registered SDR to
establish, maintain, and enforce written policies and procedures to
satisfy itself by reasonable means that the transaction data that has
been submitted to the security-based swap data repository is accurate,
and also to ensure that the transaction data and positions that it
maintains are accurate.\268\ The Commission preliminarily believes that
these capabilities would enable a registered SDR to provide the
Commission information or reports as may be requested pursuant to
proposed Rule 907(e). Thus, the Commission does not believe that
proposed Rule 907(e) would impose any additional burdens on a
registered SDR.
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\268\ See SDR Registration Proposing Release, supra note 6,
proposed Rules 13n-5(b)(1)(iii) and 13n-5(b)(3) under the Exchange
Act.
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Based on the Commission's experience and input from self-regulatory
organizations, the Commission preliminarily believes that a registered
SDR would need to hire 15 full-time staff to fulfill the obligations
outlined in proposed Rule 907. Accordingly, the Commission
preliminarily estimates that the initial annualized burden associated
with proposed Rule 907 would be approximately 45,000 hours per
registered SDR, which corresponds to an initial annualized aggregate
burden of approximately 450,000 hours.\269\ The Commission
preliminarily estimates that the ongoing annualized burden associated
with proposed Rule 907 would be approximately 30,000 hours per
registered SDR,\270\ which corresponds to an ongoing annualized
aggregate burden of approximately 300,000 hours.\271\
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\269\ This figure is based on the following: [((15,000 burden
hours per registered SDR) + (30,000 burden hours per registered
SDR)) x (10 registered SDRs)] = 450,000 initial annualized aggregate
burden hours during the first year.
\270\ This figure is based on the following: [(Sr. Programmer at
3,333 hours) + (Compliance Manager at 6,667 hours) + (Compliance
Attorney at 10,000 hours) + (Compliance Clerk at 5,000 hours) + (Sr.
System Analyst at 3,333 hours) + (Director of Compliance at 1,667
hours)] = 30,000 burden hours per registered SDR.
\271\ This figure is based on the following: [(30,000 burden
hours per registered SDR) x (10 registered SDRs)] = 300,000 ongoing,
annualized aggregate burden hours.
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5. Recordkeeping Requirements
Concurrently with proposed Regulation SBSR, the Commission is
proposing the SDR Proposed Rules.\272\ Specifically, proposed Rule 13n-
7(b) would require a registered SDR to keep and preserve at least one
copy of all documents, including all documents and policies and
procedures required by the Exchange Act and the rules or regulations
thereunder, for a period of not less than five years, the first two
years in a place that is immediately available to the staff of the
Commission for inspection and examination.\273\ This requirement would
encompass policies and procedures established by a registered SDR
pursuant to proposed Rule 907. This requirement would also encompass
any information or reports provided to the Commission pursuant to
proposed Rule 907(e).
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\272\ See SDR Registration Proposing Release, supra note 6.
\273\ See id., proposed Rule 13n-7(b) under the Exchange Act.
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6. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
All of the policies and procedures required by proposed Rule 907
would have to be made available by a registered SDR on its website and
would not, therefore, be confidential. Any information obtained by the
Commission from a registered SDR pursuant to proposed Rule 907(e)
relating to the timeliness, accuracy, and completeness of data reported
to the registered SDR would be for regulatory purposes and would be
kept confidential.
8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
1. Is the proposed collection of information necessary for the
performance of the functions of the agency? Would the information have
practical utility?
2. How many entities might be impacted by proposed Rule 907? Are
the Commission's preliminary estimates as to the number of registered
SDRs that would be subject to proposed Rule 907 accurate?
3. How accurate are the Commission's preliminary estimates of the
burdens of
[[Page 75260]]
the proposed collection of information associated with proposed Rule
907?
4. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
5. Does the Commission's proposed Rule 907 minimize burdens by
reserving to registered SDRs the flexibility to develop and implement
tailored policies and procedures, or would more specificity in the rule
text better minimize associated burdens?
6. Can you suggest any ways to minimize the burden of collection of
information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
7. Would proposed Rule 907 create any additional burdens not
discussed here? If so, please identify and quantify these burdens.
I. Jurisdictional Matters--Rule 908 of Regulation SBSR
The Commission preliminarily does not believe that proposed Rule
908 would be a ``collection of information'' within the meaning of the
PRA, as the rule would merely describe the jurisdictional reach of
proposed Regulation SBSR. The Commission requests comment on this
preliminary assessment of proposed Rule 908. Would proposed Rule 908
impose any collection of information requirements that the Commission
has not considered?
J. Registration of Security-Based Swap Data Repository as Securities
Information Processor--Rule 909 of Regulation SBSR
Certain provisions of proposed Rule 909 contain ``collection of
information requirements'' within the meaning of the PRA. The title of
this collection is ``Rule 909--Registration of Security-Based Swap Data
Repository as Securities Information Processor.''
1. Summary of Collection of Information
Proposed Rule 909 would require a registered SDR to register with
the Commission as a SIP. To comply with this requirement, a registered
SDR would need to submit a Form SIP.\274\ As a registered SIP, a
registered SDR would be required to keep its Form SIP current, and
submit amendments as required by Rule 609(b) of Regulation NMS under
the Exchange Act.\275\
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\274\ 17 CFR 249.1001.
\275\ 17 CFR 242.609(b).
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2. Proposed Use of Information
The information required by proposed Rule 909 would permit the
Commission to register a registered SDR as a SIP, and to maintain
updated information about the registered SDR/SIP over time.
3. Respondents
The Commission preliminarily estimates that there would be ten
registered SDRs. Thus, the Commission preliminarily estimates that ten
entities would have to register as SIPs as required by proposed Rule
909.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
As described in the SDR Registration Proposing Release,\276\ an
entity wishing to register with the Commission as a registered SDR
would have to submit proposed Form SDR, which is modeled after existing
Form SIP. The Commission has estimated the burden for completing Form
SIP to be 400 hours. Therefore, the Commission also has estimated the
burden for completing proposed Form SDR to be 400 hours (specifically,
150 hours of legal compliance work and 250 hours of clerical compliance
work).\277\ Any entity that is required to complete proposed Form SDR
also would have to complete Form SIP. Because of the substantial
overlap in the forms, much of the burden for completing Form SIP would
be subsumed in completing proposed Form SDR. Therefore, the Commission
preliminarily estimates that, having completed a proposed Form SDR, an
entity would need only one-quarter of the time to then complete Form
SIP, or 100 hours (specifically, 37.5 hours of legal compliance work
and 62.5 hours of clerical compliance work). Accordingly, the
Commission is preliminarily estimating that the one-time initial
registration burden for all registered SDR/SIPs would be 1,000
hours.\278\
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\276\ See supra note 6.
\277\ This figure is based on the following: [(Compliance
Attorney at 150 hours) + (Compliance Clerk at 250 hours)] = 400
burden hours per SDR. See SDR Registration Proposing Release, supra
note 6 at notes 183 and 234.
\278\ This figure is based on the following: [(Compliance
Attorney at 37.5 hours) + (Compliance Clerk at 62.5 hours) x (10
registrants)] = 400 burden hours.
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With regard to ongoing burdens, the Commission preliminarily
estimates that the aggregate annualized burden for providing amendments
to Form SIP would be one-tenth of the burden to complete the initial
form or 400 burden hours, which corresponds to 40 burden hours for each
registered SDR. This figure is based on a preliminary estimate that
each of ten registered SDRs would submit one amendment on Form SIP each
year. SIP registration also would require a registered SDR to provide
notice to the Commission of prohibitions or limitations on access to
its services. The Commission preliminarily believes that the notice
would be a simple form, and that prohibitions or limitations on access
to information provided by a registered SDR would be not be prevalent.
Thus, the Commission does not believe that providing such notice would
result in any material burden. The Commission solicits comments as to
the accuracy of these estimates.
5. Recordkeeping Requirements
Pursuant to proposed Rule 13n-7(b) under the Exchange Act,\279\ a
registered SDR would be required to keep and preserve at least one copy
of all documents, including all documents and policies and procedures
required by the Exchange Act and the rules or regulations thereunder,
for a period of not less than five years, the first two years in a
place that is immediately available to the staff of the Commission for
inspection and examination. This requirement would encompass any
regulatory documents and related work papers completed by the
registered SDR as part of its business, including Form SIP as required
by proposed Rule 909.
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\279\ See SDR Registration Proposing Release, supra note 6.
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6. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
7. Confidentiality of Responses to Collection of Information
Form SIP is not confidential.
8. Request for Comment
The Commission requests public comment on its burden estimates. The
Commission also solicits comment as follows:
8. How many entities might be impacted by proposed Rule 909? Are
the Commission's preliminary estimates as to the number of registered
SDRs that would be subject to proposed Rule 909 accurate?
9. How accurate are the Commission's preliminary estimates of the
burdens of the proposed collection of information associated with
proposed Rule 909? Given that a SDR would be required to complete Form
SDR to register with the Commission, how long would it take to also
complete Form SIP?
10. How many amendments per year would a registered SDR/SIP have to
file to Form SIP? What would be the average burden per amendment?
[[Page 75261]]
11. Can you suggest any ways to enhance the quality, utility, and
clarity of the information to be collected?
12. Can you suggest any ways to minimize the burden of collection
of information on those who would be required to respond, including
through the use of automated collection techniques or other forms of
information technology?
13. Would proposed Rule 909 or SIP registration create burdens for
registered SDRs or other entities not contemplated here? If so, please
identify and quantify these burdens.
K. Phase-In Period--Rule 910 of Regulation SBSR
The Commission preliminarily does not believe that proposed Rule
910 would be a ``collection of information'' within the meaning of the
PRA. Proposed Rule 910 merely describes when a registered SDR and its
participants would be required to comply with the various parts of
proposed Regulation SBSR, and would not create any additional
collection of information requirements. The Commission requests public
comment on its burden estimates. The Commission also solicits comment
whether proposed Rule 910 imposes any collection of information
requirements that the Commission has not considered.
L. Prohibition During Phase-In Period--Rule 911 of Regulation SBSR
The Commission preliminarily does not believe that proposed Rule
911 would be a ''collection of information'' within the meaning of the
PRA. Proposed Rule 911 would restrict the ability of a reporting party
to report a SBS to one registered SDR rather than another, but would
not otherwise create any duties or impose any collection of information
requirements beyond those already required by proposed Rule 901. The
Commission requests public comment on its burden estimates. The
Commission also solicits comment whether proposed Rule 911 imposes any
collection of information requirements that the Commission has not
considered.
M. Amendments to Rule 31
The proposed amendments to Rule 31 under the Exchange Act do not
contain any ``collection of information requirements'' within the
meaning of the PRA. Rule 31(a)(11) sets forth a list of ``exempt
sales'' to which Section 31 fees do not apply. The proposed amendment
of Rule 31 would add ``security-based swaps'' to the list of ``exempt
sales,'' and thereby exempt SBSs from Section 31 fees. The proposed
amendment would require no collection of information, nor would it
impose any burden on parties to SBS transactions. The Commission
requests public comment on its burden estimates. The Commission also
solicits comment whether the proposed amendment to Rule 31 imposes any
collection of information requirements that the Commission has not
considered.
XIV. Cost-Benefit Analysis
On July 21, 2010, the President signed the Dodd-Frank Act into law.
The Dodd-Frank Act was enacted to, among other things, promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\280\ Subtitle B of Title VII
designates the Commission to oversee the SBS markets and develop
appropriate regulations.
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\280\ See Public Law 111-203 Preamble.
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The OTC derivatives markets, which have been described as
opaque,\281\ have grown exponentially in recent years \282\ and are
capable of affecting significant sectors of the U.S. economy. One of
the primary goals of Title VII is to increase the transparency and
efficiency of the OTC derivatives market and to reduce the potential
for counterparty and systemic risk.\283\
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\281\ With respect to CDSs, for example, the Government
Accountability Office found that ``comprehensive and consistent data
on the overall market have not been readily available,'' that
``authoritative information about the actual size of the CDS market
is generally not available,'' and that regulators currently are
unable ``to monitor activities across the market.'' Government
Accountability Office, ``Systemic Risk: Regulatory Oversight and
Recent Initiatives to Address Risk Posed by Credit Default Swaps,''
GAO-09-397T (March 2009), at 2, 5, 27. See Robert E. Litan, ``The
Derivatives Dealers' Club and Derivatives Market Reform,'' Brookings
Institution (April 7, 2010) at 15-20; Michael Mackenzie, Era of an
opaque swaps market ends, Fin. Times (June 25, 2010).
\282\ The BIS semi-annual reports on the swap markets summarizes
developments in the OTC derivatives markets. The report breaks down
trading volumes and other statistics for various classes of
derivatives, including CDS, interest rate and foreign exchange
derivatives, and equity and commodity derivatives. The report covers
derivatives trading within the G10 countries. The most recent
report, available at http://www.bis.org/statistics/derstats.htm,
covers the period through the last quarter of 2009.
\283\ See ``Financial Regulatory Reform--A New Foundation:
Rebuilding Financial Supervision and Regulation,'' U.S. Department
of the Treasury, at 47-48 (June 17, 2009).
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The Dodd-Frank Act amends the Exchange Act to require the
Commission to adopt rules providing for, among other things: (1) The
reporting of SBS to a registered SDR or to the Commission; and (2)
real-time public dissemination of SBS transaction, volume, and pricing
information. To accomplish this mandate, the Commission today is
proposing Regulation SBSR, a set of reporting and related rules for SBS
transactions.
In general, proposed Regulation SBSR would provide for the
reporting of SBS information that falls into three broad categories:
(1) Information that must be reported in real time pursuant to proposed
Rule 901(c); (2) additional information that must be reported pursuant
to proposed Rule 901(d) within specified timeframes, depending on
whether the transaction is traded or confirmed electronically or
manually; and (3) life cycle events that must be reported pursuant to
proposed Rule 901(e). Proposed Regulation SBSR would require registered
SDRs to publicly disseminate certain SBS information in real time.
Proposed Regulation SBSR would identify the SBS information that would
be required to be reported, establish reporting obligations, and
specify the timeframes for reporting and disseminating information.
Proposed Regulation SBSR would require SBS market participants and
registered SDRs to establish appropriate policies and procedures
governing the transaction reporting process. In addition, proposed
Regulation SBSR would require each registered SDR to register with the
Commission as a SIP. Together, Regulation SBSR is designed to provide a
more transparent market for SBSs.
Broadly, the Commission anticipates that Regulation SBSR may have
several overarching benefits to the SBS markets. These include the
following:
Improvements in Market Quality. The Commission's rules on reporting
and public dissemination of SBS transaction data could have very
significant benefits to the SBS market. Comprehensive, timely, and
accurate reporting should allow for better regulation of the SBS
market, which should promote greater confidence and participation in
the market. Post-trade transparency could result in lower transaction
costs, greater price competition, and greater participation in the
market. These benefits could extend beyond the SBS market to the
securities markets more generally, which are increasingly
interconnected.
Improved Risk Management. As SBS market participants implement
transaction reporting programs, they would be required to review their
current positions in SBSs and report those open positions to a
registered SDR. Incorporating all positions into an OMS sufficient to
permit ongoing reporting as required under proposed Regulation SBSR
could result in a direct and immediate benefit to market
[[Page 75262]]
participants by potentially reducing the risk associated with current
open positions. Further, because proposed Regulation SBSR would require
market participants to inventory their positions in SBS to determine
what needs to be reported, the proposal should enable more robust risk
monitoring and management going forward.
Economies and Greater Efficiency. Automation and systems
development associated with SBS transaction reporting required by
proposed Regulation SBSR could provide market participants new tools to
process transactions at a lower expense per transaction. Such increased
efficiency would enable participants to handle increased volumes of
SBSs with less marginal expense, or existing volumes of SBSs with
greater efficiency. In addition, proposed Regulation SBSR is designed
to further the development of internationally recognized standards for
establishing reference identifiers in the financial services industry.
A common set of reference identifiers for participants and products
could yield significant efficiencies in both the public and private
sectors. Information about financial firms operating in different
functional areas and different jurisdictions could more readily be
identified by regulators. In addition, financial firms could eliminate
the use of multiple proprietary reference systems and move to a single,
widely accepted system.
Improved Commission Oversight. SBS transaction reporting under
proposed Regulation SBSR would provide a means for the Commission to
gain a better understanding of the SBS market--including aggregate
positions both in specific SBS instruments and positions taken by
individual entities or groups--by requiring transaction data both on
newly executed SBS and unexpired pre-enactment SBS to be reported to a
registered SDR. The reporting of SBS transactions should thus provide
the Commission and other regulators a better understanding of the
current risks in the SBS market. For example, having such data
available would help Commission staff to analyze the SBS market as a
whole in a manner that is not possible currently. In this way,
Regulation SBSR would support the Commission's supervisory function
over the SBS market, as required by Congress in the Dodd-Frank Act.
Further, proposed Regulation SBSR should facilitate completing the
reports the Commission is required to provide to Congress on SBSs and
the SBS marketplace.\284\
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\284\ See Section 719 of the Dodd-Frank Act.
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While the Commission believes that proposed Regulation SBSR would
result in significant benefits to SBS market participants, the
Commission is cognizant that the proposed rules would entail costs, as
more fully discussed below. The proposed rules could, for example,
require market participants to begin retaining additional data related
to SBS transactions. The rules also could require market participants
to modify existing internal processes and systems. The Commission
estimates that the rules comprising proposed Regulation SBSR could
affect 5,000 participants, including 1,000 reporting parties, and
several million SBSs annually.
The Commission is sensitive to the costs and benefits associated
with proposed Regulation SBSR. The Commission requests comment on the
costs and benefits associated with the individual rules, and its cost-
benefit analysis thereof, including identification and assessments of
any costs and benefits not discussed in this analysis. The Commission
also seeks comment on the accuracy of any of the benefits identified
and also welcomes comments on the accuracy of any of the cost
estimates. Finally, the Commission encourages commenters to identify,
discuss, analyze, and supply relevant data, information, or statistics
regarding any such costs or benefits.
A. Definitions--Rule 900 of Regulation SBSR
1. Benefits
By defining key terms, proposed Rule 900 would provide increased
clarity about the scope and application of proposed Regulation SBSR.
This should help market participants subject to the proposal understand
their obligations and make appropriate compliance plans. Clearly
defined terms should also help the Commission in its oversight
responsibilities.
2. Costs
The Commission preliminarily believes that proposed Rule 900 would
not entail any material costs to market participants. Proposed Rule 900
would define terms used in Regulation SBSR. The rule would not impose
any obligation or duty.
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 900 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
248. How can the Commission more accurately estimate the costs and
benefits of proposed Rule 900?
249. Would proposed Rule 900 create any additional costs or
benefits not discussed here?
B. Reporting Obligations--Rule 901 of Regulation SBSR
Pursuant to proposed Rule 901, all SBS transactions must be
reported. Together, sections (a), (b), (c), (d), (e), (h), and (i) of
proposed Rule 901 set forth the parameters that SBS counterparties must
follow to report SBS transactions to a registered SDR or, if there is
no registered SDR that would accept the information, to the Commission.
Proposed Rule 901(a) would specify which counterparty would be the
``reporting party'' for a SBS transaction. Proposed Rule 901(b) would
require a reporting party to report the information required under
proposed Rule 901 to a registered SDR or, if there is no registered SDR
that would accept the information, to the Commission. Proposed Rule 901
divides the SBS information that would be required to be reported into
three broad categories: (1) Information that would be required to be
reported in real time pursuant to proposed Rule 901(c) and publicly
disseminated pursuant to proposed Rule 902; (2) additional information
that would be required to be reported pursuant to proposed Rule
901(d)(1) within the timeframes specified in proposed Rule 901(d)(2);
and (3) life cycle events that must be reported pursuant to proposed
Rule 901(e), the timeframes for which would vary depending on whether
the transaction was executed and confirmed electronically or manually.
The information that would be reported under proposed Rule 901(d)(1)
would not be publicly disseminated. Proposed Rule 901(i) would require
the reporting of the information detailed in proposed Rules 901(c) and
(d), to the extent such information is available, for pre-enactment
SBSs and transitional SBSs.
Proposed Rule 901(f) would require a registered SDR to time stamp,
to the second, its receipt of any information submitted to it pursuant
to proposed Rules 901(c), (d), or (e). Proposed Rule 901(g) would
require a registered SDR to assign a transaction ID to each SBS
reported by a reporting party.
1. Benefits
The SBS transaction information required to be reported pursuant to
proposed Rule 901 would benefit market participants and the SBS
[[Page 75263]]
marketplace. First, the Commission preliminarily believes that, by
setting out the requirements for the reporting of each SBS transaction
to a registered SDR, proposed Rule 901 would provide the registered SDR
with the SBS transaction information necessary to support public
dissemination, as required by proposed Rule 902. Additionally, by
requiring real-time reporting of certain SBS transaction data, proposed
Rule 901, together with proposed Rule 902, would provide the necessary
framework to enable public dissemination of SBS transactions in real
time as required under proposed Rule 902. Together, proposed Rules 901
and 902 will enable market participants and regulatory authorities to
know the current state of the SBS markets and track it over time.
To comply with proposed Rule 901, reporting parties--which are the
largest and most actively engaged participants in the SBS market--would
likely need to establish and maintain OMSs capable of supporting real-
time and additional reporting. The Commission anticipates that proposed
Rule 901 would have the effect of promoting efforts by reporting
parties to inventory their positions in SBSs, as each determines what
information needs to be reported. This effect could encourage
management review of internal procedures and controls by these
reporting parties.
In addition, proposed Rule 901 would provide a means for the
Commission to gain a better understanding of the SBS market, including
the size and scope of that market, as the Commission would have access
to data held by a registered SDR.\285\ Having such data available
should help Commission staff to analyze the SBS market as a whole and
identify risks. In this way, proposed Rule 901 would support the
Commission's supervisory function over the SBS market as required by
Congress in the Dodd-Frank Act. Proposed Rule 901 also could facilitate
the reports the Commission is required to provide to Congress on SBS
and the SBS marketplace.\286\
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\285\ See, e.g., 15 U.S.C. 78m(n)(5)(D) (requiring a registered
SDR to provide the Commission with direct electronic access to its
data).
\286\ See Section 719 of the Dodd-Frank Act.
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The information reported by reporting parties pursuant to proposed
Rule 901 would be used by registered SDRs to publicly disseminate real-
time reports of SBS transactions, and to retain SBS transaction and
position information for use by regulators. The reporting requirements
of proposed Rule 901 are designed to ensure that important information
about SBSs is reported and, ultimately available to market
participants, through the market data feed disseminated by a registered
SDR.
The Commission further preliminarily believes that the time stamp
and transaction ID required to be added by the registered SDR under
proposed Rules 901(f) and (g) would facilitate data management by the
registered SDR, as well as market supervision and oversight by the
Commission and other regulatory authorities.
Generally, the availability of additional market information, along
with the ability of the Commission and other regulators to use
information about SBS transactions reported to and held by registered
SDRs, would result in more robust prudential and systemic regulation.
The Commission and other regulators would use information about SBS
transactions reported to and held by registered SDRs to conduct both
prudential and systemic regulation, as well as to examine for improper
behavior and to take enforcement actions, as appropriate. Specifying
general types of information to be reported and publicly disseminated
could increase the efficiency and level of standardization in the SBS
market.
Proposed Rule 901 would prescribe only broad categories of SBS data
to be reported. However, proposed Rule 907(a)(1) would require each
registered SDR to enumerate specific data elements to be reported, and
to specify acceptable data formats. This approach would provide for the
efficient accommodation of evolving industry conventions in the
reporting of SBS data. The requirement that all trades be reported to a
registered SDR for public dissemination, regardless of trading venue,
would reduce the coordination costs that would exist if numerous
parties were independently disseminating SBS data. In this way,
proposed Rule 901 would increase the uniformity in the SBS data that is
disseminated under proposed Rule 902.
Proposed Rule 901(i) would also provide important benefits. By
requiring reporting of pre-enactment and transitional SBS transactions,
proposed Rule 901(i) would provide the Commission with insight as to
outstanding notional size, number of transactions, and number and type
of participants in the SBS market. This would provide a starting
benchmark against which to assess the development of the SBS market
over time and, thus, represents a first step toward a more transparent
and well regulated market for SBSs. The data reported pursuant to
proposed Rule 901(i) also could help the Commission prepare the reports
that it is required to provide to Congress. Further, proposed Rule
901(i) would require market participants to inventory their positions
in SBS to determine what information needs to be reported, which could
benefit market participants by encouraging management review of their
internal procedures and controls.
The transaction ID required by proposed Rule 901(g) also would
provide an important benefit by facilitating the reporting of
subsequent, related SBS transactions that may be submitted to a
registered SDR (e.g., a transaction report regarding a SBS life cycle
event, or report to correct an error in a previously submitted report).
Regulators also would benefit by having an easy way to refer to
specific prior transactions.
Proposed Rule 901 would require reporting parties, to the extent
they do not already possess systems for electronically capturing and
transmitting data about their SBS transactions, to build or otherwise
obtain such systems. Such systems would be necessary to report data
within the timeframes set forth in proposed Rules 901(c) and (d),
because it is unlikely that manual processes could capture and report
in real time the numerous data elements relating to a SBS. There could
be substantial benefits in the form of reduced operational risk in
requiring all reporting parties to have such capability. Systematizing
all SBS transaction information more quickly would support effective
risk management, as counterparties, registered SDRs, clearing agencies
(in some cases), and regulators would obtain accurate knowledge of new
SBS transactions more quickly. Reporting parties that obtain such
systems could see additional benefits in being able to process and risk
manage their existing positions more effectively, or use their expanded
capability to participate further in the SBS market.
Finally, proposed Rule 901 could result in significant benefits by
encouraging the creation and widespread use of generally accepted
standards for reference information. Proposed Rule 901 would require
the reporting of a participant ID of each counterparty and, as
applicable, the broker ID, desk ID, and trader ID of the reporting
party or its broker. The Commission preliminarily believes that
reporting of this information would help ensure effective oversight,
enforcement, and surveillance of the SBS market by the Commission and
other regulators. For example, activity could be tracked by a
particular participant, a particular desk, or a particular trader.
Regulators could observe patterns and connections in trading activity,
or examine whether
[[Page 75264]]
a trader had engaged in questionable trading activity across different
SBS instruments. These identifiers also would facilitate aggregation
and monitoring of the positions of SBS counterparties, which could be
of significant benefit for prudential oversight and systemic risk
management.
The Commission understands that some efforts have been undertaken--
in both the private and public sectors, both domestically and
internationally--to establish a comprehensive and widely accepted
system for identifying entities that participate not just in the SBS
market, but in the financial markets generally. Such a system would be
of significant benefit to regulators worldwide, as each market
participant could readily be identified using a single reference code
regardless of the jurisdiction or product market in which the market
participant was engaging. Such a system also could be of significant
benefit to the private sector, as market participants would have a
common identification system for all counterparties and reference
entities, and would no longer have to use multiple proprietary
nomenclature systems. The enactment of the Dodd-Frank Act and the
establishment of a comprehensive system for reporting and dissemination
of SBSs--and for reporting and dissemination of swaps, under
jurisdiction of the CFTC--offer a unique opportunity to facilitate the
establishment of a comprehensive and widely accepted system for
identifying entities that participate not just in the SBS market, but
in the financial markets generally.
2. Costs
a. For Reporting Parties
The proposed SBS reporting requirements would impose initial and
ongoing costs on reporting parties. The Commission preliminarily
believes that these costs would be a function of, among other things,
the number of reportable SBS transactions and the data elements
required to be collected for each SBS transaction.
The Commission obtained information from publicly available sources
and consulted with industry participants in an effort to quantify the
number of aggregate SBS transactions on an annual basis. According to
publicly available data from DTCC, recently, there have been an average
of approximately 36,000 CDS transactions per day,\287\ corresponding to
a total number of CDS transactions of approximately 13,140,000 per
year. The Commission preliminarily believes that CDSs represent 85% of
all SBS transactions.\288\ Accordingly, and to the extent that
historical market activity is a reasonable predictor of future
activity,\289\ the Commission preliminarily estimates that the total
number of SBS transactions that would be subject to proposed Rule 901
on an annual basis would be approximately 15,460,000, which is an
average of approximately 42 per reporting party per day.\290\
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\287\ See, e.g., http://www.dtcc.com/products/derivserv/data_table_iii.php (weekly data as updated by DTCC).
\288\ The Commission's estimate is based on internal analysis of
available SBS market data. The Commission is seeking comment about
the overall size of the SBS market.
\289\ The Commission notes that regulation of the SBS markets,
including by means of proposed Regulation SBSR, could impact market
participant behavior.
\290\ These figures are based on the following: [13,140,000/
0.85] = 15,458,824. [((15,458,824 estimated SBS transactions)/(1,000
estimated reporting parties))/(365 days/year)] = 42.35, or
approximately 42 transactions per day. The Commission understands
that many of these transactions may arise from previously executed
SBS transactions.
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The Commission believes that SBS market participants would face
three categories of costs to comply with proposed Rule 901. First, each
market participant would have to develop an internal OMS capable of
capturing relevant SBS transaction information so that it can be
reported. The Commission understands that, because of the manner in
which participants transact certain SBSs with certain transaction
details being added post-execution, an OMS would likely need to link
both to a market participant's trade desk--to permit real-time
transaction reporting--and to the market participant's back office--to
facilitate reporting of complete transactions as required under
proposed Rule 901. The OMS would also have to include or be connected
to a system designed to store SBS transaction information.
Second, each reporting party would have to implement a reporting
mechanism. This would include a system that ``packages'' SBS
transaction information from the entity's OMS, sends the information,
and tracks it. The reporting mechanism would also include necessary
data transmission lines to the appropriate registered SDR.
Third, each reporting party would have to establish an appropriate
compliance program and support for the operation of the OMS and
reporting mechanism. Relevant elements of the compliance program would
include transaction verification and validation protocols, the ability
to identify and correct erroneous transaction reports, necessary
technical, administrative, and legal support. Additional operational
support would include new product development, systems upgrades, and
ongoing maintenance.
Based on conversations with industry participants, the Commission
preliminarily believes that the reporting timeframes mandated by
proposed Rules 901(c), (d), and (e) may be costly to achieve for
reporting parties that do not currently have the capabilities to
perform those functions in those time frames, requiring additional
expenditure of resources to satisfy these requirements. For example,
reporting parties that do not currently have the capability to capture
SBS trade information and provide it to a registered SDR in real time
would be required by proposed Regulation SBSR to obtain such
capability.
Proposed Rule 901 would not provide an explicit list of data
elements. Instead, proposed Regulation SBS would provide a registered
SDR with flexibility to determine the specifics of the form and format
for data to be reported under proposed Rule 901. Thus, to the extent
reported and disseminated SBS transaction data are not uniform, market
participants and regulators could face a cost to standardize and
interpret them.
Internal Order Management. To comply with their reporting
obligations, reporting parties would be required to develop and
maintain an internal OMS that can capture relevant SBS data. The
Commission preliminarily estimates that, to capture SBS data in a
manner sufficient to facilitate reporting under proposed Rule 901 would
impose an initial one-time aggregate cost of approximately $96,650,000,
which corresponds to $96,650 for each reporting party.\291\ This
estimate includes an estimate of the costs required to amend internal
procedures, design or reprogram systems, and implement processes to
ensure that SBS transaction data are captured and preserved. The
Commission further preliminarily estimates that capturing SBS data in a
manner sufficient to facilitate reporting under proposed Rule 901 would
impose an ongoing annual aggregate cost of approximately $73,144,000,
which corresponds to
[[Page 75265]]
$73,144 for each reporting party.\292\ This figure would include day-
to-day support of the OMS, as well as an estimate of the amortized
annual cost associated with system upgrades and periodic ``re-
platforming'' (i.e., implementing significant updates based on new
technology). In addition, to capture and maintain relevant information
and documents, the Commission preliminarily estimates that all
reporting parties could incur an initial and ongoing aggregate
annualized cost of $1,000,000, which corresponds to $1,000 for each
reporting party.\293\ The figure is an estimate of the hardware and
associated maintenance costs for sufficient memory to capture and store
SBS transactions, including redundant back-up systems.
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\291\ This estimate is based on the following: [((Sr. Programmer
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) +
(Director of Compliance (5 hours) at $426 per hour) + (Compliance
Attorney (20 hours) at $291 per hour) x (1,000 reporting parties)] =
$96,650,000. The Commission preliminarily believes that information
on SBS transactions is currently being retained by counterparties in
the ordinary course of business, and as a practical matter should
not result in any significant new burdens.
\292\ This estimate is based on the following: [((Sr. Programmer
(32 hours) at $285 per hour) + (Sr. Systems Analyst (32 hours) at
$251 per hour) + (Compliance Manager (60 hours) at $294 per hour) +
(Compliance Clerk (240 hours) at $59 per hour) + (Director of
Compliance (24 hours) at $426 per hour + (Compliance Attorney (48
hours) at $291 per hour) x (1,000 reporting parties)] = $73,144,000.
\293\ This estimate is based on discussions of Commission staff
with various market participants and is calculated as follows:
[$250/gigabyte of storage capacity x (4 gigabytes of storage) x
(1,000 participants)] = $1,000,000. The Commission preliminarily
believes that storage costs associated with saving relevant SBS
information and documents would not vary significantly between the
first year and subsequent years. Accordingly, the Commission has
preliminarily estimated the initial and ongoing storage costs to be
the same. Moreover, the Commission believes the per-entity annual
data storage figure of $1,000 to be a reasonable average. Some
reporting parties may face higher costs, while others would simply
use existing storage resources.
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Summing these costs, the Commission preliminarily estimates the
initial aggregate annualized cost for reporting parties for internal
order management under proposed Rule 901 would be $170,794,000, which
corresponds to $170,794 for each reporting party.\294\ The Commission
further preliminarily estimates that the ongoing aggregate annualized
costs on reporting parties for internal order management under proposed
Rule 901 would be $74,144,000, which corresponds to $74,144 for each
reporting party.\295\
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\294\ This estimate is based on the following: [(($96,650 +
$73,144 + $1,000) x (1,000 reporting parties)] = $170,794,000, which
corresponds to $170,794 burden hours per reporting party.
\295\ This is estimate is based on the following: (($73,144 +
$1,000) x 1,000 reporting parties) = $74,144,000.
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SBS Reporting Mechanism. Each reporting party would incur initial
one-time costs to establish connectivity with and report SBS
transactions to a registered SDR. Depending on the number of SBS asset
classes that a reporting party transacts in and which registered SDRs
accept the resulting SBS transaction reports, multiple connections to
different registered SDRs could be necessary. For purposes of
estimating relevant costs, the Commission preliminarily estimates that,
on average, each reporting party would require connections to two
registered SDRs.\296\
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\296\ The Commission derived this estimate as follows. First,
the Commission believes that initially there would be only a limited
number of registered SDRs, and that the number would not exceed ten.
Many reporting parties might transact in only some classes of SBSs.
Thus, even if each registered SDR accepted transaction reports only
for a single SBS asset class, the total number of connections needed
by many reporting parties would likely be limited. The Commission
also preliminarily believes that, for operational efficiency, a
participant would seek to use only one registered SDR per asset
class to obtain repository services. Next, reporting parties that
required a significant number of connections to registered SDRs
could engage a third party--a dealer or connectivity services
provider--instead of independently establishing their own
connections. Accordingly, the Commission preliminarily believes that
one connection may suffice for many reporting parties.
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On this basis, the Commission preliminarily estimates that the cost
to establish and maintain connectivity to a registered SDR to
facilitate the reporting required by proposed Rule 901 would impose an
annual (first-year and ongoing) aggregate cost of approximately
$200,000,000, which corresponds to $200,000 for each reporting
party.\297\ The Commission understands that many reporting parties
already have established linkages to entities that may register as
SDRs, which could significantly reduce the out-of-pocket costs
associated with this establishing the reporting function contemplated
by proposed Rule 901.
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\297\ This estimate is based on discussions of Commission staff
with various market participants, as well as the Commission's
experience regarding connectivity between securities market
participants for data reporting purposes. The Commission derived the
total estimated expense from the following: ($100,000 hardware- and
software-related expenses, including necessary backup and
redundancy, per SDR connection) x (2 SDR connections per reporting
party) x (1,000 reporting parties) = $200,000,000.
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Moreover, the Commission believes that establishing a reporting
mechanism for SBS transactions would impose internal costs on each
reporting party, including the development of systems necessary to
capture and send information from the entity's OMS to the relevant
registered SDR, as well as corresponding testing and support. The
Commission preliminarily estimates an initial one-time aggregate cost
of $46,657,000, which corresponds to an initial one-time cost of
$46,657 for each reporting party.\298\ In addition, the Commission
preliminarily estimates that reporting specific SBS transactions to a
registered SDR as required by proposed Rule 901 would impose an annual
aggregate cost (first-year and ongoing) of approximately $5,400,000,
which corresponds to approximately $5,400 for each reporting
party.\299\
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\298\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer (80
hours) at $285 per hour) + (Sr. Systems Analyst (80 hours) at $251
per hour) + (Compliance Manager (5 hours) at $294 per hour) +
(Director of Compliance (2 hours) at $426 per hour) + (Compliance
Attorney (5 hours) at $291 per hour) x (1,000 reporting parties)] =
$46,657,000. The Commission preliminarily believes that information
on SBS transactions is currently being retained by market
participants in the ordinary course of business, and as a practical
matter should not result in any significant new costs.
\299\ The Commission preliminarily believes that the costs of
having an operational reporting system capable of effectively
processing these transactions are covered in the cost estimates for
a compliance and ongoing support system. See infra notes 302 to 305.
The Commission preliminarily believes that the actual reporting of
transactions represents an incremental additional cost. The
referenced figure is based on discussions with various market
participants and is calculated as follows: [(Compliance Clerk (40
hours) at $59 per hour) + (Sr. Computer Operator (40 hours) at $76
per hour)) x (1,000 reporting parties)] = $5,400,000.
---------------------------------------------------------------------------
Thus, the Commission preliminarily estimates the initial, aggregate
annualized cost for reporting parties submitting SBS transaction
reports under proposed Rule 901 would be $252,057,000, which
corresponds to $252,057 for each reporting party.\300\ The Commission
further preliminarily estimates that the ongoing, aggregate annualized
cost on reporting parties for submitting SBS transaction reports under
proposed Rule 901 would be $205,400,000, which corresponds to $205,400
for each reporting party.\301\
---------------------------------------------------------------------------
\300\ This estimate is based on the following: (($46,657 +
$5,400 + $200,000) x (1,000 reporting parties)) = $252,057,000,
which corresponds to $252,057 per reporting party.
\301\ This estimate is based on the following: (($5,400 +
$200,000) x (1,000 reporting parties)) = $205,400,000, which
corresponds to $205,400 per reporting party.
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Compliance and Ongoing Support. As stated above, in complying with
proposed Rule 901, each reporting party also would need to establish
and maintain an appropriate compliance program and support for the
operation of the OMS and reporting mechanism, which would include
transaction verification and validation protocols and necessary
technical, administrative, and legal support. Additional operational
support would include new product development, systems upgrades, and
ongoing maintenance. The Commission preliminarily believes that initial
costs associated with this aspect of proposed Rule 901--i.e., the
establishment of relevant compliance capability--would also involve in
significant part the development of
[[Page 75266]]
appropriate policies and procedures, which, for those participants who
are SBS dealers or major SBS participants, is addressed in connection
with proposed Rule 906(c). A reporting party would need to design its
OMS to include tools to ensure accurate, complete reporting and employ
appropriate technical and compliance staff to maintain and support the
operation of its OMS on an ongoing basis.
The Commission preliminarily estimates that designing and
implementing an appropriate compliance and support program would impose
an initial one-time aggregate cost of approximately $51,590,000, which
corresponds to a cost of $51,590 for each reporting party.\302\ The
Commission further preliminarily estimates that maintaining its
compliance and support program would impose an ongoing annual aggregate
cost of approximately $36,572,000, which corresponds to a cost of
$36,572 for each reporting party.\303\ This figure includes day-to-day
support of the OMS, as well as an estimate of the amortized annual cost
associated with system upgrades and periodic ``re-platforming.''
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\302\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer (100
hours) at $285 per hour) + (Sr. Systems Analyst (40 hours) at $251
per hour) + (Compliance Manager (20 hours) at $294 per hour) +
(Director of Compliance (10 hours) at $426 per hour) + (Compliance
Attorney (10 hours) at $291 per hour) x (1,000 reporting parties)] =
$51,590,000.
\303\ This figure is based on discussions with various market
participants and is calculated as follows: [((Sr. Programmer (16
hours) at $285 per hour) + (Sr. Systems Analyst (16 hours) at $251
per hour) + (Compliance Manager (30 hours) at $294 per hour) +
(Compliance Clerk (120 hours) at $59 per hour) + (Director of
Compliance (12 hours) at $426 per hour) + (Compliance Attorney (24
hours) at $291 per hour) x (1,000 reporting parties)] = $36,572,000.
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates the initial
aggregate annualized costs to reporting parties for compliance and
ongoing support under proposed Rule 901 would be $88,162,000, which
corresponds to $88,162 for each reporting party.\304\ The Commission
further preliminarily estimates that the ongoing aggregate annualized
cost on reporting parties for compliance and ongoing support under
proposed Rule 901 would be $36,572,000, which corresponds to $36,572
for each reporting party.\305\
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\304\ This estimate is based on the following: (($51,590 +
$36,572) x (1,000 reporting parties)] = $88,162,000, which
corresponds to $88,162 per reporting party.
\305\ See supra note 303.
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Summing these costs, the Commission preliminarily estimates that
the initial, aggregate annualized costs associated with proposed Rule
901 would be $511,013,000, which corresponds to $511,013 per reporting
party.\306\ The Commission preliminarily estimates that the ongoing
aggregate annualized costs associated with proposed Rule 901 would be
$316,116,000, which corresponds to $316,116 per reporting party.\307\
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\306\ This estimate is based on the following: (($170,794 +
$252,057 + $88,162) x (1,000 reporting parties)) = $511,013,000,
which corresponds to $511,013 per reporting party.
\307\ This estimate is based on the following: (($74,144 +
$205,400 + $36,572) x (1,000 reporting parties)) = $316,116,000,
which corresponds to $316,116 per reporting party.
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Finally, the Commission notes that it is possible that the costs
associated with required reporting pursuant to proposed Regulation SBSR
could represent a barrier to entry for new, smaller firms that might
not have the ability or desire to comply with these reporting
requirements. To the extent that proposed Regulation SBSR causes new
firms not to enter the SBS market, this would be a cost of the
proposal. Nevertheless, the Commission preliminarily believes that
firms would be able to contract with third-party service providers,
which could facilitate their compliance with proposed Regulation SBSR.
Accordingly, the Commission preliminarily does not believe it likely
that proposed Rule 901 would, as a practical matter, act as a barrier
to new entrants. The Commission requests comment on this issue.
Reference information. The Commission, in proposed Regulation SBSR,
is not requiring the development of internationally recognized
standards for reference information that could be used across the
financial services industry. Therefore, the Commission believes that
the costs of developing and sustaining such a system should not be
considered costs of proposed Regulation SBSR. However, proposed
Regulation SBSR would require a registered SDR and its participants to
use UICs generated by such a system, if such system is able to generate
such UICs. Although the Commission believes there would be long-term
benefits for using UICs generated by such a system, there could be
short-term costs imposed on reporting parties to convert to such a
system. In addition, under these internationally recognized standards,
users of the reference information could have to pay reasonable fees to
support the system. These fees also would represent costs of proposed
Rule 901. The Commission requests comment on this issue and any
potential costs associated with the potential future use of
internationally recognized standards.
b. For Registered SDRs
Proposed Rule 901(f) would require a registered SDR to time stamp,
to the second, its receipt of any information submitted to it pursuant
to proposed Rules 901(c), (d), or (e). Proposed Rule 901(g) would
require a registered SDR to assign a transaction ID to each SBS
reported by a reporting party. The Commission preliminarily believes
that these requirements would not be significant in the context of
designing and building the technological framework that would be
required of an SDR to become registered.\308\ Therefore, the Commission
preliminarily estimates that proposed Rules 901(f) and (g) would impose
an initial aggregate one-time cost of $342,040, which corresponds to
$34,204 per registered SDR.\309\ This figure is based on an estimate of
ten registered SDRs. With regard to ongoing costs, the Commission
preliminarily estimates that proposed Rules 901(f) and (g) would impose
an ongoing aggregate annual cost of $436,440, which corresponds to
$43,644 per registered SDR.\310\ This figure represents an estimate of
the support and maintenance costs for the time stamp and transaction ID
assignment elements of a registered SDR's systems.
---------------------------------------------------------------------------
\308\ See SDR Registration Proposing Release, supra note 6.
\309\ This figure is based on discussions with various market
participants and is calculated follows: [(Sr. Programmer (80 hours)
at $285 per hour) + (Sr. Systems Analyst (20 hours) at $251 per
hour) + (Compliance Manager (8 hours) at $294 per hour) + (Director
of Compliance (4 hours) at $426 per hour) + (Compliance Attorney (8
hours) at $291 per hour) x (10 registered SDRs)] = $342,040.
\310\ This figure is based on discussions with various market
participants and is calculated as follows: [(Sr. Programmer (60
hours) at $285 per hour) + (Sr. Systems Analyst (48 hours) at $251
per hour) + (Compliance Manager (24 hours) at $294 per hour) +
(Director of Compliance (12 hours) at $426 per hour) + (Compliance
Attorney (8 hours) at $291 per hour) x (10 registered SDRs)] =
$436,440.
---------------------------------------------------------------------------
Thus, the Commission preliminarily estimates that the initial
aggregate annualized cost associated with proposed Rules 901(f) and (g)
would be $778,480, which corresponds to $77,848 per registered
SDR.\311\ Correspondingly, the Commission preliminarily estimates that
the ongoing aggregate annualized cost associated with proposed Rules
901(f) and (g) would be $436,440, which corresponds to $43,644 per
registered SDR.\312\
---------------------------------------------------------------------------
\311\ This figure is based on the following: ($34,016 + $42,240)
x (10 registered SDRs) = $778,480, which corresponds to $77,848 per
registered SDR.
\312\ See supra note 310.
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[[Page 75267]]
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 901 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
250. How can the Commission more accurately estimate the costs and
benefits?
251. What are the costs currently borne by entities covered by
proposed Rule 901 with respect to the retention of records of SBS
transactions?
252. How many entities would be affected by the proposed rule? How
many transactions would be subject to the proposed rule?
253. Are there additional costs involved in complying with the rule
that have not been identified? What are the types, and amounts, of the
costs?
254. Would the obligations imposed on reporting parties by proposed
Rule 901 be a significant enough barrier to entry to cause some firms
not to enter the SBS market? If so, how many firms might decline to
enter the market? How can the cost of their not entering the market be
tabulated? How should the Commission weigh such costs, if any, against
the anticipated benefits from increased transparency to the SBS market
from the proposal, as discussed above?
255. Can commenters assess the benefits of having comprehensive and
accurate reporting of SBS transactions to registered SDRs, which would
provide access to such information to the Commission and other
regulators? What would have been the benefits to the SBS market if such
regulatory oversight had been in place sooner?
256. What benefits and costs would there be to converting to a
reference identification system established by or on behalf of an IRSB?
What fees might be charged to support such a system? How much would
those fees be? Who would have to pay them?
257. Would there be additional benefits from the proposed rule that
have not been identified?
C. Public Dissemination of Transaction Reports--Rule 902 of Regulation
SBSR
Generally, proposed Rule 902 would require the public dissemination
of SBS transaction information. Proposed Rule 902(a) would set out the
core requirement that a registered SDR, immediately upon receipt of a
SBS transaction report of a SBS, must publicly disseminate information
about the SBS, except in the case of a block trade, that must consist
of all the information reported by the reporting party pursuant to
proposed Rule 901, plus any indicator or indicators contemplated by the
registered SDR's policies and procedures that are required by proposed
Rule 907.\313\
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\313\ In the circumstances necessitating a registered SDR's
systems to be unavailable for publicly disseminating transaction
data, the registered SDR would have to disseminate the transaction
data immediately upon its re-opening. Proposed Rule 902(c) would
prohibit the dissemination of certain information. See supra note
100 and accompanying text.
---------------------------------------------------------------------------
Proposed Rule 902(b) would require a registered SDR to publicly
disseminate a transaction report of a block trade immediately upon
receipt of information about the block trade from the reporting party.
The transaction report would consist of all the information reported by
the reporting party pursuant to proposed Rule 901(c), except for the
notional size, plus the transaction ID and an indicator that the report
represents a block trade. The registered SDR would be required to
publicly disseminate a complete transaction report for such block trade
(including the transaction ID and the full notional size) at a later
time.
1. Benefits
By reducing information asymmetries, post-trade transparency has
the potential to lower transaction costs, improve confidence in the
market, encourage participation by a larger number of market
participants, and increase liquidity in the SBS market. The current
market is opaque. Market participants, even dealers, lack an effective
mechanism to learn the prices at which other market participants
transact. In the absence of post-trade transparency, market
participants do not know whether the prices they are paying or would
pay are higher or lower than what others are paying for the same SBS
instruments. Currently, market participants resort to ``screen-
scraping'' e-mails containing indicative quotation information to
develop a sense of the market. Supplementing that effort with prompt
last-sale information would provide all market participants with more
extensive and more accurate information on which to make trading and
valuation determinations.
SBSs are complex derivative instruments, and there exists no single
accepted way to model a SBS for pricing purposes. Post-trade pricing
and volume information could allow valuation models to be adjusted to
reflect how SBS counterparties have valued a SBS instrument at a
specific moment in time. Public, real-time dissemination of last-sale
information also could aid dealers in deriving better quotations,
because they would know the prices at which other market participants
have recently traded. This information could aid end users in
evaluating current quotations, because they could inquire from dealers
why the quotations that the dealers are providing them differ from the
prices of recently executed transactions. Furthermore, end users would
be afforded the means of testing whether quotations offered by dealers
before the last sale were close to the price at which the last sale was
executed. In this manner, post-trade transparency could promote price
competition and more efficient price discovery, and ultimately lower
transaction costs in the SBS market.
Post-trade transparency of SBSs, as required by proposed Rule 902,
could benefit the financial markets generally by improving market
participants' ability to value SBSs, particularly if the trade
information is used as an input to, rather than as a substitute for,
independent valuations and pricing decisions by other market
participants. In transparent markets with sufficient liquidity,
valuations generally can be derived from recent quotations and/or last-
sale prices. However, in opaque markets or markets with low liquidity,
recent quotations or last-sale prices may not exist or, if they do
exist, may not be widely available. Therefore, market participants
holding assets that trade in opaque markets or markets with low
liquidity frequently rely instead on pricing models. These models might
be based on assumptions subject to the evaluator's discretion, and can
be imprecise. Thus, market participants holding the same asset but
using different valuation models might arrive at significantly
different values for the same asset.
Valuation models could be improved to the extent that they consider
last-sale reports of the asset to be valued, reports of related assets,
or reports of benchmark products that include the asset to be valued or
closely related assets, even if those reports are dated. There is
evidence to suggest that post-trade transparency helps reduce the range
of valuations of assets that trade in illiquid markets.\314\ Thus,
post-trade transparency in the SBS market could result in more accurate
valuations of SBSs generally--particularly if trade information is used
as an input to,
[[Page 75268]]
rather than a substitute for, independent valuations by other market
participants--as it would allow all market participants to know how SBS
counterparties priced the SBS at a specific point in time. Especially
with complex instruments, investment decisions generally are predicated
a significant amount of due diligence to value the instruments
properly. A post-trade transparency system permits other market
participants to derive at least some informational benefit from
obtaining the views of the two counterparties who did a particular
trade.
---------------------------------------------------------------------------
\314\ See Gjergji Cici, Scott Gibson, John J. Merrick, Jr.,
``Missing the Marks? Dispersion in Corporate Bond Valuations Across
Mutual Funds,'' draft paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1104508.
---------------------------------------------------------------------------
Furthermore, better valuations could create a benefit in the form
of more efficient capital allocation, which is premised on accurate
knowledge of asset prices. Asset prices that are too high could result
in a misallocation of capital, as investors demand more of an asset
that cannot deliver an economic risk-adjusted return. By the same
token, assets that are inappropriately undervalued could represent
investment opportunities that will likely not receive enough capital
because investors do not realize that a good risk-adjusted return is
available. To the extent that post-trade transparency of SBS
transactions enables asset valuations to move closer to their
fundamental value, capital could be more efficiently allocated.
Better valuations resulting from post-trade transparency of SBSs
also could reduce prudential and systemic risks. Some financial
institutions, including many of the most systemically important
financial institutions, have large portfolios of SBSs. The financial
system could benefit if the portfolios of these institutions were more
accurately valued. To the extent that post-trade transparency affirms
the valuation of an institution's portfolio, regulators, the individual
firm, and the market as a whole could be more certain as to whether the
firm would or would not pose prudential or systemic risks. In some
cases, however, post-trade transparency in the SBS market might cause
an individual firm to revalue its positions and lower the overall value
of its portfolio. The sooner that accurate valuations can be made, the
more quickly that regulators and the individual firm could take
appropriate steps to minimize the firm's prudential risk profile, and
the more quickly that regulators and other market participants could
take appropriate steps to address any systemic risk concerns raised by
that firm.
In addition, proposed Rule 902 is designed to maximize the
availability of information regarding SBS transactions to all market
participants in a way that the Commission preliminarily believes
``take[s] into account whether the public disclosure will materially
reduce market liquidity.'' \315\ Post-trade transparency, as
contemplated by proposed Rule 902, could reduce information asymmetries
among SBS market participants and thereby benefit market liquidity in
at least two ways. First, it could reduce the informational asymmetries
between market participants, allowing dealers to set quotes using
information beyond their own order flow. This could help smaller
dealers or other market participants to enter the market by reducing
the informational advantage and bargaining power of large dealers.
Second, investors with hedging needs who are at an informational
disadvantage to dealers and would have more information as to trade
prices. Such investors also could more accurately price the trade,
which would encourage their participation in the SBS market. Better
informed market participation by both dealers and investors--through
greater fairness in access to relevant pricing information--could
result in benefits in the form of an increase in overall market
liquidity.
---------------------------------------------------------------------------
\315\ 15 U.S.C. 78m(m)(1)(E)(iv).
---------------------------------------------------------------------------
Finally, real-time public dissemination of SBS transaction reports
could have effects on the overall volume of the SBS market, which could
have certain benefits. Greater transparency could result in greater
confidence in the SBS market, resulting in more market participants
being willing to trade, or the same number of market participants being
willing to trade more often. These additional transactions could result
in better allocation of risk across the financial system. On the other
hand, there could be a benefit even if fewer SBS transactions occur
because of proposed Regulation SBSR. This could be the case if market
participants that are unable or unwilling to properly manage the
attendant risks of participation in the SBS market are deterred from
participating, or if there were a reduction in the number of SBS
transactions where there is a significant information asymmetry between
the counterparties. In the latter case, there could be a benefit if
uninformed parties are deterred from unwittingly taking on imprudent
positions in SBSs.
2. Costs
A potential cost of post-trade transparency that is often cited by
market participants, particularly dealers, is that it increases
inventory risks. Dealers often enter trades with their customers as a
liquidity supplier. A potential consequence of post-trade transparency
is that dealers trying to hedge inventory following a trade are put in
a weaker bargaining position relative to subsequent counterparties, and
will either raise the liquidity fee charged to their clients or refuse
to accommodate such trades. Such behavior could lead to lower trading
volume and reduce the ability of market participants to manage risk,
both of which could have a negative welfare effect on all market
participants.
In an opaque market, market participants have to rely primarily on
their understanding of the market's fundamentals to arrive at a price
at which they would be willing to assume risk. With immediate real-time
public dissemination of a block trade, however, market participants who
might be willing to offset that risk--i.e., other dealers and natural
shorts--could extract rents from a dealer that takes a large risk
position from a counterparty. Because the initial dealer would not
internalize those higher costs, it would most likely seek to pass those
costs on to the counterparty in the form of a higher price for the
initial SBS. This could lead to less liquidity in the SBS market, and
thus lower trading volume and less ability for market participants to
manage risk. It also might be argued that increased post-trade
transparency could drive large trades to other markets that offer the
opacity desired by traders, creating fragmentation and harming price
efficiency and liquidity. This possibility is consistent with the
argument that large, informed traders may prefer a less transparent
trading environment that allows them to minimize the price impact of
their trades. Real-time public dissemination of SBS transaction
information, therefore, could cause certain market participants to
trade less frequently or to exit the market completely. It would be
difficult at this stage to estimate the likelihood of this occurring
and, if does occur, what the costs would be. The Commission invites
comment on this issue.
Another potential cost of post-trade transparency in the SBS
market, as contemplated by proposed Rule 902, is that last-sale prints,
particularly in infrequently traded products, could be the result of
unusual conditions that do not reflect the economic fundamentals of the
SBS instrument. For instance, if a large market participant failed
resulting in the liquidation of its portfolio, fire sale prices could
have the effect of requiring other market participants to unduly mark
down the value of their portfolios. This could cause additional market
stress,
[[Page 75269]]
particularly through the triggering of additional margin calls. In
these circumstances, independent evaluations and decision-making that
incorporates post-trade information can be important to stabilizing the
markets.
Simultaneously with this proposal, the Commission is proposing new
Rules 13n-1 through 13n-11 under the Exchange Act relating to the SDR
registration process, the duties of SDRs, and their core
principles.\316\ The SDR Registration Proposing Release covers
anticipated collections of information with respect to various aspects
of establishing and operating an SDR, including its start-up and
ongoing operations, and describes the costs that complying with the
proposed rules would entail. The Commission preliminarily believes that
a registered SDR would be able to integrate the functions outlined in
new Rules 13n-1 through 13n-11 with the capability to publicly
disseminate real-time SBS transaction reports required under proposed
Rule 902 as part of its overall system development. Accordingly, the
Commission believes that the costs associated with enabling and
maintaining compliance with proposed Rule 902 would, as a practical
matter, represent a portion of the SDR's overall systems development
budget and process. For purposes of the PRA, the Commission
preliminarily estimated that implementing and complying with the real-
time public dissemination requirement of proposed Rule 902 would add an
additional 20% to the start-up and ongoing operational expenses that
would otherwise be required of a registered SDR.\317\
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\316\ See SDR Registration Proposing Release, supra note 6.
\317\ See Section V.D.2 (SDR Duties, Data Collection and
Maintenance, Automated Systems, and Direct Electronic Access) of the
SDR Registration Proposing Release. This estimate is based on the
input from potential SDRs and includes time necessary to design and
program a registered SDR's system to calculate and disseminate
initial and end of day block trade reports as well as annual costs
associated with systems testing and maintenance necessary for the
special handling of block trades. These figures do not include the
development of policies and procedures necessary to calculate block
trade thresholds pursuant to proposed Rule 907(b).
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On this basis, the Commission preliminarily estimates that the
initial one-time aggregate costs associated with real-time public
dissemination for development and implementation of the systems needed
to disseminate the required transaction information and for necessary
software and hardware would be $40,004,000 million, which corresponds
to $4,000,400 per registered SDR.\318\ In addition, the Commission
preliminarily estimates that aggregate annual costs for systems and
connectivity upgrades associated with real-time public dissemination
would be $24,002,400 million, which corresponds to $2,400,240 per
registered SDR.\319\ Thus, the initial aggregate costs associated with
proposed Rule 902 would be $64,006,400, which corresponds to $6,400,640
per registered SDR.\320\
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\318\ The Commission derived this estimate from the following: [
(Attorney (1,400 hours) at $316 per hour) + (Compliance Manager
(1,600 hours) at $294 per hour) + (Programmer Analyst (4,000 hours)
at $190 per hour) + (Senior Business Analyst (1,400 hours) at $234
per hour) x (10 registered SDRs)) + ($2,000,000 for necessary
hardware and software)] = $40,004,000. See SDR Registration
Proposing Release, supra note 6 at Section VI.B.2 (estimating the
total cost associated with establishing SDR technology systems).
\319\ The Commission derived this estimate from the following:
[(Attorney (840 hours) at $316 per hour) + (Compliance Manager (960
hours) at $294 per hour) + (Programmer Analyst (2,400 hours) at $190
per hour) + (Senior Business Analyst (840 hours) at $234 per hour) x
(10 registered SDRs)) + ($1,200,000 for necessary hardware and
software upgrades)] = $24,002,400. See SDR Registration Proposing
Release, supra note 6, at Section VI.B.2 (estimating the annual
ongoing cost associated with operating and maintaining SDR
technology systems).
\320\ This estimate is based on the following: [(($4,000,400) +
($2,400,240)) x (10 registered SDRs)] = $64,006,400, which
corresponds to $6,400,640 per registered SDR.
---------------------------------------------------------------------------
The SDR Registration Proposed Rules also address additional costs
on registered SDRs that are not included here.\321\
---------------------------------------------------------------------------
\321\ See SDR Registration Proposing Release, supra at note 6.
---------------------------------------------------------------------------
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 902 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
258. What would be the costs and benefits of post-trade
transparency in the SBS market, both in the long and the short term?
How would post-trade transparency alter the existing market structure?
259. How would post-trade transparency in the SBS market affect the
ability to hedge? Would hedging become more costly or less costly over
time? Why?
260. Would post-trade transparency have the same costs and benefits
on the SBS market similar as on other securities markets? Why or why
not?
261. The SBS market is currently almost wholly institutional. Would
this characteristic impact the costs and benefits of post-trade
transparency on the SBS market? If so, how and how much? Are the needs
of market participants in the SBS market for access to transaction
information different than the needs of market participants in other
securities markets for access to transaction information?
262. A significant amount of trading in the SBS market is currently
carried out by only a limited number of market participants. Would this
characteristic impact the costs and benefits of post-trade transparency
on the SBS market? If so, how and how much? For example, is there a
concern that it would be easier to determine the identity of the
counterparties to a SBS transaction in certain instances based on the
real-time transaction report? If so, what would be the harm, if any, of
such knowledge? Would the answer differ depending upon the liquidity of
the SBS instrument, or whether it was a customized SBS or not?
263. The SBS market is generally more illiquid than other
securities markets that have post-trade transparency regimes. How would
this characteristic impact, if at all, the effect the costs and
benefits of post-trade transparency on the SBS market? Do commenters
believe that post-trade transparency could materially reduce market
liquidity in the SBS market, or particular subsets thereof? Why and
how? Please be specific in your response and provide data to the extent
possible.
264. How would a post-trade transparency regime in SBSs affect the
costs of trading in the underlying securities? For example, how, if at
all, would the post-trade transparency regime affect liquidity in the
corporate bond market?
265. Academic studies of other securities markets generally have
found that post-trade transparency reduces transaction costs and has
not reduced market liquidity. How do those markets differ or compare to
the SBS market? How would those similarities or differences affect
post-trade transparency in the SBS market?
266. Do commenters believe that post-trade transparency could
materially reduce market liquidity in the SBS market, or particular
subsets thereof? Why and how?
267. Would proposed Rule 902 create any additional costs or
benefits not discussed here?
268. Are there any ways that the Commission can study the costs and
benefits of the dissemination delay for the size of a block trade by
creating different initial requirements by entities
[[Page 75270]]
or assets classes as part of the phase-in of the rule?
D. Coded Information--Rule 903 of Regulation SBSR
To facilitate the reporting and dissemination of SBS transactions,
as would be required under proposed Rules 901 and 902, the Commission
understands that there may--or could be developed--industry conventions
for identifying SBSs or reference entities on which SBS are based
through readily available reference codes. Proposed Rule 903 addresses
this possibility. Specifically, proposed Rule 903 would provide that a
reporting party could provide information to a registered SDR pursuant
to proposed Rule 901, and a registered SDR could publicly disseminate
information pursuant to proposed Rule 902, using codes in place of
certain data elements, provided that the information necessary to
interpret such codes is widely available on a non-fee basis.
1. Benefits
The use of such codes by a registered SDR and its participants
could give rise to significant potential benefits. First, the use of
codes could greatly improve the efficiency and accuracy of the trade
reporting system by streamlining the provision of data to the
registered SDR. Reporting just the code could replace several data
elements that otherwise would have to be reported separately. Second,
the development of a public coding system could also support greater
transparency. Coded transaction reports with key identifying
information for SBS transactions could facilitate the aggregation of
market transactions, particularly when the records are dispersed across
different registered SDRs. Third, the aggregation of SBS transaction
data through codes would also facilitate more efficient market analysis
studies, surveillance activities, and system risk monitoring by
regulators by streamlining the presentation of the SBS transaction
data. Without robust, common identifying information, the process of
aggregating market data across asset classes and entities could be
impaired, increasing the effort required for market analysis
activities.
2. Costs
Proposed Rule 903 could impose certain costs on current SBS market
participants. Some SBS market participants have developed private
coding systems.\322\ To the extent that these systems are not widely
available, proposed Rule 903 would prohibit their adoption for use by
registered SDRs and their participants in connection with the reporting
and dissemination of SBS transactions required under proposed
Regulation SBSR. Consequently, the owners of these systems may no
longer be able to market and generate income (i.e., licensing fees)
from these systems, or recover development costs associated with their
systems.
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\322\ The Commission is aware of one such product identification
system that involves six-digit reference entity identifiers and
three-digit reference obligations identifiers as well as a standard
three-digit maturity identifier.
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The Commission preliminarily believes that proposed Rule 903 would
not impose any material costs on registered SDRs or their participants.
The development and use of a coding system that is widely available on
a non-fee basis would instead likely reduce the costs associated with
reporting and disseminating SBS transactions as required under proposed
Rules 901 and 902, as market participants would not have to incur any
fees to use codes.
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 903 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
269. How can the Commission more accurately estimate the costs and
benefits?
270. Would proposed Rule 903 entail any benefits or costs not
considered by the Commission?
271. Are there costs the Commission has not considered with respect
to the use of coding systems that are widely available on a non-fee
basis? Would the use of these coding systems in fact reduce the costs
associated with the obligations under proposed Rules 901 and 902?
272. Are there coding systems that are widely available on a non-
fee basis? What, if any, costs may be associated with requiring the use
of a coding system that is widely available on a non-fee basis?
273. What would be the costs and benefits of permitting the use of
codes that are available for a fee? Could allowing the use of such
codes create a regulatory monopoly in favor of the owner of the code's
intellectual property?
E. Operating Hours of Registered SDRs--Rule 904 of Regulation SBSR
Proposed Rule 904 would require a registered SDR to design its
systems to allow for continuous receipt and dissemination of SBS data,
except that a registered SDR would be permitted to establish ``normal
closing hours.'' Such normal closing hours may occur only when, in the
estimation of the registered SDR, the U.S. markets and other major
markets are inactive. In addition, a registered SDR would be permitted
to declare, on an ad hoc basis, special closing hours to perform
routine system maintenance, subject to certain requirements.
1. Benefits
The Commission preliminarily believes that it would be beneficial
to require a registered SDR to continuously receive and disseminate SBS
transaction information. The market for SBS is global, and the
Commission believes the public interest would be served by requiring
continuous real-time dissemination of any SBS transactions (with a
sufficient nexus to the United States to require reporting into a
registered SDR), no matter when they are executed. Thus, if U.S.
participants execute SBSs in Japan while the U.S. markets are closed,
market participants around the word would still be able to view real-
time reports of such transactions. Further, the Commission believes a
continuous dissemination regime would eliminate the temptation for
market participants to defer execution of SBS transactions until after
regular business hours to avoid real-time post-trade transparency.
Paragraphs (c) to (e) of proposed Rule 904 would specify
requirements for handling and disseminating reported data during a
registered SDR's normal and special closing hours. The Commission
believes that these provisions would provide benefits in that they
clarify how SBSs executed while a registered SDR is in normal or
special closing hours would be reported and disseminated.
2. Costs
The Commission believes that a registered SDR would not incur
significant costs in connection with proposed Rule 904. The Commission
today is also proposing Rules 13n-1 through 13n-11 under the Exchange
Act that would deal with SDR registration, duties, data collection and
maintenance, automated systems and other issues.\323\ That proposal
covers expenses with
[[Page 75271]]
respect to many aspects of establishing and operating an SDR,
including, implicitly, its hours of operation.
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\323\ See SDR Registration Proposing Release, supra note 6.
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The requirement for a registered SDR to provide reasonable advance
notice to participants and to the public of its normal and special
closing hours, and to provide notice to participants that the SDR is
available to accept transaction data after its system was unavailable
would likely entail a only a modest annual cost. The Commission
preliminarily estimates that the initial and ongoing aggregate annual
cost would be $27,360, which corresponds to $2,736 per registered
SDR.\324\
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\324\ The Commission derived this number as follows:
[(Operations Specialist (24 hours) at $114 per hour) x (10 potential
registered SDRs)] = $27,360, which corresponds to $2,736 per
registered SDR.
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There would be additional costs, but these costs are subsumed in
the costs associated with proposed Rules 901 and 902. For example, the
requirement for reporting parties to report information to the
registered SDR upon receiving a notice that the registered SDR has
resumed its normal operations would be part of the reporting parties'
reporting obligations under proposed Rule 901. The requirement to
disseminate transaction reports held in queue should not present any
costs in addition to those already contained in proposed Rule 902.
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 904 discussed above, as well as any costs and benefits
not already described. The Commission also requests data to quantify
any potential costs or benefits. In addition, the Commission requests
comment on the following:
274. How can the Commission more accurately estimate the costs and
benefits for handling and disseminating reported SBS transaction data
during a registered SDR's normal and special closing hours?
275. Would proposed Rule 904 create any additional costs or
benefits not discussed here?
F. Correction of Errors in Security-Based Swap Information--Rule 905 of
Regulation SBSR
Proposed Rule 905(a) would establish procedures for correcting
errors in reported and disseminated SBS information, recognizing that
that any system for transaction reporting must accommodate for the
possibility that certain data elements may be incorrectly reported.
Proposed Rule 905(b) would set forth the duties of a registered SDR to
verify disputed information and make necessary corrections. If the
registered SDR either discovers an error in a transaction on its system
or receives notice of an error from a counterparty, proposed Rule
905(b)(1) would require the registered SDR to verify the accuracy of
the terms of the SBS and, following such verification, promptly correct
the erroneous information contained in its system. Proposed Rule
905(b)(2) would further require that, if the erroneous transaction
information contained any data that fall into the categories enumerated
in proposed Rule 901(c) as information required to be reported in real
time, the registered SDR would be required to publicly disseminate a
corrected transaction report of the SBS promptly following verification
of the trade by the counterparties to the SBS.
1. Benefits
The Commission preliminarily believes that proposed Rule 905 would
enhance the overall reliability of SBS transaction data that would be
required to be reported. Requiring participants to promptly correct
erroneous transaction information should help ensure the timeliness,
accuracy, and completeness of reported transaction information.
Providing more accurate SBS transaction data to a registered SDR could
benefit participants by helping them ensure that their books are marked
accurately and reduce operational risks that arise when counterparties
do not have the same understanding of the details of a SBS transaction.
Furthermore, requiring corrected SBS transaction information be
reported to a registered SDR helps ensure that the Commission and other
regulars have an accurate view of the prudential and systemic risks in
the SBS market.
2. Costs
The Commission preliminarily believes that promptly submitting an
amended transaction report to the appropriate registered SDR after
discovery of an error as required under proposed Rule 905(a)(2) would
impose costs on reporting parties. Likewise, the Commission
preliminarily believes that promptly notifying the relevant reporting
party after discovery of an error as required under proposed Rule
905(a)(1) would impose costs on non-reporting-party participants.
With respect to reporting parties, the Commission preliminarily
believes that proposed Rule 905(a) would impose an initial, one-time
cost associated with designing and building the reporting party's
reporting system to be capable of submitting amended SBS transactions
to a registered SDR. In addition, reporting parties would face ongoing
costs associated with supporting and maintaining the error reporting
function.\325\
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\325\ The Commission preliminarily believes that the actual
submission of amended transaction reports required under proposed
Rule 905(a)(2) would not result in material, independent costs
because this would be done electronically though the reporting
system that the reporting party must develop and maintain to comply
with proposed Rule 901. The costs associated with such a reporting
system are addressed in the Commission's analysis of proposed Rule
901. See supra Section XIV.B.2 and notes 298-301.
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The Commission preliminarily believes that designing and building
appropriate reporting system functionality to comply with proposed Rule
905(a)(2) would be a component of, and represent an incremental ``add-
on'' to, the cost to build a reporting system and develop a compliance
function as required under proposed Rule 901.
Based on discussions with industry participants, the Commission
preliminarily estimates this incremental burden to be equal to 5% of
the one-time and annual costs associated with designing and building a
reporting system that is in compliance with proposed Rule 901,\326\
plus 10% of the corresponding one-time and annual costs associated with
developing the reporting party's overall compliance program required
under proposed Rule 901.\327\ Thus, for reporting parties, the
Commission preliminarily estimates that proposed Rule 905(a) would
impose an initial (first-year) aggregate cost of $11,419,000, which is
$11,419 per reporting party,\328\ and an ongoing aggregate annualized
burden of $3,927,000, which is $3,927 per reporting party.\329\
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\326\ See supra notes 298 and 299.
\327\ See supra notes 302 and 303.
\328\ This figure is calculated as follows: [((($46,657 one-time
development of reporting system) x (0.05)) + (($5,400 annual
maintenance of reporting system) x (0.05)) + (($51,590 one-time
compliance program development) x (0.1)) + (($36,572 annual support
of compliance program) x (0.1))) x (1,000 reporting parties)] =
$11,419,000, which is $11,419 per reporting party.
\329\ This figure is calculated as follows: [((($5,400 annual
maintenance of reporting system) x (0.05)) + (($36,572 annual
support of compliance program) x (0.1))) x (1,000 reporting
parties)] = $3,927,000, which is $3,927 per reporting party.
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With regard to non-reporting-party participants, the Commission
preliminarily believes that proposed Rule 905(a) would impose an
initial and ongoing cost associated with promptly notifying the
relevant reporting party after discovery of an error as required under
proposed Rule 905(a)(1). The Commission preliminarily estimates that
such annual cost would be $172,280,000, which corresponds to $43,070
per non-reporting-party
[[Page 75272]]
participant.\330\ This figure is based on the Commission's preliminary
estimates of (1) 4,000 non-reporting-party participants; (2) 11
transactions per day per non-reporting-party participant;\331\ and (3)
an error rate of one-third (33%),\332\ or approximately 4 transactions
per day per non-reporting-party participant.
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\330\ This figure is based on the following: [(4 error
notifications per non-reporting-party participant per day) x (365
days/year) x (Compliance Clerk (0.5 hours/report) at $59 per hour) x
(4,000 non-reporting-party participants)] = $172,280,000, which
corresponds to $43,070 per non-reporting-party participant. The
Commission preliminarily believes that participants already monitor
their SBS transactions and positions in the ordinary course of
business. Thus, the Commission preliminary believes that, as a
practical matter, proposed Rule 905 would not result in any
significant new burdens for these participants.
\331\ This figure is based on the following: [((15,458,824
estimated annual SBS transactions)/(4,000 estimated non-reporting-
party participants))/(365 days/year)] = 10.58, or approximately 11
transactions per day. See supra note 185. The Commission understands
that many of these transactions may arise from previously executed
SBS transactions.
\332\ In other words, the Commission is estimating that one-
third of all SBS transactions will require an amended report to be
submitted to the registered SDR pursuant to proposed Rule 905(a).
For purposes of its PRA analysis, the Commission is further assuming
that both the non-reporting-party participant and the reporting
party discover all errors. The Commission recognizes that, as a
practical matter, there may be instances where one party fails to
detect an error.
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For registered SDRs, the ability to verify disputed information,
process a transaction report cancellation, accept a new SBS transaction
report, and update relevant records are all capabilities that the
registered SDR would have to implement to comply with its obligations
under proposed Regulation SDR.\333\ Likewise, a registered SDR would be
required to have the capacity to re-disseminate SBS transaction reports
pursuant to proposed Rule 902. The Commission preliminarily believes
that the costs associated with establishing these capabilities,
including systems development, support, and maintenance, are largely
addressed in the Commission's analysis of those rules.\334\ The
Commission preliminarily estimates that to develop and publicly provide
the necessary protocols for carrying out these functions would impose
on each registered SDR a cost of $186,790.\335\ The Commission
estimates that to review and update such protocols would impose an
annualized cost on each registered SDR of $373,580.\336\
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\333\ See SDR Registration Proposing Release, supra note 6.
\334\ See id.
\335\ This figure is based on the following: [(Sr. Programmer
(80 hours) at $285 per hour) + (Compliance Manager (160 hours) at
$294 per hour) + (Compliance Attorney (250 hours) at $291 per hour)
+ (Compliance Clerk (120 hours) at $59 per hour) + (Sr. Systems
Analyst (80 hours) at $251 per hour) + (Director of Compliance (40
hours) at $426 per hour) = $186,790.
\336\ This figure is based on the following: [(Sr. Programmer
(160 hours) at $285 per hour) + (Compliance Manager (320 hours) at
$294 per hour) + (Compliance Attorney (500 hours) at $291 per hour)
+ (Compliance Clerk (240 hours) at $59 per hour) + (Sr. Systems
Analyst (160 hours) at $251 per hour) + (Director of Compliance (80
hours) at $426 per hour)] = $373,580.
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Accordingly, the Commission preliminarily estimates that the
initial aggregate annualized cost on registered SDRs under proposed
Rule 905 would be $5,603,700, which corresponds to $560,370 for each
registered SDR.\337\ The Commission further preliminarily estimates
that the ongoing aggregate annualized cost on registered SDRs under
proposed Rule 905 would be $3,735,800, which corresponds to $373,580
for each registered SDR.\338\
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\337\ This figure is based on the following: [($186,790 to
develop protocols) + ($373,580 for annual support)) x (10 registered
SDRs)] = $5,603,700, which corresponds to $560,370 per registered
SDR.
\338\ This figure is based on the following: [($373,580 for
annual support per registered SDR) x (10 registered SDRs)] =
$3,735,800, which corresponds to $373,580 per registered SDR.
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3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 905 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
276. How can the Commission more accurately estimate the costs and
benefits related to correcting errors in reported and disseminated SBS
information?
277. Would proposed Rule 905 create any additional costs or
benefits not discussed here?
G. Other Duties of Participants--Rule 906 of Regulation SBSR
Proposed Rule 906(a) would set forth a procedure designed to ensure
that a registered SDR obtains relevant ID information for both
counterparties to a SBS, not just the IDs of the reporting party.
Proposed Rule 906(a) would require a registered SDR to identify any SBS
reported to it for which it does not have participant ID and (if
applicable) broker ID, desk ID, and trader ID of each counterparty. For
such transactions, the registered SDR would be required to send a
report, once a day, to each participant seeking the missing
information. Under proposed Rule 906(a), a participant that receives
such a report would be required to provide the missing ID information
to the registered SDR within 24 hours.
Proposed Rule 906(b) would require participants to provide a
registered SDR with information identifying the participant's
affiliate(s) that may also be participants of the registered SDR, as
well as its ultimate parent(s). Additionally, under proposed Rule
906(b) participants would be required to promptly notify the registered
SDR of any changes to the information previously provided.
Proposed Rule 906(c) would require a participant that is a SBS
dealer or major SBS participant to establish, maintain, and enforce
written policies and procedures that are reasonably designed to ensure
compliance with any SBS transaction reporting obligations in a manner
consistent with proposed Regulation SBSR and the registered SDR's
applicable policies and procedures. In addition, proposed Rule 906(c)
would require each such participant to review and update its policies
and procedures at least annually.
1. Benefits
The Commission preliminarily believes that proposed Rule 906(a)
would enable each registered SDR to obtain more complete records,
consistent with the goals of the Dodd-Frank Act. Also, proposed Rule
906(a) would provide regulators with a more comprehensive picture of
SBS transactions, thus enabling more robust surveillance and
supervision of the SBS markets. More complete SBS records would provide
the Commission necessary information to investigate specific
transactions and respond effectively when issues arise in the SBS
markets.
Proposed Rule 906(b) is designed to enhance the Commission's
ability to monitor and surveil the SBS markets. Obtaining this ultimate
parent(s) and affiliate(s) information would be helpful for
understanding the risk profile of not only individual counterparties,
but for large financial groups. The Commission further preliminarily
believes that it is important that the participants promptly notify the
registered SDR of any changes to the information regarding ultimate
parent(s) and affiliate(s), as this would impact the value of the data
that the registered SDR would be retaining for regulatory purposes.
Furthermore, proposed Rule 906(b) could result in significant
benefits by encouraging the creation and widespread use of generally
accepted standards for reference information. The Commission
understands that some efforts have been undertaken--in both
[[Page 75273]]
the private and public sectors, both domestically and internationally--
to establish a comprehensive and widely accepted system for identifying
entities that participate not just in the SBS market, but in the
financial markets generally. Such a system would be of significant
benefit to regulators worldwide, as each market participant could
readily be identified using a single reference code regardless of the
jurisdiction or product market in which the market participant was
engaging. Such a system also could be of significant benefit to the
private sector, as market participants would have a common
identification system for all counterparties and reference entities,
and would no longer have to use multiple proprietary nomenclature
systems. The enactment of the Dodd-Frank Act and the establishment of a
comprehensive system for reporting and dissemination of SBSs--and for
reporting and dissemination of swaps, under jurisdiction of the CFTC--
offer a unique opportunity to facilitate the establishment of a
comprehensive and widely accepted system for identifying entities that
participate not just in the SBS market, but in the financial markets
generally.
The Commission preliminarily believes that proposed Rule 906(c)
could provide benefits to SBS market participants and the market as a
whole. Proposed Rule 906(c) would enhance the overall reliability SBS
transaction data that is required to be reported to a registered SDR
pursuant to proposed Rule 901. Requiring SBS dealers and major SBS
participants to adopt and maintain written policies and procedures
addressing compliance with proposed Regulations SBSR should result in
more reliable reporting of SBS transaction data. More reliable
reporting would benefit counterparties to SBS transactions, and the
market more generally, by increasing the usefulness of the disseminated
data, and would benefit regulators using and analyzing the reported
data. In addition, requiring participants that are SBS dealers or major
SBS participants--the entities that engage in the most SBS
transactions--to implement policies and procedures could reduce the
incidence of outages, reporting system malfunctions, or interruptions
by addressing how they may be prevented and, in the event one occurs,
how it could be resolved with the least negative impact.
The Commission preliminarily believes that requiring each
participant that is a SBS dealer or major SBS participant to adopt and
maintain written policies and procedures related to the reporting of
SBS transactions may have additional benefits. Proposed Rule 906(c)
should foster compliance efforts more generally among participants.
With written policies and procedures, a participant's compliance with
its reporting obligations would not be overly dependent on any specific
individual. Higher quality reporting of SBS transaction data should
generate greater confidence among SBS market participants and benefit
the market as a whole. Over time, participants and the Commission also
would be able to compare different approaches and develop best
practices for the reporting of SBS transactions. Best practices would
be valuable to the participants, the Commission, and market as a whole
by supporting more complete and accurate SBS transaction reporting.
Comparing the written policies and procedures adopted and maintained by
covered participants would also support Commission supervision and
oversight of SBS transaction reporting. For example, the failure of a
SBS dealer or major SBS participant to adopt and maintain appropriate
policies and procedures as required under proposed Rule 906(c) could
serve as an important indicator of other compliance issues. Proposed
Rule 906(c) could thus provide the Commission a means to address such
concerns proactively.
2. Costs
Proposed Rule 906(a) would require a registered SDR, once a day, to
send a report to each participant identifying, for each SBS to which
that participant is a counterparty, the SBS(s) for which the registered
SDR lacks participant ID and (if applicable) broker ID, desk ID, and
trader ID. The Commission preliminarily estimates that each registered
SDR would face a one-time, initial cost of $30,832 to create a report
template and develop the necessary systems and processes to produce a
daily report required by proposed Rule 906(a).\339\ The Commission
further preliminarily believes that there would be an ongoing annual
cost for a registered SDR to generate and issue the daily reports, and
to enter into its systems the ID information supplied by participants
in response to the daily reports, of approximately $29,244.\340\
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\339\ The Commission derived its estimate from the following:
[(Senior Systems Analyst (40 hours) at $251 per hour) + (Sr.
Programmer (40 hours) at $285 per hour) + (Compliance Manager (16
hours) at $294 per hour) + (Director of Compliance (8 hours) at $426
per hour) + (Compliance Attorney (8 hours) at $291)] = $30,832.
\340\ The Commission derived its estimate from the following:
[(Senior Systems Analyst (24 hours) at $251 per hour) + (Sr.
Programmer (24 hours) at $285 per hour) + (Compliance Clerk (260
hours) at $59 per hour)] = $29,244.
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Accordingly, the Commission preliminarily estimates that the
initial aggregate annualized cost for registered SDRs associated with
proposed Rule 906(a) would be approximately $600,760, which corresponds
to $60,076 per registered SDR.\341\ The Commission preliminarily
estimates that the ongoing aggregate annualized cost for registered
SDRs associated with proposed Rule 906(a) would be approximately
$292,440, which corresponds to $29,244 per for registered SDR.\342\
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\341\ The Commission derived its estimate from the following:
[($30,832 + $29,244) x (10 registered SDRs)] = $600,760, which
corresponds to $60,076 per registered SDR.
\342\ The Commission derived its estimate from the following:
[($29,244) x (10 registered SDRs)] = $292,440, which corresponds to
$29,244 per registered SDR.
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Proposed Rule 906(a) would require a participant that receives a
daily report from a registered SDR to provide the missing UICs to the
registered SDR within 24 hours. Proposed Rule 906(a) would impose
initial and ongoing costs on participants to complete and return the
reports received from a registered SDR. The Commission preliminarily
estimates that proposed Rule 906(a) would not result in any initial or
ongoing costs for participants that are reporting parties. This
estimate is based on the Commission's preliminary belief that a
reporting party would structure its reporting program to be in
compliance with proposed Regulation SBSR, and consequently, would send
complete information as relates to itself for each SBS transaction
submitted to a registered SDR. The Commission further preliminarily
estimates that proposed Rule 906(a) would result in an initial and
ongoing aggregate annualized cost for participants of approximately
$75,372,500, which corresponds to a cost of approximately $15,100 per
participant.\343\ This figure is based on the Commission's preliminary
estimates of (1) 5,000 participants; (2) 9 transactions per day per
participant; \344\ and (3) a missing information rate of
[[Page 75274]]
80%,\345\ or approximately 7 transactions per day per participant.
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\343\ This figure is based on the following: [(7 missing
information reports per participant per day) x (365 days/year) x
(Compliance Clerk (0.1 hours) at $59 per hour) x (5,000
participants)] = $75,372,500, which corresponds to $15,074.50 per
participant.
\344\ This figure is based on the following: [((15,458,824
estimated annual SBS transactions)/(5,000 estimated participants))/
(365 days/year)] = 8.47, or approximately 9 transactions per day.
See supra note 290. The Commission understands that many of these
transactions may arise from previously executed SBS transactions.
\345\ In other words, the Commission is estimating that 80% of
the time the reporting party would not know and thus would not be
able to report the necessary UICs of its counterparty. Therefore, a
registered SDR would have to obtain the missing UICs through the
process described in proposed Rule 906(a).
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Proposed Rule 906(b) would require every participant to provide a
registered SDR an initial parent/affiliate report, using ultimate
parent IDs and participant IDs, and updating that information, as
necessary. The Commission preliminarily estimates that the cost for
each participant to submit an initial or update report would be
$29.50.\346\ The Commission preliminarily estimates that each
participant would submit two reports each year.\347\ In addition, the
Commission preliminarily estimates that there may be 5,000 SBS
participants and that each one may connect to two registered SDRs.
Accordingly, the Commission preliminarily estimates that the initial
and ongoing aggregate annualized cost associated with proposed Rule
906(b) would be $590,000, which corresponds to $118 per
participant.\348\
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\346\ This figure is based on the following: [(Compliance Clerk
(0.5 hours) at $59 per hour) x (1 report)] = $29.50.
\347\ During the first year, the Commission preliminarily
believes each participant would submit its initial report and one
update report. In subsequent years, the Commission preliminarily
estimates that each participant would submit two update reports.
\348\ This figure is based on the following: [($29.50/report) x
(2 reports/year/SDR connection) x (2 SDR connections/participant) x
(5,000 participants)] = $590,000, which corresponds to $118 per
participant.
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The Commission, in proposed Regulation SBSR, is not requiring the
development of internationally recognized standards for reference
information (such participant IDs or ultimate parent IDs) that could be
used across the financial service industry. Therefore, the Commission
believes that the costs of developing and sustaining such a system
should not be considered costs of proposed Regulation SBSR. However,
proposed Regulation SBSR would require a registered SDR and its
participants to use UICs generated by such a system, if such system
were able to generate such UICs. Although the Commission believes there
would be long-term benefits for using UICs generated by such a system,
there could be short-term costs imposed on reporting parties to convert
to such a system. In addition, under these internationally recognized
standards, users of the reference information could have to pay
reasonable fees to support the system. These fees also would represent
costs of proposed Rule 901. The Commission requests comment on this
issue and any potential costs associated with the potential future use
of internationally recognized standards.
Proposed Rule 906(c) would require each participant that is a SBS
dealer or major SBS participant to establish, maintain, and enforce
written policies and procedures that are reasonably designed to ensure
compliance with any SBS transaction reporting obligations in a manner
consistent with proposed Regulation SBSR and the registered SDR's
applicable policies and procedures. Proposed Rule 906(c) would also
require the review and updating of such policies and procedures at
least annually. The Commission preliminarily estimates that developing
and implementing written policies and procedures as required under the
proposed rule could result in a one-time initial cost to each covered
participant of approximately $52,440.\349\ Drawing on the Commission's
experience with other rules that require entities to establish and
maintain policies and procedures,\350\ this figure includes the
estimated cost to develop a set of written policies and procedures,
program systems, implement internal controls and oversight, train
relevant employees, and perform necessary testing. In addition, the
Commission preliminarily estimates that the annualized cost to maintain
such policies and procedures, including a full review at least
annually, as required under the proposed rule, would be approximately
$29,736 for each covered participant.\351\ This figure is based on an
estimate of the cost to review existing policies and procedures, make
any necessary updates, conduct ongoing training, maintain relevant
systems and internal controls systems, and perform necessary testing.
---------------------------------------------------------------------------
\349\ The Commission derived its estimate from the following:
[(Sr. Programmer (40 hours) at $285 per hour) + (Compliance Manager
(40 hours) at $294 per hour) + (Compliance Attorney (40 hours) at
$291 per hour) + (Compliance Clerk (40 hours) at $59 per hour) +
(Sr. Systems Analyst (32 hours) at $251 per hour) + (Director of
Compliance (24 hours) at $426 per hour)] = $52,440 per covered
participant.
\350\ See supra note 256.
\351\ The Commission derived its estimate from the following:
[(Sr. Programmer (8 hours) at $285 per hour) + (Compliance Manager
(24 hours) at $294 per hour) + (Compliance Attorney (24 hours) at
$291 per hour) + (Compliance Clerk (24 hours) at $59 per hour) +
(Sr. Systems Analyst (16 hours) at $251 per hour) + (Director of
Compliance (24 hours) at $426 per hour)] = $29,736 per participant.
---------------------------------------------------------------------------
Accordingly, the Commission preliminarily estimates that the
initial aggregate annualized cost associated with proposed Rule 906(c)
would be approximately $82,176,000, which corresponds to $82,176 per
covered participant.\352\ The Commission preliminarily estimates that
the ongoing aggregate annualized cost associated with proposed Rule
906(c) would be approximately $29,736,000, which corresponds to $29,736
per covered participant.\353\
---------------------------------------------------------------------------
\352\ The Commission derived its estimate from the following:
[($52,440 + $29,736) x (1,000 covered participants)] = $82,176,000.
\353\ The Commission derived its estimate from the following:
[($29,736) x (1,000 covered participants)] = $29,736,000.
---------------------------------------------------------------------------
In total, the Commission preliminarily believes that proposed Rule
906 would result in an initial, aggregate annualized cost of
$159,094,260,\354\ and an ongoing, aggregate annualized cost of
$106,350,860 for all covered entities.\355\
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\354\ This figure is based on the following: [($600,760 for
registered SDRs under proposed Rule 906(a)) + ($75,372,500 for non-
reporting-party participants under proposed Rule 906(a)) + ($945,000
for participants under proposed Rule 906(b)) + ($82,176,000 for
covered participants under proposed Rule 906(c))] = $159,094,260.
\355\ This figure is based on the following: [($297,360 for
registered SDRs under proposed Rule 906(a)) + ($75,372,500 for non-
reporting-party participants under proposed Rule 906(a)) + ($945,000
for participants under proposed Rule 906(b)) + ($29,736,000 for
covered participants under proposed Rule 906(c))] = $106,350,860.
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3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 906 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
278. How can the Commission more accurately estimate the costs and
benefits?
279. Would proposed Rule 906 create any additional costs or
benefits not discussed here?
280. What would be the costs and benefits of having reference
identifiers established under the auspices of an IRSB--for
participants? For registered SDRs? What fees might be charged to
support such a system? How much would those fees be? Who would have to
pay them?
281. What would be the costs to verify ultimate parent and
affiliate information under the auspices of an IRSB and maintain it
over time? What would be the benefits of having such information
verified and maintained?
282. To what extent do participants already have policies and
procedures in place for reporting information to an SDR? To what extent
would proposed Rule 906(c) impose costs on covered
[[Page 75275]]
participants that they have not already incurred?
H. Policies and Procedures of Registered SDRs--Rule 907 of Regulation
SBSR
Proposed Rule 907 would require a registered SDR to establish and
maintain compliance with written policies and procedures: (1) That
enumerate the specific data elements of an SBS or a life cycle event
that a reporting party would report; (2) that specify data formats,
connectivity requirements, and other protocols for submitting
information; (3) for specifying how reporting parties are to report
corrections to previously submitted information, making corrections to
information in its records that is subsequently discovered to be
erroneous, and applying an appropriate indicator to any transaction
report required to be disseminated by proposed Rule 905(b)(2), which
would denote that the report relates to a previously disseminated
transaction; (4) describing how reporting parties shall report and,
consistent with the enhancement of price discovery, how the registered
SDR shall publicly disseminate, reports of, and adjustments due to,
life cycle events; SBS transactions that do not involve an opportunity
to negotiate any material terms, other than the counterparty; and any
other SBS transactions that, in the estimation of the registered SDR,
do not accurately reflect the market; (5) for assigning transaction IDs
and UICs related to its participants; and (6) for periodically
obtaining from each participant information that identifies the
participant's ultimate parent(s) and any other participant(s) with
which the counterparty is affiliated, using applicable UICs.
In addition, proposed Rule 907(b) would require a registered SDR to
establish and maintain written policies and procedures for calculating
and publicizing block trade thresholds for all SBS instruments reported
to the registered SDR in accordance with the criteria and formula for
determining block size as specified by the Commission.
Under proposed Rules 907(c) and (d), a registered SDR would be
required to make its policies and procedures publicly available on its
Web site, and review, and update as necessary, its policies and
procedures at least annually, indicating the date on which they were
last reviewed. Finally, proposed Rule 907(e) would require a registered
SDR to have the capacity to provide to the Commission, upon request,
information or reports related to the timeliness, accuracy, and
completeness of data reported to it pursuant to proposed Regulation
SBSR and the registered SDR's policies and procedures thereunder.
1. Benefits
In proposed Regulation SBSR, the Commission is establishing a
number of broad policy goals for implementing Title VII of the Dodd-
Frank Act. Proposed Rule 907 would permit a registered SDR some
flexibility regarding how to meet those goals. In many cases, there
could be many ways that that these goals could be carried out
effectively, and it may not be necessary or appropriate in all cases to
establish one particular way by rule. By requiring a registered SDR, in
proposed Rule 907, to develop policies and procedures for completing
many of the details of an SBS transaction reporting and dissemination
system, the Commission seeks to harness the knowledge and experience of
registered SDRs and harness market incentives to develop the policies
and procedures that are most effective in meeting the policy goals in
an efficient manner. The Commission expects that, over time, registered
SDRs, participants, and the Commission could identify best practices
for the reporting and dissemination of SBS transactions.
Proposed Rules 907(a)(1) and (2) would require a registered SDR to
develop and maintain policies and procedures to specify the data
elements of a SBS or a life cycle event that a reporting party must
report, as well as the data formats, connectivity requirements, and
other protocols for submitting information. The Commission
preliminarily believes that assigning this responsibility to a
registered SDR would provide a level of flexibility and transparency
that is necessary in this developing market. Furthermore, this approach
would allow registered SDRs (perhaps, but not necessarily, after
consultation with their participants) to quickly identify and address
potential weaknesses in the SBS transaction reporting process as set
out under proposed Regulation SBSR.
Proposed Rule 907(a)(3) would require a registered SDR to establish
and maintain compliance with policies and procedures for specifying how
reporting parties are to report corrections to previously submitted
information, making corrections to information in its records that is
subsequently discovered to be erroneous, and applying an appropriate
indicator to any transaction report required to be disseminated by
proposed Rule 905(b)(2), which would denote that the report relates to
a previously disseminated transaction. The Commission preliminarily
believes that a registered SDR is in the best position to determine how
these corrections are submitted, and believes that a consistent regime
for the submission of correction by participants would benefit all
market participants.
Proposed Rule 907(a)(4) would require a registered SDR to develop
and maintain policies and procedures that describe how reporting
parties would report and, consistent with the enhancement of price
discovery, how the registered SDR would publicly disseminate reports
of, and adjustments to, life cycle events; SBS transactions that do not
involve an opportunity to negotiate any material terms, other than the
counterparty; and any other SBS transactions that, in the estimation of
the registered SDR, do not accurately reflect the market. The
Commission believes that the entire SBS market could benefit if a
registered SDR, using its knowledge of the market, would develop
consistent and transparent standards when certain SBS might have
characteristics that reduce or eliminate entirely their price discovery
value. For example, while an inter-affiliate SBS transaction would be
required to be reported (so that the registered SDR obtains information
about the legal owner), it could be disseminated with indication that
the transaction was not at arm's length.
Proposed Rule 907(a)(5) would require a registered SDR to establish
and maintain compliance with policies and procedures for assigning a
transaction ID to each SBS that is reported to it, and for assigning
UICs, including participant IDs, ultimate parent IDs, desk IDs, broker
IDs, and trader IDs. As noted above, all such UICs would have to be
assigned by or on behalf of an IRSB (or, if no standards-setting body
meet the required criteria or the IRSB has not assigned a UIC to a
particular person or unit thereof, by the registered SDR). Proposed
Rule 906 could result in significant benefits by encouraging the
creation and widespread use of internationally recognized standards for
reference information. The Commission preliminarily believes that
reporting of information using UICs would promote effective oversight,
enforcement, and surveillance of the SBS market by the Commission and
other regulators. For example, activity could be tracked by a
particular participant, a particular desk, or a particular trader.
Regulators could observe patterns and connections in trading activity,
or examine whether a trader had engaged in questionable trading
activity across different SBS instruments. UICs also could facilitate
aggregation and monitoring of the positions of SBS counterparties,
which
[[Page 75276]]
could be of significant benefit for prudential and systemic risk
management.
The Commission understands that some efforts have been undertaken--
in both the private and public sectors, both domestically and
internationally--to establish a comprehensive and widely accepted
system for identifying entities that participate not just in the SBS
market, but in the financial markets generally. Such a system would be
of significant benefit to regulators worldwide, as each market
participant could readily be identified using a single reference code
regardless of the jurisdiction or product market in which the market
participant was engaging. Such a system also could be of significant
benefit to the private sector, as market participants would have a
common identification system for all counterparties and reference
entities, and would no longer have to use multiple identification
systems. The enactment of the Dodd-Frank Act and the establishment of a
comprehensive system for reporting and dissemination of SBSs--and for
reporting and dissemination of swaps, under the jurisdiction of the
CFTC--offer a unique opportunity to facilitate the establishment of a
comprehensive and widely accepted system for identifying entities that
participate not just in the SBS market, but in the financial markets
generally.
Furthermore, requiring a registered SDR to establish and maintain
compliance with written policies and procedures could result in more
accurate reporting by reporting parties, and thus more reliable
dissemination of SBS transaction data. Higher quality reporting and
dissemination of SBS transaction data should generate greater
confidence among registered SDRs, market participants, and regulators,
thus strengthening the SBS market the market as a whole.
The Commission preliminarily believes that requiring a registered
SDR to calculate and publish block trade thresholds pursuant to
proposed Rule 907(b) should help market participants, the Commission,
and other regulators monitor block trade thresholds and track changes
in the market for particular SBS instruments over time. The Commission
preliminarily believes that a registered SDR is best placed to deliver
these benefits, because an SDR has access to the necessary data and the
ability to calculate and publicize the block trade thresholds
efficiently.
The Commission preliminarily believes that requiring a registered
SDR to make publicly available on its Web site the policies and
procedures required by proposed Regulation SBSR, pursuant to proposed
Rule 907(c), would promote greater understanding of and compliance with
such policies and procedures. Periodic review of the policies and
procedures would also ensure that they are up-to-date.
Finally, proposed Rule 907(e) would require a registered SDR to
have the capacity to provide to the Commission, upon request,
information or reports related to the timeliness, accuracy, and
completeness of data reported to it pursuant to proposed Regulation
SBSR and the registered SDR's policies and procedures thereunder. There
could be benefits in obtaining information from each registered SDR
related to the timeliness, accuracy, and completeness of data reported
to the registered SDR. Required data submissions that are untimely,
inaccurate, or incomplete could compromise the regulatory data that the
Commission would utilize to carry out its oversight responsibilities.
Furthermore, required data submissions that are untimely, inaccurate,
or incomplete could diminish the value of publicly disseminated reports
that promote transparency and price discovery. Information or reports
provided to the Commission by a registered SDR related to the
timeliness, accuracy, and completeness of data could assist the
Commission in examining for compliance with proposed Regulation SBS and
in bringing enforcement or other administrative actions as necessary
and appropriate.
2. Costs
The Commission preliminarily estimates that ten registered SDRs
would be subject to proposed Rule 907, and that developing and
implementing written policies and procedures as required under proposed
Rule 907 could result in an initial, one-time cost to each registered
SDR of approximately $3,831,000.\356\ This figure includes the
estimated cost to develop a set of written policies and procedures,
program systems, implement internal controls and oversight, train
relevant employees, perform necessary testing, monitor participants,
and compile data.\357\ In addition, the Commission preliminarily
estimates that the annualized cost to maintain such policies and
procedures, including a full review at least annually; making its
policies and procedures publicly available on its Web site; and
developing the capacity to provide the Commission information or
reports related to the timeliness, accuracy, and completeness of data
reported to it pursuant to proposed Regulation SBSR and the registered
SDR's policies and procedures would be approximately $7,662,000 for
each registered SDR.\358\ This figure is based on an estimate of the
cost to review existing policies and procedures, make necessary
updates, conduct ongoing training, maintain relevant systems and
internal controls systems, calculate and publish block trade
thresholds, perform necessary testing, monitor participants, and
collect data. Accordingly, the Commission preliminarily estimates that
the initial annualized cost associated with proposed Rule 907 would be
approximately $11,492,500 per registered SDR, which corresponds to an
initial annualized aggregate cost of approximately $114,924,500.\359\
The Commission preliminarily estimates that the ongoing annualized cost
associated with proposed Rule 907 would be approximately $7,662,000 per
registered SDR, which corresponds to an ongoing annualized aggregate
cost of approximately $76,617,000.\360\ These figures are based, in
part, on the
[[Page 75277]]
Commission's experience with other rules that require entities to
establish and maintain compliance with policies and procedures.\361\
---------------------------------------------------------------------------
\356\ The Commission derived its estimate from the following:
[(Sr. Programmer (1,667 hours) at $285 per hour) + (Compliance
Manager (3,333 hours) at $294 per hour) + (Compliance Attorney
(5,000 hours) at $291 per hour) + (Compliance Clerk (2500 hours) at
$59 per hour) + (Sr. Systems Analyst (1,667 hours) at $251 per hour)
+ (Director of Compliance (833 hours) at $426 per hour)] =
$3,830,722 per SDR. The Commission preliminarily believes that
potential SDRs that have similar policies and procedures in place
may find that these costs would be lower, while potential SDRs that
do not have similar policies and procedures in place may find that
the potential costs would be higher.
\357\ This figure includes time necessary to design and program
systems and implement policies and procedures to calculate and
publish block trade thresholds for all SBS instruments reported to
the registered SDR as required by proposed Rule 907(b). It also
includes time necessary to design and program systems and implement
policies and procedures to determine which reported trades would not
be considered block trades pursuant to proposed Rule 907(b). This
figure also includes time necessary to design and program systems
and implement policies and procedures to assign certain IDs, as
required by proposed Rule 907(a)(5).
\358\ The Commission derived its estimate from the following:
[Sr. Programmer (3,333 hours) at $285 per hour) + (Compliance
Manager (6,667 hours) at $294 per hour) + (Compliance Attorney
(10,000 hours) at $291 per hour) + (Compliance Clerk (5,000 hours)
at $59 per hour) + (Sr. Systems Analyst (3,333 hours) at $251 per
hour) + (Director of Compliance (1,667 hours) at $426 per hour)] =
$7,661,728 per registered SDR. The Commission preliminarily believes
that potential SDRs that have similar policies and procedures in
place may find that these costs would be lower, while potential SDRs
that do not have similar policies and procedures in place may find
that the potential costs would be higher.
\359\ The Commission derived its estimate from the following:
[((3,830,722) + ($7,661,728)) x (10 registered SDRs)] =
$114,924,500.
\360\ The Commission derived its estimate from the following:
[($7,661,728) x (10 registered SDRs)] = $76,617,280.
\361\ See supra note 256.
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In addition, proposed Rule 907(a)(5) could impose certain costs on
registered SDRs in connection with the use of internationally
recognized standards for reference information. The Commission, in
proposed Regulation SBSR, is not requiring the development of such
standards that could be used across the financial service industry.
Therefore, the Commission believes that the costs of developing and
sustaining such a system should not be considered costs of proposed
Regulation SBSR. However, proposed Regulation SBSR would require a
registered SDR to use UICs generated by such a system, if such system
is able to generate such UICs. Although the Commission believes there
would be long-term benefits for using UICs generated by such a system,
there could be short-term costs imposed on registered SDRs to convert
to such a system. In addition, under these internationally recognized
standards, users of the reference information could have to pay
reasonable fees to support the system. These fees also would represent
costs of proposed Rule 901. The Commission requests comment on this
issue and any potential costs associated with the potential future use
of internationally recognized standards.
There could be a potential cost of proposed Rule 907 in that
registered SDRs would retain flexibility to shape the details of a SBS
trade reporting and dissemination system. It could be that such
flexibility could result in varying approaches by each registered SDR
and, thus, complicate the reporting of SBS transactions, impede the use
of SBS transaction information that is publicly disseminated, or make
market oversight more difficult. These potential costs could be avoided
were the Commission to implement more of the details through
rulemaking. The Commission requests comment on the costs, if any,
associated with providing a registered SDR a certain amount of
flexibility, and how those costs should be balance with the potential
benefits as discussed above of providing the registered SDRS with
flexibility.
Finally, with respect to proposed Rule 907(e), the Commission
preliminarily believes that, as part of its core functions, a
registered SDR would have the capacity to provide to the Commission,
upon request, information or reports related to the timeliness,
accuracy, and completeness of data reported to it pursuant to proposed
Regulation SBSR and the registered SDR's policies and procedures.
Proposed Rule 13n-5(b) would require a registered SDR to establish,
maintain, and enforce written policies and procedures to satisfy itself
by reasonable means that the transaction data that has been submitted
to the security-based swap data repository is accurate, and also to
ensure that the transaction data and positions that it maintains are
accurate.\362\ The Commission preliminarily believes that these
capabilities would enable a registered SDR to provide the Commission
information or reports as may be requested pursuant to proposed Rule
907(e). Thus, the Commission does not believe that proposed Rule 907(e)
would impose any additional costs on a registered SDR.
---------------------------------------------------------------------------
\362\ See SDR Registration Proposing Release, supra note 6,
proposed Rules 13n-5(b)(1)(iii) and 13n-5(b)(3) under the Exchange
Act.
---------------------------------------------------------------------------
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 907 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
283. How can the Commission more accurately estimate the costs and
benefits?
284. Would proposed Rule 907 create any additional costs or
benefits not discussed here?
285. Is it a potential cost that the policies and procedures
sufficiently detailed such that participants would be able to know what
is required of them?
286. What are the costs and benefits of allowing a registered SDR
some flexibility to determine whether certain SBSs may not have price
discovery value and to use certain indicators to that effect in the
publicly disseminated transaction reports?
287. What costs would be imposed on a registered SDR to use UICs
that had been established by or on behalf of an IRSB? Would the
registered SDR have to pay fees to support the system? To whom? How
much would the fees be? What would be the costs of transitioning to
such a system? How would these overall costs compare to the costs that
would be incurred by a registered SDR to assign UICs using its own
methodology?
288. What are the costs of allowing registered SDRs flexibility to
shape many of the details of a SBS trade reporting and dissemination
system? What are the benefits?
I. Jurisdictional Matters--Rule 908 of Regulation SBSR
1. Benefits
The Commission believes that, in proposing Rule 908, the Commission
has no discretion about which entities or SBSs are subject to the
Exchange Act, as amended by the Dodd-Frank Act. A federal agency does
not have the power to expand or circumscribe the reach of U.S. law.
Therefore, because the Commission has no discretion in the matter,
there are no benefits to proposed Rule 908 other than those inherent in
the Exchange Act, as amended by the Dodd-Frank Act.
2. Costs
Similarly, because the Commission has no discretion in the matter,
there are no costs to proposed Rule 908 other than those inherent in
the Exchange Act, as amended by the Dodd-Frank Act.
J. Registration of Security-Based Swap Data Repository as Securities
Information Processor--Rule 909 of Regulation SBSR
Proposed Rule 909 would require each registered SDR also to
register with the Commission as a SIP on existing Form SIP.
1. Benefits
The Commission preliminarily believes that SIP registration of a
registered SDR would help ensure fair access to important SBS
transaction data reported to and publicly disseminated by the
registered SDR. Requiring a registered SDR to register with the
Commission as a SIP would subject it to Section 11A(b)(5) of the
Exchange Act,\363\ which provides that a registered SIP must notify the
Commission whenever it prohibits or limits any person's access to its
services. Upon its own motion or upon application by any aggrieved
person, the Commission could review the SIP's action.\364\ If the
Commission finds that the person has been discriminated against
unfairly, it could require the SIP to provide access to that
person.\365\ Section 11A(b)(6) of the Exchange Act \366\ also provides
the Commission authority to take certain regulatory action as may be
necessary or appropriate against a registered SIP.\367\
[[Page 75278]]
The Commission preliminarily believes that potential consumers of SBS
market data would benefit from the Commission having the additional
authority over a registered SDR/SIP provided by Sections 11A(b)(5) and
11A(b)(6) of the Exchange Act to help ensure that these entities offer
their SBS market data on terms that are fair and reasonable and not
unreasonably discriminatory.
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\363\ 15 U.S.C. 78k-1(b)(5).
\364\ See 15 U.S.C. 78k-1(b)(5)(A).
\365\ See 15 U.S.C. 78k-1(b)(5)(B).
\366\ 15 U.S.C. 78k-1(b)(6).
\367\ Section 11A(b)(6) of the Exchange Act provides that the
Commission, by order, may censure or place limitations upon the
activities, functions, or operations of any registered SIP or
suspend for a period not exceeding 12 months or revoke the
registration of any such processor, if the Commission finds, on the
record after notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or revocation is in the public
interest, necessary or appropriate for the protection of investors,
or to assure the prompt, accurate, or reliable performance of the
functions of such SIP, and that such SIP has violated or is unable
to comply with any provision of this title or the rules or
regulations thereunder.
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2. Costs
The Commission preliminarily believes that the costs of proposed
Rule 909 would be minimal. As noted above, proposed Rule 909 would
impose an initial one-time cost on each registered SDR associated with
the submission of Form SIP.\368\ The Commission notes that Form SDR,
which all SDRs would be required to complete and submit to the
Commission pursuant to proposed Rule 13n-1 under the Exchange Act,\369\
and Form SIP are similar in many respects. Thus, the Commission
preliminarily believes that a registered SDR, which must complete Form
SDR, would be able to complete Form SIP more easily and with less cost
than otherwise would be the case. The Commission preliminarily
estimates that the one-time cost to each SDR to complete Form SIP would
be about one-quarter the cost of completing proposed Form SDR, or
approximately $14,600.\370\ In addition, the Commission preliminarily
estimates that each SDR would incur approximately one half of the
ongoing annual costs--corresponding to an average of six months of
operations--during the first year. The Commission preliminarily
estimates this cost would be approximately $730 per SDR/SIP.\371\
---------------------------------------------------------------------------
\368\ See supra Section XII.J.
\369\ See SDR Registration Proposing Release, supra note 6.
\370\ The Commission derived its estimate from the following:
[(Compliance Attorney (37.5 hours) at $291 per hour) + (Compliance
Clerk (62.5 hours) at $59 per hour)] = $14,600. See Section XII(J)
supra; SDR Registration Proposing Release, supra note 6.
\371\ The Commission derived its estimate from the following:
[($1,460/2)] = $730. See infra note 372.
---------------------------------------------------------------------------
With regard to ongoing costs, the Commission preliminarily
estimates that the aggregate annualized cost for providing amendments
to Form SIP would be one-tenth of the cost to complete the initial Form
SIP, or approximately $1,460 per SDR/SIP.\372\ This figure is based on
a preliminary estimate that each registered SDR would submit one
amendment on Form SIP each year. SIP registration also would require a
registered SDR to provide notice to the Commission of prohibitions or
limitations on access to its services. The Commission preliminarily
believes that the notice would be a simple form, and that prohibitions
or limitations on access to information provided by a registered SDR
would be not be prevalent. Thus, the Commission does not believe that
providing such notice would result in economically significant costs.
---------------------------------------------------------------------------
\372\ The Commission derived its estimate from the following:
[($14,600) x (0.1)] = $1,460. See supra note 370.
---------------------------------------------------------------------------
Accordingly, the Commission preliminarily estimates that the
initial aggregate annualized costs associated with proposed Rule 909
would be approximately $153,300, which corresponds to $15,330 per
registered SDR.\373\ The Commission further preliminary estimates that
the ongoing aggregate annualized costs associated with proposed Rule
909 would be approximately $14,600, or an ongoing annual cost of
approximately $1,460 for each registered SDR/SIP.\374\ The Commission
solicits comments as to the accuracy of these estimates.
---------------------------------------------------------------------------
\373\ The Commission derived its estimate from the following:
[(($14,600) + ($730)) x (10 registered SDRs)] = $153,300. See supra
notes 370 and 371.
\374\ The Commission derived its estimate from the following:
[($1,460) x (10 registered SDRs)] = $14,600. See supra notes 372.
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3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 909 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
289. How can the Commission more accurately estimate the costs and
benefits?
290. Would proposed Rule 909 create any additional costs or
benefits not discussed here?
291. Are the Commission's preliminary estimates reasonable?
292. Is SIP registration likely to impose costs not addressed? If
so, what are they?
K. Implementation of Security-Based Swap Reporting and Dissemination--
Rule 910 of Regulation SBSR
1. Benefits
Proposed Rule 910 addresses implementation of the obligations
imposed by proposed Regulation SBSR. Proposed Rule 910(a) would require
a reporting party to report to a registered SDR any pre-enactment SBSs
subject to reporting under proposed Rule 901(i) no later than January
12, 2012 (180 days after the effective date of the Dodd-Frank Act). The
proposed timeframe would help ensure that the Commission has relevant
information about SBS transactions necessary to prepare reports
required by the Dodd-Frank Act.\375\ Further, proposed Rule 910 would
help ensure timely implementation of Regulation SBSR, and thereby
facilitate achievement of the goals articulated in the Dodd-Frank Act.
---------------------------------------------------------------------------
\375\ See Section 719 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Proposed Rule 910(b) would establish a phase-in period for each SDR
that registers with the Commission, as well as its participants. The
phase-in period would give both the registered SDR and its participants
a reasonable period in which to acquire or configure the necessary
systems, engage and train the necessary staff, and develop and
implement the necessary policies and procedures to implement the
proposed rules. In the absence of the measured and incremental approach
specified in proposed Rule 910(b), market participants might not
evaluate and develop their systems, processes, and procedures with
sufficient care and analysis. Furthermore, without the phase-in period
afforded by proposed Rule 910(b), registered SDRs and their
participants could be forced to devote an undue amount of capital and
resources to becoming compliant with proposed Regulation SBSR, thus
diverting capital and resources from other productive endeavors.
2. Costs
The Commission preliminarily believes that proposed Rule 910(a)
would not require reporting parties to materially change their current
practices or operations with respect to recordkeeping for the pre-
enactment SBSs or transitional SBSs. Any reporting party, as part of
its regular business operations, would already maintain records
covering most if not all of the data elements associated with a SBS.
Furthermore, proposed Rule 910(a) would not require reporting parties
to report any data elements (such as the
[[Page 75279]]
time of execution) that were not already available. Therefore, proposed
Rule 910(a) would not require reporting parties to search for or
reconstruct any missing data elements.
To comply with the reporting obligations of proposed Rule 910(a),
reporting parties likely would incur many of the costs that they
otherwise would incur in order to comply with proposed Rule 901.\376\
Because of the substantial overlap between the costs necessitated by
proposed Rule 910 and proposed Rule 901 (for reporting parties) and
proposed Rule 902, the Commission preliminarily estimates that that the
initial annualized, cost for each reporting party associated with
proposed Rule 910 would be de minimis.
---------------------------------------------------------------------------
\376\ See supra Section XIV.B.2.
---------------------------------------------------------------------------
The Commission preliminarily estimates two types of costs
associated with proposed Rule 910(b): One stemming from the possibility
that the phase-in period is too long and the other stemming from the
possibility that the phase-in period is too short. If the phase-in
period were too long, the benefits from better recordkeeping and
regulatory information, as well as from post-trade transparency in the
SBS market, would be inappropriately delayed. However, if the phase-in
period were too short, market participants might not have enough time
to develop appropriate systems and procedures to effectively implement
proposed Regulation SBSR. In proposing Rule 910(b), the Commission
seeks an appropriate balance between these two considerations.
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 910 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
293. How can the Commission more accurately estimate the costs and
benefits?
294. Would proposed Rule 910 create any additional costs or
benefits not discussed here?
295. How many entities would be affected by the rule?
296. Are there additional costs involved in complying with the
proposed rule that have not been identified? What are the types, and
amounts, of the costs?
297. Are there additional benefits from the rule that have not been
identified? If so, please identify and quantify to the extent feasible.
L. Prohibition During Phase-In Period--Rule 911 of Regulation SBSR
Proposed Rule 911 would provide that a reporting party to a SBS
would not report a SBS to a registered SDR in a phase-in period
described in proposed Rule 910 during which the registered SDR is not
yet required to publicly disseminate transaction reports for that SBS
instrument unless: (1) The SBS is also reported to an registered SDR
that is disseminating transaction reports for that SBS instrument
consistent with proposed Rule 902; or (b) No other registered SDR is
able to receive, hold, and publicly disseminate transaction reports
regarding that SBS instrument.
1. Benefits
The Commission preliminarily believes that proposed Rule 911 would
have two clear benefits to the marketplace. First, it is meant to
preserve the goal of post-trade transparency for SBSs, as codified in
the Dodd-Frank Act, even as new SDRs are phased in, as specified in
proposed Rule 910, during which time they may have no obligation or
only a limited obligation to publicly disseminate SBS data. Second, the
proposed rule would prevent reporting parties from engaging in
regulatory arbitrage by avoiding reporting SBS data to an existing
registered SDR that is publicly disseminating SBS transaction reports
and instead reporting only to a new SDR subject to a phase-in period,
in an effort to avoid having their SBS transactions publicly
disseminated in real time. Proposed Rule 911 would prohibit such
conduct.
2. Costs
The Commission believes that the costs imposed by proposed Rule 911
on reporting parties and registered SDRs would be minimal, as the rule
would restrict the ability of a reporting party to report a SBS to one
registered SDR rather than another, but would not otherwise create any
quantifiable costs beyond those already required by proposed Rule 901.
To the extent there are costs, they may include the following. First,
proposed Rule 911 potentially could dampen competition among those
entities considering registering as SDRs. Potential SDR registrants
could perceive the proposed rule as a barrier to entry to the
marketplace insofar as their business may be limited during the phase-
in period. Second, as a result of proposed Rule 911, there may be some
costs associated with double-reporting of SBS information--both to an
existing SDR as well as to a new SDR in a phase-in period. Indeed,
proposed Rule 911 contemplates the potential of such double-reporting.
This could result require regulators to incur costs to accurately
identify double-counted transactions, where the same SBS transaction is
captured by two different registered SDRs.
3. Request for Comment
The Commission requests comment on the costs and benefits of
proposed Rule 911 discussed above, as well as any costs and benefits
not already described that could result. The Commission also requests
data to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
298. How can the Commission more accurately estimate the costs and
benefits?
299. Would proposed Rule 911 create any additional costs or
benefits not discussed here?
M. Amendments to Rule 31
Rule 31 under the Exchange Act \377\ sets forth a procedure for the
calculation and collection of fees payable under Section 31 of the
Exchange Act.\378\ The Dodd-Frank Act classifies SBSs as
securities,\379\ thereby subjecting them to Section 31 fees. The
proposed amendment to Rule 31 would add ``security-based swaps'' to the
list of ``exempt sales,'' and thereby exempt SBSs from Section 31
fees.\380\
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\377\ 17 CFR 240.31.
\378\ 15 U.S.C. 78ee.
\379\ See 15 U.S.C. 78c(a)(10).
\380\ The Commission is also proposing to make a technical
correction to Rule 31(a)(10)(ii), to correct a date (from
``September 30'' to ``September 25''), as required by the Dodd-Frank
Act. The Commission does not believe there are any material costs or
benefits to this change.
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The Commission preliminarily believes that the proposed amendments
to Rule 31 would have a neutral effect on existing costs and benefits.
It would not impose any additional costs or impact the transaction fees
currently paid on other securities transactions. Likewise, because
market participants have never monitored or collected fees on SBS
transactions, there would be no benefit to exempting these transactions
from Section 31 fees other than that affected entities would not have
to take any steps to pay fees on SBS transactions.
However, eliminating Section 31 fee for SBS transactions
theoretically could result in slightly higher fees on transactions in
other securities that would not benefit from a Section 31
[[Page 75280]]
exemption. Section 31 requires the Commission to adjust Section 31 fees
so that such rates are reasonably likely to produce aggregate fee
collections that equal amounts prescribed under Section 31.\381\ Thus,
although the Commission may exempt certain securities from Section 31,
it cannot reduce the total amount of fees that it is required to
collect under Section 31. An exemption granted to certain securities
could, therefore, result in a higher rate paid on transactions in the
other, non-exempted securities.
---------------------------------------------------------------------------
\381\ See 15 U.S.C. 78ee(j).
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The Commission requests comment on the costs and benefits of the
proposed amendments to Rule 31, as well as any costs and benefits not
already described that could result. The Commission also requests data
to quantify any potential costs or benefits.
N. Aggregate Total Costs
Based on the foregoing, the Commission preliminarily estimates that
proposed Regulation SBSR would impose an aggregate total first-year
cost of approximately $1,038,947,500 on all covered entities.\382\ This
amount includes an estimated total first-year cost of approximately
$852,850,500 on participants (reporting parties and non-reporting
parties), and approximately $186,097,000 on registered SDRs. The
Commission preliminarily estimates that proposed Regulation SBSR would
impose a total ongoing annualized aggregate cost of approximately
$703,147,540 for all covered entities.\383\ This amount includes an
estimated total ongoing annualized cost of approximately $598,021,500
on participants (reporting parties and non-reporting parties), and
approximately $105,126,040 on registered SDRs.
---------------------------------------------------------------------------
\382\ The Commission derived its estimate from the following:
[($511,013,000 proposed Rule 901 first-year costs on reporting
parties) + ($778,480 proposed Rule 901 first-year costs on
registered SDRs) + ($64,006,400 proposed Rule 902 first-year costs
on registered SDRs) + ($27,360 proposed Rule 904 first-year costs on
registered SDRs) + ($11,419,000 proposed Rule 905 first-year costs
on reporting parties) + ($5,603,700 proposed Rule 905 first-year
costs on registered SDRs) + ($172,280,000 proposed Rule 905 first-
year costs on non-reporting parties) + ($82,176,000 proposed Rule
906 first-year costs on reporting parties) + ($600,760 proposed Rule
906 first-year costs on registered SDRs) + ($75,962,500 proposed
Rule 906 first-year costs on all SDR participants) + ($114,927,000
proposed Rule 907 first-year costs on registered SDRs) + ($153,300
proposed Rule 909 first-year costs on registered SDRs)] =
$1,038,947,500.
\383\ The Commission derived its estimate from the following:
[($316,116,000 proposed Rule 901 ongoing annual costs on reporting
parties) + ($436,440 proposed Rule 901 ongoing annual costs on
registered SDRs) + ($24,002,400 proposed Rule 902 ongoing annual
costs on registered SDRs) + ($27,360 proposed Rule 904 ongoing
annual costs on registered SDRs) + ($3,927,000 proposed Rule 905
ongoing annual costs on reporting parties) + ($3,735,800 proposed
Rule 905 ongoing annual costs on registered SDRs) + ($172,280,000
proposed Rule 905 ongoing annual costs on non-reporting parties) +
($29,736,000 proposed Rule 906 ongoing annual costs on reporting
parties) + ($292,440 proposed Rule 906 ongoing annual costs on
registered SDRs) + ($75,962,500 proposed Rule 906 ongoing annual
costs on all SDR participants) + ($76,617,000 proposed Rule 907
ongoing annual costs on registered SDRs) + ($14,600 proposed Rule
909 ongoing annual costs on registered SDRs)] = $703,147,540.
---------------------------------------------------------------------------
With regard to registered SDRs, the Commission preliminarily
estimates that proposed Regulation SBSR would impose an initial
aggregate one-time cost of approximately $80,978,260,\384\ and an
ongoing aggregate annual cost of $105,126,400.\385\ The Commission
further preliminarily estimates that the proposed SDR registration
rules would impose an initial aggregate one-time cost of approximately
$214,913,592,\386\ and an ongoing aggregate annual cost of
approximately $140,302,120 on registered SDRs.\387\ Summing these
estimates, proposed Regulation SBSR and the proposed SDR registration
rules would impose initial costs on registered SDRs of approximately
$295,891,852,\388\ and ongoing annualized costs on registered SDRs of
approximately $245,428,520.\389\
---------------------------------------------------------------------------
\384\ The Commission derived its estimate from the following:
[($342,040 proposed Rule 901 one-time costs on registered SDRs) +
($40,004,000 proposed Rule 902 one-time costs on registered SDRs) +
($1,867,900 proposed Rule 905 one-time costs on registered SDRs) +
($308,320 proposed Rule 906 one-time costs on registered SDRs) +
($38,310,000 proposed Rule 907 one-time costs on registered SDRs) +
($146,000 proposed Rule 909 one-time costs on registered SDRs)] =
$80,978,260.
\385\ The Commission derived its estimate from the following:
[($436,440 proposed Rule 901 ongoing annual costs on registered
SDRs) + ($24,002,400 proposed Rule 902 ongoing annual costs on
registered SDRs) + ($27,360 proposed Rule 904 ongoing annual costs
on registered SDRs) + ($3,735,800 proposed Rule 905 ongoing annual
costs on registered SDRs) + ($292,440 proposed Rule 906 ongoing
annual costs on registered SDRs) + ($76,617,000 proposed Rule 907
ongoing annual costs on registered SDRs) + ($14,600 proposed Rule
909 ongoing annual costs on registered SDRs)] = $105,126,400.
\386\ See SDR Registration Proposing Release, supra note 6.
\387\ See id.
\388\ The Commission derived its estimate from the following:
[($80,978,260) + ($214,913,592)] = $295,891,852.
\389\ The Commission derived its estimate from the following:
[($105,126,400) + ($140,302,120)] = $245,428,520.
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XV. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation
Section 3(f) of the Exchange Act \390\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action would promote efficiency,
competition, and capital formation. In addition, Section 23(a)(2) of
the Exchange Act \391\ requires the Commission, when making rules under
the Exchange Act, to consider the impact of such rules on competition.
Section 23(a)(2) also prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
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\390\ 15 U.S.C. 78c(f).
\391\ 15 U.S.C. 78w(a)(2).
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A. Analysis of Proposed Regulation SBSR
The Commission preliminarily believes that public availability of
transaction and pricing data for SBSs, as required by the Dodd-Frank
Act and implemented by proposed Regulation SBSR, would promote
efficiency, competition, and capital formation by reducing information
asymmetries, lowering transaction costs, and encouraging market
participation from a larger number of firms. Public, real-time
dissemination of last-sale information aids dealers in deriving
appropriate quotations, and aids investors in evaluating current
quotations--thus furthering efficient price discovery. Increased
transparency ultimately should provide the opportunity for increased
competition among market participants and thus contribute to a more
efficient market. The Commission believes that knowledge that all
market participants are subject to the same reporting rules and can see
the same price information creates certainty, fosters investor
confidence, and promotes participation in the markets.
The Commission's experience with other asset classes is that post-
trade transparency reduces transaction costs. For example, a number of
studies have found that post-trade transparency in the corporate bond
market, resulting from the introduction of TRACE, has reduced
transaction costs.\392\ Post-trade transparency could have the same
effect in the SBS market, although the Commission acknowledges that the
differences between the SBS market and other securities markets might
be sufficiently great that post-trade transparency might not have the
same effects in the SBS market. The Commission requests comment on
whether post-trade transparency would have a similar effect on the SBS
market as it has in other securities markets--and if not, why not. To
the extent that post-trade transparency in the SBS
[[Page 75281]]
market would lower transaction costs, this would be evidence of greater
competition and efficiency. Furthermore, money saved in transaction
costs can assist in additional capital formation.
---------------------------------------------------------------------------
\392\ See supra note 88.
---------------------------------------------------------------------------
The proposed rules on block trades of SBSs are designed to minimize
any adverse impact on efficiency, competition, and capital formation.
Though temporarily withholding the full size of a block trade may have
some immediate adverse effect on efficiency, as other market
participants would lack complete real-time information about large
transactions, the Commission's approach is designed to promote
efficiency in the longer-term, by allowing SBS market participants to
engage in large transactions without the risk of other market
participants using this information in ways that promote artificial and
adverse short-term price movements. Encouraging such market
participants to continue to execute in large size is designed to
promote efficiency, competition, and capital formation. The Commission
requests comment on the effect of its proposed block trade rules on
these considerations.
Proposed Regulation SBSR is designed to provide the Commission and
other regulators with detailed, up-to-date information about both
positions of particular entities and financial groups as well as
positions by multiple market participants in particular instruments. A
well-regulated SBS market--where the Commission and other regulators
have access to information about all SBS transactions captured and
retained in the registered SDRs--could increase the confidence in the
soundness and fairness of the market, potentially drawing additional
participants and thereby increasing efficiency. The Commission and
other regulators also would have greater information with which to
surveil the SBS market and bring appropriate enforcement actions.
Together, these regulatory factors should have a positive impact on
efficiency, competition, and capital formation.
The Commission preliminarily believes that post-trade transparency
in the SBS market could improve market participants' ability to value
SBSs. In transparent markets with sufficient liquidity, valuations
generally can be derived from recent quotations and/or last-sale
prices. However, in opaque markets or markets with low liquidity,
recent quotations or last-sale prices may not exist or, if they do
exist, may not be widely available. Therefore, market participants
holding assets that trade in opaque markets or markets with low
liquidity frequently rely instead on pricing models. These models might
be based on assumptions subject to the evaluator's discretion, and can
be imprecise. Thus, market participants holding the same asset but
using different valuation models might arrive at significantly
different values for the same asset.
The Commission preliminarily believes that post-trade transparency,
even in relatively illiquid markets--such as corporate bonds or SBSs--
could represent an improvement over relying on valuation models alone,
particularly if post-trade information is used as an input to, rather
than a substitute for, independent valuation and pricing decisions by
other market participants. Market participants might devise means to
consider last-sale reports of the asset to be valued, reports of
related assets, or reports of benchmark products that include the asset
to be valued or closely related assets. There is evidence to suggest
that post-trade transparency helps reduce the range of valuations of
assets that trade in illiquid markets.\393\ The Commission
preliminarily believes that post-trade transparency in the SBS market
could result in more accurate valuations of SBSs generally, as all
market participants would have the benefit of knowing how
counterparties to an SBS valued the SBS at a specific moment in time.
Especially with complex instruments, investment decisions generally are
predicated on a significant amount of due diligence to value the
instrument properly. A post-trade transparency system permits other
market participants to derive at least some informational benefit from
obtaining the views of the two counterparties who traded that
instrument.
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\393\ See supra note 314.
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Better valuations could have a significant impact on efficiency and
capital allocation. Efficient allocation of capital is premised on
accurate knowledge of asset prices. Overvaluing asset prices could
result in a misallocation of capital, as investors seek to obtain more
of an asset that cannot deliver the anticipated risk-adjusted return.
By the same token, assets that are inappropriately undervalued
represent investment opportunities that might go unpursued, because
investors do not realize that a good risk-adjusted return is available.
To the extent that post-trade transparency enables asset valuations to
move closer to their fundamental values, capital may be more
efficiently allocated.
Better valuations resulting from post-trade transparency also could
reduce prudential and systemic risks. Some financial institutions,
including many of the most systemically important financial
institutions, have large portfolios of SBSs. The financial system would
benefit greatly if the assets of these institutions were more
accurately valued. To the extent that post-trade transparency affirms
the valuation of an institution's portfolio, regulators, the individual
firm, and the market as a whole would have more certainty as to whether
the firm would or would not pose prudential or systemic risks. In some
cases, however, post-trade transparency in the SBS market might cause
an individual firm to revalue its positions and lower the overall value
of its portfolio. The sooner that accurate valuations can be made, the
more quickly that regulators and the individual firm can take
appropriate steps to minimize the firm's prudential risk profile, and
the more quickly that regulators and other market participants can take
appropriate steps to address any systemic risk concerns raised by that
firm.
Finally, the Commission has considered how proposed Regulation SBSR
could affect market participation generally, measured by both the
number of market participants and the number of SBSs executed. The
regulatory environment created by proposed Regulation SBSR would permit
all market participants to see last-sale prices in real time, and could
thereby incentivize more market participants to enter the market, trade
more frequently, and compete with large dealers on price. Reducing
information asymmetries is pro-competitive, because it reduces the
competitive advantage that certain market participants have solely
because they have access to more or better information about the
market. Reducing information asymmetries also reduces the likelihood
that a less-informed market participant would enter into a trade at an
imprudent price. To the extent that fewer such trades occur, efficiency
and capital formation could be improved. Moreover, proposed Regulation
SBSR could result in greater confidence in the market generally, which
could have a beneficial impact on efficiency, competition, and capital
formation.
It is also possible that implementing post-trade transparency in
the SBS market and the costs of complying with proposed Regulation SBSR
could cause some market participants to execute fewer SBSs or to exit
the market completely. This could result in a detrimental impact on
efficiency,
[[Page 75282]]
competition, and capital formation. For example, certain market
participants that are currently active in the SBS market might find the
costs of complying with proposed Regulation SBSR too high. If these
market participants respond by reducing their trading activity or
exiting the market completely, competition could suffer because there
would be fewer participants competing in the market. Moreover,
efficiency could suffer because risk that otherwise might have been
allocated to the market participant optimally suited to manage it
would, if that participant has left the market, necessarily have to
reside at a suboptimal location. Moreover, capital formation could be
negatively impacted if market participants with risks to hedge find it
more difficult or costly to find a counterparty with which to transact
and instead reserve more capital against the risk of loss.
On the other hand, the possibility exists that, in certain
circumstances, efficiency, competition, and capital formation would be
positively impacted even if fewer SBS transactions occur because of
proposed Regulation SBSR. This could be the case if market participants
that are unable or unwilling to properly manage the attendant risks of
participation in the SBS market are deterred from participating, or if
there were a reduction in the number of SBS transactions where there is
a significant information asymmetry between the counterparties. In the
latter case, efficiency, competition, and capital formation could
benefit if uninformed parties are deterred from unwittingly taking on
imprudent positions in the SBS market.
It is difficult at this stage to ascertain how proposed Regulation
SBSR and other measures to implement the Dodd-Frank Act might increase
or decrease participation in the SBS market, and what impacts such an
increase or decrease might have on efficiency, competition, and capital
formation. However, the Commission requests comment on those impacts.
B. Analysis of Amendments to Rule 31 Under the Exchange Act
The Commission preliminarily believes that the proposed amendments
to Rule 31 under the Exchange Act would have no significant impact on
efficiency, competition, and capital formation. Exempting SBSs from
Section 31 fees should have little or no impact on the overall amount
of fees collected by the Commission, as the Commission is required to
adjust the fee rate to a level that is reasonably likely to produce the
aggregate fee collections stipulated in Section 31(d).\394\ Exempting
SBSs from Section 31 fees would result in other classes of securities
that remain subject to Section 31 fees continuing to bear the burden of
meeting the aggregate fee collection. Allowing SBSs to become subject
to Section 31 fees, however, could result in a competitive imbalance
between brokers and SBS dealers. Specifically, the burden for funding
Section 31 fees would fall on brokers, rather than SBS dealers.
Exempting SBSs from Section 31 fees, therefore, would avoid this
concern and any impact it might have on the development of the SBS
market.
---------------------------------------------------------------------------
\394\ See 15 U.S.C. 78ee(j).
---------------------------------------------------------------------------
The Commission requests comment on all aspects of this analysis
and, in particular, on whether proposed Regulation SBSR and the
proposed amendments to Rule 31 under the Exchange Act would place a
burden on competition, as well as the effect of the proposal on
efficiency, competition, and capital formation. Commenters are
requested to provide empirical data and other factual support for their
views, if possible.
XVI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA'') \395\ the Commission must advise the OMB
whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------
\395\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
The Commission requests comment on the potential impact of proposed
Regulation SBSR on the economy on an annual basis, on the costs or
prices for consumers or individual industries, and on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their view to the extent
possible.
XVII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \396\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\397\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \398\ Section 605(b) of the RFA \399\ states that
this requirement shall not apply to any proposed rule or proposed rule
amendment which, if adopted, would not have a significant economic
impact on a substantial number of small entities.
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\396\ 5 U.S.C. 601 et seq.
\397\ 5 U.S.C. 603(a).
\398\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451
(January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
\399\ 5 U.S.C. 605(b).
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \400\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\401\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\402\
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\400\ See 17 CFR 240.0-10(a).
\401\ 17 CFR 240.17a-5(d).
\402\ See 17 CFR 240.0-10(c).
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Based on input from SBS market participants and its own
information, the Commission preliminarily believes that the majority of
SBS transactions have at least one counterparty that is either as SBS
dealer or major SBS participant, and that these entities--whether
registered broker-dealers or not--would exceed the thresholds defining
``small entities'' set out above. Accordingly, neither of these types
of entities would likely qualify as small entities for purposes of the
RFA.
[[Page 75283]]
Moreover, even in cases where one of the counterparties to an SBS is
not covered by these definitions, the Commission preliminarily does not
believe that any such entities would be ``small entities'' as defined
in Commission Rule 0-10. Feedback from industry participants and the
Commission's own information about the SBS market indicate that only
persons or entities with assets significantly in excess of $5 million
participate in the SBS market. For example, as revealed in a current
survey conducted by Office of the Comptroller of the Currency, 99.9% of
CDS positions by U.S. Commercial Banks and Trusts are held by those
with assets over $10 billion.\403\ Given the magnitude of this figure,
and the fact that it so far exceeds $5 million, the Commission
preliminarily believes that the vast majority of, if not all, SBS
transactions are between large entities for purposes of the RFA.
---------------------------------------------------------------------------
\403\ See Office of the Comptroller of the Currency, ``Quarterly
Report on Bank Trading and Derivatives Activities Second Quarter
2010'' (2010).
---------------------------------------------------------------------------
In addition, the Commission preliminarily believes that the
entities likely to register as SDRs would not be small entities. Based
on input from SBS market participants and its own information, the
Commission preliminarily believes that most if not all the registered
SDRs would be part of large business entities, and that all registered
SDRs would have assets exceeding $5 million and total capital exceeding
$500,000. Therefore, the Commission preliminarily believes that none of
the registered SDRs would be small entities.
On this basis, the Commission preliminarily believes that the
number of SBS transactions involving a small entity as that term is
defined for purposes of the RFA would be de minimis. Moreover, the
Commission does not believe that any aspect of proposed Regulation SBSR
would be likely to alter the type of counterparties presently engaging
in SBS transactions. Therefore, the Commission preliminarily does not
believe that proposed Regulation SBSR would impact any small entities.
For the foregoing reasons, the Commission certifies that Regulation
SBSR would not have a significant economic impact on a substantial
number of small entities for purposes of the RFA. The Commission
encourages written comments regarding this certification. The
Commission requests that commenters describe the nature of any impact
on small entities, indicate whether they believe that participants and
registered SDRs are unlikely to be small entities, and provide
empirical data to support their responses.
XVIII. Statutory Basis and Text of Proposed Rule
The Commission is proposing to adopt Regulation SBSR, and Rule 900-
911 thereunder, pursuant to the Exchange Act.
List of Subjects in 17 CFR Parts 240 and 242
Brokers, Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
2. Amend Sec. 240.31 by:
a. Removing ``September 30'' at the beginning of paragraph
(a)(10)(ii) and adding in its place ``September 25'';
b. Removing the ``and'' at the end of paragraph (a)(11)(vii);
c. Removing the period at the end of paragraph (a)(11)(viii) and
adding in its place ``; and'';
d. Adding paragraph (a)(11)(ix); and
e. Adding new paragraph (a)(19) to read as follows:
Sec. 240.31 Section 31 transaction fees.
(a) * * *
(11) * * *
(ix) Any sale of a security-based swap.
* * * * *
(19) The term security-based swap has the same definition as
provided in Section 3(a)(68) of the Act (15 U.S.C. 78c(a)(68)).
* * * * *
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES
3. The authority citation for part 242 continues to read as
follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-l(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37, unless otherwise noted.
4. The part heading for part 242 is revised as set forth above.
5. Add Sec. Sec. 242.900, 242.901, 242.902, 242.903, 242.904,
242.905, 242.906, 242.907, 242.908, 242.909, 242.910, and 242.911 to
read as follows:
Sec. 242.900 Definitions.
Terms used in this Regulation SBSR (Sec. Sec. 242.900 through
242.911) that appear in Section 3 of the Exchange Act (15 U.S.C. 78c)
have the same meaning as in Section 3 of the Exchange Act (15 U.S.C.
78c) and the rules or regulations thereunder. In addition, the
following definitions shall apply:
Affiliate means any person that, directly or indirectly, controls,
is controlled by, or is under common control with, a person.
Asset class means those security-based swaps in a particular broad
category, including, but not limited to, credit derivatives, equity
derivatives, and loan-based derivatives.
Block trade means a large notional security-based swap transaction
that meets the criteria set forth in Sec. 242.907(b).
Broker ID means the UIC assigned to a person acting as a broker for
a participant.
Confirm means the production of a confirmation that is agreed to by
the parties to be definitive and complete and that has been manually,
electronically, or, by some other legally equivalent means, signed.
Control means, for purposes of Sec. Sec. 242.900 through 242.911,
the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise. A person
is presumed to control another person if the person:
(1) Is a director, general partner or officer exercising executive
responsibility (or having similar status or functions);
(2) Directly or indirectly has the right to vote 25 percent or more
of a class of voting securities or has the power to sell or direct the
sale of 25 percent or more of a class of voting securities; or
(3) In the case of a partnership, has the right to receive, upon
dissolution, or has contributed, 25 percent or more of the capital.
Derivatives clearing organization means the same as provided under
the Commodity Exchange Act.
Desk ID means the UIC assigned to the trading desk of a participant
or of a broker of a participant.
[[Page 75284]]
Effective reporting date, with respect to a security-based swap
data repository, means the date six months after the registration date.
Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C.
78a, et seq.), as amended.
Life cycle event means, with respect to a security-based swap, any
event that would result in a change in the information reported to a
registered security-based swap data repository under Sec. 242.901,
including a counterparty change resulting from an assignment or
novation; a partial or full termination of the security-based swap; a
change in the cash flows originally reported; for a security-based swap
that is not cleared, any change to the collateral agreement; or a
corporate action affecting a security or securities on which the
security-based swap is based (e.g., a merger, dividend, stock split, or
bankruptcy). 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.
Parent means a legal person that controls a participant.
Participant means:
(1) A U.S. person that is a counterparty to a security-based swap
that is required to be reported to a registered security-based swap
data repository; or
(2) A non-U.S. person that is a counterparty to a security-based
swap that is:
(i) Required to be reported to a registered security-based swap
data repository; and
(ii) Executed in the United States or through any means of
interstate commerce, or cleared through a clearing agency that has its
principal place of business in the United States.
Participant ID means the UIC assigned to a participant.
Phase-in period means the period immediately after a security-based
swap data repository has registered with the Commission during which it
is not required to disseminate security-based swap data pursuant to an
implementation schedule, as provided in Sec. 242.910.
Pre-enactment security-based swap means any security-based swap
executed before July 21, 2010 (the date of enactment of the Dodd-Frank
Act (Pub. L. 111-203, H.R. 4173)), the terms of which had not expired
as of that date.
Price means the price of a security-based swap transaction,
expressed in terms of the commercial conventions used in that asset
class.
Product ID means the UIC assigned to a security-based swap
instrument.
Publicly disseminate means to make available through the Internet
or other electronic data feed that is widely accessible and in machine-
readable electronic format.
Real time means, with respect to the reporting of security-based
swap information, as soon as technologically practicable, but in no
event later than 15 minutes after the time of execution of the
security-based swap transaction.
Registered security-based swap data repository means a security-
based swap data repository that is registered with the Commission
pursuant to Section 13(n) of the Exchange Act (15 U.S.C. 78m(n)) and
any rules or regulations thereunder.
Registration date, with respect to a security-based swap data
repository, means the date on which the Commission registers the
security-based swap data repository, or, if the Commission registers
the security-based swap data repository before the effective date of
Sec. Sec. 242.900 through 242.911.
Reporting party means the counterparty to a security-based swap
with the duty to report information in accordance with Sec. Sec.
242.900 through 242.911 to a registered security-based swap data
repository, or if there is no registered security-based swap data
repository that would receive the information, to the Commission.
Security-based swap instrument means each security-based swap in
the same asset class, with the same underlying reference asset,
reference issuer, or reference index.
Time of execution means the point at which the counterparties to a
security-based swap become irrevocably bound under applicable law.
Trader ID means the UIC assigned to a natural person who executes
security-based swaps.
Transaction ID means the unique identification code assigned by a
registered security-based swap data repository to a specific security-
based swap.
Transitional security-based swap means a security-based swap
executed on or after July 21, 2010, and before the effective reporting
date.
Ultimate parent means a legal person that controls a participant
and that itself has no parent.
Ultimate parent ID means the UIC assigned to an ultimate parent of
a participant.
Unique Identification Code or UIC means the unique identification
code assigned to a person, unit of a person, or product by or on behalf
of an internationally recognized standards-setting body that imposes
fees and usage restrictions that are fair and reasonable and not
unreasonably discriminatory. If no standards-setting body meets these
criteria, a registered security-based swap data repository shall assign
all necessary UICs using its own methodology. If a standards-setting
body meets these criteria but has not assigned a UIC to a particular
person, unit of a person, or product, a registered security-based swap
data repository shall assign a UIC to that person, unit of a person, or
product using its own methodology.
U.S. person means a natural person that is a U.S. citizen or U.S.
resident or a legal person that is organized under the corporate laws
of any part of the United States or has its principal place of business
in the United States.
Sec. 242.901 Reporting obligations.
(a) Reporting party. The reporting party shall be as follows:
(1) Where only one counterparty to a security-based swap is a U.S.
person, the U.S. person shall be the reporting party;
(2) Where both counterparties to a security-based swap are U.S.
persons:
(i) With respect to a security-based swap in which only one
counterparty is a security-based swap dealer or major security-based
swap participant, the security-based swap dealer or major security-
based swap participant shall be the reporting party;
(ii) With respect to a security-based swap in which one
counterparty is a security-based swap dealer and the other a major
security-based swap participant, the security-based swap dealer shall
be the reporting party; and
(iii) With respect to any other security-based swap not described
in paragraphs (a)(2)(i) and (ii) of this section, the counterparties to
the security-based swap shall select a counterparty to be the reporting
party.
(3) If neither counterparty is a U.S. person but the security-based
swap meets the criteria of Sec. 242.908(a)(2) or (a)(3), the
counterparties to the security-based swap shall select a counterparty
to be the reporting party.
(b) Recipient of security-based swap information. For each
security-based swap for which it is the reporting party, the reporting
party shall provide the information required by Sec. Sec. 242.900
through 242.911 to a registered security-based swap data repository or,
if there is no registered security-based swap
[[Page 75285]]
data repository that would accept the information, to the Commission.
(c) Information to be reported in real time. For each security-
based swap for which it is the reporting party, the reporting party
shall report the following information in real time:
(1) The asset class of the security-based swap and, if the
security-based swap is an equity derivative, whether it is a total
return swap or is otherwise designed to offer risks and returns
proportional to a position in the equity security or securities on
which the security-based swap is based;
(2) Information that identifies the security-based swap instrument
and the specific asset(s) or issuer(s) of any security on which the
security-based swap is based;
(3) The notional amount(s), and the currency(ies) in which the
notional amount(s) is expressed;
(4) The date and time, to the second, of execution, expressed using
Coordinated Universal Time (UTC);
(5) The effective date;
(6) The scheduled termination date;
(7) The price;
(8) The terms of any fixed or floating rate payments, and the
frequency of any payments;
(9) Whether or not the security-based swap will be cleared by a
clearing agency;
(10) If both counterparties to a security-based swap are security-
based swap dealers, an indication to that effect;
(11) If applicable, an indication that the transaction does not
accurately reflect the market; and
(12) If the security-based swap is customized to the extent that
the information provided in paragraphs (c)(1) through (11) of this
section does not provide all of the material information necessary to
identify such customized security-based swap or does not contain the
data elements necessary to calculate the price, an indication to that
effect.
(d) Additional information that must be reported. (1) In addition
to the information required under paragraph (c) of this section, for
each security-based swap for which it is the reporting party, the
reporting party shall report:
(i) The participant ID of each counterparty;
(ii) As applicable, the broker ID, desk ID, and trader ID of the
reporting party;
(iii) The amount(s) and currency(ies) of any up-front payment(s)
and a description of the terms and contingencies of the payment streams
of each counterparty to the other;
(iv) The title of any master agreement, or any other agreement
governing the transaction (including the title of any document
governing the satisfaction of margin obligations), incorporated by
reference and the date of any such agreement;
(v) The data elements necessary for a person to determine the
market value of the transaction;
(vi) If the security-based swap will be cleared, the name of the
clearing agency;
(vii) If the security-based swap is not cleared, whether the
exception in Section 3C(g) of the Exchange Act was invoked;
(viii) If the security-based swap is not cleared, a description of
the settlement terms, including whether the security-based swap is
cash-settled or physically settled, and the method for determining the
settlement value; and
(ix) The venue where the security-based swap was executed.
(2) Any information required to be reported pursuant to paragraph
(d)(1) of this section must be reported promptly, but in no event later
than:
(i) Fifteen minutes after the time of execution for a security-
based swap that is executed and confirmed electronically;
(ii) Thirty minutes after the time of execution for a security-
based swap that is confirmed electronically but not executed
electronically; or
(iii) Twenty-four hours after the time of execution for a security-
based swap that is not executed or confirmed electronically.
(e) Duty to report any life cycle event of a security-based swap.
For any life cycle event, and any adjustment due to a life cycle event,
that results in a change to information previously reported pursuant to
paragraph (c), (d), or (i) of this section, the reporting party shall
promptly provide updated information reflecting such change to the
entity to which it reported the original transaction, using the
transaction ID, subject to the following exceptions:
(1) If a reporting party ceases to be a counterparty to a security-
based swap due to an assignment or novation, the new counterparty shall
be the reporting party following such assignment or novation, if the
new counterparty is a U.S. person.
(2) If, following an assignment or novation, the new counterparty
is not a U.S. person, the counterparty that is a U.S. person shall be
the reporting party following such assignment or novation.
(f) Time stamping incoming information. A registered security-based
swap data repository shall time stamp, to the second, its receipt of
any information submitted to it pursuant to paragraph (c), (d), or (e)
of this section.
(g) Assigning transaction ID. A registered security-based swap data
repository shall assign a transaction ID to each security-based swap
reported by a reporting party.
(h) Format of reported information. The reporting party shall
electronically transmit the information required under this section in
a format required by the registered security-based data repository, and
in accordance with any applicable policies and procedures of the
registered security-based swap data repository.
(i) Reporting of pre-enactment and transitional security-based
swaps. With respect to any pre-enactment security-based swap or
transitional security-based swap, the reporting party shall report all
of the information required by paragraphs (c) and (d) of this section,
to the extent such information is available.
Sec. 242.902 Public dissemination of transaction reports.
(a) Dissemination of transaction reports. Except in the case of a
block trade, a registered security-based swap data repository shall
publicly disseminate a transaction report of a security-based swap
immediately upon receipt of information about the security-based swap
from a reporting party, or upon re-opening following a period when the
registered security-based swap data repository was closed. The
transaction report shall consist of all the information reported by the
reporting party pursuant to Sec. 242.901, plus any indicator or
indicators contemplated by the registered security-based swap data
repository's policies and procedures that are required by Sec.
242.907.
(b) Dissemination of block trades. A registered security-based swap
data repository shall publicly disseminate a transaction report of a
security-based swap that constitutes a block trade immediately upon
receipt of information about the block trade from the reporting party.
The transaction report shall consist of all the information reported by
the reporting party pursuant to Sec. 242.901(c), except for the
notional size, plus the transaction ID and an indicator that the report
represents a block trade. The registered security-based swap data
repository shall publicly disseminate a complete transaction report for
such block trade (including the transaction ID and the full notional
size) as follows:
(1) If the security-based swap was executed on or after 05:00 UTC
and before 23:00 UTC of the same day, the transaction report (including
the transaction ID and the full notional size)
[[Page 75286]]
shall be disseminated at 07:00 UTC of the following day.
(2) If the security-based swap was executed on or after 23:00 UTC
and up to 05:00 UTC of the following day, the transaction report
(including the transaction ID and the full notional size) shall be
disseminated at 13:00 UTC of that following day.
(3) Notwithstanding the foregoing, if a registered security-based
swap data repository is in normal closing hours or special closing
hours at a time when it would be required to disseminate information
about a block trade pursuant to this section, the registered security-
based swap data repository shall instead disseminate information about
the block trade immediately upon re-opening.
(c) Non-disseminated information. A security-based swap data
repository shall not disseminate:
(1) The identity of either counterparty to a security-based swap;
(2) With respect to a security-based swap that is not cleared at a
registered clearing agency and that is reported to a registered
security-based swap data repository, any information disclosing the
business transactions and market positions of any person; or
(3) Any information regarding a security-based swap reported
pursuant to Sec. 242.901(i).
(d) Temporary restriction on other market data sources. No person
other than a registered security-based swap data repository shall make
available to one or more persons (other than a counterparty)
transaction information relating to a security-based swap before the
earlier of 15 minutes after the time of execution of the security-based
swap; or the time that a registered security-based swap data repository
publicly disseminates a report of that security-based swap.
Sec. 242.903 Coded information.
A reporting party may provide information to a registered security-
based swap data repository pursuant to Sec. 242.901 and a registered
security-based swap data repository may publicly disseminate
information pursuant to Sec. 242.902 using codes in place of certain
data elements, provided that the information necessary to interpret
such codes is widely available on a non-fee basis.
Sec. 242.904 Operating hours of registered security-based swap data
repositories.
A registered security-based swap data repository shall have systems
in place to continuously receive and disseminate information regarding
security-based swaps pursuant to Sec. Sec. 242.900 through 242.911,
subject to the following exceptions:
(a) A registered security-based swap data repository may establish
normal closing hours during periods when, in its estimation, the U.S.
market and major foreign markets are inactive. A registered security-
based swap data repository shall provide reasonable advance notice to
participants and to the public of its normal closing hours.
(b) A registered security-based swap data repository may declare,
on an ad hoc basis, special closing hours to perform system maintenance
that cannot wait until normal closing hours. A registered security-
based swap data repository shall: to the extent reasonably possible
under the circumstances, avoid scheduling special closing hours during
when, in its estimation, the U.S. market and major foreign markets are
most active; and provide reasonable advance notice of its special
closing hours to participants and to the public.
(c) During normal closing hours, and to the extent reasonably
practicable during special closing hours, a registered security-based
swap data repository shall have the capability to receive and hold in
queue information regarding security-based swaps that has been reported
pursuant to Sec. Sec. 242.900 through 242.911.
(d) When a registered security-based swap data repository re-opens
following normal closing hours or special closing hours, it shall
disseminate transaction reports of security-based swaps held in queue,
in accordance with the requirements of Sec. 242.902.
(e) If a registered security-based swap data repository could not
receive and hold in queue transaction information that was required to
be reported pursuant to Sec. Sec. 242.900 through 242.911, it must
immediately upon re-opening send a message to all participants that it
has resumed normal operations. Thereafter, any participant that had an
obligation to report information to the registered security-based swap
data repository pursuant to Sec. Sec. 242.900 through 242.911, but
could not do so because of the registered security-based swap data
repository's inability to receive and hold in queue data, must
immediately report the information to the registered security-based
swap data repository.
Sec. 242.905 Correction of errors in security-based swap information.
(a) Duty of counterparties to correct. Any counterparty to a
security-based swap that discovers an error in information previously
reported pursuant to Sec. Sec. 242.900 through 242.911 shall correct
such error in accordance with the following procedures:
(1) If a counterparty that was not the reporting party for a
security-based swap discovers an error in the information reported with
respect to such security-based swap, the counterparty shall promptly
notify the reporting party of the error; and
(2) If the reporting party for a security-based swap transaction
discovers an error in the information reported with respect to a
security-based swap, or receives notification from its counterparty of
an error, the reporting party shall promptly submit to the entity to
which the security-based swap was originally reported an amended report
pertaining to the original transaction report. If the reporting party
reported the initial transaction to a registered security-based swap
data repository, the reporting party shall submit an amended report to
the registered security-based swap data repository in a manner
consistent with the policies and procedures contemplated by Sec.
242.907(a)(3).
(b) Duty of registered security-based swap data repository to
correct. A registered security-based swap data repository shall:
(1) Upon discovery of the error or receipt of a notice of the error
from a reporting party, verify the accuracy of the terms of the
security-based swap and, following such verification, promptly correct
the erroneous information regarding such security-based swap contained
in its system; and
(2) If such erroneous information falls into any of the categories
of information enumerated in Sec. 242.901(c), publicly disseminate a
corrected transaction report of the security-based swap promptly
following verification of the trade by the parties to the security-
based swap, with an indication that the report relates to a previously
disseminated transaction.
Sec. 242.906 Other duties of participants.
(a) Reporting by non-reporting-party counterparty. A registered
security-based swap data repository shall identify any security-based
swap reported to it for which the registered security-based swap data
repository does not have the participant ID and (if applicable) the
broker ID, desk ID, and trader ID of each counterparty. Once a day, a
registered security-based swap data repository shall send a report to
each participant identifying, for each security-based swap to which
that participant is a counterparty, the security-based swap(s) for
which the registered security-based swap data repository lacks
participant ID and (if
[[Page 75287]]
applicable) broker ID, desk ID, and trader ID. A participant that
receives such a report shall provide the missing information to the
registered security-based swap data repository within 24 hours.
(b) Duty to provide ultimate parent and affiliate information. Each
participant of a registered security-based swap data repository shall
provide to the registered security-based swap data repository
information sufficient to identify its ultimate parent(s) and any
affiliate(s) of the participant that also are participants of the
registered security-based swap data repository, using ultimate parent
IDs and participant IDs. A participant shall promptly notify the
registered security-based swap data repository of any changes to that
information.
(c) Policies and procedures of security-based swap dealers and
major security-based swap participants. Each participant that is a
security-based swap dealer or major security-based swap participant
shall establish, maintain, and enforce written policies and procedures
that are reasonably designed to ensure that it complies with any
obligations to report information to a registered security-based swap
data repository in a manner consistent with Sec. Sec. 242.900 through
242.911 and the registered security-based swap data repository's
applicable policies and procedures. Each such participant shall review
and update its policies and procedures at least annually.
Sec. 242.907 Policies and procedures of registered security-based
swap data repositories.
(a) General policies and procedures. With respect to the receipt,
reporting, and dissemination of data pursuant to Sec. Sec. 242.900
through 242.911, a registered security-based swap data repository shall
establish and maintain written policies and procedures:
(1) That enumerate the specific data elements of a security-based
swap or a life cycle event that a reporting party must report, which
shall include, at a minimum, the data elements specified in Sec.
242.901(c) and (d);
(2) That specify one or more acceptable data formats (each of which
must be an open-source structured data format that is widely used by
participants), connectivity requirements, and other protocols for
submitting information;
(3) For specifying how reporting parties are to report corrections
to previously submitted information, making corrections to information
in its records that is subsequently discovered to be erroneous, and
applying an appropriate indicator to any transaction report required to
be disseminated by Sec. 242.905(b)(2) that the report relates to a
previously disseminated transaction;
(4) Describing how reporting parties shall report and, consistent
with the enhancement of price discovery, how the registered security-
based swap depository shall publicly disseminate, reports of, and
adjustments due to, life cycle events; security-based swap transactions
that do not involve an opportunity to negotiate any material terms,
other than the counterparty; and any other security-based swap
transactions that, in the estimation of the registered security-based
swap data repository, do not accurately reflect the market;
(5) For assigning:
(i) A transaction ID to each security-based swap that is reported
to it; and
(ii) UICs established by or on behalf of an internationally
recognized standards-setting body that imposes fees and usage
restrictions that are fair and reasonable and not unreasonably
discriminatory (or, if no standards-setting body meets these criteria
or a standards-setting body meets these criteria but has not assigned a
UIC to a particular person, unit of a person, or product, using its own
methodology).
(6) For periodically obtaining from each participant information
that identifies the participant's ultimate parent(s) and any other
participant(s) with which the counterparty is affiliated, using
ultimate parent IDs and participant IDs.
(b) Policies and procedures regarding block trades. (1) A
registered security-based swap data repository shall establish and
maintain written policies and procedures for calculating and
publicizing block trade thresholds for all security-based swap
instruments reported to the registered security-based swap data
repository in accordance with the criteria and formula for determining
block size as specified by the Commission.
(2) Exceptions. Notwithstanding the above, a registered security-
based swap data repository shall not designate as a block trade any
security-based swap:
(i) That is an equity total return swap or is otherwise designed to
offer risks and returns proportional to a position in the equity
security or securities on which the security-based swap is based; or
(ii) Contemplated by Section 13(m)(1)(C)(iv) of the Exchange Act
(15 U.S.C. 78m(m)(1)(C)(iv)).
(c) Public availability of policies and procedures. A registered
security-based swap data repository shall make the policies and
procedures required by Sec. Sec. 242.900 through 242.911 publicly
available on its Web site.
(d) Updating of policies and procedures. A registered security-
based swap data repository shall review, and update as necessary, the
policies and procedures required by Sec. Sec. 242.900 through 242.911
at least annually. Such policies and procedures shall indicate the date
on which they were last reviewed.
(e) A registered security-based swap data repository shall have the
capacity to provide to the Commission, upon request, information or
reports related to the timeliness, accuracy, and completeness of data
reported to it pursuant to Sec. Sec. 242.900 through 242.911 and the
registered security-based swap data repository's policies and
procedures thereunder.
Sec. 242.908 Jurisdictional matters.
(a) Notwithstanding any other provision of Sec. Sec. 242.900
through 242.911, no security-based swap is required to be reported to a
registered security-based swap data repository, and no registered
security-based swap data repository is required to publicly disseminate
a report of a security-based swap, unless the security-based swap:
(1) Has at least one counterparty that is a U.S. person;
(2) Was executed in the United States or through any means of
interstate commerce; or
(3) Was cleared through a clearing agency having its principal
place of business in the United States.
(b) Notwithstanding any other provision of Sec. Sec. 242.900
through 242.911, a counterparty to a security-based swap shall not
incur any obligation under Sec. Sec. 242.900 through 242.911 unless it
is:
(1) A U.S. person;
(2) A counterparty to a security-based swap executed in the United
States or through any means of interstate commerce; or
(3) A counterparty to a security-based swap cleared through a
clearing agency having its principal place of business in the United
States.
Sec. 242.909 Registration of security-based swap data repository as a
securities information processor.
A registered security-based swap data repository shall also
register with the Commission as a securities information processor on
Form SIP (Sec. 249.1001 of this chapter).
Sec. 242.910 Implementation of security-based swap reporting and
dissemination.
(a) Reporting of pre-enactment security-based swaps. The reporting
party shall report to a registered
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security-based swap data repository any pre-enactment security-based
swaps no later than January 12, 2012 (180 days after the effective date
of the Dodd-Frank Act (Pub. L. 111-203, 124 Stat. 1376)).
(b) Phase-in of compliance dates. A registered security-based swap
data repository and its participants shall be subject to the following
phased-in compliance schedule:
(1) Phase 1, six months after the registration date (i.e., the
effective reporting date):
(i) Reporting parties shall report to the registered security-based
swap data repository any transitional security-based swaps.
(ii) With respect to any security-based swap executed on or after
the effective reporting date, reporting parties shall comply with
Sec. Sec. 242.901.
(iii) Participants and the registered security-based swap data
repository shall comply with Sec. 242.905 (except with respect to
dissemination) and Sec. 242.906(a) and (b).
(iv) Participants that are SBS dealers or major SBS participants
shall comply with Sec. 242.906(c).
(2) Phase 2, nine months after the registration date: Wave 1 of
public dissemination--The registered security-based swap data
repository shall comply with Sec. 242.902 and 242.905 (with respect to
dissemination of corrected transaction reports) for 50 security-based
swap instruments.
(3) Phase 3, 12 months after the registration date: Wave 2 of
public dissemination The registered security-based swap data repository
shall comply with Sec. 242.902 and 242.905 (with respect to
dissemination of corrected transaction reports) for an additional 200
security-based swap instruments.
(4) Phase 4, 18 months after the registration date: Wave 3 of
public dissemination--All security-based swaps reported to the
registered security-based swap data repository shall be subject to
real-time public dissemination as specified in Sec. 242.902.
Sec. 242.911 Prohibition during phase-in period.
A reporting party shall not report a security-based swap to a
registered security-based swap data repository in a phase-in period
described in Sec. 242.910 during which the registered security-based
swap data repository is not yet required or able to publicly
disseminate transaction reports for that security-based swap instrument
unless:
(a) The security-based swap is also reported to a registered
security-based swap data repository that is disseminating transaction
reports for that security-based swap instrument consistent with Sec.
242.902; or
(b) No other registered security-based swap data repository is able
to receive, hold, and publicly disseminate transaction reports
regarding that security-based swap instrument.
By the Commission.
Dated: November 19, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-29710 Filed 12-1-10; 8:45 am]
BILLING CODE 8011-01-P